<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11232
------------------------
VEREX LABORATORIES, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Colorado 84-0850695
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14 Inverness Drive East, D-100 Englewood, Colorado 80112
- ---------------------------------------------------------------------------
(Address of principal executive offices)
(303) 799-4499
---------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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 requirements for the past 90 days.
Yes X No
-------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The registrant had 2,327,359 shares of its no par value common stock
outstanding as of March 31, 1997.
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VEREX LABORATORIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets March 31, 1997 June 30, 1996
------ -------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 3,593 $ 155,229
Receivables
Trade 494 10,146
Note receivable - current 18,877
Prepaid expenses 5,184 16,376
Patented drug products 188,124 229,037
------- -------
197,395 429,665
Property and Equipment,
at cost
Furniture and equipment 489,900 489,900
Leasehold improvements 1,317 1,317
------- -------
491,217 491,217
Less accumulated depreciation
and amortization (458,992) (440,242)
------- -------
Property and equipment - net 32,225 50,975
Other Assets
Notes receivable - long-term 16,123
Patents and trademarks, net
of accumulated amortization
of $249,267 and $232,581 160,776 161,173
------- -------
160,776 177,296
------- -------
Total $390,396 $657,936
======== ========
Liabilities and Stockholders'
Equity
Current liabilities
Checks written in excess of
bank balance $59,543
Accounts payable and other
accruals 322,654 225,744
Accrued interest 359,270
Notes payable - stockholder
(Note 4) 1,667,000
Notes payable - officers 31,000
-------- ---------
353,654 2,311,557
Long-term liabilities
Accrued salary and benefits
payable, net of current
portion (Note 4) 2,207,823
---------
2,207,823
Commitments and contingencies
(Note 5)
Stockholders' Equity
Common Stock, no par value,
100,000,000 shares authorized
2,327,359 and 2,301,359 shares
issued and outstanding 2,304,423 2,285,331
Additional paid in capital 5,540,925 5,495,017
Accumulated deficit (7,808,606) (11,641,792)
--------- ----------
36,742 (3,861,444)
--------- ----------
Total $390,396 $657,936
========= ==========
</TABLE>
See notes to consolidated financial statement
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VEREX LABORATORIES, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For The Nine For The Nine
Months Ending Months Ending
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Revenues
Net sales $ 201,084
Contract income 27,658
Forgiveness of debt $ 4,658,830
Other Income 390 3,472
----------- ----------
$ 4,659,220 $ 232,214
Cost and Expenses
Cost of sales 135,163
General and administrative 661,318 827,530
Research and development 69,491 431,096
Operating 9,672
Marketing 2,544
Interest 95,222 90,502
--------- --------
826,031 1,496,507
Net Income (loss) $3,833,189 ($1,264,293)
Income tax (benefits) ---- ----
Net Income (loss) $3,833,189 ($1,264,293)
---------- ----------
Net income (loss) per
common share (note 3) $1.65 ($0.61)
Weighted average shares
outstanding 2,322,319 2,080,308
</TABLE>
See notes to consolidated financial statement
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<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
For The Three For The Three
Months Ending Months Ending
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Revenues
Net sales $ 44,322
Contract income 27,658
Forgiveness of debt $ 4,658,830
Other Income 10 392
------------ -----------
$4,658,840 $72,372
Cost and Expenses
Cost of sales 33,153
General and administrative 201,757 289,317
Research and development (29,075) 34,219
Operating 3,188
Interest 24,518 28,757
---------- ----------
197,200 388,634
Net Income (loss) $4,461,640 ($316,262)
---------- ----------
Net income (loss) per common
share (note 3) $1.92 ($0.15)
Weighted average shares
outstanding 2,322,319 2,080,308
</TABLE>
See notes to consolidated financial statement
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<PAGE>
VEREX LABORATORIES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For The Nine For The Nine
Months Ending Months Ending
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Cash Flows from Operating
Activities
Net income (loss) $ 3,833,189 ($1,264,293)
Adjustments to reconcile net
income (loss) to net
cash flow provided by (used in)
operating activities
Forgiveness of debt (4,658,830)
Depreciation and amortization 35,436 39,188
Changes in certain assets &
liabilities:
Patented drug products 40,913 42,214
Receivables 44,652 8,823
Inventory 10,425
Other assets 11,192 (48)
Accounts payable and other
accruals 37,366 73,299
Accrued interest 95,221
Accrued salary and benefits payable 309,516 307,266
-------- --------
Net cash provided by (used in)
operating activities ($251,345) ($783,126)
Cash flows from financing activities:
Proceeds from note payable 51,000
Payments on note payable (11,436)
Net cash provided by financing ------ --------
activities 51,000 11,436)
Cash flows from investing
activities:
Proceeds from sales of common stock 65,000 748,601
Additions to property and equipment (18,698)
Additions to patents and trademarks (16,291) (44,322)
------- -------
Net cash provided by (used in)
investing activities 48,709 685,581
------- -------
Net increase (decrease) in cash and
cash equivalents (151,636) (108,981)
Cash and cash equivalents-beginning
of period 155,229 140,766
------- --------
Cash and cash equivalents-end of period $3,593 $31,785
------- -------
</TABLE>
Supplemental cash flow information:
Cash paid for interest was $0 (1996) and $5,782 (1995).
See notes to consolidated financial statements
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<PAGE>
VEREX LABORATORIES, INC. and SUBSIDIARIES
Consolidated Notes to Financial Statements
(Unaudited)
1. Financial Statements
--------------------
These unaudited financial statements should be read in conjunction with the
Company's financial statements as of June 30, 1996, included in the Annual
Report on Form 10-K. In the opinion of the Company, the accompanying
consolidated financial statements contain all adjustments (consisting of
normal recurring items) necessary to present fairly the consolidated
financial position and results of operations for the periods presented. The
results of operations for the nine-month period ended March 31, 1997, are not
necessarily indicative of the results to be expected for the full year. The
Company's consolidated financial statements include the accounts of its
wholly-owned subsidiary Bear Laboratories, Inc.
2. Commitments
-----------
Office Lease:
- -------------
The Company is obligated under an office lease commencing April 1, 1997
and ending on March 31, 2000, to pay $6,826.54 in monthly installments for
its general office and research facility, which contains 8,623 sq. ft. of
space. A portion of this is subleased to others.
Clinical Trials:
- ----------------
The Company is continuing with clinical trials on its AIDS drug, Aztec,
and has made commitments for ongoing patient and laboratory work totaling
$195,000, part of which has been completed.
3. Net Income Per Common Share
---------------------------
Net income (loss) per common share for the nine-month periods ended
March 31, 1997 and March 31, 1996 has been computed on the basis of the
weighted number of common shares outstanding of 2,322,319 and 2,080,308 at
March 31, 1997 and 1996 respectively.
4. Credit Arrangements - Birklea, Ltd.
-----------------------------------
Effective November 30, 1993, the Company entered into a Credit Agreement
with Birklea, Ltd., a major shareholder of the Company, whereby Birklea, Ltd.
agreed to use its best efforts to provide up to $10,000,000 in financing to
the Company. Advances under the arrangement bear interest at prime rate set
by Morgan Guaranty Bank, New York. The convertible promissory note
thereunder is secured by the Company's right, title and interest in patent
applications, patents, trade names, know-how and trade secrets relating to
existing and future drug formulations relating to the drug commonly known as
AZT. At December 31, 1996, the Company had drawn down $1,687,000 pursuant to
the Credit Agreement. Subject to the Company having sufficient cash
resources or alternative borrowing resources, principal is payable and
interest are due upon 120 day notice or July 15, 1997. Effective March 31,
1997 Birklea Ltd. agreed to forgive its debt of $2,325,000 and release the
lien on the Company's AZT formulation and Dr. Dunn agreed to forgive a debt
of $2,517,239 relating to accrued compensation.
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5. Commitments and Contingencies
-----------------------------
In order to improve the Company's financial position and reduce
indebtedness of approximately $4,842,000 due to the Company's two principal
shareholders, the Company entered into an agreement with those shareholders,
Dr. Dunn and Birklea Ltd., whereby they forgave their respective indebtedness
in consideration for the right to receive 25% each respectively of any
licensing fees, advance royalties, royalties or any other source of income
from the Company's AZT formulation, Aztecr until they have received
$5,034,678 and $4,650,000 each respectively. In addition, the Company agreed
to divide 10% among Dr. Dunn and Birklea Ltd. of all income through licensing
fees, advance royalties, royalties and any other sources from the Company's
formulations of Verinr, C-R naproxen, C-R niacin and C-R dipyridamole up to
the amount of the respective indebtedness from the Company which they have
forgiven.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Operations
----------
The first nine months of the fiscal year and the three months ending
March 31, 1997 resulted in very little revenue from operations. However, on
March 31, 1997 the Company entered into an agreement with its two major
shareholders whereby $4,658,830 in indebtedness was forgiven in exchange for
certain royalty rights. See Notes 4 and 5 to the financial statements for
details.
Financial Position
------------------
The Company went from a deficit shareholders' equity of $3,861,444 to a
positive shareholders' equity of $36,742 primarily as a result of debt
forgiveness of $4,658,830. See Notes 4 and 5 to the financial statements
for details of this matter.
Liquidity and Capital Resources
-------------------------------
The Company in the past was dependent upon Birklea, Ltd., an Irish
corporation, and other outside sources to provide equity and/or debt
financing to the Company to fund its research and development and other
administrative costs. It is estimated that an additional $85,000 during the
next three months will be required to fund the Phase III Aztec clinical
trials. The Company is currently seeking funding from outside sources,
including licensing arrangements. There is no assurance such funding will be
available, or if available, on terms favorable or acceptable to the Company.
The Company has had success in recent years in obtaining capital, in the form
of private placement of common stock, from investors outside the U.S.
Specifically, it has sold more than $2,175,000 worth of stock since 1993
pursuant to Regulation S under the Securities Act of 1993. These funds were
used to pay for clinical trials and general and administrative expenses.
Except as indicated above, there are no planned expenditures outside the
normal operating costs of the Company which will cause the Company to make
any extraordinary plans for handling any cash requirements within the
foreseeable future.
The Company currently has no cash resources and expects no further funding
through Birklea Ltd. It is seeking funding through a variety of other
sources including private investors, industry partners, licencing
arrangements and possible other means. The Company is currently deferring
salaries of some of its employees and is unable to pay some other overhead
items. Unless it is able to find funding by August 31, 1997, it may be
forced to either merge with another company or discontinue further operations.
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<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibit 3.1 Restated Articles of Incorporation*
Exhibit 3.2 Restated By-Laws*
Stock Purchase Agreement - Birklea, Ltd. **
Stock Option - James M. Dunn, M.D. **
Stock Option - Jerry R. Dunn **
Exhibit 10 - Agreement - Birklea Ltd. and Dr. James M. Dunn
* Incorporated by reference to SEC File No. 2-82403-D filed September 30,
1983
** Incorporated by reference to SEC File No. 0-11232, Form 8-K January 14,
1993
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1997.
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<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
(Registrant) VEREX LABORATORIES, INC.
By:(Signature) /s/James M. Dunn, M.D.
(Date) May 15, 1997
(Name and Title) James M. Dunn, M.D.
President, Chief Executive Officer
and Chief Financial Officer
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,593
<SECURITIES> 0
<RECEIVABLES> 494
<ALLOWANCES> 0
<INVENTORY> 188,124
<CURRENT-ASSETS> 197,395
<PP&E> 491,217
<DEPRECIATION> 458,992
<TOTAL-ASSETS> 390,396
<CURRENT-LIABILITIES> 353,654
<BONDS> 0
0
0
<COMMON> 2,327,359
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 390,396
<SALES> 0
<TOTAL-REVENUES> 4,659,220
<CGS> 0
<TOTAL-COSTS> 826,031
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,222
<INCOME-PRETAX> 3,833,189
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,833,189
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
</TABLE>
<PAGE>
AGREEMENT
This Agreement made and entered into this 31st day of March, 1997, by and
between Verex Laboratories Inc., a Colorado Corporation (hereinafter referred
to as "VEREX"), James M. Dunn M.D. (hereinafter referred to as "DUNN") and
Birklea Ltd., a Irish Corporation (hereinafter referred to as "BIRKLEA").
WITNESSETH
WHEREAS; all of the parties hereto mutually agree that VEREX is indebted
to DUNN in the amount of $2,517,239 as of March 31, 1997, and that;
WHEREAS; all of the parties hereto mutually agree that VEREX is indebted
to BIRKLEA in the amount of $2,325,000 as of March 31, 1997, and that;
WHEREAS; VEREX is desirous of creating a better financial picture of its
corporation for possible investors and/or joint venture possibilities, and
that;
WHEREAS; all of the parties hereto are desirous of improving the financial
picture of VEREX;
NOW THEREFORE; in consideration of the mutual promise between the parties
it is hereby agreed as follows:
1. DUNN hereby agrees to fully forgive and discarded the debt payable
to him by VEREX in the amount of $2,517,239 as provided by his
Employment Contract dated the 30th day of November, 1993.
2. BIRKLEA hereby agrees to fully forgive and discharge the debt
payable to it by VEREX in the amount of $2,325,000 pursuant to
the Convertible Secured Note dated the 30th day of November, 1993.
3. In consideration of the forgiveness of these obligations to VEREX
by DUNN and BIRKLEA, VEREX agrees that the security interest that
BIRKLEA now has in the Aztec product of VEREX shall not be
disturbed except to the extent provided herein.
4. It is agreed that in consideration of the forgiveness of these
debts that VEREX will attempt to continue the development of Aztec
and find a buyer for the product, either through an outright sale
of the product or through a licensing and royalty agreement.
-1-
<PAGE>
5. It is agreed that all monies obtained from whatever source, whether
it be licensing fees, advanced royalties, royalties or any other
source of income from Aztec shall be divided as follows:
1. Fifty percent (50%) of such income shall go directly to VEREX,
twenty five percent (25%) shall go to BIRKLEA and twenty five
percent (25%) to DUNN, until such time as the entities have been
paid the following amounts:
BIRKLEA - $4,650,000 and DUNN - $5,034,678
6. This incentive amount is being paid on a contingent basis if the
sale of Aztec can be made an in consideration of DUNN and BIRKLEA
forgiving their existing debt owed by VEREX.
7. It is agreed that in the event no money is received by VEREX on
the sale of Aztec through any licensing or royalty agreement by
December 31, 1998, and there are no signed contract by which any
money is forthcoming from the sale of Aztec, BIRKLEA and Dunn
will enter into a subsequent agreement. The agreement will
reverse their existing relationship to the extent that DUNN will
assign the patent for Aztec to VEREX and VEREX will then assign
the patent to BIRKLEA .
BIRKLEA will sign all of the necessary documentation satisfactory
to both parties such that BIRKLEA will be the new owner with full
right of ownership to the Aztec product. BIRKLEA will sign a
security interest in the product similar to the one it now holds
as a secured party to the Aztec product over to DUNN to the extent
of $5,034,678. At that time and for a period of ten years (10)
BIRKLEA shall have all rights title and interest to the product
and shall attempt to sell the product under whatever fashion it
can and will pay to DUNN twenty five percent (25%) of any and all
proceeds derived from the sales of the product until such time as
the debt of $5,034,678 is paid in full. After that time BIRKLEA
will have no further obligation to pay any money to DUNN for this
product.
8. In addition to this amount, VEREX agrees that it shall divide ten
percent (10%) of all income through licensing fees, advance
royalties, royalties and any other source on VEREX formulations of
Verin, C-R naproxen, C-R niacin and C-R dipyridamole to offset the
forgiven debt of BIRKLEA and DUNN in the following amounts:
BIRKLEA - $2,325,000 and DUNN - $2,517,339
9. The incentive amount described in Paragraph 5 above shall only be
paid out of funds from the sale of Aztec. The funds described in
Paragraph 8 above shall be used to reduce the actual debt amount
-2-
<PAGE>
that has been forgiven by way of this agreement.
10. The list of products stated in Paragraph 8 above specifically
does not include the nanosphere technology. The reason for this
is that VEREX is attempting to make some progress with outside
investors and/or licensing companies for the nanosphere technology
and including this product in this incentive of debt re-payment
agreement could greatly hinder the progress of VEREX in its
attempt to accomplish this goal. However, it is specifically
agreed that any and all agreements made on the nanosphere
technology shall remain with VEREX and no agreements shall be made
for that technology outside of VEREX. All income whether through
licensing fees, royalties, sale of product or whatever fees
generated from the nanosphere technology will remain as assets of
VEREX.
11. It is agreed that the indebtedness as provided by the employment
contract to DUNN dated the 30th day of November, 1993, shall be
set at a firm amount as of this day as set out in the terms and
conditions and the document creating the debt shall be frozen at
this amount. No further obligation will be incurred under that
agreement.
12. It is agreed that the indebtedness as provided by the Convertible
Secured Note to BIRKLEA dated the 30th day of November, 1993, shall
be set at a firm amount as of this day as set out in the terms and
conditions and the document creating the debt shall be frozen at
this amount. No further obligation will be incurred under that
agreement.
The parties have entered into this agreement on the date first above written.
VEREX LABORATORIES, INC.,
a Colorado Corporation
By:________________________________________
James M. Dunn, M.D., President
BIRKLEA, Ltd., a Irish Corporation
By:________________________________________
By:________________________________________
James M. Dunn, M.D., individually
