SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-Q
___________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission File No. 0-31261
ATHEROGENICS, INC.
(Exact name of registrant as specified in its charter)
|
Georgia |
58-210832 |
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(State of incorporation) |
(I.R.S. Employer Identification Number) |
8995 Westside Parkway, Alpharetta, Georgia 30004
(Address of registrant's principal executive
offices, including zip code)
_______________________
(Registrant's telephone number, including area code):
(678) 336-2500
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 [ ]
As of May 9, 2002, there were 27,924,529
shares of the registrant's
common stock outstanding.
_________________________
ATHEROGENICS, INC.
FORM 10-Q
INDEX
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PART I. FINANCIAL INFORMATION |
Page No. |
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Item 1. Financial Statements (unaudited) |
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Condensed Balance Sheets |
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March 31, 2002 and December 31, 2001 |
3 |
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Condensed Statements of Operations |
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Three months ended March 31, 2002 and 2001 |
4 |
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Condensed Statements of Cash Flows |
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Three months ended March 31, 2002 and 2001 |
5 |
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Notes to Condensed Financial Statements |
6 |
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Item 2. Management's Discussion and Analysis of Financial Condition |
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and Results of Operations |
7 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
10 |
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PART II. OTHER INFORMATION |
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Item 2. Changes in Securities and Use of Proceeds |
11 |
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Item 6. Exhibits and Reports on Form 8-K |
11 |
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SIGNATURES |
12 |
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2
PART I - FINANCIAL INFORMATION
ATHEROGENICS, INC.
CONDENSED BALANCE SHEETS
The accompanying notes are an integral part of these
condensed financial statements.
3
ATHEROGENICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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Three months ended |
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March 31, |
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2002 |
2001 |
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Revenues: |
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License fees |
$ -- |
$ 833,333 |
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Research and development |
-- |
597,089 |
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Total revenues |
-- |
1,430,422 |
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Operating expenses: |
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Research and development, excluding |
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amortization of deferred stock compensation |
5,385,614 |
3,571,888 |
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General and administrative, excluding |
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amortization of deferred stock compensation |
983,346 |
948,651 |
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Amortization of deferred stock compensation |
499,323 |
794,817 |
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Total operating expenses |
6,868,283 |
5,315,356 |
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Operating loss |
(6,868,283 |
) |
(3,884,934 |
) |
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Net interest income |
304,568 |
784,306 |
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Net loss |
$ (6,563,715 |
) |
$ (3,100,628 |
) |
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Net loss per share - basic and diluted |
$ (0.24 |
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$ (0.13 |
) |
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Weighted average shares outstanding |
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- basic and diluted |
27,876,269 |
23,939,682 |
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The accompanying notes are an integral part of these
condensed financial statements.
4
ATHEROGENICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three months ended |
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March 31, |
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2002 |
2001 |
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Operating activities: |
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Net loss |
$ (6,563,715 |
) |
$ (3,100,628 |
) |
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Adjustments to reconcile net loss to net cash used in |
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operating activities: |
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Depreciation and amortization |
174,682 |
108,486 |
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Amortization of deferred stock compensation |
499,323 |
794,817 |
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Stock issued for services |
-- |
18,437 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
-- |
359,560 |
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Prepaid expenses, notes receivable and other assets |
61,448 |
36,174 |
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Accounts payable |
(293,363 |
) |
(178,909 |
) |
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Accrued liabilities |
(251,577 |
) |
(59,974 |
) |
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Deferred revenues |
-- |
(833,333 |
) |
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Net cash used in operating activities |
(6,373,202 |
) |
(2,855,370 |
) |
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Investing activities: |
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Purchases of equipment and leasehold improvements |
(257,364 |
) |
(336,947 |
) |
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Sales of short-term investments |
10,520,862 |
18,513,742 |
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Net cash provided by investing activities |
10,263,498 |
18,176,795 |
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Financing activities: |
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Payments on capital lease |
(23,973 |
) |
(45,187 |
) |
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Proceeds from the exercise of common stock options |
32,471 |
20,655 |
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Net cash provided by (used in) |
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financing activities |
8,498 |
(24,532 |
) |
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Increase in cash and cash equivalents |
3,898,794 |
15,296,893 |
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Cash and cash equivalents at beginning of period |
28,682,050 |
26,463,070 |
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Cash and cash equivalents at end of period |
$ 32,580,844 |
$ 41,759,963 |
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Supplemental disclosures of cash flow information: |
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Interest paid |
$ 3,245 |
$ 11,868 |
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Valuation adjustment for variable options and warrants issued |
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for technology license agreement |
147,015 |
-- |
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The accompanying notes are an integral part of these
condensed financial statements.
5
ATHEROGENICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited interim condensed financial
statements reflect all adjustments (consisting solely of
normal recurring adjustments) which management considers
necessary for a fair presentation of the financial position,
results of operations and cash flows of AtheroGenics for the
interim periods. Certain footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted from the interim financial statements as permitted
by the rules and regulations of the Securities and Exchange
Commission. Interim results are not necessarily
indicative of results for the full year.
The interim results should be read in conjunction with the
financial statements and notes thereto included in
AtheroGenics' Annual Report on Form 10-K for the year
ended December 31, 2001. Shareholders are encouraged to
review the Form 10-K for a broader discussion of
AtheroGenics' opportunities and risks inherent in the
business. Copies of the Form 10-K are available on
request.
2. Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting
Standards ("SFAS") Nos. 141, Business
Combinations and SFAS 142, Accounting for Goodwill and
Other Intangibles ("SFAS 141" and "SFAS
142"). SFAS 141 requires that the purchase method
of accounting be used for all business combinations initiated
after June 30, 2001, and provides new criteria for
determining whether an acquired intangible asset should be
recognized separately from goodwill. SFAS 142 requires
that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for
impairment at least annually. Intangible assets that
have finite lives will continue to be amortized over their
useful lives. The adoption of SFAS 141 and SFAS 142 has
had no impact on AtheroGenics' financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long-lived Assets,
("SFAS 144") which is applicable to financial
statements issued for fiscal years beginning after December
15, 2001. SFAS 144 establishes a new method of
accounting and reporting for the impairment of long-lived
assets other than goodwill and intangible assets. The
statement provides a single accounting model for long-lived
assets to be disposed of and changes the criteria required to
classify an asset as held-for-sale. The adoption of
SFAS 144 has had no impact on AtheroGenics' financial
statements.
3. Net Loss per Share
SFAS No. 128, Earnings per Share, requires
presentation of both basic and diluted earnings per
share. Basic earnings per share is computed by dividing
net income (loss) by the weighted average number of shares of
common stock outstanding during the period. Diluted
earnings per share is computed in the same manner as basic
earnings per share except that diluted earnings per share
reflects the potential dilution that would occur if
outstanding options and warrants were exercised.
Because AtheroGenics reported a net loss for all periods
presented, shares associated with stock options and warrants
are not included because they are antidilutive. Basic
and diluted net loss per share amounts are the same for these
periods.
4. Deferred Stock
Compensation
During 2000 and 1999, in connection with the grant of certain
options to employees and directors, AtheroGenics recorded
non-cash deferred stock compensation of $12,093,928 and
$1,895,160, respectively, representing the difference between
the exercise price and the deemed fair value of
AtheroGenics' common stock on the dates these stock
options were granted. These amounts are included as a
reduction of shareholders' equity and are being amortized
over the vesting periods of the individual options, generally
four years, using the graded vesting method. The graded
vesting method provides for vesting of portions of the
overall award at interim dates and results in higher vesting
in earlier years than straight-line vesting. The fair
value of AtheroGenics common stock for purposes of this
calculation was determined based on the business factors
underlying the value of common stock on the date such option
grants were made. During the three months ended March
31, 2002, AtheroGenics recorded a total of $392,010 of
amortization of deferred stock compensation, as compared to
$794,817 during the same period in
6
the prior year. Through March 31, 2002, the deferred stock compensation has been decreased by $1,395,735 for options that were forfeited.
During 2001, in connection with the grant of certain
warrants as part of a licensing agreement with National
Jewish Medical and Research Center and options granted for
the addition of new members to our Scientific Advisory Board,
AtheroGenics recorded non-cash deferred stock compensation of
$1,092,000. The fair value of the warrants and options
for purposes of this calculation was determined by using the
Black Scholes model. These amounts are included as a
reduction of shareholders' equity and are being amortized
over the vesting periods of the individual warrants and
options, generally four years, using the graded vesting
method. At March 31, 2002, AtheroGenics recorded an
additional $147,015 in deferred stock compensation to
properly reflect the current fair market value of these
warrants and options. During the three months ended
March 31, 2002, AtheroGenics recorded a total of $107,313 of
amortization of deferred stock compensation for these
warrants and options.
At March 31, 2002, AtheroGenics had a total of $2,623,006
remaining to be amortized over the vesting periods of all
stock options and warrants.
5. Bank Credit Agreements
On March 6, 2002, AtheroGenics entered into a revolving
credit facility with Silicon Valley Bank for up to a maximum
amount of $5,000,000 to be used for working capital
requirements. Under the terms of the facility, interest
on advances is charged at the Bank's prime rate plus
1.50% per year, provided that certain liquidity levels are
maintained; otherwise interest will be charged at prime rate
plus 2.0% per year. Amounts borrowed under the
revolving credit facility may be repaid and reborrowed at any
time and from time to time during the term of the
facility. The revolving line of credit terminates on
September 5, 2004 and all outstanding amounts and accrued
interest will be due and payable on that date. As of
March 31, 2002, there was no outstanding balance under the
revolving credit facility.
In addition, on March 6, 2002, AtheroGenics entered into an
equipment loan facility with Silicon Valley Bank for up to a
maximum amount of $2,500,000 to be used to finance existing
and new equipment purchases. Under the terms of the
facility, AtheroGenics may request up to six equipment
advances until September 6, 2002. The interest rate on
the equipment advances will be equal to the greater of (1)
the Bank's prime rate plus 3.0% or (2) 7.5% per year and
will be fixed at the time of each advance. Amounts
borrowed under the equipment loan facility will be repaid in
33 equal installments of principal and interest beginning on
the first business day of the month following an
advance. As of March 31, 2002, there was no outstanding
balance under the equipment loan facility.
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of
Operations
The following should be read with the financial
statements and related footnotes and Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in AtheroGenics' Annual Report on
Form 10-K. The results discussed below are not
necessarily indicative of the results to be expected in any
future periods. The following discussion contains
forward-looking statements that are subject to risks and
uncertainties which could cause actual results to differ from
the statements made.
OVERVIEW
Since our operations began in 1994, we have focused on the
discovery, development and commercialization of novel drugs
for the treatment of chronic inflammatory diseases, such as
atherosclerosis, rheumatoid arthritis and asthma. Based
on our proprietary vascular protectant technology platform,
we have advanced three drug candidates into development, and
are progressing on a number of other pre-clinical
programs. Our lead drug candidate, AGI-1067, is
currently in Phase IIb clinical trials for the treatment and
prevention of post-angioplasty restenosis and
atherosclerosis. Our second drug candidate, AGIX-4207,
has completed initial Phase I clinical trials in both oral
and intravenous formulations to assess the safety and
tolerability for the treatment of rheumatoid arthritis, and
we are designing Phase II clinical trials. Our third
drug candidate, AGI-1096, is in Phase I clinical trials to
assess the safety and tolerability of this compound, which is
being developed for the prevention of solid organ transplant
rejection.
To date, we have devoted substantially all of our resources
to research and development. We have not received any
commercial revenues from product sales. Revenues have
been derived from certain license fees of a non-recurring
nature received in connection with entering into an exclusive
license agreement. This exclusive license agreement
7
was terminated in October 2001. We expect to incur significant losses in most years prior to deriving any product revenue as we continue to increase research and development costs. We have incurred significant losses since we began operations in 1994 and as of March 31, 2002, we had an accumulated deficit of $67.8 million. We cannot assure you that we will become profitable. We expect that losses will fluctuate from quarter to quarter and that these fluctuations may be substantial. Our ability to achieve profitability depends upon a variety of factors, including our ability, alone or with others, to complete the successful development of our product candidates, to obtain required regulatory clearances, and to manufacture and market our future products.
Research and Development. Research and
development expenses were $5.4 million for the three months
ended March 31, 2002, compared to $3.6 million for the three
months ended March 31, 2001. The increase of $1.8
million, or 51%, reflects higher costs associated with
conducting clinical trials for AGI-1067, AGIX-4207 I.V. and
AGI-1096. Drug discovery activities related to our MEKK
anti-inflammation technology platform have also contributed
to the increase in research expenses.
General and Administrative. General and
administrative expenses were $983,346 for the three months
ended March 31, 2002, compared to $948,651 for the three
months ended March 31, 2001. The slight increase of
$34,695, or 4%, in expenses was due to the impact of ordinary
increases in compensation and administrative operating costs.
Amortization of Deferred Stock Compensation. In
2000 and 1999, we recorded non-cash deferred stock
compensation totaling approximately $14.0 million for options
granted with exercise prices below the deemed fair value for
financial reporting purposes of our common stock on their
respective grant dates. In June 2001, we recorded
non-cash deferred stock compensation totaling approximately
$1.1 million for certain warrants granted in connection with
a licensing agreement with National Jewish Medical and
Research Center and options granted to new members of our
Scientific Advisory Board. Amortization of deferred
stock compensation was $499,323 for the three months ended
March 31, 2002, compared to $794,817 for the three months
ended March 31, 2001. This deferred stock compensation
is being amortized using the graded vesting method, which
results in higher amortization in the earlier years.
Net Interest Income
Net interest income was $304,568 for the three months ended
March 31, 2002 as compared to net interest income of $784,306
for the three months ended March 31, 2001. The decrease
in net interest income is a reflection of lower average
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily
through private placements of preferred stock and our initial
public offering of 6.9 million shares of our common stock
that raised net proceeds of $49.4 million. In June
2001, we completed a private placement of 3.6 million shares
of our common stock that raised net proceeds of $18.9
million. At March 31, 2002, we had cash, cash
equivalents and short-term investments of $51.8 million,
compared with $58.4 million at December 31, 2001.
Working capital at March 31, 2002 was $48.9 million, compared
to $55.1 million at December 31, 2001. The decrease in
cash, cash equivalents, short-term investments and working
capital is primarily due to the use of funds for operating
purposes and purchases of equipment.
Net cash used in operating activities was $6.4 million for
the three months ended March 31, 2002, compared to $2.9
8
million for the three months ended March 31, 2001. The increase in the use of cash in operating activities is principally due to increased expenditures for the CART-2 Phase IIb study for AGI-1067 and Phase I clinical trials for AGIX-4207 I.V. and AGI-1096.
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the status of product development; |
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the time and cost involved in conducting clinical trials and obtaining regulatory approvals; |
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the costs of filing, prosecuting and enforcing patent and other intellectual property claims; |
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competing technological and market developments; and |
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our ability to market and distribute our future products and establish new licensing agreements. |
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the
"Reform Act") provides a safe harbor for
forward-looking statements made by or on behalf of
AtheroGenics. AtheroGenics and its representatives may
from time to time make written or verbal forward-looking
statements, including statements contained in this report and
our other filings with the Securities and Exchange Commission
and in our reports to our shareholders. Generally, the
words "believe," "expect,"
"intend," "estimate,"
"anticipate," "will" and similar
expressions identify forward-looking statements. All
statements which address operating performance, events or
developments that we expect or anticipate will occur in the
future, such as projections about our future results of
operations or our financial condition, research, development
and commercialization of our product candidates and
anticipated trends in our business, are forward-looking
statements within the meaning of the Reform Act. The
forward-looking statements are and will be based on
management's then current views and assumptions regarding
future events and operating performance, and speak only as of
their dates. AtheroGenics undertakes no obligation to
publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.
9
The following are some of the factors that could affect
our financial performance or could cause actual results to
differ materially from those expressed or implied in our
forward-looking statements:
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AGI-1067, AGIX-4207, AGIX-4207 I.V. and AGI-1096 may fail in clinical trials; |
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our ability to generate positive cash flow in light of our history of operating losses; |
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our ability to successfully develop our other product candidates; |
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our ability to commercialize our product candidates if we fail to demonstrate adequately their safety |
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and efficacy; |
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possible delays in our clinical trials; |
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our inability to predict whether or when we will obtain regulatory approval to commercialize our |
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product candidates or the timing of any future revenue from these product candidates; |
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our ability to protect adequately or enforce our intellectual property rights or secure rights to third |
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party patents; |
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the ability of our competitors to develop and market anti-inflammatory products that are more |
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effective, have fewer side effects or are less expensive than our current or future product candidates; |
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third parties' failure to synthesize and manufacture our product candidates could delay our clinical |
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trials or hinder our commercialization prospects; |
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our ability to create sales, marketing and distribution capabilities or enter into agreements with third |
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parties to perform these functions; |
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our ability to attract, retain and motivate skilled personnel and cultivate key academic collaborations; |
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our inability to obtain additional financing on satisfactory terms, which could preclude us from |
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developing or marketing our products; |
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our ability to obtain an adequate level of reimbursement or acceptable prices for our products; and |
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if plaintiffs bring product liability lawsuits against us, we may incur substantial financial loss or may |
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be unable to obtain future product liability insurance at reasonable prices, if at all, either of which |
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could diminish our ability to commercialize our future products. |
The foregoing list of important factors is not exclusive.
Item 3. Quantitative And Qualitative Disclosures About
Market Risk
Market risk represents the risk of loss that may impact our
financial position, operating results or cash flows due to
changes in U.S. interest rates. This exposure is
directly related to our normal operating activities.
Our cash, cash equivalents and short-term investments are
invested with high quality issuers and are generally of a
short-term nature. Interest rates payable on our lease
obligations are generally fixed. As a result, we do not
believe that near-term changes in interest rates will have a
material effect on our future results of operations.
10
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of
Proceeds
The Securities and Exchange Commission declared our
Registration Statement on Form S-1 (File No. 333-31140)
effective August 8, 2000. The net proceeds from the
sale of the 6,900,000 shares of common stock registered
pursuant to the Registration Statement (including the
exercise of the underwriters’ over-allotment option)
were $49.4 million after deducting underwriting discounts of
$3.9 million and offering expenses of $1.9 million.
We expect to use the proceeds from our initial public offering for research and development activities, including clinical trials, process development and manufacturing support, and for general corporate purposes, including working capital. A portion of the proceeds may be used to acquire or invest in complementary businesses, products or technologies. As of March 31, 2002, the proceeds have been applied toward:
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purchases of fixed assets and leasehold improvements, $1.9 million; |
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operating activities, $19.2 million; and |
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investments in highly liquid, interest bearing, investment grade securities, $28.3 million. |
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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Exhibit No. |
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10.20(a)* |
Revolving Promissory Note dated March 6, 2002 between AtheroGenics, Inc. and Silicon Valley |
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Bank. |
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10.20(b)* |
Equipment Term Note dated March 6, 2002 between AtheroGenics, Inc. and Silicon Valley |
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Bank. |
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10.20(c)* |
Loan and Security Agreement dated March 6, 2002 between AtheroGenics, Inc. and Silicon |
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Valley Bank. |
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10.20(d)* |
Negative Pledge Agreement dated March 6, 2002 between AtheroGenics, Inc. and Silicon Valley |
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Bank. |
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__________ |
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* Filed herewith.
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(b) Reports on Form 8-K
None.
11
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.
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ATHEROGENICS, INC. |
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Date: May 10, 2002 |
By: /s/MARK P. COLONNESE |
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MARK P. COLONNESE |
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Senior Vice President of Finance and Administration and |
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Chief Financial Officer (Principal Accounting and |
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Financial Officer) |
12