================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
-------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 000-49744
-------------------------
ADERIS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
-------------------------
Delaware 54-1749283
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
85 Main Street
Hopkinton, Massachusetts 01748
(Address of principal executive offices, including zip code)
(508) 497-2300
(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 [_] No [X]
================================================================================
ADERIS PHARMACEUTICALS, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
Page
----
PART I. FINANCIAL INFORMATION................................................................. 1
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheet as of December 31, 2001 and March 31, 2002 (unaudited)........ 1
Consolidated Statements of Operations for the three months ended March 31, 2001 and
March 31, 2002 (unaudited)............................................................... 2
Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and
March 31, 2002 (unaudited)............................................................... 3
Notes to Consolidated Financial Statements (unaudited)................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 7
Item 3. Quantitative and Qualitative Disclosure About Market Risk........................... 21
PART II. OTHER INFORMATION AND SIGNATURES...................................................... 22
Item 1. Legal Proceedings................................................................... 22
Item 2. Changes in Securities and Use of Proceeds........................................... 22
Item 5. Other Information................................................................... 22
Item 6. Exhibits And Reports On Form 8-K.................................................... 22
i
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
ADERIS PHARMACEUTICALS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (Unaudited)
December 31, March 31,
- ------------------------------------------------------------------------------------------
2001 2002
- ------------------------------------------------------------------------------------------
Assets (unaudited)
Current Assets:
Cash and cash equivalents.................................. $ 42,820,944 $ 37,812,743
Prepaid expenses and other current assets.................. 152,497 523,902
------------ ------------
Total current assets..................................... 42,973,441 38,336,645
Property and Equipment, net................................... 365,058 572,098
Other Assets.................................................. 123,500 1,012,000
------------ ------------
$ 43,461,999 $ 39,920,743
============ ============
Liabilities And Stockholders' Deficit
Current Liabilities:
Accounts payable........................................... $ 169,774 $ 488,667
Accrued expenses and other current liabilities............. 1,975,674 821,585
------------ ------------
Total current liabilities................................ 2,145,448 1,310,252
------------ ------------
Convertible Preferred Stock, $0.001 par value:
Undesignated convertible preferred stock--
Authorized--203,647 shares
Issued and outstanding--none.............................. -- --
Series A convertible preferred stock--
Authorized--666,667 shares
Issued and outstanding--666,667 shares at December 31,
2001 and March 31, 2002.................................. 480,303 480,303
Series B convertible preferred stock--
Authorized--1,500,000 shares
Issued and outstanding--1,316,909 shares at
December 31, 2001 and March 31, 2002..................... 7,844,443 7,844,443
Series C convertible preferred stock--
Authorized--538,776 shares
Issued and outstanding--538,776 shares at December 31,
2001 and March 31, 2002.................................. 5,484,110 5,484,110
Series D convertible preferred stock--
Authorized--4,090,910 shares
Issued and outstanding--4,076,834 shares at December
31, 2001 and March 31, 2002.............................. 42,406,576 42,406,576
Stockholders' Deficit:
Common stock, $0.001 par value--
Authorized--50,000,000 shares
Issued and outstanding--2,961,478 shares and 3,798,821
shares at December 31, 2001 and March 31, 2002,
respectively.............................................. 2,961 3,799
Additional paid-in capital................................... 15,321,587 15,714,743
Deferred compensation........................................ (5,636,169) (4,746,228)
Deficit accumulated during the development stage............. (24,587,260) (28,577,255)
------------ ------------
Total stockholders' deficit.............................. (14,898,881) (17,604,941)
------------ ------------
$ 43,461,999 $ 39,920,743
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
1
ADERIS PHARMACEUTICALS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the three months For the period from
ended March 31, inception (April 22,
------------------------ 1994) to March 31,
2001 2002 2002
- --------------------------------------------------------------------------------------------------------------------------
Revenues:
License fees and collaboration revenues(a)............................. $ 536,013 $ -- $ 20,117,603
Grant revenues......................................................... -- -- 150,000
----------- ----------- ------------
Total revenues...................................................... 536,013 -- 20,267,603
----------- ----------- ------------
Costs and Expenses:
Research and development(a)(b)......................................... 1,337,431 2,010,542 26,911,535
General and administrative(b).......................................... 534,459 1,159,598 10,715,801
Stock-based compensation(b)............................................ 365,624 1,007,849 8,519,514
Royalty expense........................................................ 5,000 5,000 2,020,400
Write-offs of purchased technology..................................... -- -- 724,242
In-Process research and development write-offs......................... -- -- 309,503
----------- ----------- ------------
Total operating expenses............................................ 2,242,514 4,182,989 49,200,995
----------- ----------- ------------
Loss from operations................................................ (1,706,501) (4,182,989) (28,933,392)
----------- ----------- ------------
Other Income (Expense):
Interest income........................................................ 150,783 193,155 1,528,148
Other income........................................................... -- (161) 49,093
Interest expense....................................................... -- -- (790,882)
----------- ----------- ------------
Total other income.................................................. 150,783 192,994 786,359
Loss before income taxes............................................ (1,555,718) (3,989,995) (28,147,033)
Provision for Income Taxes................................................ -- -- 430,222
----------- ----------- ------------
Net loss............................................................ $(1,555,718) $(3,989,995) $(28,577,255)
=========== =========== ============
Net loss per share
Basic.................................................................. $ (0.57) $ (1.15)
=========== ===========
Diluted................................................................ $ (0.57) $ (1.15)
=========== ===========
Pro forma basic and diluted............................................ $ (0.27)
===========
Weighted average shares outstanding--
Basic.................................................................. 2,743,522 3,475,111
=========== ===========
Diluted................................................................ 2,743,522 3,475,111
=========== ===========
Pro forma basic and diluted............................................ 14,783,955
===========
(a)The following summarizes revenues and expenses from related parties:
License fees and collaboration revenues................................ $ -- $ -- $ 9,242,342
Research and development expenses...................................... $ -- $ -- $ 1,500,000
(b)The following summarizes the departmental allocation of the stock-based
compensation charge:
Research and development............................................... $ 41,319 $ 276,723 $ 1,118,354
General and administrative............................................. $ 324,305 $ 731,126 $ 7,401,160
----------- ----------- ------------
Total stock-based compensation...................................... $ 365,624 $ 1,007,849 $ 8,519,514
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
2
ADERIS PHARMACEUTICALS, INC.
(A development stage company)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the
period from
inception
For the three (April 22,
Months ended 1994) to
March 31, March 31,
2001 2002 2002
- --------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net loss..................................... (1,555,718) (3,989,995) $(28,577,255)
Adjustments to reconcile net loss to net
cash used in operating activities--
Noncash interest on convertible notes....... -- -- 790,239
Write-off of purchased technology........... -- -- 1,033,746
Depreciation and amortization............... 7,257 27,090 1,078,602
Stock-based compensation expense
related to options to employees and
nonemployees.............................. 365,624 1,007,849 8,519,514
Issuance of Series B convertible
preferred stock to vendor for
services performed........................ -- -- 100,002
Changes in operating assets and
liabilities--
Prepaids and other current assets......... (13,027) (371,405) (523,902)
Other assets.............................. 17,960 (888,500) (1,012,000)
Accounts payable.......................... 40,945 318,893 488,667
Accrued expenses and other current
liabilities.............................. 1,262,024 (1,154,089) 821,585
Deferred revenues......................... (536,013) -- --
----------- ----------- ------------
Net cash used in operating
activities............................. (410,948) (5,050,157) (17,280,802)
----------- ----------- ------------
Cash Flows from Investing Activities
Purchases of property and equipment.......... (74,814) (234,130) (711,684)
Purchase of Whitby Research, net of cash
acquired.................................... -- -- (500,000)
Purchase of Renalogics, Inc., net of
cash acquired............................... -- -- (311,416)
----------- ----------- ------------
Net cash used in investing
activities............................. (74,814) (234,130) (1,523,100)
----------- ----------- ------------
Cash Flows from Financing Activities
Net proceeds from issuance of Series A
convertible preferred stock................. -- -- 480,303
Net proceeds from issuance of Series B
convertible preferred stock................. -- -- 2,526,486
Net proceeds from issuance of Series C
convertible preferred stock................. -- -- 5,484,110
Net proceeds from issuance of Series D
convertible preferred stock................. 28,743,847 -- 43,645,277
Proceeds from notes payable to
stockholders................................ -- -- 4,100,000
Proceeds from issuance of common stock....... -- -- 14,083
Proceeds from exercise of common stock
options..................................... -- 276,086 366,386
----------- ----------- ------------
Net cash provided by financing
activities............................. 28,743,847 276,086 56,616,645
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash
Equivalents.................................. 28,258,085 (5,008,201) 37,812,743
Cash and Cash Equivalents, beginning of
period....................................... 4,118,162 42,820,944 --
----------- ----------- ------------
Cash and Cash Equivalents, end of period...... 32,376,247 37,812,743 $ 37,812,743
=========== =========== ============
Supplemental Cash Flow Information
Cash paid for income taxes................... $ -- $ -- $ 354,222
=========== =========== ============
Supplemental Disclosure of Noncash
Investing and Financing Activities
Issuance of Series B convertible
preferred stock and common stock upon
conversion of notes payable................. $ -- $ -- $ 4,890,239
=========== =========== ============
Net Cash Paid for the Acquisitions
Fair value of assets......................... $ -- $ -- $ 1,987,610
Fair value of common stock issued............ -- -- (1,161,346)
----------- ----------- ------------
Cash paid.................................... -- -- 826,264
Less--cash acquired.......................... -- -- (14,848)
----------- ----------- ------------
Net cash paid for the acquisitions.......... $ -- $ -- $ 811,416
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
3
Aderis Pharmaceuticals, Inc.
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Consolidated Financial Statements
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) for reporting on Form 10-Q.
Accordingly, certain information and footnote disclosure required for complete
financial statements are not included herein. It is recommended that these
financial statements be read in conjunction with the consolidated financial
statements and related notes of Aderis Pharmaceuticals, Inc. (the "Company") for
the year ended December 31, 2001 as reported in the Company's S-1 (Registration
No. 333-76612) filed with the SEC. In the opinion of management, all adjustments
(consisting of normal, recurring adjustments) considered necessary for a fair
presentation of financial position, results of operations and cash flows at the
dates and for the periods presented have been included. The consolidated balance
sheet presented as of December 31, 2001 has been derived from the consolidated
financial statements that have been audited by the Company's independent public
accountants. The results of operations for the period ended March 31, 2002 may
not be indicative of the results that may be expected for the year ending
December 31, 2002, or for any other future period.
Principles of consolidation
The accompanying consolidated financial statements include the Company and
its wholly-owned subsidiary, Renalogics, Inc. Intercompany balances are
eliminated in consolidation.
Use of estimates
The preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts and disclosure of certain assets and liabilities at the balance sheet
date. Such estimates include the recording of revenue and expenses, the carrying
value of property and equipment and intangible assets and the value of certain
liabilities. Actual results may differ from such estimates.
Revenue recognition
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," was issued
in December 1999. SAB No. 101 requires companies to recognize certain up-front
nonrefundable fees and milestone payments over the life of the related alliances
when such fees are received in conjunction with alliances that have multiple
elements. The Company has adopted SAB No. 101 for all periods presented.
The Company has entered into agreements with pharmaceutical companies under
which it licenses product rights to certain compounds, earns milestone payments
(based on the pharmaceutical company achieving certain milestones in the
development of the compound), consulting fees and research and development cost
reimbursements. Under these arrangements, the Company has fulfilled all of its
contractual development obligations as of March 31, 2002 and any additional
development work requested to be performed by the pharmaceutical company will be
charged for at a rate at which the Company would separately charge for these
development services. The Company is also involved on committees with these
pharmaceutical companies monitoring the development of these compounds. As a
result of this, the Company is recognizing the total expected fees under these
contracts, exclusive of royalties (as the receipt of royalties do not occur
until the successful development and sale of a product which is a separate
discrete earnings event), as revenue on a straight-line basis over the estimated
development period of the compound to the extent such amount is not greater than
cash received.
4
Aderis Pharmaceuticals, Inc.
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The pharmaceutical company has the right to cancel these agreements at any
time and all payments received are nonrefundable; therefore, no revenue is
recognized ahead of cash received. Deferred revenue consists of payments
received in advance of revenue-recognized under these agreements.
Cash and cash equivalents
Cash equivalents consist of short-term, highly liquid investments with
maturities of 90 days or less when acquired. Cash equivalents, which consisted
primarily of money market accounts, are stated at cost, which approximate market
value.
Research and development expenses
Research and development costs are charged to operations as incurred.
Basic and diluted income (loss) per common share
The Company applies SFAS No. 128, "Earnings per Share," which establishes
standards for computing and presenting earnings per share. Basic net income
(loss) per share excludes potential dilution and is computed by dividing net
income (loss) by the weighted average number of unrestricted common shares
outstanding for the period. Diluted net income per share is computed by dividing
net income by the diluted weighted average number of common and
common-equivalent shares outstanding during the period.
For the three months ended March 31, 2001 and 2002, 1,644,870 and 2,163,681
shares, respectively, of options and warrants were excluded from the computation
of diluted net loss per share, as their effort would be anti-dilutive. In
addition, 8,676,237 and 10,941,993 shares of convertible preferred stock as
converted have been excluded from the calculation of diluted net loss per share
for the three months ended March 31, 2001 and 2002, respectively, as their
effect would be anti-dilutive.
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred stock that will convert
upon the completion of the Company's proposed initial public offering (using the
if-converted method) from the original date of issuance. Upon consummation of
the proposed initial public offering, all of the convertible preferred stock
outstanding as March 31, 2002 will be converted into an aggregate of 10,941,993
shares of common stock. In addition, the Company will also issue 366,851 shares
of common stock to the previous shareholders of Renalogics. These shares have
been included in the calculation of pro forma earnings per share.
Comprehensive income (loss)
SFAS No. 130, "Reporting Comprehensive Income," requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
involving nonowner sources. The Company does not have any items of comprehensive
loss other than its reported net loss.
Disclosures about segments of an enterprise
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information regarding
operating segments and establishes standards for related disclosure about
products and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or decision
making group, in making decisions
5
Aderis Pharmaceuticals, Inc.
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
regarding resource allocation and assessing performance. To date, the Company
has viewed its operations and manages its business as one operating segment.
As of March 31, 2002, all of the Company's assets are located in the United
States.
All of the Company's revenue for the three months ended March 31, 2002 was
derived from customers located in the United States.
Recently issued accounting pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method of
accounting. SFAS No. 142 discusses how intangible assets that are acquired
should be accounted for in financial statements upon their acquisition and also
how goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. Beginning on January 1,
2002, with the adoption of SFAS No. 142, goodwill and certain purchased
intangibles existing on June 30, 2001 will no longer be subject to amortization
over their estimated useful lives. Rather, the goodwill and certain purchased
intangibles will be subject to an annual assessment for impairment based on fair
value. The provisions of SFAS No. 142 are required to be adopted starting with
fiscal years beginning after December 15, 2001. The adoption of these statements
did not have a material impact on the Company's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121.
SFAS No. 144 further refines the requirements of SFAS No. 121 that companies (i)
recognize an impairment loss only if the carrying amount of a long-lived asset
is not recoverable based on its undiscounted future cash flows and (ii) measure
an impairment loss as the difference between the carrying amount and fair value
of the asset. In addition, SFAS No. 144 provides guidance on accounting and
disclosure issues surrounding long-lived assets to be disposed of by sale. The
adoption of this statement did not have a material impact on the Company's
financial position or results of operations. The provisions of SFAS No. 144 are
required to be adopted starting with fiscal years beginning after December 15,
2001.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion of the financial condition and
results of our operations in conjunction with the financial statements and the
notes to those statements included elsewhere in this Quarterly Report. The
discussion in this Quarterly Report contains forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. The cautionary statements made in this Quarterly
Report should be read as applying to all related forward-looking statements
wherever they appear in this Quarterly Report. Our actual results could differ
materially from those discussed here. Factors that could cause or contribute to
these differences include those discussed in "Risks Related to our Business," as
well as those discussed elsewhere in this Quarterly Report. See "Risks Related
to our Business" and "Cautionary Note Regarding Forward-Looking Statements"
herein.
OVERVIEW AND CRITICAL ACCOUNTING POLICIES
We were formed in 1994 to develop small molecule drugs that act selectively
on subtypes of dopamine and adenosine receptors. We began operations by
acquiring the pharmaceutical research programs of Whitby Research, Inc., a
wholly owned subsidiary of Ethyl Corp. In 1999, we acquired Renalogics, Inc., a
development stage company that had funded two early stage research programs at
Emory University.
To date, our revenues have consisted primarily of license fees, milestone
payments and other fees pursuant to product license and development agreements
between us and our corporate collaborators. Staff Accounting Bulletin (SAB) No.
101, issued in December 1999, requires companies to recognize certain up-front
nonrefundable fees and milestone payments over the life of the related contract
alliance when such fees are received in conjunction with alliances that have
multiple elements. We have entered into development agreements for three of our
drug candidates under which we license product rights to certain of our
compounds, for which we earn up-front license fees and on-going milestone
payments as our collaborators reach certain development milestones specified in
the contracts. Payments under these agreements are non-refundable. Each contract
calls for us to participate on an on-going basis in joint management committees
and potentially provide fee-based development assistance to our collaborators.
As a result of this on-going involvement on our part, we recognize total fixed
or determined contract revenues on a straight-line basis over the development
period set forth in the contract adjusted from time to time for any delays in
development or clinical trials of the compound. Most of our contracts can be
canceled by our collaborators at any time, allowing our collaborators to avoid
the payment of future fees. Therefore, we do not recognize revenues ahead of
actual cash received. Any royalty payments to us provided for in our contracts
are recognized in the period in which they are earned. Deferred revenues consist
of payments received in advance of revenues recognized under these agreements.
Revenues have varied and will likely vary in the future from period to period
due principally to the timing of milestone payments and the progress towards
attainment of development milestones by our collaborators.
Research and development expenses primarily consist of salaries and related
expenses for personnel and consulting services. Other research and development
expenses include fees paid to outside service providers for materials
manufacturing and clinical trial design and management, fees paid to
consultants, the costs of laboratory supplies and materials, amortization of
purchased technology and allocations of other corporate costs. We charge all
research and development expenses to operations as they are incurred. Our
research and development activities are focused on pre-clinical testing and
clinical development of small molecule drugs to treat central nervous system,
cardiovascular and renal system disorders. Our activities include but are not
limited to:
. laboratory testing of a variety of molecules to determine their
potential utility in humans in treating the target disorders;
7
. pre-clinical testing of the molecules to assess their pharmacologic
activity and toxicity potential; and
. a series of clinical testing in healthy volunteers and patients to
determine the safety and efficacy of the drug candidates.
We are not directly compensated for our research and development
activities. We fund the costs of early development of our product candidates and
assess on an on-going basis:
. their medical and commercial potential;
. the medical and clinical risks of continued development; and
. the feasibility and advisability of entering into a collaboration
agreement for continued development and commercialization of our drug
candidates.
Clinical development timelines, likelihood of success and total costs can
and do vary widely based in part on the targeted indication, whether therapy is
required to be acute or chronic and the inherent unpredictability of attracting
subjects to participate in the required clinical trials. We anticipate that we
will make on-going determinations as to which research and development projects
to pursue and how much funding to direct to each project on an on-going basis in
response to the scientific and clinical success of each product candidate.
Selling and general and administrative expenses primarily consist of
salaries and related expenses for personnel in business development,
administration, finance, accounting and human resources. Other costs include
facility costs and professional fees for legal and accounting services.
Royalty expense consists of charges related to our in-licensing of the
compounds and related technologies for our product candidates. These charges are
typically incurred under our various agreements for purchased and in-licensed
technology when we receive payments from our product candidates which
incorporate technology covered under such agreements. These charges are computed
as a percentage of the license fees, milestone payments and on-going royalties,
if any, received by us related to our product candidates. The amounts and term
of these obligations vary by product candidate.
We have granted stock options to employees and non-employees at prices,
which for financial reporting purposes, are deemed below fair market value on
the dates of grant. As a result, we have recorded deferred compensation expense,
which represents, in the case of employees, the difference between the option
exercise price and the deemed fair value of our common stock. In the case of
non-employees, deferred compensation represents the fair market value of the
options granted, computed using the Black-Scholes option-pricing model.
RESULTS OF OPERATIONS
Three months ended March 31, 2002 and 2001
Revenue
Revenue for the three months ended March 31, 2002 decreased $0.5 million to
$0.0 million from $0.5 million for the three months ended March 31, 2001. The
decrease is due to no milestone payments being earned or received from our
collaborators during the period ended March 31, 2002.
Research and development expenses
Research and development expenses for the three months ended March 31, 2002
increased $0.7 million to $2.0 million from $1.3 million for the three months
ended March 31, 2001. The increase is
8
primarily composed of $1.0 million of increased spending related to acceleration
of toxicology testing and manufacturing of sustained release dosage forms of our
product candidate, DTI-0009 for atrial fibrillation and $0.1 million in costs
related to additional staff. These increases are offset by reductions in
clinical trial expenses of $0.5 million resulting from the discontinuance in
2001 of testing efforts related to DTI-0026, a drug candidate for treating
kidney disease that showed poor clinical results and from the completion in 2001
of Phase I clinical testing of DTI-0017 and its current reformulation. During
the three months ended March 31, 2002, we estimate that we spent 78% of our
total research and development expenses on our DTI-0009 program for atrial
fibrillation compared to 42% for the three months ended March 31, 2001. This
increase is due primarily to acceleration of the development program for the
oral dosage form of this drug candidate. During the three months ended March 31,
2002, we estimate that we spent 2% of our total research and development
expenses on our DTI-0026 program for treating kidney disease and 2% on our
DTI-0017 programs for congestive heart failure compared to 22% for each of these
programs for the three months ended March 31, 2001. The decrease is due to the
discontinuance in 2001 of the DTI-0026 program and reduced spending on clinical
testing of DTI-0017 in 2002. During the three months ended March 31, 2002, we
estimate that we spent 18% of our total research and development expenses on
other early stage research efforts compared to 14% for the three months ended
March 31, 2001. Allocations of expenses to each development program are based on
actual outsourced costs for each program and an allocation of internal salaries
and support costs based on the estimate of time spent on each program. We expect
research and development expenses to continue to increase in the future as more
of our drug candidates progress into clinical trials.
General and administrative expenses
General and administrative expenses increased approximately $0.7 million to
$1.2 million for the three months ended March 31, 2002 from $0.5 million for the
three months ended March 31, 2001. This increase is primarily attributable to
our investment in development of the administrative infrastructure necessary to
enable us to continue to expand our operations, support our accelerated
development efforts and facilitate the additional reporting and regulatory
requirements of a public company. The increase is primarily composed of $0.2
million of marketing and investor relations expenses, $0.2 million of consulting
expenses related to development of our administrative infrastructure, additional
costs of $0.1 million in company wide employee benefits and facilities related
expenses of $0.1 million.
Stock based compensation
Stock based compensation increased approximately $0.6 million to $1.0
million for the three months ended March 31, 2002 from $0.4 million for the
three months ended March 31, 2001. The increase is primarily attributable to an
$0.8 million increase of stock compensation expense in connection with the
current and previous grant of stock options to our officers, directors and other
employees and a $0.2 million decrease related to the cashless exercise of
options by a former member of management during the first quarter of 2001.
Net interest income
Net interest income increased approximately $42,000 to $0.2 million for the
three months ended March 31, 2002 from $0.2 million for the three months ended
March 31, 2001. The increase is attributable to increased cash balances
resulting from the sale of Series D preferred stock during 2001.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
private placements of common stock and preferred stock, as well as payments we
received under licensing agreements and loans. As of March 31, 2002 we had
raised aggregate net proceeds from loans and the sale of our common stock and
preferred stock of $56.6 million. In addition, through March 31, 2002, we had
received $20.3 million from license fees, milestone payments and research
contracts.
9
Cash and cash equivalents were $37.8 million at March 31, 2002 compared to
$42.8 million at December 31, 2001. The decrease in cash balances at March 31,
2002 resulted primarily from operating expenses for the three month period
related to conducting clinical trials and other research and development
activities and costs associated with our proposed initial public offering.
Net cash used for operating activities was $5.1 million and $0.4 million
for the three months ended March 31, 2002 and March 31, 2001, respectively. The
increase from 2001 to 2002 consisted primarily of lower revenues in 2002 and
increased operating expenses related to conducting clinical trials and other
research, development and administrative activities and the timing of cash
payments related to these activities.
Net cash used for investing activities was $0.2 million and $0.1 million
for the three months ended March 31, 2002 and March 31, 2001, respectively. The
increase from 2001 to 2002 is related primarily to the purchase of certain
laboratory equipment and analytical instrumentation.
Net cash provided by financing activities was $0.3 million for the three
months ended March 31, 2002 compared with cash provided for the three months
ended March 31, 2001 of $28.7 million. The decrease in cash provided by
financing activities is due to the proceeds realized in the three months ended
March 31, 2001 from the sale of our Series D preferred stock.
We expect to continue to incur substantial operating losses. Our future
capital requirements are difficult to forecast and will depend on many factors,
including:
. cash requirements of any potential acquisitions;
. scientific progress in our research and development programs;
. the size and complexity of these programs;
. the scope and results of preclinical studies and clinical trials;
. our ability to establish and maintain corporate partnerships;
. the time and costs involved in obtaining regulatory approvals;
. the costs involved in filing, prosecuting and enforcing patent claims;
. competing technological and market developments;
. the cost of manufacturing preclinical and clinical material; and
. other factors not within our control.
Although we currently have no specifically identified material commitments
for capital expenditures, we anticipate that implementing our strategy will
require substantial increases in our capital expenditures and other capital
commitments. Considering our current spending levels on our existing programs
and a likely future increase in activity on these programs, estimates of future
staff growth and related spending and the estimated capital requirements of
potential in-licensing activity and future acquisitions, we believe that
existing capital resources should be sufficient to fund our operations for at
least the next 24 months.
Until we can generate sufficient cash from our operations to sustain our
business, which we do not expect for the foreseeable future, we expect to
finance future cash needs through private and public financings, including
equity financings. We cannot be certain that additional funding will be
available
10
when needed or on favorable terms. If funding is not available, we may need to
delay or curtail our development and commercialization activities to a
significant extent.
We cannot estimate the completion dates and costs of our current internal
research and development programs due to inherent uncertainties in outcomes of
clinical trials and regulatory approvals of our product candidates. We cannot be
certain that we will be able to successfully complete our research and
development projects or successfully find collaboration or distribution partners
for our product candidates. Our failure to complete our research and development
projects could have a material adverse effect on our financial position or
results of operations.
STOCK COMPENSATION
In connection with the grant of stock options to employees, we recorded
deferred compensation totaling $35,300 for the three months ended March 31, 2002
representing the difference between the exercise price and the deemed fair value
of our common stock for financial reporting purposes on the date those options
were granted. This amount is initially recorded as a component of stockholders'
equity and is being charged against income over the vesting period of the
individual options. We recorded stock compensation expense related to employee
options of $0.9 million for the three months ended March 31, 2002. At March 31,
2002, we had a total of $4.7 million remaining to be amortized over the vesting
periods of the stock options.
We expect to record deferred stock compensation expense for options granted
through March 31, 2002, assuming no forfeitures, as follows:
Amount
------------
Nine months ending December 31, 2002.......... $ 2,107,000
Twelve months ending December 31, 2003........ 1,590,000
Twelve months ending December 31, 2004........ 796,000
Twelve months ending December 31, 2005........ 253,000
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements that involve
risks and uncertainties. These statements relate to future events or our future
financial performance. We have attempted to identify forward-looking statements
by terminology including "anticipates," "believes," "can," "continue," "could,"
"estimates," "expects," "intends," "may," "plans," "potential," "predicts,"
"should" or "will" or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under
"Risks Related to our Business," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We undertake no obligation to publicly
update any forward-looking statements, whether as a result of new information,
future events or otherwise. Please also note that we provided a cautionary
discussion of risks and uncertainties under the section entitled "Risks Related
to our Business" below. The factors identified below and those set forth in our
SEC filings are the factors that we think could cause our actual results to
differ materially from expected results. Other factors besides those listed here
could also adversely affect us. This discussion is provided as permitted by the
Private Securities Litigation Reform Act of 1995.
11
RISKS RELATED TO OUR BUSINESS
We have a history of operating losses and accumulated deficit, and we may not
achieve or maintain profitability in the future.
Since we were founded in 1994, we have engaged primarily in organizational
and research and development efforts. We have incurred operating losses in all
but two years since our inception, and we may never achieve sustained
profitability. The net loss for the fiscal years ended December 31, 2000 was
$4.9 million compared to net income of $1.1 million for the fiscal year ended
December 31, 1999. The net loss for the year ended December 31, 2001 was $11.1
million. The net loss for the three months ended March 31, 2002 was $4.0
million. As of March 31, 2002, we had an accumulated deficit of $28.6 million.
Our losses have resulted principally from costs incurred in connection with our
research and development activities and from general and administrative costs
associated with our operations.
We have not commercially launched any products to date and do not expect to
do so in the near future. Our ability to generate revenue from product sales or
to achieve profitability is dependent on our ability, alone or with our
corporate collaborators, to successfully and timely design, develop, manufacture
and commercialize our product candidates. Our revenues to date have been
generated principally from license fees and milestone payments from our drug
compounds. We expect that our costs will continue to exceed our revenues on an
annual basis for the foreseeable future. We may never achieve profitability.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
Our operating results fluctuate significantly, and any failure to meet financial
expectations may disappoint securities analysts or investors and result in
a decline in our stock price, assuming the closing of our initial public
offering, causing investor losses.
Our operating results have fluctuated in the past and are likely to do so
in the future. These fluctuations could cause our stock price to decline,
assuming the closing of our initial public offering. Some of the factors that
could cause our operating results to fluctuate include:
. expiration or termination of agreements with collaborators, which
may not be renewed or replaced;
. general and industry-specific economic conditions, which may
affect our collaborators' and our research and development
expenditures on our out-licensed drug candidates;
. inability of our collaborators and us to complete non-clinical
and clinical studies in a timely manner that results in a failure
or delay in receiving the required regulatory approvals to
commercialize our drug candidates;
. the timing and willingness of our collaborators to invest the
resources necessary to commercialize our drug candidates;
. the timing of receipts of milestone payments from our
collaborators; and
. the timing of regulatory approvals, if any.
If our revenues decline in a quarter, whether due to a delay in recognizing
expected revenues or otherwise, our earnings will decline because many of our
expenses are relatively fixed. In particular, our research and development and
general and administrative expenses are not affected directly by variations in
revenue.
12
Due to fluctuations in our revenues and operating expenses, we believe that
period-to-period comparisons of our results of operations are not a good
indication of our future performance. It is possible that in some future quarter
or quarters, our operating results will be below the expectations of securities
analysts or investors. In that case and assuming the closing of our initial
public offering, our stock price could fluctuate significantly or decline.
We are at an early stage of development and we do not have, and may never
develop, any commercial drugs or other products that generate revenues.
We are a biopharmaceutical company at an early stage of development, and we
do not have any commercial products. Our drug candidates will require
significant additional development, clinical trials, regulatory clearances and
additional investment before they can be commercialized. Our product development
efforts may not lead to commercial drugs, either because the drug candidates
fail to be safe and effective in clinical trials or because we have inadequate
financial or other resources to pursue our drug candidates through the clinical
trial process. We do not expect to be able to market any of our existing drug
candidates for a number of years, if at all. If we are unable to develop any
commercial drugs, or if such development is delayed, we will be unable to
generate product revenues.
The regulatory approval process is expensive, time consuming, uncertain and may
prevent us from obtaining required approvals for the commercialization of
some of our drug candidates.
The research, testing, manufacturing and marketing of drug candidates are
subject to extensive regulation by numerous regulatory authorities in the United
States and other countries. In addition, countries other than the United States
have complex and technical regulatory requirements that differ from country to
country. Failure to comply with the regulatory requirements of the Food and Drug
Administration, or FDA, and other applicable foreign and US regulatory
requirements may subject a company to administrative or judicially imposed
sanctions. These include:
. warning letters;
. civil penalties;
. criminal penalties;
. injunctions;
. product seizure or detention;
. product recalls;
. total or partial suspension of production; and
. FDA refusal to approve pending new drug applications, or NDAs, or
supplements to approved NDAs.
Our drug candidates are in the early stages of development and have not
received required regulatory clearance from the FDA or any other foreign or US
regulatory body to be commercially marketed and sold. The regulatory clearance
process typically takes many years and is extremely expensive. Despite the time
and expense exerted, regulatory clearance is never guaranteed.
The number of pre-clinical studies and clinical trials that will be
required for FDA approval varies depending on the drug candidate, the disease or
condition that the drug candidate is in development for and regulations
applicable to any particular drug candidate.
13
The FDA can delay, limit or deny approval of a drug for many reasons,
including:
. a drug candidate may not be safe or effective;
. FDA officials may interpret data from pre-clinical testing and
clinical trials in different ways than we interpret it;
. the FDA might not approve our manufacturing processes or
facilities, or the processes or facilities of our collaborators;
or
. the FDA may change its approval policies or adopt new
regulations.
Even if we receive FDA and other regulatory approvals, our drug candidates
may later exhibit adverse effects that limit or prevent their widespread use or
that force us to withdraw products derived from those drug candidates from the
market. If we fail to obtain regulatory clearance for our current or future drug
candidates, we will be unable to market and sell any products and therefore may
never be able to generate product revenues or be profitable.
If we receive regulatory approval, we will also be subject to ongoing FDA
obligations and continued regulatory review, such as continued safety
reporting requirements, and we may also be subject to additional FDA
post-marketing obligations.
Any regulatory approvals that we receive for our drug candidates may also
be subject to limitations on the indicated uses for which the drug candidate may
be marketed or contain requirements for potentially costly post-marketing
follow-up studies. In addition, we or our third-party manufacturers will be
required to adhere to federal regulations setting forth current good
manufacturing practices, known as cGMP. The regulations require that our drug
candidates are manufactured and our records maintained in a prescribed manner
with respect to manufacturing, testing and quality control activities.
Furthermore, we or our third party manufacturers must pass a pre-approval
inspection of manufacturing facilities by the FDA and foreign authorities before
obtaining marketing approval, and will be subject to periodic inspection by the
FDA and corresponding foreign regulatory authorities under reciprocal agreements
with the FDA. Such inspections may result in compliance issues that could
prevent or delay marketing approval, or require the expenditure of money or
other resources to correct.
We are dependent on the successful outcome of the clinical trials for our most
advanced drug candidates, Rotigotine-CDS, MRE-470 and DTI-0009.
Our business prospects will depend on our ability and the ability of our
collaborators to complete patient enrollment in clinical trials, to obtain
satisfactory results, to obtain required regulatory approvals and to
successfully commercialize Rotigotine-CDS, MRE-470 and DTI-0009. Many factors
affect patient enrollment, including the size of the patient population, the
proximity of patients to clinical sites and the eligibility criteria for the
trial. Delays in patient enrollment in the trials may result in increased costs,
program delays, or both, which could slow down our product development and
approval process. If clinical trials for these drug candidates are not completed
or conducted as planned, or if either or both of these drug candidates do not
prove to be safe and effective or do not receive required regulatory approvals,
the commercialization of these drug candidates would be delayed or prevented
and, accordingly, our ability to generate revenue and achieve profitability
would be materially harmed which would likely cause a sharp drop in our stock
price, assuming the closing of our initial public offering.
14
Our pre-clinical and initial clinical testing results may not be predictive of
future trial results. If subsequent trial results are negative, we may be
forced to stop developing drug candidates important to our future.
The results of pre-clinical studies and initial clinical trials of our drug
candidates do not necessarily predict the results of later-stage clinical
trials. Drug candidates in later stages of clinical trials may fail to show the
desired safety and efficacy traits despite having progressed through initial
clinical testing. The data collected from clinical trials of our drug candidates
may not be sufficient to support FDA or other regulatory approval.
Administering any drug candidates we develop to humans may produce
undesirable side effects. These side effects could interrupt, delay or halt
clinical trials of our drug candidates and could result in the FDA or other
regulatory authorities denying approval of our drug candidates for any or all
targeted indications. For example, in our first Phase I clinical trial for
DTI-0017, one of the patients in the trial experienced a seizure. This patient
has filed a complaint against us seeking monetary relief. We are in the process
of evaluating any possible role of DTI-0017 in this adverse event. See Part II,
Item 1 "Legal Proceedings." The FDA, other regulatory authorities or we may
suspend or terminate clinical trials at any time. None of our drug candidates
may be safe for human use.
If we fail to maintain our existing collaborative relationships, or if our
collaborators do not devote adequate resources to the development and
commercialization of our licensed drug candidates, we may not be able to
achieve profitability.
We have granted exclusive development, commercialization and marketing
rights to Schwarz Pharma for the development of Rotigotine-CDS, to King for
MRE-470 and to Fujisawa Healthcare for the intravenous formulation of DTI-0009
in the United States and Canada. These collaborators are responsible for most,
and in some cases all, aspects of these programs, including conducting research
and development, clinical trials, the regulatory approval process and
commercialization. Other than attendance at periodic joint steering committee
meetings, we have no ongoing obligations under our collaborative arrangements.
See "Business--Corporate Collaborations" in our registration statement on Form
S-1 (Registration No. 333-76612) for details on these collaborations.
We have limited control over the amount and timing of resources that our
collaborators dedicate to the development of our licensed drug candidates. Our
ability to generate royalties from our collaborators depends on our
collaborators' abilities to establish the safety and efficacy of our drug
candidates, obtain regulatory approvals and achieve market acceptance of
products developed from our drug candidates. If Schwarz Pharma, King or Fujisawa
Healthcare do not perform under our collaborative agreements, our potential for
revenue from the related drug candidates will be dramatically reduced. Schwarz
Pharma, King and Fujisawa Healthcare may terminate our collaborative agreements
on short notice and at their sole discretion.
Collaborative agreements generally pose the following risks:
. collaborators may not pursue further development and
commercialization of compounds resulting from collaborations or
may elect not to continue or renew research and development
programs;
. collaborators may delay clinical trials, underfund a clinical
trial program, stop a clinical trial or abandon a drug candidate,
repeat or conduct new clinical trials or require a new
formulation of a drug candidate for clinical testing;
. collaborators could independently develop, or develop with third
parties, products that could compete with our future products;
15
. the terms of our agreements with our current or future
collaborators may not be favorable to us;
. a collaborator with marketing and distribution rights to one or
more products may not commit enough resources to the marketing
and distribution of products developed from our drug candidates,
limiting our potential revenues from the commercialization of a
product;
. disputes may arise delaying or terminating the research,
development or commercialization of our drug candidates, or
result in significant litigation or arbitration; and
. collaborations may be terminated and, if terminated, we would
experience increased capital requirements if we elected to pursue
further development of the drug candidate.
In addition, there have been a significant number of recent business
combinations among large pharmaceutical companies that have resulted in a
reduced number of potential future collaborators. If business combinations
involving our collaborators were to occur, the effect could be to diminish,
terminate or cause delays in one or more of our product development programs.
If we do not find additional collaborators for our drug candidates, we may have
to reduce or delay our rate of product development and/or increase our
expenditures.
Our strategy for developing, manufacturing and commercializing our drug
candidates includes entering into various relationships with pharmaceutical
companies to advance our programs and reduce our expenditures on each program.
We may not be able to negotiate additional collaborations on acceptable terms,
if at all. If we are not able to establish additional collaborative
arrangements, we may have to reduce or delay further development of some of our
programs and/or increase our expenditures and undertake the development
activities at our own expense. If we elect to increase our capital expenditures
to fund development programs on our own, we will need to obtain additional
capital, which may not be available on acceptable terms or at all.
If physicians and patients do not accept our products, we may be unable to
generate significant revenue, if any.
Even if our products obtain regulatory approval, our products, if any, may
not gain market acceptance among physicians, patients and the medical community
which would limit our ability to generate revenue and would adversely affect our
results of operations. The degree of market acceptance of any product depends on
a number of factors, including:
. demonstration of clinical efficacy and safety;
. cost effectiveness;
. convenience and ease of administration;
. potential advantages over alternative treatment methods; and
. marketing and distribution support.
Physicians will not recommend our products until clinical data or other
factors demonstrate the safety and efficacy of our products as compared to other
treatments. In practice, competitors may be more
16
effective in marketing their drugs. Even if the clinical safety and efficacy of
products developed from our drug candidates is established, physicians may elect
not to recommend these products for a variety of factors, including the
reimbursement policies of government and third party payors.
The reimbursement status of newly approved healthcare drugs is uncertain and
failure to obtain adequate reimbursement could limit our ability to market
any products we may develop and decrease our ability to generate revenue.
There is significant uncertainty related to the reimbursement of newly
approved pharmaceutical products. Our ability and the ability of our
collaborators to commercialize products developed from our drug candidates in
both domestic and foreign markets will depend in part on the reimbursements, if
any, obtained from third-party payors such as government health administration
authorities, private health insurers, managed care programs and other
organizations. Third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement of new
pharmaceutical products. Cost control initiatives could decrease the price that
we, or our collaborators, would receive for products developed from our drug
candidates and affect our ability to commercialize any products we may develop.
If third parties fail to provide reimbursement for any drugs, consumers and
doctors may not choose to use products developed from our drug candidates, and
we may not realize an acceptable return on our investment in product
development.
We may be unable to raise additional capital or generate the significant
revenues necessary to expand our operations and invest in new products.
It might be necessary for us to raise additional capital over the next few
years to continue our research and development efforts and to commercialize our
products. We believe that the projected revenues from collaborations should be
sufficient to fund our anticipated levels of operations for the next 24 months.
However, our business or operations may change in a manner that would consume
available resources more rapidly than anticipated. We may not continue to
receive payments under existing collaborative arrangements and existing or
potential future collaborations may not be adequate to fund our operations. We
may need additional funds sooner than planned to meet operational needs and
capital requirements for product development and commercialization. Additional
funds may not be available when needed or on terms acceptable to us. If adequate
funds are not available, we may have to reduce substantially or eliminate
expenditures for the development and production of certain of our proposed
products or obtain funds through arrangements with our corporate collaborators
that require us to relinquish rights to certain of our technologies or products.
Either of these alternatives could have a material adverse effect on our
business, operating results, financial condition and future growth prospects.
Our competitors may develop and market drugs that are less expensive, more
effective, or safer, which may diminish or eliminate the commercial success
of any products we may commercialize.
The biopharmaceutical market is highly competitive. We are aware of other
companies that are developing products that may be competitive to ours. We
anticipate that we will face increased competition in the future as new
companies enter the market and advanced technologies emerge. Our competitors
may:
. adapt more quickly to new technologies and scientific advances;
. initiate or withstand substantial price competition more
successfully than we can;
. have greater success in recruiting skilled scientific workers
from the limited pool of available talent;
. more effectively negotiate third-party licensing and
collaboration arrangements; and
17
. take advantage of acquisition or other opportunities more readily
than we can.
Almost all of the larger biopharmaceutical companies have developed, or are
attempting to develop, products that will compete with products that may be
developed from our drug candidates.
It is possible that our competitors will develop and market products that
are less expensive and more effective than our future products or that will
render our products obsolete. It is also possible that our competitors will
commercialize competing products before any products developed from our drug
candidates are marketed. We expect that the competition from other
biopharmaceutical companies, pharmaceutical companies, universities and public
and private research institutions will increase. Many of our competitors have
substantially greater financial, technical, research and other resources than we
do. We may not have the financial resources, technical expertise or marketing,
distribution or support capabilities to compete successfully. See
"Business--Competition" in our registration statement on Form S-1 (Registration
No. 333-76612) for additional information on our competitive environment.
If we are unable to effectively protect our intellectual property, third parties
may use our technology, which could impair our ability to compete in our
markets.
Our continued success will depend significantly on our ability to obtain
and maintain meaningful patent protection for our drug candidates throughout the
world. We rely on patents to protect a significant part of our intellectual
property and to enhance our competitive position. However, our presently pending
and future patent applications may not issue as patents, and any patent issued
to us may be challenged, invalidated, held unenforceable or circumvented.
Furthermore, the claims in patents which have been issued to us, or which may be
issued to us in the future, may not be sufficiently broad to prevent third
parties from producing competing products. In addition, the laws of various
foreign countries in which we compete may not protect our intellectual property
to the same extent as do the laws of the United States. If we fail to obtain
adequate patent protection for our proprietary technology, our competitors may
produce competing products based on our technology, which would substantially
impair our ability to compete.
In addition to patent protection, we also rely on protection of trade
secrets, know-how and confidential and proprietary information. To maintain the
confidentiality of trade secrets and proprietary information, we generally seek
to enter into confidentiality agreements with our employees, consultants and
collaborators upon the commencement of a relationship with us. However, we may
not obtain these agreements in all circumstances. In the event of unauthorized
use or disclosure of our trade secrets or proprietary information, these
agreements, even if obtained, may not provide meaningful protection for our
trade secrets or other confidential information. In addition, adequate remedies
may not exist in the event of unauthorized use or disclosure of this
information. The loss or exposure of our trade secrets and other proprietary
information would impair our competitive advantages and could have a material
adverse effect on our operating results, financial condition and future growth
prospects. Furthermore, others may have developed, or may develop in the future,
substantially similar or superior know-how and technology.
We may be involved in lawsuits to protect or enforce our patents which could be
expensive and time consuming.
In order to protect or enforce our patent rights, we may initiate patent
litigation against third parties or we may be similarly sued by others. We may
also become subject to interference proceedings conducted in the patent and
trademark offices of various countries to determine the priority of inventions.
The defense and prosecution, if necessary, of intellectual property suits,
interference proceedings and related legal and administrative proceedings is
costly and diverts our technical and management personnel from their normal
responsibilities. We may not prevail in any of these suits. An adverse
determination of any litigation or defense proceedings could put our patents at
risk of being invalidated or interpreted narrowly and could put our patent
applications at risk of not being issued.
18
Furthermore, because of the substantial amount of discovery required in
connection with intellectual property litigation, there is a risk that some of
our confidential information could be compromised by disclosure during this type
of litigation. In addition, during the course of this kind of litigation, there
could be public announcements of the results of hearings, motions or other
interim proceedings or developments. If securities analysts or investors
perceive these results to be negative, it could have a substantial adverse
effect on the trading price of our common stock, assuming the closing of our
initial public offering.
Our success depends on our ability to operate without infringing or
misappropriating the proprietary rights of others.
Our success depends on avoiding the infringement of other parties' patents
and proprietary rights as well as avoiding the breach of any licenses relating
to our technologies and products. Given that there may be patents of which we
are unaware, particularly in the United States where patent applications are
confidential, avoiding patent infringement may be difficult. Various third
parties hold patents which may relate to our technology, and we may be found to
infringe these or other patents or proprietary rights of third parties, either
with products we are currently developing or with new products which we may
develop in the future. If a third party holding rights under a patent
successfully asserts an infringement claim with respect to any of our current or
future products or drug candidates, we may be prevented from manufacturing or
marketing our infringing product in the country or countries covered by the
patent we infringe, unless we can obtain a license from the patent holder. We
may not be able to obtain the license on commercially reasonable terms, if at
all, especially if the patent holder is a competitor. In addition, even if we
can obtain the license, it may be non-exclusive, which will permit others to use
the same technology licensed to us. We also may be required to pay substantial
damages to the patent holder in the event of an infringement. Under some
circumstances in the United States, these damages could be triple the actual
damages the patent holder incurs. If we have supplied infringing products to
third parties for marketing or licensed third parties to manufacture, use or
market infringing products, we may be obligated to indemnify these third parties
for any damages they may be required to pay to the patent holder and for any
losses the third parties may sustain themselves as the result of lost sales or
damages paid to the patent holder. Any successful infringement action brought
against us may also adversely affect marketing of the infringing product in
other markets not covered by the infringement action, as well as our marketing
of other products based on similar technology. Furthermore, we may suffer
adverse consequences from a successful infringement action against us even if
the action is subsequently reversed on appeal, nullified through another action
or resolved by settlement with the patent holder. The damages or other remedies
awarded, if any, may be significant. As a result, any infringement action
against us would likely delay the regulatory approval process, harm our
competitive position, be very costly and require significant time and attention
of our key management and technical personnel.
We depend on our key personnel, the loss of any of whom would impair our product
development and commercialization efforts.
Our performance is substantially dependent on the performance of our senior
management and key scientific and technical personnel. We only carry key person
life insurance on Peter G. Savas, our chief executive officer and president and
Donald A. McAfee, our chief technical officer. The loss of the services of any
member of our senior management, scientific or technical staff may significantly
delay or prevent the achievement of product development and other business
objectives and could have a material adverse effect on our business, operating
results and financial condition. We also rely on consultants and advisors to
assist us in formulating our research and development strategy. All of our
consultants and advisors are either self-employed or employed by other
organizations, and they may have other commitments such as consulting or
advisory contracts with other organizations that may affect their ability to
contribute to us. Our future success will also depend on our ability to
identify, recruit and retain additional qualified scientific, technical and
managerial personnel. There is currently a shortage of skilled executives and
intense competition for such personnel in the areas of our activities, and we
may be unable to continue to attract and retain personnel with the advanced
qualifications necessary for the development
19
of our business. The inability to attract and retain the necessary scientific,
technical and managerial personnel could limit or delay our product development
efforts which would adversely affect the growth of our business.
We have no manufacturing capacity and depend on third parties to manufacture our
products.
We do not currently operate manufacturing facilities for clinical or
commercial production of our drug candidates under development. We have no
experience in manufacturing, and we currently lack resources and the capability
to manufacture any of our drug candidates on a clinical or commercial scale. As
a result, we are dependent on corporate collaborators, licensees or other third
parties for the manufacturing of clinical and commercial scale quantities of our
drug candidates. These third parties may not be successful in manufacturing our
drug candidates on a commercial scale. In addition, in the event of a natural
disaster, equipment failure, power failure, strike or other difficulty, we may
be unable to replace our third party manufacturers in a timely manner.
We have no marketing or sales staff, and if we are unable to enter into
collaborations with marketing partners or if we are unable to develop our
own sales and marketing capability, we may not be successful in
commercializing our products.
We currently have no sales, marketing or distribution capability. As a
result, we will depend on collaborations with third parties which have
established distribution systems and direct sales forces. To the extent that we
enter into co-promotion or other licensing arrangements, our revenues will
depend upon the efforts of third parties, over which we may have little or no
control.
If we are unable to reach and maintain agreement with one or more
pharmaceutical companies or collaborators, we may be required to market our
products directly. We may elect to establish our own specialized sales force and
marketing organization to market our products to physicians. In order to do
this, we would have to develop a marketing and sales force with technical
expertise and with supporting distribution capability. Developing a marketing
and sales force is expensive and time consuming and could delay a product
launch. We may not be able to develop this capacity, which would make us unable
to commercialize our products.
We may be subject to product liability claims and may not be able to obtain
adequate insurance.
Once we have commercially launched our products, we will face exposure to
product liability claims. We intend to secure limited product liability
insurance coverage, but may not be able to obtain such insurance on acceptable
terms with adequate coverage, or at reasonable costs. There is also a risk that
third parties that we have agreed to indemnify could incur liability.
Since we conduct clinical trials on humans, we face the risk that the use
of our drug candidates will result in adverse effects. These risks will exist
even for products developed from our drug candidates that may be cleared for
commercial sale. We cannot predict all of the possible harms or side effects
that may result and, therefore, the amount of insurance coverage we currently
hold may not be adequate to protect us from all liabilities. We may not have
sufficient resources to pay for any liabilities resulting from a claim beyond
the limit of, or excluded from, our insurance coverage.
Our research and development operations involve hazardous materials, which could
subject us to significant liability.
Our research and development activities involve the controlled use of
hazardous materials, including hazardous chemicals and radioactive materials.
Accordingly, we are subject to federal, state and local laws governing the use,
handling and disposal of these materials. We may incur significant costs to
comply with additional environmental and health and safety regulations in the
future. Although we believe that our safety procedures for handling and
disposing of hazardous materials comply with
20
regulatory requirements, we cannot eliminate the risk of accidental
contamination or injury from these materials. In the event of an accident or
environmental discharge, we may be held liable for any resulting damages, which
may exceed our financial resources.
We may encounter difficulties in managing our growth, and these difficulties
could disrupt our operations.
We expect to have significant growth in the number of our employees and the
scope of our operations. Recent growth has placed a significant strain on our
managerial, operational and financial resources. To manage our anticipated
future growth, we must continue to implement and improve our managerial,
operational and financial systems, to expand our facilities and to continue to
recruit and train additional qualified personnel. Due to our limited resources,
we may not be able to effectively manage the expansion of our operations or
recruit and train additional qualified personnel. Any inability to manage growth
could delay the execution of our business plans or disrupt our operations.
The indictment of Arthur Andersen LLP may adversely affect Arthur Andersen LLP's
ability to satisfy any claims arising from the provision of auditing
services to us and may impede our access to the capital markets.
On March 14, 2002, Arthur Andersen LLP, which audited our financial
statements included in this Quarterly Report, was the subject of an indictment
charging it with federal obstruction of justice arising from the government's
investigation of Enron Corp. The trial relating to those charges is currently
underway. The Securities and Exchange Commission, or SEC, stated that it will
continue accepting financial statements audited by Arthur Andersen LLP so long
as Arthur Andersen LLP is able to make specified representations to us. The SEC
has also proposed rules stating that it will dispense with, in certain
circumstances, the requirement to obtain the consent of Arthur Andersen LLP for
the use of its audit reports with respect to financial statements in public
filings with the SEC. It is possible that events arising out of the trial may
adversely affect the ability of Arthur Andersen LLP to satisfy any claims
arising from its provision of auditing services to us, including claims that may
arise out of Arthur Andersen LLP's audit of our financial statements included in
this Quarterly Report. Due to the uncertainties surrounding the outcome of the
trial, and concerns that Arthur Andersen LLP's ability to continue providing
auditing services and issuing audit reports to us, we plan to initiate a search
to potentially replace Arthur Andersen LLP as our independent auditor.
If for any reason, the SEC ceases accepting our financial statements that
were audited by Arthur Andersen LLP, Arthur Andersen LLP is unable to provide
underwriters of our securities with customary comfort letters and other
assurances with respect to public offerings and private placements of our
securities, or if Arthur Andersen LLP ceases, for any reason, to provide us with
its consent to the inclusion of its audit reports with respect to our financial
statements in our public filings with the SEC, we may be unable to access the
capital markets unless another independent accounting firm is able to audit our
financial statements originally audited by Arthur Andersen LLP. Any delay or
inability to access the capital markets caused by these circumstances could have
a material adverse effect on our business, operating results, financial
condition and future growth prospects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of March 31, 2002, we had cash and cash equivalents of $37.8 million
consisting of cash and highly liquid investments. Our exposure to market risk
relates to the increase or decrease in the amount of interest income we can earn
on our investment portfolio and on the increase or decrease in the amount of any
interest expense we must pay with respect to any outstanding debt instruments.
As of March 31, 2002, we had no long-term debt. We do not plan to invest in
derivative financial instruments.
21
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
We may from time to time become a party to legal proceedings arising in the
ordinary course of our business. Except as disclosed below, we are not currently
a party to any material pending litigation or other material legal proceedings.
On January 18, 2002, we were served with a complaint filed by Mr. Joseph
Ladd against us. The complaint was filed with the US District Court in the
Eastern District of Louisiana. The complaint alleges that while the plaintiff
was a participant in a clinical trial of DTI-0017, he was injured as a result of
his participation in the trial. The complaint alleges that DTI-0017 caused his
injuries. The plaintiff is seeking monetary damages in the amount of $1,500,000.
On February 12, 2002, Ardais Corporation filed a complaint against us in
the United States District Court for the District of Massachusetts. The
complaint alleges unfair competition and trademark dilution under federal and
Massachusetts state law. Specifically, Ardais Corporation claims that our use of
the trademark ADERIS PHARMACEUTICALS dilutes the strength of their allegedly
famous trademark ARDAIS and constitutes unfair competition under federal and
state statutes. The plaintiff is seeking unspecified monetary relief and an
injunction to prevent us from using the ADERIS name. On March 27, 2002, we filed
an answer to the complaint denying its essential allegations.
We intend to defend ourselves vigorously against these claims.
Nevertheless, due to the uncertain nature of litigation, and because these cases
are at an early stage, we cannot be sure of the extent to which we may be found
liable, if at all, or if we will be enjoined from using the name ADERIS in the
future.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2002, we granted an option to purchase 3,300 shares of our
common stock at an exercise price of $0.67 per share, as adjusted to reflect a
1.65-for-1 stock split. This transaction was effected in reliance on Rule 701
promulgated under Section 3(b) of the Securities Act of 1933, as amended, as a
transaction pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipient of securities in
such transaction represented the intent to acquire the securities for investment
purposes only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the instruments
representing such securities issued in such transaction. The recipient either
received adequate information about us or had adequate access, through their
employment or other relationships with us to such information. No underwriters
were employed in connection with the transaction set forth in this Item 2.
ITEM 5. OTHER INFORMATION
In March 2002, we completed a 1.65-for-1 stock split in the form of a stock
dividend.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See accompanying index to exhibits.
(b) Reports on Form 8-K during the quarter ended March 31, 2002:
No Reports on Form 8-K were filed during the quarter ended March 31, 2002.
22
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.
ADERIS PHARMACEUTICALS, INC.
(Registrant)
By: /s/ KENNETH L. RICE, JR.
----------------------------------------
Kenneth L. Rice, Jr.
Vice President, Chief Commercial Officer
and Secretary
(Principal Financial Officer)
By: /s/ JOSEPH R. VIDAL
----------------------------------------
Joseph R. Vidal
Vice President - Finance
(Principal Accounting Officer)
Dated: June 6, 2002
23
INDEX TO EXHIBITS
Exhibit
No. Description
3.1+ Amended and Restated Certificate of Incorporation of Aderis
Pharmaceuticals, Inc., as currently in effect.
3.2+ Bylaws of Aderis Pharmaceuticals, Inc., as currently in effect.
3.3+ Form of Amended and Restated Certificate of Incorporation to be
effective upon the closing of our initial public offering.
3.4+ Bylaws of Aderis Pharmaceuticals, Inc., to be effective upon the
closing of our initial public offering.
4.2+ Restated Investor Rights Agreement dated March 31, 1995, as amended by
the First Amendment dated November 3, 1995, the Second Amendment dated
June 21, 1999, the Third Amendment dated February 21, 2001 and the
Fourth Amendment dated August 15, 2001.
4.3+ Warrant to Purchase Common Stock, dated July 18, 2001, granted to
Gerard Klauer Mattison & Co., Inc.
10.1+ Form of Indemnification Agreement between Aderis and each of our
directors and officers.
10.2+ 1995 Stock Option Plan as amended by the First Amendment dated June 7,
1999 and the Second Amendment dated August 10, 2001.
10.3+ Amended and Restated 2001 Incentive Award Plan.
10.4+* Development and License Agreement by and between Discovery
Therapeutics, Inc. and Fujisawa Healthcare, Inc., dated July 29, 1999.
10.5+* Development and Commercialization Agreement by and between Medco
Research, Inc. and Discovery Therapeutics, Inc., dated August 19,
1997.
10.6+* Exclusive License Agreement by and between Discovery Therapeutics,
Inc. and Schwarz Pharma AG, dated August 10, 1999, as amended by
Amendment No. 1 dated December 22, 1999.
10.7+* Earn Out Agreement by and between Whitby, Inc. and Discovery
Therapeutics, Inc. dated April 25, 1994.
10.8+ Property Lease by and between Straley Corporation and Discovery
Therapeutics, Inc. dated December 15, 2000, as amended by Lease dated
November 15, 2001.
10.9+ Property Lease by and between Morton G. Thalhimer, Inc. and Discovery
Therapeutics, Inc. dated February 24, 1998, as amended by the First
Addendum dated January 7, 1999, the Second Addendum dated July 14,
1999, and the Third Addendum dated September 12, 2000.
10.10+ Employment Agreement by and between Peter G. Savas and Aderis
Pharmaceuticals, Inc., dated January 2, 2002.
10.11+ Employment Agreement by and between Kenneth L. Rice, Jr. and Aderis
Pharmaceuticals, Inc., dated January 2, 2002.
10.12+ Employment Agreement by and between William S. Wheeler and Aderis
Pharmaceuticals, Inc., dated January 2, 2002.
10.13+ Patent License Agreement by and between Aderis and Can-Fite Biopharma
Ltd. dated May 6, 2002.
21.1+ List of Subsidiaries of Aderis.
+ Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 333-76612).
* The Securities and Exchange Commission has granted confidential
treatment of certain provisions of these exhibits. Omitted material for which
confidential treatment has been granted has been filed separately with the
Securities and Exchange Commission.
24