<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 333-35930
POZEN Inc.
(Exact name of registrant as specified in its charter)
Delaware 62-1657552
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6330 Quadrangle Drive
Suite 240
Chapel Hill, North Carolina 27514
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (919) 490-0012
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] Yes [_] No
The number of outstanding shares of the registrant's common stock as of November
10, 2000 was 27,362,987.
<PAGE>
POZEN Inc.
(A Development Stage Company)
FORM 10-Q
For the Nine Months Ended September 30, 2000
INDEX
<TABLE>
<S> <C>
PART 1. FINANCIAL INFORMATION.............................................................................. Page
Item 1. Financial Statements (unaudited)
Balance Sheets as of September 30, 2000 and December 31, 1999...................................... 3
Statements of Operations for the Three and Nine Months Ended
September 30, 2000 and 1999 and Period From
Inception (September 26, 1996) Through September 30, 2000.......................................... 4
Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999 and Period From
Inception (September 26, 1996) Through September 30, 2000.......................................... 5
Notes to Financial Statements ..................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 12
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 13
Item 2. Changes in Securities and Use of Proceeds.......................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................................................ 14
Item 6. Exhibits and Reports on Form 8-K................................................................... 14
Signature Page ................................................................................................... 15
Exhibit Index ................................................................................................... 16
</TABLE>
2
<PAGE>
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
POZEN Inc.
(A Development Stage Company)
Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,966,253 $ 4,171,086
Prepaid expenses 684,350 14,720
Accrued interest receivable 9,685 19,297
Other current assets 9,091 9,553
-------------- --------------
Total current assets 19,669,379 4,214,656
Equipment, net of accumulated depreciation 134,215 110,351
-------------- --------------
Total assets $ 19,803,594 $ 4,325,007
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities: $ 2,821,647 $ 359,370
Accounts payable 3,628,466 2,000,927
Accrued expenses -------------- --------------
Total current liabilities 6,450,113 2,360,297
Redeemable convertible Series E preferred stock, $0.001 par value, 3,167,260
shares designated, 2,589,927 shares issued and outstanding at September 30,
2000; aggregate liquidation preference of $17,999,993 16,614,115 --
Series E preferred stock warrants 261,000 --
Redeemable convertible Series F preferred stock, $0.001 par value, 3,167,260
shares designated, 1,597,285 shares issued and outstanding at
September 30, 2000; aggregate liquidation preference of $11,101,130 10,741,990 --
Stockholders' equity (deficit):
Series A preferred stock, $0.001 par value, 2,750,000 shares designated,
2,105,931 shares issued and outstanding at December 31, 1999 and
September 30, 2000 2,106 2,106
Series B preferred stock, $0.001 par value, 4,000,000 shares designated,
1,139,377 shares issued and outstanding at December 31, 1999 and
September 30, 2000 1,139 1,139
Series C preferred stock, $0.001 par value, 2,839,507 shares designated,
563,004 shares issued and outstanding at December 31, 1999 and
September 30, 2000 563 563
Series D preferred stock, $0.001 par value, 6,000,000 shares designated,
2,593,750 issued and outstanding at December 31, 1999 and
September 30, 2000 2,594 2,594
Common stock, $0.001 par value, 90,000,000 shares authorized, issued and
outstanding 5,847,540 and 5,947,568 shares at December 31, 1999 and
September 30, 2000, respectively 5,948 5,848
Additional paid in capital 34,653,364 28,742,154
Preferred stock warrants 1,341,000 1,341,000
Deferred compensation (7,056,651) (3,343,253)
Deficit accumulated during the development stage (43,213,687) (24,787,441)
-------------- --------------
Total stockholders' equity (deficit) (14,263,624) 1,964,710
-------------- --------------
Total liabilities and stockholders' equity (deficit) $ 19,803,594 $ 4,325,007
============== ==============
</TABLE>
See accompanying Notes to Financial Statements.
3
<PAGE>
POZEN Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period from
Three Months Nine Months Inception
Ended Ended (September 26,
September 30, September 30, 1996) Through
September 30,
------------------------------------------------------------------------------
2000 1999 2000 1999 2000
------------ ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
General and administrative $ 1,238,735 $ 681,284 $ 3,288,752 $ 1,442,933 $ 8,193,677
Research and development 7,550,640 2,527,138 14,847,661 5,674,693 34,996,760
-------------------------- --------------------------- --------------
Total operating expenses 8,789,375 3,208,422 18,136,413 7,117,626 43,190,437
Interest income (expense), net 235,237 (401,281) 540,049 (443,289) 806,631
-------------------------- --------------------------- --------------
Net loss (8,554,138) (3,609,703) (17,596,364) (7,560,915) (42,383,806)
Deemed dividend to preferred stockholders 10,741,990 -- 27,617,105 -- 27,617,105
Preferred stock dividends 439,307 -- 829,882 -- 829,882
-------------------------- --------------------------- --------------
Net loss attributable to common stockholders $(19,735,435) $(3,609,703) $(46,043,351) $(7,560,915) $ (70,830,793)
========================== =========================== ==============
Basic and diluted net loss per common share $ (3.35) $ (0.62) $ (7.87) $ (1.29)
========================== ===========================
Shares used in computing basic and diluted
net loss per common share 5,887,246 5,844,167 5,850,520 5,844,167
========================== ===========================
Pro forma net loss per common shares - basic
and diluted $ (1.00) $ (0.31) $ (2.59) $ (0.68)
========================== ===========================
Pro forma weighted average common shares 19,737,305 11,552,118 17,790,301 11,171,796
outstanding - basic and diluted
========================== ===========================
</TABLE>
See accompanying Notes to Financial Statements.
4
<PAGE>
POZEN Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Period from Inception
Nine Months Ended (September 26, 1996)
September 30, Through September 30,
--------------------------------- -----------------------
2000 1999 2000
------------ ----------- -------------
<S> <C> <C> <C>
Operating activities
Net loss $(17,596,364) $(7,560,915) $ (42,383,806)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 37,027 29,917 145,560
Amortization of deferred compensation 2,173,074 430,508 3,429,990
Noncash financing charge -- 450,000 450,000
Changes in operating assets and liabilities:
Prepaid expenses and accrued interest receivable (660,018) 9,674 (694,035)
Other assets 462 -- (9,091)
Accounts payable and accrued expenses 3,259,934 (604,021) 5,620,231
--------------------------------- ----------------------
Net cash used in operating activities (12,785,885) (7,244,837) (33,441,151)
Investment activities
Purchase of equipment (60,891) (30,840) (279,774)
--------------------------------- ----------------------
Net cash used in investing activities (60,891) (30,840) (279,774)
--------------------------------- ----------------------
Financing activities
Proceeds from issuance of preferred stock 27,617,105 9,000,000 48,651,850
Proceeds from issuance of common stock 24,838 -- 31,018
Proceeds from notes payable -- 3,000,000 3,000,000
Proceeds from stockholders' receivables -- -- 1,004,310
--------------------------------- ----------------------
Net cash provided by financing activities 27,641,943 12,000,000 52,687,178
--------------------------------- ----------------------
Net increase in cash and cash equivalents 14,795,167 4,724,323 18,966,253
Cash and cash equivalents at beginning of period 4,171,086 2,986,080 --
--------------------------------- ----------------------
Cash and cash equivalents at end of period $ 18,966,253 $ 7,710,403 $ 18,966,253
================================= ======================
Supplemental schedule of cash flow information
Cash paid for interest $ 5,164 $ 136,140 $ 183,808
================================= ======================
Supplemental schedule of non cash investing
and financing activities
Conversion of notes payable to preferred stock $ -- $ 3,000,000 $ 3,000,000
================================= ======================
Preferred stock dividend $ 829,882 $ -- $ 829,882
================================= ======================
</TABLE>
See accompanying Notes to Financial Statements.
5
<PAGE>
POZEN Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization
POZEN Inc. (the "Company") is a pharmaceutical company engaged in the
development of products in targeted therapeutic areas. Since its inception in
1996, the Company's business activities have primarily been associated with the
development and acquisition of four pharmaceutical product candidates. The lead
product candidate is MT 100, an orally delivered therapeutic in Phase III
clinical trials for the treatment of migraine. To date, the Company has devoted
substantially all its resources to the research and clinical development of MT
100 and MT 300, an injectable product candidate for severe migraine. Other
migraine therapeutic product candidates include MT 500, a migraine prophylactic,
and MT 400, an orally delivered co-active therapy.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Statements--The accompanying unaudited interim
financial statements have been prepared in accordance with generally accepted
accounting principles and applicable Securities and Exchange Commission (SEC)
regulations for interim financial information. These financial statements are
unaudited and, in the opinion of management, include all adjustments necessary
to present fairly the balance sheets, statements of operations, and statements
of cash flows for the periods presented in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations. Operating results for the three and nine months ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. These financial statements and notes should be
read in conjunction with the financial statements and notes thereto for the year
ended December 31, 1999 included in the Company's Registration Statement on Form
S-1, as amended (File No. 333-35930), which was declared effective by the SEC on
October 10, 2000.
1.349-for-1 Stock Split--The accompanying financial statements have been
adjusted retroactively to reflect a 1.349-for-1 stock split, which was effective
on October 5, 2000.
Deemed Dividend to Preferred Stockholders--In accordance with EITF 98-5, the
Company has recorded a deemed dividend to preferred stockholders which
represents the excess of the fair market value of the underlying common stock
and warrants issued to the series E and series F convertible preferred
stockholders over the sales price of the securities, but with the charge limited
to the net proceeds received from the series E and series F offerings,
respectively.
Stock-based Compensation--The Company accounts for non-cash stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which states that no
compensation expense is recognized for stock options or other stock-based awards
that are granted to employees with an exercise price equal to or above the
estimated fair value of the Company's common stock on the grant date. In the
event that stock options are granted with an exercise price below the estimated
fair market value of the Company's common stock at the grant date, the
difference between the fair market value of the Company's common stock and the
exercise price of the stock option is recorded as deferred compensation.
In connection with the grant of stock options to employees, the Company recorded
deferred compensation of $5,882,195 in the nine months ended September 30, 2000
and $883,275 in the nine months ended September 30, 1999. These amounts are
recorded as a component of stockholders' equity and are being amortized as
charges to operations over the vesting period of the options using the straight-
line method. The vesting period of the options is generally three years.
Recently Issued Accounting Standards--In June 1998, the FASB issued SFAS 133,
"Accounting for Derivative Investments and Hedging Activities." SFAS 133
establishes a new model for accounting for derivatives and hedging activities
and supersedes several existing standards. SFAS 133, as amended by SFAS 137 and
SFAS 138, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company does not expect that the adoption of SFAS 133 will
have a material impact on its financial statements.
In December 1999, the SEC staff issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. SAB 101 explains how the SEC staff
applies by analogy the existing rules on revenue recognition to other
transactions not covered by such rules. In March 2000, the SEC issued SAB 101A
that delayed the original effective date of SAB 101 until the second quarter of
2000 for calendar year companies. In June 2000, the SEC issued SAB 101B that
further delayed the effective date of SAB 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The Company
does not expect that the adoption of SAB 101 will have a material impact on its
financial statements.
6
<PAGE>
3. Net Loss Per Share
Basic net loss per share is based on the weighted-average number of common
shares outstanding. Potentially dilutive securities, consisting of convertible
preferred stock, stock options and warrants, have been excluded from the
historical diluted earnings per share computations as their effect is
antidilutive.
In accordance with SFAS 128, basic and diluted net loss per common share has
been computed using the weighted-average number of shares of common stock
outstanding during the period. Pro forma basic and diluted net loss per common
share, as presented below and in the financial statements, has been computed
for the three and nine months ended September 30, 2000 and 1999 as described
above, and also gives effect to the conversion of the convertible preferred
stock that automatically converted to common stock upon the completion of the
Company's initial public offering (using the if- converted method) from the
original date of issuance and the assumed payment in shares of common stock of
the accumulated dividend on the series E and series F convertible preferred
stock.
A reconciliation of pro forma basic and diluted net loss per common share is as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $ (8,554,138) $(3,609,703) (17,596,364) $(7,560,915)
Deemed dividend to preferred stockholders 10,741,990 -- 27,617,105 --
Preferred stock dividends 439,307 -- 829,882 --
------------------------------ ------------------------------
Net loss attributable to common stockholders $(19,735,435) $(3,609,703) (46,043,351) $(7,560,915)
============================== ==============================
Shares used in computing basic and diluted
net loss per common share 5,887,246 5,844,167 5,850,520 5,844,167
============================== ==============================
Basic and diluted net loss per common share $ (3.35) $ (0.62) (7.87) $ (1.29)
============================== ==============================
Pro Forma:
Shares used above 5,887,246 5,844,167 5,850,520 5,844,167
Adjustment to reflect weighted-average effect
of assumed conversion of preferred stock 13,850,059 5,707,951 11,939,781 5,327,629
------------------------------ ------------------------------
Pro forma weighted average common shares
Outstanding - basic and diluted 19,737,305 11,552,118 17,790,301 11,171,796
============================== ==============================
Pro forma net loss per common share - basic
and diluted $ (1.00) $ (0.31) (2.59) $ (0.68)
============================== ==============================
</TABLE>
4. Redeemable Preferred Stock and Deemed Dividend to Preferred Stockholders
In March 2000, the Company completed a private placement of series E convertible
preferred stock resulting in net proceeds of $16,875,115 and in August 2000 the
Company completed a private placement of series F convertible preferred stock
resulting in net proceeds of $10,741,990.
In connection with these offerings, the Company recorded a non-cash charge of
$16,875,115 during March 2000 and a non-cash charge of $10,741,990 during August
2000. Both non-cash charges are related to the beneficial conversion feature of
the preferred stock the Company sold. Both the series E and series F convertible
preferred stock were sold at $6.95 per share. In addition, the terms of
conversion provided for a decrease in the conversion price from $6.95 to $5.73
if the Company did not complete its initial public offering by September 15,
2000. Subsequent to the commencement of the Company's initial public offering
process, the Company re-evaluated the deemed fair market value of its common
stock as of March 2000 and August 2000, respectively, and determined it to be
$15.00 per share. Accordingly, the incremental fair value is deemed to be the
equivalent of a preferred stock dividend. The deemed dividend was limited to the
net proceeds received from the series E and series F offerings. The Company
recorded the deemed dividend at the dates
7
<PAGE>
of issuance by offsetting charges and credits to additional paid-in capital
totaling $27,617,105, without any effect on total stockholders' equity.
5. Subsequent Events
On October 16, 2000, the Company completed its initial public offering in which
it sold five million shares of common stock at $15.00 per share. On November 9,
2000 the Company issued an additional 750,000 shares pursuant to the
underwriters' exercise of the over-allotment option. The initial public
offering resulted in gross proceeds of approximately $86,250,000, of which
$6,038,000 was applied toward the underwriting discount. Expenses related to the
offering totaled approximately $1,500,000. The Company has invested the net
proceeds of the initial public offering in highly liquid, interest bearing,
investment grade securities. On October 16, 2000, all of the convertible
preferred stock converted into shares of common stock. After the offering, the
Company had authorized capital stock consisting of 90,000,000 shares of common
stock, $0.001 par value per share, and 10,000,000 shares of preferred stock,
$0.001 par value per share.
8
<PAGE>
Item 2. Management Discussion and Analysis of Financial Conditions and Results
of Operations
This discussion of our financial condition and the results of operations should
be read together with the financial statements and notes contained elsewhere in
this Form 10-Q and the financial statements (and notes thereto) appearing in our
Registration Statement on Form S-1, as amended (File No. 333-35930), declared
effective on October 10, 2000. Some of the statements contained in this
Quarterly Report on Form 10-Q are forward-looking statements concerning our
operations, economic performance and financial condition within the meaning of
the federal securities laws. These statements may be found in this section and
elsewhere in this report.
Forward-looking statements typically are identified by use of terms such as
"may," "will," "should," "could," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "continue" and similar words, although some
forward-looking statements are expressed differently. You should be aware that
our actual results could differ materially from those contained in the forward-
looking statements, which are based on management's current expectations and are
subject to a number of risks and uncertainties, including, but not limited to,
our failure to successfully commercialize MT 100 and our other products;
unanticipated costs and delays in the development of MT 100 and our other
products; our inability to enter into or maintain, and the risks resulting from
our dependence upon, collaboration or contractual arrangements necessary for the
development, manufacture, commercialization, marketing, sales and distribution
of our products; competitive factors; our inability to protect our patents or
proprietary rights and obtain necessary rights to third party patents and
intellectual property to operate our business; our inability to operate our
business without infringing the patents and proprietary rights of others;
general economic conditions; the failure of our products to gain market
acceptance; our inability to obtain any additional required financing;
technological changes; government regulation; changes in industry practice; and
one-time events, including those discussed herein and in our Registration
Statement filed on Form S-1 (File No. 333-35930) under "Business" or " Risk
Factors." We do not intend to update any of these factors or to publicly
announce the results of any revisions to these forward-looking statements.
Overview
We are a pharmaceutical company engaged in the development of products in
targeted therapeutic areas. Since our inception in 1996, our business activities
have primarily been associated with the development and acquisition of four
pharmaceutical product candidates. Our lead product candidate is MT 100, an
orally delivered therapeutic in Phase III clinical trials for the treatment of
migraine. To date, we have devoted substantially all our resources to the
research and clinical development of MT 100 and MT 300, our injectable product
candidate for severe migraine. Our other migraine therapeutic product candidates
include MT 500, a migraine prophylactic, and MT 400, which is designed to
provide faster relief and a reduced relapse rate. Specifically, our business
activities have included product candidate research and development; designing
and funding clinical trials for our product candidates; regulatory and clinical
activities; intellectual property prosecution and expansion; and business
development including consideration of product acquisition or in-licensing.
Historically, we have financed our operations and internal growth primarily
through private placements of preferred stock rather than through collaborative
or partnership agreements. Therefore we have no research funding or
collaboration payments payable to us nor have we received any payments which are
refundable or subject to performance milestones.
Our results include non-cash compensation expense as a result of the issuance of
stock option grants. Compensation expense for options granted to employees
represents the difference between the fair value of our common stock and the
exercise price of the options at the date of grant. We account for stock-based
employee compensation arrangements in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and comply with the disclosure provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." Compensation for options granted to consultants has been
determined in accordance with SFAS No. 123 as the fair value of the equity
instruments issued. APB Opinion No. 25 has been applied in accounting for fixed
and milestone-based stock options to employees and directors as allowed by SFAS
No. 123. This amount is being recorded over the respective vesting periods of
the individual stock options. The expense is included in the respective
categories of expense in the statement of operations.
We have incurred significant losses since our inception and we have not
generated any revenue. As of September 30, 2000, our accumulated deficit was
$43,213,687. Our historical operating losses have resulted principally from our
research and development activities, including Phase III and Phase II clinical
trial activities for our product candidates MT 100 and MT 300, respectively, and
general and administrative expenses. We expect to continue to incur operating
losses over the next several years as we complete our MT 100 clinical trials,
apply for regulatory approval, continue development of our other migraine
therapeutic product candidates, and acquire and develop product candidate
portfolios in other therapeutic areas. Our results may vary depending on many
factors, including the progress of MT 100 and MT 300 in the regulatory process;
the acceleration of our other product candidates in the regulatory process; the
establishment of collaborations for the development and commercialization of any
of our migraine product candidates; and acquisition or in-licensing of other
therapeutic product candidates. Our ability to generate revenue is dependent
upon
9
<PAGE>
our ability, alone or with others, to successfully develop MT 100 or our other
migraine product candidates, obtain regulatory approvals and, alone or with
others, successfully manufacture and market our future products.
Three months ended September 30, 2000 compared to the three months ended
September 30, 1999
Net loss per share: Net loss for the quarter, excluding the one-time deemed
dividend to preferred stockholders and preferred stock dividend, was $8,554,138,
compared to a net loss of $3,609,703, for the same period in 1999. In the three
months ended September 30, 2000, we recorded a deemed dividend to preferred
stockholders of $10,741,990 which resulted from the sale of series F convertible
preferred stock in August 2000 at a price per share below the deemed fair value
of our stock at the time of sale of the preferred stock. Also, in the three
months ended September 30, 2000, we recorded an aggregate preferred stock
dividend of $439,307 to be paid in shares or cash to series E and in shares to
series F preferred stockholders upon the completion of our initial public
offering. Net loss attributable to common stockholders for the three months
ended September 30, 2000 was $19,735,435, or $3.35 per share, and for the three
months ended September 30, 1999 was $3,609,703, or $0.62 per share. Pro forma
net loss allocable to common shareholders, giving effect to the conversion of
such stock that automatically converted to common stock upon the completion of
our initial public offering and the assumed payment in shares of common stock of
the accumulated dividend on the series E and series F convertible preferred
stock, was $1.00 and $0.31 per common share for the three months ended September
30, 2000 and 1999, respectively.
Revenue: We generated no revenue during the three months ended September 30,
2000 and the three months ended September 30,1999.
Research and development: Research and development expenses increased 198.8% to
$7,550,640 for the three months ended September 30, 2000 from $2,527,138 for the
three months ended September 30, 1999. This net increase was due primarily to a
$3,002,000 increase in the costs associated with our Phase III clinical trials
for MT 100, our lead product candidate, along with a net increase of $1,653,000
in the pharmaceutical development and toxicology costs related to MT 100 and to
our other products. Additional research and development personnel costs
increased $368,000, of which $305,000 represented amortization of deferred stock
compensation. Amortization of deferred compensation included in research and
development expenses for the quarter was $446,000. Research and development
expenses included the personnel costs related to our research activities and
clinical trial preparations and monitoring expenses, and any regulatory matters.
General and administrative: General and administrative expenses increased 81.8%
to $1,238,735 for the three months ended September 30, 2000 from $681,284 for
the three months ended September 30, 1999. This increase of $557,000 resulted
from increases of $485,000 in personnel and related benefits, of which $366,000
represented amortization of deferred stock compensation, and $72,000 in other
costs related to the operational infrastructure. Amortization of deferred
compensation included in general and administrative expenses for the quarter was
$423,000. General and administrative expenses consisted primarily of the costs
of administrative personnel and related facility costs along with legal,
accounting and professional fees.
Interest income, net: Net interest income increased to $235,237 for the three
months ended September 30, 2000 from a net interest expense of $401,281 for the
three months ended September 30, 1999. Interest income increased $161,000 for
the three months ended September 30, 2000 as compared to the three months ended
September 30, 1999 due to increased levels of cash and cash equivalents
available for investing. During the three months ended September 30, 2000,
there was nominal interest expense while interest expense was $476,000 for the
three months ended September 30, 1999 and was related to a promissory note
converted to preferred stock during the period.
Nine months ended September 30, 2000 compared to the nine months ended September
30, 1999
Net loss per share: Net loss for the nine months ended September 30, 2000,
excluding a one-time deemed dividend to preferred stockholders and preferred
stock dividend, was $17,596,364, compared to a net loss of $7,560,915, for the
nine months ended September 30, 1999. In the nine months ended September 30,
2000 we recorded a deemed dividend to preferred stockholders of $27,617,105
which resulted from the sale of series E convertible preferred stock in March
2000 and series F convertible preferred stock in August 2000, each sale at a
price per share below the deemed fair value of our stock at the time of sale of
the preferred stock. Also, in the nine months ended September 30, 2000, we
recorded an aggregate preferred stock dividend of $829,882 to be paid in shares
to series E and series F preferred stockholders upon our initial public
offering. Net loss allocable to common stockholders for the nine months ended
September 30, 2000 was $46,043,351, or $7.87 per share, and for the nine months
ended September 30, 1999 was $7,560,915, or $1.29 per share. Pro forma net loss
allocable to common shareholders, giving effect to the conversion of such stock
that automatically converted to
10
<PAGE>
common stock upon the completion of our initial public offering and the assumed
payment in shares of common stock of the accumulated dividend on the series E
and series F convertible preferred stock, was $2.59 and $0.68 per common share
for the nine months ended September 30, 2000 and 1999, respectively.
Revenue: We generated no revenue during the nine months ended September 30, 2000
and the nine months ended September 30, 1999.
Research and development: Research and development expenses increased 161.6% to
$14,847,661 for the nine months ended September 30, 2000 from $5,674,693 for the
nine months ended September 30, 1999. This increase was primarily due to the
$6,942,000 increase in costs related to toxicology studies and clinical trial
costs associated with our Phase III clinical trials of MT 100, a net increase of
$1,031,000 in the pharmaceutical development and toxicology costs related to our
other products, and $1,200,000 in research and development personnel and
benefits cost, of which $805,000 represented amortization of deferred stock
compensation. Amortization of deferred compensation included in research and
development expenses for the nine month period was $1,114,000.
General and administrative: General and administrative expenses increased 127.9%
to $3,288,752 for the nine months ended September 30, 2000 from $1,442,933 for
the nine months ended September 30, 1999. This increase of $1,846,000 resulted
primarily from increases of $1,245,000 in personnel and related benefits, of
which $938,000 represented amortization of deferred stock compensation,
$147,000 in professional fees, $170,000 in contracted consulting fees and
$284,000 in other costs related to the expanded operational infrastructure.
Amortization of deferred compensation included in general and administrative
expenses for the nine month period was $1,059,000.
Interest income, net: Net interest income increased to $540,049 for the nine
months ended September 30, 2000 from a net interest expense of $443,289 for the
nine months ended September 30, 1999. Interest income increased $397,000 to
$540,000 for the nine months ended September 30, 2000 from $143,000 for the nine
months ended September 30, 1999 due to increased levels of cash and cash
equivalents available for investing. During the nine months ended September 30,
2000, there was nominal interest expense while interest expense was $586,000 for
the nine months ended September 30, 1999 and was related to a promissory note
converted to preferred stock during the period.
Income Taxes
As of September 30, 2000, we had federal and state net operating loss
carryforwards of approximately $37,000,000 and research and development credit
carryforwards of approximately $1,050,000. These federal net operating loss
carryforwards and research and development credit carryforwards begin to expire
in 2012. State net operating loss carryforwards begin to expire in 2001. The
utilization of the loss carryforwards to reduce future income taxes will depend
on our ability to generate sufficient taxable income prior to the expiration of
the net loss carryforwards. In addition, the maximum annual use of net loss
carryforwards is limited in certain situations where changes occur in our stock
ownership.
Liquidity and Capital Resources
Since our inception, we have financed our operations and internal growth
primarily through private placements of preferred stock, resulting in aggregate
net proceeds to us of $49,656,160. As of September 30, 2000, cash and cash
equivalents were $18,966,253. The majority of the proceeds raised since
inception have funded our operating activities.
Financing activities provided cash in an aggregate amount of approximately
$53,000,000 since inception. These amounts represent the net proceeds we
received from the sale of preferred and common stock and proceeds from notes
payable. In March 2000, we closed a private placement of preferred stock that
raised net proceeds of $16,875,115 after commissions and expenses. In addition,
in August 2000 we closed a private placement of preferred stock that raised net
proceeds of $10,741,990 after commissions and expenses. An aggregate deemed
dividend to preferred stockholders of $27,617,105 was recognized with respect to
these financings.
Net cash used in investing activities included primarily additions of equipment.
Since inception through September 30, 2000, approximately $280,000 was spent on
equipment.
At September 30, 2000, cash and cash equivalents totaled $18,966,253, an
increase of $14,795,167 as compared to December 31, 1999. The increase in cash
and cash equivalents resulted primarily from our financing activities, offset by
the cash used in operating activities. Cash used by operations of $12,785,885
during the nine months ended September 30, 2000 represented a net loss of
$17,596,364 offset by non-cash charges of $2,210,101, a net increase in prepaid
and other assets of $659,556 and an increase in accounts payable and accrued
liabilities of $3,259,934. The increase in accounts payable and accrued
liabilities was primarily due to the increased spending on our clinical
activities. Cash used in investing activities of $60,891 during the nine months
ended September 30, 2000 reflected the purchase of equipment. Cash provided by
financing activities during the nine months ended September 30,
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2000, which totaled $27,641,943, was generated primarily by the net aggregate
proceeds of $27,617,105 from the sales of the series E and series F convertible
preferred stock in March and August 2000, respectively.
On October 16, 2000, the Company completed its initial public offering in which
it sold five million shares of common stock at $15.00 per share. On November 9,
2000 the Company issued an additional 750,000 shares pursuant to the
underwriters' exercise of the over-allotment option. The initial public
offering resulted in gross proceeds of approximately $86,250,000, of which
$6,038,000 was applied toward the underwriting discount. Expenses related to the
offering totaled approximately $1,500,000.
Factors That May Affect Our Results
Our business is subject to certain risks and uncertainties. These risks and
uncertainties are described at the beginning of this section and in the "Risk
Factors" and "Business" sections of the Company's Registration Statement on Form
S-1, as amended (File No. 333-35930), which was declared effective by the SEC on
October 10, 2000. These Risk Factors are incorporated by reference in this
report. If any of these risks eventuate, our business, financial condition, cash
flows and results of operations could be materially adversely affected.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Our exposure to market risk is primarily in our investment portfolio. We have
invested the proceeds of our initial public offering in short-term, interest-
bearing, investment grade securities. We do not use derivative financial
instruments for speculative or trading purposes.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 6, 2000, an action was filed against us by Punk Ziegel & Company
arising out of our engagement of Punk Ziegel in early 1999 to assist us with the
sale of convertible preferred stock in a private placement offering. Punk Ziegel
alleges in the action that POZEN owes it certain fees and expenses in connection
with our termination of their engagement, and transaction consideration,
including warrants, in connection with our issuance and sale of preferred stock
in the twelve-month period following our termination of such engagement. We are
currently investigating this matter but believe that this is not a material
proceeding.
Item 2. Changes in Securities and Use of Proceeds
(a) In conjunction with our initial public offering, declared effective on
October 10, 2000, our Board of Directors and stockholders amended our
Certificate of Incorporation, as of October 16, 2000, increasing the authorized
capital stock to 90,000,000 shares of common stock and reducing the number of
authorized shares of preferred stock to 10,000,000, each with a par value of
$0.001. Upon the closing of the offering, all of our outstanding shares of
convertible preferred stock were converted into shares of common stock.
(b) None.
(c) Recent Sales of Unregistered Securities.
On March 24, 2000, we completed a private placement of 2,589,927 shares of
series E convertible preferred stock and received cash of $16,875,115, net of
offering costs. The terms of the series E provided for similar conversion and
voting rights and liquidation preference as those provided to the holders of
series A, series B, series C, and series D. The series E holders were entitled
to receive cumulative dividends at an annual rate of 8% of the original purchase
price payable in cash or shares of series E at the option of the holder. In
addition, the terms of conversion provided for a decrease in the conversion
price from $6.95 to $5.73 if we were unable to complete by September 15, 2000 a
qualified public offering or to effect a merger or acquisition through which the
holders of the series E would be entitled to receive $10.43 or more for each of
their shares of preferred stock. We recorded a non-cash preferred stock charge
at the date of issuance of the series E by offsetting charges and credits to
additional paid-in capital of $16,875,115, without any effect on total
stockholders' equity. The amount of the non-cash charge was limited to the net
proceeds received from the series E offering.
In conjunction with the issuance of the series E, we issued warrants to purchase
23,217 shares of series E at an initial exercise price of $6.95 per share to
certain key advisors for their services related to financing activities. These
warrants have since been modified to provide for an additional per share payment
upon exercise, equal to the difference between the exercise price otherwise
applicable and the initial public offering price per share of common stock. For
these series E issuances we relied on the exemption provided by Section 4(2) of
the Securities Act and Regulation D promulgated thereunder.
On August 28, 2000, we completed a private placement of 1,597,285 shares of
series F convertible preferred stock and received cash of $10,741,990, net of
offering costs. The terms of the series F were substantially similar to those of
the series E. We recorded a non-cash preferred stock charge at the date of
issuance by offsetting charges and credits to additional paid-in capital of
$10,741,990, without any effect on total stockholders' equity. The amount of the
non-cash charge was limited to the net proceeds received from the series E
offering. For these issuances we relied on the exemption provided by Section
4(2) of the Securities Act and Regulation D and Regulation S promulgated
thereunder.
During the nine months ended September 30, 2000, we issued and sold 100,028
shares of our common stock to employees and consultants upon exercise of stock
options held by them for exercise prices ranging from $0.19 to $0.44. For these
issuances we relied on the exemption provided by Section 4(2) of the Securities
Act and Rule 701 promulgated thereunder.
The recipients of the above-mentioned securities represented their intention to
acquire the securities for investment only and not with a view to distribution
thereof. Appropriate legends were affixed to the stock certificates in such
transactions. All recipients had adequate access, through employment or other
relationships, to information about us.
In conjunction with our initial public offering, all of our outstanding shares
of preferred stock, including the series E and F and dividends payable in shares
of preferred stock, were converted into shares of common stock.
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(d) Use of Proceeds
The effective date of our Registration Statement on Form S-1 (File No. 333-
35930) relating to our initial public offering was October 10, 2000. We sold a
total of 5,750,000 shares of our common stock, including shares sold upon
exercise of the underwriters' over-allotment options, at a price of $15.00 per
share to an underwriting syndicate led by U.S. Bancorp Piper Jaffray, Prudential
Vector Healthcare and Pacific Growth Equities, Inc. The initial public offering
resulted in gross proceeds of approximately $86,250,000, of which $6,038,000 was
applied toward the underwriting discount. Expenses related to the offering
totaled approximately $1,500,000. All of the net proceeds have been invested in
short-term, interest-bearing, investment grade securities pending our use for
the purposes specified in our Registration Statement, including the following:
approximately 65% for the development, approval and commercialization of our
product candidates; approximately 25% to acquire products that are complementary
to ours; and approximately 10% for general corporate and working capital
purposes.
The amounts and timing of our actual expenditures for each purpose may vary
significantly depending upon numerous factors, including the size, scope and
progress of our product candidate development efforts; regulatory approvals;
competition; marketing and sales activities; the market acceptance of any
products introduced by us; future revenue growth, if any; and the amount of
cash, if any, we generate from operations.
Item 4. Submission of Matters to Vote of Security Holders
Effective as of October 5, 2000, our stockholders acted by written consent
pursuant to Section 228 of the Delaware General Corporation Law to approve an
amendment to our Amended and Restated Certificate of Incorporation, providing
for a 1.349-for-1 stock split with respect to each issued and outstanding share
of common stock. 9,103,522 votes were cast by written consent in favor of the
proposed amendment and there were no votes against or abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of, or incorporated by reference into,
this Report on Form 10-Q.
No. Description of Exhibit
--- ----------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrant.*
3.2 Amended and Restated Bylaws of the Registrant.*
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws of the
Registrant defining rights of the holders of Common Stock of the
Registrant.
10.1 Sublease Agreement between Quintiles, Inc. and the Registrant, dated April
7, 1997.*
10.2 Stock Option Plan of the Registrant.*
10.3 First Amendment to Stock Option Plan dated February 14, 1997.*
10.4 Executive Employment Agreement with John R. Plachetka dated April 1, 1999.*
10.5 License Agreement dated September 24, 1999 between the Registrant and F.
Hoffman-La Roche Ltd.*
10.6 Investor Rights Agreement dated July 28, 1999 between the Registrant and
the holders of the Series D Preferred Stock.*
10.7 Investor Rights Agreement dated March 24, 2000 between the Registrant and
the holders of the Series E Preferred Stock.*
21.1 List of Subsidiaries.*
27.1 Financial Data Schedule.**
99 Risk Factors **
*Incorporated by reference to Registration Statement on Form S-1, No. 333-
35930.
**Filed herewith.
(b) Reports on Form 8-K
We filed no reports on Form 8-K during the quarter ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chapel
Hill, North Carolina, on November 14, 2000.
POZEN Inc.
----------
(Registrant)
November 14, 2000 By: /s/ JOHN R. PLACHETKA
---------------------------
John R. Plachetka
President and Chief
Executive Officer
November 14, 2000 /s/ MATTHEW E. CZAJKOWSKI
--------------------------
Matthew E. Czajkowski
Chief Financial Officer (Principle
Financial Officer)
November 14, 2000 /s/ JOHN E. BARNHARDT
-----------------------
John E. Barnhardt
Vice President, Finance and
Administration (Principle
Accounting Officer)
15
