SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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For the quarterly period ended September 30, 2003 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE |
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For the transition period from to |
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Commission file number 000-25571 |
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AXONYX INC.
(Exact name of registrant as specified in its charter)
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NEVADA |
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86-0883978 |
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(State or other
jurisdiction of incorporation |
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(I.R.S. Employer |
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500 SEVENTH AVENUE, 10TH FLOOR, NEW YORK, NEW YORK 10018 |
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(Address of principal executive offices) (Zip Code) |
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(212) 645-7704 |
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(Registrant’s telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report) |
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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 October 31, 2003, there were 33,300,600 shares of the registrant’s common stock outstanding.
AXONYX INC.
INDEX
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
Item 1. Consolidated Financial Statements
AXONYX INC.
Condensed Consolidated Balance Sheets
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September 30, |
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December 31, |
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(unaudited) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
30,014,000 |
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$ |
3,021,000 |
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Cash held in escrow |
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1,453,000 |
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Stock subscriptions receivable |
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3,415,000 |
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Other current assets |
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46,000 |
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8,000 |
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Total current assets |
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30,060,000 |
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7,897,000 |
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Equipment, net |
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25,000 |
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37,000 |
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Security deposit |
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6,000 |
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50,000 |
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$ |
30,091,000 |
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$ |
7,984,000 |
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LIABILITIES |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
882,000 |
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$ |
1,335,000 |
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Total liabilities |
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882,000 |
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1,335,000 |
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STOCKHOLDERS’ EQUITY |
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Preferred stock - $.001 par value, 15,000,000 shares authorized; none issued |
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Common Stock - $.001 par value, 75,000,000 shares authorized; 33,249,699 and 23,733,613 shares issued and outstanding. |
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33,000 |
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24,000 |
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Additional paid-in capital |
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59,422,000 |
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32,247,000 |
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Accumulated deficit |
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(30,246,000 |
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(25,622,000 |
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Total stockholders’ equity |
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29,209,000 |
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6,649,000 |
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Total liabilities and stockholders’ equity |
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$ |
30,091,000 |
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$ |
7,984,000 |
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See notes to condensed consolidated financial statements.
3
AXONYX INC.
Condensed Consolidated Statements of Operations
(unaudited)
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Three months ended |
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Nine months ended |
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2003 |
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2002 |
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2003 |
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2002 |
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Revenue |
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$ |
— |
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$ |
— |
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$ |
1,000,000 |
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$ |
— |
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Costs and expenses: |
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Research and development |
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986,000 |
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980,000 |
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3,262,000 |
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3,104,000 |
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General and administrative |
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844,000 |
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526,000 |
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2,434,000 |
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1,989,000 |
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1,830,000 |
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1,506,000 |
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5,696,000 |
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5,093,000 |
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Loss from operations |
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(1,830,000 |
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(1,506,000 |
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(4,696,000 |
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(5,093,000 |
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Foreign exchange |
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5,000 |
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(1,000 |
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13,000 |
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1,000 |
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Interest income |
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22,000 |
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18,000 |
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59,000 |
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85,000 |
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Net loss |
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$ |
(1,803,000 |
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$ |
(1,489,000 |
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$ |
(4,624,000 |
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(5,007,000 |
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Net loss per common share |
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$ |
(0.07 |
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$ |
(0.09 |
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$ |
(0.18 |
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$ |
(0.29 |
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Weighted average shares-basic and diluted |
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27,398,419 |
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17,247,371 |
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25,107,598 |
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17,247,371 |
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See notes to condensed consolidated financial statements.
4
AXONYX INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)
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Common Stock |
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Number |
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Amount |
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Additional |
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Accumulated |
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Total |
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Balance - December 31, 2002 |
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23,733,613 |
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$ |
24,000 |
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$ |
32,247,000 |
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$ |
(25,622,000 |
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$ |
6,649,000 |
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Issuance of common stock and warrants - net of expenses |
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9,401,086 |
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9,000 |
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26,652,000 |
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26,661,000 |
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Issuance of common stock options and warrants for consulting services |
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310,000 |
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310,000 |
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Issuance of common stock for consulting services |
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115,000 |
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205,000 |
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205,000 |
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Amortization of unearned stock option compensation |
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8,000 |
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8,000 |
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Net loss |
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— |
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— |
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(4,624,000 |
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(4,624,000 |
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Balance - September 30, 2003 |
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33,249,699 |
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$ |
33,000 |
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$ |
59,422,000 |
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$ |
(30,246,000 |
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$ |
29,209,000 |
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See notes to condensed consolidated financial statements.
5
AXONYX INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
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Nine months ended |
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2003 |
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2002 |
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Cash flows from operating activities: |
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Net Loss |
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$ |
(4,624,000 |
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$ |
(5,007,000 |
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Adjustments to reconcile net loss to cash used in operating activities: |
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Depreciation and amortization |
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12,000 |
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11,000 |
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Compensation related to common stock issued for services |
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213,000 |
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— |
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Compensation related to options and warrants issued for services |
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310,000 |
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223,000 |
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Changes in: |
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Other current assets |
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(38,000 |
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(66,000 |
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Security deposits |
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44,000 |
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— |
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Accounts payable and accrued expenses |
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(453,000 |
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(580,000 |
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Net cash used in operating activities |
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(4,536,000 |
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(5,419,000 |
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Cash flows from financing activities: |
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Collection of stock subscriptions receivable and cash held in escrow |
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4,868,000 |
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Net proceeds from issuance of common stock and warrants and exercise of warrants |
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26,661,000 |
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— |
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Net cash provided from financing activities |
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31,529,000 |
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Net increase (decrease) in cash and cash equivalents |
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26,993,000 |
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(5,419,000 |
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Cash and cash equivalents at beginning of period |
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3,021,000 |
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9,115,000 |
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Cash and cash equivalents at end of period |
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$ |
30,014,000 |
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$ |
3,696,000 |
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See notes to condensed consolidated financial statements.
6
AXONYX INC.
Notes to Condensed
Consolidated Financial Statements
September 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 September 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:
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Three Months |
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Nine Months |
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2003 |
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2002 |
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2003 |
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2002 |
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Reported net loss |
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$ |
(1,803,000 |
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$ |
(1,489,000 |
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$ |
(4,624,000 |
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$ |
(5,007,000 |
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Stock based compensation determined under the fair value based method |
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(592,000 |
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(578,000 |
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(2,313,000 |
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(1,798,000 |
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Pro forma net loss |
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$ |
(2,395,000 |
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$ |
(2,067,000 |
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$ |
(6,937,000 |
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$ |
(6,805,000 |
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Loss per share (basic and diluted): |
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As reported |
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$ |
(0.07 |
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$ |
(0.09 |
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$ |
(0.18 |
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$ |
(0.29 |
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Pro forma |
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$ |
(0.09 |
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$ |
(0.12 |
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$ |
(0.28 |
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$ |
(0.39 |
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(3) Restated Pro-Forma Stock Based Employee Compensation.
The pro-forma stock-based employee compensation determined under the fair value based method for the periods included in the Company’s March 31, 2003 and June 30, 2003 Quarterly Reports on Form 10-Q requires revision to adjust the pro forma charge because of an error in applying the fair values to those interim periods. The changes to the stock-based employee compensation determined under the fair value based method are shown below.
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2003 |
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2002 |
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As Previously Reported |
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As Restated |
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As Previously Reported |
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As Restated |
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Three months ended March 31 |
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Stock-based employee compensation determined under the fair value based method |
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$ |
(3,327,000 |
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$ |
(418,000 |
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$ |
(1,596,000 |
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$ |
(586,000 |
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Pro forma net loss |
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(4,902,000 |
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(1,993,000 |
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(3,236,000 |
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(2,226,000 |
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Pro forma loss per common share (basic and diluted) |
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(0.21 |
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(0.08 |
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(0.19 |
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(0.13 |
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Decrease in pro forma loss per common share |
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0.13 |
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0.06 |
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Three months ended June 30 |
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Stock-based employee compensation determined under the fair value based method |
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(866,000 |
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(1,303,000 |
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(299,000 |
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$ |
(634,000 |
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Pro forma net loss |
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(2,113,000 |
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(2,550,000 |
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(2,178,000 |
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(2,513,000 |
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Pro forma loss per common share (basic and diluted) |
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(0.09 |
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(0.11 |
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(0.13 |
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(0.15 |
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Increase in pro forma loss per common share |
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0.02 |
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0.02 |
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Six months ended June 30 |
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Stock-based employee compensation determined under the fair value based method |
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(4,193,000 |
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(1,721,000 |
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(1,895,000 |
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$ |
(1,220,000 |
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Pro forma net loss |
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(7,015,000 |
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(4,543,000 |
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(5,414,000 |
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(4,739,000 |
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Pro forma loss per common share (basic and diluted) |
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(0.29 |
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(019 |
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(0.31 |
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(0.27 |
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Decrease in pro forma loss per common share |
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0.10 |
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0.04 |
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(4) Financing Activities
On September 11, 2003, Axonyx received aggregate gross proceeds from financing activities of $25,000,000 through the private placement of 7,476,636 shares of common stock and warrants to purchase 5,607,477 shares of common stock, exercisable at $3.50 per share.
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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 U.S. FOOD AND DRUG ADMINISTRATION (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,
9
and 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 contract 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 months ended September 30, 2003 and 2002 we had no revenue. For the nine months ended September 30, 2003, we had revenue of $1,000,000 compared to no revenue for the nine months ended September 30, 2002. In April 2003, Axonyx received a milestone payment of $1 million from ARS, a subsidiary of 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 September 30, 2003, we incurred a net loss of $1,803,000compared to a net loss of $1,489,000 for the three months ended September 30, 2002. The increase is primarily attributed to an increase in non cash stock option compensation to consultants and higher clinical trial insurance costs offset in part with a decline in professional fees and rent expense. For the nine months ended September 30, 2003 we incurred a net loss of $4,624,000 as compared to a net loss of $5,007,000 for the nine months ended September 30, 2002. We expect to incur additional losses for the foreseeable future.
For the three months ended September 30, 2003, we incurred research and development costs of $986,000 compared to $980,000 for the three months ended September 30, 2002. For the nine months ended September 30, 2003, we incurred research and development costs of $3,262,000 compared to $3,104,000 for the nine months ended September 30, 2002. The increase for the nine month period is attributed to an increase in Phenserine clinical trial expenses of $386,000 and scientific consultant expenses of $204,000 over the prior year. The Phenserine increase primarily reflects an increase in clinical trial expenditures of $1,302,000 offset in part by a decline in chemical manufacturing costs of $561,000 and lower preclinical costs of $362,000. The cost increases are offset in part by a reduction in salaries of $203,000 resulting from staff reductions, lower travel costs of $126,000, lower contract program costs of $60,000 and other reduced expenditures.
Our research and development costs in the three months ended September 30, 2003 and 2002 primarily included development costs for Phenserine. In the third quarter of 2003 we incurred $418,000 for our Phenserine Phase IIB/Phase III clinical program, $204,000 incurred for Phenserine preclinical toxicology studies, and costs of $55,000 for chemical formulation. In the third quarter of 2002 we spent an aggregate of $710,000 on our Phenserine drug development
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program, including $139,000 on chemical manufacturing and control, $543,000 on preclinical toxicology studies, and $24,000 on clinical trial expenses.
For the three months ended September 30, 2003, we incurred general and administrative costs of $844,000 compared to $526,000 for the three months ended September 30, 2002. The increase for the three-month period was due primarily to non cash stock option charges for consultants of $417,000 and higher investor relation costs of $36,000. These increases are offset in part by lower professional fees of $123,000, reduced salary costs of $53,000, lower rent costs of $33,000 and other expense variances. For the nine months ended September 30, 2003, we incurred general and administrative costs of $2,434,000 compared to $1,989,000 for the nine months ended September 30, 2002. The increase for the nine month period was due primarily to an increase in non cash common stock and options compensation to consultants of $705,000, higher stock market listing fees of $64,000 and investor relation costs of $27,000. These higher costs were offset in part by decreases in professional fees of $219,000, rent costs of $80,000 and travel of $55,000.
Interest income for the three months and nine months ended September 30, 2003 was $22,000 and $59,000, respectively, as compared to $18,000 and $85,000, respectively, for the three months and nine months ended September 30, 2002. This quarterly increase reflects higher invested cash balances on hand. The decrease in the year to date interest income numbers 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 September 30, 2003, Axonyx had $30,014,000 in cash and cash equivalents and working capital of $29,178,000 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 nine months ended September 30, 2003 was $4,536,000 resulting from a net loss of $4,624,000, a reduction in accounts payable and accrued expenses of $453,000 and an increase in other current assets of $38,000 offset in part by stock and option based compensation to consultants of $523,000, a reduction in security deposits of $44,000 and depreciation expense of $12,000.
Net cash from financing activities for the nine months ended September 30, 2003 was $31,529,000. This consists of three events that occurred during the period. In January we received $4,868,000 from a private placement of shares of common stock and warrants that closed on December 31, 2002 with the cash receipts portion of this transaction settling in 2003. Expenses of $458,000 relating to this placement were paid in the prior year. In June 2003 we received net proceeds of $3,226,000 from the exercise of warrants and the sale of common stock. In September 2003, we received net proceeds of $23,435,000 from a private placement of common stock and warrants closed on September 11, 2003.
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We believe that we have sufficient capital resources to finance our plan of operation at least through December 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 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 December 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 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.
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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 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 third quarter of 2003 of approximately $5,000. If the foreign currency rates were to fluctuate by 10% from rates at September 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 our 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 September 30, 2003, an evaluation was performed under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2003. There have been no 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.
Item 2. Changes in Securities and Use of Proceeds.
On September 11, 2003 we raised aggregate gross proceeds of $25,000,000 in a private placement involving the sale of 7,476,636 shares of common stock at $3.25 per share and 5,607,477 five year warrants to purchase shares of common stock at an exercise price of $3.50 per share to 45 accredited investors. We plan to use the net proceeds of this financing transaction to support our strategic business objectives that include the continued clinical development of Phenserine, our lead product to treat Alzheimer’s disease. 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) and Regulation D, Rule 506 of the Securities Act.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
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31.1 |
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Quarterly Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
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31.2 |
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Quarterly Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
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32.1 |
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Quarterly Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
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32.2 |
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Quarterly Certification of the Chief Financial 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 5, dated September 16, 2003, reporting our press release, “Axonyx Announces $25 Million Private Placement of Common Stock and Warrants.”
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.
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Dated October 31, 2003. |
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AXONYX INC. |
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By: |
/s/ Marvin S. Hausman, M.D |
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Marvin S. Hausman, M.D. |
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Chairman and Chief Executive Officer |
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By: |
/s/ S. Colin Neill |
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S. Colin Neill |
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Chief Financial Officer
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