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 June 30, 2002
Commission File No. 0-31261
ATHEROGENICS, INC.
(Exact name of registrant as specified in its charter)
|
Georgia |
58-210832 |
|
(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 August 12, 2002, there were 27,970,669
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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June 30, 2002 and December 31, 2001 |
3 |
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Condensed Statements of Operations |
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Three and six months ended June 30, 2002 and 2001 |
4 |
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Condensed Statements of Cash Flows |
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Six months ended June 30, 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 4. Submission of Matters to a Vote of Security Holders |
11 |
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Item 6. Exhibits and Reports on Form 8-K |
12 |
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SIGNATURES |
13 |
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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)
|
Three months ended |
Six months ended |
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June 30, |
June 30, |
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2002 |
2001 |
2002 |
2001 |
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Revenues: |
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License fees |
$ -- |
$ 277,778 |
$ -- |
$ 1,111,111 |
|||||||||
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Research and development |
-- |
203,467 |
-- |
800,556 |
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Total revenues |
-- |
481,245 |
-- |
1,911,667 |
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Operating expenses: |
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Research and development |
5,317,582 |
3,846,895 |
10,703,196 |
7,418,783 |
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General and administrative |
1,024,849 |
946,621 |
2,008,195 |
1,895,272 |
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Amortization of deferred stock |
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compensation |
499,323 |
225,576 |
998,646 |
1,020,393 |
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Total operating expenses |
6,841,754 |
5,019,092 |
13,710,037 |
10,334,448 |
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Operating loss |
(6,841,754 |
) |
(4,537,847 |
) |
(13,710,037 |
) |
(8,422,781 |
) |
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Net interest income |
269,260 |
588,570 |
573,828 |
1,372,876 |
|||||||||
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Net loss |
$ (6,572,494 |
) |
$ (3,949,277 |
) |
$ (13,136,209 |
) |
$ (7,049,905 |
) |
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Net loss per share - |
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basic and diluted |
$ (0.24 |
) |
$ (0.16 |
) |
$ (0.47 |
) |
$ (0.29 |
) |
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Weighted average shares outstanding - |
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basic and diluted |
27,925,386 |
24,483,242 |
27,900,963 |
24,212,963 |
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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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Six months ended |
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June 30, |
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2002 |
2001 |
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Operating activities: |
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Net loss |
$ (13,136,209 |
) |
$ (7,049,905 |
) |
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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 |
359,113 |
224,215 |
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Amortization of deferred stock compensation |
998,646 |
1,020,393 |
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Stock issued for services |
-- |
29,778 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
-- |
885,086 |
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Prepaid expenses, notes receivable and other assets |
(67,357 |
) |
(102,206 |
) |
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Accounts payable |
(420,051 |
) |
(219,592 |
) |
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Accrued liabilities |
2,289 |
363,887 |
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Deferred revenues |
-- |
(1,111,111 |
) |
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Net cash used in operating activities |
(12,263,569 |
) |
(5,959,455 |
) |
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Investing activities: |
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Purchases of equipment and leasehold improvements |
(395,342 |
) |
(556,358 |
) |
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Sales of short-term investments |
11,625,629 |
22,958,316 |
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Net cash provided by investing activities |
11,230,287 |
22,401,958 |
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Financing activities: |
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Proceeds from equipment loan facility |
936,851 |
-- |
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Payments on capital lease and equipment loan facility |
(126,911 |
) |
(79,930 |
) |
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Proceeds from the issuance of common stock in a private placement |
-- |
20,613,750 |
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Proceeds from the exercise of common stock options |
58,521 |
69,450 |
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Net cash provided by financing activities |
868,461 |
20,603,270 |
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(Decrease) increase in cash and cash equivalents |
(164,821 |
) |
37,045,773 |
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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 |
$ 28,517,229 |
$ 63,508,843 |
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Supplemental disclosures of cash flow information: |
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Interest paid |
$ 17,255 |
$ 17,157 |
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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 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 presented. Certain footnote disclosures
normally included in financial statements prepared in
accordance with accounting principles generally accepted in
the United States 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 six months ended June 30,
2002, AtheroGenics recorded a total of $784,020 of
6
amortization of deferred stock compensation, as compared to $911,193 during the same period in 2001. Through June 30, 2002, the deferred stock compensation has been decreased by $1,395,735 for options that were forfeited.
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 a Phase IIb clinical trial for atherosclerosis
and post-angioplasty restenosis. We are currently
working in cooperation with the Food and Drug Administration
to define the Phase III clinical development program for
AGI-1067 as an oral therapy for atherosclerosis in patients
with established coronary artery disease. Our second
drug candidate, AGIX-4207, has completed initial Phase I
clinical trials in both oral and intravenous formulations
which
7
assessed the safety and tolerability for the treatment of rheumatoid arthritis, and we are preparing for 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 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. We terminated this exclusive license
agreement 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 June 30, 2002, we
had an accumulated deficit of $74.4 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.
RESULTS OF OPERATIONS
Comparison of the Three and Six Month Periods Ended June 30,
2002 and 2001
Revenues
There were no revenues during the three and six months ended
June 30, 2002, compared to $481,245 and $1.9 million,
respectively, during the same periods in 2001. Last
year's revenues reflected the amortization of a $5.0
million license fee payment and research and development
revenue attributable to a license agreement that we
terminated in October 2001.
Expenses
Research and Development. Research and
development expenses increased 38% to $5.3 million for the
quarter ended June 30, 2002, from $3.8 million for the
comparable period in 2001, and 44% to $10.7 million for the
six months ended June 30, 2002 from $7.4 million in the
comparable period in 2001. The increase in research and
development expenses for the three and six months ended June
30, 2002, was primarily due to higher costs associated with
conducting clinical trials for AGI-1067 and AGIX-4207 I.V.
General and Administrative. General and
administrative expenses increased 8% to $1.0 million for the
quarter ended June 30, 2002, from $946,621 for the
comparable period in 2001, and 6% to $2.0 million for the six
months ended June 30, 2002 from $1.9 million in the
comparable period in 2001. The increase in general and
administrative expenses for the three and six months ended
June 30, 2002, was due to increased recruiting and relocation
costs in addition 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 quarter ended June
30, 2002, compared to $255,576 for the same period in 2001,
and $998,646 for the six months ended June 30, 2002 compared
to $1.0 million for the same period in 2001. The
increase in the quarter ended June 30, 2002 is due to the
additional deferred stock compensation related to the
National Jewish options and warrants. The decrease in
the six months ended June 30, 2002 is due to the deferred
stock compensation being amortized using the graded vesting
method, which results in higher amortization in the earlier
years.
Net Interest Income
Net interest income decreased 54% from $588,750 for the
quarter ended June 30, 2001 to $269,260 for the quarter ended
June 30, 2002. Net interest income decreased 58% from
$1.4 million six months ended June 30, 2001 to $573,828
for the six months ended June 30, 2002. The decrease in
net interest income is a reflection of lower average interest
rates and lower investment balances.
8
LIQUIDITY AND CAPITAL RESOURCES
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the status of product development; |
|
- |
the time and cost involved in conducting clinical trials and obtaining regulatory approvals; |
|
- |
the costs of filing, prosecuting and enforcing patent and other intellectual property claims; |
|
- |
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
9
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.
|
- |
AGI-1067, AGIX-4207, AGIX-4207 I.V. and AGI-1096 may fail in clinical trials; |
|
- |
our ability to generate positive cash flow in light of our history of operating losses; |
|
- |
our ability to successfully develop our other product candidates; |
|
- |
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 need to comply with applicable regulatory requirements in the manufacture and distribution of |
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our products to avoid incurring penalties that may inhibit our ability to commercialize our products; |
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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 June 30, 2002, the proceeds have
been applied toward:
|
- |
purchases of fixed assets and leasehold improvements, $2.0 million; |
|
- |
operating activities, $25.0 million; and |
|
- |
investments in highly liquid, interest bearing, investment grade securities, $22.4 million. |
Item 4. Submission of Matters to a Vote of
Security Holders
Our annual meeting of shareholders was held on April 24,
2002. At the annual meeting, the shareholders of
AtheroGenics (1) elected three Class II directors to serve
until the 2005 Annual Meeting of Shareholders and (2) ratified
the appointment of Ernst & Young LLP as our
independent auditors for the fiscal year ending
December 31, 2002.
We had 27,891,756 shares of common stock outstanding as of
March 1, 2002, the record date of the annual meeting.
At the annual meeting, we had 21,748,228 share of common
stock present in person or represented by proxy for the two
proposals indicated above. The following sets forth
detailed information regarding the results of the voting at
the annual meeting:
|
Proposal 1. |
Election of three Class II directors |
|||
|
Name of Nominee |
No. of Votes For |
No. of Votes Withheld |
||
|
R. Wayne Alexander |
21,719,628 |
28,600 |
||
|
William A. Scott |
21,719,028 |
29,200 |
||
|
Stephen A. Sudovar |
21,708,063 |
40,165 |
||
|
Proposal 2. |
Ratifications of the appointment of independent auditors |
|||
|
No. of Votes For |
No. of Votes Against |
Abstention |
||
|
21,735,560 |
6,500 |
6,168 |
||
11
Item 6. Exhibits and Reports on Form 8-K
|
Exhibit No. |
|
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10.21* |
Promissory Note and Stock Pledge Agreement dated as of April 15, 2002 between |
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AtheroGenics, Inc. and Mark P. Colonnese. |
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__________ |
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* Filed herewith.
|
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(b) Reports on Form 8-K
None.
12
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.
|
|
ATHEROGENICS, INC. |
|
Date: August 13, 2002 |
By: /s/MARK P. COLONNESE |
|
|
MARK P. COLONNESE |
|
|
Senior Vice President of Finance and Administration and |
|
|
Chief Financial Officer (Principal Accounting and |
|
|
Financial Officer) |
13