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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 June 30, 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 Identification No.)
incorporation or organization)
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 [X] No [ ]
The number of shares outstanding of the registrant's common stock as of
August 6, 2004 was 55,391,887.
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 17
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES
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)
June 30, December 31,
(In thousands, except share and per share data) 2004 2003
- -----------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 48,126 $ 1,219
Short-term investments -- 14,500
--------------------------------
Total cash, cash equivalents and short-term investments 48,126 15,719
Interest receivable -- 11
Accounts receivable 18 27
Prepaid expenses 81 224
--------------------------------
Total current assets 48,225 15,981
Property and equipment, net 306 370
Security deposits 25 25
--------------------------------
Total assets $ 48,556 $ 16,376
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accrued payroll and payroll-related expenses $ 317 $ 464
Accounts payable and accrued expenses 3,712 3,595
Deferred revenue 18 18
--------------------------------
Total current liabilities 4,047 4,077
Deferred revenue 368 377
--------------------------------
Total liabilities 4,415 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: 150,000,000 shares;
issued and outstanding: 55,385,195 and 39,276,755 shares
at June 30, 2004 and December 31, 2003, respectively 554 393
Additional paid-in-capital 166,224 127,239
Deficit accumulated during the development stage (122,637) (115,710)
--------------------------------
44,141 11,922
--------------------------------
Total liabilities and shareholders' equity $ 48,556 $ 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 Three Months Ended For the Six Months Ended May 1, 1994 (Inception)
June 30, June 30, through
(In thousands, except per share data) 2004 2003 2004 2003 June 30, 2004
-------------------------- -------------------------- -----------------------
Revenues:
Contract research grants $ 37 $ 72 $ 100 $ 138 $ 2,501
Research and laboratory support fees 80 24 104 27 5,886
Technology license fees 8 6 17 6 4,478
---------------------- ---------------------- ---------
Total revenues 125 102 221 171 12,865
---------------------- ---------------------- ---------
Operating expenses:
Clinical trials 2,029 1,721 3,834 2,597 30,973
Other research and development 1,162 887 2,119 1,856 64,691
---------------------- ---------------------- ---------
Total research and development 3,191 2,608 5,953 4,453 95,664
General and administrative 726 654 1,343 1,356 26,083
---------------------- ---------------------- ---------
Total operating expenses 3,917 3,262 7,296 5,809 121,747
---------------------- ---------------------- ---------
Loss from operations (3,792) (3,160) (7,075) (5,638) (108,882)
Interest income 115 24 206 55 5,079
Interest expense -- -- -- -- (210)
Other income (expense) 8 -- (24) -- (69)
---------------------- ---------------------- ---------
Loss before income taxes (3,669) (3,136) (6,893) (5,583) (104,082)
Income tax provision (benefit) -- -- 34 (22) (189)
---------------------- ---------------------- ---------
Net loss (3,669) (3,136) (6,927) (5,561) (103,893)
Preferred stock dividends and accretion -- -- -- -- (18,489)
---------------------- ---------------------- ---------
Loss applicable to common shareholders $(3,669) $(3,136) $(6,927) $(5,561) $(122,382)
====================== ====================== =========
Loss applicable to common shareholders
per share $ (0.07) $ (0.11) $ (0.13) $ (0.19)
====================== ======================
Weighted-average number of shares of
common stock outstanding 55,325 29,274 51,317 29,101
====================== ======================
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)
--------------
Comprehensive loss (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 26,441 -- 67 67
Exercise of warrants 2,528,154 25 6,095 6,120
Net loss (6,927) (6,927)
--------------
Comprehensive loss (6,927)
-------------------------------------------------------------------------------------
Balance at June 30, 2004 55,385,195 $ 554 $ 166,224 $ -- $(122,637) $ 44,141
=====================================================================================
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 Six Months May 1, 1994
Ended June 30, (Inception) through
(In thousands) 2004 2003 June 30, 2004
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (6,927) $ (5,561) $(103,893)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation and amortization 93 100 2,708
Loss on equipment disposals -- 9 12
(Decrease) increase in deferred revenue (9) 386
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 163 236 (98)
Other assets -- -- (22)
Current liabilities (30) 1,134 3,994
-------------------------------------------------
Net cash used in operating activities (6,710) (4,082) (90,250)
-------------------------------------------------
Cash flows from investing activities:
Purchases of marketable securities (61,901) -- (321,052)
Maturities of marketable securities 76,401 -- 321,052
Acquisition of equipment (29) (54) (2,082)
-------------------------------------------------
Net cash provided by (used in) investing activities 14,471 (54) (2,082)
-------------------------------------------------
Cash flows from financing activities:
Initial public offering -- -- 9,696
Net proceeds from issuances of common stock 33,026 4,457 81,811
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 6,120 -- 6,235
Repayment of equipment capital leases -- -- (927)
Other financing activities, net -- -- (286)
-------------------------------------------------
Net cash provided by financing activities 39,146 4,457 140,458
-------------------------------------------------
Change in cash and cash equivalents 46,907 321 48,126
Cash and cash equivalents, beginning of period 1,219 10,131 --
-------------------------------------------------
Cash and cash equivalents, end of period $ 48,126 $ 10,452 $ 48,126
=================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ -- $ -- $ 210
=================================================
Cash paid for taxes $ 3 $ -- $ 20
=================================================
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. Beginning May 27, 2005, if the volume weighted-average price of the
Company's 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. The net proceeds, net of
cash offering costs, were $32.9 million.
4. Warrant Exercises
For the six months ended June 30, 2004, the Company issued 2,528,154
shares of its common stock upon exercises of warrants issued in connection with
private placements in 2003 and 2004, resulting in proceeds of $6.1 million.
5
5. Per Share Data - Anti-dilution
As of June 30, 2004, the Company had outstanding warrants to purchase
9,866,384 shares of its common stock at exercise prices between $2.20 and $6.00
per share, and outstanding stock options to purchase 4,606,078 shares of its
common stock at exercise prices 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 six months ended June 30, 2004, the Company recorded a
provision of $34,000 for minimum state capital taxes. For the six months ended
June 30, 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 six-month
periods ended June 30, 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.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
-------------------- -------------------
Risk-free interest rate 4.12% 3.16% 4.09% 3.16%
Expected volatility 83% 170% 85% 170%
Expected life (in years) 5.9 5.91 5.9 5.91
Expected dividend yield 0% 0% 0% 0%
6
From
Inception
For the Three Months For the Six Months (May 1, 1994)
Ended June 30, Ended June 30, through
2004 2003 2004 2003 June 30, 2004
-----------------------------------------------------------------
Net loss as reported $(3,669) $(3,136) $(6,927) $(5,561) $(103,893)
Add: Stock-based employee
compensation expense included in
reported net loss -- -- -- -- 768
Deduct: Stock-based employee compensation
expense determined under the fair value
based method for all awards (409) (811) (947) (1,681) (20,061)
-----------------------------------------------------------------
Pro forma net loss (4,078) (3,947) (7,874) (7,242) (123,186)
Pro forma preferred stock dividend and accretion -- -- -- -- (18,489)
-----------------------------------------------------------------
Pro forma loss applicable to common shareholders $(4,078) $(3,947) $(7,874) $(7,242) $(141,675)
=================================================================
Pro forma basic and diluted loss applicable to
common shareholders per share $ (0.07) $ (0.13) $ (0.15) $ (0.25)
================================================
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 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
7
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.
We have five research and development projects, which include two
product candidates in clinical trials (Triapine(R) and CLORETAZINE(TM)
(VNP40101M)) and three product development programs in preclinical development
(heterocyclic hydrazones, KS119 and TAPET(R)). The following table provides
information on clinical trials sponsored by us which were open for patient
enrollment as of June 30, 2004.
- --------------------------------------------------------------------------------
Trial
Commencement
Product Trial Date
- ----------------- ------------------------------------------ -----------------
Triapine(R) Phase II trial in combination with May 2003
gemcitabine in pancreatic cancer
Phase II trial in combination with May 2003
gemcitabine in non-small-cell lung
cancer
Phase I trial in combination with Ara-C
in advanced leukemia March 2003
- ----------------- ------------------------------------------ -----------------
CLORETAZINE(TM) Phase II trial in acute myeloid leukemia March 2004
(VNP40101M) and myelodysplastic syndromes
Phase I trial in combination with Ara-C July 2003
in advanced leukemia
- --------------------------------------------------------------------------------
In addition to above-listed clinical trials for Triapine, the National
Cancer Institute (NCI) is also sponsoring several Phase I and Phase II single
agent or 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.
8
In addition to the above-listed clinical trials for CLORETAZINE(TM)
(VNP40101M), a Phase II trial in primary brain tumors was initiated in May 2004
under an investigator's IND. We provide product for this trial and incur certain
costs related to patient enrollment.
Our plan of operations for the next 12 months includes the following
elements:
o Conduct Phase I and 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 an oral formulation of Triapine;
o Conduct Phase I clinical studies of CLORETAZINE(TM)(VNP40101M) in
combination with standard chemotherapy treatments;
o Conduct Phase II and Phase III clinical studies of CLORETAZINE(TM)
(VNP40101M) as a single agent or in combination with standard chemotherapy
treatments;
o Provide product and make payments related to certain patient costs for a
Phase II study of CLORETAZINE(TM) (VNP40101M) in primary brain tumors to be
conducted under an investigator's IND;
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.
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.
9
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.
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.
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
10
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 applicable agreement, are achieved.
We record revenue from royalties, if any, 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
11
2002 and 2003 of certain research and development tax credits to the State of
Connecticut and the provisions recorded in 2003 and 2004 for minimum state
capital taxes, 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 June
30, 2004. 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 ("APB 25", 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.
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
There may be potential new accounting pronouncements or regulatory
rulings, which may have an impact on our future financial position and results
of operations. On March 31, 2004, the FASB issued an Exposure Draft ("ED"),
"Share-Based Payment - An Amendment of FASB Statements No. 123 and 95." The ED
addresses the accounting for transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed Statement would eliminate the ability to account for share-based
compensation transactions using APB 25 and generally would require instead that
such transactions be accounted for using a fair-value based method. As proposed,
companies would be required to recognize an expense for compensation cost
related to share-based payment arrangements including stock options and employee
stock purchase plans. As proposed, the new rules would be applied on a modified
prospective basis as defined in the ED, and would be effective for public
companies for fiscal years beginning after December 15, 2004. We are currently
evaluating our option valuation methodologies and assumptions in light of these
evolving accounting standards related to employee stock options.
RESULTS OF OPERATIONS
12
COMPARISON OF THE THREE-MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
REVENUES. Revenues were $125,000 for the three months ended June 30,
2004, compared to $102,000 for the same period in 2003. The increase was due
primarily to higher revenues from research and laboratory support fees,
partially offset by lower revenues from contract research grants.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses (which include clinical trials expenses and other research and
development expenses) were $3.2 million for the three months ended June 30,
2004, compared to $2.6 million for the same 2003 period. Clinical trials
expenses increased to $2.0 million for the second quarter of 2004 from $1.7
million for the same 2003 period. The increase was due primarily to (1) higher
drug production expense of $366,000 and (2) higher clinical trial expense of
$215,000 for CLORETAZINE(TM) (VNP40101M) trials due to higher patient
enrollment, partially offset by lower expense of $369,000 for Triapine(R) trials
due primarily to start-up expenses for two Phase II trials in the second quarter
of 2003. Other research and development expenses were $1.2 million for the
second quarter of 2004 compared to $887,000 for the same 2003 period. The
increase was due primarily to higher expenses for consulting, external research
and testing, and the purchase of additional lab supplies. We expect total
research and development expenses to increase over time mainly due to expanded
clinical trials, including commencement of a Phase III clinical trial of
CLORETAZINE(TM) (VNP40101M) before the end of the first quarter of 2005, and
additional development of our preclinical products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $726,000 for the three months ended June 30, 2004 from
$654,000 for the same 2003 period. The increase was primarily due to higher
consulting fees as well as expenses associated with our June 2004 annual
stockholder meeting, partially offset by lower legal fees.
INTEREST INCOME. Interest income was $115,000 for the three months
ended June 30, 2004, as compared to $24,000 for the same 2003 period. The
increase was primarily due to higher levels of invested funds in 2004.
NET LOSS. The net loss was $3.7 million, or $0.07 per share, for the
three months ended June 30, 2004, compared to a net loss of $3.1 million, or
$0.11 per share, for the same 2003 period. Weighted-average common shares
outstanding for the three months ended June 30, 2004 and 2003 were 55.3 million
and 29.3 million, respectively.
COMPARISON OF THE SIX-MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
REVENUES. Revenues were $221,000 for the six months ended June 30,
2004, compared to $171,000 for the same period in 2003. The increase was due
primarily to higher revenues from research and laboratory support fees partially
offset by lower revenues from contract research grants.
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RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses (which include clinical trials expenses and other research and
development expenses) were $6.0 million for the six months ended June 30, 2004,
compared to $4.5 million for the same 2003 period. Clinical trials expenses
increased to $3.8 million for the six months ended June 30, 2004 from $2.6
million for the same 2003 period. The increase was due primarily to higher drug
production expense of $643,000 and higher patient enrollment which resulted in
higher expense of $370,000 for CLORETAZINE(TM) (VNP40101M) trials. Other
research and development expenses were $2.1 million for the six months ended
June 30, 2004, compared to $1.9 million for the same 2003 period. The increase
was due primarily to higher expenses for consulting and external research and
testing, partially offset by a decrease in employee-related expenses due to
fewer employees. We expect total research and development expenses to increase
over time mainly due to expanded clinical trials, including commencement of a
Phase III clinical trial of CLORETAZINE(TM) (VNP40101M) before the end of the
first quarter of 2005, and additional development of our preclinical products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $1.3 million for the six months ended June 30, 2004, as compared
to $1.4 million for the same 2003 period. The decrease was primarily due to
lower legal and patent fees, partially offset by higher consulting fees as well
as expenses associated with our June 2004 annual stockholder meeting.
INTEREST INCOME. Interest income was $206,000 for the six months ended
June 30, 2004, as compared to $55,000 for the same period in 2003. The increase
was primarily due to higher levels of invested funds in 2004.
INCOME TAXES. For the six months ended June 30, 2004, a current state
income tax provision of $34,000 was recorded for minimum state capital taxes.
For the six months ended June 30, 2003, an income tax benefit of $22,000 was
recognized for the sale of certain research and development tax credits to the
State of Connecticut.
NET LOSS. The net loss was $6.9 million, or $0.13 per share, for the
six months ended June 30, 2004, compared to a net loss of $5.6 million, or $0.19
per share, for the same period in 2003. Weighted-average common shares
outstanding for the six months ended June 30, 2004 and 2003 were 51.3 million
and 29.1 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had cash and cash equivalents of $48.1 million
compared to cash, cash equivalents and short-term investments of $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 $6.1 million from exercises of warrants, described below, offset by
cash used of $6.7 million to fund operating activities.
CASH USED IN OPERATING ACTIVITIES
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Cash used in operating activities is primarily a result of our net
loss. However, operating cash flows differ from net loss as a result of non-cash
charges, changes in operating assets and liabilities, or differences in the
timing of cash flows and earnings/expense recognition. Significant components of
cash used in operating activities are as follows:
Receivables and prepaid expenses decreased $163,000 during the six
months ended June 30, 2004 compared to a decrease of $236,000 for the same 2003
period. The decreases in 2004 and 2003 were primarily due to a reduction in
prepaid insurance expense as the timing of insurance premium payments differs
from the recognition of insurance expense.
Current liabilities decreased $30,000 during the six months ended June
30, 2004 compared to an increase of $1.1 million for the same 2003 period. The
increase in 2003 was primarily due to an increase of $666,000 in our clinical
trials liability as the timing of payments to clinical vendors differs from the
recognition of clinical trials expenses and an increase of $174,000 related to
salary deferrals in connection with our May 2002 plan to conserve cash
resources. On August 1, 2003, we reinstated payment of the full salaries of our
senior management. The salary deferrals are being paid in equal installments
over the twelve-month period beginning August 1, 2003. As of June 30, 2004, the
salary deferral amounted to $34,000 and was included in accrued payroll and
payroll-related expenses in the accompanying balance sheet.
CASH PROVIDED BY OR USED IN INVESTING ACTIVITIES
Cash provided by or used in investing activities primarily relates to
the purchases and maturities of investments and acquisitions of capital
equipment. For the six months ended June 30, 2004, purchases of marketable
securities totaled $61.9 million and maturities of marketable securities totaled
$76.4 million. Capital expenditures were $29,000 for the six months ended June
30, 2004 and $54,000 for the same 2003 period. Capital expenditures for 2004 are
not expected to exceed $500,000. The expected increase in capital spending over
amounts spent in fiscal 2003 reflects the expected purchase of additional
equipment and information systems.
CASH PROVIDED BY FINANCING ACTIVITIES
Cash provided by financing activities is primarily related to capital
raised, warrant exercise proceeds and activity under our employee stock plans.
For the six months ended June 30, 2004, we received $39.1 million primarily due
to net proceeds of $32.9 million from a private placement and proceeds of $6.1
million from exercises of warrants. For the six months ended June 30, 2003, we
received $4.5 million primarily due to net proceeds of $4.4 million from a
private placement.
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
15
will be used to fund clinical and preclinical product development activities,
working capital and general corporate purposes.
In September 2003, we completed a private placement of 6,475,000 shares
of our Common Stock at $1.75 per share and warrants to purchase 6,475,000 shares
of common stock at $2.50 per share. Net proceeds from this private placement
totaled $10.4 million. The warrants expire September 19, 2008.
In June 2003, we completed a private placement of 3,846,150 shares of
our Common Stock at $1.30 per share and warrants to purchase 1,923,075 shares of
common stock at $2.20 per share. Net proceeds from this private placement
totaled $4.4 million. The warrants expire June 25, 2008.
For the six months ended June 30, 2004, we issued 2,528,154 shares of
our Common Stock upon exercises of warrants issued in connection with private
placements in 2003 and 2004, resulting in proceeds of $6.1 million.
FUTURE CASH REQUIREMENTS
We estimate that our existing cash and cash equivalents totaling $48.1
million at June 30, 2004 will be sufficient to fund our planned operations into
2006. We currently estimate that we need cash of approximately $23 million, net
of cash inflows from research grants, technology license fees and interest on
investments, to fund our operations for the next twelve months. This estimate
includes costs associated with the planned initiation of a Phase III clinical
trial of CLORETAZINE(TM) (VNP40101M) before the end of the first quarter of
2005. However, we are currently evaluating our operating plan and our spending
may vary from our current forecast of $23 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.
OFF-BALANCE SHEET FINANCING
We have no off-balance sheet arrangements that have a material current
effect or that are reasonably likely to have a material future effect on our
financial position or results of operations.
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CONTRACTUAL OBLIGATIONS
During the first six months of 2004, there were no significant changes
in our reported payments due under contractual obligations at December 31, 2003.
Under various agreements with contract research organizations, clinical sites
and contract drug manufacturers, we expect to incur costs relating to the
progress of clinical trials. These costs are expensed as incurred and are based
upon patient enrollment, services rendered or other expenses as incurred. In the
event of termination, certain agreements provide for cancellation fees to be
paid by us and for reimbursement of noncancellable commitments that may have
been entered into on our behalf.
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:
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including changes to interest rates
associated with our cash equivalents and investments, and foreign currency
exchange rates. The following describes the nature of these risks which we do
not believe to be material to us.
Our cash equivalents are generally highly liquid investments in U.S
Government securities and money market funds. Investments in fixed rate interest
earning instruments carry a degree of interest risk. Due in part to these
factors, our future investment income may fall short of expectations due to
changes in interest rates or we may suffer losses in principal if forced to sell
securities that have declined in market value due to changes in interest rates.
Our investments are held for purposes other than trading and we believe that we
currently have no material adverse market risk exposure. The cash equivalents as
of June 30, 2004 had maturities of 30 days. The weighted-average interest rate
on cash equivalents held at June 30, 2004 was approximately 1%.
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We have a contract with a vendor outside the U.S. that is denominated
in a foreign currency. To date, fluctuations in this currency have not
materially impacted our results of operations. We have no derivative financial
instruments. We do not believe we have material exposures to changes in foreign
currency exchange rates.
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 has
been no change in our internal control over financial reporting during the
period covered by this quarterly report or in other factors that has materially
affected or is reasonably likely to materially affect the Company's internal
control.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Vion's Annual Meeting of Stockholders held on June 9, 2004, three
proposals were voted upon by the Company's stockholders. A description of each
proposal and a tabulation of the votes for each of the proposals follows:
1. To elect seven directors to hold office until the 2006 Annual Meeting of
Stockholders or until their successors are elected and qualified. All seven
nominees were elected:
For Authority Withheld
Nominee From Nominee
------- ------------
William R. Miller 42,187,067 324,236
Stephen K. Carter, M.D. 42,208,517 302,786
Frank T. Cary 42,207,167 304,136
Alan Kessman 42,208,517 302,786
Charles K. MacDonald 42,188,417 322,886
Alan C. Sartorelli, Ph.D. 42,258,617 252,686
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Walter B. Wriston 42,207,167 304,136
2. To approve an amendment to the Amended and Restated Certificate of
Incorporation to increase the number of shares of authorized Common Stock from
100 million to 150 million. The amendment was approved:
Abstentions and
For Against Broker Non-Votes
--- ------- ----------------
40,720,181 609,321 1,181,801
3. To ratify the appointment of Ernst & Young LLP as independent auditors
for the Company for the fiscal year ending December 31, 2004. The appointment of
Ernst & Young LLP was ratified:
Abstentions and
For Against Broker Non-Votes
--- ------- ----------------
42,248,617 232,695 29,991
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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 June 30, 2004:
1. On May 13, 2004, under Item 12 to announce its financial
results for the three months ended March 31, 2004.
2. On June 1, 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) in patients with primary
brain tumors.
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3. On June 7, 2004, under Item 5 and Item 7 to announce that
initial clinical data from a Phase I clinical trial of
CLORETAZINE(TM) (VNP40101M) in combination with Ara-C in
leukemia and also initial clinical data from a Phase I
trials of a weekly schedule of CLORETAZINE(TM) (VNP40101M)
were presented in poster sessions at the American Society of
Clinical Oncology Annual Meeting
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 August 11, 2004.
VION PHARMACEUTICALS, INC.
By: /s/ Howard B. Johnson
-------------------------------------
Howard B. Johnson
President and Chief Financial Officer
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