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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 or 15d of the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File No. 0-27282
June 30, 1998
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 is required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
3,923,725 shares of common stock, $.001 par value per share, were outstanding on
June 30, 1998
Transitional Small Business Disclosure Format Yes [X] No [ ]
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<PAGE>
Atlantic Pharmaceuticals , Inc. and Subsidiaries
Part One - Financial Information Page
Item 1 - Financial Statements
Consolidated Balance Sheets
as of June 30, 1998(unaudited) and December 31, 1997. 1
Consolidated Statements of Operations(unaudited) for the three
months ended June 30, 1998 and 1997 for the six months ended
June 30, 1998 and 1997 and the period from July 13, 1993 (inception)
to June 30, 1998. 2
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1998 and 1997
and the period from July 13, 1993(inception) to June 30, 1998. 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 6
Part Two - Other Information
Item 4- Submission of Matters to a Vote of Security Holders 21
Item 5- Other Information 21
Item 6 - Exhibits and Report on Form 8-K 21
<PAGE>
PART ONE- FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Balance Sheets
June 30, 1998 (unaudited) and December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Assets 6/30/98 12/31/97
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(unaudited) (audited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 8,315,159 8,543,495
Accounts Receivable 100,000 --
Prepaid expenses 62,698 1,250
- --------------------------------------------------------------------------------------------------------------
Total current assets 8,477,857 8,544,745
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Furniture and equipment, net of accumulated depreciation
of $230,891 and $150,086 at June 30,1998 (unaudited) and December 31,
1997, respectively 347,918 250,961
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8,825,775 8,795,706
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Liabilities and Stockholders' Equity
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Current liabilities:
Accrued expenses 597,835 392,566
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Total current liabilities 597,835 392,566
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Stockholders' equity
Preferred stock, $.001 par value. Authorized 50,000,000 shares; 1,375,000
designated as Series A convertible preferred stock Series A convertible
preferred stock, $.001 par value; authorized 1,375,000 shares, 811,885 and
1,214,723 shares issued and outstanding at June 30, 1998 (unaudited) and
December 31, 1997, respectively 812 1,215
Series A convertible preferred stock warrants,117,195 and 123,720 issued
and outstanding at June 30, 1998 (unaudited)and December 31, 1997,
respectively 540,073 570,143
Common stock $.001 par value. Authorized 80,000,000 shares; 3,923,725 and
3,064,571 shares issued and outstanding at June 30, 1998 (unaudited) and
December 31,1997, respectively 3,924 3,065
Common stock subscribed. 182 shares at June 30,1998 (unaudited) and
December 31, 1997 -- --
Additional paid-in capital 21,583,408 21,493,715
Deficit accumulated during development stage (13,839,735) (13,590,056)
Deferred compensation (60,000) (74,400)
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8,228,482 8,403,682
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
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Total stockholders' equity 8,227,940 8,403,140
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$ 8,825,775 $ 8,795,706
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</TABLE>
See accompanying notes to consolidated financial statements.
Page 1
<PAGE>
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Operations (Unaudited)
Three months ended June 30, 1998 and 1997 , the six months ended June 30, 1998
and 1997 and the period from July 13, 1993 (inception) to June 30, 1998.
<TABLE>
<CAPTION>
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Three Months Ended Six Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30, Cumulative from
1998 1997 1998 1997 July 13, 1993
---- ---- ---- ---- (inception) to
June 30, 1998
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Revenue:
<S> <C> <C> <C> <C> <C>
Grant Revenue $ -- 2,288 -- 2,288 99,932
License Rvenue 2,500,000 -- 2,500,000 -- 2,500,000
Total Revenue 2,500,000 2,288 2,500,000 2,288 2,599,932
Costs and expenses:
Research and development $ 651,532 1,072,625 1,408,258 1,288,181 5,655,177
License fees -- -- -- -- 173,500
General and administrative 972,714 736,811 1,596,705 1,475,759 10,655,200
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Total operating expenses 1,624,246 1,809,436 3,004,963 2,763,940 16,483,877
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Other expense (income):
Interest income (146,800) (22,221) (255,284) (45,073) (669,785)
Interest expense -- -- -- -- 625,575
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Total other expense (income) (146,800) (22,221) (255,284) (45,073) (44,210)
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Net Income (Loss) $ 1,022,554 (1,784,927) (249,679) (2,716,579) (13,839,735)
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Imputed Preferred Stock dividend $ (505,540) (121,114) (1,522,242) (121,114) (5,225,547)
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Net Income(Loss) to common stockholders 517,014 (1,906,041) (1,771,921) (2,837,693) (19,065,282)
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Basic net income (loss) per common share $ 0.14 (0.64) (0.52) (0.97) (12.48)
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Shares used in calculation
of basic net Income(loss) per common share 3,682,763 2,965,887 3,438,980 2,939,948 1,527,431
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Diluted net income (loss) per common share 0.05 (0.64) (0.52) (0.97) (12.48)
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Shares used in calculation
of primary net Income(loss) per common share 10,459,280 2,965,887 3,438,980 2,939,948 1,527,431
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</TABLE>
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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, 1998 and 1997 and the period from July 13, 1993
(inception) to June 30, 1998
<TABLE>
<CAPTION>
Cumulative from
July 13, 1998
Six Months Ended (inception) to
June 30, June 30, June, 30
1998 1997 1998
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (249,679) (2,837,693) (13,839,735)
Adjustments to reconcile net loss to net
cash used in operating activities:
Compensation Expense relating to
Warrants 69,036 136,722 367,238
Stock Options -- 121,114 134,382
Channel Merger -- 657,900 657,900
Discount on notes payable-bridge financing -- -- 300,000
Depreciation 80,805 21,886 230,891
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses (61,449) (18,174) (62,699)
(Increase) decrease in accounts receivable (100,000) -- (100,000)
Increase (decrease) in accrued expenses 205,269 82,595 597,835
Increase (decrease) in accrued interest -- -- 172,305
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Net cash used in operating activities (56,018) (1,835,650) (11,541,883)
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Net cash used in investing activities
Acquisition of furniture and equipment (177,762) (124,737) (578,810)
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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)
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 -- -- (1,500,000)
Repurchase of common stock -- -- (324)
Proceeds from the issuance of common stock 5,444 18 7,552,992
Proceeds from the issuance of Preferred Stock -- 2,001,000 10,613,184
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,444 2,001,018 20,435,852
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Net increase (decrease) in cash and cash equivalents (228,336) 40,630 8,315,159
Cash and cash equivalents at beginning of period 8,543,495 2,269,532 --
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,315,159 2,310,163 8,315,159
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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>
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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, 1998 and 1997
(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,
1998. These financial statements should be read in conjunction with the
Company's Annual Report on Form 10 - KSB for the year ended December 31, 1997.
(2) STOCK OPTIONS
The 1995 Stock Option Plan, as amended, provides for the granting of equity
incentives of up to 1,009,783 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.
On November 11, 1997, in connection with their public relations services,
the Investor Relations Group (the "Investor") and its designees were issued
options to purchase 24,000 shares of the Company's Common Stock at $9.50 per
share, which options expire on November 10, 2002. In connection with the
issuance of these options, the Company recognized an expense in the amount of
$27,218 for the quarter ended June 30, 1998. This expense is included in general
and administrative expenses in the accompanying Consolidated Statements of
Operations.
As of June 30, 1998, options to purchase 247,185 shares of the Company's
Common Stock were available for future issuance under the Company's 1995 Stock
Option Plan. No options have been exercised as of June 30, 1998.
(3) DEVELOPMENT AND LICENSE AGREEMENT BETWEEN OPTEX OPHTHALMOLOGICS, INC. AND
BAUSH & LOMB SURGICAL.
On May 14, 1998, the Company's majority-owned subsidiary, Optex
Ophthalmologics, Inc. ("Optex"), entered into a Development & License Agreement
(the "Agreement") with Bausch & Lomb Surgical ("Bausch & Lomb") to complete the
development of Catarex, a cataract-removal technology owned by Optex. Under the
terms of the Agreement, Optex and Bausch & Lomb intend jointly to complete the
final design and development of the Catarex system and Bausch & Lomb, which was
granted an exclusive worldwide license to the Catarex technology for human
ophthalmic surgery, will assume responsibility for commercializing Catarex
globally. The Agreement provides that Bausch & Lomb will pay Optex milestone
payments of (a) $2,500,000 upon the signing of the Agreement, (b) $4,000,000
upon the successful completion of certain clinical trials, (c) $2,000,000 upon
receipt of regulatory approval to market the Catarex device in the United States
(and this milestone payment is creditable in full against royalties) and (d)
$1,000,000 upon receipt of regulatory approval to market the Catarex device in
Japan. Pursuant to the Agreement, Bausch & Lomb shall reimburse Optex for its
budgeted research and development expenses so long as such expenses do not
exceed $2,500,000. During the term (which terminates upon the expiration of the
last to expire of the licensed United States patents) of the Agreement, Bausch &
Lomb shall pay Optex a royalty of 7% of net sales and an additional 3% royalty
when certain conditions involving liquid polymer lenses have been met. This
summary of the Agreement is qualified by reference to the entire Agreement,
which is attached as an exhibit to the Form 8-K filed by the Company on May 22,
1998.
In the second quarter the first milestone payment, which is nonrefundable,
in the amount of $2,500,000, was received and recorded as license revenue.
4
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(4) SUBSEQUENT EVENTS
On July 10, 1998 Jon Douglas Lindjord, President and Chief Executive
Officer of the Company, resigned. At such time, Robert A. Fildes, Ph.D., the
Chairman of the Board of the Company, assumed the position of interim Chief
Executive Officer and President.
5
<PAGE>
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, 1997.
Results of Operations for the quarter ended June 30, 1998
- ---------------------------------------------------------
For the second quarter ended June 30, 1998 license revenue was $2,5000,000
compared with no license revenue in the second quarter of 1997. This license
revenue represents a milestone payment that was received from Baush & Lomb in
connection with the development and license agreement between Optex and Baush &
Lomb.
For the second quarter ended June 30, 1998, research and development
expense was $651,532 which represents a decrease of 39% over the similar period
in 1997, primarily due to recognition of a nonrecurring research and development
expense in the amount of $657,900 incurred in connection with the issuance of
common stock to the Channel minority stockholders of Channel Therapeutics, Inc.,
a Wholly owned subsidiary of the Company, in the second quarter of 1997.
For the second quarter of 1998 general and administrative expense was
$972,714 which represents an increase of 32% over the second quarter of 1997,
primarily as a result of an increase in compensation expenses, legal expenses
and consulting expenses.
For the second quarter of 1998, interest income was $146,800, compared to
$22,221 in the second quarter of 1997. The increase is due to the availability
of cash from the May and August 1997 private placement of the Company's Series A
Convertible Preferred Stock.
Results of Operations for the six-month period ended June 30, 1998
- ------------------------------------------------------------------
For the six-month period ended June 30, 1998, license revenue was
$2,5000,000 compared with no license revenue in the similar of 1997. This
license revenue represents a milestone payment that was received from Baush &
Lomb in connection with the development and license agreement between Optex and
Baush & Lomb.
For the six-month period ended June 30, 1998, research and development
expense was $1,408,258 which represents an increase of 9% over the similar
period in 1997, primarily due to increased spending on Company's technologies as
money became available from the proceeds of the May and August1997 private
placement of the Company's Series A Convertible Preferred Stock.
For the six-months period ended June 30, 1998, general and administrative
expense was $1,596,705 which represents an increase of 8% over the similar
period of 1997, primarily as a result of increased compensation expenses, legal
expenses and consulting expenses.
For the six-month period ended June 30, 1998, interest income was $255,284,
compared to $45,073 for the six-month period ended June 30, 1997. The increase
is due to the availability of cash from the May and August 1997 private
placement of the Company's Series A Convertible Preferred Stock.
Liquidity and Capital Resources
- -------------------------------
The Company has incurred an accumulated deficit of $13,839,735 since
inception and expects to continue to incur additional losses through the year
ending December 31, 1998 and the foreseeable future.
As of June 30, 1998 the Company anticipates that its current resources will
be sufficient to finance the Company's currently anticipated needs for operating
and capital expenditures for at least eighteen months. 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
6
<PAGE>
financing, the Company may cease operation and in all likelihood all of 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; 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 technologies are proceeding.
The development of the Catarex device is continuing. Bausch & Lomb,
pursuant to the licensing and development agreement consummated with Optex in
May 1998, is coordinating the further development of the device. The focus is on
the continued refinement of the clinical prototype of the device and the
subsequent integration of the device into other systems, with the aim of
beginning human clinical trials as soon as possible. Provisional patent
applications have been recently filed and additional patent applications are
likely for new developments with the device. A development team consisting of
members of both Optex and Bausch & Lomb is working on the development program.
Gemini's research on the antisense enhancing technology is continuing. A
lead product candidate oligonucletoide against Respiratory Syncytial Virus
("RSV") has completed preliminary in vivo testing in animal models in
preparation for definitive in vivo testing later in the year. The Company
believes that data obtained to date supports the continued development of the
compound. The planned definitive in vivo studies will be in a primate model and
possible production sources for sufficient oligonucletoide to support the
studies are being identified. In vitro and in vivo studies are continuing using
an anti-telomerase oligonucletoide against several potential cancer targets.
Results from the studies using malignant human glioma cells in culture treated
with the 2-5A antisense technology showed that the vast majority of malignant
cells were killed within 14 days. Furthermore, the studies demonstrated that
when the antisense molecules were applied to human tumors implanted in nude
mice, the tumor mass was significantly reduced over a 14-day period. The
antisense research program in the next several months will be focused on
increasing the stability and ensuring consistent uptake of the lead compounds.
Continued in vitro and in vivo testing will be undertaken against a variety of
malignancies, utilizing a variety of regimens, including potential combination
therapy.
Data analysis for the large animal studies has been completed for one of
the monomeric molecules of Channel's sulfated cyclodextrin compounds (CT-1) and
is in progress for the polymeric form CT-2. Promising results were seen with
continuous IV infusion of CT-1 and the data has been summarized for presentation
to potential collaborators on the development of the compound. Significant
inflammation was seen in the test subjects with CT-2. The Company will finalize
and review the analysis of the data in the next quarter and determine whether
additional resources will be committed for the continued development of CT-2. A
program of research and discovery for additional sulfated cyclodextrins is
continuing with the aim of identifying potentially more potent compounds. One
such compound, CT-8, has already been tested in a small animal model, with
promising results. Bioengineering for the stent-bonding program (which is a dual
approach of applying a sulfated cyclodextrin to a stent) is also continuing.
The design of the toxicology program has been completed for the
anti-inflammatory and analgesic compound CT-3. Manufacturing of the initial
batch of compound to support the toxicology testing has been completed and the
support studies for the toxicology program have begun. Additional studies are
under consideration to further define the mechanism of action of the
anti-inflammatory and analgesic properties of CT-3 that had been identified in
in vivo studies.
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
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<PAGE>
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 19, 1998.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
such compliance. The Company has reviewed its internal system and doesn't expect
material adverse effect on the Company's business, financial condition and
operating results. The Company is in the process of reviewing third party
software to comply with this issue.
8
<PAGE>
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 ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. 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.
RESET DATE OF SERIES A CONVERTIBLE PREFERRED STOCK; PAYMENT IN KIND DIVIDENDS
The shares of the Company's Series A Convertible Preferred Stock (the
"Series A") is convertible into shares of Common Stock of the Company.
Currently, each share of Series A is convertible into 2.12 shares of Common
Stock and the conversion price of the Series A is $4.72. The conversion price is
subject to adjustment as more fully described in the Certificate of Designations
for the Series A. Among other events triggering an adjustment to the conversion
price described in the Certificate of Designations, the conversion price may be
adjusted on August 7, 1998 (the "Reset Date") if the average closing bid price
of the Company's Common Stock from June 25, 1998 through and including August 6,
1998 is less than $6.136. If the average closing bid is less than $6.136 during
this period of time, the new conversion price will equal the greater of (a)
$2.36 and (b) the average closing bid price of the Company's Common Stock from
June 25, 1998 through and including August 6, 1998 divided by 1.3. No cash is
paid to the Company upon the conversion of the Series A into shares of the
Company's Common Stock.
In addition, commencing on August 7, 1998 the holders of the Series A are
entitled to payment-in-kind dividends ("PIK dividends"), payable semi-annually
in arrears, on their shares of Series A at the rate of 0.13 shares of Series A
for each outstanding share of Series A.
If the conversion price of the Series A is reduced then the holders of the
Series A will be entitled to receive more than 2.12 shares of the Company's
Common Stock upon conversion of the Series A and if the Company is obligated to
pay PIK dividends to the holders of the Series A then more shares of Common
Stock will be issuable upon conversion of the Series A, either of which could
adversely affect the prevailing market price of the Company's Common Stock.
The complete description of the rights and preferences of the Series A is
contained in the Certificate of Designations filed with the secretary of state
of the state of Delaware.
DEVELOPMENT STAGE COMPANIES; HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT;
UNCERTAINTY OF FUTURE PROFITABILITY
The technologies and products under development by the Company are in the
research and development stage and no operating revenue (outside of a milestone
payment made by Bausch & Lomb Surgical ("Bausch & Lomb") and grant revenues) has
been generated to date. Except for any payments that Bausch & Lomb may be
obligated to make pursuant to the Development & License Agreement (the
"Development & License Agreement"), dated May 14, 1998, between Optex
Ophthalmologics, Inc. and Bausch & Lomb, 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 recently established businesses. The Company has incurred
operating losses since its inception. As of June 30, 1998, the Company's working
capital and accumulated deficit were $7,880,022 and $13,839,735 respectively.
Operating losses have resulted principally from costs incurred in identifying
and acquiring the technologies under development, research and development
activities, patent prosecution and maintenance costs and 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
9
<PAGE>
and development programs, including preclinical studies and clinical trials for
its products and technologies under development, as well as costs incurred in
identifying and, possibly, acquiring, additional technologies. The Company's
ability to achieve profitability depends upon its ability (alone or with
corporate partners) to develop pharmaceutical and medical device products,
obtain regulatory approval for its proposed products and/or enter into
agreements either for the sale or sublicense of its technologies or 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.
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, independent contractor and employment agreements, the
Company currently anticipates that it will spend all of its current cash
reserves by the end of 1999. 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 one or
more corporate partners. 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 partners to fund some or all of its
activities, as well as to manufacture or market the products which may be
developed, the Company and its subsidiaries currently have only one such
arrangement in place with a corporate partner (i.e., Bausch & Lomb), and there
can be no assurance that the Company or any of its subsidiaries will be able to
enter into any additional ventures on favorable terms, if at all. In addition,
no assurance can be given that the Company or any of its subsidiaries would be
able to complete a private placement or public offering of its securities.
Failure by the Company or any of its subsidiaries to enter into such
collaborative ventures or to receive additional funding either through a public
offering or a private placement to complete its proposed product development
programs 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 3,702,750 Redeemable Warrants
(that are currently exercisable) as well as options and warrants (that are
currently exercisable in part) to purchase 3,702,750 and 863,155 shares of its
Common Stock, respectively, at exercise prices ranging from $5.50 to $6.05 and
$0.75 to $10.00, respectively, and the exercise price for most of such
convertible securities is below the per share price of the Common Stock as
quoted on the SmallCap tier of the Nasdaq Stock Market ("Nasdaq") as of June 30,
1998. As of June 30, 1998, the Company also had outstanding 811,885 shares of
its Series A and warrants to purchase 117,195 shares of Series A, all of which
currently are convertible into shares of the Company's Common Stock at a
conversion rate of 2.12 shares of Common Stock for each share of Series A. The
aforementioned conversion rate is subject to adjustment in favor of the holders
of the Series A upon the occurrence of certain events. The exercise of such
convertible securities or the conversion of the Series A, if any, may dilute the
value of the Common Stock. In addition, so long
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as such convertible securities remain unexercised, the terms under which the
Company could obtain additional capital may be adversely affected.
BAUSCH & LOMB DEVELOPMENT & LICENSE AGREEMENT
On May 14, 1998, the Company's majority-owned subsidiary, Optex entered
into a worldwide licensing agreement with Bausch & Lomb to complete the
development of Catarex, the cataract removal technology developed by Optex.
Under the terms of the agreement, Optex and Bausch & Lomb intend to jointly
complete the final design and development of the Catarex system. Bausch & Lomb
will assume responsibility for commercializing Catarex globally. Optex received
a milestone payment upon execution of the License & Development Agreement and is
to receive certain additional milestone payments from Bausch & Lomb. In
addition, Bausch & Lomb has committed to pay ongoing royalties on sales of
Catarex products. There can be no assurance that the Company and Bausch & Lomb
will be able to complete the development of Catarex, that the milestones that
trigger payment obligations from Bausch & Lomb will be reached or that Bausch &
Lomb will be able to successfully commercialize Catarex and, consequently, pay
royalties to the Company.
NO DEVELOPED OR APPROVED PRODUCTS
To achieve profitable operations, the Company, alone or with others, must
successfully develop, obtain regulatory approval for, introduce and market its
products under development. Most 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 (other than some grant revenues and the milestone
payment received from Bausch & Lomb). In addition, the Company has no
manufacturing or marketing facilities nor any contracts with any commercial
manufacturing or marketing entities to manufacture for or market the Company's
products to consumers (except for the License & Development Agreement with
Bausch & Lomb). 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, will fail to meet
applicable regulatory standards or will fail to obtain required regulatory
approvals or 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,
that third parties market superior or equivalent technologies and products or
that third parties have superior resources to market similar products or
technologies. Further, the Company's proposed technologies and products might
prove to have undesirable or unintended side effects that prevent or limit their
commercial use.
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. In addition, there can be no assurance that the
Company's research and development schedules will be met. Further, due to the
extended testing required before marketing clearance can be obtained from the
U.S. 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.
ANALYSIS OF RESULTS OF A PIVOTAL STUDY OF THE CYCLODEXTRIN TECHNOLOGY
The Company has performed several studies in small animal models of its
cyclodextrin technology and the results of this research have indicated that the
sulfated cyclodextrins may have potential as a treatment for restenosis and late
vein graft failure. The Company recently completed research in large animal
models of the cyclodextrin
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technology, and the results of the research in the large animal models are
believed to be more predictive of the effect of the cyclodextrin technology in
humans for the treatment of restenosis. Initial data analysis of the large
animal studies of the cyclodextrin technology for restenosis that were completed
in the second quarter indicates promising results with continuous intravenous
infusion of CT-1 and significant inflammatory reactions with CT-2. The Company
intends to conduct additional data analysis of the CT-2 study. Depending on its
analysis of the results of these studies of the cyclodextrin technology, the
Company may elect, among other alternatives, to sublicense all or some of its
proprietary rights and/or to relinquish its proprietary rights to the
cyclodextrin technology.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
The Company's proposed products and technologies are in early stages of
development. The research, preclinical development, clinical trials, product
manufacturing and marketing to be conducted by, or on behalf of, the Company is
subject to extensive regulation by the FDA, comparable agencies in state and
local jurisdictions 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 processes of obtaining
approvals from the FDA are 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.
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.
Before a new medical device can be introduced in the market, the
manufacturer must generally obtain FDA clearance or approval through either
clearance of a 510(k) notification or approval of a Pre-Market Approval
Application. A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is "substantially equivalent" to certain
categories of legally marketed medical devices. The FDA recently has been
requiring more rigorous demonstration of substantial equivalence than in the
past, including in some cases requiring submission of clinical data. The FDA may
determine that the proposed device is not substantially equivalent to a
predicate device or that additional information is needed before a substantial
equivalence determination can be made. It generally takes from 4 to 12 months
from submission to obtain 510(k) premarket clearance, but may take longer. A
"not substantially equivalent" determination, or a request for additional
information, could prevent or delay the market introduction of products that
fall into this category. For any devices that are cleared through the 510(k)
process, modifications or enhancements that could significantly affect safety or
effectiveness, or constitute a major change in the intended use of the device,
will require new 510(k) submissions.
The steps required before a drug may be approved by applicable government
agencies for marketing in the United States generally include (i) preclinical
laboratory and animal tests, (ii) the submission to the FDA of an
Investigational New Drug Application, (iii) adequate and well controlled human
clinical trials to establish the safety and efficacy of the drug, (iv)
submission to the FDA of a New Drug Application and (v) satisfactory completion
of an FDA inspection of the manufacturing facility or facilities at which the
drug is made to assess compliance with Good Manufacturing Practices. Lengthy and
detailed preclinical and clinical testing, validation of manufacturing and
quality control processes, and other costly and time-consuming procedures are
required. Satisfaction of these requirements typically takes several years and
the time needed to satisfy them may vary substantially, based on the type,
complexity and novelty of the pharmaceutical product. The effect of government
regulation may be to delay or to prevent marketing of potential products for a
considerable period of time and to impose costly procedures upon the Company's
activities. There can be no assurance that the FDA or any other regulatory
agency will grant approval for any products developed by the Company on a timely
basis, or at all. Success in preclinical or early
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stage clinical trials does not assure success in later stage clinical trials.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations that could delay, limit or prevent regulatory approval.
If regulatory approval of a product is granted, such approval may impose
limitations on the indicated uses for which a product may 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. Any delay or
failure of the Company to obtain and maintain regulatory approval of its
proposed products, processes or facilities would have a material adverse effect
on the business, financial condition and results of operations of the Company.
DEPENDENCE ON LICENSE AND SPONSORED RESEARCH AGREEMENTS
The Company depends on license agreements from third parties that form the
basis of its proprietary technology. Optex owns the proprietary rights that form
the basis of the Catarex technology. In general, the Company also relies on
sponsored research agreements for its research and development efforts. However,
the research and development for the Catarex device is jointly conducted at the
laboratory facilities of the Company's subsidiary, Optex, and at the laboratory
facilities of Bausch & Lomb and some of the research and development concerning
the 2-5A Chimeric Antisense Technology is conducted at the laboratory facilities
of the Company's subsidiary, Gemini Technologies, Inc. The license agreements
that have been entered into by the Company typically require the Company's 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. The
Company is also responsible for the costs of filing and prosecuting patent
applications and maintaining issued patents. Certain research and development
activities of the Company are 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 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 and/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 technologies. With the exception of Optex, all of
these patents and patent applications are owned by third parties and are
licensed or sublicensed to the Company. Optex owns the patents and the patent
applications relating to the Catarex technology; however, Optex has licensed
those rights to Bausch & Lomb. 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 its 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 evaluate any 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
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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 technologies, or cease altogether any
related research and development activities or product sales, any of which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company has certain proprietary rights and in the future may require
additional licenses from other parties to develop, manufacture and market
commercially viable products effectively, and the Company's commercial success
could depend in part on obtaining and maintaining such licenses. There can be no
assurance that such licenses could be obtained or maintained on commercially
reasonable terms, if at all, that the patents underlying such licenses would be
valid and enforceable or that the proprietary nature of the patented technology
underlying such licenses would 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.
The success of the Company is also dependent upon the skills, knowledge and
experience of its scientific and technical personnel (both employees and
independent contractors). 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
their employment by 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.
RAPID TECHNOLOGICAL CHANGE; COMPETITION
The Company's business is characterized by intensive research efforts and
intense competition and is subject to rapid and substantial technological
change. 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, research and development, manufacturing, marketing, distribution and
other resources than the Company. Certain of such entities have experience in
undertaking testing and clinical trials of new or improved products similar in
nature or that have a similar therapeutic effect to that which the Company is
developing. In addition, certain competitors have already begun testing of
similar products or technologies and may introduce such products or technologies
before the Company may do so. Accordingly, other entities may succeed in
developing products earlier than the Company or that are more effective, more
widely accepted or more economical than those proposed to be developed by the
Company. There can be no assurance that developments by others will not render
the Company's products or technologies noncompetitive or that the Company will
be able to keep pace with technological developments. 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
MANUFACTURE AND MARKETING OF PHARMACEUTICAL PRODUCTS
The Company 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's subsidiary, Optex, has entered into a
License & Development Agreement with Bausch & Lomb, and the Company anticipates
that it may, in the future, enter into additional collaborative agreements with
pharmaceutical and/or biotechnology
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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 development, clinical
testing, seeking of regulatory approval, manufacturing, distribution, marketing
and selling arrangements on commercially acceptable terms for the Company's
long-term needs for such anticipated products would have a material adverse
effect on the Company's business. There can be no assurance that the Company
will be able to enter into any additional arrangements for the development,
clinical testing, seeking of regulatory approval, 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.
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 desirable or 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 ten full-time employees,
three of whom are officers of Atlantic and each of its subsidiaries, 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
or from competing with the Company, directly or indirectly. 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. On July
10, 1998 Jon Douglas Lindjord, President and Chief Executive Officer of the
Company, resigned. This resignation may have a material adverse effect on the
Company. At this time the Company is conducting an executive search for a
replacement.
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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
employers unrelated to the Company and some have entered into one or more
additional 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 for which the Company is
able to acquire licenses or those which were invented while performing
consulting services on behalf of the Company pursuant to a proprietary
information agreement, will not become the property of the Company, but will
likely 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.
CERTAIN INTERLOCKING RELATIONSHIPS; POTENTIAL CONFLICTS OF INTEREST
Lindsay A. Rosenwald, M.D., a principal stockholder of the Company, is the
President and sole stockholder of Paramount Capital, Incorporated ("Paramount"),
the placement agent for the Company's 1997 private placement of its Series A.
Steven Kanzer, a Director of the Company, is the Senior Managing Director, Head
of Venture Capital of Paramount. Michael S. Weiss, the Company's Secretary, is a
Senior Managing Director of Paramount. In the regular course of its business,
Paramount 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 reasonably obtainable from a person who is
not an affiliate in an arms-length transaction. The Company is obligated to
enter into an agreement with Paramount pursuant to which Paramount will provide
financial advisory services to the Company. The Company also is bound by
agreements between itself and Paramount pursuant to which Paramount agreed to
provide financial advisory services to the Company and pursuant to which
Paramount agreed to provide placement advisory services in connection with the
private placement of the Series A. Nevertheless, neither Paramount, Dr.
Rosenwald nor Messrs. Kanzer or Weiss 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 assurance, and the Company does
not expect and securityholders should not expect, that any biomedical or
pharmaceutical product or technology identified by Paramount, Dr. Rosenwald or
Messrs. Kanzer or Weiss 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.
CONTROL BY EXISTING STOCKHOLDERS
Dr. Rosenwald and VentureTek, L.P. (a limited partnership controlled by
certain relatives of Dr. Rosenwald but of which Dr. Rosenwald disclaims
beneficial ownership) together beneficially own approximately 20% of the
outstanding shares of Common Stock of the Company and approximately 5% of the
Series A. Generally, the holders of the Common Stock and the Series A vote
together as a single class. 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
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additional products or technologies and, even if suitable products or
technologies are identified, the Company may not have sufficient resources to
pursue any such products or technologies.
TERMS OF SERIES A
The Certificate of Designations of the Series A provides that the holders
of the Series A generally vote with the holders of the Common Stock as a single
class. However, so long as 687,500 shares of Series A are outstanding, the
Company needs the approval of 66.67% of the outstanding shares of Series A,
voting separately as a class, to approve certain actions of the Company. In
addition, the holders of the Series A receive a liquidation preference upon the
consummation of certain corporate transactions and are entitled to notice of
certain corporate transactions and the conversion price of the Series A is
adjusted upon the occurrence of certain events. The preferences accorded to the
Series may adversely affect the prevailing market price of the Company's
securities.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF REDEEMABLE WARRANTS
The Redeemable Warrants as described in the notes to the financial
statement are subject to redemption commencing December 14, 1996 by the Company
under certain conditions. Redemption of the Redeemable Warrants could encourage
holders to exercise the Redeemable Warrants and pay the exercise price at a time
when it may be disadvantageous for the holders to do so, to sell the Redeemable
Warrants at the current market price when they might otherwise wish to hold the
Redeemable Warrants, or to accept the redemption price, which may be
substantially less than the market value of the Redeemable Warrants at the time
of redemption. The holders of the Redeemable Warrants will automatically forfeit
their rights to purchase the shares of Common Stock issuable upon exercise of
such Redeemable Warrants unless the Redeemable Warrants are exercised before
they are redeemed. The holders of Redeemable Warrants do not possess any rights
as stockholders of the Company unless and until such Redeemable Warrants are
exercised.
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 and the shares of Common Stock issuable upon conversion
of the Series A are all freely tradable, subject to volume and other
restrictions imposed by Rule 144 under the Securities Act of 1933 as amended
(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. A 9-month restriction on transfer
applicable to the shares of Common Stock issuable upon conversion of the Series
A expired on July 15, 1998. Sales of substantial amounts of Common Stock may
have an adverse effect on the market price of the Company's Common Stock.
No prediction can be made as to the effect, if any, that sales of Units,
Redeemable 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 Redeemable 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 ability to raise capital in the
future through the sale of equity securities.
SECURITIES LAW RESTRICTIONS ON THE EXERCISE OF REDEEMABLE WARRANTS
A holder of Redeemable Warrants has 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
filed and has undertaken to keep effective and current a prospectus permitting
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 keep suck
prospectus effective and current.
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Although the Company intends to seek to qualify for sale the shares of Common
Stock underlying the Redeemable Warrants 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 of Common Stock 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.
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, Redeemable Warrants and Units of the Company are
quoted on Nasdaq, continued inclusion of such securities on Nasdaq will require
that (i) the Company maintain at least $2,000,000 in net tangible assets, (ii)
the minimum bid price for the Common Stock be at least $1.00 per share, (iii)
the public float consist of at least 500,000 shares of Common Stock, valued in
the aggregate at more than $1,000,000, (iv) the Common Stock have at least two
active market makers, (v) the Common Stock be held by at least 300 holders and
(vi) the Company adhere to certain corporate governance requirements. 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
securities would thereafter be conducted in the over-the-counter market in the
"pink sheets" or the National Association of Securities Dealers' "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 securities are delisted from trading on Nasdaq and the
trading price of the Common Stock is less than $5.00 per share, trading in the
securities would also be subject to the requirements of Rule 15g-9 promulgated
under the Securities Exchange Act of 1934, as amended (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 Securities and
Exchange Commission (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, Redeemable Warrants or Units of
the Company. There can be no assurance that such securities will not be delisted
or treated as penny stock.
LIQUIDITY OF INVESTMENT; VOLUME OF TRADING
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 Company's securities.
POSSIBLE VOLATILITY OF STOCK PRICE
The securities markets have, from time to time, experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. These fluctuations often substantially affect the
market price of a company's Common Stock. In particular, the market prices for
securities of medical device companies and biotechnology companies have in the
past been, and can in the future be expected to be, especially
18
<PAGE>
volatile. The market price of the Company's securities has in the past and in
the future may be subject to volatility in general and from quarter to quarter
in particular depending upon announcements regarding developments of the Company
or its competitors, or other external factors, as well as continued operating
losses by the Company and fluctuations in the Company's financial results. These
factors could have a material adverse effect on the Company's business,
financial condition and results of operations and may not be indicative of the
prices that may prevail in the public market.
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. In addition, Optex is
required to indemnify Bausch & Lomb for certain matters under the terms of the
Development & License Agreement.
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.
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 and any entity or person affiliated
with or controlling or controlled by such entity or person. 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.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation limits, to the maximum extent
permitted by Delaware law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. The
19
<PAGE>
Company's Bylaws provide that the Company shall indemnify its officers and
directors and may indemnify its employees and other agents to the fullest extent
permitted by law. The Company has entered into indemnification agreements with
its officers and directors containing provisions that are in some respects
broader than the specific indemnification provisions contained in Delaware law.
The indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature) and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. Section 145 of the Delaware law provides that a
corporation may indemnify a director, officer, employee or agent made or
threatened to be made a party to an action by reason of the fact that he was a
director, officer, employee or agent of the corporation or was serving at the
request of the corporation against expenses actually and reasonably incurred in
connection with such action if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Delaware law does not
permit a corporation to eliminate a director's duty of care, and the provisions
of the Company's Certificate of Incorporation have no effect on the availability
of equitable remedies, such as injunction or rescission, for a director's breach
of the duty of care.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
such compliance. The Company has reviewed its internal system and doesn't expect
material adverse effect on the Company's business, financial condition and
operating results. The Company is in the process of reviewing third party
software to comply with this issue.
20
<PAGE>
PART TWO- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was convened on May 11,
1998 for the purpose of (1) electing a Board of six directors to serve for the
ensuring year; (2) approving an amendment to the Company's Restated Certificate
of Incorporation, as amended, to decrease the number of authorized shares of
Common Stock of the Company from 80,000,000 to 50,000,000 and to decrease the
number of authorized shares of Preferred Stock of the Company from 50,000,000 to
10,000,000; (3) approving the payment by the Company to each non-employee
director of a $6,000 annual fee and a fee for attendance at meetings of the
Board and committees of the Board; (4) ratifying the appointment of KPMG Peat
Marwick LLP as the Company's independent auditors; (5) approving a Consultancy
Agreement and a Financial Services Agreement between the Company and Yuichi
Iwaki, M.D., Ph.D.; (6) approving a Consultancy Agreement and a Financial
Services Agreement between the Company and John Prendergast, Ph.D.; and (7)
transacting such other business as may properly come before the annual meeting.
A copy of the Company's Proxy Statement described the matters submitted to the
stockholders was filed by the Company on April 14, 1998. A quorum was not
present at the May 11, 1998 meeting and, accordingly, the annual meeting was
adjourned to June 15, 1998. At the reconvened meeting on June 15, 1998, a quorum
was not present and, accordingly, the annual meeting was adjourned to July 15,
1998. At the reconvened meeting on July 15, 1998, a quorum was not present and,
accordingly, the annual meeting was adjourned to August 28, 1998.
ITEM 5. OTHER INFORMATION
On July 10, 1998 Jon Douglas Lindjord, President and Chief Executive
Officer of the Company, resigned. At such time Robert A. Fildes, Ph.D., the
Chairman of the Board of the Company, assumed the position of interim Chief
Executive Officer and President.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Form 8-K Reports
On May 22, 1998 the Company filed a report on Form 8-K stating that on
May 14, 1998, the Company's majority-owned subsidiary, Optex Ophthalmologics,
Inc. ("Optex"), entered into a Development & License Agreement (the "Agreement")
with Bausch & Lomb Surgical ("Bausch & Lomb") to complete the development of
Catarex, a cataract-removal technology owned by Optex. Under the terms of the
Agreement, Optex and Bausch & Lomb intend jointly to complete the final design
and development of the Catarex system and Bausch & Lomb, which was granted an
exclusive worldwide license to the Catarex technology for human ophthalmic
surgery, will assume responsibility for commercializing Catarex globally. The
entire Agreement is attached as an exhibit to the Form 8-K filed by the Company
on May 22, 1998.
21
<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.
July 29, 1998
/S/ Robert A. Fildes
--------------------
Robert A. Fildes, Ph.D.
Chairman of the Board
Interim Chief Executive Officer and President
/S/ Shimshon Mizrachi
---------------------
Shimshon Mizrachi
Chief Financial Officer
(Principal Accounting and Financial Officer)
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED June 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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<CURRENT-ASSETS> 8,477,857
<PP&E> 347,918
<DEPRECIATION> 230,891
<TOTAL-ASSETS> 8,825,775
<CURRENT-LIABILITIES> 597,835
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<COMMON> 3,924
<OTHER-SE> 8,223,204
<TOTAL-LIABILITY-AND-EQUITY> 8,825,775
<SALES> 0
<TOTAL-REVENUES> 2,500,000
<CGS> 0
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<OTHER-EXPENSES> 3,004,963
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (255,284)
<INCOME-PRETAX> (249,679)
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