<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 1-12416
APROGENEX, INC.
(Exact name of Small Business Issuer as specified in its charter)
Delaware 76-0269632
(State of incorporation) (I.R.S. Employer Identification Number)
8000 El Rio Street
Houston, TX 77054-4104
(Address of principal executive offices)
(713) 748-5114
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES: X NO:
As of October 24, 1996, there were 5,200,598 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one):
YES: NO: X
Total number of pages in this document: 19.
Exhibit Index is located on page: 18.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Aprogenex, Inc.
(A Delaware Corporation in the Development Stage)
Balance Sheets
(Unaudited)
December 31, September 30,
1995 1996
ASSETS ----------- -----------
Current assets:
Cash and cash equivalents $ 1,301,934 $ 855,999
Accounts receivable and prepaid expenses 103,412 87,321
----------- -----------
Total current assets 1,405,346 943,320
Property and equipment, net 956,034 705,118
Other assets, net 30,574 112,510
----------- -----------
$ 2,391,954 $ 1,760,948
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 273,361 $ 91,935
Accrued liabilities 244,491 175,223
Current portion of capital lease obligations 176,962 197,959
---------- ----------
Total current liabilities 694,814 465,117
Capital lease obligations, net of current portion 203,905 52,980
Convertible Notes Payable, including
accrued interest -- 2,009,750
Commitments and contingencies
Stockholders' equity
Undesignated Preferred Stock, 10,320,000 shares
authorized, none issued -- --
Series A Convertible Preferred Stock, $.001
par value; 880,000 shares authorized; 459,000
and 449,000 shares issued and outstanding,
respectively; liquidation preference of $13 per
share (aggregating to $5,967,000 and $5,837,000,
respectively) 459 449
Common Stock, $.001 par value; 20,000,000 shares
authorized; 5,156,345 and 5,200,598 shares
issued and outstanding, respectively 5,156 5,201
Additional paid-in capital 27,311,550 27,312,430
Deficit accumulated during the
development stage (26,002,816) (28,328,865)
Warrants to purchase Common and Preferred Stock 178,886 243,886
----------- -----------
Total stockholders' equity (deficit) 1,493,235 (766,899)
----------- -----------
$ 2,391,954 $ 1,760,948
=========== ===========
The accompanying notes are an integral part of these financial statements
<PAGE> 3
Aprogenex, Inc.
(A Delaware Corporation in the Development Stage)
Statements of Operations
(Unaudited)
For the
Period From
Inception
For the Three (January 25,
Months Ended September 30, 1989)Through
------------------------ September 30,
1995 1996 1996
----------- ----------- ------------
Revenues $ 17,650 $ 15,874 $ 227,184
----------- ----------- ------------
Costs and expenses:
Research and development 684,194 468,830 16,780,866
General and administrative 583,681 273,412 10,840,145
----------- ----------- ------------
Total costs and expenses 1,267,875 742,242 27,621,011
----------- ----------- ------------
Loss before interest and other (1,250,225) (726,368) (27,393,827)
Interest expense (21,766) (70,775) (691,887)
Interest income and other, net 44,102 44,048 689,504
----------- ----------- ------------
Net loss $(1,227,889) $ (753,095) $(27,396,210)
=========== =========== ============
Net loss per Common share $ (.24) $ (.14)
=========== ===========
Shares used in computing net
loss per Common share 5,136,345 5,200,598
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
Aprogenex, Inc.
(A Delaware Corporation in the Development Stage)
Statements of Operations (Continued)
(Unaudited)
For the
Period From
Inception
For the Nine (January 25,
Months Ended September 30, 1989)Through
------------------------ September 30,
1995 1996 1996
----------- ----------- ------------
Revenues $ 25,720 $ 46,455 $ 227,184
----------- ----------- ------------
Costs and expenses:
Research and development 2,497,199 1,509,683 16,780,866
General and administrative 1,672,309 822,773 10,840,145
----------- ----------- ------------
Total costs and expenses 4,169,508 2,332,456 27,621,011
----------- ----------- ------------
Loss before interest and other (4,143,788) (2,286,001) (27,393,827)
Interest expense (64,196) (112,797) (691,887)
Interest income and other, net 94,866 72,749 689,504
----------- ----------- ------------
Net loss $(4,113,118) $(2,326,049) $(27,396,210)
=========== =========== ============
Net loss per Common share $ (.82) $ (.45)
=========== ===========
Shares used in computing net loss
per Common share 5,041,880 5,193,507
=========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
Aprogenex, Inc.
(A Delaware Corporation in the Development Stage)
Statements of Cash Flows
(Unaudited)
For the
Period From
Inception
For the Three (January 25,
Months Ended September 30, 1989)Through
------------------------ September 30,
1995 1996 1996
----------- ----------- ------------
Operating Activities:
Net loss $(1,227,889) $ (753,095) $(27,396,210)
Adjustments to reconcile to net cash
used by operating activities
Depreciation and amortization 81,645 98,761 1,930,041
Interest expense accrued on
Convertible Notes, payable in 1998 -- 50,987 61,424
Amortization of discount
on Convertible Notes -- 6,926 8,326
Amortization of deferred compensation
related to certain stock options -- -- 94,300
Non-cash portion of technology
acquisition -- -- 2,421,875
Interest expense on notes payable
converted into preferred stock -- -- 186,154
Issuance of common stock, options, or
warrants for services -- -- 48,295
Changes in assets and liabilities-
(Increase) decrease in prepaid
expenses, receivables and other 93,589 3,014 (107,741)
Increase (decrease) in accounts
payable and accrued liabilities (301,904) (85,857) 267,158
----------- ----------- ------------
Net cash provided (used) by
operating activities (1,354,559) (679,264) (22,486,378)
----------- ----------- ------------
Investing Activities:
Purchases of marketable securities (2,116) -- (5,018,891)
Disposition of marketable securities -- -- 5,018,891
Purchases of property and equipment (28,844) -- (2,239,113)
Proceeds from sale-leaseback agreement -- -- 982,416
Deferred organization costs -- -- (1,788)
----------- ----------- ------------
Net cash provided (used) by
investing activities (30,960) -- (1,258,485)
----------- ----------- ------------
(Continued)
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
Aprogenex, Inc.
(A Delaware Corporation in the Development Stage)
Statements of Cash Flows (Continued)
(Unaudited)
For the
Period From
Inception
For the Three (January 25,
Months Ended September 30, 1989)Through
------------------------ September 30,
1995 1996 1996
----------- ----------- ------------
Financing Activities:
Net proceeds from sale of
preferred stock (57) -- 8,676,736
Net proceeds from sale of
common stock 9,000 -- 10,511,178
Net borrowings under Convertible Notes -- -- 1,834,318
Exercise of stock options 15,280 -- 110,087
Proceeds from sale of warrants -- -- 183,886
Principal payments under
capital lease obligations (38,216) (26,956) (1,072,141)
Borrowings under notes payable
converted into preferred stock -- -- 4,363,048
Net borrowings under Bridge Loans -- -- 570,000
Repayment of Bridge Loans -- -- (570,000)
Purchase of treasury stock -- -- (6,250)
----------- ----------- ------------
Net cash provided (used)
by financing activities (13,993) (26,956) 24,600,862
----------- ----------- ------------
Increase (decrease) in cash
and cash equivalents (1,399,512) (706,220) 855,999
Cash and cash equivalents, beginning
of period 3,481,527 1,562,219 --
----------- ----------- ------------
Cash and cash equivalents,
end of period $ 2,082,015 $ 855,999 $ 855,999
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
Aprogenex, Inc.
(A Delaware Corporation in the Development Stage)
Statements of Cash Flows (Continued)
(Unaudited)
For the
Period From
Inception
For the Nine (January 25,
Months Ended September 30, 1989)Through
------------------------ September 30,
1995 1996 1996
----------- ----------- ------------
Operating Activities:
Net loss $(4,113,118) $(2,326,049) $(27,396,210)
Adjustments to reconcile to net cash
used by operating activities
Depreciation and amortization 232,530 277,413 1,930,041
Interest expense on Convertible
Notes payable in 1998 -- 61,424 61,424
Amortization of discount on
Convertible Notes -- 8,326 8,326
Amortization of deferred
compensation related to certain
stock options -- -- 94,300
Non-cash portion of
technology acquisition -- -- 2,421,875
Interest expense on notes payable
converted into preferred stock -- -- 186,154
Issuance of common stock, options,
or warrants for services -- -- 48,295
Changes in assets and liabilities-
(Increase) decrease in prepaid
expenses, receivables and other 9,966 16,091 (107,741)
Increase (decrease) in accounts
payable and accrued liabilities (209,578) (250,694) 267,158
----------- ----------- ------------
Net cash provided (used) by
operating activities (4,080,200) (2,213,489) (22,486,378)
----------- ----------- ------------
Investing Activities:
Purchases of marketable securities (163,194) -- (5,018,891)
Disposition of marketable securities 1,000,000 -- 5,018,891
Purchases of property and equipment (75,204) (2,751) (2,239,113)
Proceeds from sale-leaseback agreement -- -- 982,416
Deferred organization costs -- -- (1,788)
----------- ----------- ------------
Net cash provided (used)
by investing activities 761,602 (2,751) (1,258,485)
----------- ----------- ------------
(Continued)
The accompanying notes are an integral part of these financial statements.
<PAGE> 8
Aprogenex, Inc.
(A Delaware Corporation in the Development Stage)
Statements of Cash Flows (Continued)
(Unaudited)
For the
Period From
Inception
For the Nine (January 25,
Months Ended September 30, 1989)Through
------------------------ September 30,
1995 1996 1996
----------- ----------- ------------
Financing Activities:
Net proceeds from sale
of preferred stock 3,835,383 -- 8,676,736
Net proceeds from sale
of common stock 564,015 -- 10,511,178
Net borrowings under
Convertible Notes -- 1,834,318 1,834,318
Exercise of stock options 58,826 915 110,087
Proceeds from sale of
warrants 48,786 65,000 183,886
Principal payments under
capital lease obligations (121,950) (129,928) (1,072,141)
Borrowings under notes
payable converted
into preferred stock -- -- 4,363,048
Net borrowings under
Bridge Loans -- -- 570,000
Repayment of Bridge Loans -- -- (570,000)
Purchase of treasury stock -- -- (6,250)
----------- ----------- ------------
Net cash provided (used)
by financing activities 4,385,060 1,770,305 24,600,862
----------- ----------- ------------
Increase (decrease) in cash
and cash equivalents 1,066,462 (445,935) 855,999
Cash and cash equivalents,
beginning of period 1,015,553 1,301,934 --
----------- ----------- ------------
Cash and cash equivalents,
end of period $ 2,082,015 $ 855,999 $ 855,999
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
<PAGE> 9
Condensed Notes to Financial Statements
1. Description of Business and Certain Significant Risks
Aprogenex, Inc. ("Aprogenex" or the "Company") was incorporated as Molecular
Analysis Incorporated on August 1, 1988, and commenced operations on January
25, 1989. The Company was organized to research, develop, and market medical
diagnostic products using DNA probes to detect and identify diseases and
genetic disorders. The proprietary technology of Aprogenex includes methods
of in situ hybridization using synthesized DNA probes.
Aprogenex is in the development stage and has only generated limited revenues
from the sale of research-use-only products. The future success of the
Company is dependent upon many factors, including the protection of its
proprietary technology, the ability to practice its technology without
infringing patents issued to others, the successful identification and
development of saleable products using this technology, obtaining regulatory
approvals to market such products, the penetration of markets for these
products, and obtaining funds necessary to complete these activities and
finance its other activities.
The Company's technology can be utilized to develop products that serve
various markets ranging from genetics to infectious diseases. The potential
customers for the Company's product candidates are generally laboratories
throughout the world, and such laboratories may require a broader range of
products or instrumentation than is available from the Company. Additionally,
the Company's product candidates must compete with products from other
companies developed using similar technologies, as well as with products
developed using other technologies. Most competitors have substantially
greater resources than the Company, which will make penetration of markets for
the Company's products difficult.
The Company estimates that, as of September 30, 1996, it has cash resources to
fund its normal operations into the first quarter of 1997. Accordingly, the
Company will require additional funding to complete its product development
activities or to sustain operations through the commercialization of such
products. The Company from time to time is engaged in activities to raise
funds through the sale of equity or debt or the license of portions of its
technology. The ability of the Company to continue its activities, to realize
or recover its investment in property and equipment, or to continue as a going
concern is dependent upon its ability to obtain additional funding. There can
be no assurance that the Company will be able to obtain such funding or, if
such funding is obtained, the terms or conditions of such funding.
As previously disclosed in the Company's Form 10-KSB for the year ended
December 31, 1995, as filed with the Securities and Exchange Commission, the
opinion of Arthur Andersen LLP, the independent public accountants for the
Company, included an explanatory fourth paragraph that indicated that the
Company's continued operations is dependent upon its ability to obtain
additional working capital to complete the research and development and other
activities and to attain successful future operations.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (the
"Commission"). Certain information and footnote disclosures normally included
in the annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
those rules and regulations. This financial information should be read in
<PAGE> 10
conjunction with the Financial Statements included within the Company's Form
10-KSB for the year ended December 31, 1995.
In the opinion of the management of the Company, the accompanying financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) that are necessary for a fair presentation of financial position
and the results of operations for the periods presented.
3. Genetics Collaborations
During 1996, the Company entered into separate collaborations with AmCell
Corporation and BioSeparations, Inc. for the supply of components to these
companies for prenatal genetics tests under development. The Company will
provide DNA probes to each company for incorporation into prenatal genetic
testing systems being developed by each company. AmCell is utilizing its
Magnetic Activated Cell Sorting technology to develop a component to enrich,
or concentrate, fetal cells circulating in maternal blood. BioSeparations is
utilizing its Charge Flow Separation technology to develop a competitive
enrichment component. Both companies may incorporate the Company's DNA probe
products into any test successfully developed with their technology.
The Company does not expect any significant revenues from these collaborations
until, if ever, either company successfully completes its development
activities, obtains any regulatory approvals required, and achieves market
acceptance of its products.
4. Litigation
In September 1996, a lawsuit styled Roy Fugman, Marilyn Fugman, Lillian O.
Fugman, and The Estate of George Oskvarek v. Aprogenex. Inc., Joel Bresser, J.
Donald Payne and Luis Cantarero was filed in United States District Court for
the Northern District of Illinois. See "Part II, Item 1. Legal Proceedings."
<PAGE> 11
Item 2. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
At September 30, 1996, the Company had cash resources of $856,000 available to
it and had net working capital of $478,000.
To date, the Company has financed its operations primarily through private
placements of its equity and debt securities and its initial public offering
in 1993. The Company has raised approximately $25.5 million in net proceeds
through these transactions, including $4.5 million of such sales consummated
through the conversion of the Company's debt securities into equity.
Additionally, the Company has financed $1.3 million of its approximately $2.6
million of capital expenditures since inception through equipment leases.
The Company has expended and will continue to expend in the future substantial
funds to continue the research and development of its products which are in
various stages of development, conduct clinical investigations, make capital
expenditures, and manufacture and market its products. Additional amounts
will be expended in research activities, continuing development of products,
testing of these existing and other products in field trials and clinical
investigations, seeking regulatory approval of successfully tested products,
and the manufacturing and marketing of products approved for sale. If
regulatory approvals are obtained, the Company expects to expend substantial
funds on marketing and distribution activities. The amount and timing of
anticipated expenditures will depend upon numerous factors both within and
outside the Company's control. Factors within the Company's control include
the number of products under development, the timing of the commencement of
clinical investigations and regulatory filings, and the extent of pre-
marketing or marketing activities. Factors generally beyond the control of
the Company include the results of research and development activities, the
extent of clinical investigations and the regulatory process to obtain FDA or
other approvals of products and technological advances of, and products
developed by, its competitors. Moreover, even if the Company's activities are
successful, the ability to generate income from the sale of products will be
dependent upon, among other things, acceptance of products by customers,
access to distribution channels for products and the Company's ability to
obtain reimbursement approval from government and third-party payers. The
necessity for instrumentation to be used with the Company's products may also
affect capital requirements.
In addition to the foregoing, the Company's working capital requirements
during the next 12 months may vary depending upon numerous additional factors,
including the progress of the Company's research and development program, the
results of laboratory testing, the time and cost required to seek regulatory
approvals, the need to obtain licenses to proprietary rights held by others,
any required adjustments to the Company's operating plan to respond to the
competitive pressures or technological advances, the time of pre-marketing and
marketing activities, and the success of the Company in developing
collaborative arrangements with others for the development of its technology.
The Company's cash and marketable securities as of September 30, 1996, are
expected to be used as set forth in "Plan of Operations" below. The Company
anticipates that its resources will be sufficient to fund its activities into
the first quarter of 1997. The report of the Company's independent auditors
on the financial statements for the year ended December 31, 1995 included an
explanatory paragraph with respect to the need for future financing. The
Company expects to seek additional financing in 1996 to fund its operations
during 1997. The Company will seek to obtain additional funds through equity
or debt financing, collaborative or other arrangements with corporate partners
and others, and from other sources. If additional funds are raised by issuing
equity securities, dilution to stockholders may occur. The Board of Directors
<PAGE> 12
of the Company is empowered, without stockholder approval (other than in
certain cases approvals of the holders of the Series A Convertible Preferred
Stock), to issue additional shares of Series A Preferred Stock or other series
of preferred stock with dividend, liquidation, conversion, voting and other
rights that could adversely affect the voting power or other rights of the
holders of the Company's securities. If debt securities are issued, a portion
of the Company's cash flow will have to be dedicated to payment of principal
and interest on such indebtedness and the Company may be subject to certain
restrictive financial and operating restrictions in the agreements and
instruments relating to such indebtedness. There can be no assurance that
there will be significant sales of the Company's products or that such
revenues will be sufficient for operations. In such event, the Company would
also be required to seek additional funds. There can be no assurance that
additional financing, whenever required, will be available when needed or on
terms acceptable to the Company. If adequate funds are not available, the
Company may be required to delay or to eliminate expenditures for certain of
its products, to license to third parties the rights to commercialize
additional products or technologies that the Company would otherwise seek to
develop itself or if no other reasonable alternative is available, to cease
operations.
Additionally, depending on market conditions or future business opportunities,
the Company may decide to issue additional equity or debt securities for cash
or to acquire assets or technology of others. The working capital of the
Company may also be used to acquire such assets or technology, reducing the
funds available for alternative use.
The Company from time to time engages in discussions with diagnostic companies
regarding collaborative arrangements for the development and sale of
applications of the Company's technology which, depending upon the terms and
requirements of such arrangements, could expand the Company's research
activities. Such arrangements, if consummated, could significantly reduce the
amount of capital that would be required for the development and
commercialization of certain applications. It is possible, however, that the
net proceeds ultimately derived from any such arrangement could be less than
would be the case if the Company undertook and completed development of such
products itself. There can be no assurance as to the ability of the Company to
consummate any such arrangement, or the terms or timing of any such
arrangement. Additionally, from time to time the Company engages in
exploratory discussions with others regarding mergers, acquisitions, joint
ventures, dispositions and other transactions. There can be no assurance,
however, that any such transaction will be effected by the Company or on what
terms.
The Company's liquidity will be reduced as amounts are expended for continuing
activities. While not currently anticipated, the Company's liquidity could
also be substantially reduced if significant amounts are expended for
additional facilities, equipment or to license or acquire proprietary
technology owned by others or to legally defend its proprietary technology.
Plan of Operations
During the next 12 months, the principal focus of the Company's activities is
currently expected to be (i) the development and marketing of research-use-
only HIV products, (ii) the development of clinical HIV products for
submission to regulatory authorities as therapeutic monitoring products, (iii)
the marketing of DNA probe products to other companies for use in their
genetics programs, (iv) the development of other products and enhancements to
the Company's technology, and (v) if any of the foregoing development
activities are successful, conducting field trials for, seeking any required
regulatory approvals of, and the marketing of these products. These planned
<PAGE> 13
activities reflect an increased emphasis on the development of HIV and other
products and a reduced emphasis on the continued development of genetics
products. Such planned activities may change depending upon business
opportunities that present themselves, the success of development activities,
the financial position of the Company and other matters that may arise in the
future.
For a discussion of certain of the factors that affect the timing of any sales
of the Company's products, see the Company's Form 10-KSB for the year ended
December 31, 1995.
The Company expects to either renew its lease for its facilities in 1996 or to
move to a new location. Any move would require the construction of new
manufacturing and laboratory facilities and may require the expenditure of
approximately $1.0 million or more. Capital expenditures of other equipment
are not expected to exceed $500,000 during the next 12 months. However, all
such expenditures will vary based on the success of the Company's efforts, its
financial resources, changes in manufacturing, research or development
programs, and other factors.
The Company does not believe that it is likely that the sales of its "For
Research Use Only" genetic testing products will provide sufficient
commercialization to fund its operations. The Company cannot currently
predict the success or market acceptance of its "For Research Use Only" HIV
product. There can be no assurance that the Company will ever achieve
profitability or that its products will be marketed successfully or become
commercially viable. There can be no assurance that the Company will not
encounter substantial expenses related to further testing and development,
regulatory compliance, production and marketing problems, and competition or
defense of the Company's license and patent rights.
As of October 22, 1996, the Company employed 10 full and part-time employees
and engaged three contract personnel. If the Company is successful in its
fund-raising, development and marketing activities, the number of employees
and temporary personnel will increase. The number of such personnel will
depend on the progress of the Company's efforts and cannot be forecast with
certainty.
The foregoing plan of operations includes certain objectives of the Company,
and there can be no assurance that these objectives will be achieved within
the stated period, if at all. Furthermore, this plan of operations is subject
to change based on future events and circumstances, many of which are beyond
the control of the Company. See "Forward Looking Statements" below.
Results of Operations
The Company's net losses for the three month periods ended September 30, 1995,
June 30, 1996, and September 30, 1996 were $1,228,000, $797,000, and $753,000,
respectively. The decrease in losses from the 1995 period is principally the
result of reduced activities in developing prenatal genetic testing products
partially offset by increased research on Human Immunodeficiency Virus ("HIV")
products. See the Company's Form 10-KSB for the year ended December 31, 1995
and the discussion below. The Company expects to incur substantial operating
losses into at least 1998 as it continues the activities discussed in "Plan of
Operations" above. The Company expects to incur additional losses thereafter
until such time, if ever, as there is sufficient commercialization of its
products to offset its research and development activities. There can be no
assurance that the Company will be able to achieve or sustain profitability.
Revenues for the three month periods ended September 30, 1995, June 30, 1996,
and September 30, 1996 were $18,000, $13,000 and $16,000, respectively. Such
amounts were obtained from "Research Use Only" sales of the Company's
<PAGE> 14
products. For a discussion of the market potential for these products, see
the Company's Form 10-KSB for the year ended December 31, 1995.
Research and development expenditures have varied with the nature and scope of
the Company's research activities. These amounts include the costs of basic
and product-related research, process development efforts, and costs
associated with field trials. Research and development expenditures for the
three month periods ended September 30, 1995, June 30, 1996, and September 30,
1996 were $684,000, $520,000 and $469,000, respectively. The decrease from
the third quarter of 1995 to the second and third quarter of 1996 is
principally attributable to reduced expenditures for development of a sell
separation or enrichment component to the Company's prenatal genetic testing
product using fetal cells from maternal blood ("GenSite"). While development
efforts for the cell separation or enrichment component of GenSite constituted
a significant portion of the Company's resources prior to 1996, such efforts
constituted a small portion of the Company's efforts in 1996. During mid-
1996, the Company ended its efforts for the development of its own enrichment
system as well as any efforts to license the enrichment systems of others;
both such efforts were ended in 1996 in conjunction with the Company's
collaboration efforts with other companies developing enrichment systems.
However, the Company's strategy may change depending upon business
opportunities that are available to the Company.
The Company expects the level of research and development expenditures,
exclusive of acquisition costs, during the next twelve months to depend on its
financial resources, the success of its development and testing activities for
certain products, and market acceptance of its products and the need for
product enhancements, and such expenditures may increase as a result of such
activities. Expenses could increase as a result of any additional
acquisitions of intellectual property or other research costs.
The cost of materials sold is currently included in research and development
costs because such materials manufactured are principally used for development
activities. The costs associated with products sold in 1995 and 1996 were not
material.
General and administrative expenses for the three month periods ended
September 30, 1995, June 30, 1996, and September 30, 1996 were $584,000,
$280,000 and $273,000, respectively. The decrease from the third quarter of
1995 to the second and third quarters of 1996 is principally attributable to
reduced administrative, marketing and legal costs. The Company's President,
who resigned in September, 1995, was not replaced until April, 1996, reducing
administrative expenses through March 31, 1996. The Company eliminated two
marketing and business development related positions in 1995 as a result of
delays in the expected marketing of its prenatal genetic testing product, and
instead relied upon part-time consulting arrangements to market its "Research
Use Only" products in certain areas. Additionally, legal expenses declined
because of lower patent prosecution fees.
The Company's selling expenses are included in selling, general and
administrative expenses, but have not been material to date. The Company
expects selling expenses to increase as the number of research-use-only
products available for sale increases, as regulatory approvals of its products
are obtained and the Company commences the commercialization of its products.
The Company currently intends to employ distributors for certain products, and
selling expenses will vary depending upon the success of this strategy.
Interest expense for the three month periods ended September 30, 1995, June
30, 1996, and September 30, 1996 were $22,000, $27,000, and $71,000,
respectively. Such amounts prior to June 30, 1996, were principally interest
on capitalized leases, and the amounts declined from the third quarter of 1995
to the second quarter of 1996 as a result of the expiration of certain leases
and principal payments on the remaining leases, partially offset by the
<PAGE> 15
$12,000 of interest expense on the Convertible Notes during the quarter ended
June 30, 1996. Interest expense for the quarter ended September 30, 1996
increased from prior quarters as a result of interest on the Convertible
Notes, which were outstanding during the full period. Such amounts are
payable upon maturity of the Convertible Notes.
Interest income and other, net, for the three month periods ended September
30, 1995, June 30, 1996, and September 30, 1996 were $44,000, $16,000, and
$44,000, respectively. The increase from the second quarter to the third
quarter of 1996 is the result of higher funds available for investment due to
proceeds from the sale of convertible notes.
Forward-Looking Statements
The statements contained in all parts of this document regarding future
products and product developments, financial performance, future regulatory
approvals, business strategies, market acceptance, business arrangements, and
results and other statements which are not historical facts are forward-
looking statements. The words "expect," "project," "estimate," "predict,"
"anticipate," "believes," and similar expressions are also intended to
identify forward looking statements. The forward looking statements involve
risks and uncertainties, including, but not limited to, those relating to: the
Company's products being in the early stage of development; uncertainty of
developing markets; the need for additional financing and limited access to
capital funding; the Company's limited operating history; its accumulated
deficit and anticipated losses; government regulation (including that the
Company's products are subject to extensive regulation and required government
approvals, that there is no assurance of regulatory approvals and that failure
to obtain such approvals will have an adverse effect; uncertainty of the type
of, timing or receipt of FDA approval; that the Company will be subject to
numerous international regulations and that other regulations may adversely
affect the Company); the Company's reliance on distributors and collaborative
partners; license patents and trade secrets (including the uncertainty of
domestic and international patent protection, the possibility of patent
infringement claims against the Company, the Company's reliance on trade
secrets and proprietary know-how and that there is no assurance of
confidentiality); the potential adverse effects of technological change and
competition; potential of limited third-party reimbursement; use of hazardous
materials; possibility of product liability claims; dependence on key
personnel; limited manufacturing and marketing experience; uncertainty
relating to health care reform measures; and other factors detailed in the
Company's Securities and Exchange Commission filings.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In September 1996, a lawsuit styled Roy Fugman, Marilyn Fugman, Lillian O.
Fugman, and The Estate of George Oskvarek v. Aprogenex. Inc., Joel Bresser, J.
Donald Payne and Luis Cantarero was filed in United States District Court for
the Northern District of Illinois. In general, the plaintiffs allege that
their transactions in the Company's stock were made in reliance upon a
stockbroker's recommendations and analyses which, in turn, were allegedly
predicated on misleading or erroneous information provided to the stockbroker
by officers of Aprogenex. The complaint alleges among other things that
officers of the Company made oral statements inconsistent with the Company's
careful and cautious written public disclosures and that the stockbroker was
persuaded by the Company's representatives to disregard warnings in public
disclosures and, instead, to rely on other assurances of Aprogenex personnel.
<PAGE> 16
The plaintiffs in this lawsuit allege that the defendants (the Company and
certain current and former officers and directors) employed devices, schemes
and artifices to defraud; made untrue statements of material fact or omitted
to state material facts necessary in order to make statements made, in light
of the circumstances under which they were made, not misleading; or engaged in
acts or practices in a course of business that operated as a fraud or deceit
upon plaintiff and others similarly situated in connection with their
purchases and sales of Aprogenex stock and that such alleged actions violated
Section 10b of the Securities Exchange Act of 1934 and Rule 10b 5 promulgated
thereunder. The plaintiffs have requested damages, costs of suit and such
other and further relief, at law or in equity, to which they may be entitled
and have alleged aggregate net losses in excess of $175,000. The Company
expects to contest the case vigorously.
Item 5. Other Information
On September 20, 1996, the Company's Vice President - Research and Development
resigned. The Company does not expect to replace this individual at this time
and his duties will be assumed by others within the Company.
Item 6. Submission of Matters to a Vote of Security-Holders
On July 12, 1996, the annual meeting of stockholders was held in Houston,
Texas. There were 5,200,598 shares of Common Stock and 449,000 shares of
Series A Convertible Preferred Stock (each of which was entitled to 4.26
votes) issued, outstanding and entitled to vote at the meeting. Three items
were acted upon by the stockholders.
The first action was the election of Directors of the Company. All of the
nominees were elected in uncontested elections, and the votes cast for and
against were as follow:
Nominees No. of Votes
For Withheld
Dr. Michael E. Hogan 4,118,320 22,653
Christopher T. Kelly 4,118,320 22,653
David Leech 4,118,320 22,653
J. Donald Payne 4,118,320 22,653
Terry Ward 4,118,320 22,653
The second action was the approval of the amended and restated Directors Stock
Option Plan and the increase by 50,000 in the number shares of Common Stock
authorized for issuance under the plan. At the meeting, there were 3,681,308
votes for the approval of the increase, 425,315 votes against the approval of
the increase, 34,350 votes abstained and no shares did not vote.
The final action was the approval of Arthur Andersen LLP as the independent
public accountants for for the Company for 1996. At the meeting, there were
4,135,143 votes for the approval of Arthur Andersen LLP, 2,530 votes against,
3,300 votes abstained, and no shares did not vote.
Item 7. Exhibits and Reports on Form 8-K
a.) Exhibits
Exhibit
Number Document Description
27 Financial Data Schedule.
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Aprogenex, Inc.
October 31, 1996 By: /s/ J. Donald Payne
--------------------------
J. Donald Payne
Vice President-Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE> 18
Exhibit Index
Exhibit
Number Document Description
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited Balance Sheet as of September 30, 1996 and the unaudited Statement of
Operations for the nine months ended September 30, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 855999
<SECURITIES> 0
<RECEIVABLES> 87321
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 943320
<PP&E> 705118<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1760948
<CURRENT-LIABILITIES> 465117
<BONDS> 2062730
0
449
<COMMON> 5201
<OTHER-SE> (772549)
<TOTAL-LIABILITY-AND-EQUITY> 1760948
<SALES> 46455
<TOTAL-REVENUES> 46455
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1509683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112797
<INCOME-PRETAX> (2326049)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2326049)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2326049)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
<FN>
<F1>Net of accumulated depreciation.
</FN>
</TABLE>
