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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2004

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number: 000-19122

 


 

APHTON CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware   95-3640931

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

80 SW 8th Street, Miami, Florida   33130
(address of principal executive offices)   (Zip Code)

 

(305) 374-7338

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class


 

Number of Shares outstanding


 

As of


Common Stock, $0.001 par value   37,630,558   April 30, 2004

 



Table of Contents

APHTON CORPORATION

 

Index
     Page

Part I - Financial Information

   1

Item 1. Financial Statements:

   1

Balance Sheets – March 31, 2004 (unaudited) and December 31, 2003

   2

Statements of Operations (unaudited) - Three months ended March 31, 2004 and 2003

   3

Statements of Cash Flows (unaudited) - Three months ended March 31, 2004 and 2003

   4

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

   7

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   14

Item 4. Controls and Procedures

   14

Part II - Other Information

   15

Item 6. Exhibits and Reports on Form 8-K

   15

Signatures

   16

 

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Part I - Financial Information

 

Item 1. Financial Statements

 

The interim financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements include all adjustments (consisting of normal recurring entries) necessary to present fairly our financial position as of March 31, 2004 and December 31, 2003 and the results of our operations for the three months ended March 31, 2004 and 2003; and our cash flows for the three months ended March 31, 2004 and 2003. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in our latest annual report on Form 10-K.

 

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APHTON CORPORATION

Balance Sheets

 

    

March 31,

2004


    December 31,
2003


 
     (Unaudited)        
Assets                 

Current assets:

                

Cash and current investments:

                

Cash and short-term cash investments

   $ 61,275,828     $ 18,378,988  

Investment securities-trading

     888,250       836,587  
    


 


Total cash and current investments

     62,164,078       19,215,575  

Other assets (including current portion of unconditional supply commitment)

     431,639       517,627  
    


 


Total current assets

     62,595,717       19,733,202  

Equipment and improvements, at cost, net of accumulated depreciation and amortization

     154,379       158,534  

Deferred financing costs, net of accumulated amortization of $15,043 as of March 31, 2004 and $8,990 as of December 31, 2003

     549,957       556,010  

Unconditional supply commitment

     6,797,900       6,797,900  
    


 


Total assets

   $ 70,097,953     $ 27,245,646  
    


 


Liabilities and Stockholders’ Equity (Deficit)                 

Liabilities:

                

Current liabilities:

                

Trade accounts payable

   $ 1,618,526     $ 1,604,435  

Due to related party

     3,234,000       3,234,000  

Accrued liabilities

     1,253,555       1,114,464  

Accrued interest payable

     382,500       630,000  
    


 


Total current liabilities

     6,488,581       6,582,899  

Convertible debentures, net of discount of $12,008,733 as of March 31, 2004 and $12,261,508 as of December 31, 2003

     10,991,267       10,738,492  

Deferred revenue

     10,000,000       10,000,000  
    


 


Total liabilities

     27,479,848       27,321,391  
    


 


Commitments

                

Stockholders’ equity (deficit):

                

Preferred stock, $0.001 par value - Authorized: 4,000,000 shares; Issued and outstanding: none

     —         —    

Common stock, $0.001 par value - Authorized: 60,000,000 shares; Issued and outstanding: 37,564,464 shares at March 31, 2004 and 29,217,257 shares at December 31, 2003

     37,564       29,217  

Additional paid in capital

     215,408,945       166,501,394  

Purchase warrants

     298,900       298,900  

Accumulated deficit

     (173,127,304 )     (166,905,256 )
    


 


Total stockholders’ equity (deficit)

     42,618,105       (75,745 )
    


 


Total liabilities and stockholders’ equity (deficit)

   $ 70,097,953     $ 27,245,646  
    


 


 

The accompanying notes are an integral part of the financial statements.

 

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APHTON CORPORATION

Statements of Operations (Unaudited)

For the three months ended March 31, 2004 and 2003

 

    

Three months ended

March 31,


 
     2004

    2003

 

Revenue:

   $ —       $ —    
    


 


Costs and expenses:

                

General and administrative

Research and development

    
 
812,452
4,790,980
 
 
   
 
580,462
4,269,734
 
 
    


 


Total costs and expenses

     5,603,432       4,850,196  
    


 


Loss from operations

     (5,603,432 )     (4,850,196 )
    


 


Other income (expense):

                

Dividend and interest income

     24,848       13,710  

Interest expense including amortized discount

     (641,328 )     (82,500 )

Unrealized losses from investments

     (2,137 )     (3,961 )
    


 


Net loss

   $ (6,222,049 )   $ (4,922,947 )
    


 


Per share data:

                

Basic and fully diluted loss per common share

   $ (0.20 )   $ (0.20 )
    


 


Weighted average number of common shares outstanding

     31,890,259       24,534,972  
    


 


 

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APHTON CORPORATION

Statements of Cash Flows (Unaudited)

For the three months ended March 31, 2004 and 2003

 

    

Three Months Ended

March 31,


 
     2004

    2003

 

Cash flows from operating activities:

                

Cash paid to suppliers and employees

   $ (5,709,849 )   $ (4,022,169 )
    


 


Net cash used in operating activities

     (5,709,849 )     (4,022,169 )
    


 


Cash flows from investing activities:

                

Capital expenditures

     (9,209 )     —    
    


 


Net cash used in investing activities

     (9,209 )     —    
    


 


Cash flows from financing activities:

                

Proceeds from sale of common stock and warrants

     48,615,898       1,219,251  
    


 


Net cash received from financing activities

     48,615,898       1,219,251  
    


 


Net increase (decrease) in cash and short-term cash investments

     42,896,840       (2,802,918 )

Cash and short-term cash investments:

                

Beginning of period

     18,378,988       7,824,182  
    


 


End of period

   $ 61,275,828     $ 5,021,264  
    


 


Reconciliation of net loss to net cash used in operating activities                 

Net loss

   $ (6,222,049 )   $ (4,922,947 )
    


 


Adjustments to reconcile net loss to net cash used in operating activities:

                

Common stock issued for interest payment

     300,000          

Depreciation and amortization

     13,364       25,432  

Amortization of deferred financing costs

     6,053       —    

Amortization of discount on convertible debentures

     252,775       —    

Unrealized loss on investments

     2,137       3,961  

Non-cash employee compensation expense

     (2,137 )     (3,961 )

Changes in -

                

Investment securities - trading

     (53,801 )     (45,276 )

Other assets

     85,989       44,214  

Current liabilities

     (92,180 )     876,408  
    


 


Net cash used in operating activities:

   $ (5,709,849 )   $ (4,022,169 )
    


 


 

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Notes to the Financial Statements (unaudited)

 

1. Organization and Operations

 

Aphton is a biopharmaceutical company focused on the development and commercialization of pharmaceutical products for the treatment of cancer and gastrointestinal disease. Aphton’s research and development efforts are based on its proprietary active immunization and monoclonal antibody technologies. Aphton’s technologies are based on key discoveries made by it as well as its deep understanding of the central role of gastrin, a naturally occurring hormone, and gastrin receptors. It is well documented in scientific literature that gastrin and gastrin receptors are critical to the onset, development, growth and spread of adenocarcinomas of the gastrointestinal system, including those found in the esophagus, stomach, pancreas, liver and throughout the colon and rectum.

 

Aphton’s lead product candidate is an immunotherapeutic called G17DT. Aphton has completed one Phase III clinical trial and it is in a second Phase III clinical trial for the treatment of pancreatic cancer with G17DT. Aphton also recently completed testing of G17DT in one Phase II clinical trial for the treatment of gastric cancer and one Phase II clinical trial for the treatment of colorectal cancer. On October 30, 2003, Aphton announced positive results from its Phase III randomized, double-blinded, placebo-controlled clinical trial of G17DT as monotherapy in patients with pancreatic cancer. Treatment with G17DT resulted in a median survival of 151 days, compared with 83 days for patients treated with placebo. Aphton has generated additional positive data in multiple human clinical trials using G17DT. In its studies to date, virtually no systemic toxicity has been observed. By comparison, currently approved drugs for the treatment of gastric, pancreatic and colorectal cancers have significant side effects.

 

Aphton’s fiscal year end was changed in March, 2001 from January 31 to December 31, effective for the 11 month period ending December 31, 2001.

 

2. Summary of Significant Accounting Policies

 

Comprehensive Loss

 

The net loss for the three months ended March 31, 2004 and 2003 was the comprehensive loss for those periods.

 

Earnings (loss) per share

 

At March 31, 2004, shares of our common stock issuable upon the exercise of approximately 1.7 million warrants and 3.9 million options were excluded from the computation of net loss per share because their effect was anti-dilutive. At March 31, 2003, shares of our common stock issuable upon the exercise of approximately 0.2 million warrants and 3.5 million options were excluded from the computation of net loss per share because their effect was anti-dilutive.

 

Stock-Based Compensation

 

On December 31, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity’s

 

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accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. We intend to continue to account for stock-based compensation based on the provisions of APB Opinion No. 25.

 

The following table summarizes our results as if we had recorded stock-based employee compensation expense for the three months ended March 31, 2004 and 2003, based on the provisions of SFAS 123, as amended by SFAS 148:

 

     March 31,
2004


    March 31,
2003


 

Net loss:

                

As reported

   $ (6,222,049 )   $ (4,922,947 )

Compensation expense, net of tax

     (831,872 )     (255,168 )
    


 


Pro forma

   $ (7,053,921 )   $ (5,178,115 )
    


 


Basic loss per share:

                

As reported

   $ (0.20 )   $ (0.20 )

Compensation expense, net of tax

     (0.02 )     (0.01 )
    


 


Pro forma

   $ (0.22 )   $ (0.21 )
    


 


Diluted loss per share:

                

As reported

   $ (0.20 )   $ (0.20 )

Compensation expense, net of tax

     (0.02 )     (0.01 )
    


 


Pro forma

   $ (0.22 )   $ (0.21 )
    


 


 

Reclassifications

 

Interest expense amounts have been reclassified in the March 31, 2003 presentation to conform to the 2004 presentation.

 

3. March 2004 sale of common stock

 

In March 2004, the Company sold 8,050,000 shares of registered common stock at $6.50 per share or approximately $52.3 million and received net proceeds of approximately $48.6 million, after deducting all costs related to the sale of the common stock.

 

4. Convertible Debentures

 

As of March 31, 2004 and December 31, 2003 we have outstanding $23.0 million in convertible debentures. There was an initial discount calculated against the value of the notes of $12.9 million, comprised of the beneficial conversion feature of $8.3 million and other discounts of $4.6 million on the notes. The unamortized discount as of March 31, 2004 is $12.0 million which is offset against the $23.0 million and is shown as $11.0 million of convertible debentures in the accompanying financial statements. Of this amount, $3.0 million is our Series A Convertible Debenture. Our Series A Convertible Debenture is a convertible, redeemable, five-year note that matures on December 19, 2007. The Series A Convertible Debenture bears interest at a rate of 11.0% per annum, payable annually. The debenture is convertible at the holder’s option at a conversion price equal to the average closing price of our common stock, as defined in the debenture, at the time of conversion. The Series A Convertible Debenture contains provisions that place a cap on the number of shares of our common stock issuable upon its conversion, such that the holder thereof shall not have the right to convert any portion of the Series A Convertible Debenture to the extent that after giving effect to such conversion the holders would beneficially own more than 19.99% of the number of shares of our common stock outstanding immediately prior to such conversion.

 

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The remaining $20.0 million in convertible notes were issued in two tranches to accredited investors during the three months ended June 30, 2003. On April 4, 2003, we issued $15.0 million of convertible, redeemable, 5-year, interest-bearing senior convertible notes (which we refer to as our 2003 senior convertible notes) and 5-year warrants to purchase an aggregate total of 1,080,000 shares of our common stock to various accredited investors. On June 12, 2003 we issued an additional $5 million of our 2003 senior convertible notes and a 5-year warrant to purchase an aggregate total of 360,000 shares of our common stock to an accredited investor. The senior convertible notes mature on March 31, 2008. The senior convertible notes bear interest at a rate of 6.0% per annum, payable quarterly in cash or shares of our common stock, at our option.

 

The senior convertible notes are convertible at a fixed price of $2.50 per share, unless otherwise adjusted prior to conversion pursuant to the price adjustment provisions set forth therein. The conversion price of the senior convertible notes will be lowered in the event of a sale by us of our common stock or securities convertible into our common stock at a per share offering price less than the conversion price of the senior convertible notes in effect immediately prior to such sale. The warrants are exercisable into shares of our common stock at $2.70 per share, unless otherwise adjusted prior to exercise pursuant to the price adjustment provisions that are substantially similar to those set forth in the senior convertible notes. The senior convertible notes and the warrants contain provisions that place a cap on the numbers of shares of our common stock issuable upon their conversion or exercise, such that the holders thereof shall not have the right to convert any portion of the notes to the extent that after giving effect to such conversion the holders would beneficially own more than 19.99% or 4.99%, as the case may be for the respective holder, of the number of shares of our common stock outstanding immediately prior to such conversion or exercise.

 

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

 

Overview

 

General

 

We are a biopharmaceutical company focused on the development and commercialization of pharmaceutical products for the treatment of cancer and gastrointestinal disease. Our research and development efforts are based on our proprietary active immunization and monoclonal antibody technologies. Our lead product candidate is an immunotherapeutic called G17DT. We currently have, in various stages, clinical trials testing G17DT in the treatment of various gastrointestinal cancers and non-cancer diseases. We believe that our human data and the safety profile of G17DT support the broad applicability and corresponding commercial potential for this therapy in gastrointestinal cancer.

 

Financial Operations

 

We do not have any products approved for sale in the United States or abroad. Therefore, we do not generate any revenue from the sale of our products. We have experienced significant operating losses since our inception in 1981 and expect to continue incurring significant operating losses for at least the next several years. We expect losses to continue over the next several years as we continue our clinical trials, apply for regulatory approvals and continue our research and development efforts. We also expect to experience negative operating cash flows for the foreseeable future. Our losses have adversely impacted, and will continue to adversely impact, our working capital, total assets and stockholders’ equity.

 

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Our net loss for the quarter ended March 31, 2004 was $6.2 million and as of March 31, 2004, we had an accumulated deficit of approximately $173.1 million. Our operating losses are primarily due to the costs of development of our potential products. These costs can vary significantly from year to year depending on the number of potential products in development, the stage of development of each potential product, the number of patients enrolled in and complexity of clinical trials and other factors. Our ability to achieve profitability depends upon our ability, alone or through relationships with third parties, to develop successfully our technology and products, to obtain required regulatory approvals and to manufacture, market and sell such products. It is possible that we may never be profitable.

 

Because we have not yet generated any revenue from the sale of our products, we have primarily relied on the capital markets as our source of funding. In addition, we may seek funding through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, potential products or products that we would otherwise seek to develop or commercialize ourselves. These collaborations may take the form of strategic alliances with other drug companies. If funding from these various sources is not available at reasonable terms, we may be required to reduce our operating expenses in order to conserve cash and capital by delaying, reducing the scope of or eliminating one or more of our product development programs.

 

Results of Operations

 

Three months ended March 31, 2004 and 2003

 

    

Three months Ended

March 31,


    % Change
from
2003 to
2004


 
     2003

    2004

   
     (in thousands)  

Revenue:

   $ —       $ —       —    

Costs and expenses:

                      

General and administrative

     580       812     40 %

Research and development

     4,270       4,791     12 %
    


 


     

Total costs and expenses

     4,850       5,603     16 %
    


 


     

Loss from operations

     (4,850 )     (5,603 )   16 %
    


 


     

Other income (expense):

                      

Interest expense including amortized discount

     (83 )     (641 )   677 %

Dividend and interest income

     14       24     81 %

Unrealized losses from investments

     (4 )     (2 )   (46 %)
    


 


     

Net loss

   $ (4,923 )   $ (6,222 )   26 %
    


 


     

 

General and administrative expenses. General and administrative expenses are primarily comprised of expenses related to intellectual property, general corporate and patent legal costs and the salaries of our administrative personnel. The increase in our general and administrative expenses for the three months ended March 31, 2004 compared to the three months ended March 31, 2003 was primarily due to an increase in professional fees, premiums for our director and officer insurance policy and an increase in salary and benefits of our administrative personnel.

 

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Research and development expenses. Research and development expenses are primarily comprised of the external costs of contracted clinical research organizations, or CROs, and, to a lesser extent, our external and internal research and development costs which include the salaries of dedicated and allocated personnel and the costs of the dedicated and allocated research and development facilities. The increase in our research and development expenses for the three months ended March 31, 2004 compared to the three months ended March 31, 2003 was primarily due to the costs and final stages of our clinical trials and the cost of the documentation preparation necessary to submit G17DT to regulatory authorities. We do not accumulate cost information by major development product. Many costs are applicable to more than one product.

 

Interest expense including amortized discount. Interest expense, including amortized discount of $253,000, was approximately $641,000 for the three months ended March 31, 2004 compared with interest expense of approximately $83,000 for the three months ended March 31, 2003. This increase is related to our senior convertible debentures of $20,000,000 being issued in the quarter ended June 30, 2003. Of this amount, $15,000,000 was issued in April 2003 and $5,000,000 was issued in June 2003. Interest expense included the amortized discount that was incurred in connection with the $20.0 million senior convertible notes we issued in 2003 and the interest expense on our $3.0 million convertible debenture issued in 2002. The expenses relating to the $20.0 million senior convertible notes were non-cash expenses and had no effect on our available cash or our cash burn rate.

 

Net loss. The increase in net loss for the three months ended March 31, 2004 compared to the three months ended March 31, 2003 was primarily a result of our higher research and development expenses and an increase in our interest expense including amortized discount relating to the senior convertible debentures and the related deferred financing costs which was approximately $641,000 for the three months ended March 31, 2004 compared to approximately $83,000 for the three months ended March 31, 2003. We had no revenues from operations for the three months ended March 31, 2003 or 2004.

 

Liquidity and Capital Resources

 

We finance our operations through the sale of our equity securities, convertible debentures and licensing fees. These funds provide us with the resources to operate our business, attract and retain key personnel and scientific staff, fund our research and development program, preclinical testing and clinical trials, apply and obtain the necessary regulatory approvals and develop our technology and products.

 

On December 24, 2003, we filed a shelf registration statement with the Securities and Exchange Commission (the “Commission”) for the issuance of up to $100.0 million of our common stock. The shelf registration statement was declared effective on January 15, 2004. We believe an effective shelf registration statement with registered shares of our common stock available for sale gives us the opportunity to raise funding when terms are favorable. Subsequent to year end, in March 2004, we sold 8,050,000 shares of our common stock in an underwritten offering at $6.50 per share and received net proceeds in the amount of $48.6 million. We have approximately $47.7 million of common stock that remains available for sale at our discretion, subject to certain limitations under federal securities laws.

 

As of March 31, 2004, we had cash, cash equivalents, and marketable securities totaling $62.2 million and working capital of $56.1 million compared to cash, cash equivalents and marketable securities totaling $19.2 million and working capital of $13.2 million at December 31, 2003. This increase is primarily due to our receipt of the net proceeds from the issuance of the senior convertible notes in the second quarter of 2003 and the sale of our common stock in March 2004.

 

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Indebtedness

 

As of March 31, 2004 and December 31, 2003 we have outstanding $23.0 million in convertible debentures. There was an initial discount calculated against a value of the convertible debentures of $12.9 million, comprised of the beneficial conversion feature of $8.3 million and other discounts attributable to the value of the detachable warrants issued in conjunction with the convertible debentures of $4.6 million. The discount at March 31, 2004 was $12.0 million which is offset against the $23.0 million and is shown as $11.0 million of convertible debentures in the accompanying financial statements.

 

Of the $23.0 million, $3.0 million is our Series A Convertible Debenture. Our Series A Convertible Debenture is a convertible, redeemable, five-year note that matures on December 19, 2007. The Series A Convertible Debenture bears interest at a rate of 11.0% per annum, payable annually. The debenture is convertible at the holder’s option at a conversion price equal to the average closing price of our common stock, as defined in the debenture, at the time of conversion. The Series A Convertible Debenture contains provisions that place a cap on the number of shares of our common stock issuable upon its conversion, such that the holder thereof shall not have the right to convert any portion of the Series A Convertible Debenture to the extent that after giving effect to such conversion the holder would beneficially own more than 19.99% of the number of shares of our common stock outstanding immediately prior to such conversion.

 

The remaining $20.0 million in convertible notes, which we refer to as our 2003 senior convertible notes, were issued in two tranches to accredited investors in 2003. On April 4, 2003, we issued $15.0 million of convertible, redeemable, 5-year, interest-bearing senior convertible notes and 5-year warrants to purchase an aggregate total of 1,080,000 shares of our common stock to various accredited investors. On June 12, 2003 we issued an additional $5.0 million of our 2003 senior convertible notes and a 5-year warrant to purchase an aggregate total of 360,000 shares of our common stock to an accredited investor. The 2003 senior convertible notes mature on March 31, 2008. The 2003 senior convertible notes bear interest at a rate of 6.0% per annum, payable quarterly in cash or shares of our common stock, at our option.

 

The 2003 senior convertible notes are convertible at a fixed price of $2.50 per share, unless otherwise adjusted prior to conversion pursuant to the price adjustment provisions set forth therein. The conversion price of the 2003 senior convertible notes will be lowered in the event of a sale by us of our common stock or securities convertible into our common stock at a per share offering price less than the conversion price of the 2003 senior convertible notes in effect immediately prior to such sale. The warrants are exercisable into shares of our common stock at $2.70 per share, unless otherwise adjusted prior to exercise pursuant to the price adjustment provisions that are substantially similar to those set forth in the 2003 senior convertible notes. The 2003 senior convertible notes and the warrants contain provisions that place a cap on the numbers of shares of our common stock issuable upon their conversion or exercise, such that the holders thereof shall not have the right to convert any portion of the notes to the extent that after giving effect to such conversion the holders would beneficially own more than 19.99% or 4.99%, as the case may be for the respective holder, of the number of shares of our common stock outstanding immediately prior to such conversion or exercise.

 

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Uses of Funds

 

The primary uses of our cash are to fund our operations and working capital requirements, specifically, to fund the continued clinical development of G17DT, the clinical and pre-clinical studies for our other product candidates, including monoclonal antibodies, and for potential licenses and acquisitions of complementary products or technologies. Our uses of cash for operating activities and capital expenditures during the three months ended March 31, 2003 and 2004 were as follows:

 

    

Three months ended

March 31,


     2003

   2004

     (in thousands)

Net cash used in operating activities

   $ 4,022    $ 5,710

Capital expenditures

     —        9
    

  

Total

   $ 4,022    $ 5,719
    

  

 

The net cash used in operating activities is comprised of our net losses and working capital requirements.

 

Liquidity

 

Based on our current operating plans and our known and anticipated contractual obligations and assuming no further funding or potential revenues that may be generated from product partnering or licensing initiatives we are currently pursuing, we believe that our existing capital resources, which consist primarily of cash and short-term cash investments, including the proceeds from the financing activities described in the preceding paragraphs, will enable us to maintain operations and satisfy our periodic interest obligations on our 2003 senior convertible notes (which we may, at our option, satisfy in cash or shares of our common stock) into 2006. However, there can be no assurance that changes in our research and development plans or other future events affecting our operating expenses will not result in the depletion of our funds at an earlier time.

 

Our working capital and capital requirements will depend upon numerous factors, including the following: the progress of our research and development program, pre-clinical testing and clinical trials; the timing and cost of obtaining regulatory approvals; the levels of resources that we devote to product development, manufacturing and marketing capabilities; technological advances; competition; and collaborative arrangements or strategic alliances with other drug companies, including the further development, manufacturing and marketing of certain of our products and our ability to obtain funds from such strategic alliances or from other sources. Many of these factors are beyond our control. In the event that we require additional funds, we may be required to sell additional equity securities, convertible debt or otherwise, or obtain funds through arrangements with collaborative partners. If we are unable to complete such transactions, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs.

 

Inflation

 

Inflation and changing prices have not had a material effect on our continuing operations and we do not expect inflation to have any material effect on our continuing operations in the foreseeable future. Interest and other income were primarily derived from money-market accounts.

 

Effect Of Recently Issued Accounting Pronouncements

 

On January 1, 2003, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 addresses consolidation of business enterprises of variable interest entities. FIN 46 was effective immediately for all variable interest entities created after January 31, 2003. In December 2003, the FASB issued a

 

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revision to FIN 46, which delayed the effective date to periods ending after March 15, 2004 for all VIEs, other than Special Purpose Entities. We have not acquired any variable interest entities subsequent to January 31, 2003. The adoption of FIN 46 did not have a material impact on our financial position, results of operations or cash flows.

 

Off-Balance Sheet Arrangements

 

We do not have or engage in any off-balance sheet arrangements.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, however we believe such differences are unlikely to be significant.

 

Our significant accounting policies are described in Note 2 to the financial statements included in our Annual Report on Form 10-K. We believe that our most critical accounting policies include the use of estimates. The impact of these estimates on results of operations in 2003 was not significant and we believe that the impact of these estimates on results of operations in 2004 will not be significant. We periodically review these policies and estimates, the effect of which is reflected as a component of net loss in the period in which the change is known.

 

Convertible Debt Issued with Stock Purchase Warrants

 

We account for convertible debt issued with stock purchase warrants in accordance with APB No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, EITF No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments. This requires us to calculate the fair value of warrants and the beneficial conversion features based on certain assumptions and estimates.

 

Income taxes

 

We account for income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach in accounting for income taxes. Under this method, the amount of deferred tax asset or liability is calculated by applying the provisions of enacted tax laws to the differences in the bases of assets and liabilities for financial and income tax purposes. For all periods presented, the deferred tax assets are fully reserved.

 

Research and Development Expenses

 

Research and development costs are expensed as incurred. These costs include external and internal research and development costs, the salaries of dedicated personnel, the allocated salaries of personnel who also perform general and administrative tasks, the costs of the dedicated research and development facilities and the costs of contracted researchers. There is no allocation of administrative expense or corporate costs to research and development costs.

 

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Special Note Regarding Forward Looking Statements

 

This quarterly report 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.

 

These statements concern expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Specifically, this quarterly report contains forward-looking statements regarding:

 

  our beliefs regarding the applicability and corresponding commercial potential of G17DT;

 

  our expectations regarding losses and negative operating cash flows for the next several years;

 

  our expectations as to the adequacy of existing capital resources to support our operations and periodic interest obligations into 2006;

 

  our expectations regarding the effect of inflation on our continuing operations for the foreseeable future; and

 

  our belief that the impact of our use of estimates will not be significant on our results of operations.

 

These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We caution investors that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following:

 

  our ability to obtain additional financing or reduce our costs and expenses;

 

  our ability to develop, obtain regulatory approval for, produce in commercial quantities and gain commercial acceptance for G17DT and our other product candidates;

 

  our ability to maintain and enter into new arrangements and collaborations with third parties for the supply of key materials and/or assistance in the manufacture, market, sale and distribution of our products;

 

  our ability to enforce our patents and proprietary rights;

 

  our level of debt obligations and the impact of restrictions imposed on us by the terms of this debt;

 

  our ability to attract and retain highly qualified scientists and other technical personnel; and

 

  changes in healthcare reform.

 

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

We do not engage in trading market risk sensitive instruments or purchasing hedging instruments or “other than trading” instruments that are likely to expose us to significant market risk, whether interest rate, foreign currency exchange, commodity price or equity price risk.

 

Foreign Currency Exchange Risk. We have a laboratory and staff in Europe. During the three months ended March 31, 2004, we incurred expenses for our pipeline products. If the U.S. dollar weakens relative to a foreign currency, any losses generated in the foreign currency will, in effect, increase when converted into U.S. dollars and vice versa. We do not speculate in the foreign exchange market and do not manage exposures that arise in the normal course of business related to fluctuations in foreign currency exchange rates by entering into offsetting positions through the use of foreign exchange forward contracts. We also do not engage in derivative activities.

 

Interest Rate Risk. At March 31, 2004, we had cash equivalents in the amount of $61 million. We also had net convertible debentures payable of $11 million. Cash equivalents consist of money market funds and short term investments with maturities of three months or less placed with major financial institutions.

 

We are exposed to certain market risks that are inherent in our financial instruments. Specifically, we are subject to interest rate risk on our convertible debentures. The following table presents the future principal payment obligations and interest rates associated with our convertible debt instruments assuming our actual level of long-term debt indebtedness as of March 31, 2004:

 

     2004

   2005

   2006

   2007

   2008

   Thereafter

   Fair
Value


     (in thousands)

Convertible Debentures:

                                                

Series A Convertible Debentures (11.0%)

   $ —      $ —      $ —      $ 3,000    $ —      $ —      $ 2,487

Senior Convertible Notes (6.0%)

   $ —      $ —      $ —      $ —      $ 20,000    $ —      $ 11,084

 

We maintain an investment portfolio of money market funds and auction rate securities. The securities in our investment portfolio are not leveraged, and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that a change in interest rates would have a significant negative impact on the value of our investment portfolio.

 

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest our excess cash in investments supported by debt instruments of the U.S. Government and its agencies, bank obligations and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than three months.

 

Item 4. Controls and Procedures

 

In order to ensure that the information we must disclose in our filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, we maintain disclosure controls and procedures. Our principal executive officer and principal financial officer have reviewed

 

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and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of March 31, 2004. Based on such evaluation, such officers have concluded that, as of March 31, 2004, our disclosure controls and procedures were effective in timely alerting them to material information relating to us required to be included in our periodic SEC filings. There has been no change in our internal control over financial reporting during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Part II - Other Information

 

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

 

(a) Exhibits

 

31.1    Certification by Patrick T. Mooney, M.D., Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .
31.2    Certification by Frederick W. Jacobs, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification by Patrick T. Mooney, M.D., Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification by Frederick W. Jacobs, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b) Reports on Form 8-K

 

During the three months ended March 31, 2004, we filed the following current reports on Form 8-K:

 

  1. On February 10, 2004, we furnished information under Item 12 regarding our preliminary unaudited financial results for the year ended December 31, 2003.

 

  2. On February 25, 2004, we furnished information under Item 12 regarding our reclassification of certain line items on our balance sheet to reflect a recalculation of the value of the beneficial conversion feature attributable to our issuance of $20.0 million convertible debentures and reporting our expectations of the amounts and effects of these adjustments as of December 31, 2003.

 

  3. On March 1, 2004, we furnished information under Items 5 and 7 regarding our pricing of an offering of 7,000,000 shares of common stock to the public for a total offering size of $45.5 million.

 

  4. On March 19, 2004, we furnished information under Item 9 regarding our financial results and operating highlights for the fourth quarter and year ended December 31, 2003.

 

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Signatures

 

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

 

               

APHTON CORPORATION

Date: May 7, 2004

     

By:

 

/s/ Patrick T. Mooney, M.D.


               

Patrick T. Mooney, M.D.

Chief Executive Officer and President

(Principal Executive Officer)

Date: May 7, 2004

     

By:

 

/s/ Frederick W. Jacobs


               

Frederick W. Jacobs

Vice President, Chief Financial Officer, Treasurer and Chief Accounting Officer

(Principal Financial Officer)

 

 

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