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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 000-26534
VION PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3671221
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4 SCIENCE PARK
NEW HAVEN, CT 06511
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 498-4210
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]
The number of shares outstanding of the registrant's common stock as of May 10,
2004 was 55,353,004.
VION PHARMACEUTICALS, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements 1
Condensed Balance Sheets 1
Condensed Statements of Operations 2
Condensed Statement of Changes in Shareholders' Equity 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
In this report, unless the context otherwise requires, the terms "we," "us,"
"our," "the Company" and "Vion" refer to Vion Pharmaceuticals, Inc., a Delaware
corporation.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Condensed Balance Sheets
(Unaudited)
March 31, December 31,
(In thousands, except share and per share data) 2004 2003
- ------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 43,392 $ 1,219
Short-term investments 7,850 14,500
--------- ---------
Total cash, cash equivalents and short-term investments 51,242 15,719
Interest receivable 6 11
Accounts receivable 107 27
Prepaid expenses 150 224
--------- ---------
Total current assets 51,505 15,981
Property and equipment, net 338 370
Security deposits 25 25
--------- ---------
Total assets $ 51,868 $ 16,376
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accrued payroll and payroll-related expenses $ 440 $ 464
Accounts payable and accrued expenses 3,701 3,595
Deferred revenue 18 18
--------- ---------
Total current liabilities 4,159 4,077
Deferred revenue 373 377
--------- ---------
Total liabilities 4,532 4,454
--------- ---------
Shareholders' Equity:
Preferred stock, $0.01 par value, authorized: 5,000,000 shares; issued and
outstanding: none -- --
Common stock, $0.01 par value, authorized: 100,000,000 shares;
issued and outstanding: 55,187,004 and 39,276,755 shares
at March 31, 2004 and December 31, 2003, respectively 552 393
Additional paid-in-capital 165,752 127,239
Deficit accumulated during the development stage (118,968) (115,710)
--------- ---------
47,336 11,922
--------- ---------
Total liabilities and shareholders' equity $ 51,868 $ 16,376
========= =========
The accompanying notes are an integral part of these financial statements.
1
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Condensed Statements of Operations
(Unaudited)
For the
Period from
For the Three Months Ended May 1, 1994
March 31, (Inception) through
(In thousands, except share and per share data) 2004 2003 March 31, 2004
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Contract research grants $ 63 $ 66 $ 2,464
Research and laboratory support fees 24 3 5,806
Technology license fees 9 -- 4,470
--------------------------------------------------------------
Total revenues 96 69 12,740
--------------------------------------------------------------
Operating expenses:
Clinical trials 1,805 876 28,944
Other research and development 957 969 63,529
--------------------------------------------------------------
Total research and development 2,762 1,845 92,473
General and administrative 617 702 25,357
--------------------------------------------------------------
Total operating expenses 3,379 2,547 117,830
--------------------------------------------------------------
Loss from operations (3,283) (2,478) (105,090)
Interest income 91 31 4,964
Interest expense -- -- (210)
Other expense (32) -- (77)
--------------------------------------------------------------
Loss before income taxes (3,224) (2,447) (100,413)
Income tax provision (benefit) 34 (22) (189)
--------------------------------------------------------------
Net loss (3,258) (2,425) (100,224)
Preferred stock dividends and accretion -- -- (18,489)
--------------------------------------------------------------
Loss applicable to common shareholders $ (3,258) $ (2,425) $ (118,713)
==============================================================
Basic and diluted loss applicable to
common shareholders per share $ (0.07) $ (0.08)
===================================
Weighted-average number of shares of
common stock outstanding 47,309,143 28,926,990
===================================
The accompanying notes are an integral part of these financial statements.
2
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Condensed Statement of Changes in Shareholders' Equity
(Unaudited)
Accumulated
Common Stock Additional Other Total
--------------------- Paid-in Comprehensive Accumulated Shareholders'
(In thousands, except share data) Shares Amount Capital Income (Loss) Deficit Equity
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 26,167,642 $ 262 $ 100,027 $ 120 $ (77,752) $ 22,657
Public offering - August 2001 2,500,000 25 11,386 11,411
Exercise of stock options 191,527 2 777 779
Exercise of warrants 4,015 -- 14 14
Compensation associated with stock option
grants 111 111
Issuances under employee benefit plans 10,189 -- 62 62
Change in net unrealized gains and losses (126) (126)
Net loss (13,810) (13,810)
----------------
Comprehensive loss (13,936)
-------------------------------------------------------------------------------
Balance at December 31, 2001 28,873,373 $ 289 $ 112,377 $ (6) $ (91,562) $ 21,098
Exercise of stock options 10,395 -- 32 32
Issuances under employee benefit plans 25,104 -- 38 38
Change in net unrealized gains and losses 6 6
Net loss (12,310) (12,310)
----------------
Comprehensive loss (12,304)
-------------------------------------------------------------------------------
Balance at December 31, 2002 28,908,872 $ 289 $ 112,447 $ -- $ (103,872) $ 8,864
Private placement - June 2003 3,846,150 38 4,436 4,474
Private placement - September 2003 6,475,000 65 10,340 10,405
Exercise of stock options 5,552 - 3 3
Issuances under employee benefit plans 41,181 1 13 14
Net loss (11,838) (11,838)
-------------------------------------------------------------------------------
Balance at December 31, 2003 39,276,755 $ 393 $ 127,239 $ -- $ (115,710) $ 11,922
Private placement - February 2004 13,553,845 136 32,823 32,959
Exercise of stock options 19,250 - 70 70
Exercise of warrants 2,337,154 23 5,620 5,643
Net loss (3,258) (3,258)
-------------------------------------------------------------------------------
Balance at March 31, 2004 55,187,004 $ 552 $ 165,752 $ -- $ (118,968) $ 47,336
===============================================================================
The accompanying notes are an integral part of these financial statements.
3
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
For The Period From
For the Three Months May 1, 1994
Ended March 31, (Inception) through
(In thousands) 2004 2003 March 31, 2004
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (3,258) $ (2,425) $(100,224)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation and amortization 46 53 2,661
Loss on equipment disposals -- 9 12
(Decrease) increase in deferred revenue (4) 391
Purchased research and development -- -- 4,481
Non-cash compensation -- -- 1,068
Stock issued for services -- -- 600
Amortization of financing costs -- -- 346
Extension/reissuance of placement agent warrants -- -- 168
Changes in operating assets and liabilities-
Receivables and prepaid expenses (1) 144 (262)
Other assets -- -- (22)
Current liabilities 82 248 4,106
---------------------------------------------------------
Net cash used in operating activities (3,135) (1,971) (86,675)
---------------------------------------------------------
Cash flows from investing activities:
Purchases of marketable securities (61,901) -- (321,052)
Maturities of marketable securities 68,551 -- 313,202
Acquisition of equipment (14) (22) (2,067)
---------------------------------------------------------
Net cash (used in) provided by investing activities 6,636 (22) (9,917)
---------------------------------------------------------
Cash flows from financing activities:
Initial public offering -- -- 9,696
Net proceeds from issuances of common stock 33,029 8 81,814
Net proceeds from issuance of preferred stock -- -- 20,716
Net proceeds from exercise of Class A Warrants -- -- 5,675
Net proceeds from exercise of Class B Warrants -- -- 17,538
Net proceeds from exercise of other warrants 5,643 -- 5,758
Repayment of equipment capital leases -- -- (927)
Other financing activities, net -- -- (286)
---------------------------------------------------------
Net cash provided by financing activities 38,672 8 139,984
---------------------------------------------------------
Change in cash and cash equivalents 42,173 (1,985) 43,392
Cash and cash equivalents, beginning of period 1,219 10,131 --
---------------------------------------------------------
Cash and cash equivalents, end of period $ 43,392 $ 8,146 $ 43,392
=========================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ -- $ -- $ 210
=========================================================
Cash paid for taxes $ -- $ -- $ 17
=========================================================
The accompanying notes are an integral part of these financial statements.
4
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
(Unaudited)
1. The Company
Vion Pharmaceuticals, Inc. (the "Company") is a development stage
company engaged in the development of therapeutics and technologies for the
treatment of cancer. The Company, formerly OncoRx, Inc., was incorporated in
March 1992 as a Delaware corporation and began operations on May 1, 1994.
2. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q. They do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for interim periods are not necessarily
indicative of the results that may be expected for the full year. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K/A for the year ended December 31, 2003
(File No. 000-26534).
3. Private Placement of Common Stock
In February 2004, the Company completed a private placement of
13,553,845 shares of its common stock at $2.60 per share and warrants to
purchase 3,388,463 shares of common stock at $3.25 per share. A warrant to
purchase an additional 300,000 shares of common stock at $3.25 per share was
issued to the placement agent. All of these warrants expire on February 11,
2009. The net proceeds, net of cash offering costs, were $32.9 million.
On March 29, 2004, the Company filed a registration statement on Form
S-3 related to the private placement, covering the resale of all shares of
common stock and common stock issuable upon exercise of the warrants. If the
registration statement is not declared effective by the SEC on or before June
20, 2004, or if after the registration statement has been declared effective by
the SEC, sales of the shares of common stock covered by the registration
statement cannot be made pursuant to the registration statement for any reason,
then at the time of the event, the Company would be required to make payments
equal to 2% of the aggregate purchase price paid by the investors. The Company
would be required to make additional payments of 2% of the aggregate purchase
price for each additional month thereafter until it has complied with its
5
obligations under the registration rights agreement. After a period of twelve
months following the effective date of the registration statement related to the
private placement, if the volume weighted-average price of the common stock is
at or above $4.875 per share for 20 consecutive trading days, then the warrants
shall become callable by the Company upon written notice within 10 trading days
of such period.
4. Warrant Exercises
For the three months ended March 31, 2004, the Company issued 2,337,154
shares of its common stock upon exercises of warrants issued in connection with
two private placements in 2003, resulting in proceeds of $5.6 million.
5. Per Share Data - Anti-dilution
As of March 31, 2004, the Company had outstanding warrants to purchase
10,057,384 shares of its common stock between $2.20 and $6.00 per share, and
outstanding stock options to purchase 4,478,369 shares of its common stock
between $0.36 and $17.88 per share. These warrants and options were excluded
from the computation of diluted loss per share because such warrants and options
were anti-dilutive in the respective periods presented.
6. Income Taxes
For the three-month period ended March 31, 2004, the Company recorded a
provision of $34,000 related to minimum state capital taxes. For the three-month
period ended March 31, 2003, the Company recognized a state tax benefit of
$22,000 for the sale of certain research and development tax credits to the
State of Connecticut.
7. Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25") and related interpretations in accounting
for stock-based compensation issued to employees rather than the alternative
fair value accounting method provided for under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). Under APB 25, no compensation expense is recognized if the terms of the
option are fixed and the exercise price of the option granted equals the market
price of the underlying stock on the date of grant. For the three-month periods
ended March 31, 2004 and 2003, no stock-based compensation cost is reflected in
the Company's reported net loss.
The following tables illustrate the assumptions used and the effect on net loss
and net loss per share if the Company had applied the fair value recognition
provision of SFAS 123 to employee stock-based compensation. The Company has
computed the pro forma disclosures required under SFAS 123, as amended by SFAS
148, for all employee stock options granted using the Black-Scholes option
pricing model prescribed by SFAS 123.
6
For the Three Months Ended March 31,
-----------------------------------------
2004 2003
--------------------- -------------------
Risk-free interest rate 3.14% 3.16%
Expected volatility 134% 170%
Expected life (in years) 5.89 5.91
Expected dividend yield 0% 0%
From Inception
For the Three Months (May 1, 1994)
Ended March 31, through
2004 2003 March 31, 2004
----------------------- --------------
Net loss as reported $ (3,258) $ (2,425) $(100,224)
Add: Stock-based employee
compensation expense
included in reported net loss -- -- 768
Deduct: Total stock-based employee
compensation expense
determined under the fair value
based method for all awards (538) (845) (19,652)
-----------------------------------
Pro forma net loss (3,796) (3,270) (119,108)
Pro forma preferred stock dividend
and accretion -- -- (18,489)
-----------------------------------
Pro forma loss applicable to common
shareholders $ (3,796) $ (3,270) $(137,597)
===================================
Pro forma basic and diluted loss applicable
to common shareholders per share $ (0.08) $ (0.11)
=======================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements other than statements of historical fact included in
this Quarterly Report on Form 10-Q, including without limitation statements
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations," regarding our financial position, business strategy, and plans
and objectives of our management for future operations, are forward-looking
statements. When used in this Quarterly Report on Form 10-Q, words such as
"may," "will," "should," "could," "potential," "seek," "project," "predict,"
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to us or our management, identify forward-looking statements.
Forward-looking statements are based on the beliefs of our management as well as
assumptions made by and information currently available to our management. Such
statements are subject to certain risk factors which may cause our plans to
differ or results to vary from those expected, including our ability to secure
external sources of funding to continue operations, the inability to access
capital and funding on favorable terms, continued operating losses and the
inability to continue operations as a result, our dependence on regulatory
approval for our products, delayed or unfavorable results of drug trials, the
possibility that favorable results of earlier clinical trials are not predictive
of safety and efficacy results in later clinical trials, the need for additional
research and testing, and a variety of other risks set
7
forth from time to time in our filings with the U.S. Securities and Exchange
Commission including, but not limited to, the detailed discussion of risks
attendant to the forward-looking statements included under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
Annual Report on Form 10-K/A for the year ended December 31, 2003. The
information contained in this Quarterly Report on Form 10-Q is believed to be
current as of the date of filing with the U.S. Securities and Exchange
Commission. Except in special circumstances in which a duty to update arises
under law when prior disclosure becomes materially misleading in light of
subsequent events, we do not intend to update any of these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
OVERVIEW
We are a development stage company engaged in the development of
therapeutics and technologies for the treatment of cancer. Our activities to
date have consisted primarily of research and product development, obtaining
regulatory approval for clinical trials, conducting clinical trials, negotiating
and obtaining collaborative agreements, and obtaining financing in support of
these activities. Our revenues primarily consist of contract research grants,
technology license fees, and research and laboratory support fees. Since
inception, we have generated minimal revenues and have incurred substantial
operating losses from our activities. We expect to incur substantial operating
losses for the next several years due to expenses associated with our
activities.
Our plan of operations for the next 12 months includes the following
elements:
o Conduct Phase I clinical studies of an intravenous formulation of
Triapine(R) in combination with standard chemotherapy treatments;
o Conduct Phase I clinical studies of an oral formulation of Triapine;
o Conduct Phase II clinical studies of an intravenous formulation of Triapine
in combination with standard chemotherapy treatments;
o Provide product for Phase I and Phase II clinical studies to be sponsored
by the NCI of an intravenous formulation of Triapine as a single agent and
in combination with standard chemotherapy treatments;
o Conduct Phase I clinical studies of CLORETAZINE(TM) (VNP40101M) as a single
agent and in combination with standard chemotherapy treatments;
o Conduct Phase II clinical studies of CLORETAZINE(TM) (VNP40101M) as a
single agent and in combination with standard chemotherapy treatments;
o Provide product for a Phase II study of CLORETAZINE(TM)(VNP40101M) to be
conducted under an investigator's IND;
8
o Conduct additional clinical trials of Triapine(R) and/or CLORETAZINE(TM)
(VNP40101M), depending on the results of the clinical trials already
underway;
o Continue to evaluate one second generation TAPET(R) vector in veterinary
clinical trials;
o Continue to conduct internal product development studies with respect to
our clinical products and other product candidates that we may identify,
including heterocyclic hydrazones and KS119;
o Continue to support research and development being performed at Yale
University and by other collaborators; and
o Continue to seek collaborative partnerships, joint ventures, co-promotional
agreements or other arrangements with third parties.
We have five major research and development projects, which include two
product candidates in clinical trials and three projects in preclinical
development. The following table provides information on our ongoing clinical
trials as of March 2004.
- ------------------------------- -------------------------------------------------- ---------------------------------
Product Trial Trial Commencement Date
- ------------------------------- -------------------------------------------------- ---------------------------------
Triapine(R) Phase II trial in combination with gemcitabine May 2003
in pancreatic cancer
Phase II trial in combination with gemcitabine
in non-small-cell lung cancer May 2003
Phase I trial in combination with Ara-C in
advanced leukemia March 2003
- ------------------------------- -------------------------------------------------- ---------------------------------
CLORETAZINE(TM) Phase II trial in acute myeloid leukemia and March 2004
(VNP40101M) myelodysplastic syndromes
Phase I trial in combination with Ara-C in
advanced leukemia July 2003
Phase I trial with weekly administration
schedule in solid tumors February 2003
- ------------------------------- -------------------------------------------------- ---------------------------------
In addition to the above-listed clinical trials for Triapine, the
National Cancer Institute (NCI) is expected to sponsor additional Phase I and
Phase II single agent and combination clinical trials of that compound. In
January 2004, we announced the first trial to open under NCI sponsorship. We are
expected to provide product for the NCI trials.
9
In addition to the above-listed clinical trials for CLORETAZINE(TM)
(VNP40101M), a Phase II trial in human glioma is planned for 2004 under an
investigator's Investigational New Drug Application. A Phase II trial of
CLORETAZINE(TM) (VNP40101M) in combination with Ara-C in acute myeloid leukemia
is planned to commence in the second half of 2004.
We have three additional preclinical product development programs
underway: (1) heterocyclic hydrazones; (2) KS119 and (3) TAPET(R).
Completion of clinical trials may take several years or more and the
length of time can vary substantially according to the type, complexity, novelty
and intended use of a product candidate. The types of costs incurred during a
clinical trial vary depending upon the type of product candidate, the disease
treated and the nature of the study.
If we enter into Phase III or registrational clinical trials of a
product and achieve successful completion of those trials, of which there can be
no certainty, we intend to submit the results to the FDA to support regulatory
approval of the product. However, we cannot be certain that any of our products
will prove to be safe or effective, will achieve the safety and efficacy needed
to enter into Phase III or registrational clinical trials, will receive
regulatory approvals, or will be successfully commercialized. Our clinical
trials might prove that our product candidates may not be effective in treating
the disease or have undesirable or unintended side effects, toxicities or other
characteristics that require us to cease further development of the project. The
cost to take a product candidate through clinical trials is dependent upon,
among other things, the disease indications, the timing, the size and dosing
schedule of each clinical trial, the number of patients enrolled in each trial
and the speed at which patients are enrolled and treated. We could incur
increased product development costs if we experience delays in trial enrollment,
the evaluation of clinical trial results or regulatory approvals. Significant
delays could allow our competitors to bring products to market before we do and
impair our ability to commercialize our product candidates. These uncertainties
and variability make it difficult to accurately predict the future cost of or
timing to complete our product development projects.
We budget and monitor our research and development costs by category.
Significant categories of costs include personnel, clinical, third party
research and development services, and laboratory supplies.
Given the uncertainties related to pharmaceutical product development,
we are currently unable to reliably estimate when, if ever, our product
candidates will generate revenue and cash flows. We do not expect to receive net
cash inflows from any of our major research and development projects until and
unless a product candidate becomes a profitable commercial product.
AVAILABLE INFORMATION
The following information can be found on our website at
http://www.vionpharm.com or may be obtained free of charge by contacting our
Investor Relations Department at (203) 498-4210 or by sending an e-mail message
to info@vionpharm.com:
10
o our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports as soon as
reasonably practicable after such material is electronically filed with the
Securities and Exchange Commission;
o our policies related to corporate governance, including the charter for the
Nominating and Governance Committee of our Board of Directors and our code
of ethics applying to our chief executive officer and senior financial
officials; and
o the charter of the Audit Committee of our Board of Directors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying discussion and analysis of our financial condition and
results of operations are based upon our financial statements and the related
disclosures, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and assumptions that affect the amounts
reported in our financial statements and accompanying notes. These estimates
form the basis for making judgments about the carrying values of assets and
liabilities. We base our estimates and judgments on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. Actual results could differ materially from these estimates.
We believe the following policies to be the most critical to an
understanding of our financial condition and results of operations because they
require us to make estimates, assumptions and judgments about matters that are
inherently uncertain.
REVENUE RECOGNITION
We record revenue from contract research grants as the costs are
incurred. We are reimbursed for eligible costs after submission of grant
reports. We are subject to grant audits as required by the Department of Health
and Human Services. Audits may result in adjustments to the amount of grant
revenues recorded and funds received.
We record revenue under technology license agreements related to the
following. Actual license fees received may vary from recorded estimated
revenues.
o Nonrefundable upfront license fees for which no further
performance obligations exist are recognized as revenue on
the earlier of when payments are received or collection is
assured;
o Nonrefundable upfront license fees including guaranteed,
time-based payments that require continuing involvement in
the form of development or other efforts by us are
recognized as revenue ratably over the performance period;
and
o Milestone payments are recognized as revenue when
milestones, as defined in the agreement, are achieved.
11
We record revenue from royalties based on licensees' sales of our
products or technologies. Revenues are recognized as earned in accordance with
the contract terms when royalties from licensees can be reliably measured and
collectibility is reasonably assured. Royalty estimates are made in advance of
amounts collected based on historical and forecasted trends.
We record revenue from laboratory and research support as the services
are provided. Actual laboratory and research support fees collected may vary
from revenue recognized.
The effect of any change in revenues from contract research grants,
technology license agreements, or laboratory and research support would be
reflected in revenues in the period such determination was made. Historically,
such adjustments have been insignificant.
RESEARCH AND DEVELOPMENT EXPENSES
We record research and development expenses as incurred. We disclose
clinical trials expenses and other research and development expenses as separate
components of research and development expense in our statements of operations
to provide more meaningful information to our investors. The classification of
expenses into these components of research and development expense are based, in
part, on estimates of certain costs when incurred. The effect of any change in
the clinical trials expenses and other research and development expenses would
be reflected in the period such determination was made.
INCOME TAXES
We provide deferred income taxes for the future tax consequences of
temporary differences between the financial statement carrying amounts and the
tax basis of assets and liabilities, and on operating loss and tax credit
carryforwards. Except for the sales recorded in 2002 and 2003 of certain
research and development tax credits to the State of Connecticut and the 2003
provision for minimum state capital taxes paid, we have not recorded a provision
or benefit for income taxes in the financial statements due to recurring
historical losses and based on judgments regarding the timing of future
profitability. Accordingly, we have provided a full valuation allowance for our
deferred income tax asset as of December 31, 2003. In the event we were to
determine that we would be able to realize deferred income tax assets in the
future, an adjustment to increase income in that period of determination would
be made.
STOCK-BASED COMPENSATION
We measure stock-based compensation expense under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees and related
Interpretations, and provide required disclosures under the fair value
recognition provisions of Financial Accounting Standards No. 123, Accounting for
Stock -Based Compensation, as amended by Financial Accounting Standards No. 148.
12
INVESTMENTS
Our investment securities are classified as available-for-sale and
carried at fair market value. Unrealized gains or losses are recorded in other
comprehensive income until the securities are sold or otherwise disposed.
However, a decline in fair market value below cost that is other than temporary
would be accounted for as a realized loss in the period such determination was
made.
RECENTLY ENACTED PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, Consolidation of Variable Interest Entities, ("FIN
No. 46") as amended by FASB Staff Position No. FIN 46-6. FIN No. 46 provides
guidance for identifying a controlling interest in a Variable Interest Entity (a
"VIE") established by means other than voting interests. FIN No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. As such, the statement, which was effective in 2003 for new interests
and in 2004 for existing interests, will not have an impact on our financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. The Company does not currently
have any financial instruments with characteristics of both liabilities and
equity. As such, the statement did not have an impact on our financial
statements.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
REVENUES. Revenues were $96,000 for the three-month period ended March
31, 2004, as compared to $69,000 for the same period in 2003. The increase was
due primarily to higher revenues from research and laboratory support fees.
RESEARCH AND DEVELOPMENT. Total research and development expenses
(which include clinical trials expenses and other research and development
expenses) were $2.8 million for the three-month period ended March 31, 2004,
compared to $1.8 million for the same 2003 period. Clinical trials expenses
increased to $1.8 million for the first quarter of 2004 from $876,000 for the
comparable 2003 period. The increase was due primarily to higher patient
enrollment which resulted in higher expenses for Triapine(R) trials of $387,000
and CLORETAZINE(TM) (VNP40101M)) trials of $156,000, as well as additional drug
production expense of $278,000.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $617,000 for the three-month period ended March 31, 2004 from
$702,000 for the comparable 2003 period. The decrease was primarily due to lower
legal and patent fees.
13
INTEREST INCOME. Interest income increased to $91,000 for the
three-month period ended March 31, 2004, from $31,000 for the same period in
2003. The increase was primarily due to higher levels of invested funds in 2004,
partially offset by lower interest rates.
OTHER EXPENSE. Other expense related to foreign currency transaction
losses was $32,000 for the three-month period ended March 31, 2004, compared to
$0 for the same 2003 period. The foreign currency transaction losses were
related to a contract with a vendor outside the U.S. that is denominated in a
foreign currency.
INCOME TAX PROVISION (BENEFIT). An income tax provision of $34,000 was
recorded for the three-month period ended March 31, 2004, for minimum state
capital taxes. For the three months ended March 31, 2003, an income tax benefit
of $22,000 was recognized related to the sale of certain research and
development tax credits to the State of Connecticut.
NET LOSS. The net loss was $3.3 million, or $0.07 per share, for the
three-month period ended March 31, 2004, compared to a net loss of $2.4 million,
or $0.08 per share, for the same period in 2003. Weighted-average common shares
outstanding for the three-month periods ended March 31, 2004 and 2003 were 47.3
million and 28.9 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, we had cash, cash equivalents and short-term
investments of $51.2 million compared to $15.7 million at December 31, 2003. The
increase in 2004 was due primarily to net proceeds of $32.9 million from a
private placement of securities in February 2004 and proceeds of $5.6 million
from exercises of warrants, described below, offset by cash used of $3.1 million
to fund operating activities.
In February 2004, we completed a private placement of 13,553,845 shares
of our Common Stock at $2.60 per share. The investors also received warrants to
purchase 3,388,463 shares of Common Stock at $3.25 per share and the placement
agent received a warrant to purchase an additional 300,000 shares of Common
Stock at $3.25 per share. All of these warrants expire on February 11, 2009. Net
proceeds from the private placement totaling $32.9 million will be used to fund
clinical and preclinical product development activities, working capital and
general corporate purposes.
On August 1, 2003, we reinstated payment of the full salaries of our
senior management, a portion of which had been deferred in connection with our
May 2002 plan to conserve cash resources. The salary deferrals are being paid in
equal installments over the twelve-month period beginning August 1, 2003. As of
March 31, 2004, the salary deferral amounted to $136,000 and was included in
accrued payroll and payroll-related expenses in the accompanying balance sheet.
Capital expenditures for the three months ended March 31, 2004 were
approximately $14,000. Capital expenditures for 2004 are not expected to exceed
$300,000.
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We estimate that our existing cash, cash equivalents and short-term
investments totaling $51.2 million at March 31, 2004 will be sufficient to fund
our planned operations into 2006. We currently estimate that we need cash of
approximately $12.3 million, net of cash inflows from research grants,
technology license fees and interest, to fund our operations for the next twelve
months. However, we are currently evaluating our overall strategic plan and may,
therefore, spend more than our current forecast of $12.3 million. Our operating
plans and cash requirements may vary materially from the foregoing due to the
results of preclinical development, clinical trials, product testing,
relationships with strategic partners, changes in focus and direction of our
preclinical and clinical development programs, competitive and technological
advances, the regulatory process in the United States and abroad, and other
factors. In the future, we will need to raise substantial capital to complete
our product development and clinical trials and to fund operations in 2006 and
beyond, however, we cannot assure you that we will be able to raise additional
capital, nor can we predict what the terms of any financing might be.
CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods (in thousands):
- ------------------------------ ------------------- ------------- ---------- ----------- ---------- --------------
From April 1 to 2009 &
December 31, 2004 2005 2006 2007 2008 Thereafter
- ------------------------------ ------------------- ------------- ---------- ----------- ---------- --------------
Employment agreement (1) $ 309 $ 412 $ -- $ -- $ -- $ --
- ------------------------------ ------------------- ------------- ---------- ----------- ---------- --------------
Employee retention
payments (1) 285 -- -- -- -- --
- ------------------------------ ------------------- ------------- ---------- ----------- ---------- --------------
Operating leases (1) 216 299 263 -- -- --
- ------------------------------ ------------------- ------------- ---------- ----------- ---------- --------------
Research and development
commitment (2) 150 50 -- -- -- --
- ------------------------------ ------------------- ------------- ---------- ----------- ---------- --------------
Total contractual obligations $960 $761 $263 $ -- $ -- $ --
- ------------------------------ =================== ============= ========== =========== ========== ==============
(1) Includes commitments to our Chief Executive Officer under an employment
agreement, to our employees and officers (excluding our CEO) for retention
payments, and for non-cancelable operating leases. Refer to Note 9 to our
financial statements in our Annual Report on Form 10-K/A for the year ended
December 31, 2003 for additional discussion.
(2) Reflects commitment to fund laboratory research. Refer to Note 10 to our
financial statements in our Annual Report on Form 10-K/A for the year ended
December 31, 2003 for additional discussion.
(3) Under our license agreements, we are obligated to make milestone payments
totaling $2,675,000 upon achieving specified milestones and to pay
royalties to our licensors. These contingent milestone and royalty payment
obligations are not included in the above table. Refer to Note 3 to our
financial statements in our Annual Report on Form 10-K/A for the year ended
December 31, 2003 for additional discussion
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to certain market risks, see
Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", in our
Annual Report on Form 10-K/A for the year ended December 31, 2003. There have
been no significant changes in our market risk exposure since then.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures - As of the end of
the period covered by this quarterly report, we carried out an evaluation, under
the supervision and with the participation of our chief executive officer and
chief financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in our periodic filings with the Securities
and Exchange Commission. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
(b) Changes in internal control over financial reporting - There have
been no significant changes in our internal control over financial reporting or
in other factors that could significantly affect those controls subsequent to
the date of their last evaluation.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2004, we issued 13,553,845 shares of our Common Stock at
$2.60 per share in a private placement to a group of institutional investors in
reliance on an exemption under Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder. The investors also received
warrants to purchase 3,388,463 shares of Common Stock and the placement agent
received a warrant to purchase 300,000 shares of Common Stock at $3.25 per
share. All of these warrants expire on February 11, 2009. The aggregate offering
price in this offering was $35.2 million. We have subsequently registered the
resale of these shares by the investors and placement agent pursuant to a
registration statement on Form S-3, which has not yet been declared effective by
the SEC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
The Registrant filed the following reports on Form 8-K during the
quarter ended March 31, 2004:
1. On January 15, 2004, under Item 5 and Item 7 to announce
that Mr. Howard B. Johnson was appointed President, in
addition to his responsibilities as Chief Financial Officer.
2. On January 20, 2004, under Item 5 and Item 7 to announce
that clinical trials of its anticancer agent Triapine(R) had
been initiated under the its collaboration with the Cancer
Therapy Evaluation program of the National Cancer Institute.
3. On February 6, 2004, under Item 5 and Item 7 to announce an
update on Phase II single agent clinical trials of its
anticancer product Triapine in head and neck cancer and in
prostate cancer.
4. On February 11, 2004 under Item 5 and Item 7 to announce the
Company entered into a Securities Purchase Agreement with
certain purchasers relating to a private placement of shares
of Common Stock and Warrants, and a Registration Rights
Agreement relating thereto.
5. On March 5, 2004, under Item 5 and Item 7 to announce an
update on its development of second-generation
TAPET(R)vectors.
6. On March 8, 2004, under Item 5 and Item 7 to announce it had
received fast track designation from the U.S. Food and Drug
Administration for CLORETAZINE(TM)(VNP40101M) in relapsed or
refractory acute myeloid leukemia.
7. On March 11, 2004, under Item 12 to announce its financial
results for the three and twelve months ended in December
31, 2003.
17
8. On March 15, 2004 under Item 5 and Item 7 to announce it had
entered into a worldwide non-exclusive license agreement for
its Melasyn(R) technology with Johnson & Johnson Consumer
Companies, Inc.
9. On March 29, 2004, under Item 5 and Item 7 to announce that
it had initiated a Phase II clinical trial of its anticancer
product CLORETAZINE(TM) (VNP40101M) as a single agent in
patients with acute myeloid leukemia or myelodysplastic
syndromes.
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, in the City of New Haven, State of
Connecticut on May 14, 2004.
VION PHARMACEUTICALS, INC.
By: /s/ Howard B. Johnson
--------------------------------
Howard B. Johnson
President and Chief Financial Officer
18