SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

AXONYX INC.

(Exact name of registrant as specified in its charter)

 

 

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 ý No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o No ý

 

As of May 12, 2003, there were 23,791,113 shares of the registrant’s common stock outstanding.

 

 

AXONYX INC.

 

INDEX

 

PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31, 2002 (audited)
	Condensed Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2003 and 2002
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2003
	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2003 and 2002
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 2.	Changes in Securities and Use of Proceeds
Item 6.	Exhibits and Reports on Form 8-K

 

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PART I. FINANCIAL INFORMATION

 

Item 1.                                Consolidated Financial Statements

 

AXONYX INC.

 

Condensed Consolidated Balance Sheets

 

		March 31, 2003			December 31, 2002
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	5,578,000		$	3,021,000
Cash held in escrow					1,453,000
Stock subscriptions receivable					3,415,000
Other current assets		143,000			8,000
Total current assets		5,721,000			7,897,000
Equipment, net		33,000			37,000
Security deposit		4,000			50,000
		$	5,758,000		$	7,984,000
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses		$	579,000		$	1,335,000
Total liabilities		579,000			1,335,000
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value, 15,000,000 shares authorized; none issued Common Stock - $.001 par value, 75,000,000 shares authorized; 23,791,113 shares issued and outstanding.		24,000			24,000
Additional paid-in capital		32,355,000			32,255,000
Unearned compensation - stock/options		(3,000		)	(8,000		)
Accumulated deficit		(27,197,000		)	(25,622,000		)
Total stockholders’ equity		5,179,000			6,649,000
Total liabilities and stockholders’ equity		$	5,758,000		$	7,984,000

 

See notes to condensed consolidated financial statements.

 

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AXONYX INC.

 

Condensed Consolidated Statements of Operations

(unaudited)

 

		Three months ended March 31,
		2003			2002
Revenue		$	—		$	—
Costs and expenses:
Research and development		1,027,000			961,000
General and administrative		573,000			714,000
		1,600,000			1,675,000
Loss from operations		(1,600,000		)	(1,675,000		)
Foreign exchange		3,000			(1,000		)
Interest income		22,000			36,000
Net loss		$	(1,575,000	)	$	(1,640,000	)
Net loss per common share		$	(0.07	)	$	(0.10	)
Weighted average shares-basic and diluted		23,745,669			17,247,371

 

See notes to condensed consolidated financial statements.

 

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AXONYX INC.

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)

 

		Common Stock					Additional Paid-in Capital			Unearned Compensation Stock Options			Accumulated Deficit			Total Stockholders’ Equity
		Number of Shares		Amount
Balance - December 31, 2002		23,733,613		$	24,000		$	32,255,000		$	(8000)		$	(25,622,000	)	$	6,649,000
Issuance of common stock options and warrants for consulting services							44,000									44,000
Issuance of common stock for consulting services		57,500					56,000									56,000
Amortization										5,000						5,000
Net loss		—		—			—			—			(1,575,000		)	(1,575,000		)
Balance - March 31, 2003		23,791,113		$	24,000		$	32,355,000		$	(3,000	)	$	(27,197,000	)	$	5,179,000

 

See notes to condensed consolidated financial statements.

 

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AXONYX INC.

 

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

		Three months ended March 31,
		2003			2002
Cash flows from operating activities:
Net Loss		$	(1,575,000	)	$	(2,066,000	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		4,000			3,000
Compensation related to common stock issued for services		56,000
Compensation related to stock options and warrants issued for services		49,000			252,000
Changes in:
Other current assets		(135,000		)	(81,000		)
Security deposits		46,000			—
Accounts payable and accrued expenses		(756,000		)	(474,000		)
Net cash used in operating activities		(2,311,000		)	(2,366,000		)
Cash flows from investing activities:
Purchase of equipment		—			(8,000		)
Net cash used in investing activities		—			(8,000		)
Cash flows from financing activities
Collection of stock subscriptions receivable and cash held in escrow		4,868,000			—
Net cash provided from financing activities		4,868,000			—
Net (decrease)/increase in cash and cash equivalents		2,557,000			(2,374,000		)
Cash and cash equivalents at beginning of period		3,021,000			10,363,000
Cash and cash equivalents at end of period		$	5,578,000		$	7,989,000

 

See notes to condensed consolidated financial statements.

 

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AXONYX INC.

 

Notes to Condensed Consolidated Financial Statements
March 31, 2003

 

(1)  Financial Statement Presentation

 

The unaudited condensed consolidated financial statements of Axonyx Inc. (the “Company”) herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position at March 31, 2003 and the results of operations for the interim periods presented.  Certain information and footnote disclosure normally included in the financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations.  However, management believes that the disclosures are adequate to make the information presented not misleading.  These financial statements and notes thereto should be read in conjunction with the financial statements and the notes thereto for the year ended December 31, 2002 included in the Company’s Form 10-K filing.  The results for the interim periods are not necessarily indicative of the results for the full fiscal year.

 

(2)  Stock-based Compensation

 

The Company follows the intrinsic value based method in accounting for stock-based employee compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” which was released in December 2002 as an amendment of SFAS No. 123.

 

The following table illustrates the effect on net loss and loss per share if the fair value based method had been applied to all awards:

 

		3 Months ended March 31,
		2003			2002
Reported net loss attributable to common stockholders		$	(1,575,000	)	$	(1,640,000	)
Stock-based employee compensation determined under the fair value based method		(3,327,000		)	(1,596,000		)
Pro forma net loss attributable to common stockholders		$	(4,902,000	)	$	(3,236,000	)
Loss per common share attributable to common stockholders (basic and diluted):
As reported		$	.07		$	.10
Pro forma		$	.21		$	.19

 

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(3)  Other

 

During the three months ended March 31, 2003 the Company collected $1,453,000 of cash that was held in escrow and $3,415,000 of stock subscriptions receivable, both of which resulted from the sale of common stock and warrants in December 2002.

 

(4)  Subsequent Events

 

In April 2003, Axonyx received a milestone payment of $1 million from Serono International S.A. under the terms of a license agreement for beta-sheet breaker technology that was signed in September 2000.  The milestone payment was triggered when Serono initiated a Phase I clinical trial with a beta-sheet breaker peptide for the potential treatment of Alzheimer’s disease.

 

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Item 2.                                Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.  ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN OR INCORPORATED BY REFERENCE INTO THIS FORM 10-Q ARE FORWARD-LOOKING STATEMENTS.  IN ADDITION, WHEN USED IN THIS DOCUMENT, THE WORDS “ANTICIPATE,” “ESTIMATE,” “PROJECT,” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.  THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS INCLUDING AMONG OTHERS, THE RISK THAT OUR CLINICAL TRIALS WILL NOT PROVE SUCCESSFUL, THAT WE WILL NOT BE ABLE TO OBTAIN FINANCING TO COMPLETE ANY FUTURE TRIALS, THE FDA WILL NOT GRANT MARKETING APPROVAL FOR PHENSERINE OR THAT, IF APPROVED, PHENSERINE WILL NOT PROVE COMPETITVE IN THE MARKETS.  THESE RISKS AND OTHERS ARE MORE FULLY DESCRIBED IN OUR REPORT ON THIS FORM 10-Q AND IN OUR OTHER PUBLIC FILINGS, INCLUDING OUR FORM 10-K.  SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED.  ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS INCLUDED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GIVE ANY ASSURANCES THAT THESE EXPECTATIONS WILL PROVE TO BE CORRECT.  WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO SUCH FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

 

The following discussion and analysis should be read in conjunction with our financial statements and the notes thereto appearing in Part I, Item 1.

 

Axonyx is a biopharmaceutical company engaged in the business of acquiring and developing novel post-discovery central nervous system drug candidates, primarily in areas of memory and cognition.  We acquire patent rights to central nervous system pharmaceutical compounds we believe may have significant potential market impact and work to advance the compounds through pre-clinical and clinical development towards regulatory approval.  We have acquired worldwide exclusive patent rights to three main classes of therapeutic compounds designed for the treatment of Alzheimer’s disease (AD), Mild Cognitive Impairment, and related diseases.  We have acquired patent rights to a class of potential therapeutic compounds designed for the treatment of prion related diseases, which are degenerative diseases of the brain that are thought to be caused by an infectious protein called a prion.  Prion is a contraction of the descriptive term, proteinaceous infectious proteins.  Prions, unlike viruses, bacteria and fungi, have no DNA and consist only of protein.  Such diseases include Creutzfeldt Jakob Disease, new variant in humans, Bovine Spongiform Encephalopathy (BSE or Mad Cow Disease) in cows, and Scrapies disease in sheep.  We licensed these patent rights from New York University and, via a

 

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sublicense, from the National Institutes of Health/National Institute on Aging.  We also have co-inventorship rights to a therapeutic compound named Posiphen designed for the treatment of Alzheimer’s disease.

 

We out-source all of our preclinical and clinical research and development, utilizing contracting research organizations, or CROs, and sponsored research arrangements.  We have contracted with several CROs to undertake the pre-clinical and clinical development of Phenserine.  We have entered into a License Agreement with Applied Research Systems ARS Holding N.V. (ARS), a subsidiary of Serono International, S.A. (Serono), a Swiss biopharmaceutical company, under which ARS is undertaking research on certain of our licensed technologies.

 

Our current business strategy is to concentrate our financial resources primarily on the further clinical development of Phenserine, an inhibitor of acetylcholinesterase, that is our lead drug candidate for the treatment of AD.  Acetylcholinesterase is an enzyme in the synapse that degrades the neurotransmitter acetylcholine in the brain and other tissues of the body.  Acetylcholine is a chemical substance that sends signals between nerve cells, called neurotransmission, and is therefore called a neurotransmitter.  Neurotransmitters are secreted by neurons, or nerve cells, into the space between neurons called the synapse.  Acetylcholine is a primary neurotransmitter in the brain, and is associated with memory and cognition.  We are planning to initiate a Phase IIb clinical trial that will evaluate the effects of Phenserine on the levels of beta-amyloid precursor protein and beta amyloid in the plasma and cerebrospinal fluid of AD patients.  We are also planning to undertake a Phase III potentially pivotal clinical trial to further examine the safety and efficacy of Phenserine.

 

In addition to the Phenserine clinical program, we are sponsoring pre-clinical research relating to an assay method for screening drug candidates for Alzheimer’s disease.  Pursuant to a sublicense agreement with ARS, a subsidiary of Serono International, S.A., ARS is undertaking research and development concerning the development of (1) compounds called Amyloid Inhibitory Peptides which may prevent and reverse the formation of amyloid plaques in AD, and (2) pharmaceutical compounds for the diagnosis and treatment of prion-related diseases.  Given sufficient financial resources, we may, in the future, sponsor further pre-clinical development of:  (1) Tolserine, another acetylcholinesterase inhibitor, (2) one or more butyrylcholinesterase inhibitors which will be chosen from a series of selectively acting compounds, the best studied of which are Phenethylnorcymserine (PENC) and Bisnorcymserine, and (3) initiate pre-clinical development of Posiphen, a compound that appears to decrease the formation of the beta-amyloid precursor protein with potential applications in the treatment of AD.

 

Our AD-targeted approaches include the following, which are described in more detail below:

 

(1)                                  Phenserine, an inhibitor of acetylcholinesterase and beta-amyloid precursor protein, our lead drug candidate, and Tolserine, another follow-on acetylcholinesterase inhibitor;

 

(2)                                  a butyrylcholinesterase inhibitor which will be chosen from a series of selectively acting compounds;

 

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(3)                                  Posiphen, a compound that decreases the formation of beta-amyloid precursor protein;

 

(4)                                  through our sublicense with ARS, a subsidiary of Serono, compounds called Amyloid Inhibitory Peptides (AIPs) which may prevent and reverse the formation of amyloid plaques in AD.

 

Effective September 15, 2000, ARS, a subsidiary of Serono, entered into a License Agreement with Axonyx, exercising its right to license certain of Axonyx’s patent rights under a Development Agreement and Right to License signed with Axonyx in May of 1999.  Under the Development Agreement, ARS had paid Axonyx a $250,000 non-refundable fee for the right to license.  Pursuant to the License Agreement, ARS acquired exclusive worldwide patent rights to our AIP and PIP technologies.  Furthermore, ARS continued the research and development of the AIP and PIP technologies initiated during the term of the Development Agreement and Right to License.  We cannot assure you that additional revenues from patent licensing or that revenue from research and development contracts will be generated in fiscal year 2003.

 

Upon the execution of the License Agreement with ARS on September 15, 2000, Axonyx generated $1.5 million of revenue in the form of an up-front license fee.  We received a milestone payment of $1 million in April 2003 in relation to the initiation of a Phase I clinical trial with a licensed AIP drug compound under the License Agreement.  We may generate additional revenues from ARS if certain development milestones are reached concerning the licensed compounds or other products and related intellectual property, although such milestone payments may not occur in fiscal year 2003 or at all.  Under the License Agreement we may also generate royalty revenue from any net sales of licensed technologies.  We cannot assure you that licensed compounds or products will reach any particular stage of development requiring a milestone payment, that licensed compounds or products will ever reach the market giving rise to royalty payments, or that additional revenues from patent licensing will be generated.

 

Effective September 1, 2002, we entered into a Research Agreement and a Consulting Agreement with David Henry Small, Ph.D., and an Intellectual Property Assignment Agreement with David Henry Small, Ph.D., Marie-Isabel Aquilar, Ph.D., Supundi Subasinghe (“Assignment Agreement”).  Each of these agreements relate to the development of an assay method for the rapid screening of drug candidates for the treatment of Alzheimer’s Disease.  The Research Agreement funds a research project concerning further development of the assay method under the guidance of Dr. Small for a three year period commencing October 1, 2002, for Australian $90,000 per year.  Under the Assignment Agreement Dr. Small and two other co-inventors have assigned a patent application concerning the assay method in return for revenue sharing upon commercialization of the assay method.  Under the Consulting Agreement with Dr. Small, we engaged Dr. Small for a three year period commencing September 1, 2002 for Australian $20,000 per year payable in full at the beginning of each year and a grant of stock options for consulting services related to the development of the assay method.

 

Our actual research and development and related activities may vary significantly from current plans depending on numerous factors, including changes in the costs of such activities from current estimates, currency fluctuations, the results of our research and development

 

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programs, the results of clinical studies, the timing of regulatory submissions, technological advances, determinations as to commercial viability and the status of competitive products.  The focus and direction of our operations will also be dependent on the establishment of our collaborative arrangement with other companies, the availability of financing and other factors.  We expect our development costs to increase as our Phenserine development program enters the later stages of clinical development.  If we in-license or out-license rights to some of our drug candidates our development expenses may fluctuate significantly from prior periods.

 

RESULTS OF OPERATIONS

 

For the three months ended March 31, 2003, and for the three months ended March 31, 2002 we realized no revenue.

 

For the three months ended March 31, 2003, we incurred a net loss of $1,575,000 compared to a net loss of $1,640,000 for the three months ended March 31, 2002.  The decreased losses were due primarily to a decline in general and administrative expenses of $141,000 and a foreign exchange gain of $4,000, offset in part by an increase in research and development costs of $66,000 and a decline of interest income of $14,000.  We expect to incur additional losses for the foreseeable future.

 

For the three months ended March 31, 2003, we incurred research and development costs of $1,027,000 compared to $961,000 for the three months ended March 31, 2002.  The increase was due primarily to increased costs incurred related to the planned Phase IIb/Phase III clinical program of $297,000 and Phenserine preclinical toxicology studies of $160,000 offset by a decline in chemical manufacturing expenditures of $293,000 and a reduction in consulting costs of $47,000 and option charges of $51,000.

 

Our research and development costs in the three months ended March 31, 2003 and 2002 primarily included development costs for Phenserine.  In the first quarter of 2003 we incurred $376,000 in preparations for our Phenserine Phase IIb/Phase III clinical program, $291,000 incurred for Phenserine preclinical toxicology studies, and costs aggregate of $49,000 for clinical tests on the final drug formulation of Phenserine, the carcinogenicity studies, bio-assays of blood plasma samples and finalizing drug stability studies.  In the first quarter of 2002 we spent an aggregate of $524,000 on our Phenserine drug development program, including $293,000 on chemical manufacturing and control, $131,000 on preclinical toxicology studies, and $80,000 on clinical trial expenses.  Concerning other non-Phenserine research and development expenses in the first quarter of 2003, we spent $50,000 on research and consulting services concerning the assay method being developed by Dr. David Small at Monash University (Australia), including overhead costs at Monash University payable by Axonyx.  In the first quarter of 2002 we incurred aggregate costs of $71,000 on terminated research programs unrelated to Phenserine.

 

For the three months ended March 31, 2003, we incurred general and administrative costs of $573,000 compared to $714,000 for the three months ended March 31, 2002.  The decrease was due primarily to reduced costs in several areas including professional fees of $101,000, option charges of $45,000, rent costs of $29,000 and travel and entertainment costs of $26,000, offset in part by an increase in Nasdaq listing fees of $41,000 and an increase in investor relations costs of $23,000.

 

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Interest income for the three months ended March 31, 2003 was $22,000 as compared to $36,000 for the three months ended March 31, 2002.  The decrease reflects the general decline in short term interest rates over previous year levels and lower average cash balances than the prior year.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of March 31, 2003, Axonyx had $5,578,000 in cash and cash equivalents and working capital of $5,142,000 as compared to $3,021,000 in cash and cash equivalents, $1,453,000 held in escrow, and $6,562,000 in working capital at December 31, 2002.  We had $3,415,000 of stock subscriptions receivable on December 31, 2002 due to the closing of a private placement of common stock and warrants on that date.  We do not have any available lines of credit.  Since inception we have financed our operations from private placements of equity securities, the exercise of common stock purchase warrants, license fees, interest income and loans from a shareholder.

 

Net cash used in operating activities during the quarter ended March 31, 2003 was $2,311,000 resulting from a net loss of $1,575,000, a reduction in accounts payable and accrued expenses of $756,000 and an increase in prepaid insurance of $135,000 offset in part by stock based compensation to consultants of $105,000, a reduction in security deposits of $46,000 and depreciation expense of $4,000.

 

Net cash from financing activities for the quarter ended March 31, 2003 was $4,868,000.  On December 31, 2002 we issued an aggregate of 6,486,242 shares of common stock at $0.688 per share and warrants to purchase 3,243,121 shares of common stock exercisable at $0.688 per share to 31 accredited investors.  We received gross proceeds of $4,868,000 million from this private placement.  Of the gross proceeds of $4,868,000, as of December 31, 2002, $3,415,000 was stock subscriptions receivable, $1,453,000 was cash held in escrow, and there was $391,000 of expenses accrued in connection with the private placement.  In the quarter ended March 31, 2003 the stock subscriptions receivable of $3,415,000 were collected and the $1,453,000 of cash held in escrow was released.

 

We believe that we have sufficient capital resources to finance our plan of operation at least through March 2004.  This is a forward-looking statement, and there may be changes that could consume available resources significantly before such time.  We are pursuing potential equity financing, sub-licensing and other collaborative arrangements that may generate additional capital for us.  However, we cannot assure you that we will generate sufficient additional capital or revenues, if any, to fund its operations beyond March 31, 2004, that any future equity financings will be successful, or that other potential financings through bank borrowings, debt or equity offerings, or otherwise, will be available on acceptable terms or at all.

 

We expect to incur substantial operating losses for at least the next several years.  We currently have limited sources of revenue other than interest income, and we cannot assure you that we will be able to develop other revenue sources or that our operations will become profitable, even if we are able to commercialize any products.  Other than interest income, the only revenue that we have realized to date has been fees and milestone payments totaling $2.75 million paid by ARS, as described above.  We cannot assure you that we will receive any

 

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additional revenues in fiscal year 2003, or at all.  If we do not generate significant increases in revenue, at some point in the future we may not be in a position to continue operations and investors could lose their entire investment.

 

Our drug development programs and the potential commercialization of our drug candidates require substantial working capital, including expenses for preclinical testing, chemical synthetic scale-up, manufacture of drug substance for clinical trials, toxicology studies, clinical trials of drug candidates, payments to our licensors and potential commercial launch of our drug candidates.  Our future working capital needs will depend on many factors, including:

 

•                                          the progress and magnitude of our drug development programs;

 

•                                          the scope and results of preclinical testing and clinical trials;

 

•                                          the cost, timing and outcome of regulatory reviews;

 

•                                          the costs under current and future license and option agreements for our drug candidates, including the costs of obtaining and maintaining patent protection for our drug candidates;

 

•                                          the costs of acquiring any additional drug candidates;

 

•                                          the rate of technological advances;

 

•                                          the commercial potential of our drug candidates;

 

•                                          the magnitude of our administrative and legal expenses including office rent; and

 

•                                          the costs of establishing third party arrangements for manufacturing.

 

We have incurred negative cash flow from operations since we incorporated and do not expect to generate positive cash flow from our operations for at least the next several years.  Therefore, we expect that we will need additional future financings to fund our operations.  In order to carry out our plan of operations beyond the next twelve months, including completion of the planned potentially pivotal Phase III clinical trial for Phenserine, we will need to generate additional working capital.  We may not be able to obtain adequate financing to fund our operations, including any new clinical trials, and any additional financing we obtain may be on terms that are not favorable to us.  In addition, any future financings could substantially dilute our stockholders.  If adequate funds are not available we will be required to delay, reduce or eliminate one or more of our drug development programs, including Phenserine, to enter into new collaborative arrangements on terms that are not favorable to us (i.e., the collaborative arrangements could result in the transfer to third parties of rights that we consider valuable), or to cease operations altogether.

 

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Critical Accounting Policies and Estimates.

 

This discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared under accounting principles generally accepted in the United States of America.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could materially differ from those estimates.  We have disclosed all significant accounting policies in note B to the financial statements included in our Form 10-K. Our critical accounting policies are:

 

Revenue recognition:  We defer recognition of revenue from fees received in advance unless they represent the culmination of a separate earnings process.  Such deferred fees are recognized as revenue over the term of the arrangement as they are earned, in accordance with the agreement.  License fees represent the culmination of a separate earnings process if they are sold separately without obligating us to perform research and development activities or other services.  Right to license fees are recognized over the term of the arrangement.  Nonrefundable, noncreditable license fees that represent the culmination of a separate earnings process are recognized upon execution of the license agreement.  Revenue from the achievement of milestone events stipulated in the agreements will be recognized when the milestone is achieved.  Royalties will be recognized as revenue when the amounts earned become fixed and determinable.

 

Research, development costs:  Research and development costs are expensed as incurred.

 

Stock-based compensation:  We account for stock-based employee compensation under the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations.  We have adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, which was released in December 2002 as an amendment of SFAS No. 123.  We follow the fair value based method of accounting for awards to nonemployees.

 

Item 3.                                Quantitative and Qualitative Disclosures About Market Risk.

 

We have foreign currency accounts that are exposed to currency exchange risk.  These foreign currency accounts have been utilized to fund our ongoing Phase IIb clinical trial in Europe and the operations of our wholly owned subsidiary, Axonyx Europe, based in the Netherlands.  We had net foreign exchange gains for the first quarter of 2003 of approximately $4,000.  If the foreign currency rates were to fluctuate by 10% from rates at March 31, 2002 and 2003, the effect on our financial statements would not be material.  Beginning in the third quarter

 

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of 2001, we limited our exposure to foreign currency risk by reducing the balances of our foreign currency accounts.  We made some block purchases of Euros in the first quarter of 2003 in preparation for payment of clinical trial expenses related to the Phase IIb clinical trial for Phenserine.  As long as we continue to fund our foreign operations, we will be exposed to some currency exchange risks.

 

We consider out investments in money market accounts, short term commercial paper and time deposits as cash and cash equivalents.  The carrying values of these investments approximate fair value because of the short maturities (three months or less) of these instruments and accounts.  Therefore, changes in the market’s interest rates do not affect the value of the investments as recorded by us.

 

We do not enter into or trade derivatives or other financial instruments or conduct any hedging activities.

 

Item 4.                                Controls and Procedures.

 

(a)                                  Evaluation of disclosure controls and procedures.  As of a date within the 90-day period prior to the filing of this report, an evaluation of the effectiveness of Axonyx’s “disclosure controls and procedures” (as such term is defined in Rules 13a-14(c) and 15d-14(c) of the United States Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out by our Chief Executive Officer and our Chief Operating Officer and Treasurer.  Based on that evaluation, the CEO and COO/Treasurer have concluded that as of such date our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in United States Securities and Exchange Commission rules and forms.

 

(b)                                  Changes in Internal Controls.  Subsequent to the completion of their evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

PART II – OTHER INFORMATION

 

Item 2.                                Changes in Securities and Use of Proceeds.

 

On March 15, 2003 we signed an Investor Relations Agreement with 4 P Management S.A., an investor relations firm, pursuant to which we undertook to issue up to 75,000 shares of restricted common stock, in two tranches of 37,500 shares, in partial compensation for investor relations services.  On April 28, 2003 we issued 37,500 shares of restricted common stock to 4 P Management Partners pursuant to the Investor Relations Agreement.  An additional 37,500 shares is to be issued to 4 P Management Partners on May 31, 2003 under the terms of the Investor Relations Agreement.

 

On March 3, 2003, we signed an agreement with Karsten Behrens concerning the engagement of Mr. Behrens to provide investor relations services to Axonyx.  Pursuant to that

 

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agreement we undertook to issue up to 40,000 shares of restricted common stock to Mr. Behrens, in two tranches of 20,000 shares, in partial compensation for the investor relations services.  On April 30, 2003 we issued 20,000 shares of restricted common stock to Mr. Behrens pursuant to the agreement.  An additional 20,000 shares is to be issued to Mr. Behrens pursuant to the agreement on May 31, 2003.

 

Item 6.                              Exhibits and Reports on Form 8-K

 

(a)                           Exhibits

 

99.1               Certification of Chief Executive Officer

 

99.2               Certification of Principal Financial Officer

 

(b)                           Reports on Form 8-K

 

We filed a Current Report on Form 8-K, Item 5, dated January 8, 2003, reporting our press release, “Axonyx Announces $4.9 Million Private Placement of Common Stock and Warrants”.

 

We filed a Current Report on Form 8-K, Item 5 dated March 4, 2003, reporting our press release, “Axonyx Announces Transfer to the Nasdaq SmallCap Market”.

 

We filed a Current Report on Form 8-K, Item 12, dated April 7, 2003, reporting our press release, “Axonyx Announces Fourth Quarter and Year End Financial Results”.

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, Axonyx has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated May 12, 2003.
		AXONYX INC.
		By:	/s/ Marvin S. Hausman, M.D
		Marvin S. Hausman, M.D.
		President and Chief Executive Officer
		By:	/s/ Gosse B. Bruinsma, M.D
		Gosse B. Bruinsma, M.D.
		Treasurer (Principal Financial and Accounting Officer)

 

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CERTIFICATIONS

 

I, Marvin S. Hausman, M.D., certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of Axonyx Inc.;

 

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could

 

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significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  May 12, 2003
/s/ Marvin S. Hausman, M.D.
Marvin S. Hausman, M.D.
President and Chief Executive Officer

 

CERTIFICATION

 

I, Gosse B. Bruinsma, M.D., certify that:

 

1.  I have reviewed this quarterly report on Form 10-Q of Axonyx Inc.;

 

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.  The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

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a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  May 12, 2003
/s/ Gosse B. Bruinsma, M.D.
Gosse B. Bruinsma, M.D.
Treasurer (Principal Financial and Accounting Officer)

 

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