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, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO _________
COMMISSION FILE NUMBER 0-26918
EXEGENICS INC.
(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2402409
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
2110 RESEARCH ROW, SUITE 621, DALLAS, TEXAS 75235
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214)-358-2000
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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
--- ---
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE: 16,184,486 SHARES OF COMMON
STOCK, $.01 PAR VALUE, OUTSTANDING AS OF MAY 7, 2002.
TABLE OF CONTENTS
<Table>
<Caption>
Page(s)
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PART I. FINANCIAL INFORMATION
Item 1. -- Financial Statements:
Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001 3
Statements of Operations for the Three Months
Ended March 31, 2002 and 2001 (unaudited) 4
Statements of Cash Flows for the Three Months
Ended March 31, 2002 and 2001 (unaudited) 5
Notes to Financial Statements 6
Item 2. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. -- Quantitative and Qualitative Disclosures About
Market Risk 11
PART II. OTHER INFORMATION
Item 1. -- Legal Proceedings 11
Item 2. -- Changes in Securities and Use of Proceeds 11
Item 3. -- Defaults upon Senior Securities 11
Item 4. -- Submission of Matters to a Vote of Security Holders 11
Item 5. -- Other Information 11
Item 6. -- Exhibits and Reports on Form 8-K 11
</Table>
EXEGENICS INC.
BALANCE SHEETS
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 13,750,000 $ 14,995,000
Restricted cash 550,000 550,000
Investments 10,038,000 10,050,000
Prepaid expenses and other current assets 345,000 656,000
------------ ------------
Total current assets 24,683,000 26,251,000
Equipment, net 806,000 1,009,000
Patent rights, less accumulated amortization of $120,000
and $111,000 64,000 74,000
Notes receivable - officer/stockholder 278,000 278,000
Other assets 8,000 13,000
------------ ------------
Total $ 25,839,000 $ 27,625,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 922,000 $ 1,163,000
Deferred revenue 222,000 56,000
Current portion of capital lease obligations 59,000 83,000
------------ ------------
Total current liabilities 1,203,000 1,302,000
Capital lease obligations, less current portion 202,000 202,000
------------ ------------
Total liabilities 1,405,000 1,504,000
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $.01 par value, 10,000,000 shares
authorized; 831,574 and 755,590 shares of Series A
convertible preferred issued and outstanding (liquidation
value $2,078,935 and $1,890,000) 8,000 8,000
Common stock - $.01 par value, 30,000,000 shares authorized;
16,180,935 shares issued 162,000 162,000
Additional paid-in capital 67,106,000 67,025,000
Subscriptions receivable (363,000) (360,000)
Unearned compensation (1,000) (5,000)
Accumulated deficit (39,908,000) (38,139,000)
Treasury stock, 511,200 shares of common stock, at cost (2,570,000) (2,570,000)
------------ ------------
Total Stockholders' equity 24,434,000 26,121,000
------------ ------------
Total $ 25,839,000 $ 27,625,000
============ ============
</Table>
See notes to financial statements
3
EXEGENICS, INC.
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
------------ ------------
(unaudited)
Revenue:
Licensing & research fees $ 333,000 $ 333,000
------------ ------------
Operating Expenses:
Research and development 1,241,000 1,177,000
General and administrative 1,061,000 937,000
------------ ------------
2,302,000 2,114,000
------------ ------------
Operating (loss) (1,969,000) (1,781,000)
------------ ------------
Other (income) expense:
Gain (3,000) --
Interest (income) (189,000) (461,000)
Interest expense 6,000 2,000
------------ ------------
(186,000) (459,000)
------------ ------------
Loss before provision (benefit)
for taxes (1,783,000) (1,322,000)
Provision (benefit) for taxes (14,000) 18,000
------------ ------------
NET LOSS (1,769,000) (1,340,000)
Preferred stock dividend (169,000) (180,000)
------------ ------------
NET LOSS ATTRIBUTABLE TO
TO COMMON SHAREHOLDERS $ (1,938,000) $ (1,520,000)
============ ============
NET LOSS PER SHARE-BASIC AND DILUTED $ (0.12) $ (0.09)
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING - BASIC AND
DILUTED 16,180,935 16,148,937
============ ============
</Table>
See notes to financial statements
4
EXEGENICS INC.
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2002 2001
------------ ------------
(unaudited)
Cash flows from operating activities:
Net (loss) $ (1,769,000) $ (1,340,000)
Adjustments to reconcile net (loss) to net
cash used in operating activities:
Depreciation and amortization 101,000 84,000
Value assigned to common shares and options 85,000 117,000
Changes in:
Prepaids and other assets 366,000 109,000
Deferred revenue 167,000 555,000
Accounts payable and accrued expenses (295,000) 16,000
------------ ------------
Net cash used in operating activities (1,345,000) (459,000)
------------ ------------
Cash flows from investing activities:
(Purchase) sale of equipment 123,000 (185,000)
------------ ------------
Net cash provided by (used in) investing activities 123,000 (185,000)
------------ ------------
Cash flows from financing activities:
Payment of royalties (23,000) --
Purchase of treasury stock -- (935,000)
------------ ------------
Net cash used in financing activities (23,000) (935,000)
------------ ------------
NET DECREASE IN CASH (1,245,000) (1,579,000)
Cash and cash equivalents at beginning of period 15,545,000 35,408,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,300,000 $ 33,829,000
============ ============
Supplemental disclosures of cash flow information:
Noncash investing activities:
Equipment acquired included in accounts
payable and accrued expenses: -- $ 15,000
</Table>
See notes to financial statements
5
EXEGENICS INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2002
(unaudited)
(1) FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements of EXEGENICS 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. 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, 2001. The results for the
interim periods are not necessarily indicative of the results for the
full fiscal year.
(2) MASTER LICENSE AGREEMENT WITH BRISTOL-MYERS SQUIBB
In June 1998, the Company executed a "Master License Agreement" with
Bristol-Myers Squibb ("BMS"). This agreement sublicensed to BMS the
Company's rights to two technologies related to production of
paclitaxel, the active ingredient in BMS's largest selling cancer
product, Taxol(R). The agreement provides for various fees, milestone
payments, research and development funding ($2,000,000) for a limited
term (two years) and royalties. Subsequently, an additional $2,000,000
in R&D funding was provided by BMS, and the term of a concurrent
"Sponsored Research Agreement" (detailing the specifics of the research
to be conducted by EXEGENICS) was extended through June 12, 2002. The
final payment of this BMS R&D support obligation was received in
February 2002.
(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 period. No
effect has been given to outstanding options, warrants or convertible
preferred stock in the diluted computation, as their effect would be
antidilutive.
(4) STOCKHOLDERS' EQUITY
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) Issue No. 96-18. The Company has recognized deferred
stock compensation related to certain stock option and warrant grants.
During the three months ended March 31, 2002, the Company granted
10,000, 25,000, 10,000 and 25,000 options to purchase shares of common
stock at $7.13, $3.28, $3.20 and $1.67 per share, respectively, in
return for consulting services. During the three months ended March 31,
2001, the Company granted 5,000 options to purchase shares of common
stock at $7.188 per share in return for consulting services. The
Company valued these options based on the Black-Scholes option pricing
model. As a result, the Company recorded a charge of $39,100 and $1,400
during the three months ended March 31, 2002 and 2001, respectively,
related to these grants. In connection with other option grants to
consultants in previous years, the Company recorded a charge of $46,000
and $115,700 during the three months ended March 31, 2002 and 2001,
respectively.
6
EXEGENICS INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2002
(unaudited)
(5) DEFERRED REVENUE
The Company recognizes revenue from development agreements over the
stated life of the agreement. Amounts received in advance of the
services to be performed are recorded as deferred revenue. Accordingly,
funds of $500,000 received during the three months ended March 31,
2002, net of $333,000 in revenues recognized cumulatively through March
31, 2002 and, including $56,000 in deferred revenue outstanding as of
December 31, 2001 resulting in deferred revenue of $222,000 at March
31, 2002.
(6) RESERVE FOR RESTRUCTURE
The Company generally recognizes operating expenses as incurred. As
part of its reorganization efforts in June 2001, the Company terminated
several employees, remodeled facilities and moved equipment, and
recognized approximately $560,000 related to those activities through
March 31, 2002. Cash payments of $82,000 were charged against the
account during the quarter ending March 31, 2002. Accrued expenses
relating to restructuring are $128,000 at March 31, 2002.
(7) SUBSEQUENT EVENTS
As a result of the Company's decision to concentrate on its strategic
drug discovery and development programs, as well as the impending end
of the term of the "Sponsored Research Agreement" with BMS, the Company
recently undertook a re-structuring of its internal scientific
projects. Several scientific, administrative and support positions were
eliminated, resulting in estimated severance payments of $50,000, which
will be recognized in the second quarter of 2002.
7
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.
OVERVIEW
We were organized and commenced operations in 1991. Prior to 2001, our
efforts were principally devoted to research activities including efforts to
discover therapeutic products for human diseases. Beginning in 2001, we
repositioned ourselves as a post-genomics drug creation enterprise with a goal
of building a development pipeline of commercially viable drug leads and
pharmaceutical products for the treatment of cancers and drug-resistant
bacterial diseases. In the first quarter of 2002, we adopted a strategy to
leverage our proprietary research technologies, Quantum Core Technology
(QCT(TM)) and Optimized Anti-Sense Inhibitory Sequence (OASIS(TM)), to create
and/or obtain novel compounds that may be advanced towards clinical drug
candidates and pharmaceutical products. We increased our efforts to obtain and
develop clinical drug candidates and to identify opportunities for financial and
operational synergies. There can be no assurance, however, that we will be
successful in discovering or advancing drug leads that are commercially viable
or that we will otherwise be able to achieve our strategic goals.
In April 2002, we announced that the Company had created a new class of
anti-bacterial agents specific to certain pathogenic bacteria and that we had
filed a provisional U.S. patent application regarding the structure and use of
these agents. This new class of agents indicated on a preliminary basis in vitro
anti-bacterial activity against strains of STAPHYLOCOCCUS AUREUS and other
Gram-positive bacteria that show resistance to certain, currently available
therapeutic agents. Our continuing work to create drugs based on these agents
will employ our proprietary research technologies, as well as the other
activities described below. There can be no assurance, however, that we will be
successful in producing clinical drug candidates.
In April 2002, we announced that we are exploring acquisition and
merger opportunities that would provide pharmaceutical compounds that are in or
close to human clinical trials. We plan to identify and acquire clinical drug
candidates that complement our own technologies and accelerate our development
of proprietary drugs. We have engaged a strategic and financial advisory firm
with experience in biotechnology to assist in this endeavor. There can be no
assurance, however, that we will be successful in obtaining clinical drug
candidates or accelerating our development of proprietary drugs.
In April 2002, we announced that Bristol-Myers Squibb ("BMS") advised
us that it would not provide additional funding beyond their previous commitment
for our research related to the development of a new fermentation process for
paclitaxel. The sponsored research program has been actively funded by BMS since
1998 and we received their final payment in February of this year. Our Master
License Agreement with BMS remains in effect.
As a result of our decision to focus on the discovery and creation of
drug leads as well the lack of continued external funding of our paclitaxel
research, we recently restructured our program of internal scientific projects.
We have discontinued support of certain projects that are not consistent with
the new focus. Consequently, we recently eliminated several scientific,
administrative and support positions that will result in severance payments of
approximately $50,000 which will be recognized in the second quarter of 2002. We
plan to out-license to or partner
8
with other companies to advance our system for producing glucocerebrosidase used
in treating Gaucher's Disease. There can be no assurance that we will be
successful in finding partners for these programs.
We anticipate that the focus of our efforts for the next twelve months will be
as follows:
o Accelerating discovery and development of candidate drug leads through
increased outsourcing.
o Advancing our research related to enzyme targets that are central to the
development of resistance by Mycobacterium tuberculosis, the causative
agent of tuberculosis. Using QCT we are in the preclinical discovery stage
of creating "core inhibitors" of the specific enzyme targets.
o Developing anti-infective candidate drug leads pursuant to our recently
announced creation of a new class of anti-bacterial agents.
o Establishing a partner relationship to advance and leverage our QCT(TM) and
OASIS(TM) research platforms.
o Acquiring later-stage pharmaceutical compounds that complement our own
technologies to accelerate the development of proprietary drugs.
o Divesting, via out-licensing or partnering, our system for producing
glucocerebrosidase used in treating Gaucher's Disease.
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.
RESULTS OF OPERATIONS
Revenue
Revenues were $333,000 for the three months ended March 31, 2002 and
$333,000 for the three months ended March 31, 2001. Revenues in both periods
were 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 $1,241,000 for the
three months ended March 31, 2002 and $1,177,000 for the three months ended
March 31, 2001, an increase of $64,000 or 5 percent. The increase in research
and development expenses for the three months ended March 31, 2002 as compared
to the same period in 2001 was due to a $21,000 increase in research services
and supplies, a $60,000 increase for research consultants, a $41,000 increase in
facilities and equipment related expenses, a $24,000 increase in research
operating costs previously charged to general and administrative, offset by an
$82,000 decrease in expenses for contract research, licenses and royalties.
9
General and Administrative Expenses
We incurred general and administrative expenses of $1,061,000 for the
three months ended March 31, 2002 and $937,000 for the three months ended March
31 2001, an increase of $124,000 or 13 percent. The increase in general and
administrative expenses for the three months ended March 31, 2002 as compared to
the same period in 2001 was attributable to a $140,000 increase in professional
fees for legal services related to intellectual property and general corporate
legal activities and audit fees, a $31,000 increase in administrative salary
expense, a $75,000 increase in professional consultant fees primarily as a
result of increased business development activities, a $7,000 increase in other
general and administrative expenses, offset by an $80,000 decrease in governance
fees, a $24,000 decrease in public and financial relations expenses and a
$25,000 decrease in research operating costs now charged to research and
development expenses.
Stock Based Compensation
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) Issue No. 96-18. The Company has recognized
deferred stock compensation related to certain stock option and warrant grants.
During the three months ended March 31, 2002 the Company granted 10,000, 25,000,
10,000 and 25,000 options to purchase shares of common stock at $7.13, $3.28,
$3.20 and $1.67 per share, respectively, in return for consulting services.
During the three months ended March 31, 2001 the Company granted 5,000 options
to purchase shares of common stock at $7.188 per share in return for consulting
services. The Company valued these options based on the Black-Scholes option
pricing model. As a result, the Company recorded a charge of $39,100 and $1,400
during the three months ended March 31, 2002 and 2001, respectively, related to
these grants. In connection with other option grants to consultants in previous
years, the Company recorded a charge of $46,000 and $115,700 during the three
months ended March 31, 2002 and 2001, respectively.
Interest Income
Interest income was $189,000 and $461,000 for the three months ended
March 31, 2002 and March 31, 2001, respectively. The decrease was due primarily
to lower interest rates in the first quarter of 2002 and also to lower principal
balances.
Net Loss
We incurred a net loss attributable to common shareholders of
$1,938,000 and $1,520,000 for the three months ended March 31, 2002 and March
31, 2001, respectively. The increase in net loss of $418,000 was primarily the
result of the aforementioned changes in our operations. Net loss per common
share was $0.12 and $0.09 for the three months ending March 31, 2002 and March
31, 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had cash, cash equivalents and investments of
approximately $24,300,000. 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, 2002, net
cash used in operating activities was $1,345,000, the largest element of which
was the net loss attributable to common shareholders of $1,938,000. In addition,
during the three months ended March 31, 2002 we used $23,000 in financing
activities and received $123,000 from investing activities, primarily from the
sale of equipment. As a result of the decision by BMS to discontinue funding of
our paclitaxel research efforts, we have lost our sole source of revenue. We
cannot make any assurance as to when, if ever, we will generate significant
revenue again.
We have scheduled payments to fund scientific research at academic
institutions and to make minimum royalty payments for licensing and
collaborative agreements of approximately $425,000 during the remainder of 2002.
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 ending December
31, 2002.
We believe that we have sufficient cash, cash equivalents, and
investments on hand at March 31, 2002 to finance our plan of operation through
December 31, 2002. However, there can be no assurance that we will generate
sufficient revenues, if any, to fund our 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.
10
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to financial market risk, including changes in interest
rates, relates primarily to our marketable security investments. We generally
place our marketable security investments in high credit quality instruments,
primarily U.S. government obligations. We do not believe that a 100 basis point
increase or decrease in interest rates would significantly impact our business.
We do not have any derivative instruments. We operate only in the United States
and all sales have been made in U.S. dollars. We do not have any material
exposure to changes in foreign currency exchange rates.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed herewith as part of this form 10-Q:
None
The following report was filed on Form 8-K during the quarter ended March 31,
2002:
None
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXEGENICS INC.
Date: May 9, 2002 /s/ Joan H. Gillett
-------------------------------
Joan H. Gillett, CPA
Vice President/Controller
Principal Accounting Officer
12