UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-QSB
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 2003
--------------------------------
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------------- ------------------
Commission File No. 001-31326
SENESCO TECHNOLOGIES, INC.
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 84-1368850
------------------------------- -------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
303 George Street, Suite 420, New Brunswick, New Jersey 08901
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(732) 296-8400
--------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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:
----- -----
State the number of shares outstanding of each of the Issuer's classes of
common stock, as of February 9, 2004:
Class Number of Shares
----- ----------------
Common Stock, $0.01 par value 13,108,243
Transitional Small Business Disclosure Format (check one):
Yes: No: X
----- -----
SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
-----------------------------------------
TABLE OF CONTENTS
-----------------
Page
----
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements....................................... 1
CONDENSED CONSOLIDATED BALANCE SHEET
as of December 31, 2003 (unaudited) and June 30, 2003........... 2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 2003 and December 31,
2002, For the Six Months Ended December 31, 2003 and December
31, 2002, and From Inception on July 1, 1998 through December
31, 2003 (unaudited)............................................ 3
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
From Inception on July 1, 1998 through December 31, 2003
(unaudited)..................................................... 4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended December 31, 2003 and December 31,
2002, and From Inception on July 1, 1998 through December 31,
2003 (unaudited) ............................................... 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)...................................................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 11
Overview......................................................... 11
Factors That May Affect Our Business, Future Operating Results
and Financial Condition.......................................... 12
Liquidity and Capital Resources.................................. 21
Changes to Critical Accounting Policies and Estimates............ 23
Results of Operations............................................ 23
Item 3. Controls and Procedures..................................... 26
PART II. OTHER INFORMATION.
Item 2. Changes in Securities and Small Business Issuer Purchases
of Equity Securities........................................ 26
Item 4. Submission of Matters to a Vote of Security Holders......... 27
Item 6. Exhibits and Reports on Form 8-K............................ 28
SIGNATURES................................................................ 30
-i-
PART I. FINANCIAL INFORMATION.
-----------------------------
ITEM 1. FINANCIAL STATEMENTS.
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. However, Senesco Technologies, Inc., a
Delaware corporation, and its wholly owned subsidiary, Senesco, Inc., a New
Jersey corporation (collectively, "Senesco" or the "Company"), believe that the
disclosures are adequate to assure that the information presented is not
misleading in any material respect.
The results of operations for the interim periods presented herein are not
necessarily indicative of the results to be expected for the entire fiscal year.
-1-
SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
-----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
-----------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
December 31, June 30,
2003 2003
------------------- -------------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 280,967 $ 319,930
Short-term investments........................................................ 1,301,095 2,099,295
Prepaid expenses and other current assets..................................... 65,297 185,535
-------------- --------------
Total Current Assets..................................................... 1,647,359 2,604,760
Property and equipment, net................................................... 62,935 75,203
Intangibles, net.............................................................. 742,342 578,810
Security deposit.............................................................. 7,187 7,187
-------------- --------------
TOTAL ASSETS............................................................. $ 2,459,823 $ 3,265,960
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 27,014 $ 56,136
Accrued expenses.............................................................. 402,799 263,160
-------------- --------------
Total Current Liabilities.............................................. 429,813 319,296
Grant payable................................................................. 90,150 90,150
-------------- --------------
TOTAL LIABILITIES........................................................ 519,963 409,446
-------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; authorized 5,000,000 shares,
no shares issued........................................................... -- --
Common stock, $0.01 par value; authorized 30,000,000 shares,
issued and outstanding 11,992,179 and 11,880,045 shares.................... 119,922 118,800
Capital in excess of par...................................................... 13,515,265 12,234,373
Deficit accumulated during the development stage.............................. (11,695,327) (9,496,659)
-------------- --------------
Total Stockholders' Equity................................................. 1,939,860 2,856,514
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................. $ 2,459,823 $ 3,265,960
============== ==============
See Notes to Condensed Consolidated Financial Statements.
-2-
SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
-----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
-----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(unaudited)
From Inception on
For the Three For the Three For the Six For the Six July 1, 1998
Months Ended Months Ended Months Ended Months Ended through
December 31, December 31, December 31, December 31, December 31,
2003 2002 2003 2002 2003
Revenue................................ $ -- $ -- $ -- $ 10,000 $ 210,000
----------- ----------- ----------- ------------ -------------
Operating Expenses:
General and administrative........... 597,527 496,286 1,736,919 884,310 9,312,890
Research and development............. 301,144 215,803 573,145 374,967 3,164,391
----------- ----------- ----------- ------------ -------------
Total Operating Expenses............... 898,671 712,089 2,310,064 1,259,277 12,477,281
----------- ----------- ----------- ------------ -------------
Loss From Operations................... (898,671) (712,089) (2,310,064) (1,249,277) (12,267,281)
Sale of state income tax loss.......... 91,448 130,952 91,448 130,952 433,282
Interest income, net................... 9,037 18,727 19,948 41,283 138,672
----------- ----------- ----------- ------------ -------------
Net Loss............................... $ (798,186) $ (562,410) $(2,198,668) $ (1,077,042) $ (11,695,327)
=========== =========== =========== ============ =============
Basic and Diluted Net Loss Per Common
Share.................................. $ (0.07) $ (0.05) $ (0.18) $ (0.09)
=========== =========== =========== ============
Basic and Diluted Weighted Average
Number of Common
Shares Outstanding..................... 11,950,053 11,880,045 11,915,049 11,880,045
=========== =========== =========== ============
See Notes to Condensed Consolidated Financial Statements.
-3-
SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
-----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
-----------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------
FROM INCEPTION ON JULY 1, 1998 THROUGH DECEMBER 31, 2003
--------------------------------------------------------
(unaudited)
Deficit
Accumulated
Capital in During the
Excess of Development Stage
Common Stock Par Value Total
------------------------- ---------------- -------------------- ---------
Shares Amount
------ ------
Common stock outstanding............. 2,000,462 $ 20,005 $ (20,005) -- --
Contribution of capital.............. -- -- 85,179 -- $ 85,179
Issuance of common stock in
reverse merger on January 22,
1999 at $0.01 per share.............. 3,400,000 34,000 (34,000) -- --
Issuance of common stock for
cash on May 21, 1999 at
$2.63437 per share................... 759,194 7,592 1,988,390 -- 1,995,982
Issuance of common stock for
placement fees on May 21, 1999 at
$0.01 per share...................... 53,144 531 (531) -- --
Issuance of common stock for
cash on January 26, 2000 at
$2.867647 per share.................. 17,436 174 49,826 -- 50,000
Issuance of common stock for
cash on January 31, 2000 at
$2.87875 per share................... 34,737 347 99,653 -- 100,000
Issuance of common stock for
cash on February 4, 2000 at
2.934582 per share................... 85,191 852 249,148 -- 250,000
Issuance of common stock for
cash on March 15, 2000 at
$2.527875 per share.................. 51,428 514 129,486 -- 130,000
Issuance of common stock for
cash on June 22, 2000 at $1.50 per
share................................ 1,471,700 14,718 2,192,833 -- 2,207,551
(continued)
See Notes to Condensed Consolidated Financial Statements.
-4-
SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
-----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
-----------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------
FROM INCEPTION ON JULY 1, 1998 THROUGH DECEMBER 31, 2003
--------------------------------------------------------
(unaudited)
Deficit
Accumulated
Capital in During the
Excess of Development
Common Stock Par Value Stage Total
----------------------- ----------------- --------------- ------------
Shares Amount
------ ------
Commissions, legal and bank fees
associated with issuances for the
year ended June 30, 2000........... -- -- $ (260,595) -- $ (260,595)
Fair market value of options
and warrants vested during the year
ended June 30, 2000................ -- -- 873,779 -- 873,779
Fair market value of warrants
vested during the year ended June
30, 2001........................... -- -- 80,700 -- 80,700
Issuance of common stock and
warrants for cash from
November 30, 2001 through
April 17, 2002..................... 3,701,430 $ 37,014 6,440,486 -- 6,477,500
Issuance of common stock and
warrants associated with bridge
loan conversion on December 3,
2001............................... 305,323 3,053 531,263 -- 534,316
Commissions, legal and bank fees
associated with issuances for the
year ended June 30, 2002........... -- -- (846,444) -- (846,444)
Fair market value of options and
warrants vested during the year
ended June 30, 2002................ -- -- 577,708 -- 577,708
Fair market value of options and
warrants vested during the year
ended June 30, 2003................ -- -- 97,497 -- 97,497
(continued)
See Notes to Condensed Consolidated Financial Statements.
-5-
SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
-----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
-----------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------
FROM INCEPTION ON JULY 1, 1998 THROUGH DECEMBER 31, 2003
--------------------------------------------------------
(unaudited)
Deficit
Accumulated
Capital in During the
Excess of Development
Common Stock Par Value Stage Total
------------------------ -------------- --------------- -------------
Shares Amount
------ ------
Fair market value of options
and warrants vested during the
six month period ended December
31, 2003........................... -- -- $ 1,084,888 -- $ 1,084,888
Options and warrants exercised
and other transactions during the
six month period ended December
31, 2003........................... 112,134 $ 1,122 196,004 -- 197,126
Net loss........................... -- -- -- $ (11,695,327) (11,695,327)
---------- --------- ------------- ------------- ------------
Balance at December 31, 2003....... 11,992,179 $ 119,922 $ 13,515,265 $ (11,695,327) $ 1,939,860
========== ========= ============= ============= ============
See Notes to Condensed Consolidated Financial Statements.
-6-
SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
-----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
-----------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------
(unaudited)
From Inception on
For the Six Months Ended July 1, 1998 through
December 31, December 31,
2003 2002 2003
-------------- -------------- ----------------------
Cash flows from operating activities:
Net loss........................................................ $ (2,198,668) $ (1,077,042) $ (11,695,327)
Adjustments to reconcile net loss
to net cash used in operating activities:
Noncash capital contribution.................................... -- -- 85,179
Noncash conversion of accrued expenses into equity.............. -- -- 131,250
Issuance of common stock and warrants for interest.............. -- -- 9,316
Issuance and vesting of stock options and warrants
for services................................................... 1,084,888 137,177 2,583,323
Depreciation and amortization................................... 15,331 12,237 98,744
(Increase) decrease in operating assets:
Accounts receivable............................................. -- 75,000 --
Prepaid expense and other current assets........................ 120,238 (161,260) (65,297)
Security deposit................................................ -- -- (7,187)
Increase (decrease) in operating liabilities:
Accounts payable................................................ (29,122) (32,720) 27,014
Accrued expenses................................................ 139,639 2,854 402,799
------------- ------------- ----------------
Net cash used in operating activities........................... (867,694) (1,043,754) (8,430,186)
------------- ------------- ----------------
Cash flows from investing activities:
Patent costs.................................................... (164,876) (56,458) (744,582)
Redemption (purchase) of investments, net....................... 798,200 729,176 (1,301,095)
Purchase of property and equipment.............................. (1,719) (1,980) (159,439)
------------- ------------- ----------------
Net cash provided by (used in) investing activities............. 631,605 670,738 (2,205,116)
------------- ------------- ----------------
Cash flows from financing activities:
Proceeds from grant............................................. -- 11,089 90,150
Proceeds from issuance of bridge notes.......................... -- -- 525,000
Proceeds from issuance of common stock and warrants, net........ 197,126 -- 10,301,119
------------- ------------- ----------------
Cash provided by financing activities........................... 197,126 11,089 10,916,269
------------- ------------- ----------------
Net increase (decrease) in cash and cash equivalents............ (38,963) (361,927) 280,967
Cash and cash equivalents at beginning of period................ 319,930 798,711 --
------------- ------------- ----------------
Cash and cash equivalents at end of period...................... $ 280,967 $ 436,784 $ 280,967
============= ============= ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest...................... $ -- $ -- $ 22,317
============= ============= ================
Supplemental schedule of noncash financing activity:
Conversion of bridge notes into stock......................... $ -- $ -- $ 534,316
============= ============= ================
See Notes to Condensed Consolidated Financial Statements.
-7-
SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
-----------------------------------------
(A DEVELOPMENT STAGE COMPANY)
-----------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 2003.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments, consisting
solely of those which are of a normal recurring nature, necessary to present
fairly its financial position as of December 31, 2003, the results of its
operations for the three-month periods ended December 31, 2003 and 2002, the
results of its operations and cash flows for the six-month periods ended
December 31, 2003 and 2002, and for the period from inception on July 1, 1998
through December 31, 2003.
The Company had previously reported stock-based compensation as a separate
category in its consolidated statement of operations. Beginning in fiscal 2004,
the Company no longer reports stock-based compensation as a separate category
and has included such stock-based compensation in general and administrative and
research and development expenses, as applicable. Therefore, certain
reclassifications have been made to the prior year consolidated financial
statements in order to conform to the current year's classification.
Interim results are not necessarily indicative of results for the full
fiscal year.
NOTE 2 - LOSS PER SHARE:
Net loss per common share is computed by dividing the loss by the weighted
average number of common shares outstanding during the period. Since September
7, 1999, the Company has had outstanding options and warrants to purchase its
common stock, $0.01 par value per share (the "Common Stock"); however, as of
December 31, 2003 and 2002, shares to be issued upon the exercise of options and
warrants aggregating 6,308,094 and 5,840,653, respectively, at an average
exercise price of $2.67 and $2.62, respectively, are not included in the
computation of diluted loss per share as the effect is anti-dilutive.
NOTE 3 - STOCK OPTIONS AND WARRANTS:
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Options to purchase Common Stock have been
granted at or above the fair market value of the stock as of the date of grant.
Accordingly, no compensation costs have been recognized for the stock option
plan. Had compensation cost been determined based on the fair value at the grant
dates for those awards consistent with the method of FASB No. 123, the Company's
net loss and net loss per share would have been increased to the pro forma
amounts indicated below:
-8-
THREE MONTH PERIODS ENDED DECEMBER 31, 2003 2002
-------------------------------------------------------------------------------------------------
Net loss:
As reported $(798,186) $(562,410)
Stock-based employee compensation costs (164,645) (200,789)
-------------------------------------------------------------------------------------------------
Pro forma $(962,831) $(763,199)
=================================================================================================
Loss per share:
As reported $ (0.07) $ (0.05)
=================================================================================================
Pro forma $ (0.08) $ (0.06)
=================================================================================================
SIX MONTH PERIODS ENDED DECEMBER 31, 2003 2002
-------------------------------------------------------------------------------------------------
Net loss:
As reported $(2,198,668) $(1,077,042)
Stock-based employee compensation costs (308,146) (430,290)
-------------------------------------------------------------------------------------------------
Pro forma $(2,506,814) $(1,507,332)
=================================================================================================
Loss per share:
As reported $ (0.18) $ (0.09)
=================================================================================================
Pro forma $ (0.21) $ (0.13)
=================================================================================================
The estimated grant date present value reflected in the above table is
determined using the Black-Scholes model. The material factors incorporated in
the Black-Scholes model in estimating the value of the options reflected in the
above table for the three and six-month periods ended December 31, 2003 and 2002
include the following: (i) an exercise price equal to the fair market value of
the underlying stock on the dates of grant; (ii) an option term of 5 and 10
years; (iii) a risk-free rate range of 3.80% to 4.24% and 3.00% to 4.22%,
respectively, that represents the interest rate on a U.S. Treasury security with
a maturity date corresponding to that of the option term; (iv) volatility of
147.83%; and (v) no annualized dividends paid with respect to a share of Common
Stock at the date of grant. The ultimate values of the options will depend on
the future price of the Company's Common Stock, which cannot be forecast with
reasonable accuracy.
NOTE 4 - SIGNIFICANT EVENTS:
In connection with the one-year financial advisory agreement entered into
by the Company with Sands Brothers International Ltd. ("Sands Brothers") in
September 2003, Sands Brothers was issued a five-year warrant to purchase
237,600 shares of the Company's Common Stock at an exercise price equal to $3.59
per share. During the six-month period ended December 31, 2003, the Company
recorded stock-based compensation in the amount of $843,480 related to the
issuance of such warrant.
On December 15, 2003, the Board unanimously approved and the Company
subsequently granted, effective December 16, 2003: (i) options under the 1998
Stock Incentive Plan, as
-9-
amended (the "Plan"), to purchase an aggregate of 85,000 shares of Common Stock
to certain members of the Board at an exercise price equal to $3.15 per share,
with one-half of such options exercisable on the date of grant and one-half of
such options becoming exercisable on the first anniversary from the date of
grant; (ii) options under the Plan to purchase an aggregate of 130,000 shares of
Common Stock to the members of the Company's Scientific Advisory Board, certain
research consultants and executive officers of the Company, at an exercise price
equal to $3.15 per share, with one-third of such options exercisable on the date
of grant and one-third of such options becoming exercisable on each of the first
and second anniversaries from the date of grant; and (iii) a warrant to purchase
20,000 shares of Common Stock to Forbes, Inc. at an exercise price equal to
$3.15 per share, with one-third of such options exercisable on the date of grant
and one-third of such options becoming exercisable on each of the first and
second anniversaries from the date of grant.
Pursuant to the New Jersey Technology Tax Credit Transfer Program, the
Company sold its entire New Jersey net operating loss tax benefit for the fiscal
year ended June 30, 2002 in the amount of $105,720 and received net proceeds of
$91,448.
NOTE 5 - SUBSEQUENT EVENT:
In February 2004, the Company completed a private placement to certain
accredited investors (the "Private Placement") for an aggregate amount of
1,536,922 shares of Common Stock and warrants to purchase 768,459 shares of
Common Stock for the aggregate cash consideration of $3,642,500. The Private
Placement offered units of one share of Common Stock and a five-year warrant to
purchase 0.50 shares of Common Stock at a price equal to $2.37 per unit. The
warrants were issued at an exercise price equal to $3.79 per share, with such
warrants vesting on the date of grant. The estimated costs associated with the
Private Placement totaled approximately $330,000. The Company did not engage a
placement agent for the sale of such securities. In addition, the Company
entered into a Registration Rights Agreement with these purchasers. The
Registration Rights Agreement requires the Company to file a registration
statement on Form S-3 for the shares by March 18, 2004, to register the
securities acquired by the purchasers in the Private Placement. If the Company
fails to file a registration statement by that date, it is required to pay to
each purchaser in the Private Placement 1.5% of the aggregate purchase price
paid by such purchaser.
Sands Brothers and Stanford Group Company acted as co-managing finders of
the Private Placement, and certain consultants to the Company provided financial
advisory services in connection with the Private Placement. As consideration for
their services to the Company, such finders were issued warrants to purchase an
aggregate of 73,682 shares of Common Stock, on the same terms and conditions as
the warrants issued to the purchasers in the Private Placement.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
our condensed consolidated financial statements and the related notes thereto
included in the Quarterly Report on Form 10-QSB. The discussion and analysis may
contain forward-looking statements that are based upon current expectations and
entail various risks and uncertainties. Our actual results and the timing of
events could differ materially from those anticipated in the forward-looking
statements as a result of various factors, including those set forth under
"Factors That May Affect Our Business, Future Operating Results and Financial
Condition" and elsewhere in this report.
OVERVIEW
We are a development stage biotechnology company whose mission is to
utilize its patent-pending genes (primarily DHS and Factor 5A) to: (i) enhance
the quality and productivity of fruits, flowers, vegetables and agronomic crops
through the control of cell death in plants (senescence); and (ii) develop novel
approaches to treat (A) programmed cell death diseases in humans (apoptosis)
(e.g., rheumatoid arthritis, macular degeneration, glaucoma, and heart disease),
which are the result of premature cell death in humans, and (B) cancer, a group
of diseases in which apoptosis is blocked. Agricultural results to date include
longer shelf life of perishable produce, increased seed and biomass yield and
greater tolerance to environmental stress. Mammalian results to date include:
determining the expression of our patent-pending genes in both ischemic and
non-ischemic heart tissue; correlating such genes to certain key immune
regulators known as cytokines that have been found to be involved in apoptosis;
reducing cytokine induced apoptosis in human optic nerve cell lines and in
epithelial cells of the intestine and reducing cytokine expression in human
liver cell lines; and inducing apoptosis, while retarding cell proliferation, in
human cancer cell lines derived from tumors.
We do not expect to generate significant revenues for approximately the
next two to three years, during which time we will engage in significant
research and development efforts.
We are currently working with lettuce, melon, tomato, canola, Arabidopsis
(a model plant that is similar to canola), banana, alfalfa and certain species
of trees, and have obtained proof of concept for the lipase, DHS and Factor 5A
genes in several of these plants. Also, we have completed a first round of field
trials of lettuce and bananas with our respective partners and are moving into a
second round. These field trials have shown that our technology effectively
reduces browning in cut lettuce and extends the shelf life of banana fruit by
100%. Near-term research and development initiatives include (i) silencing or
reducing the expression of DHS and Factor 5A genes in these plants and (ii)
propagation and testing of plants with our silenced genes. We have also
completed our research and development initiative in carnation flower, which
yielded a 100% increase in shelf life through the inhibition of the DHS
reaction.
Our preliminary research reveals that DHS and Factor 5A genes regulate
apoptosis in animal and human cells. In humans, we have shown that Factor 5A
encodes for proteins with similar structures but that serve different functions
(isoforms). There are two different isoforms of Factor 5A: the apoptosis
isoform, which causes cell death and the growth isoform, which causes cell
proliferation.
-11-
We believe that our technology downregulating the apoptosis isoforms of
Factor 5A may have potential application as a means of controlling a broad range
of diseases that are attributable to premature apoptosis. Apoptotic diseases
include neurodegenerative diseases, retinal diseases, such as glaucoma and
macular degeneration, heart disease, stroke, Crohn's disease and rheumatoid
arthritis, among others. We have commenced pre-clinical research on diseased
heart tissue as well as cell-line studies to determine Factor 5A's ability to
regulate key inflammatory cytokines, including Interleukin-1, Interleukin-18 and
TNF-a, which are indicated in numerous apoptotic diseases. In addition, we have
initiated cell-line studies for applications of our technology to glaucoma,
surface ocular diseases and cells of the intestines and on liver cell-lines.
These preclinical tests have shown that Factor 5A appears to control expression
of the suite of proteins required for apoptosis. Such proteins include p53,
interleukins, caspases, tumor necrosis factor (TNF-alpha) and Interferon gamma.
Expression of these cell death proteins is required for the execution of
apoptosis.
Conversely, we have also established in pre-clinical studies that apoptosis
upregulation of the apoptosis Factor 5A gene is able to kill cancer cells.
Tumors arise when cells that have been targeted to undergo apoptosis are unable
to do so because of an inability to activate the apoptotic pathways. Because the
Factor 5A gene appears to function at the initiation point of the apoptotic
pathways, we believe that our gene technology has potential application as a
means of combating a broad range of cancers and have initiated studies with in
vivo cancer models to determine Factor 5A's ability to shrink human tumors
grafted onto mice. In addition, we have also shown that suppression of the
growth isoform of Factor 5A in cancer cells reduces proliferation of cancer
cells. This will allow us to pursue cancer treatments which simultaneously cause
cancer cells to die and not allow them to divide further.
On March 25, 2003, we were granted Patent No. 6,538,182, entitled "DNA
Encoding a Plant Deoxyhypusine Synthase, A Plant Eukaryotic Initiation Factor
5A, Transgenic Plants and A Method For Controlling Senescence and Programmed
Cell Death in Plants", from the United States Patent and Trademark Office, or
PTO. In addition to this patent, we have a wide variety of patent applications
(including divisional applications and continuations-in-part) in process with
the PTO and internationally. We intend to continue our strategy of enhancing
these new patent applications through the addition of data as it is collected.
Consistent with our commercialization strategy, we intend to attract other
companies interested in strategic partnerships or licensing our technology that
may result in additional license fees, revenues from contract research and other
related revenues. Successful future operations will depend on our ability to
transform our research and development activities into commercializable
technology.
FACTORS THAT MAY AFFECT OUR BUSINESS, FUTURE OPERATING RESULTS AND FINANCIAL
CONDITION
The more prominent risks and uncertainties inherent in our business are
described below. However, additional risks and uncertainties may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations may suffer.
-12-
WE HAVE A LIMITED OPERATING HISTORY AND HAVE INCURRED SUBSTANTIAL LOSSES AND
EXPECT FUTURE LOSSES.
We are a developmental stage biotechnology company with a limited operating
history and limited assets and capital. We have incurred losses each year since
inception and have an accumulated deficit of $11,695,327 at December 31, 2003.
We have generated minimal revenues by licensing certain of our technology to
companies willing to share in our development costs. However, our technology may
not be ready for widespread commercialization for several years. We expect to
continue to incur losses over the next two to three years because we anticipate
that our expenditures on research and development, commercialization and
administrative activities will significantly exceed our revenues during that
period. We cannot predict when, if ever, we will become profitable.
WE DEPEND ON A SINGLE PRINCIPAL TECHNOLOGY.
Our primary business is the development and commercial exploitation of
technology to identify, isolate, characterize, and silence genes which control
the aging and death of cells in plants and mammals. Our future revenue and
profitability critically depend upon our ability to successfully develop
senescence and apoptosis gene technology and later market and license such
technology at a profit. We have conducted experiments on certain crops with
favorable results and have conducted certain preliminary cell-line experiments,
which have provided us with data upon which we have designed additional research
programs. However, we cannot give any assurance that our technology will be
commercially successful or economically viable for all crops or mammalian
applications.
In addition, no assurance can be given that adverse consequences might not
result from the use of our technology such as the development of negative
effects on plants or mammals or reduced benefits in terms of crop yield or
protection. Our failure to obtain market acceptance of our technology or to
successfully commercialize such technology or develop a commercially viable
product would have a material adverse effect on our business.
WE OUTSOURCE ALL OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES.
We rely on third parties to perform all of our research and development
activities. Our primary research and development efforts take place at the
University of Waterloo in Ontario, Canada, where our technology was developed,
at the University of Colorado, at two research hospitals in Canada, at Anawah,
Inc., and with our commercial partners. At this time, we do not have the
internal capabilities to perform our research and development activities.
Accordingly, the failure of third-party research partners, such as the
University of Waterloo, to perform under agreements entered into with us, or our
failure to renew important research agreements with these third parties, would
have a material adverse effect on our ability to develop and exploit our
technology.
WE HAVE SIGNIFICANT FUTURE CAPITAL NEEDS.
As of December 31, 2003, we had cash and highly-liquid investments valued
at $1,582,062 and working capital of $1,217,546. In January 2004 and February
2004, we received aggregate net proceeds of approximately $3,300,000 from a
private placement of our equity securities. Using our available reserves as of
December 31, 2003 and the net proceeds from the private equity financing, we
believe that we can operate according to our current business plan for at least
the next twelve months. To date, we have generated minimal revenues and
anticipate
-13-
that our operating costs may exceed any revenues generated over the next several
years. Therefore, we may be required to raise additional capital in the future
in order to operate according to our current business plan, and such funding may
not be available on favorable terms, if at all. In addition, in connection with
such funding, if we need to issue more equity securities than our certificate of
incorporation currently authorizes, or more than 20% of the shares of our common
stock outstanding, we may need stockholder approval. If stockholder approval is
not obtained or if adequate funds are not available, we may be required to
curtail operations significantly or to obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, product candidates, products or potential markets.
Investors may experience dilution in their investment from future offerings of
our common stock. For example, if we raise additional capital by issuing equity
securities, such an issuance would reduce the percentage ownership of existing
stockholders. In addition, assuming the exercise of all options and warrants
granted, as of December 31, 2003, we had 11,699,728 shares of common stock
authorized but unissued, which may be issued from time to time by our board of
directors without stockholder approval. In connection with our private placement
of equity securities, in January 2004 and February 2004, we issued an aggregate
of an additional 1,536,922 shares of common stock and warrants to purchase
842,141 shares of common stock. Therefore, assuming the exercise of all options
and warrants granted as of February 13, 2004, we had 9,320,665 shares of common
stock authorized but unissued, which may be issued from time to time by our
board of directors without stockholder approval. Furthermore, we may need to
issue securities that have rights, preferences and privileges senior to our
common stock. Failure to obtain financing on acceptable terms would have a
material adverse effect on our liquidity.
Since inception, we have financed all of our operations through private
equity financings. Our future capital requirements depend on numerous factors,
including:
o the scope of our research and development;
o our ability to attract business partners willing to share in our
development costs;
o our ability to successfully commercialize our technology;
o competing technological and market developments;
o our ability to enter into collaborative arrangements for the development,
regulatory approval and commercialization of other products; and
o the cost of filing, prosecuting, defending and enforcing patent claims
and other intellectual property rights.
OUR BUSINESS DEPENDS ON OUR PATENTS, LICENSES AND PROPRIETARY RIGHTS AND THE
ENFORCEMENT OF THESE RIGHTS.
As a result of the substantial length of time and expense associated with
developing products and bringing them to the marketplace in the agricultural and
biotechnology industries, obtaining and maintaining patent and trade secret
protection for technologies, products and processes is of vital importance. Our
success will depend in part on several factors, including, without limitation:
o our ability to obtain patent protection for technologies, products and
processes;
o our ability to preserve trade secrets; and
o our ability to operate without infringing the proprietary rights of other
parties both in the United States and in foreign countries.
-14-
We have been issued one patent by the PTO. We have also filed patent
applications in the United States for our technology, which technology is vital
to our primary business, as well as several Continuations in Part on these
patent applications. Our success depends in part upon the enforcement of our
patent rights and whether patents are granted for our pending patent
applications.
Furthermore, although we believe that our technology is unique and will not
violate or infringe upon the proprietary rights of any third party, there can be
no assurance that such claims will not be made or if made, could be successfully
defended against. If we do not obtain and maintain patent protection, we may
face increased competition in the United States and internationally, which would
have a material adverse effect on our business.
Since patent applications in the United States are maintained in secrecy
until patents are issued, and since publication of discoveries in the scientific
and patent literature tend to lag behind actual discoveries by several months,
we cannot be certain that we were the first creator of the inventions covered by
our pending patent applications or that we were the first to file patent
applications for these inventions.
In addition, among other things, we cannot guarantee that:
o our patent applications will result in the issuance of patents;
o any patents issued or licensed to us will be free from challenge and that
if challenged, would be held to be valid;
o any patents issued or licensed to us will provide commercially
significant protection for our technology, products and processes;
o other companies will not independently develop substantially equivalent
proprietary information which is not covered by our patent rights;
o other companies will not obtain access to our know-how;
o other companies will not be granted patents that may prevent the
commercialization of our technology; or
o we will not require licensing and the payment of significant fees or
royalties to third parties for the use of their intellectual property in
order to enable us to conduct our business.
If any relevant claims of third-party patents which are adverse to us are
upheld as valid and enforceable, we could be prevented from commercializing our
technology or could be required to obtain licenses from the owners of such
patents. We cannot guarantee that such licenses would be available or, if
available, would be on acceptable terms.
We could become involved in infringement actions to enforce and/or protect
our patents. Regardless of the outcome, patent litigation is expensive and time
consuming and would distract our management from other activities.
The laws of some foreign countries do not protect proprietary rights to the
same extent as the laws of the United States, and many companies have
encountered significant problems and costs in protecting their proprietary
rights in these foreign countries.
Patent law is still evolving relative to the scope and enforceability of
claims in the fields in which we operate. We are like most biotechnology
companies in that our patent protection is highly uncertain and involves complex
legal and technical questions for which legal principles are not yet firmly
established. In addition, if issued, our patents may not contain claims
-15-
sufficiently broad to protect us against third parties with similar technologies
or products, or provide us with any competitive advantage.
The PTO and the courts have not established a consistent policy regarding
the breadth of claims allowed in biotechnology patents. The allowance of broader
claims may increase the incidence and cost of patent interference proceedings
and the risk of infringement litigation. On the other hand, the allowance of
narrower claims may limit the value of our proprietary rights.
Our success also depends upon know-how, unpatentable trade secrets, and the
skills, knowledge and experience of our scientific and technical personnel. As a
result, we require all employees to agree to a confidentiality provision that
prohibits the disclosure of confidential information to anyone outside of our
company, during the term of employment and thereafter. We also require all
employees to disclose and assign to us the rights to their ideas, developments,
discoveries and inventions. We also attempt to enter into similar agreements
with our consultants, advisors and research collaborators. We cannot guarantee
adequate protection for our trade secrets, know-how or other proprietary
information against unauthorized use or disclosure. We occasionally provide
information to research collaborators in academic institutions and request the
collaborators to conduct certain tests. We cannot guarantee that the academic
institutions will not assert intellectual property rights in the results of the
tests conducted by the research collaborators, or that the academic institutions
will grant licenses under such intellectual property rights to us on acceptable
terms, if at all. If the assertion of intellectual property rights by an
academic institution is substantiated, and the academic institution does not
grant intellectual property rights to us, these events could have a material
adverse effect on our business and financial results.
WE WILL HAVE TO PROPERLY MANAGE OUR GROWTH.
As our business grows, we may need to add employees and enhance our
management, systems and procedures. We will need to successfully integrate our
internal operations with the operations of our marketing partners,
manufacturers, distributors and suppliers to produce and market commercially
viable products. Although we do not presently intend to conduct research and
development activities in-house, we may undertake those activities in the
future. Expanding our business will place a significant burden on our management
and operations. Our failure to effectively respond to changes brought about by
our growth may have a material adverse effect on our business and financial
results.
WE HAVE NO MARKETING OR SALES HISTORY AND DEPEND ON THIRD-PARTY MARKETING
PARTNERS.
We have no history of marketing, distributing or selling biotechnology
products and we are relying on our ability to successfully establish marketing
partners or other arrangements with third parties to market, distribute and sell
a commercially viable product both here and abroad. Our business plan also
envisions creating strategic alliances to access needed commercialization and
marketing expertise. We may not be able to attract qualified sub-licensees,
distributors or marketing partners, and even if qualified, such marketing
partners may not be able to successfully market agricultural products or human
health applications developed with our technology. If we fail to successfully
establish distribution channels, or if our marketing partners fail to provide
adequate levels of sales, we will not be able to generate significant revenue.
-16-
WE DEPEND ON PARTNERS TO DEVELOP AND MARKET PRODUCTS.
In its current state of development, our technology is not ready to be
marketed to consumers. We intend to follow a multi-faceted commercialization
strategy that involves the licensing of our technology to business partners for
the purpose of further technological development, marketing and distribution. We
are seeking business partners who will share the burden of our development costs
while our technology is still being developed, and who will pay us royalties
when they market and distribute products incorporating our technology upon
commercialization. The establishment of joint ventures and strategic alliances
may create future competitors, especially in certain regions abroad where we do
not pursue patent protection. If we fail to establish beneficial business
partners and strategic alliances, our growth will suffer and the continued
development of our technology may be harmed.
COMPETITION IN THE AGRICULTURAL AND BIOTECHNOLOGY INDUSTRIES IS INTENSE AND
TECHNOLOGY IS CHANGING RAPIDLY.
Many agricultural and biotechnology companies are engaged in research and
development activities relating to senescence and apoptosis. The market for
plant protection and yield enhancement products is intensely competitive,
rapidly changing and undergoing consolidation. We may be unable to compete
successfully against our current and future competitors, which may result in
price reductions, reduced margins and the inability to achieve market acceptance
for products containing our technology. Our competitors in the field of plant
senescence gene technology are companies that develop and produce transgenic
plants and include major international agricultural companies, specialized
biotechnology companies, research and academic institutions and, potentially,
our joint venture and strategic alliance partners. Such companies include:
Paradigm Genetics; Aventis Crop Science; Mendel Biotechnology; Renessen LLC;
Exelixis Plant Sciences, Inc.; PlantGenix, Inc.; and Eden Bioscience, among
others. Some of the companies involved in apoptosis research include: Cell
Pathways, Inc.; Trevigen, Inc.; Idun Pharmaceuticals; Novartis; Introgen
Therapeutics, Inc.; Genta, Inc.; and Oncogene, Inc. Many of these competitors
have substantially greater financial, marketing, sales, distribution and
technical resources than us and have more experience in research and
development, clinical trials, regulatory matters, manufacturing and marketing.
We anticipate increased competition in the future as new companies enter the
market and new technologies become available. Our technology may be rendered
obsolete or uneconomical by technological advances or entirely different
approaches developed by one or more of our competitors.
OUR BUSINESS IS SUBJECT TO VARIOUS GOVERNMENT REGULATIONS.
At present, the U.S. federal government regulation of biotechnology is
divided among three agencies: (i) the USDA regulates the import, field testing
and interstate movement of specific types of genetic engineering that may be
used in the creation of transgenic plants; (ii) the EPA regulates activity
related to the invention of plant pesticides and herbicides, which may include
certain kinds of transgenic plants; and (iii) the FDA regulates foods derived
from new plant varieties. The FDA requires that transgenic plants meet the same
standards for safety that are required for all other plants and foods in
general. Except in the case of additives that significantly alter a food's
structure, the FDA does not require any additional standards or specific
approval for genetically engineered foods, but expects transgenic plant
developers to consult the FDA before introducing a new food into the
marketplace. Use of our technology, if developed for human health applications,
will also be subject to FDA regulation.
-17-
We believe that our current activities, which to date have been confined to
research and development efforts, do not require licensing or approval by any
governmental regulatory agency. However, federal, state and foreign regulations
relating to crop protection products and human health applications developed
through biotechnology are subject to public concerns and political
circumstances, and, as a result, regulations have changed and may change
substantially in the future. Accordingly, we may become subject to governmental
regulations or approvals or become subject to licensing requirements in
connection with our research and development efforts. We may also be required to
obtain such licensing or approval from the governmental regulatory agencies
described above, or from state agencies, prior to the commercialization of our
genetically transformed plants and mammalian technology. In addition, our
marketing partners who utilize our technology or sell products grown with our
technology may be subject to government regulations. The imposition of
unfavorable governmental regulations on our technology or the failure to obtain
licenses or approvals in a timely manner would have a material adverse effect on
our business.
THE HUMAN HEALTH APPLICATIONS OF OUR TECHNOLOGY ARE SUBJECT TO A LENGTHY AND
UNCERTAIN REGULATORY PROCESS.
The FDA must approve any drug or biologic product before it can be marketed
in the United States. In addition, prior to being sold outside of the U.S., any
products resulting from the application of our mammalian technology must be
approved by the regulatory agencies of foreign governments. Prior to filing a
new drug application or biologics license application with the FDA, we would
have to perform extensive pre-clinical testing and clinical trials, which could
take several years and may require substantial expenditures. Any failure to
obtain regulatory approval could delay or prevent us from commercializing our
mammalian technology.
CLINICAL TRIALS ON OUR HUMAN HEALTH APPLICATIONS MAY BE UNSUCCESSFUL IN
DEMONSTRATING EFFICACY AND SAFETY, WHICH COULD DELAY OR PREVENT REGULATORY
APPROVAL.
Clinical trials may reveal that our mammalian technology is ineffective or
harmful, which would significantly limit the possibility of obtaining regulatory
approval for any drug or biologic product manufactured with our technology. The
FDA requires submission of extensive pre-clinical, clinical and manufacturing
data to assess the efficacy and safety of potential products. Furthermore, the
success of preliminary studies does not ensure commercial success, and
later-stage clinical trials may fail to confirm the results of the preliminary
studies.
CONSUMERS MAY NOT ACCEPT OUR TECHNOLOGY.
We cannot guarantee that consumers will accept products containing our
technology. Recently, there has been consumer concern and consumer advocate
activism with respect to genetically engineered consumer products. The adverse
consequences from heightened consumer concern in this regard could affect the
markets for products developed with our technology and could also result in
increased government regulation in response to that concern. If the public or
potential customers perceive our technology to be genetic modification or
genetic engineering, agricultural products grown with our technology may not
gain market acceptance.
-18-
WE DEPEND ON OUR KEY PERSONNEL.
We are highly dependent on our scientific advisors, consultants and
third-party research partners. Dr. Thompson is the inventor of our technology
and the driving force behind our current research. The loss of Dr. Thompson
would severely hinder our technological development. Our success will also
depend in part on the continued service of our key employees and our ability to
identify, hire and retain additional qualified personnel in an intensely
competitive market. We do not maintain key person life insurance on any member
of management. The failure to attract and retain key personnel could limit our
growth and hinder our research and development efforts.
CERTAIN PROVISIONS OF OUR CHARTER, BY-LAWS AND DELAWARE LAW COULD MAKE A
TAKEOVER DIFFICULT.
Certain provisions of our certificate of incorporation and by-laws could
make it more difficult for a third party to acquire control of us, even if the
change in control would be beneficial to stockholders. Our certificate of
incorporation authorizes our board of directors to issue, without stockholder
approval, except as may be required by the rules of the American Stock Exchange,
5,000,000 shares of preferred stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of our common stock. Similarly, our by-laws do not restrict our board of
directors from issuing preferred stock without stockholder approval.
In addition, we are subject to the Business Combination Act of the Delaware
General Corporation Law which, subject to certain exceptions, restricts certain
transactions and business combinations between a corporation and a stockholder
owning 15% or more of the corporation's outstanding voting stock for a period of
three years from the date such stockholder becomes a 15% owner. These provisions
may have the effect of delaying or preventing a change of control of us without
action by our stockholders and, therefore, could adversely affect the value of
our common stock.
Furthermore, in the event of our merger or consolidation with or into
another corporation, or the sale of all or substantially all of our assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, our board of directors is required to provide accelerated
vesting of outstanding options.
OUR MANAGEMENT AND OTHER AFFILIATES HAVE SIGNIFICANT CONTROL OF OUR COMMON STOCK
AND COULD CONTROL OUR ACTIONS IN A MANNER THAT CONFLICTS WITH OUR INTERESTS AND
THE INTERESTS OF OTHER STOCKHOLDERS.
As of December 31, 2003, our executive officers, directors and affiliated
entities together beneficially own approximately 37.5% of the outstanding shares
of our common stock, assuming the exercise of options and warrants which are
currently exercisable, held by these stockholders. As of February 13, 2004, upon
the closing of our private placement of equity securities, our executive
officers, directors and affiliated entities together beneficially own
approximately 35.5% of the outstanding shares of our common stock, assuming the
exercise of options and warrants which are currently exercisable, held by these
stockholders. As a result, these stockholders, acting together, will be able to
exercise considerable influence over matters requiring approval by our
stockholders, including the election of directors, and may not always act in the
best interests of other stockholders. Such a concentration of ownership may have
the
-19-
effect of delaying or preventing a change in control of us, including
transactions in which our stockholders might otherwise receive a premium for
their shares over then current market prices.
OUR STOCKHOLDERS MAY EXPERIENCE SUBSTANTIAL DILUTION AS A RESULT OF OUTSTANDING
OPTIONS AND WARRANTS TO PURCHASE OUR COMMON STOCK.
As of December 31, 2003, we have granted options outside of our stock
option plan to purchase 10,000 shares of our common stock and outstanding
warrants to purchase 4,358,194 shares of our common stock. In addition, as of
December 31, 2003, we have reserved 3,000,000 shares of our common stock for
issuance upon the exercise of options granted pursuant to our stock option plan,
1,946,000 of which have been granted and 1,054,000 of which may be granted in
the future. As of February 13, 2004, upon the closing of our private placement
of equity securities, we have outstanding warrants to purchase 5,135,961 shares
of our common stock. The exercise of these options and warrants will result in
dilution to our existing stockholders and could have a material adverse effect
on our stock price.
SHARES ELIGIBLE FOR PUBLIC SALE.
As of December 31, 2003, we had 11,992,179 shares of our common stock
issued and outstanding, of which approximately 8,000,000 shares are registered
pursuant to a registration statement on Form S-3, which was deemed effective on
June 28, 2002, and the remainder of which are in the public float. In addition,
we have registered 3,000,000 shares of our common stock underlying options
granted or to be granted under our stock option plan. As of February 13, 2004,
upon the closing of our private placement of equity securities, we had
13,593,475 shares of our common stock issued and outstanding. Pursuant to the
terms of such equity offering, we are obligated to file a registration statement
on Form S-3 by March 18, 2004 to register such shares of common stock.
Consequently, sales of substantial amounts of our common stock in the public
market, or the perception that such sales could occur, may adversely affect the
market price of our common stock.
OUR STOCK HAS A LIMITED TRADING MARKET.
Our common stock is quoted on the American Stock Exchange and currently has
a limited trading market. We cannot assure that an active trading market will
develop or, if developed, will be maintained. As a result, our stockholders may
find it difficult to dispose of shares of our common stock and, as a result, may
suffer a loss of all or a substantial portion of their investment.
OUR STOCK PRICE MAY FLUCTUATE.
The market price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control. These
factors include:
o quarterly variations in operating results;
o the progress or perceived progress of our research and development
efforts;
o changes in accounting treatments or principles;
o announcements by us or our competitors of new technology, product and
service offerings, significant contracts, acquisitions or strategic
relationships;
o additions or departures of key personnel;
o future offerings or resales of our common stock or other securities;
o stock market price and volume fluctuations of publicly-traded companies
in general and development companies in particular; and
-20-
o general political, economic and market conditions.
IF OUR COMMON STOCK IS DELISTED FROM THE AMERICAN STOCK EXCHANGE, IT MAY BE
SUBJECT TO THE "PENNY STOCK" REGULATIONS WHICH MAY AFFECT THE ABILITY OF OUR
STOCKHOLDERS TO SELL THEIR SHARES.
In general, regulations of the SEC define a "penny stock" to be an equity
security that is not listed on a national securities exchange or Nasdaq and that
has a market price of less than $5.00 per share or with an exercise price of
less than $5.00 per share, subject to certain exceptions. If the American Stock
Exchange delists our common stock, it could be deemed a penny stock, which
imposes additional sales practice requirements on broker-dealers that sell such
securities to persons other than certain qualified investors. For transactions
involving a penny stock, unless exempt, a broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
consent to the transaction prior to the sale. In addition, the rules on penny
stocks require delivery, prior to and after any penny stock transaction, of
disclosures required by the SEC.
If our common stock were subject to the rules on penny stocks, the market
liquidity for our common stock could be severely and adversely affected.
Accordingly, the ability of holders of our common stock to sell their shares in
the secondary market may also be adversely affected.
INCREASING POLITICAL AND SOCIAL TURMOIL, SUCH AS TERRORIST AND MILITARY ACTIONS,
INCREASE THE DIFFICULTY FOR US AND OUR STRATEGIC PARTNERS TO FORECAST ACCURATELY
AND PLAN FUTURE BUSINESS ACTIVITIES.
Recent political and social turmoil, including the terrorist attacks of
September 11, 2001, the conflict in Iraq and the current crisis in the Middle
East, can be expected to put further pressure on economic conditions in the
United States and worldwide. These political, social and economic conditions may
make it difficult for us to plan future business activities. Specifically, if
the current crisis in Israel continues to escalate, the Rahan Joint Venture
could be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
As of December 31, 2003, our cash balance and investments totaled
$1,582,062, and we had working capital of $1,217,546. In addition, upon the
closings of our private equity financing on January 16, 2004 and February 2,
2004, we received aggregate proceeds of $3,642,500. As of December 31, 2003, we
had a federal tax loss carry-forward of approximately $8,583,000 and a state tax
loss carry-forward of approximately $3,263,000 to offset future taxable income.
There can be no assurance, however, that we will be able to take advantage of
any or all of such tax loss carry-forwards, if at all, in future fiscal years.
-21-
CONTRACTUAL OBLIGATIONS
The following table lists our cash contractual obligations as of December
31, 2003:
-------------------------------------------------------------------------------------------------------------------
Payments Due by Period
Contractual Obligations
-------------------------------------------------------------------------------------------------------------------
Less than More than
Total 1 year 1 - 3 years 4 - 5 years 5 years
-------------------------------------------------------------------------------------------------------------------
Research and Development
Agreements (1) $ 280,000 $ 280,000 $ -- $ -- $ --
-------------------------------------------------------------------------------------------------------------------
Facility, Rent and
Operating Leases (2) $ 79,464 $ 34,056 $ 45,408 $ -- $ --
-------------------------------------------------------------------------------------------------------------------
Employment, Consulting
and Scientific Advisory
Board Agreements (3) $ 627,416 $ 437,083 $ 190,333 $ -- $ --
===================================================================================================================
Total Contractual
Cash Obligations $ 986,880 $ 751,139 $ 235,741 $ -- $ --
===================================================================================================================
(1) Certain of our research and development agreements disclosed herein provide
that payment is to be made in Canadian dollars and, therefore, the
contractual obligations are subject to fluctuations in the exchange rate.
(2) The lease for our office space in New Brunswick, New Jersey is subject to
certain escalations for our proportionate share of increases in the
building's operating costs.
(3) Certain of our employment and consulting agreements provide for automatic
renewal (which is not reflected in the table), unless terminated earlier by
the parties to the respective agreements.
We expect our capital requirements to increase significantly over the next
several years as we commence new research and development efforts, increase our
business and administrative infrastructure and embark on developing in-house
business capabilities and facilities. Our future liquidity and capital funding
requirements will depend on numerous factors, including, but not limited to, the
levels and costs of our research and development initiatives and the cost and
timing of the expansion of our business development and administrative staff.
CAPITAL RESOURCES
Since inception, we have generated revenues of $210,000 in connection with
the initial fees received under our license and development agreements. We have
not been profitable since inception, we will continue to incur additional
operating losses in the future, and we will require additional financing to
continue the development and subsequent commercialization of our technology.
While we do not expect to generate significant revenues from the licensing of
our technology in the near future, we may enter into additional licensing or
other agreements with marketing and distribution partners that may result in
additional license fees. We may also receive revenues from contract research, or
other related revenue.
-22-
In February 2004, we completed a private placement to certain accredited
investors for an aggregate amount of 1,536,922 shares of common stock and
warrants to purchase 768,459 shares of common stock for the aggregate cash
consideration of $3,642,500. The private placement offered units of one share of
common stock and a five-year warrant to purchase 0.50 shares of common stock at
a price equal to $2.37 per unit. The warrant was offered with an exercise price
equal to $3.79 per share, with such warrant vesting on the date of grant. The
estimated costs associated with the private placement totaled approximately
$330,000.
Pursuant to the New Jersey Technology Tax Credit Transfer Program, the
Company sold its entire New Jersey net operating loss tax benefit for the fiscal
year ended June 30, 2002 in the amount of $105,720 and received net proceeds of
$91,448.
We anticipate that, based upon our current cash and investments, we will be
able to fund operations for at least the next twelve months. Over the next
twelve months, we plan to fund our research and development and
commercialization activities by (i) utilizing our current cash balance and
investments, (ii) achieving some of the milestones set forth in our current
licensing agreements, and (iii) through the execution of additional licensing
agreements for our technology.
CHANGES TO CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates are set forth in our Annual
Report on Form 10-KSB for the fiscal year ended June 30, 2003. There have been
no changes to such critical accounting policies and estimates.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2003 and Three Months Ended December 31, 2002
-----------------------------------------------------------------------------
We had no revenue during the three-month periods ended December 31, 2003
and December 31, 2002.
Operating expenses consist of general and administrative expenses, research
and development expenses and stock-based compensation. Operating expenses for
the three-month periods ended December 31, 2003 and December 31, 2002 were
$898,671 and $712,089, respectively, an increase of $186,582, or 26.2%. This
increase in operating expenses was primarily the result of an increase in
stock-based compensation, research and development expenses, and other general
and administrative expenses.
General and administrative expenses consist primarily of stock-based
compensation and other general and administrative costs, which include payroll
and benefits, professional services, investor relations, office rent and
corporate insurance. General and administrative expenses for the three-month
periods ended December 31, 2003 and December 31, 2002 were $597,527 and
$496,286, respectively, an increase of $101,241, or 20.4%. This increase was
primarily the result of an increase in stock-based compensation related to the
issuance and vesting of stock options and warrants as well as an increase in
other general and administrative expenses, investor relations expenses and
corporate insurance, which were mostly offset by a decrease in payroll and
benefits, and professional fees.
-23-
Three months ended December 31,
2003 2002
---- ----
Stock-based compensation $ 189,740 $ 97,497
Other general and administrative expenses 407,787 398,789
----------- ----------
Total general and administrative expenses $ 597,527 $ 496,286
=========== ==========
The increase in stock-based compensation was primarily the result of an increase
in the number of options and warrants that became exercisable during the
three-month period ended December 31, 2003 as well as an increase in the
Black-Scholes valuation of each option and warrant becoming exercisable during
the three-month period ended December 31, 2003. The increase in other general
and administrative expenses was primarily the result of an increase in investor
relations expenses and insurance, which was mostly offset by a decrease in
professional fees and payroll and benefits. The increase in investor relations
expenses during the three-month period ended December 31, 2003 was primarily the
result of an increase in financial consulting costs. Insurance costs increased
during the three-month period ended December 31, 2003 primarily because we
increased the policy limit on our directors' and officers' liability insurance
policy. Professional fees decreased during the three-month period ended December
31, 2003, primarily as a result of a decrease in legal fees related to the
preparation of our proxy and Form 10-QSB. Payroll and benefits decreased during
the three-month period ended December 31, 2003, primarily as a result of the
termination of an employee in June 2003.
Research and development expenses consist primarily of fees associated with
a research and development agreement with the University of Waterloo, costs
associated with the research being performed at the University of Colorado,
amortization of the initial fee in connection with a research agreement with
Anawah, Inc., consulting fees to the Scientific Advisory Board and other
consultants and stock-based compensation. Research and development expenses for
the three-month periods ended December 31, 2003 and December 31, 2002 were
$301,144 and $215,803, respectively, an increase of $85,341, or 39.5%. This
increase was primarily the result of an increase in stock-based compensation as
well as an increase in the research and development costs incurred in connection
with the expanded research undertaken by the University of Waterloo and the
implementation of our mammalian cell research programs.
Three months ended December 31,
2003 2002
---- ----
Stock-based compensation $ 51,668 $ --
Other research and development expenses 249,476 215,803
---------- ----------
Total research and development expenses $ 301,144 $ 215,803
========== ==========
Six Months Ended December 31, 2003 and Six Months Ended December 31, 2002
-------------------------------------------------------------------------
We had no revenue during the six-month periods ended December 31, 2003 and
December 31, 2002.
Operating expenses for the six-month periods ended December 31, 2003 and
December 31, 2002 were $2,310,064 and $1,259,277, respectively, an increase of
$1,050,787, or 83.4%. This increase in operating expenses was primarily the
result of an increase in stock-based compensation and research and development
expenses, partially offset by a decrease in other general and administrative
expenses.
-24-
General and administrative expenses for the six-month periods ended
December 31, 2003 and December 31, 2002 were $1,736,919 and $884,310,
respectively, an increase of $852,609, or 96.4%. This increase was primarily the
result of an increase in stock-based compensation related to the issuance and
vesting of stock options and warrants which was partially offset by a decrease
in other general and administrative expenses.
Six months ended December 31,
2003 2002
---- ----
Stock-based compensation $ 1,033,220 $ 122,297
Other general and administrative expenses 703,699 762,013
------------ -----------
Total general and administrative expenses $ 1,736,919 $ 884,310
============ ===========
The increase in stock-based compensation was primarily the result of a
warrant being granted, in connection with a financial advisory agreement, to a
financial advisor during the six-month period ended December 31, 2003. The
decrease in other general and administrative expenses was primarily from a
decrease in professional fees and payroll, which was partially offset by an
increase in investor relations expenses and corporate insurance. Professional
fees decreased during the six-month period ended December 31, 2003, primarily as
a result of a decrease in legal fees. During the six-month period ended December
31, 2002, we had incurred additional professional fees related to our filing of
registration statements with the Securities and Exchange Commission on Forms S-3
and S-8 as well as a decrease in professional fees associated with our Form
10-KSB and proxy statement. Payroll and benefits decreased during the six-month
period ended December 31, 2003, primarily as a result of the termination of an
employee in June 2003. The increase in investor relations expenses during the
six-month period ended December 31, 2003, was primarily the result of an
increase in financial consulting costs. Insurance costs increased during the
six-month period ended December 31, 2003 primarily because we increased the
policy limit on our directors' and officers' liability insurance policy.
Research and development expenses for the six-month periods ended December
31, 2003 and December 31, 2002 were $573,145 and $374,967, respectively, an
increase of $198,178, or 52.9%. This increase was primarily the result of an
increase in stock-based compensation as well as an increase in the research and
development costs incurred in connection with the expanded research undertaken
by the University of Waterloo, the implementation of our mammalian cell research
programs and the implementation of new plant research being conducted in
connection with the agreement with Anawah, Inc.
Six months ended December 31,
2003 2002
---- ----
Stock-based compensation $ 51,668 $ 14,880
Other research and development expenses 521,477 360,087
----------- -----------
Total research and development expenses $ 573,145 $ 374,967
=========== ===========
Period From Inception on July 1, 1998 through December 31, 2003
---------------------------------------------------------------
From inception of operations on July 1, 1998 through December 31, 2003, we
had revenues of $210,000, which consisted of the initial license fees in
connection with our various development and license agreements.
-25-
We have incurred losses each year since inception and have an accumulated
deficit of $11,695,327 at December 31, 2003. We expect to continue to incur
losses as a result of expenditures on research, product development and
administrative activities.
ITEM 3. CONTROLS AND PROCEDURES.
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of December 31, 2003. Based on this evaluation, our chief executive
officer and chief financial officer concluded that as of December 31, 2003, our
disclosure controls and procedures were (1) designed to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to our chief executive officer and chief financial officer by others
within those entities, particularly during the period in which this report was
being prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. No change in our
internal controls over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the three months ended
December 31, 2003 that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION.
--------------------------
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES.
During the three months ended December 31, 2003, options and warrants to
purchase an aggregate of 112,134 shares of our common stock were exercised for a
total aggregate proceeds of $195,024.
On December 15, 2003, our Board of Directors unanimously approved and we
subsequently granted, effective December 16, 2003: (i) options under the our
stock option plan to purchase an aggregate of 85,000 shares of common stock to
certain members of the Board of Directors at an exercise price equal to $3.15
per share, with one-half of such options exercisable on the date of grant and
one-half of such options becoming exercisable on the first anniversary from the
date of grant; (ii) options under our stock option plan to purchase an aggregate
of 130,000 shares of common stock to the members of our Scientific Advisory
Board, certain research consultants and executive officers of our Company, at an
exercise price equal to $3.15 per share, with one-third of such options
exercisable on the date of grant and one-third of such options becoming
exercisable on each of the first and second anniversaries from the date of
grant; and (iii) a warrant to purchase 20,000 shares of common stock to Forbes,
Inc. at an exercise price equal to $3.15 per share, with one-third of such
options exercisable on the date of grant and one-third of such options becoming
exercisable on each of the first and second anniversaries from the date of
grant.
-26-
In February 2004, we completed a private placement to certain accredited
investors for an aggregate amount of 1,536,922 shares of common stock and
warrants to purchase 768,459 shares of common stock for the aggregate cash
consideration of $3,642,500. The private placement offered units of one share of
common stock and a five-year warrant to purchase 0.35 shares of common stock at
a price equal to $2.37 per unit. The warrants were issued at an exercise price
equal to $3.79 per share, with such warrants vesting on the date of grant. The
estimated costs associated with the private placement totaled approximately
$330,000. We did not engage a placement agent for the sale of such securities.
In addition, we entered into a registration rights agreement with these
purchasers. The registration rights agreement requires us to file a registration
statement on Form S-3 by March 18, 2004, to register the securities acquired by
the purchasers in the private placement. If we fail to file a registration
statement by that date, we are required to pay to each purchaser 1.5% of the
aggregate purchase price paid by such purchaser.
Sands Brothers and Stanford Group Company acted as co-managing finders of
such private placement and certain consultants provided financial advisory
services in connection with such private placement. As consideration for their
services, we issued warrants to such finders to purchase an aggregate of 73,682
shares of our common stock, on the same terms and conditions as the warrants
issued to the purchasers in the private placement.
We did not employ an underwriter in connection with the issuance of the
securities described above. We believe that the issuance of the foregoing
securities was exempt from registration under Section 4(2) of the Securities Act
of 1933, as amended, as transactions not involving a public offering. Each of
the recipients acquired the securities for investment purposes only and not with
a view to distribution and had adequate information about our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) Our annual meeting of stockholders was held on December 15, 2003.
(b) The following is a complete list of our current directors, each of
whom was elected to a one-year term at the meeting, and whose term
of office continued after the meeting.
Ruedi Stalder
Bruce C. Galton
John E. Thompson, Ph.D.
Christopher Forbes
Thomas C. Quick
David Rector
John Braca
(c) There were 7,637,502 shares of common stock present at the meeting
in person or by proxy, out of a total number of 11,887,979 shares of
common stock issued and outstanding and entitled to vote at the
meeting.
The proposals and results of the vote of the stockholders taken at
the meeting by ballot and by proxy as solicited by us on behalf of
our Board of Directors were as follows:
-27-
(A) For the election of the nominees for our Board of Directors:
Nominee For Against Withheld
----------------------- ----------- ------- -----------
Ruedi Stalder 7,637,222 280 -
Bruce C. Galton 7,637,222 280 -
John E. Thompson, Ph. 7,637,222 280 -
Christopher Forbes 7,637,222 280 -
Thomas C. Quick 7,637,222 280 -
David Rector 7,637,222 280 -
John Braca 7,637,222 280 -
(D) For the proposal to ratify the appointment of Goldstein Golub and
Kessler, LLP as our independent auditors for the fiscal year ending
June 30, 2004:
For Against Abstain
--------------- ---------------- -------------
7,614,592 4,000 18,910
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
4.1 Form of Warrant issued to certain accredited investors (with
attached schedule of parties and terms thereto).
Incorporated by reference to Exhibit 4.1 of the Company's
Current Report on Form 8-K, filed on February 3, 2004.
10.1* Investment Banking Agreement dated November 28, 2003, by and
between Senesco Technologies, Inc., Sands Brothers
International Ltd. and Stanford Group Company.
10.2* Research Agreement dated November 6, 2003, by and among
University Health Network, Dr. Fei-Fei Liu and the Company.
10.3 Form of Securities Purchase Agreement by and between the
Company and certain accredited investors (with attached
schedule of parties and terms thereto). Incorporated by
reference to Exhibit 10.1 of the Company's Current Report on
Form 8-K, filed on February 3, 2004.
10.4 Form of Registration Rights Agreement by and between the
Company and certain accredited investors (with attached
schedule of parties and terms
-28-
thereto). Incorporated by reference to Exhibit 10.2 of the
Company's Current Report on Form 8-K, filed on February 3,
2004.
10.5 Amendment No. 1 to the Securities Purchase Agreement by and
between the Company and Crestview Capital Master, L.L.C.
Incorporated by reference to Exhibit 10.1 of the Company's
Current Report on Form 8-K, filed on February 13, 2004.
10.6 Amendment No. 1 to the Registration Rights Agreement by and
between the Company and Crestview Capital Master, L.L.C.
Incorporated by reference to Exhibit 10.2 of the Company's
Current Report on Form 8-K, filed on February 13, 2004.
31.1* Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of principal financial and accounting officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of principal executive officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
1350.
32.2* Certification of principal financial and accounting officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. 1350.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on February 3, 2004, which
included as exhibits thereto the Securities Purchase Agreement and Registration
Rights Agreement.
The Company filed a Current Report on Form 8-K on February 13, 2004, which
included as exhibits thereto Amendment No. 1 to the Securities Purchase
Agreement and Amendment No. 1 to the Registration Rights Agreement.
* Filed herewith.
-29-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SENESCO TECHNOLOGIES, INC.
DATE: February 17, 2004 By: /s/ Bruce C. Galton
--------------------------------------------
Bruce C. Galton, President
and Chief Executive Officer
(Principal Executive Officer)
DATE: February 17, 2004 By: /s/ Joel Brooks
--------------------------------------------
Joel Brooks, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
-30-