SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

 

 

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 August 12, 2003, there were 25,773,063 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 June 30, 2003 (unaudited) and December 31, 2002 (audited)
	Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2003 and 2002
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended June 30, 2003
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 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 4.	Submission of Matters to a Vote of Security Holders
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

 

		June 30, 2003			December 31, 2002
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	8,264,000		$	3,021,000
Cash held in escrow					1,453,000
Stock subscriptions receivable					3,415,000
Other current assets		101,000			8,000
Total current assets		8,365,000			7,897,000
Equipment, net		29,000			37,000
Security deposit		4,000			50,000
		$	8,398,000		$	7,984,000
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses		$	1,034,000		$	1,335,000
Total liabilities		1,034,000			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; 25,773,063 and 23,733,613 shares issued and outstanding.		26,000			24,000
Additional paid-in capital		35,782,000			32,255,000
Unearned compensation - stock/options		—			(8,000		)
Accumulated deficit		(28,444,000		)	(25,622,000		)
Total stockholders’ equity		7,364,000			6,649,000
Total liabilities and stockholders’ equity		$	8,398,000		$	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 June 30,						Six months ended June 30,
		2003			2002			2003			2002
Revenue		$	1,000,000		$	—		$	1,000,000		$	—
Costs and expenses:
Research and development		1,249,000			1,163,000			2,276,000			2,124,000
General and administrative		1,017,000			749,000			1,590,000			1,463,000
		2,266,000			1,912,000			3,866,000			3,587,000
Loss from operations		(1,266,000		)	(1,912,000		)	(2,866,000		)	(3,587,000		)
Foreign exchange		4,000			2,000			7,000			1,000
Interest income		15,000			31,000			37,000			67,000
Net loss		$	(1,247,000	)	$	(1,879,000	)	$	(2,822,000	)	$	(3,519,000	)
Net loss per common share		$	(0.05	)	$	(0.11	)	$	(0.12	)	$	(0.20	)
Weighted average shares-basic and diluted		24,138,566			17,247,371			23,943,202			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		$	(8,000	)	$	(25,622,000	)	$	6,649,000
Issuance of common stock and warrants - net of expenses		1,924,450		2,000			3,241,000									3,243,000
Issuance of common stock options and warrants for consulting services							81,000									81,000
Issuance of common stock for consulting services		115,000					205,000									205,000
Amortization										8,000						8,000
Net loss		—		—			—			—			(2,822,000		)	(2,822,000		)
Balance - June 30, 2003		25,773,063		$	26,000		$	35,782,000		$	—		$	(28,444,000	)	$	7,364,000

 

See notes to condensed consolidated financial statements.

 

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AXONYX INC.

 

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

		Six months ended June 30,
		2003			2002
Cash flows from operating activities:
Net Loss		$	(2,822,000	)	$	(3,519,000	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		8,000			7,000
Compensation related to common stock issued for services		213,000			188,000
Compensation related to options and warrants issued for services		81,000			—
Changes in:
Other current assets		(93,000		)	(130,000		)
Security deposits		46,000			1,000
Accounts payable and accrued expenses		(301,000		)	(220,000		)
Net cash used in operating activities		(2,868,000		)	(3,673,000		)
Cash flows from financing activities:
Collection of stock subscriptions receivable and cash held in escrow		4,868,000
Net proceeds from issuance of common stock and warrants and exercise of warrants		3,243,000			—
Net cash provided from financing activities		8,111,000
Net decrease in cash and cash equivalents		5,243,000			(3,673,000		)
Cash and cash equivalents at beginning of period		3,021,000			9,115,000
Cash and cash equivalents at end of period		$	8,264,000		$	5,442,000

 

See notes to condensed consolidated financial statements.

 

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AXONYX INC.

 

Notes to Condensed Consolidated Financial Statements

June 30, 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 June 30, 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:

 

		Three months Ended						Six Months ended
		June 30, 2003			June 30, 2002			June, 2003				June, 2002
Reported net loss		$	(1,247,000	)	$	(1,879,000	)	$		(2,822,000	)	$		(3,519,000	)
Stock-based employee compensation determined under the fair value based method		(866,000		)	(299,000		)	(4,193,000			)	(1,895,000			)
Pro forma net loss		$	(2,113,000	)	$	(2,178,000	)	$		(7,015,000	)	$		(5,414,000	)
Loss per common share (basic and diluted):
As reported		$	.05		$	.11		$	.12			$	.20
Pro forma		$	.09		$	.13		$	.29			$	.31

 

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(3)  Financing Activities

 

In June 2003, Axonyx received aggregate net cash from financing activities of $3,243,000, of which gross proceeds of $2,298,000 was received pursuant to the issuance of 919,130 shares of common stock to holders of AXC warrants who exercised their warrants and received additional warrants, gross proceeds of $575,000 was received through the sale of 230,000 shares of common stock in a private placement, and gross proceeds of $345,000 was received pursuant to the issuance of approximately 775,000 shares of common stock to holders of AXD warrants who exercised their warrants.

 

(4)  Other

 

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 THOSE OR 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

 

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Scrapies disease in sheep.  We licensed these patent rights from New York University and, via a 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.  In June 2003, we initiated a Phase IIB clinical trial that is designed to 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.  In addition, also in June 2003, we initiated 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;

 

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

 

(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., and 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.

 

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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 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 and six months ended June 30, 2003, we had revenue of $1,000,000 compared to no revenue for the three and six months ended June 30, 2002.  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.

 

For the three months ended June 30, 2003, we incurred a net loss of $1,247,000 compared to a net loss of $1,879,000 for the three months ended June 30, 2002.  The decreased losses were due to the revenue in the form of a $1 million milestone payment received from Serono International S.A. in April 2003, offset by an increase in general and administrative costs of $268,000, an increase in research and development costs of $86,000 and a decline of interest income of $16,000.  For the six months ended June 30, 2003 we incurred a net loss of $2,822,000 as compared to a net loss of $3,519,000 for the six months ended June 30, 2002.  We expect to incur additional losses for the foreseeable future.

 

For the three months ended June 30, 2003, we incurred research and development costs of $1,249,000 compared to $1,163,000 for the three months ended June 30, 2002.  For the six months ended June 30, 2003, we incurred research and development costs of $2,276,000 compared to $2,124,000 for the six months ended June 30, 2002.  The increase for the six month period is attributed to an increase in Phenserine expenditures of $415,000 over the prior year.  The Phenserine increase reflects an increase in clinical trial expenditures of $903,000 offset in part by a decline in chemical manufacturing costs of $477,000.  The Phenserine program cost increases are offset in part by a reduction in salaries of $203,000 resulting from staff reductions and lower travel costs of $81,000.

 

Our research and development costs in the three months ended June 30, 2003 and 2002 primarily included development costs for Phenserine.  In the second quarter of 2003 we incurred $699,000 for our Phenserine Phase IIB/Phase III clinical program, $220,000 incurred for Phenserine preclinical toxicology studies, and aggregate costs of $66,000 for chemical formulation.  In the second quarter of 2002 we spent an aggregate of $760,000 on our Phenserine drug development program, including $301,000 on chemical manufacturing and control, $402,000 on preclinical toxicology studies, and $57,000 on clinical trial expenses.

 

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For the three months ended June 30, 2003, we incurred general and administrative costs of $1,017,000 compared to $749,000 for the three months ended June 30, 2002.  The increase for the three month period was due primarily to an increase in common stock and options compensation to consultants of $287,000, investor relations costs of $24,000 and other administrative costs of $18,000 offset in part by a $35,000 reduction in rent costs and $26,000 reduction in travel costs.  For the six months ended June 30, 2003, we incurred general and administrative costs of $1,590,000 compared to $1,463,000 for the six months ended June 30, 2002.  The increase for the six month period was due primarily to an increase in common stock and options compensation to consultants of $287,000, higher stock market listing fees of $41,000 and insurance costs of $15,000 offset in part by decreases in rent costs of $47,000, lower professional fees of $96,000, travel of $52,000 and other expenses of $17,000.

 

Interest income for the three months and six months ended June 30, 2003 was $15,000 and $37,000, respectively, as compared to $31,000 and $67,000, respectively, for the three months and six months ended June 30, 2002.  These decreases for 2003 reflect the general decline in short term interest rates over previous year levels and lower average cash balances than the prior periods.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2003, Axonyx had $8,264,000 in cash and cash equivalents and working capital of $7,331,000 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 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 for the six months ended June 30, 2003 was $2,868,000 resulting from a net loss of $2,822,000, a reduction in accounts payable and accrued expenses of $301,000 and an increase in prepaid insurance of $93,000 offset in part by stock based compensation to consultants of $294,000, a reduction in security deposits of $46,000 and depreciation expense of $8,000.

 

Net cash from financing activities for the six months ended June 30, 2003 was $8,111,000, of which $4,868,000 constituted the gross proceeds from a private placement of shares of common stock and warrants that closed on December 31, 2002.  Net cash from financing activities in June 2003 was $3,243,000.  In June 2003, we received aggregate gross proceeds of approximately $2.3 million and issued 919,130 shares of common stock upon the exercise of warrants by fifteen holders of AXC warrants pursuant to a special offer.  In June 2003 we raised aggregate gross proceeds of $575,000 through the sale of 230,000 shares of common stock at $2.50 per share in a private placement with four European accredited investors.  Also in June 2003 we received gross proceeds of approximately $345,000 and issued approximately 775,000 shares to holders of AXD warrants who exercised their warrants.

 

We believe that we have sufficient capital resources to finance our plan of operation at least through June 2004.  This is a forward-looking statement, and there may be changes that

 

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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 our operations beyond June 30, 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 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

 

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the 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.

 

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.

 

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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 and Phase III clinical trials in Europe and the operations of our wholly owned subsidiary, Axonyx Europe, based in the Netherlands.  We had net foreign exchange gains for the second quarter of 2003 of approximately $4,000.  If the foreign currency rates were to fluctuate by 10% from rates at June 30, 2002 and 2003, the effect on our financial statements would not be material.  Beginning in the third quarter 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 and Phase III clinical trials 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.

 

As of June 30, 2003, an evaluation was performed under the supervision and with the participation of our management, including the CEO and COO, of the effectiveness of our disclosure controls and procedures.  Based on that evaluation, our management, including the CEO and COO, concluded that our disclosure controls and procedures were effective as of June 30, 2003.  There have been no significant changes in our internal control over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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 was issued to 4 P Management Partners on May 31, 2003 under the terms of the Investor Relations Agreement.  The issuance of the securities was exempt from the registration requirements of the Securities Act pursuant to the exemption set forth in Section 4(2) of the Securities Act.

 

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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 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 was issued to Mr. Behrens pursuant to the agreement on May 31, 2003.  The issuance of the securities was exempt from the registration requirements of the Securities Act pursuant to the exemption set forth in Section 4(2) of the Securities Act.

 

In June 2003, we offered holders of AXC warrants convertible at $3.91 per share and due to expire in December 2003, a one-time opportunity to exercise these warrants at $2.50 per share under the proviso that the investors relinquish their cashless exercise provision and complete the transaction in a timely manner.  In June 2003, we received aggregate gross proceeds of approximately $2.3 million and issued 919,130 shares of common stock upon the exercise of warrants by fifteen holders of AXC warrants who exercised pursuant to our offer.  The potential resale of the shares of common stock issued to the holders of AXC warrants is covered by an effective resale registration statement.  For each AXC warrant exercised, we issued one-half of a new two-year AXE warrant exercisable at $5.00 per share which we can call for exercise if our common stock trades above $8.00 per share for a pre-defined period.  We issued new AXE warrants to purchase 459,565 shares of common stock to those holders who exercised warrants.  The issuance of the AXE warrants was exempt from the registration requirements of the Securities Act pursuant to the exemption set forth in Section 4(2) of the Securities Act.

 

Also in June 2003 we raised aggregate gross proceeds of $575,000 through the sale of 230,000 shares of common stock at $2.50 per share in a private placement with four European accredited investors.  The issuance of the securities was exempt from the registration requirements of the Securities Act pursuant to the exemption set forth in Section 4(2) of the Securities Act.

 

In June 2003, we issued 15,000 AXE warrants to 4 P Management Partners, S.A. pursuant to a Finder’s Agreement dated June 2, 2003 as a portion of a finder’s fee due to 4 P Management Partners in relation to the European private placement above.  The issuance of the securities was exempt from the registration requirements of the Securities Act pursuant to the exemption set forth in Section 4(2) of the Securities Act.

 

Item 4.                                   Submission of Matters to a Vote of Security Holders.

 

We held our 2003 Annual Meeting of Stockholders on July 1, 2003.  At the meeting, six of the eight incumbent directors of Axonyx were re-elected.  Two of the incumbent directors were not nominated for re-election.  Gosse B. Bruinsma, M.D. received 21,291,016 votes for, 13,825 votes against, and 13,700 abstentions.  Louis G. Cornacchia received 21,290,341 votes for, 14,500 votes against, and 13,700 abstentions.  Michael R. Espey received 21,227,116 votes for, 77,725 votes against, and 13,700 abstentions.  Steven H. Ferris received 21,267,716 votes for, 37,125 votes against, and 13,700 abstentions.  Marvin S. Hausman, M.D. received 21,259,611 votes for, 45,230 votes against, and 13,700 abstentions.  Gerard J. Vlak received 21,290,516 votes for, 14,325 votes against, and 13,700 abstentions.  The appointment of Eisner

 

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LLP, independent auditors, as the Axonyx’s auditors was ratified.  The ratification of the auditors was approved by a vote of 21,284,666 votes for, 16,600 votes against, and 7,275 abstentions.

 

Item 6.                                   Exhibits and Reports on Form 8-K.

 

(a)	Exhibits
	31.1		Quarterly Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
	31.2		Quarterly Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
	32.1		Quarterly Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002
	32.2		Quarterly Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002
(b)	Reports on Form 8-K
	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 August 11, 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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