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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
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Form 10-QSB
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Quarterly Report under Section 13 of the Securities Exchange Act of 1934
For the Quarterly period Ended Commission File No. 0-27282
June 30, 1997
Atlantic Pharmaceuticals, Inc.
1017 Main Campus Drive, Suite 3900
Raleigh, North Carolina, 27606
Telephone (919)513-7020
Incorporated in Delaware IRS ID # 36-3898269
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 last 90 days:
Yes /X/ No / /
3,016,920 shares of common stock, $.001 par value per share, were
outstanding on June 30, 1997
Transitional Small Business Disclousre Format Yes / / No /X/
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Atlantic Pharmaceuticals , Inc. and Subsidiaries
<TABLE>
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PAGE
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Part One--Financial Information
Item 1--Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996. 1
Consolidated Statements of Operations for the three months ended June 30, 1997 and 1996 for the six months
ended June 30, 1997 and 1996 and the period from July 13, 1993(inception) to June 30, 1997. 2
Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 and the period from
July 13, 1993(inception) to June 30, 1997. 3
Notes to Consolidated Financial Statements 4
Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations 6
Part Two--Other Information
Item 1- Legal Proceedings 19
Item 4--Submission of Matters to a Vote of Security Holders 19
Item 6--Exhibits and Report on Form 8-K 20
</TABLE>
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ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
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ASSETS 30-JUN-97 31-DEC-96
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(UNAUDITED)
<S> <C> <C>
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Current assets:
Cash and cash equivalents $ 2,310,163 2,269,532
Prepaid expenses 43,123 24,949
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Total current assets 2,353,286 2,294,481
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Furniture and equipment, net of accumulated depreciation
of $98,328 and $75,133 at June 30,1997 and December 31,
1996, respectively. 185,611 82,761
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Total assets $ 2,538,897 2,377,242
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Liabilities and Stockholders' Equity
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Current liabilities:
Accrued expenses $ 364,387 281,792
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Total current liabilities 364,387 281,792
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Stockholders' equity
Preferred stock, $.001 par value. Authorized 50,000,000
shares; none issued and none outstanding. -- --
Series A Convertible Preferred stock, $.001 par value.
Authorized 1,100,000 shares; 230,000 issued and
outstanding at June 30, 1997. 230 --
Common stock $.001 par value. Authorized 80,000,000 shares;
3,016,920 and 2,913,720 shares issued and outstanding at
June 30, 1997 and December 31,1996, respectively 3,017 2,914
Common stock subscribed. 182 shares at June 30,1997 and
December 31,1996. -- --
Additional paid -in capital 13,536,958 10,634,938
Deficit accumulated during development stage (11,276,353) (8,438,660)
Deferred compensation (88,800) (103,200)
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2,175,052 2,095,992
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
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Total stockholders' equity 2,174,510 2,095,450
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Total liabilities and stockholders' equity $ 2,538,897 2,377,242
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</TABLE>
See accompanying notes to consolidated financial statements.
Page 1
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ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Operations (Unaudited)
Three months ended June 30, 1997 and 1996, the six months ended June 30, 1997
and 1996 and the period from July 13, 1993 (inception) to June 30, 1997.
<TABLE>
<CAPTION>
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THREE MONTHS ENDED SIX MONTHS ENDED CUMULATIVE
--------------------- -------------------- FROM JULY13,
JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1993 (INCEPTION) TO
1997 1996 1997 1996 JUNE 30,1997
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<S> <C> <C> <C> <C> <C>
Revenue:
Grant Revenue $ 2,288 -- 2,288 -- 99,932
Total Revenue 2,288 -- 2,288 -- 99,932
Costs and expenses:
Research and development $1,072,625 248,061 1,288,181 487,313 2,974,516
License fees -- -- -- -- 173,500
General and administrative 736,811 531,952 1,475,759 1,109,869 7,695,923
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Total operating expenses 1,809,436 780,013 2,763,940 1,597,182 10,843,939
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Other expense (income):
Interest income (22,221) (37,300) (45,073) (89,501) (214,343)
Interest expense -- -- -- --
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Total other expense (income) (22,221) (37,300) (45,073) (89,501) 411,232
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Net loss $(1,784,927) (742,713) (2,716,579) (1,507,681) (11,155,239)
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Imputed Preferred Stock dividend $ (121,114) -- (121,114) -- (121,114)
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Net Loss to common stockholders (1,906,041) -- (2,837,693) -- (11,276,353)
Net loss per share $ (0.64) (0.28) (0.97) (0.57) (10.29)
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Shares used in calculation
of net loss per share 2,965,887 2,663,720 2,939,948 2,663,720 1,095,328
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</TABLE>
See accompanying notes to consolidated financial statements.
Page 2
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ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1997 and 1996 and the period from July 13, 1993
(inception) to June 30, 1997
<TABLE>
<CAPTION>
CUMULATIVE FROM
JULY 13, 1993
SIX MONTHS ENDED (INCEPTION) TO
JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997
<S> <C> <C> <C>
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Cash flows from operating activities:
Net loss $ (2,837,693) (1,507,681) (11,276,353)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock based compensation- development 657,900 -- 657,900
Stock based compensation- general and administrative 136,722 14,400 381,304
Imputed Preferred Stock dividend 121,114 121,114
Discount on notes payable-bridge financing -- -- 300,000
Depreciation 21,886 21,543 97,019
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses (18,174) 12,000
Increase (decrease) in accrued expenses 82,595 (423,188) 364,386
Increase (decrease) in accrued interest (115,011) 172,305
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Net cash used in operating activities (1,835,650) (1,997,937) (9,225,448)
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Net cash used in investing activities
Acquisition of furniture and equipment (124,737) (51,384) (282,631)
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Cash flows from financing activities:
Proceeds from issuance of demand notes payable -- -- 2,395,000
Repayment of demand notes payable -- (125,000) (125,000)
Proceeds from the issuance of notes payable --
bridge financing -- -- 1,200,000
Proceeds of issuance of warrants -- -- 300,000
Repayment of notes payable bridge financing (75,000) (1,500,000)
Repurchase of common stock -- -- (324)
Proceeds from the issuance of common stock 18 -- 7,547,566
Proceeds from the issuance of Preferred Stock 2,001,000 -- 2,001,000
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Net cash provided by (used in) financing activities 2,001,018 (200,000) 11,818,242
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Net increase (decrease) in cash and cash equivalents 40,631 (2,249,321) 2,310,163
Cash and cash equivalents at beginning of period 2,269,532 5,044,632 --
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Cash and cash equivalents at end of period $ 2,310,163 2,795,311 2,310,163
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Supplemental disclosure of noncash financing
activities:
Issuance of common stock in exchange for common stock
subscriptions $ -- -- 7,027
Conversion of demand notes payable and the related
accrued interest to common stock -- -- 2,442,304
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</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
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Atlantic Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1997 and 1996
(1) Basis of Presentation
The accompanying financial statements have been prepared in accordance
with Generally Accepted Accounting Principles for interim financial information.
Accordingly, they do not include all information and footnotes required by
Generally Accepted Accounting Principles for complete financial statements. In
the opinion of management, the accompanying financial statements reflect all
adjustments, consisting of only normal recurring adjustments, considered
necessary for fair presentation. Operating results are not necessarily
indicative of results that may be expected for the year ending December 31,
1997. These financial statements should be read in conjunction with the
Company's Annual Report on Form 10 - KSB for the year ended December 31, 1996.
(2) Stock Options
In July 1995, Atlantic Pharmaceuticals, Inc.(the "Company")
established the 1995 Stock Option Plan which, as amended, provides for the
granting of equity incentives of up to 950,000 shares of the Company's common
stock, par value $0.001 per share (the "Common Stock"), to officers, directors,
employees, and consultants of the Company.
As of December 31, 1996, options to purchase 419,316 shares of
the Company's Common Stock were available for future issuance under the
Company's 1995 Stock Option Plan. On February 19, 1997 the Company granted
options to purchase an aggregate of 115,000 shares of Common Stock, exercisable
for seven years at an exercise price of $6.875 per share. During the four-year
period commencing February 19, 1998, 25% of such options shall cliff vest and
the remainder of the shares will be exercisable in an equal successive one-year
installments. No options have been exercised as of June 30, 1997.
(3) Issuance of Warrants
A warrant to purchase 24,000 shares of the Company's Common Stock at
$7.00 per share was issued to a consultant. That warrant expires on November 22,
2001. In connection with the issuance of these warrants, the Company recognized
an expense in the amount of $36,880 in the first quarter and an expense in the
amount of $36,880 in the second quarter. This expense is included in general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
(4) The Channel Merger
Pursuant to an Agreement and Plan of Reorganization by and among the
Company, Channel, and New Channel, Inc., a Delaware corporation, dated February
20, 1997, all of the stockholders of Channel (except for the Company) agreed to
receive an aggregate of 103,200 shares of Common Stock of the Company in
exchange for their shares of common stock, par value $0.0001 per share, of
Channel. On February 20, 1997, Channel became a wholly owned subsidiary of the
Company. On February 21, 1997, all of the rights of Channel in the CT-3
4
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Technology were transferred to the Company. On May 16, 1997 the Company issued
103,200 shares of Common Stock of the Company to stockholders of Channel. In
connection with the issuance of these shares the Company recognized an expense
in the amount of $657,900. This expense is included in research and development
expenses in the accompanying Consolidated Statements of Operations.
(5) Private Placement
Pursuant to the first closing of a private placement (the "Private
Placement") of its Series A Convertible Preferred Stock, par value $0.001 per
share (the "Preferred Stock"), the Company issued and sold an aggregate of
230,000 shares of Preferred Stock to certain accredited investors on May 22,
1997 in consideration of an aggregate amount equal to $2,300,000. The net
proceeds to the Company after deducting commissions and expenses of the private
placement agent were $2,001,000.
The rights and preferences of the Preferred Stock are as described in the
Certificate of Designations of Series A Convertible Preferred Stock which was
filed with the Secretary of State of Delaware on May 22, 1997. The holders of
the Preferred Stock have registration rights as to the shares of common stock,
par value $0.001, underlying the Preferred Stock.
Paramount Capital, Inc. ("Paramount") acted as placement agent for the
Private Placement. Lindsay A. Rosenwald, M.D. a greater than five percent
stockholder of the Company, is the sole stockholder of Paramount.
(6) Subsequent Events
On August 7, 1997 the Company completed the Private Placement of its
Preferred Stock. On such date the Company issued and sold an aggregate of
[1,007,200] shares of its Preferred Stock to certain accredited investors in
consideration of an aggregate amount equal to [$10,072,000]. The net proceeds to
the Company after deducting commissions and expenses of the private placement
agent were [$8,742,695].
5
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's Annual Report on Form
10 - KSB for the year ended December 31, 1996.
Results of Operations for the quarter ended June 30, 1997
For the second quarter ended June 30, 1997, research and development
expense increased by 332% over the similar period in 1996, primarily due to
increased research and development activities and the recognition of a
research and development expense in the amount of $657,900 in connection with
the issuance of common stock to the Channel minority shareholders.
For the second quarter of 1997 general and administrative expense increased
by 38% over the second quarter of 1996, primarily as a result of warrant
compensation expenses, legal expenses and other general and administrative
expenses.
For the second quarter of 1997, interest income was $22,221, compared to
$37,300 in the second quarter of 1996. The decrease is due to a reduction in
the Company's cash and cash equivalents.
Results of Operations for the six-month period ended June 30, 1997
For the six-months period ended June 30, 1997, research and development
expense increased by 164% over the similar period in 1996, primarily due to
increased research and development activities and the recognition of a
research and development expense in the amount of $657,900 in connection with
the issuance of common stock to the Channel minority shareholders.
For the six-months period ended June 30, 1997, general and administrative
expense increased by 33% over the similar period of 1996 primarily as a result
of warrant compensation expenses, legal expenses and other general and
administrative expenses.
For the six-months period ended June 30, 1997, interest income was $45,073,
compared to $89,501 for the six-months period ended June 30, 1996. The decrease
is due to a reduction in the Company's cash and cash equivalents.
Liquidity and Capital Resources
The Company has incurred an accumulated deficit of $11,276,353 since
inception and expects to continue to incur additional losses through the year
ending December 31, 1997 and the foreseeable future.
As of June 30 the Company anticipated that its current resources will be
sufficient to finance the Company's currently anticipated needs for operating
and capital expenditures for at least six months; however, subsequent to June
30, 1997 the Company completed its Private
6
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Placement of Preferred Stock . The Company anticipate that the funds that
were generated in the Private Placement will be sufficient to finance the
Company's currently anticipated needs for operating and capital expenditures
for at least two years. In addition, the Company will attempt to generate
additional capital through a combination of collaborative agreements,
strategic alliances and public and private equity and debt financings.
However, no assurance can be provided that additional capital will be
obtained through these or other sources. If the Company is not able to obtain
continued financing, the Company may cease operation and in all likelihood
all the Company's security holders will lose their entire investment.
The Company's working capital requirements will depend upon numerous
factors, including: progress of the Company's research and development programs;
preclinical and clinical testing; timing and cost of obtaining regulatory
approvals; levels of resources that the Company devotes to the development of
manufacturing and marketing capabilities; technological advances; status of
competitors; and ability of the Company to establish collaborative arrangements
with other organizations.
Research and Development Activities
Preclinical studies with all four of the company's technologies are
proceeding according to plan.
Gemini's 2-5A antisense enhancing technology is continuing to make good
progress. New oligonucleotides against the RSV (Respiratory Sensational Virus)
have demonstrated a potential for broad spectrum and powerful virucidal
activity. These new molecules are being readied for advanced animal testing.
Additional work on a promising cancer target has yielded encouraging data and a
patent has been filed in connection therewith. A promising lead compound against
Chronic Myelogenous Leukemia is currently undergoing verification and, if
consistently potent, will be tested in vivo. The Company has also filed a patent
relating to anti-PKR (Phoshporkinase Signaling Device) oligonucleotides, which
have the potential to disrupt certain critical aspects of intracellular
signalling pathways.
Channel's sulfated cyclodextrin technology is yielding new compound leads,
some of which appear to be highly active and potentially non-toxic. These
compounds are undergoing early in vivo characterization. CT-1 porcine testing
and in vivo CT-2 AV shunt testing are expected to be completed before the second
quarter in 1998. The stent-bonding program is being refined to achieve optimal
stability. Additionally, discussions are underway regarding the potential
incorporation of sulfated cyclodextrins into synthetic vascular graft material.
Atlantic's CT-3 technology is progressing towards definitive toxicology
assessments, following which an IND (Investigation of New Drug) will be filed,
thus paving the way for human testing.
Future Outlook
In addition to historical information, this report contains
predictions, estimates and other forward-looking statements within the meaning
of section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from any future performance suggested in this report as a result of
the risk factors set forth below and in the Company's Annual Report on Form
10-KSB filed with the Securities and Exchange Commission on March 30, 1997.
7
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RISK FACTORS
In addition to the other information in this Form 10-QSB, the following risk
factors should be considered carefully in evaluating the Company and its
business. This Form 10-QSB contains forward looking statements relating to
future events or future financial performance of the Company within the meaning
of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). Investors are cautioned
that such statements are only predictions and that events or results may differ
materially. In evaluating such statements, investors should specifically
consider the following factors and other factors set forth in this Form 10-QSB
which could cause actual results to differ materially from those indicated by
such forward looking statements.
Development Stage Companies; History of Operating Losses; Accumulated Deficit;
Uncertainty of Future Profitability
The technologies and products under development by the Company and its
subsidiaries are in the research and development stage and no operating revenue,
outside of grant revenues, have been generated to date. The Company does not
expect to generate any revenues in the near future. As a result, the Company
must be evaluated in light of the problems, delays, uncertainties and
complications encountered in connection with newly established businesses. The
Company has incurred operating losses since its inception. As of June 30, 1997,
the Company's working capital and accumulated deficit were $1,988,899 and
$11,276,353 respectively. Operating losses have resulted principally from costs
incurred in identifying and acquiring the technologies under development,
research and development activities and from general and administrative costs.
The Company expects to incur significant operating losses over the next several
years, primarily due to continuation and expansion of its research and
development programs, including preclinical studies and clinical trials for its
pharmaceutical products under development. The Company's ability to achieve
profitability depends upon its ability to develop pharmaceutical and medical
device products, obtain regulatory approval for its proposed products and enter
into agreements for product development, manufacturing and commercialization.
There can be no assurance that the Company will ever achieve significant
revenues or profitable operations from the sale of its proposed products.
Qualification of Auditor's Opinion
The Company's independent accountants have included an explanatory paragraph in
their report on the Company's consolidated financial statements at December 31,
1996, included in the Company's 1996 Annual Report on Form 10-KSB, which states
that the Company has suffered recurring losses from operations and has limited
capital resources, both of which raise substantial doubt about the Company's
ability to continue as a going concern.
8
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Need for Additional Financing; Issuance of Securities by the Company and its
Subsidiaries; Future Dilution
The Company will require, and is constantly considering potential sources for,
substantial additional financing to continue its research, to complete its
product development and to manufacture and market any products that may be
developed. Based solely upon its currently existing consulting, license,
sponsored research and employment agreements, the Company currently anticipates
that it will spend all of its current cash reserves by December 1997. There can
be no assurance, however, that the Company's current cash reserves will not be
expended prior to that time. The Company anticipates that further funds may be
raised at any time through additional public or private debt or equity
financings conducted either by the Company or by one or more of its
subsidiaries, or through collaborative ventures entered into between the Company
or one or more of its subsidiaries and a corporate partner. There can be no
assurance that the Company will be able to obtain additional financing or that
such financing, if available, can be obtained on terms acceptable to the
Company. If additional financing is not otherwise available, the Company will be
required to modify its business development plans or reduce or cease certain or
all of its operations. In such event, holders of securities of the Company will,
in all likelihood, lose their entire investment.
Although the Company and each of its subsidiaries will seek to enter into
collaborative ventures with corporate sponsors to fund some or all of such
activities, as well as to manufacture or market the products which may be
successfully developed, neither the Company nor any of its subsidiaries
currently has any such arrangements with corporate sponsors, and there can be no
assurance that the Company or any of its subsidiaries will be able to enter into
such ventures on favorable terms, if at all. In addition, no assurance can be
given that the Company or any of its subsidiaries will be able to complete a
subsequent private placement or public offering of their securities. Failure by
the Company or any of its subsidiaries to enter into such collaborative ventures
or to receive additional funding to complete its proposed product development
programs either through a public offering or a private placement would have a
material adverse effect on the Company.
In the event that the Company obtains any additional funding, such financings
may have a dilutive effect on the holders of the Company's securities. In
addition, if one or more of the Company's subsidiaries raises additional funds
through the issuance and sale of its equity securities, the interest of the
Company and its stockholders in such subsidiary or subsidiaries, as the case may
be, could be diluted and there can be no assurance that the Company will be able
to maintain its majority interest in any or all of its current subsidiaries. In
addition, the interest of the Company and its stockholders in each subsidiary
will be diluted or subject to dilution to the extent any such subsidiary issues
shares or options to purchase shares of its capital stock to employees,
directors, consultants and others. In the event that the Company's voting
interest in any of its current subsidiaries falls below 50%, the Company may not
be able to exercise an adequate degree of control over the affairs and policies
of such subsidiary as currently being exercised. In addition, the Company has
outstanding currently exercisable warrants to purchase 3,826,750 shares of its
Common Stock at exercise prices ranging from $5.50 to $10.00, and the exercise
price for most of such warrants is below the per share price of the Common Stock
as currently quoted on the Nasdaq SmallCap Market ("Nasdaq"). The exercise of
such warrants, if any, may dilute the value of the Common Stock.
No Developed or Approved Products
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To achieve profitable operations, the Company, alone or with others, must
successfully develop, obtain regulatory approval for, introduce and market its
products under development. The great majority of the preclinical and clinical
development work for the products under development of the Company remains to be
completed. The Company has not generated, nor is it expected to generate in the
near future, any operating revenues. In addition, the Company has no
manufacturing or marketing facilities nor any contracts with any commercial
manufacturing or marketing entities. No assurance can be given that any of its
product development efforts will be successfully completed, that required
regulatory approvals will be obtained, or that any such products, if developed
and introduced, will be successfully marketed or achieve market acceptance.
Technological Uncertainty and Early Stage of Product Development
The technologies and products which the Company intends to develop are in the
early stages of development, require significant further research, development
and testing and are subject to the risks of failure inherent in the development
of products based on innovative or novel technologies. These risks include the
possibility that any or all of the Company's proposed technologies and products
will be found to be ineffective or unsafe, that such technologies and products
once developed, although effective, are uneconomical to market, that third
parties hold proprietary rights that preclude the Company from marketing such
technologies and products or that third parties market superior or equivalent
technologies and products.
The Company's agreements with licensors do not contain any representations by
the licensors as to the safety or efficacy of the inventions or discoveries
covered thereby. The Company is unable to predict whether the research and
development activities it is funding will result in any commercially viable
products or applications. Further, due to the extended testing required before
marketing clearance can be obtained from the United States Food and Drug
Administration (the "FDA") or other similar agencies, the Company is not able to
predict with any certainty, when, if ever, the Company will be able to
commercialize any of its proposed technologies or products.
Government Regulation; No Assurance of Product Approval
The Company's proposed products and technologies are in very early stages of
development. The research, preclinical development, clinical trials, product
manufacturing and marketing to be conducted by the Company is subject to
regulation by the FDA and similar health authorities in foreign countries. FDA
approval of the Company's products, as well as the manufacturing processes and
facilities, if any, used to produce such products will be required before such
products may be marketed in the United States. The process of obtaining
approvals from the FDA is costly, time consuming and often subject to
unanticipated delays. There can be no assurance that approvals of the Company's
proposed products, processes or facilities will be granted on a timely basis, or
at all. In addition, new government regulations may be established that could
delay or prevent regulatory approval of the Company's products under
development. Any future failure to obtain or delay in obtaining any such
approval will materially and adversely affect the ability of the Company to
market its proposed products and the business, financial condition and results
of operations of the Company.
Even if regulatory approval of the Company's proposed products is granted, such
approval may include significant limitations on indicated uses for which any
such products could be marketed. Further, even if such regulatory approvals are
obtained, a marketed drug or device and its manufacturer are subject to
continued review, and later discovery of previously unknown problems may result
in restrictions on such product or manufacturer, including withdrawal of the
product from the market. Failure of the Company to obtain and maintain
regulatory approval of its
10
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proposed products, processes or facilities would have a material adverse
effect on the business, financial condition and results of operations of the
Company.
The Company's proposed products and technologies may also be subject to certain
other federal, state and local government regulations, including, but not
limited to, the Federal Food, Drug and Cosmetic Act, the Environmental
Protection Act, the Occupational Safety and Health Act and state, local and
foreign counterparts to certain of such acts. The Company intends to develop its
business to strategically address regulatory needs. However, the Company cannot
predict the extent of the adverse effect on its business or the financial and
other costs that might result from any government regulations arising out of
future legislative, administrative or judicial action.
Securities Law Restrictions on the Exercise of Redeemable Warrants
A holder of Redeemable Warrants will have the right to exercise such Redeemable
Warrants for the purchase of shares of Common Stock only if the Company has
filed with the Securities and Exchange Commission a current prospectus meeting
the requirements of the Securities Act covering the issuance of such shares of
Common Stock issuable upon exercise of the Redeemable Warrants and only if the
issuance of such shares has been registered or qualified, or is deemed to be
exempt from registration or qualification under, the securities laws of the
state of residence of the holder of the Redeemable Warrant. The Company has
undertaken and intends to file and keep effective and current a prospectus which
will permit the purchase and sale of the Common Stock underlying the Redeemable
Warrants, but there can be no assurance that the Company will be able to do so.
Although the Company intends to seek to qualify for sale the shares of Common
Stock underlying the Redeemable Warrant in those states in which the securities
are to be offered, no assurance can be given that such qualification will occur.
The Redeemable Warrants may be deprived of any value if a prospectus covering
the shares issuable upon the exercise thereof is not kept effective and current
or if such underlying shares are not, or cannot be, registered in the applicable
states.
Dependence on License and Sponsored Research Agreements
The Company depends on license agreements that form the basis of its proprietary
technology, and, with the exception of its majority-owned subsidiary, Optex
Opthalmologics, Inc., a Delaware corporation ("Optex"), the Company relies on
sponsored research agreements for its research and development efforts. The
license agreements that have been entered into by the Company typically require
the use of due diligence in developing and bringing products to market and the
payment of certain milestone amounts that in some instances may be substantial.
With the exception of Optex, the Company is also obligated to make royalty
payments on the sales, if any, of products resulting from such licensed
technology and, is responsible for the costs of filing and prosecuting patent
applications and maintaining issued patents. With the exception of Optex, the
Company does not currently have laboratory facilities, and, accordingly, certain
research and development activities of the Company is intended to be conducted
by universities or other institutions pursuant to sponsored research agreements.
The sponsored research agreements entered into and contemplated to be entered
into by the Company generally require periodic payments on an annual, quarterly
or monthly basis.
If the Company does not meet its financial, development or other obligations
under either its license agreements or its sponsored research agreements in a
timely manner, the Company could lose the rights to its proprietary technology
or the right to have the applicable university or institution conduct its
research and development efforts. If the rights of the Company under its license
or sponsored research agreements are terminated, such termination could have a
material
11
<PAGE>
adverse effect on the business and research and development efforts of
the Company.
Uncertainty Regarding Patents and Proprietary Rights
The success of the Company will depend in large part on its or its licensors'
ability to obtain patents, defend their patents, maintain trade secrets and
operate without infringing upon the proprietary rights of others, both in the
United States and in foreign countries. The patent position of firms relying
upon biotechnology is highly uncertain and involves complex legal and factual
questions. To date there has emerged no consistent policy regarding the breadth
of claims allowed in biotechnology patents or the degree of protection afforded
under such patents. The Company relies on certain United States patents and
pending United States and foreign patent applications relating to various
aspects of its products and processes. All of these patents and patent
applications are owned by third parties and are licensed or sublicensed to the
Company, with the exception of the patents and the patent applications related
to the Catarex device which are owned by the Optex. The patent application and
issuance process can be expected to take several years and entail considerable
expense to the Company, as it is responsible for such costs under the terms of
such license agreements. There can be no assurance that patents will issue as a
result of any such pending applications or that the existing patents and any
patents resulting from such applications will be sufficiently broad to afford
protection against competitors with similar technology. In addition, there can
be no assurance that such patents will not be challenged, invalidated, or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company. The commercial success of the Company will also
depend upon avoiding infringement of patents issued to competitors. A United
States patent application is maintained under conditions of confidentiality
while the application is pending, so the Company cannot determine the inventions
being claimed in pending patent applications filed by its competitors.
Litigation may be necessary to defend or enforce the Company's patent and
license rights or to determine the scope and validity of others' proprietary
rights. Defense and enforcement of patent claims can be expensive and time
consuming, even, in those instances in which the outcome is favorable to the
Company, and can result in the diversion of substantial resources from the
Company's other activities. An adverse outcome could subject the Company to
significant liabilities to third parties, require the Company to obtain licenses
from third parties, or require the Company to alter its products or processes,
or cease altogether any related research and development activities or product
sales, any of which may have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company has certain licenses from third parties and in the future may
require additional licenses from other parties to develop, manufacture and
market commercially viable products effectively. The Company's commercial
success will depend in part on obtaining and maintaining such licenses. There
can be no assurance that such licenses can be obtained or maintained on
commercially reasonable terms, if at all, that the patents underlying such
licenses will be valid and enforceable or that the proprietary nature of the
patented technology underlying such licenses will remain proprietary.
The Company relies substantially on certain technologies that are not patentable
or proprietary and are therefore available to its competitors. The Company also
relies on certain proprietary trade secrets and know-how that are not
patentable. Although the Company has taken steps to protect its unpatented
trade secrets and know-how, in part through the use of confidentiality
agreements with its employees, consultants and contractors, there can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known or be independently developed or discovered by
competitors.
12
<PAGE>
The success of the Company is also dependent upon the skills, knowledge and
experience of its scientific and technical personnel. The management and
scientific personnel of the Company has been recruited primarily from other
scientific companies, pharmaceutical companies and academic institutions. In
some cases, these individuals may be continuing research in the same areas with
which they were involved prior to joining the Company. Although the Company has
not received any notice of any claims and knows of no basis for any claims, it
could be subject to allegations of violation of trade secrets and similar claims
which could, regardless of merit, be time consuming, expensive to defend, and
have a material adverse effect on the Company's business, results of operations
and financial condition.
Uncertainty of Product Pricing and Reimbursement; Health Care Reform and Related
Measures
The levels of revenues and profitability of pharmaceutical and/or biotechnology
products and companies may be affected by the continuing efforts of governmental
and third party payors to contain or reduce the costs of health care through
various means and the initiatives of third party payors with respect to the
availability of reimbursement. For example, in certain foreign markets, pricing
or profitability of prescription pharmaceuticals is subject to government
control. In the United States there have been, and the Company expects that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. Although the Company cannot predict what
legislative reforms may be proposed or adopted or what impact actions taken by
federal, state or private payors for health care goods and services in response
to any health care reform proposals or legislation may have on its business, the
existence and pendency of such proposals could have a material adverse effect on
the Company in general. In addition, the Company's ability to commercialize
potential pharmaceutical and/or biotechnology products may be adversely affected
to the extent that such proposals have a material adverse effect on other
companies that are prospective collaborators with respect to any of the
Company's product candidates.
In addition, in both the United States and elsewhere, sales of medical products
and services are dependent in part on the availability of reimbursement to the
consumer from third party payors, such as government and private insurance
plans. Third party payors are increasingly challenging the prices charged for
medical products and services. If the Company succeeds in bringing one or more
products to the market, there can be no assurance that these products will be
considered cost effective and that reimbursement to the consumer will be
available or will be sufficient to allow the Company to sell its products on a
competitive basis.
Dependence Upon Key Personnel and Consultants
The Company is highly dependent upon its officers and directors, as well as its
Scientific Advisory Board members, consultants and collaborating scientists.
Atlantic and its subsidiaries have an aggregate of only eight full-time
employees, four of whom are officers of Atlantic, and the loss of any of these
individuals would have a material adverse effect on the Company. Although
Atlantic has entered into employment agreements with each of its officers, such
employment agreements do not contain provisions which would prevent such
employees from resigning their positions with Atlantic at any time. The Company
does not maintain key-man life insurance policies on any of such key personnel.
Each of the Company's non-employee directors, advisors and consultants devotes
only a portion of his or her time to the Company's business. The loss of certain
of these individuals could have a material adverse effect on the Company.
13
<PAGE>
The Company may seek to hire additional personnel. Competition for qualified
employees among pharmaceutical and biotechnology companies is intense, and the
loss of any of such persons, or the inability to attract, retain and motivate
any additional highly skilled employees required for the expansion of the
Company's activities could have a material adverse effect on the Company. There
can be no assurance that the Company will be able to retain its existing
personnel or to attract additional qualified employees.
The Company's scientific advisors are employed on a full time basis by unrelated
employers and some have one or more consulting or other advisory arrangements
with other entities which may conflict or compete with their obligations to the
Company. Inventions or processes discovered by such persons, other than those to
which the licenses may relate, those to which the Company is able to acquire
licenses for or those which were invented while performing consulting services
on behalf of the Company pursuant to a proprietary information agreement or
utilizing the Company's facilities, will not become the property of the Company,
but will remain the property of such persons or of such persons' full-time
employers. Failure to obtain needed patents, licenses or proprietary information
held by others could have a material adverse effect on the Company.
Competition
The Company's business is characterized by intensive research efforts and
intense competition. Many companies, research institutes, hospitals and
universities are working to develop products and technologies in the Company's
fields of research. Most of these entities have substantially greater financial,
technical, manufacturing, marketing, distribution and other resources than the
Company. Certain of such companies have experience in undertaking testing and
clinical trials of new or improved products similar in nature to that which the
Company is developing. In addition, certain competitors have already begun
testing of similar compounds or processes and may introduce such products or
processes before the Company. Accordingly, other companies may succeed in
developing products earlier than the Company or that are more effective than
those proposed to be developed by the Company. Further, it is expected that
competition in the Company's fields will intensify. There can be no assurance
that the Company will be able to compete successfully in the future.
Dependence on Others for Clinical Development of, Regulatory Approvals for and
Marketing of Pharmaceutical Products
The Company currently does not have the resources to directly manufacture,
market or sell any of the Company's proposed products and the Company has no
current plans to acquire such resources. The Company anticipates that it will,
in the future, enter into collaborative agreements with pharmaceutical and/or
biotechnology companies for the development of, clinical testing of, seeking of
regulatory approval for, manufacturing of, marketing of and commercialization of
certain of its proposed products. The Company may in the future grant to its
collaborative partners rights to license and commercialize any products
developed under these collaborative agreements, and such rights would limit the
Company's flexibility in considering alternatives for the commercialization of
such products. Under such agreements, the Company may rely on its respective
collaborative partners to conduct research efforts and clinical trials on,
obtain regulatory approvals for and manufacture, market and commercialize
certain of its products. The Company expects that the amount and timing of
resources devoted to these activities generally will be controlled by each such
individual partner. The inability of the Company to acquire such third party
manufacturing, distribution, marketing and selling arrangements for such
anticipated products would have a material adverse effect on the Company's
business. There can be no assurance that
14
<PAGE>
the Company will be able to enter into any arrangements for the
manufacturing, marketing and selling of its products, or that, if such
arrangements are entered into, such future partners will be successful in
commercializing products or that the Company will derive any revenues from
such arrangements.
Risk of Product Liability; No Insurance
Should the Company develop and market any products, the marketing of such
products, through third-party arrangements or otherwise, may expose the Company
to product liability claims. The Company presently does not carry product
liability insurance. Upon clinical testing or commercialization of the Company's
proposed products, certain of the licensors require that the Company obtain
product liability insurance. There can be no assurance that the Company will be
able to obtain such insurance or, if obtained, that such insurance can be
acquired in sufficient amounts to protect the Company against such liability or
at a reasonable cost. The Company is required to indemnify the Company's
licensors against any product liability claims incurred by them as a result of
the products developed by the Company. None of the Company's licensors has made,
and are not expected to make, any representations as to the safety or efficacy
of the inventions covered by the licenses or as to any products which may be
made or used under rights granted therein or thereunder.
Control by Existing Stockholders
Two principal stockholders of the Company beneficially own approximately 26% of
the outstanding shares of Common Stock. Accordingly, such holders, if acting
together, may have the ability to exert significant influence over the election
of the Company's Board of Directors and other matters submitted to the Company's
stockholders for approval. The voting power of these holders may discourage or
prevent any proposed takeover of the Company.
No Assurance of Identification of Additional Projects
The Company is engaged in the development and commercialization of biomedical
and pharmaceutical products and technologies. From time to time, if the
Company's resources allow, the Company may explore the acquisition and
subsequent development and commercialization of additional biomedical and
pharmaceutical products and technologies. However, there can be no assurance
that the Company will be able to identify any additional products or
technologies and, even if suitable products or technologies are identified, the
Company does not expect to have sufficient resources to pursue any such products
or technologies in the foreseeable future.
Certain Interlocking Relationships; Potential Conflicts of Interest
Two of the four members of the Board of Directors and one of the officers of the
Company are full-time and/or part-time officers of Paramount Capital, Inc.
("Paramount") and/or Paramount Capital Investments, LLC a New York-based,
merchant banking and venture capital firm specializing in biotechnology
companies ("Investments"). In the regular course of its business, Investments
identifies, evaluates and pursues investment opportunities in biomedical and
pharmaceutical products, technologies and companies. Generally, Delaware
corporate law requires that any transactions between the Company and any of its
affiliates be on terms that, when taken as a whole, are substantially as
favorable to the Company as those then reasonably obtainable from a person who
is not an affiliate in an arms-length transaction. Nevertheless, neither
Investments nor any such directors are obligated pursuant to any agreement or
understanding with the Company to make any additional products or technologies
available to the Company, nor can there be any
15
<PAGE>
assurance, and the Company does not expect and security holders should not
expect, that any biomedical or pharmaceutical product or technology
identified by Investments or any such directors in the future will be made
available to the Company. In addition, certain of the officers and directors
of the Company may from time to time serve as officers or directors of other
biopharmaceutical or biotechnology companies.There can be no assurance that
such other companies will not, in the future, have interests in conflict with
those of the Company.
The Company has entered into several agreements with Paramount as well as with
certain of the Company's directors pursuant to which Paramount and such
directors provide financial advisory services to the Company.
No Dividends
The Company has not paid any cash dividends on its Common Stock since its
formation and does not anticipate paying any cash dividends in the foreseeable
future. Management anticipates that all earnings and other resources of the
Company, if any, will be retained by the Company for investment in its business.
Possible Delisting from Nasdaq and Market Illiquidity
Although the Common Stock is quoted on Nasdaq, continued inclusion of such
securities on Nasdaq will require that (i) the Company maintain at least
$2,000,000 in total assets and $1,000,000 in capital and surplus, (ii) the
minimum bid price for the Common Stock be at least $1.00 per share, (iii) the
public float consist of at least 100,000 shares of Common Stock, valued in the
aggregate at more than $200,000, (iv) the Common Stock have at least two active
market makers and (v) the Common Stock be held by at least 300 holders. If the
Company is unable to satisfy such maintenance requirements, the Company's
securities may be delisted from Nasdaq. In such event, trading, if any, in the
Common Stock would thereafter be conducted in the over-the-counter market in the
"pink sheets" or the NASD's "Electronic Bulletin Board." Consequently, the
liquidity of the Company's securities could be materially impaired, not only in
the number of securities that can be bought and sold at a given price, but also
through delays in the timing of transactions and reduction in security analysts'
and the media's coverage of the Company, which could result in lower prices for
the Company's securities than might otherwise be attained and could also result
in a larger spread between the bid and asked prices for the Company's
securities.
In addition, if the Common Stock is delisted from trading on Nasdaq and the
trading price of the Common Stock is less than $5.00 per share, trading in the
Common Stock would also be subject to the requirements of Rule 15g-9 promulgated
under the Exchange Act. Under such rule, broker/dealers who recommended such
low-priced securities to persons other than established customers and accredited
investors must satisfy special sales practice requirements, including a
requirement that they make an individualized written suitability determination
for the purchaser and receive the purchaser's written consent prior to the
transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of
1990 also requires additional disclosure in connection with any trades involving
a stock defined as a penny stock (generally, according to recent regulations
adopted by the Commission, any equity security not traded on an exchange or
quoted on Nasdaq that has a market price of less than $5.00 per share, subject
to certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. Such requirements could severely limit the market
liquidity of the Common Stock. There can be no assurance that the Common Stock
will not be delisted or treated as penny stock.
16
<PAGE>
Liquidity of Investment
The Company's securities are traded on the Nasdaq SmallCap Market, and the
Company's securities lack the liquidity of securities traded on the principal
trading markets. Accordingly, an investor may be unable to promptly liquidate
an investment in the Common Stock.
Possible Volatility of Stock Price
The market price of the Company's securities, like the stock prices of many
publicly traded biotechnology and smaller pharmaceutical companies, has been and
may continue to be highly volatile.
Environmental Regulation
In connection with its research and development activities, the Company is
subject to federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials and wastes. Although the
Company believes that it has complied with these laws and regulations in all
material respects and has not been required to take any action to correct any
noncompliance, there can be no assurance that the Company will not be required
to incur significant costs to comply with environmental and health and safety
regulations in the future.
Possible Adverse Effect of Shares Eligible for Future Sale
Future sales by existing stockholders could adversely affect the prevailing
market price of the Company's Common Stock. The outstanding shares of the
Company's Common Stock are all freely tradeable, subject to volume and other
restrictions imposed by Rule 144 under the Securities Act with respect to sales
by affiliates of the Company. An 18-month restriction on transfer applicable to
the shares of Common Stock now owned or hereafter acquired by the Company's
officers, directors and certain stockholders expired on June 14, 1997. sales of
substantial amounts of Common Stock may have an adverse effect on the market
price of the Company's Common Stock.
In connection with its initial public offering, the Company granted to the
underwriter thereof warrants to purchase from the Company 165,000 units, each
consisting of one share of Common Stock and one redeemable warrant to purchase
one share of Common Stock at an initial exercise price of $6.60 per unit. Such
warrants are exercisable during the four-year period commenced December 13,
1996. The redeemable warrants issuable upon exercise of these warrants have an
exercise price of $6.05 per share. As long as the warrants remain unexercised,
the terms under which the Company could obtain additional capital may be
adversely affected. The Company granted to holders of the warrants issued to
such underwriter the right on two occasions (one at the expense of the Company)
to file a registration statement under the Securities Act covering the
securities underlying such warrants and the additional right to include such
securities in any registration filed by the Company under the Securities Act.
No prediction can be made as to the effect, if any, that sales of units,
warrants and/or Common Stock or the availability of such securities for sale
will have on the market prices prevailing from time to time for the units, the
warrants and/or the Common Stock. Nevertheless, the possibility that
substantial amounts of such securities may be sold in the public market may
adversely affect prevailing market prices for the Company's equity securities
and could impair the Company's
17
<PAGE>
ability to raise capital in the future through the sale of equity securities.
Antitakeover Effects of Provisions of the Certificate of Incorporation and
Delaware Law
Atlantic's Certificate of Incorporation authorizes the issuance of shares of
"blank check" Preferred Stock. The Board of Directors has the authority to
issue the Preferred Stock in one or more series and to fix the relative rights,
preferences and privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series. The issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the stockholders of the Company. The
issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of the Common Stock, including the loss
of voting control to others.
The Company is subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation. The foregoing provisions could have
the effect of discouraging others from making tender offers for the Company's
shares and, as a consequence, they also may inhibit fluctuations in the market
price of the Company's shares that could result from actual or rumored takeover
attempts. Such provisions also may have, the effect of preventing changes in the
management of the Company.
18
<PAGE>
Part Two--Other Information
Item 1. Legal Proceedings.
In November 1996 and February 1997, related complaints alleging claims under
the Securities Exchange Act of 1934, as amended, and common law causes of action
were filed against the Company in the United States District Court for the
District of Delaware and the Delaware Chancery Court, respectively. The parties
have reached a settlement in principle with respect to such complaints, pursuant
to which an existing stockholder of the Company owning greater than five percent
of the Company's capital stock transferred to plaintiff an aggregate of 5,000
shares of the Company's common stock.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was called to order on May
21,1997 pursuant to due notice and adjourned to June 17, 1997, upon due notice.
Total shares voted were 1,721,536 out of 2,913,720 entitled to vote.
Matters voted on:
1. ELECTION OF DIRECTORS: FOR WITHHELD
--- --------
Jon D. Lindjord 1,714,636 6,900
John K.A. Predergast, Ph.D 1,714,636 6,900
Steve H. Kanzer 1,714,636 6,900
Yuichi Iwaki, M.D., Ph.D. 1,714,636 6,900
Accordingly, following the June 17, 1997 meeting the
members of the Board of Directors standing for election were
re-elected. Dr. Lindsay A. Rosenwald, M.D. did not stand for
re-election to the Company's Board of Directors. Therefore the
Company's Board of Directors now consist of Jon D. Lindjord, Yuichi
Iwaki, M.D., Ph.D., Steve H. Kanzer and John K.A. Prendergast,
Ph.D. The Board of Directors currently has one vacancy.
2. To approve a form of indemnification agreement to be entered
into by and between the Company and its officers and directors.
For Against Abstain
--- ------- -------
1,677,436 32,350 11,750
3. To ratify the Board of Director's selection of KPMG Peat
Marwick LLP to serve as the Company's independent auditors for
the year ending December 31, 1997.
For Against Abstain
--- ------- -------
1,712,636 1,500 7,400
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Form 8-K Reports
On June 9, 1997 the Company filed a report on Form 8-K stating that the
Company had, pursuant to a private placement, issued and sold an aggregate of
230,000 shares of Preferred Stock to certain accredited investors on May 22,
1997 in consideration of an aggregate amount equal to $2,300,000. The net
proceeds to the Company after deducting commissions and expenses of the private
placement agent were $2,001,000.
20
<PAGE>
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized,
Atlantic Pharmaceuticals, Inc.
August 14, 1997 Jon D. Lindjord
----------------
Jon D. Lindjord
Chief Executive Officer and President
August 14, 1997 Shimshon Mizrachi
-----------------
Shimshon Mizrachi
Controller
Principal Accounting and Financial Officer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
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BY REFERENCE TO SUCH FINANCIAL STATEMENTS
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