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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-16043
ALTEON INC.
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3304550
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
170 WILLIAMS DRIVE, RAMSEY, NEW JERSEY 07446
--------------------------------------------
(Address of principal executive offices)
(Zip Code)
(201) 934-5000
---------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
On May 5, 2003, 35,905,841 shares of the registrant's Common Stock were
outstanding.
Page 1 of 23 pages
The Exhibit Index is on page 22
ALTEON INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of March 31, 2003 and
December 31, 2002 ............................................ 3
Statements of Operations for the three months
ended March 31, 2003 and 2002 ................................ 4
Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 ................................ 5
Notes to Financial Statements .................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 17
Item 4. Controls and Procedures ........................................ 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 18
Item 6. Exhibits and Reports on Form 8-K ............................... 18
SIGNATURES ............................................................. 19
CERTIFICATIONS ......................................................... 20
INDEX TO EXHIBITS ...................................................... 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALTEON INC.
BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31, December 31,
2003 2002
---- ----
Current Assets:
Cash and cash equivalents .............................. $ 17,499,278 $ 14,452,413
Short-term investments ................................. 2,995,200 2,986,200
Other current assets ................................... 428,825 143,124
------------- -------------
Total current assets ................................. 20,923,303 17,581,737
Property and equipment, net ............................ 394,003 517,623
------------- -------------
Total assets ............................................. $ 21,317,306 $ 18,099,360
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................ $ 726,566 $ 537,394
Accrued expenses ....................................... 2,812,466 3,258,729
------------- -------------
Total current liabilities ............................ 3,539,032 3,796,123
------------- -------------
Stockholders' Equity:
Preferred Stock, $0.01 par value,
1,993,329 shares authorized, and 1,102 and
1,079 of Series G and 3,309 and 3,241 of
Series H shares issued and outstanding,
as of March 31, 2003 and
December 31, 2002, respectively ...................... 44 43
Common Stock, $0.01 par value, 80,000,000
shares authorized, and 35,900,841 and
33,600,841 shares issued and outstanding,
as of March 31, 2003 and December 31, 2002,
respectively ......................................... 359,008 336,008
Additional paid-in capital ............................. 192,922,717 183,341,416
Accumulated deficit .................................... (175,504,109) (169,375,594)
Accumulated other comprehensive income ................. 614 1,364
------------- -------------
Total stockholders' equity ........................... 17,778,274 14,303,237
------------- -------------
Total liabilities and stockholders' equity................ $ 21,317,306 $ 18,099,360
============= =============
The accompanying notes are an integral part of these unaudited statements.
3
ALTEON INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2003 2002
---- ----
Revenues:
Investment income ............................... $ 48,723 $ 135,664
------------ ------------
Expenses:
Research and development
(which includes non-cash variable
stock compensation expense/(benefit)
of $61,970 and $(46,838) for the three months
ended March 31, 2003 and 2002, respectively) .. 2,904,843 3,287,257
General and administrative
(which includes non-cash variable
stock compensation expense/(benefit)
of $965,929 and $(587,107) for the three months
ended March 31, 2003 and 2002, respectively) .. 2,366,937 589,992
------------ ------------
Total expenses .............................. 5,271,780 3,877,249
------------ ------------
Net loss .......................................... $ (5,223,057) $ (3,741,585)
Preferred stock dividends ...................... 905,458 832,415
Net loss applicable to
common stockholders ............................. $ (6,128,515) $ (4,574,000)
============ ============
Basic/diluted net loss per share
applicable to common stockholders ............... $ (0.18) $ (0.15)
============ ============
Weighted average common shares used
in computing basic/diluted net loss per share ... 33,626,397 31,472,436
============ ============
The accompanying notes are an integral part of these unaudited statements.
4
ALTEON INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
---------
2003 2002
---- ----
Cash Flows from Operating Activities:
Net loss............................................ $ (5,223,057) $ (3,741,585)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization ...................... 160,720 157,980
Amortization of deferred compensation .............. 15,445 5,721
Non-cash compensation expense/(benefit) related to
variable plan employee stock options ............. 1,027,899 (633,945)
Changes in operating assets and liabilities:
Other current assets ............................... (285,701) 821,365
Accounts payable and accrued expenses .............. (257,091) 1,095,005
------------ ------------
Net cash used in operating activities ............ (4,561,785) (2,295,459)
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures ............................... (37,100) (16,918)
Purchases of marketable securities ................. (9,750) (8,952,565)
Maturities of marketable securities ................ -- 4,000,000
------------ ------------
Net cash used in investing activities ............ (46,850) (4,969,483)
------------ ------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock ......... 7,655,500 18,610,521
Net proceeds from exercise of employee stock
options........................................... -- 34,067
------------ ------------
Net cash provided by financing activities ........ 7,655,500 18,644,588
------------ ------------
Net increase in cash and cash equivalents ............ 3,046,865 11,379,646
Cash and cash equivalents, beginning of period ....... 14,452,413 4,249,439
------------ ------------
Cash and cash equivalents, end of period ............. $ 17,499,278 $ 15,629,085
============ ============
The accompanying notes are an integral part of these unaudited statements.
5
ALTEON INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of Management, all
adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 2003, are not necessarily indicative of the results that
may be expected for the year ending December 31, 2003. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002, filed
with the Securities and Exchange Commission.
The Company's business is subject to significant risks, which are
described in this Report, including under the heading "Forward-Looking
Statements and Cautionary Statements."
NOTE 2 - LIQUIDITY
Alteon has incurred an accumulated deficit of $175,504,109 as of March 31,
2003, and expects to incur operating losses, potentially greater than losses in
prior years, for a number of years. The Company has devoted substantially all of
its resources to research, drug discovery and development programs. To date, it
has not generated any revenues from the sale of products and does not expect to
generate any such revenues for a number of years, if at all.
The Company has financed its operations through proceeds from the sale of
common and preferred equity securities, revenue from collaborative
relationships, reimbursement of certain of our research and development
expenses by its collaborative partners, investment income earned on cash
balances and short-term investments and the sale of a portion of our New
Jersey net operating loss carryforwards.
As of March 31, 2003, the Company had working capital of $17,384,271,
including $20,494,478 of cash and cash equivalents and short-term investments.
The Company's cash used in operations for the three months ended March 31, 2003,
was $4,561,785. The Company raised $7,655,500 through the sale of common stock
in March 2003 (See Note 7). The Company anticipates that at its current spending
level, its existing available cash and cash equivalents and short-term
investments will be adequate to satisfy its working capital requirements for its
current operations through the first quarter of 2004. If it becomes necessary,
the Company has the ability to quickly and significantly reduce the cash burn
rate, as it has limited fixed commitments. Following completion of the SAPPHIRE
(Systolic And Pulse Pressure Hemodynamic Improvement by Restoring Elasticity)
and SILVER (Systolic Hypertension Interaction with Left VEntricular Remodeling)
trials, the Company will require substantial new funding to pursue development
of ALT-711 and continue its operations.
The Company will require, over the long-term, substantial new funding to
pursue development and commercialization of ALT-711 and its other product
candidates to continue its operations. The Company believes that satisfying
these capital requirements over the long-term will require successful
commercialization of its product candidates. However, it is uncertain whether
any products will be approved or will be commercially successful. The amount of
the Company's future capital requirements will depend on numerous factors,
including the progress of its research and development programs, the conduct of
pre-clinical tests and clinical trials, the development of regulatory
submissions, the costs associated with protecting patents and other proprietary
rights, the development of marketing and sales capabilities and the availability
of third-party funding.
Because of Alteon's long-term capital requirements, the Company may seek
access to the public or private equity markets whenever conditions are
favorable. This may have the effect of materially diluting the current holders
of the Company's outstanding stock. The Company may also seek additional funding
through corporate collaborations and other financing vehicles, potentially
including off-balance sheet financing through limited partnerships or
corporations. There can be no assurance that such funding will be available at
all or on terms acceptable to Alteon. If adequate funds are not available, the
Company may be required to curtail significantly one or more of its research or
development programs. If Alteon obtains funds through arrangements with
collaborative partners or others, the Company may be required to relinquish
rights to certain of its technologies or product candidates.
6
NOTE 3 - CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include cash and highly liquid investments,
which have a maturity of less than three months at the time of purchase.
Short-term investments are considered available-for-sale and are recorded at
fair value, as determined by quoted market value, with changes in fair value
recorded as a component of accumulated other comprehensive income. As of March
31, 2003 and December 31, 2002, short-term investments were invested in debt
instruments of the U.S. government and government agencies. They consist of the
following:
March 31, December 31,
2003 2002
---------- -----------
U.S. government agency funds $2,995,200 $2,986,200
========== ==========
NOTE 4 - NET LOSS PER SHARE
Basic loss per share is based on the weighted average number of shares
outstanding during the period. Diluted loss per share is the same as basic loss
per share, since the assumed exercise of stock options and warrants and the
conversion of preferred stock would be antidilutive. The amount of common stock
equivalents excluded from the calculation as of March 31, 2003 and 2002, was
18,041,617 and 16,146,103, respectively.
NOTE 5 - STOCK COMPENSATION
The Company accounts for employee stock-based compensation and awards
issued to non-employee directors under Accounting Principles Board Opinion No.
25 ("APB Opinion No. 25"), "Accounting for Stock Issued to Employees," and
related interpretations, under which no compensation cost (excluding those
options granted below fair market value) has been recognized. Stock option
awards issued to consultants and contractors are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation." In March 2000, the Financial Accounting Standards
Board ("FASB") released Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation, An Interpretation of APB
Opinion No. 25." The interpretation became effective on July 1, 2000, but in
some circumstances applies to transactions that occurred prior to the effective
date. Under the interpretation, stock options that are repriced must be
accounted for as variable-plan arrangements until the options are exercised,
forfeited or expire. This requirement applies to any options repriced after
December 15, 1998.
On February 2, 1999, the Company repriced certain stock options. The total
non-cash stock compensation expense/(benefit) resulting from the 1999 repricing
for the three months ended March 31, 2003 and 2002, is $1,027,899 and
$(633,945), respectively. As of March 31, 2003, there were approximately 589,899
repriced options outstanding, which expire on various dates through January
2008.
If the Company had applied the fair value recognition provisions of SFAS
No. 123 to all of its option grants, the Company's pro forma net loss and net
loss per share applicable to common stockholders for the three months ended
March 31, 2003 and 2002, would be as follows:
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Net loss, as reported ............................... $(5,223,057) $(3,741,585)
Add: Variable non-cash stock compensation
expense/(benefit) included in reported
net loss ...................................... 1,027,899 (633,945)
Less: Total stock-based employee compensation
expense determined under fair value
method ........................................ (329,227) (466,006)
----------- -----------
Pro forma net loss .................................. $(4,524,385) $(4,841,536)
Preferred stock dividends ........................... 905,458 832,415
----------- -----------
Pro forma net loss applicable to common
stockholders....................................... $(5,429,843) $(5,673,951)
Earnings per share applicable to common stockholders:
Basic/diluted, as reported .................... $ (0.18) $ (0.15)
Basic/diluted pro forma ....................... $ (0.16) $ (0.18)
7
NOTE 6 - COMPREHENSIVE LOSS
The following sets forth comprehensive loss for the three months ended
March 31, 2003 and 2002:
Three Months Ended
March 31,
---------
2003 2002
---- ----
Net Loss .................... $(5,223,057) $(3,741,585)
Net Unrealized Loss
on Short-Term Investments... (750) (18,354)
----------- -----------
Comprehensive Loss .......... $(5,223,807) $(3,759,939)
=========== ===========
NOTE 7 - STOCKHOLDERS' EQUITY
In March 2003, Alteon completed a public offering of 2,300,000 shares of
common stock at $3.50 per share, which provided net proceeds of $7,655,500.
Series G Preferred Stock and Series H Preferred Stock dividends are
payable quarterly in shares of preferred stock. For the three months ended March
31, 2003 and 2002, preferred stock dividends were $905,458 and $832,415,
respectively.
In December 2002, we completed a public offering of 1,714,285 shares of
common stock at $1.75 per share, which provided net proceeds of approximately
$2,965,000. In connection with this offering, certain previously issued warrants
were repriced pursuant to antidilution provisions contained in the warrants.
In January 2002, Alteon completed a public offering of 4,450,000 shares of
common stock at $4.25 per share, which provided net proceeds of $18,610,521.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a product-based biopharmaceutical company primarily engaged in the
discovery and development of oral drugs to reverse or slow down diseases of
aging and complications of diabetes. Our product candidates represent novel
approaches to some of the largest pharmaceutical markets. Our lead compound is
in Phase 2b clinical development; several others are in earlier development
stages. These pharmaceutical candidates were developed as a result of our
research on the Advanced Glycation End-product ("A.G.E.") pathway, a fundamental
pathological process and inevitable consequence of aging that causes or
contributes to many medical disorders, including cardiovascular, kidney and eye
diseases.
Our lead compound, ALT-711, is being developed initially for
cardiovascular indications, and two Phase 2a clinical trials in cardiovascular
compliance and in diastolic heart failure ("DHF") have been successfully
completed. Based on the positive results of the trial in cardiovascular
compliance, we have initiated two Phase 2b efficacy trials of ALT-711, the
SAPPHIRE (Systolic And Pulse Pressure Hemodynamic Improvement by Restoring
Elasticity) and SILVER (Systolic Hypertension Interaction with Left VEntricular
Remodeling) trials in systolic hypertension, for which data is expected to be
reported concurrently about mid-year 2003. We are also considering further
clinical development in DHF and related conditions.
As we continue clinical development of ALT-711, we will determine if it is
appropriate to retain development and marketing rights for one or several
indications in North America, while at the same time continuing to evaluate
potential corporate partnerships for the further development and ultimate
marketing of the compound in other territories throughout the world. We believe
that ALT-711 may address the cardiovascular, diabetes and primary care physician
markets.
We continue to explore the use of topical A.G.E. Crosslink Breakers in
skin and photo aging, as a result of our recent evaluation of ALT-744's positive
activity in this area. We are focusing efforts on bringing forward other
crosslink breaker compounds with more attractive formulation characteristics
than those of ALT-744 to address the pharmaceutical market for skin and photo
aging, and will discontinue research on the ALT-744 prototype.
Since our inception in October 1986, we have devoted substantially all of
our resources to research, drug discovery and development programs. To date, we
have not generated any revenues from the sale of products and do not expect to
generate any such revenues for a number of years, if at all. We have incurred an
accumulated deficit of approximately $175,504,000 as of March 31, 2003, and
expect to incur operating losses, potentially greater than losses in prior
years, for a number of years.
We have financed our operations through proceeds from an initial public
offering of common stock in 1991, subsequent public offerings of common stock,
private placements of common and preferred equity securities, revenue from
collaborative relationships, reimbursement of certain of our research and
development expenses by our collaborative partners, investment income earned on
cash balances and short-term investments and the sale of a portion of our New
Jersey net operating loss carryforwards.
Our business is subject to significant risks, which are described in this
Report, including under the heading "Forward-Looking Statements and Cautionary
Statements."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Total revenues for the three months ended March 31, 2003 and 2002, were
$49,000 and $136,000, respectively. Revenues were derived from interest earned
on cash and cash equivalents and short-term investments. The decrease in income
was attributable to a decrease in investment balances and the decrease in
short-term interest rates.
Our total expenses were $5,272,000 for the three months ended March 31,
2003, compared to $3,877,000 for the three months ended March 31, 2002, and in
each year consisted primarily of research and development expenses. Research and
development expenses included third-party expenses associated with pre-clinical
and clinical studies, manufacturing costs, including the development and
preparation of clinical supplies, personnel and personnel-related expenses and
facility expenses. Research and development expenses were $2,905,000 for the
three months ended March 31, 2003, as compared to $3,287,000 for the same period
in 2002. In 2003, they primarily consisted of $1,100,000 in personnel and
personnel-related expenses, $811,000 in clinical trial expenses related to the
Phase 2b SAPPHIRE and SILVER trials, $307,000 in pre-clinical expenses, $144,000
related to manufacturing (assay validation and development) and drug stability
studies and non-cash variable stock compensation expense of $62,000. Research
and development expenses for the three months ended March 31, 2002, consisted of
$1,049,000 in clinical trial expenses related to enrollment of the SAPPHIRE and
SILVER trials, $871,000 of manufacturing expenses (tableting,
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
production of active pharmaceutical ingredient and process development) and drug
stability studies, $715,000 in personnel and personnel-related expenses and a
non-cash variable stock compensation benefit of $(47,000).
Research and development expenses decreased approximately $382,000, or
11.6%, as compared to the three months ended March 31, 2002. This was primarily
a result of decreased manufacturing activity. The first three months of 2002
included tablet manufacturing for the SAPPHIRE and SILVER trials, production of
active pharmaceutical ingredient and process development work for anticipated
Phase 3 clinical supplies. The decrease was also attributed to lower clinical
costs associated with the SAPPHIRE and SILVER trials in the first three months
of 2003 due to the number of patients who have completed the trial. Targeted
enrollment for these trials was reached in November 2002, and the release of
data is targeted for mid-year 2003. These decreased costs were partially offset
by higher personnel and personnel-related costs, including temporary help, for
the three months ended March 31, 2003.
The development and successful commercialization of ALT-711 are subject to
substantial risks described in this Report. See, for example, "Forward-Looking
Statements and Cautionary Statements -- If we do not successfully develop any
products, we may not derive any revenues."
General and administrative expenses increased to $2,367,000 for the three
months March 31, 2003, compared to $590,000 for the same period in 2002, and
included a non-cash variable stock compensation expense/(benefit) of $966,000
and $(587,000), respectively. Non-cash variable stock compensation
expense/(benefit) is directly related to changes in our stock price (See Note
5). In addition to the non-cash variable stock compensation expense, general and
administrative expenses increased $224,000 due to increased business development
and marketing research costs.
Our net loss applicable to common stockholders increased to $6,129,000 for
the three months ended March 31, 2003, compared to $4,574,000 in the same period
in 2002, an increase of 34.0%, primarily related to the variable non-cash stock
compensation expense. Included in the net loss applicable to common stockholders
are preferred stock dividends of approximately $905,000 and $832,000 for the
three months ended March 31, 2003 and 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents and short-term investments at March 31,
2003, of $20,494,000, compared to $17,439,000 at December 31, 2002. This is an
increase in cash and cash equivalents and short-term investments for the three
months ended March 31, 2003, of $3,055,000. This consisted of $7,656,000 of net
proceeds from a public offering of 2,300,000 shares of common stock at $3.50 per
share in March 2003. This was offset by $4,562,000 of net cash used in
operations, consisting primarily of research and development expenses,
personnel-related costs and facility expenses and approximately $37,000 in
capital expenditures.
In December 2002, we completed a public offering of 1,714,285 shares of
common stock at $1.75 per share, which provided net proceeds of approximately
$2,965,000. In connection with this offering, certain previously issued warrants
were repriced pursuant to antidilution provisions contained in the warrants.
At December 31, 2002, we had available federal net operating loss
carryforwards, which expire in various amounts from the years 2006 through 2022,
of approximately $152,365,000 and New Jersey net operating loss carryforwards,
which expire in the years 2004 through 2009, of approximately $106,771,000. In
addition, we had federal research and development tax credit carryforwards of
approximately $7,048,000 and New Jersey research and development tax credit
carryforwards of approximately $811,000 at December 31, 2002. The amount of
federal net operating loss and research and development tax credit carryforwards
which can be utilized in any one period may become limited by federal income tax
regulations if a cumulative change in ownership of more than 50% occurs within a
three-year period.
In December 2002, we sold $1,839,000 of our gross New Jersey net operating
loss carryforwards and $578,000 of our New Jersey research and development tax
credit carryforwards under the State of New Jersey's Technology Business Tax
Certificate Transfer Program (the "Program"). The Program allows qualified
technology and biotechnology businesses in New Jersey to sell unused amounts of
net operating loss carryforwards and defined research and development tax
credits for cash. The proceeds from the sale in 2002 were $647,000 and were
recorded as a tax benefit in the December 31, 2002 statement of operations. The
State of New Jersey may renew the Program annually and limits the aggregate
proceeds to $10,000,000. We cannot be certain if we will be able to sell any of
the carryforwards in the future.
We anticipate that at our current spending level, our existing available
cash and cash equivalents and short-term investments will be adequate to satisfy
our working capital requirements for our current operations through the first
quarter of 2004. If it becomes necessary, we have the ability to quickly and
significantly reduce the cash burn rate, as we have limited fixed commitments.
Following completion of the SAPPHIRE and SILVER trials, we will require
substantial new funding to pursue development of ALT-711 and continue our
operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The amount of our future capital requirements will depend on numerous
factors, including the progress of our discovery research programs, the
initiation of pre-clinical tests and clinical trials, the development of
regulatory submissions, the costs associated with protecting patents and other
proprietary rights, the development of marketing and sales capabilities and the
availability of third-party funding.
Because of our short-term and long-term capital requirements, we may seek
access to the public or private equity markets whenever conditions are
favorable. This may have the effect of materially diluting the current holders
of our outstanding stock. We may also seek additional funding through corporate
collaborations and other financing vehicles, potentially including off-balance
sheet financing through limited partnerships or corporations. There can be no
assurance that such funding will be available at all or on terms acceptable to
us. If adequate funds are not available, we may be required to curtail
significantly one or more of our research or development programs. If we obtain
funds through arrangements with collaborative partners or others, we may be
required to relinquish rights to certain of our technologies or product
candidates.
Our current priorities are the evaluation and continued development of
ALT-711, our lead A.G.E. Crosslink Breaker candidate and determining the optimal
course for the continued development of additional A.G.E. Crosslink Breaker
compounds and A.G.E.-Formation Inhibitors. We are focusing our resources on the
development of ALT-711. As we continue clinical development of ALT-711, we are
evaluating potential corporate partnerships for further development and ultimate
marketing of the compound in territories throughout the world. We plan to retain
development and marketing rights for one or several indications in the United
States. In addition, we are exploring partnering and regulatory pathways for the
continued development of pimagedine. As described above, we believe that
additional development of this compound and other product candidates will
require us to find additional sources of funding.
CRITICAL ACCOUNTING POLICIES
In December 2001, the U.S. Securities and Exchange Commission issued a
statement concerning certain views of the Commission regarding the appropriate
amount of disclosure by publicly held companies with respect to their critical
accounting policies. In particular, the Commission expressed its view that in
order to enhance investor understanding of financial statements, companies
should explain the effects of critical accounting policies as they are applied,
the judgments made in the application of these policies and the likelihood of
materially different reported results if different assumptions or conditions
were to prevail. We have since carefully reviewed the disclosures included in
our filings with the Commission, including, without limitation, our Annual
Report on Form 10-K for the year ended December 31, 2002, and accompanying
audited financial statements and related notes thereto. We believe the effect of
the following accounting policy is significant to our results of operations and
financial condition.
We account for options granted to employees and directors in accordance
with APB Opinion No. 25, and related interpretations. As such, compensation
expense is recorded on fixed stock grants only if the current fair value of the
underlying stock exceeds the exercise price of the option at the date of grant
and it is recognized on a straight-line basis over the vesting period. Based on
the performance of our stock, we repriced certain employee stock options on
February 2, 1999. As a result of this repricing, options to purchase 1.06
million shares of stock were repriced and certain vesting periods related to
these options were modified or extended. Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation, An Interpretation of APB
Opinion No. 25," requires us to record compensation expense or benefit, which is
adjusted every quarter, for increases or decreases in the fair value of the
repriced options based on changes in our stock price from the value at July 1,
2000, until the repriced options are exercised, forfeited or expire at various
dates through 2008. As a result, net loss applicable to common stockholders and
net loss per share to common stockholders may be subject to volatility. Had we
accounted for repricing of stock option grants in accordance with SFAS No. 123,
the expense related to the vested options would have been recorded at the
repricing date, and the expense related to non-vested options would have been
recorded over the vesting period.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS
Statements in this Form 10-Q that are not statements or descriptions of
historical facts are "forward-looking" statements under Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, and are subject to numerous risks and
uncertainties. These forward-looking statements and other forward-looking
statements made by us or our representatives are based on a number of
assumptions. The words "believe," "expect," "anticipate," "intend," "estimate"
or other expressions, which are predictions of or indicate future events and
trends and which do not relate to historical matters, identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, as they involve risks and uncertainties, and actual
results could differ materially from those currently anticipated due to a number
of factors, including those set forth in this section and elsewhere in this Form
10-Q. These factors include, but are not limited to, the risks set forth below.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The forward-looking statements represent our judgment and expectations as
of the date of this Report. We assume no obligation to update any such
forward-looking statements.
IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR NEEDS, WE MAY HAVE
TO CURTAIL OR DISCONTINUE THE RESEARCH, PRODUCT DEVELOPMENT, PRE-CLINICAL
TESTING AND CLINICAL TRIALS OF SOME OR ALL OF OUR PRODUCT CANDIDATES.
As of March 31, 2003, we had working capital of approximately $17,384,000,
including approximately $20,494,000 of cash and cash equivalents and short-term
investments. During 2003, we sold 2,300,000 shares of common stock, raising net
proceeds of approximately $7,655,000. Our cash used in operations for the three
months ended March 31, 2003 and 2002, was approximately $4,562,000 and
$2,295,000, respectively. We anticipate that at our current spending level, our
existing available cash and cash equivalents and short-term investments will be
adequate to satisfy our working capital requirements for our current operations
through the first quarter of 2004. If it becomes necessary, we have the ability
to quickly and significantly reduce the cash burn rate, as we have limited fixed
commitments. Following completion of the SAPPHIRE and SILVER trials, we will
require substantial new funding to pursue development of ALT-711 and continue
our operations.
We will require, over the long-term, substantial new funding to pursue
development and commercialization of ALT-711 and our other product candidates
and continue our operations. We believe that satisfying these capital
requirements over the long-term will require successful commercialization of our
product candidates. However, it is uncertain whether or not any products will be
approved or will be commercially successful. The amount of our future capital
requirements will depend on numerous factors, including the progress of our
research and development programs, the conduct of pre-clinical tests and
clinical trials, the development of regulatory submissions, the costs associated
with protecting patents and other proprietary rights, the development of
marketing and sales capabilities and the availability of third-party funding.
Because of our short-term and long-term capital requirements, we, as
stated above, may seek access to the public or private equity markets. This may
have the effect of materially diluting the current holders of our outstanding
stock. We may also seek additional funding through corporate collaborations and
other financing vehicles, potentially including off-balance sheet financing
through limited partnerships or corporations. There can be no assurance that
such funding will be available at all or on terms acceptable to us. If we obtain
funds through arrangements with collaborative partners or others, we may be
required to relinquish rights to certain of our technologies or product
candidates.
IF WE DO NOT SUCCESSFULLY DEVELOP ANY PRODUCTS, WE MAY NOT DERIVE ANY REVENUES.
We have not yet requested or received regulatory approval for any product
from the United States Food and Drug Administration ("FDA") or any other
regulatory body. All of our product candidates are still in research or clinical
development. We may not succeed in the development and marketing of any
therapeutic or diagnostic product. To achieve profitable operations, we must,
alone or with others, successfully identify, develop, introduce and market
proprietary products. Such products will require significant additional
investment, development and pre-clinical and clinical testing prior to potential
regulatory approval and commercialization.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Potential products may be found ineffective or cause harmful side
effects during pre-clinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of third parties. We may not be able to
undertake additional clinical trials. In addition, our product development
efforts may not be successfully completed, we may not obtain regulatory
approvals, and our products, if introduced, may not be successfully marketed or
achieve customer acceptance. We do not expect any of our products, including
ALT-711, to be commercially available for a number of years, if at all.
CLINICAL TRIALS REQUIRED FOR OUR PRODUCT CANDIDATES ARE EXPENSIVE AND
TIME-CONSUMING, AND THEIR OUTCOME IS UNCERTAIN.
Before obtaining regulatory approvals for the commercial sale of any of
our products under development, we must demonstrate through pre-clinical studies
and clinical trials that the product is safe and effective for use in each
target indication. The length of time necessary to complete clinical trials
varies significantly and may be difficult to predict. Factors which can cause
delay or termination of our clinical trials include: (i) slower than expected
patient enrollment due to the nature of the protocol, the proximity of patients
to clinical sites, the eligibility criteria for the study, competition with
clinical trials for other drug candidates or other factors; (ii) lower than
expected retention rates of patients in a clinical trial; (iii) inadequately
trained or insufficient personnel at the study site to assist in overseeing and
monitoring clinical trials; (iv) delays in approvals from a study site's review
board; (v) longer treatment time required to
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
demonstrate effectiveness or determine the appropriate product dose; (vi) lack
of sufficient supplies of the product candidate; (vii) adverse medical events or
side effects in treated patients; (viii) lack of effectiveness of the product
candidate being tested and (ix) regulatory changes.
Even if we obtain positive results from pre-clinical or clinical trials
for a particular product, we may not achieve the same success in future trials
of that product. In addition, some or all of the clinical trials we undertake
may not demonstrate sufficient safety and efficacy to obtain the requisite
regulatory approvals, which could prevent the creation of marketable products.
Our product development costs will increase if we have delays in testing or
approvals, if we need to perform more or larger clinical trials than planned or
if our trials are not successful. Delays in our clinical trials may harm our
financial results and the commercial prospects for our products.
IF WE ARE UNABLE TO DERIVE REVENUES FROM PRODUCT SALES, WE MAY NEVER BE
PROFITABLE.
All of our revenues to date have been generated from collaborative
research agreements and financing activities, or interest income earned on these
funds. We have not received any revenues from product sales. We may not realize
product revenues on a timely basis, if at all.
At March 31, 2003, we had an accumulated deficit of approximately
$175,504,000. We anticipate that we will incur substantial, potentially greater,
losses in the future. Our products under development may not be successfully
developed and our products, if successfully developed, may not generate revenues
sufficient to enable us to earn a profit. We expect to incur substantial
additional operating expenses over the next several years as our research,
development and clinical trial activities increase. We do not expect to generate
revenues from the sale of products, if any, for a number of years. Our ability
to achieve profitability depends, in part, on our ability to enter into
agreements for product development, obtain regulatory approval for our products
and develop the capacity, or enter into agreements, for the manufacture,
marketing and sale of any products. We may not obtain required regulatory
approvals, or successfully develop, manufacture, commercialize and market
product candidates, and we may never achieve product revenues or profitability.
PRIOR STOCK OPTION REPRICING MAY HAVE AN ADVERSE EFFECT ON OUR FUTURE FINANCIAL
PERFORMANCE.
Based on the performance of our stock, we repriced certain employee stock
options on February 2, 1999, in order to bolster employee retention. As a result
of this repricing, options to purchase 1.06 million shares of stock were
repriced and certain vesting periods related to these options were modified or
extended. This repricing may have a material adverse impact on future financial
performance based on the Financial Accounting Standards Board ("FASB")
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation, An Interpretation of APB Opinion No. 25." This
interpretation requires us to record compensation expense or benefit, which is
adjusted every quarter, for increases or decreases in the fair value of the
repriced options based on changes in our stock price from the value at July 1,
2000, until the repriced options are exercised, forfeited or expire. The options
expire at various dates through January 2008.
IF WE ARE UNABLE TO FORM THE COLLABORATIVE RELATIONSHIPS THAT OUR BUSINESS
STRATEGY REQUIRES, THEN OUR PROGRAMS WILL SUFFER AND WE MAY NOT BE ABLE TO
DEVELOP PRODUCTS.
Our strategy for developing and deriving revenues from our products
depends, in large part, upon entering into arrangements with research
collaborators, corporate partners and others. We are seeking to establish these
relationships to provide the funding necessary for continuation of our product
development, but if such efforts are not successful, our programs may suffer and
we may be unable to develop products.
IF WE ARE ABLE TO FORM OUR COLLABORATIVE RELATIONSHIPS, BUT ARE UNABLE TO
MAINTAIN THEM, OUR PRODUCT DEVELOPMENT MAY BE DELAYED AND DISPUTES OVER RIGHTS
TO TECHNOLOGY MAY RESULT.
We may form collaborative relationships that will, in some cases, make us
dependent upon outside partners to conduct pre-clinical testing and clinical
trials and to provide adequate funding for our development programs. Such
corporate partners, if any, may have all or a significant portion of the
development and regulatory approval responsibilities. Failure of the corporate
partners to develop marketable products or to gain the appropriate regulatory
approvals on a timely basis, if at all, would have a material adverse effect on
our business, financial condition, results of operations and liquidity.
In most cases, we will not be able to control the amount and timing of
resources that our corporate partners devote to our programs or potential
products. If any of our corporate partners breached or terminated its agreement
with us or otherwise failed to conduct its collaborative activities in a timely
manner, the pre-clinical or clinical development or commercialization of product
candidates or research programs could be delayed, and we would be
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
required to devote additional resources to product development and
commercialization or terminate certain development programs.
Disputes may arise in the future with respect to the ownership of rights
to any technology we develop with third parties. These and other possible
disagreements between us and collaborators could lead to delays in the
collaborative research, development or commercialization of product candidates,
or could require or result in litigation or arbitration, which would be
time-consuming and expensive and would have a material adverse effect on our
business, financial condition, results of operations and liquidity.
Any corporate partners we have may develop, either alone or with others,
products that compete with the development and marketing of our products.
Competing products, either developed by the corporate partners or to which the
corporate partners have rights, may result in their withdrawal of support with
respect to all or a portion of our technology, which would have a material
adverse effect on our business, financial condition, results of operations and
liquidity.
IF WE CANNOT SUCCESSFULLY DEVELOP A MARKETING AND SALES FORCE OR MAINTAIN
SUITABLE ARRANGEMENTS WITH THIRD PARTIES TO MARKET AND SELL OUR PRODUCTS, OUR
ABILITY TO DELIVER PRODUCTS MAY BE IMPAIRED.
We currently have no experience in marketing or selling pharmaceutical
products. In order to achieve commercial success for any approved product, we
must either develop a marketing and sales force or, where appropriate or
permissible, enter into arrangements with third parties to market and sell our
products. We might not be successful in developing marketing and sales
capabilities. Further, we may not be able to enter into marketing and sales
agreements with others on acceptable terms, and any such arrangements, if
entered into, may be terminated. If we develop our own marketing and sales
capability, it will compete with other companies that currently have
experienced, well funded and larger marketing and sales operations. To the
extent that we enter into co-promotion or other sales and marketing arrangements
with other companies, revenues will depend on the efforts of others, which may
not be successful.
IF WE CANNOT SUCCESSFULLY FORM AND MAINTAIN SUITABLE ARRANGEMENTS WITH THIRD
PARTIES FOR THE MANUFACTURING OF THE PRODUCTS WE MAY DEVELOP, OUR ABILITY TO
DEVELOP OR DELIVER PRODUCTS MAY BE IMPAIRED.
We have no experience in manufacturing products for commercial purposes
and do not have manufacturing facilities. Consequently, we are dependent on
contract manufacturers for the production of products for development and
commercial purposes. The manufacture of our products for clinical trials and
commercial purposes is subject to cGMP regulations promulgated by the FDA. In
the event that we are unable to obtain or retain third-party manufacturing for
our products, we will not be able to commercialize such products as planned. We
may not be able to enter into agreements for the manufacture of future products
with manufacturers whose facilities and procedures comply with cGMP and other
regulatory requirements. Our current dependence upon others for the manufacture
of our products may adversely affect our profit margin, if any, on the sale of
future products and our ability to develop and deliver such products on a timely
and competitive basis.
IF WE ARE NOT ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO OUR
SUCCESS, THE DEVELOPMENT AND ANY POSSIBLE SALES OF OUR PRODUCT CANDIDATES COULD
SUFFER AND COMPETITORS COULD FORCE OUR PRODUCTS COMPLETELY OUT OF THE MARKET.
Our success will depend on our ability to obtain patent protection for our
products, preserve our trade secrets, prevent third parties from infringing upon
our proprietary rights and operate without infringing upon the proprietary
rights of others, both in the United States and abroad.
The degree of patent protection afforded to pharmaceutical inventions is
uncertain and our potential products are subject to this uncertainty.
Competitors may develop competitive products outside the protection that may be
afforded by the claims of our patents. We are aware that other parties have been
issued patents and have filed patent applications in the United States and
foreign countries with respect to other agents that have an effect on Advanced
Glycation End-products ("A.G.E.s.") or the formation of A.G.E. crosslinks. In
addition, although we have several patent applications pending to protect
proprietary technology and potential products, these patents may not be issued,
and the claims of any patents, which do issue, may not provide significant
protection of our technology or products. In addition, we may not enjoy any
patent protection beyond the expiration dates of our currently issued patents.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to maintain, develop and expand
our competitive position, which we seek to protect, in part, by confidentiality
agreements with our corporate partners, collaborators, employees and
consultants. We also have invention or patent assignment agreements with our
employees and certain, but not all, corporate partners and consultants. Relevant
inventions may be developed by a person not bound by an invention assignment
agreement.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Binding agreements may be breached, and we may not have adequate remedies for
such breach. In addition, our trade secrets may become known to or be
independently discovered by competitors.
IF WE FAIL TO OBTAIN REGULATORY APPROVALS FOR OUR PRODUCTS, THE COMMERCIAL USE
OF OUR PRODUCTS WILL BE LIMITED.
Our research, pre-clinical testing and clinical trials of our product
candidates are, and the manufacturing and marketing of our products will be,
subject to extensive and rigorous regulation by numerous governmental
authorities in the United States and in other countries where we intend to test
and market our product candidates.
Prior to marketing, any product we develop must undergo an extensive
regulatory approval process. This regulatory process, which includes
pre-clinical testing and clinical trials and may include post-marketing
surveillance of each compound to establish its safety and efficacy, can take
many years and can require the expenditure of substantial resources. Data
obtained from pre-clinical and clinical activities is susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. In
addition, we may encounter delays or rejections based upon changes in FDA policy
for drug approval during the period of product development and FDA regulatory
review of each submitted new drug application ("NDA"). We may encounter similar
delays in foreign countries. We may not obtain regulatory approval for the drugs
we develop. Moreover, regulatory approval may entail limitations on the
indicated uses of the drug. Further, even if we obtain regulatory approval, a
marketed drug and its manufacturer are subject to continuing review and
discovery of previously unknown problems with a product or manufacturer which
may have adverse effects on our business, financial condition and results of
operations, including withdrawal of the product from the market. Violations of
regulatory requirements at any stage, including pre-clinical testing, clinical
trials, the approval process or post-approval, may result in various adverse
consequences, including the FDA's delay in approving, or its refusal to approve
a product, withdrawal of an approved product from the market and the imposition
of criminal penalties against the manufacturer and NDA holder. None of our
products has been approved for commercialization in the United States or
elsewhere. We may not be able to obtain FDA approval for any products. Failure
to obtain requisite governmental approvals or failure to obtain approvals of the
scope requested will delay or preclude our licensees or marketing partners from
marketing our products or limit the commercial use of such products and will
have a material adverse effect on our business, financial condition, results of
operations and liquidity.
IF WE ARE NOT ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE
DEVELOPMENT AND MARKETING OF CURES AND THERAPIES FOR CARDIOVASCULAR DISEASES,
DIABETES AND THE OTHER CONDITIONS FOR WHICH WE SEEK TO DEVELOP PRODUCTS, WE MAY
NOT BE ABLE TO CONTINUE OUR OPERATIONS.
We are engaged in pharmaceutical fields characterized by extensive
research efforts and rapid technological progress. Many established
pharmaceutical and biotechnology companies with resources greater than ours are
attempting to develop products that would be competitive with our products.
Other companies may succeed in developing products that are safer, more
efficacious or less costly than any we may develop and may also be more
successful than us in production and marketing. Rapid technological development
by others may result in our products becoming obsolete before we recover a
significant portion of the research, development or commercialization expenses
incurred with respect to those products.
Certain technologies under development by other pharmaceutical companies
could result in better treatments for cardiovascular disease, or diabetes and
its related complications. Several large companies have initiated or expanded
research, development and licensing efforts to build pharmaceutical franchises
focusing on these medical conditions. It is possible that one or more of these
initiatives may reduce or eliminate the market for some of our products. In
addition, other companies have initiated research in the inhibition or crosslink
breaking of A.G.E.s.
IF GOVERNMENTS AND THIRD-PARTY PAYERS CONTINUE THEIR EFFORTS TO CONTAIN OR
DECREASE THE COSTS OF HEALTHCARE, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR
PRODUCTS SUCCESSFULLY.
In certain foreign markets, pricing and/or profitability of prescription
pharmaceuticals are subject to government control. In the United States, we
expect that there will continue to be federal and state initiatives to control
and/or reduce pharmaceutical expenditures. In addition, increasing emphasis on
managed care in the United States will continue to put pressure on
pharmaceutical pricing. Cost control initiatives could decrease the price that
we receive for any products we may develop and sell in the future and have a
material adverse effect on our business, financial condition and results of
operations. Further, to the extent that cost control initiatives have a material
adverse effect on our corporate partners, our ability to commercialize our
products may be adversely affected.
Our ability to commercialize pharmaceutical products may depend, in part,
on the extent to which reimbursement for the products will be available from
government health administration authorities, private health insurers and other
third-party payers. Significant uncertainty exists as to the reimbursement
status of newly approved healthcare products, and third-party payers, including
Medicare, are increasingly challenging the prices charged for
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
medical products and services. Third-party insurance coverage may not be
available to patients for any products developed by us. Government and other
third-party payers are attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for new therapeutic products and by
refusing in some cases to provide coverage for uses of approved products for
disease indications for which the FDA has not granted labeling approval. If
adequate coverage and reimbursement levels are not provided by government and
other third-party payers for our products, the market acceptance of these
products would be adversely affected.
IF THE USERS OF THE PRODUCTS WE DEVELOP CLAIM THAT OUR PRODUCTS HAVE HARMED
THEM, WE MAY BE SUBJECT TO COSTLY AND DAMAGING PRODUCT LIABILITY LITIGATION,
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS.
The use of any of our potential products in clinical trials and the sale
of any approved products, including the testing and commercialization of ALT-711
or other compounds, exposes us to liability claims resulting from the use of
products or product candidates. A claim, which was subsequently settled, was
made by a participant in one of our clinical trials, and additional claims might
be made directly by other such participants, consumers, pharmaceutical companies
or others. We maintain product liability insurance coverage for claims arising
from the use of our products in clinical trials. However, coverage is becoming
increasingly expensive, and we may not be able to maintain or acquire insurance
at a reasonable cost or in sufficient amounts to protect us against losses due
to liability that could have a material adverse effect on our business,
financial conditions and results of operations. We may not be able to obtain
commercially reasonable product liability insurance for any product approved for
marketing in the future and insurance coverage and our resources may not be
sufficient to satisfy any liability resulting from product liability claims. A
successful product liability claim or series of claims brought against us could
have a material adverse effect on our business, financial condition, results of
operations and liquidity.
IF WE ARE UNABLE TO ATTRACT AND RETAIN THE KEY PERSONNEL ON WHOM OUR SUCCESS
DEPENDS, OUR PRODUCT DEVELOPMENT, MARKETING AND COMMERCIALIZATION PLANS COULD
SUFFER.
We are highly dependent on the principal members of our management and
scientific staff. The loss of services of any of these personnel could impede
the achievement of our development objectives. Furthermore, recruiting and
retaining qualified scientific personnel to perform research and development
work in the future will also be critical to our success. We may not be able to
attract and retain personnel on acceptable terms given the competition between
pharmaceutical and healthcare companies, universities and non-profit research
institutions for experienced scientists. In addition, we rely on consultants to
assist us in formulating our research and development strategy. All of our
consultants are employed outside of us and may have commitments to or consulting
or advisory contracts with other entities that may limit their availability to
us.
OUR OPERATIONS INVOLVE A RISK OF INJURY OR DAMAGE FROM HAZARDOUS MATERIALS, AND
IF AN ACCIDENT WERE TO OCCUR, WE COULD BE SUBJECT TO COSTLY AND DAMAGING
LIABILITY CLAIMS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our research and development activities involve the controlled use of
hazardous materials and chemicals. Although we believe that our safety
procedures for handling and disposing of hazardous materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of an accident, we could be held liable for any damages or fines that
result. Such liability could have a material adverse effect on our business,
financial condition, results of operations and liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to our investments in short-term marketable securities. We do not use
derivative financial instruments. Our investments consist primarily of debt
instruments of the U.S. government, government agencies, financial institutions
and corporations with strong credit ratings. We prepared a detailed market risk
disclosure of these investments in our 2002 Annual Report on Form 10-K. There
have been no material changes in our market risk position since December 31,
2002.
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. Within the 90 days prior to
the filing date of this Quarterly Report on Form 10-Q, our Chief Executive
Officer and our Vice President, Finance, evaluated the effectiveness of Alteon's
disclosure controls and procedures as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon
that evaluation, the Chief Executive Officer and the Vice President, Finance,
have concluded that Alteon's current disclosure controls and procedures are
adequate and effective to
16
ensure that information required to be disclosed in the reports Alteon files
under the Exchange Act is recorded, processed, summarized and reported on a
timely basis.
b) Changes in internal controls. There have been no significant changes in
Alteon's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation by the Chief
Executive Officer and the Vice President, Finance.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 5, 2002, Lisa Weller, a former Alteon employee, filed suit
against Alteon in the Superior Court of New Jersey asserting claims for alleged
pregnancy, sex and handicap discrimination, wrongful termination and intentional
infliction of emotional distress, all arising from the company's termination of
her employment as an executive assistant. Alteon removed the case to the United
States District Court for the District of New Jersey. In December 2002, we
agreed to a settlement with Ms. Weller under which we deny all liability in
exchange for a dismissal and release by Ms. Weller of any and all claims against
us. The settlement is currently being executed by both parties.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See Exhibit Index on page 22 for Exhibits filed with this Quarterly Report
on Form 10-Q.
b) The following reports on Form 8-K was filed during the quarter ended March
31, 2003:
On March 27, 2003, the Company filed a Current Report on Form 8-K, dated
March 26, 2003, which reported that the Company had agreed to sell 2,300,000
shares of its common stock to institutional investors.
On January 3, 2003, the Company filed a Current Report on Form 8-K, dated
December 27, 2002, which reported that the Company had raised $646,500 through
the sale of net operating loss carryforwards under the State of New Jersey's
Technology Business Tax Certificate Transfer Program and that the Company had
closed a previously reported stock purchase agreement to sell common stock to a
group of institutional investors.
18
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.
Date: May 12, 2003
ALTEON INC.
By: /s/Kenneth I. Moch
-------------------------------------
Kenneth I. Moch
President and Chief Executive Officer
(principal executive officer)
By: /s/Elizabeth A. O'Dell
-------------------------------------
Elizabeth A. O'Dell
Vice President, Finance
Secretary and Treasurer
(principal accounting officer)
19
CERTIFICATIONS
I, Kenneth I. Moch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alteon Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all
material respects, the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant,
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 12, 2003 /s/ Kenneth I. Moch
-------------------------------------
Kenneth I. Moch
President and Chief Executive Officer
20
CERTIFICATIONS
I, Elizabeth O'Dell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alteon Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present, in all
material respects, the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant,
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 12, 2003 /s/ Elizabeth A. O'Dell
-----------------------------------
Elizabeth A. O'Dell
Vice President, Finance
Secretary and Treasurer
21
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
--- ----------------------
3.1 Restated Certificate of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 to the Company's Report on Form 10-Q filed on
November 10, 1999, S.E.C. File Number 000-19529.)
3.2 Certificate of the Voting Powers, Designations, Preference and Relative
Participating, Optional and Other Special Rights and Qualifications,
Limitations or Restrictions of Series F Preferred Stock Alteon Inc.
(Incorporated by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, S.E.C. File
Number 001-16043.)
3.3 Certificate of Retirement dated September 10, 2000, of Alteon Inc.
(Incorporated by reference to Exhibit 3.1 to the Company's Report on
Form 10-Q filed on November 10, 1999, S.E.C. File Number 000-19529.)
3.4 Certificate of Designations of Series G Preferred Stock of Alteon Inc.
(Incorporated by reference to Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, S.E.C. File
Number 000-19529.)
3.5 Certificate of Amendment of Certificate of Designations of Series G
Preferred Stock of Alteon Inc. (Incorporated by reference to Exhibit
3.4 to the Company's Report on Form 10-Q filed on August 14, 1998,
S.E.C. File Number 000-19529.)
3.6 Certificate of Designations of Series H Preferred Stock of Alteon Inc.
(Incorporated by reference to Exhibit 3.5 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, S.E.C. File
Number 000-19529.)
3.7 Amended Certificate of Designations of Series H Preferred Stock of
Alteon Inc. (Incorporated by reference to Exhibit 3.6 to the Company's
Report on Form 10-Q filed on August 14, 1998, S.E.C. File Number
000-19529.)
3.8 Certificate of Retirement dated November 20, 2000, of Alteon Inc.
(Incorporated by reference to Exhibit 3.8 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, S.E.C. File
Number 001-16043.)
3.9 Certificate of Amendment to Restated Certificate of Incorporation of
Alteon Inc., dated June 7, 2001. (Incorporated by reference to Exhibit
3.8 to the Company's Report on Form 10-Q filed on August 14, 2001,
S.E.C. File Number 001-16043.)
3.10 By-laws, as amended. (Incorporated by reference to Exhibit 3.10 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2002, S.E.C. File Number 001-16043.)
4.1 Stockholders' Rights Agreement dated as of July 27, 1995, between
Alteon Inc. and Registrar and Transfer Company, as Rights Agent.
(Incorporated by reference to Exhibit 4.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, S.E.C. File
Number 001-16043.)
4.2 Amendment to Stockholders' Rights Agreement dated as of April 24, 1997,
between Alteon Inc. and Registrar and Transfer Company, as Rights
Agent. (Incorporated by reference to Exhibit 4.4 to the Company's
Current Report on Form 8-K filed on May 9, 1997, S.E.C. File Number
000-19529.)
4.3 Registration Rights Agreement dated as of April 24, 1997, between
Alteon Inc. and the investors named on the signature page thereof.
(Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K filed on May 9, 1997, S.E.C. File Number 000-19529.)
4.4 Form of Common Stock Purchase Warrant. (Incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K filed on May 9,
1997, S.E.C. File Number 000-19529.)
4.5 Amendment to Stockholders' Rights Agreement dated as of December 1,
1997, between Alteon Inc. and Registrar and Transfer Company, as Rights
Agent. (Incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K filed on December 10, 1997, S.E.C. File
Number 000-19529.)
4.6 Registration Rights Agreement dated September 29, 2000. (Incorporated
by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
filed on October 5, 2000, S.E.C. File Number 001-16043.)
22
4.7 Form of Series 1 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form 8-K
filed on October 5, 2000, S.E.C. File Number 001-16043.)
4.8 Form of Series 2 Common Stock Purchase Warrant. (Incorporated by
reference to Exhibit 4.3 to the Company's Current Report on Form 8-K
filed on October 5, 2000, S.E.C. File Number 001-16043.)
4.9 Notice of Appointment, dated August 29, 2002, of The American Stock
Transfer & Trust Company as successor Rights Agent, pursuant to
Stockholders' Rights Agreement dated as of July 27, 1995. (Incorporated
by reference to Exhibit 4.4 of the Company's Report on Form 10-Q filed
on November 13, 2002, S.E.C. File Number 001-16043.)
10.1+ Letter Agreement, dated May 5, 2003, between the Company and Robert C.
deGroof, Ph.D., amending Employment Agreement, dated as of March 14,
2000.
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
--------------
+ Denotes a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 6(a) of this Form 10-Q.
23