UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[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 for the transition period from ________ to ________
Commission File Number: 0-19122
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APHTON CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 95-3640931
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 SW Eighth Street, Suite 2160, Miami, Florida 33130
- ----------------------------------------------- ----------
(address of principal executive offices) (Zip Code)
(305) 374-7338
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(Registrant's telephone number, including area code)
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(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.
X Yes No
--- ---
Indicate by check mark whether the registrant is an accelerated filing (as
defined in Rule 12b-2 of the Exchange Act).
X Yes No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of
Class Shares outstanding As of
Common Stock, $0.001 par value 24,701,639 May 14, 2003
APHTON CORPORATION
Index
Page
Part I - Financial Information
Item 1. Financial Statements: 3
Balance Sheets - March 31, 2003 (unaudited) and December 31, 2002 4
Statements of Operations (unaudited) - Three months ended March 31,
2003 and 2002 5
Statements of Cash Flows (unaudited) - Three months ended March 31,
2003 and 2002 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Item 4. Controls and Procedures 11
Part II - Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Certifications 15
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Part I - Financial Information
Forward-Looking Statements
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. In some cases, you can identify forward-looking statements by
terminology such as "may", "will", "should", "expect", "plan", "anticipate",
"believe", "continue", "predict", "estimated", "potential", or the negative of
such terms or other comparable terminology. We have based these forward-looking
statements on our current expectations and projections about future events.
These statements include, but are not limited to information about:
o Our business outlook and future financial performance;
o Anticipated profitability, revenues, expenses and capital expenditures;
o Anticipated research, development, clinical, regulatory and reimbursement
progress;
o Future funding and expectations as to any future events; and
o Other statements that are not historical fact and are forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 that involve risks and uncertainties.
When considering such forward-looking statements, you should keep in mind the
risk factors and other cautionary statements in our publicly available filings
with the Securities and Exchange Commission, including our Annual Report on Form
10-K for the year ended December 31, 2002. These risks and uncertainties could
cause our actual results to differ materially from future results expressed or
implied by the forward-looking statements. Many of these factors are beyond our
ability to control or predict. You should not put undue reliance on any
forward-looking statements. We undertake no obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this Form 10-Q or to reflect the occurrence of unanticipated
events, except as may be required under applicable securities laws.
Item 1. Financial Statements
The interim financial statements included herein have been prepared by us,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the financial statements
include all adjustments necessary to present fairly our financial position as of
March 31, 2003 and December 31, 2002 and the results of our operations for the
three months ended March 31, 2003 and 2002; and our cash flows for the three
months ended March 31, 2003 and 2002. It is suggested that these financial
statements be read in conjunction with the financial statements and the notes
thereto included in our latest annual report on Form 10-K.
Critical Accounting Policies
Our significant accounting policies are described in Note 2 to the financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the SEC on March 31, 2003. We believe that our
most critical accounting policies include the use of estimates. The impact of
these estimates on results of operations in 2003 and 2002 are not significant.
Our management periodically reviews these policies and estimates, the effect of
which is reflected as a component of net loss in the period in which the change
is known. Such changes to these estimates have not been material to our results
of operations during the three months ended March 31, 2003.
Financial Statement Overview
The following highlighted information is also contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations. During
the three months ended March 31, 2003, we received gross proceeds of
approximately $1.5 million from the sale of 500,000 shares of our common stock
and 150,000 warrants to purchase our common stock. Total costs were reduced from
$10.1 million in the quarter ending March 31, 2002 to $4.9 million in the
quarter ended March 31, 2003. This decrease is primarily due to the completion
of recruitment and final stages of our clinical trials. While pursuing our
objectives, we intend to reduce our costs and expenses through the first quarter
of 2004 to less than $16 million. We expect our total costs to decrease in the
remaining quarters of the year 2003. During this period we had no contract
revenues. Subsequent to the reporting period, in April 2003, we received gross
proceeds of $15 million from the sale of senior convertible notes and warrants
in the first tranche of a $20 million financing package, which is not reflected
in the financial statements below. The sale of an additional $5 million of
senior convertible notes and warrants in the second tranche is subject to
certain conditions as discussed in the section captioned "Liquidity and Capital
Resources" under Item 2 of this report.
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APHTON CORPORATION
Balance Sheets
Assets (unaudited)
March 31, 2003 December 31, 2002
Current Assets:
Cash and current investments:
Cash and short-term cash investments $5,021,264 $7,824,182
Investment securities-trading 794,370 749,095
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Total cash and current investments 5,815,635 8,573,277
Other assets (including current portion of
unconditional supply commitment) 330,526 374,740
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Total current assets 6,146,161 8,948,017
Equipment and improvements, at cost,
net of accumulated depreciation and amortization 219,631 245,063
Unconditional supply commitment 6,797,900 6,797,900
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Total assets $13,163,692 $15,990,980
============ ============
Liabilities and Stockholders' Deficit
Liabilities:
Current liabilities:
Accounts payable and other $15,193,026 $14,316,616
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Total current liabilities 15,193,026 14,316,616
Convertible debenture 3,000,000 3,000,000
Deferred revenue 10,000,000 10,000,000
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Total liabilities 28,193,026 27,316,616
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Commitments
Stockholders' Deficit:
Preferred stock, $0.001 par value -
Authorized: 2,000,000 shares -
Issued and outstanding: none - -
Common stock, $0.001 par value -
Authorized: 30,000,000 shares
Issued and outstanding: 24,701,639 shares at
March 31, 2003 and 24,201,639 shares
at December 31, 2002 24,702 24,202
Additional paid in capital 130,156,651 128,956,652
Purchase warrants 317,650 298,900
Accumulated deficit (145,528,337) (140,605,390)
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Total stockholders' deficit (15,029,334) (11,325,636)
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Total liabilities and stockholders' deficit $13,163,692 $15,990,980
============ ============
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APHTON CORPORATION
Statements of Operations (Unaudited)
For the three months ended March 31, 2003 and 2002
Three months ended Three months ended
March 31, 2003 March 31, 2002
Revenue: $ - $ -
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Costs and expenses:
General and administrative 580,462 389,432
Research and development 4,352,234 9,690,247
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Total costs and expenses 4,932,696 10,079,679
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Loss from operations 4,932,696 10,079,679
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Other income (expense):
Dividend and interest income 13,710 22,288
Unrealized losses from investments (3,961) (29,645)
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Net loss $(4,922,947) $(10,087,036)
============== ==============
Per share data:
Basic and fully diluted loss per common share $(0.20) $(0.54)
============== ==============
Weighted average number of common shares outstanding 24,534,972 18,740,210
============== ==============
The net loss for the three months ended March 31, 2003 and 2002 was the
comprehensive losses for those periods. For all periods presented, shares of our
common stock issuable upon the exercise of approximately 3.7 million purchase
warrants were excluded from the computation of net loss per share because their
effect was anti-dilutive.
Stock-Based Compensation
On December 31, 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. This Statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement
amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure
about those effects in interim financial information. We intend to continue to
account for stock-based compensation based on the provisions of APB Opinion No.
25.
The following table summarizes our results as if we had recorded stock-based
compensation expense for the three months ended March 31, 2003 and March 31,
2002, based on the provisions of SFAS 123, as amended by SFAS 148:
Net loss: March 31, 2003 March 31, 2002
As reported $(4,922,947) $(10,087,036)
Compensation expense, net (143,126) (70,782)
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Pro forma $(5,066,073) $(10,157,818)
============== ===============
Basic loss per share:
As reported $(0.20) $(0.54)
Compensation expense, net of tax (0.01) -
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Pro forma $(0.21) $(0.54)
============== ===============
Diluted loss per share:
As reported $(0.20) $(0.54)
Compensation expense, net of tax (0.01) -
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Pro forma $(0.21) $(0.54)
============== ===============
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APHTON CORPORATION
Statements of Cash Flows (Unaudited)
For the three months ended March 31, 2003 and 2002
Cash flows from operating activities: 2003 2002
Cash paid to suppliers and employees $(4,022,169) $(10,490,271)
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Net cash used in operating activities (4,022,169) (10,490,271)
Cash flows from investing activities:
Purchase of held to maturity securities - (6,990,295)
Proceeds from maturity of held to maturity securities - 2,000,000
Capital expenditures - (9,055)
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Net cash provided by (used in) investing activities - (4,999,350)
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Cash flows from financing activities:
Sales of equity securities 1,219,251 27,652,154
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Cash received from financing activities 1,219,251 27,652,154
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Net (decrease) increase in cash and short-term cash investments (2,802,918) 12,162,533
Cash and short-term cash investments:
Beginning of period 7,824,182 3,176,717
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End of period $ 5,021,264 $ 15,339,250
============ =============
Reconciliation of net loss to net cash used in operating activities
Net loss $(4,922,947) $(10,087,036)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 25,430 17,900
Unrealized losses from investments 3,961 29,645
Non-cash employee research and development credit (3,961) (29,645)
Changes in -
Investment securities- trading (45,276) (8,755)
Other assets 44,214 (30,833)
Unconditional supply commitment - 250,000
Accounts payable and other 876,410 (631,547)
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Net cash used in operating activities: $(4,022,169) $(10,490,271)
============ =============
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three months ended March 31, 2003 and 2002
General
Aphton Corporation is a biopharmaceutical company. We are engaged in research
and development and conduct clinical trials for our products, both independently
and with our corporate strategic partners. We apply our innovative active
immunization technology-platform to develop products for neutralizing, and
removing from circulation, hormones and other molecules that participate in
gastrointestinal system and reproductive system cancer and non-cancer diseases.
We are also developing a product to neutralize hormones to prevent pregnancy.
Since 1997 we have had a strategic alliance with Pasteur Merieux Connaught, now
Aventis Pasteur, for products that treat gastrointestinal cancers, in North
America and Europe. Since 1998, we have had a strategic alliance with SmithKline
Beecham, now GlaxoSmithKline, for products that treat reproductive system
cancers and non-cancer diseases, worldwide.
On May 2, 2003 we announced that Patrick T. Mooney, MD, has joined our
management team, reporting to the office of the Chief Executive Officer in the
capacity of Chief Medical Officer. Dr. Mooney was most recently Vice President
and Senior Biotechnology Analyst at Thomas Weisel Partners. Dr. Mooney will be
working closely with our senior management in finance, business development and
operations; including clinical trials and regulatory affairs, research,
development and manufacturing.
On March 31, 2003 we announced that taking into full account the $20 million
financing package announced earlier that day, of which $15 million was received
by April 4, 2003, our Board of Directors determined that it was not in the best
interest of our shareholders to restructure the existing Co-Promotion Agreement
and License with Aventis
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Pasteur to treat human cancers with G17DT and that the Letter of Intent (LOI)
dated December 19, 2002 to restructure the agreement with Aventis, expired as of
that date.
While retaining our favorable royalty split, which is in excess of 50%, in our
agreement with Aventis Pasteur for countries in North America and Europe, we are
pursuing our primary objective of filing for approval to market G17DT for
monotherapy for advanced pancreatic cancer patients in the European Union,
Canada and Australia by September 2003. With the expiration of the LOI
agreement, we have resumed our intention to license, in return for royalties,
up-front fees and milestone payments: a) G17DT to treat human cancers in markets
worldwide outside of North America and Europe, including especially in Japan,
with a focus there on gastric cancer therapy; b) monoclonal antibody products to
target gastrointestinal system cancers, worldwide; and c) G17DT for non-cancer
therapy, to treat gastroesophageal reflux disease (GERD), worldwide.
We agree with the prevalent view that in the current market environment,
biotechnology companies have been essentially separated into two major segments:
those with commercial products and those that are continuing development work on
potential commercial products. We believe that we may be able to move from the
latter to one that has an approved commercial product in a relatively short
period of time. The transition to having a commercial product, followed by
revenues and a positive cash flow is consistent, in management's opinion, with
the expectation of higher values for our shareholders. We believe that we have
reached the decisive turning point in our corporate development and in the
pursuit of our corporate objectives.
Our primary approach for the treatment of major diseases such as cancer has been
to employ (anti) "hormone therapy." Our hormone therapy involves neutralizing,
or blocking, targeted hormones which play a critical role in diseases of the
gastrointestinal and reproduction systems. We have selected the strategy of
hormone therapy because hormone therapy has proved over decades to be
efficacious in the treatment of major diseases, both malignant and
non-malignant. Well-documented examples of the efficacy of hormone therapy in
humans are blocking gastrin (Proglumide) or blocking another hormone stimulated
by gastrin, namely histamine (Zantac, Tagamet), to reduce stomach acid. These
hormone therapies treat GERD, ulcerations of the esophagus and peptic ulcers.
Additional examples of hormone therapy include blocking estrogen (Tamoxifen),
for breast cancer therapy and blocking the production of testosterone (Lupron,
Zoladex) for prostate cancer therapy.
Our anti-gastrin 17 immunogen (G17DT) is an anti-gastrin targeted therapy which
induces antibodies in patients that bind to both gastrin 17 and gly-gastrin and
remove them from circulation before they can bind to the cancer cell and
initiate cell growth. Gastrin 17 and gly-gastrin are believed to be central
growth factors, or the initiating signals, for cell growth, cell proliferation
and metastasis (spread) in gastric, i.e. stomach, pancreatic, esophageal,
colorectal, liver and other gastrointestinal (GI) system cancers. This signaling
program is accomplished by gastrin binding to the large numbers of gastrin
receptors which appear, de novo, in the great majority of cases, on tumor cell
surfaces throughout the gastrointestinal system. Interrupting this process by
immunizing the patient with our anti-gastrin immunogen is a precisely "targeted"
immunotherapy. This specificity of targeting only cancer cells occurs because
gastrin is not normally secreted and gastrin receptors are not normally found on
cells in the GI system, unless they are malignant, or on the path to malignancy
(except for those cells involved with normal acid secretion).
Recent findings have shown that inhibiting gastrin not only inhibits cell
growth, proliferation and metastasis directly, but also "unblocks" a central
pathway leading to cell-suicide (apoptosis). This tilts the balance, from cell
growth, to cell suicide. This effect is amplified synergistically when our drug
is given together with a chemotherapeutic drug, as demonstrated in our phase II
trial for gastric cancer patients treated with G17DT in combination with
cisplatin and 5-FU, described hereunder. Gastrin also stimulates the secretion
and expression of other important growth factors and receptors within and on the
surfaces of the cancer cells involved in tumor growth. Hence, inhibiting gastrin
inhibits all of the foregoing factors contributing to tumor growth and spread,
while simultaneously opening a central pathway to cell suicide. Our anti-gastrin
targeted therapy adds a biological dimension to the treatment of
gastrointestinal cancers.
Clinical Results
We are currently completing the following clinical trials: a phase III trial
conducted outside of the United States for pancreatic cancer with our G17DT as a
monotherapy; a phase II clinical trial conducted in the United States and
foreign countries, with G17DT in combination with the chemotherapeutics
cisplatin and 5-FU for gastric cancer patients; and a phase II trial in Europe
with GnRH pharmaccine for prostate cancer patients. We are conducting a second
phase III trial that has also completed patient recruitment, conducted in the
United States and foreign
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countries for pancreatic cancer with G17DT in combination with the
chemotherapeutic gemcitabine. We have initiated but are not currently recruiting
patients pending funding for a phase II trial in Europe with G17DT for GERD, or
"severe heart burn" patients. In addition, our Phase II clinical trial with
respect to immuno-contraception has been initiated but is "on hold" pending
further funding from the World Health Organization (WHO).
Phase III Pancreatic Cancer Clinical Trial
On March 4, 2003 we announced that we have met with and presented results of our
randomized, double blind, controlled, monotherapy, Phase III clinical trial
conducted in Europe with G17DT for patients with advanced pancreatic cancer to
an appropriate foreign regulatory authority. The presentation of the most
recently completed analysis of the data resulting from the Phase III clinical
trial demonstrated an overall median survival benefit of 83%, with a
statistically significant value of p. The corresponding hazard ratio (HR) was
0.65, which also had a statistically significant value of p. (an HR of 0.65
means that at any point in time, patients on G17DT had a 154% higher likelihood
of surviving longer than patients on the control.) There are still surviving,
treated patients in the trial. Their standard of care could be influenced,
thereby jeopardizing both their inclusion in the final statistical analysis and
the ultimate breadth of the indication allowed in each jurisdiction, if
additional specifics on the trial were provided at this time.
We believe that the results of the randomized, double blind, phase III trial
conducted in foreign countries with G17DT as a monotherapy for advanced
pancreatic cancer patients are already sufficient for filing for marketing
approval in the European Union, Canada and Australia. Therefore, we have begun
the process of gathering and compiling the data and the preparation of the
extensive regulatory documentation required for submission for marketing
approval. This process can be expected to be completed by September 2003, but
cannot be stated with certainty. We expect we will receive priority review of
the filings. The time for review and the granting of marketing approval in each
jurisdiction cannot, however, be predicted by us with certainty.
Phase II Gastric Cancer Clinical Trial
We believe that the results of our phase II trial for gastric cancer patients
treated with G17DT in combination with cisplatin and 5-FU can be described as
"impressive." On February 6, 2003 we reported an interim analysis of tumor
response results from our phase II clinical trial with patients with metastatic
stomach cancer who were treated with our G17DT and chemotherapy consisting of
cisplatin and 5FU.
A total of 103 patients were enrolled, of which 73 were evaluable and reported
upon. 37 patients had either a partial or a complete tumor response, for an
overall tumor response rate of 51%. Two patients had a complete response (CR -
no detectable residual tumor) and 35 had a partial response (PR). An additional
13 patients had stable disease. Thus, a total of 82% of the patients had either
tumor shrinkage or stable disease. Throughout the trial, there was no systemic
toxicity attributed to G17DT. This report followed interim response results from
our phase II clinical trial reported at the American Society of Clinical
Oncology (ASCO) on May 17, 2002, with an overall tumor response rate of 48.3%
and an interim report dated July 31, 2002, with an overall tumor response rate
of 51.4%.
One patient showed a previously unseen response pattern. He first responded to
treatment with the combination of G17DT and cisplatin/5FU with a reduction of
the tumor lesions by approximately 70% (a partial response). Subsequently, the
disease stabilized; i.e. the size of the lesions did not increase for between 7
to 8 months, in spite of discontinuation of treatment with cisplatin halfway
through the study period because of neuropathy. An additional treatment with
G17DT in October 2002, the 5th overall treatment, resulted in a reduction of the
tumor lesions (PR) by a further 80%. Subsequent to the sixth treatment in
January 2003, there was a complete disappearance of all lesions, the second
complete response in the study. Over a year and a half after his first
treatment, the patient is alive and doing well, with no residual tumor
detectable.
The characteristics of the patient's response after extended treatment with
G17DT without cisplatin strongly suggest a direct relation between immunotherapy
and the disappearance of the tumor lesions. Our anti-gastrin targeted
immunotherapy adds a biological, non-toxic dimension to the treatment of
gastrointestinal cancers.
There is only one large, randomized, phase III clinical trial that has been
reported in the medical literature with cisplatin plus 5 FU for patients with
advanced gastric cancer. Of 399 total patients enrolled in the trial, 245 were
evaluable. For the patients treated with cisplatin plus 5FU, the tumor response
rate was 20%, as reported by the European Organization for Research and
Treatment of Cancer (EORTC) which conducted the trial. The results reported by
us on February 6, 2003 compare favorably with those results. They represent a
155% improvement relative to the 20% results reported in the EORTC clinical
trial.
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On February 21, 2003 we announced that the U.S. Food and Drug Administration (or
the FDA) has reviewed and granted our request for Fast Track designation for our
G17DT (anti-gastrin) immunogen in combination with cisplatin and 5-FU for use in
stage IV gastric cancer to improve overall survival. "Fast Track" is a formal
mechanism of interacting with the FDA using approaches that are available to all
applicants for marketing claims. The benefits of a Fast Track designation
include scheduled meetings with the FDA to seek FDA input into development
plans, the option of submitting a New Drug Application in sections rather than a
submission of all components simultaneously, and the option of requesting
evaluation of studies using surrogate endpoints. The Fast Track designation is
intended for the combination of a product and a claim that addresses an unmet
medical need, but is independent of the FDA's priority review and accelerated
approval mechanisms.
Results of Operations
During the three months ended March 31, 2003, we received gross proceeds of
approximately $1.5 million from the sale of 500,000 shares of our common stock
and 150,000 warrants to purchase our common stock. Total costs were reduced from
$10.1 million in the quarter ending March 31, 2002 to $4.9 million in the
quarter ended March 31, 2003. This decrease is primarily due to the completion
of recruitment and final stages of our clinical trials. While pursuing our
objectives, we intend to reduce our costs and expenses through the first quarter
of 2004 to less than $16 million. We expect our total costs to decrease in the
remaining quarters of the year 2003. During this period we had no contract
revenues.
We do not accumulate cost information by major development product. Many costs
are applicable to more than one product. We estimate that 95% of our research
and development costs are spent on gastrointestinal and reproductive system
cancers. There are no payment or penalty milestones associated with any of the
projects, all of which are in Phase II or III clinical trials. We do not
speculate on the timing of approvals by regulatory authorities.
We will pursue our primary objective of filing for approval to market G17DT for
monotherapy for advanced pancreatic cancer patients in the European Union,
Canada and Australia by September 2003. We believe that our existing capital
resources, which consist primarily of cash and short-term cash investments,
including the proceeds from the financing activities described in the preceding
paragraphs, will enable us to maintain a range of operations and satisfy our
periodic interest obligations through the first quarter of 2004.
Other
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement eliminates the required classification of gain or loss on
extinguishment of debt as an extraordinary item of income and states that such
gain or loss be evaluated for extraordinary classification under the criteria of
Accounting Principles Board Opinion No. 30, "Reporting Results of Operations."
This statement also requires sale-leaseback accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions, and makes various other technical corrections to existing
pronouncements. We implemented SFAS No. 145 on January 1, 2003. We do not expect
this statement to have a material impact on our consolidated financial position
or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." This statement requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than the date of an entity's commitment to an exit
plan. We implemented SFAS No. 146 on January 1, 2003 for transactions that occur
after December 31, 2002. We do not expect this statement to have a material
impact on our consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the
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disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years and interim periods ending
after December 15, 2002. SFAS No. 148 does not amend SFAS 123 to require
companies to account for employee stock options using the fair value method. We
adopted the disclosure provisions required under SFAS No. 148 effective December
31, 2002.
Inflation and changing prices have not had a significant effect on continuing
operations and are not expected to have any material effect in the foreseeable
future. Interest and other income were primarily derived from money-market
accounts.
Liquidity and Capital Resources
We finance our operations through the sale of our equity securities, convertible
debentures and licensing fees. These funds provide us with the resources to
operate our business, attract and retain key personnel and scientific staff,
fund our research and development program, preclinical testing and clinical
trials, obtain the necessary regulatory approvals and develop our technology and
products.
On December 19, 2002, we sold a convertible, redeemable, five-year
interest-bearing Series A Convertible Debenture to Aventis Pharmaceuticals, Inc.
(Aventis) for gross proceeds of $3 million in a private placement. The debenture
is convertible at Aventis's option under certain conditions into our common
stock based upon a price substantially equivalent to the market price of our
common stock at the time of conversion. We are required to make annual interest
payments in cash at 6.00% per annum on the debenture.
On February 24, 2003, an institutional investor purchased in a private placement
500,000 shares of our registered common stock at $2.96 per share and 150,000
unregistered warrants at $0.125 per warrant for gross proceeds of approximately
$1.5 million. The shares of our common stock underlying the warrants were
registered in April 2003 and each warrant entitles the holder thereof to
purchase a share of our common stock at a price of $2.96 per share within the
next five years.
On March 31, 2003, we sold in a private placement convertible, redeemable,
5-year, interest-bearing notes and warrants to three institutional investors,
including a substantial participation by two existing investors, for proceeds of
$15 million in the first tranche of a $20 million financing package. The senior
convertible notes are convertible at a fixed price of $2.50 per share. As part
of the transaction we also issued to the investors five year warrants with a
fixed exercise price of $2.70 per share (both are at a premium to the market
price of the common stock as of the last closing price on the date prior to the
transaction), unless otherwise adjusted prior to conversion pursuant to the
provisions of the notes and warrants. We have the right and obligation to redeem
the notes under certain conditions at any time after the third year from the
issuance date. The securities have registration rights. We are required to make
quarterly interest payments in cash or in stock at our option at 6.00% per annum
on the senior convertible notes. Subsequent to receipt of the $15 million in the
first tranche in April 2003, we reduced our current liabilities by a significant
amount.
Subject to certain conditions, we are obligated to sell and one of the investors
is obligated to purchase an additional $5 million of such notes and warrants
convertible into shares of our common stock, also with registration rights, in
the second tranche. In compliance with regulatory requirements, a shareholder's
meeting will be held to approve certain aspects of the transaction.
The selected pro forma financial information summarized below shows the effect
of the presumed gross proceeds from the first and second tranches of the $20
million convertible debt financing, of which $15 million was received by April
4, 2003, as if all funds were received on March 31, 2003.
Actual Effect of Proceeds Pro Forma
Balance Sheet Data: March 31, 2003 from Financing (1) March 31, 2003 (1)
- ----------------------------------------- ---------------------- ------------------------- --------------------------
Cash and current investments $ 5,021,264 $20,000,000 $25,021,264
Total assets $13,163,692 $20,000,000 $33,163,692
Convertible Debentures $ 3,000,000 $20,000,000 $23,000,000
Total Liabilities $28,193,026 $20,000,000 $48,193,026
Total stockholders' deficit $15,029,334 - $15,029,334
Weighted average shares outstanding 24,534,972 - 24,534,972
-10-
(1) Receipt of $5 million, from the purchase of an additional $5 million of
senior convertible notes and warrants in a second tranche from one of the
investors, is subject to the following conditions: (i) a registration statement,
filed pursuant to a registration rights agreement among us and the selling
stockholders, is effective and available for the resale of the shares issuable
upon conversion of the senior convertible notes and exercise of the warrants
purchased in the first tranche on each of the ten trading days immediately prior
to the closing of the second tranche; (ii) our common stock continuing to be
listed on the Nasdaq and it not having been suspended from trading or having
been threatened with delisting by the Nasdaq, or having fallen below the minimum
standards for continued listing; (iii) no change of control of us or event of
default having occurred under the senior convertible notes then outstanding;
(iv) performance of our obligation to deliver shares of our common stock
issuable upon the conversion of the then outstanding senior convertible notes
and the warrants; (v) payment of interest on a timely basis; (vi) our share
price remaining above $3.00 per share; and (vi) shareholder approval of the $20
million financing transaction with the selling stockholders and the amendment to
our certificate of incorporation to increase our authorized common stock to
60,000,000 shares having been obtained.
The unaudited pro forma financial information is not calculated in accordance
with generally accepted accounting principles (GAAP). The gross proceeds of $20
million from our convertible debt financing, of which $15 million was received
by April 4, 2003, are material to our liquidity and capital resources position
and management uses this unaudited pro forma financial information to provide
shareholders and investors with a more accurate picture of our financial
position. The sale of an additional $5 million of convertible debt in a second
tranche is subject to certain conditions as discussed above. The unaudited
pro forma financial information is not necessarily indicative of our future
results of operations and should be read in conjunction with this section
captioned "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" and with our financial statements included in this
report. This information should not be considered in isolation or as a
substitute for measures of performance determined in accordance with GAAP.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risks are all immaterial. Investment securities consist principally
of debt securities issued by the US Treasury and other US Government agencies
and corporations and investment in other securities, including mutual funds.
Item 4. Controls and Procedures
Our chief executive officer (CEO) and chief financial officer (CFO) conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of a date within the 90 days before the filing of
this quarterly report. Based on their evaluation as of that evaluation date, our
CEO and CFO concluded that our disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) of the Exchange Act) are effective to ensure that
information required to be disclosed by us in reports filed with the Securities
and Exchange Commission under the Exchange Act is recorded, processed,
summarized and reported within the required time periods.
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect internal controls subsequent to
the evaluation date.
-11-
Part II - Other Information
Item 1. Legal Proceedings. Not applicable.
Item 2. Changes in Securities.
Recent Sales of Unregistered Securities
Aventis Debenture
On December 19, 2002, we sold a convertible, redeemable, five-year
interest-bearing Series A Convertible Debenture to Aventis Pharmaceuticals, Inc.
(Aventis) for gross proceeds of $3 million in a private placement. The debenture
is convertible at Aventis's option under certain conditions into our common
stock based upon a price substantially equivalent to the market price of our
common stock at the time of conversion. For more information about the
debenture, please refer to our annual report on Form 10-K for the year ended
December 31, 2002 to which the debenture was filed as an exhibit.
Mainfield Warrants
On February 24, 2003, we sold a warrant to purchase 150,000 shares of our common
stock to Mainfield Enterprise Inc. (Mainfield) for gross proceeds of $18,750 in
a private placement. The warrant is exercisable at $2.96 per share, in whole or
in part, at any time on or before February 24, 2008 and contains customary
cashless exercise provisions. The shares of common stock underlying the warrant
were registered on a registration statement on Form S-3 we filed on behalf of
the warrant-holder which became effective on April 22, 2003. For more
information about the warrant, please refer to our annual report on Form 10-K
for the year ended December 31, 2002 to which the warrant was filed as an
exhibit.
Senior Convertible Notes and Warrants
On March 31, 2003, we sold in a private placement convertible, redeemable,
5-year, interest-bearing senior convertible notes and 5-year warrants to
purchase an aggregate total of 1,080,000 shares of our common stock to Smith
Barney Fundamental Value Fund, Heartland Group, Inc. and SF Capital Partners
Ltd., for gross proceeds of $15 million in the first tranche of a $20 million
financing package.
The senior convertible notes are convertible at a fixed price of $2.50 per
share, unless otherwise adjusted prior to conversion pursuant to the price
adjustment provisions set forth therein. The conversion price of the senior
convertible notes will be lowered in the event of a sale by us of our common
stock or securities convertible into our common stock at a per share offering
price less than the conversion price of the senior convertible notes in effect
immediately prior to such sale. The warrants are exercisable into shares of our
common stock at $2.70 per share, unless otherwise adjusted prior to exercise
pursuant to the price adjustment provisions that are substantially similar to
those set forth in the senior convertible notes.
The conversion of the senior convertible notes and the exercise of the warrants
are subject to shareholder approval of certain aspects of the financing
transaction and the amendment of our certificate of incorporation to increase
our authorized capital stock. In addition, the senior convertible notes and the
warrants contain provisions that place a cap on the numbers of shares of our
common stock issuable upon their conversion or exercise, such that the holders
thereof shall not have the right to convert any portion of the notes to the
extent that after giving effect to such conversion the holders would
beneficially own more than 19.99% or 4.99%, as the case may be for the
respective holder, of the number of shares of our common stock outstanding
immediately prior to such conversion or exercise.
For more information about the senior convertible notes and the warrants, please
refer to our current report on Form 8-K dated April 1, 2003 to which a form of
the senior convertible note and a form of the warrant were filed as exhibits.
All of the securities issued in the preceding transactions were sold to
accredited investors in reliance upon Section 4(2) of the Securities Act and/or
Rule 506 promulgated thereunder.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable.
-12-
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
99.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
99.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
* This document is being furnished in accordance with SEC
Release Nos. 33-8212 and 34-47551.
(b) Reports on Form 8-K
During the three months ended March 31, 2003, we filed the
following current reports on Form 8-K:
- On February 7, 2003, announcing the reported latest tumor
responses from Phase II gastric cancer trial;
- On February 21, 2003, announcing the fast track designation
approved by the FDA for G17DT combined with Cisplatin and
5-FU;
- On February 25, 2003, attaching the stock purchase agreement
with Mainfield Enterprises Inc. and engagement letter with
Wharton Capital to sell 500,000 shares of common stock for
gross proceeds of $1,480,000;
- On February 25, 2003, disclosing unaudited year-end
financial results for the year 2002; and
- On March 6, 2003, announcing the Phase III data with G17DT
for pancreatic cancer patients presented to overseas
regulatory agency.
Subsequent to the three months ended March 31, 2003, we filed the
following current reports on Form 8-K:
- On April 1, 2003, announcing the sale of senior convertible
notes and warrants for $15 million to SF Capital Partners
Ltd., Heartland Group, Inc. and Smith Barney Fundamental
Value Fund Inc. closed on March 31, 2003;
- On April 1, 2003, announcing that the letter of intent with
Aventis Pharmaceuticals, Inc. expired as of March 31, 2003;
and
- On May 2, 2003, announcing that Patrick T. Mooney, MD, has
joined our management team, reporting to the office of the
Chief Executive Officer in the capacity of Chief Medical
Officer.
-13-
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
APHTON CORPORATION
Date: May 15, 2003 By: /s/ Philip C. Gevas
----------------------------------------
Philip C. Gevas
Chairman of the Board, Chief Executive
Officer and President
(Principal Executive Officer)
By: /s/ Frederick W. Jacobs
----------------------------------------
Frederick W. Jacobs
Vice President, Chief Financial Officer,
Treasurer and Chief Accounting Officer
(Principal Financial Officer)
-14-
CERTIFICATION
I, Philip C. Gevas, Chairman of the Board, Chief Executive Officer and
President, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aphton Corporation;
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 officer 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 we 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 officer 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 function):
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 officer and I have indicated in this
quarterly report whether or not 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.
Date: May 15, 2003 Signature: /s/ Philip C. Gevas
--------------------------------
Philip C. Gevas
Chairman of the Board, Chief Executive
Officer and President
(Principal Executive Officer)
-15-
CERTIFICATION
I, Frederick W. Jacobs, Vice President, Chief Financial Officer, Treasurer and
Chief Accounting Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aphton Corporation;
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 officer 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 we 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 officer 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 function):
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 officer and I have indicated in this
quarterly report whether or not 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.
Date: May 15, 2003 Signature: /s/ Frederick W. Jacobs
----------------------------------------
Frederick W. Jacobs
Vice President, Chief Financial Officer,
Treasurer and Chief Accounting Officer
(Principal Financial Officer)
-16-
EXHIBIT INDEX
Exhibit Number Description
99.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
99.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
* This document is being furnished in accordance with SEC Release Nos. 33-8212
and 34-47551.