Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
------------------------------------------------
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
For Quarter Ended Commission File Number 0-23788
Xechem International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3284803
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Jersey Avenue, Bldg. B, Suite. 310, New Brunswick, NJ 08901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 247-3300
-----------------------------
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 of 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
Number of shares outstanding of the issuer's common stock, as of November 15,
1996, was 7,761,094 shares.
Transitional Small Business Disclosure Format
Yes No X
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
Page No.
Part I. Financial Information
Item 1. Consolidated Balance Sheet as of
September 30, 1996 [Unaudited]........................... 3..4
Consolidated Statements of Operations
for the three months and nine months ended
September 30, 1996 and 1995 [Unaudited] ................. 5
Consolidated Statement of Stockholders'
Equity for the nine months ended
September 30, 1996 [Unaudited]........................... 6..7
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1996 and
1995 [Unaudited]......................................... 8..9
Notes to Consolidated Financial Statements................ 10..16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 17..24
Part II. Other Information .................................... 25
Signatures............................................ ...... 26
<PAGE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
---------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996
[UNAUDITED]
- ------------------------------------------------------------------------------
------------------------------------------------------------------
<S> <C>
Current Assets:
Cash and Cash Equivalents $ 50,824
Inventory 1,326,849
Prepaid Expenses 142,029
Other Current Assets 25,535
-------
Total Current Assets $1,545,237
Equipment, Net of Accumulated
Depreciation of $309,740 $ 858,134
Leasehold Improvements - Net of Accumulated
Amortization of $217,068 714,365
Deposits 22,167
Patent Issuance Costs-Net of Accumulated
Amortization of $11,990 174,995
---------
Total Assets $3,314,898
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996
[UNAUDITED]
- ------------------------------------------------------------------------------
<S> <C>
Current Liabilities:
Accounts Payable $ 386,947
Accrued Expenses 81,003
Notes Payable - Related Party 719,363
Notes Payable - Others 445,000
Other Current Liabilities 85,900
Total Current Liabilities $1,718,213
Note Payable - Related Party: $ 388,088
---------
Commitments and Contingencies $ --
---------
Minority Interest - XetaPharm, Inc. $ 46,400
---------
Stockholders' Equity:
Class A Voting Preferred Stock, $.00001 Par Value, 2,500
Shares Authorized; 2,500 Shares Issued and Outstanding $ --
Additional Paid-in Capital [Class A Voting Preferred] 2,500
Class B 8% Preferred Stock, $.00001 Par Value, 1,150 Shares
Authorized; 1,070 Shares Issued and Outstanding,
$107,000 Liquidation Value --
Additional Paid-in Capital [Class B 8% Preferred] 107,000
Class C Preferred Stock, $.00001 Par Value, 2,996,350 Shares
Authorized; 9,700 Class C Series 1 8% Convertible Shares
Issued and Outstanding --
Additional Paid-in Capital [Class C Preferred] 921,500
Common Stock, $.00001 Par Value, 15,000,000
Shares Authorized; 7,704,494 Shares Issued and Outstanding 77
Additional Paid-in Capital [Common] 21,704,997
(Deficit) Accumulated During the Development Stage (21,573,877)
------------
Total Stockholders' Equity $1,162,197
Total Liabilities and Stockholders' Equity $3,314,898
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
</TABLE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
--------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
----------------------------------------------------------------------
Cumulative
Period from
Three months ended Nine months ended March 15,
September 30, September 30, 1990 [Date of
Inception] to
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5 Sept. 30, 1996
------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ 48,471 $ -- $ 206,222 $ 2,996 $ 573,095
--------- ----------- ----------- ---------- -----------
Expenses:
Research and Development $ 343,950 $ 105,768 $ 1,105,029 $1,340,083 4,145,459
Rent 44,834 35,047 110,074 90,989 456,842
General and Administrative 268,778 232,740 1,185,624 1,255,238 4,359,217
--------- ----------- ----------- ---------- -----------
Total Expenses $ 657,562 $ 373,555 $ 2,400,727 $2,686,310 $ 8,961,518
--------- ----------- ----------- ---------- -----------
(Loss) from Operations $(609, 091) $ (373,555) $(2,194,505) $(2,683,314) $(8,388,423)
Other Income 2,648 14,936 8,257 61,542 271,915
Interest (Expense) - Related Party (22,233) (10,434) (64,693) (30,959) (8,559,858)
Interest (Expense) (8,762) -- (53,217) (23,259) (4,901,111)
Minority Interest - XetaPharm, Inc. $ (3,600) $ -- $ (3,600) $ -- $ (3,600)
---------- ----------- ------------ ---------- ------------
(Loss) Before Income Taxes $(633,838) $ (369,053) $(2,300,558) $(2,675,990) $(21,573,877)
Income Taxes -- -- -- -- --
--------- ----------- ----------- ---------- -----------
Net (Loss) $(633,838) $ (369,053) $(2,300,558) $(2,675,990) $(21,573,877)
========== ============ ============ ============ =============
Preferred Stock Dividends $ 26,364 $ 2,140 $ 69,875 $ 6,420 $ 84,261
========= =========== =========== ========== ===========
Net (Loss) Available to Common Stockholders$(660,202) $ (371,193) $(2,370,433) $(2,682,410) $(21,658,138)
========== ============ ============ ============ =============
Net (Loss) per Share $ (0.09) $ (0.06) $ (0.34) $ (0.44)
========== ============ ============ ===========
Average Number of Shares Outstanding 7,436,960 6,431,033 6,913,685 6,079,867
========= =========== =========== ==========
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
[UNAUDITED]
Class A Additional Class B Additional Class C Addition Xechem, Inc. Xechem InternAddition(Deficit)
Voting Pref Paidd in 8% Preferred Paid in 8% Conv.Pf Paid in Common Stock Common Stock Paid in Accumulated
Capital Capital Capital Capital During
# of Par # of Par # of Par # of Par # of Par Development
Shares Value Class A Shares Value Class B Shares Value Classc Shares Value Shares Value Common Stage
------- ------ ------ ------- ----- ------ ------ ----- ------- ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C><C><C><C> <C> <C> <C> <C> <C>
Common Stock issued in exchange
for equipment in - $- -$ - $ - -$ 100 $125,000 $- $ $ -
March 1990 at no par value
Capital contributions April 1990 - - - - - - - - - - - - - 170,000
Net (loss) for the period from
March 15, 1990(inception)
to December 31, 1990 - - - - - - - - - - - - 170,000 (159,271)
- -- ---
Balance - December 31, 1990 $ - -$ - $- -$ - $ - -$ 100$ 125,000 $- $ (159,271)
Capital contributions July 1991 - - - - - - - - - - - 95,971 -
Capital contributions Sept 1991 - - - - - - - - - - - 50,172 -
Capital contributions Octr 1991 - - - - - - - - - - - 25,000 -
Net (loss) for the year ended
December 31, 1991 - - - - - - - - - - - - (357,390)
-
Balance - December 31, 1991 - -$ - - -$ - - -$ 100$ 125,000 $- $ 341,143 (516,661)
Capital contributions - - - - - - - - - - - - 95,000 -
Net (loss) for the year ended
December-31, 1992 - - - - - - - - - - - - (487,301)
-
Balance - December 31, 1992 $ - -$ - $- -$ - $ - -$ 100$ 125,000 $- $ 436,143 (1,003,962)
Net (loss) for the year ended
December 31, 1993 - - - - - - - - - - - - (819,816)
Balance - December 31, 1993 $ - -$ - $- -$ - $ - -$ 100$ 125,000 $- $ 436,143 (1,823,778)
Reorganization 2,500 - 2,500 1,070 - 107,000 - (100)(125,000 4,370,500 43 13,840,487
Initial Public Offering - - - - - - - - - - 1,150,000 12 4,542,670
Exercise of options-Third Qtr-
1994 - - - - - - - - 105,000 1 1,049 -
Exercise of options - Fourth
Quarter-1994 - - - - - - - - 105,000 1 50,060 -
Net (loss) for the year ended
December-31, 1994 - - - - - - - - - - - (14,316,193)
-
Balance - Decmber 31, 1994 2,500$ -$ 2,500 1,070 $ -$ 107,000 $ - $ - 5,730,500 57 18,870,409 (16,139,971)
Private Placement - Comm Stk - - - - - - - - - - 118,778 2 388,887 -
Exercise of options -First Qtr.
1995 - - - - - - - - - 30,000 328,125 -
Exercise of options and issues
of Apotex stock -
Second Quarter 1995 - - - - - - - - - - 674,700 7 980,806 -
Exercise of options - Third Quarte- 1995 - - - - - - - - - 24,500 (260,612) -
Exercise of options
Fourth Quarter-1995 - - - - - - - - - 5,000 40,624 -
Net (loss) for the year ended
December 31, 1995 - - - - - - - - - - - (3,133,348)
-
Balance - December 31, 1995
- - Forward 2 ,500 $ 2,500 $1,070 $ 107,000 $ - $ - $ 6,583,478 66 20,348,239 (19,273,319)
---- ---- ---- ---- -- ------ --- --- --- -- --- --------- -- -------- -----------
5
</TABLE>
<PAGE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
[UNAUDITED]
Class A Additional Class B Additional Class C Add'l. Xechem, Inc. Xechem Interna Add'l (Deficit)
Voting Pref Paid in 8%Preferre Paid in 8% Conv. Pref. P in C Stock Common Stock Paid in Accumulated
Capital Capital Capital Capital During
# of Par # of Par # of Par # of Par # of Par Development
Shares Value Class A Shares Value Class B Shares Value Class C Shares Value Shares Value Common Stage
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C><C> <C> <C> <C> <C>
Balance -
December 31, 1995
brought forward 2,500 - 2,500 1,070 -$ 107,000 $- $ - - $ - 6,583,478 66 20,348,239 (19,273,319)
Private Placement
Common Stock - - - - - - - - - 138,333 1 102,785 -
Private Placement
Preferred Stock - - - - 22,500 2,137,500 12,500 28,125 -
Conversion of Preferred
Stock - - - - - (12,800) (1,216,000) 1,017,583 10 1,187,847 -
Exercise of options -
Second Quarter-1996 - - - - - - - - - 2,000 - 4,625 -
Exercise of options -
Third Quarte- -1996 - - - - - - - - - 600 - 564 -
Cancellation of Apotex
Stock - - - - - - - - - - (75,000) - -
Ocean Marine Settlement - - - - - - - - - 25,000 32,812 -
Net (loss) for the nine
months end September 30
1996 - - - - - - - - - (2,300,558)
-
Balance - September 30,
1996 2,500 - 2,500 1,070 - 107,000 9,700 $ 921,500 - 7,704,494 77 21,704,997 (21,573,877)
---- -- ---- ---- -- ----- ---- ------ ----- -------- -- - ----------- -----------
See Accompanying Notes to Consolidated Financial
Statements
</TABLE>
6
<PAGE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
--------------------------------------------------------------------
---------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Cumulative
Period From
March 15,
1990 [Date of
Nine months ended Inception] to
September 30, Sept. 30,
1 9 9 6 1 9 9 5 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Net (Loss) $(2,300,558) $(2,675,990) $(21,573,877)
----------- ----------- -------------
Adjustments to Reconcile Net (Loss) to Net Cash
Provided (Used) by Operating Activities:
Depreciation $ 92,068 $ 60,036 $ 189,237
Amortization 56,770 43,568 368,019
Loss on Sale of Assets -- -- 698
Interest and Compensation Expense
in Connection with Issuance of Equities 62,501 1,041,034 14,157,774
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts Receivable 9,979 8,895 4,343
Inventory (471,248) -- (1,299,614)
Prepaid Expenses 85,704 11,915 (142,029)
Other Current Assets 37,411 (176,538) (56,218)
Deposits (1,650) -- (22,167)
Organizational Costs -- -- (13,828)
Other Assets 2,250 (2,600) (1,592)
Deferred Offering Costs -- (39,392) --
Increase (Decrease) in:
Accounts Payable (85,076) 214,116 387,811
Accrued Interest Payable 66,663 (6,887) 85,900
Accrued Expenses (21,540) 23,272 88,219
Other Current Liabilities -- 37,684 --
---------- ---------- -----------
Total Adjustments $ (166,168) $1,215,103 $13,746,553
----------- ---------- -----------
Net Cash (Used) by Operating
Activities - Forward $(2,466,726) $(1,460,887) $(7.827,324)
------------ ------------ ------------
Investing Activities:
Patent Issuance Costs $ (101,067) $ (28,820) $ (186,244)
Purchases of Equipment and
Leasehold Improvements (188,618) (150,063) (1,559,817)
Proceeds from Sale of Asset -- -- 9,200
Purchase of Marketable Securities -- -- (1,476,449)
Proceeds from Sale of Marketable Securities -- 1,476,449 1,476,449
-------- ---------- -----------
Net Cash (Used) by Investing
Activities - Forward $ (289,685) $1,297,566 $(1,736,861)
----------- ---------- ------------
See Accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
</TABLE>
<TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
----------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Cumulative
Period From
March 15,
1990 [Date of
Nine months ended Inception] to
September 30, Sept. 30,
1 9 9 6 1 9 9 5 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Net Cash (Used) by Operating
Activities - Forwarded $(2,466,726) $(1,460,887) $7,827,324
----------- ------------ ----------
Net Cash (Used) by Investing
Activities - Forwarded $ (289,685) $1,297,566 $(1,736,861)
----------- ---------- -----------
Financing Activities:
Proceeds from Note Payable - Bank $ -- $ -- $ (390,000)
Payments on Note Payable - Bank -- -- --
Proceeds from Related Party Loans 155,000 -- 1,294,582
Proceeds from Borrowings Under
Line of Credit -- 450,000 1,365,000
Proceeds from Notes Payable - Others -- -- 445,000
Proceeds from Interim Loans 55,000 225,000 970,295
Proceeds from Bridge Financing 265,000 -- 640,000
Capital Contribution -- -- 95,000
Payments on Interim Loans (55,000) -- (305,000)
Payments on Notes Payable - Others -- (125,000) (520,000)
Payment on Stockholder Loans -- -- (207,037)
Payment of Line of Credit -- (975,000) (975,000)
Proceeds from Issuance of
Common Stock 102,785 -- 5,034,344
Proceeds from Issuance of Class C
Series 1 Preferred Stock 2,109,357 -- 2,109,357
Proceeds from Exercise of Options 26 7,292 8,468
Purchase of Letter of Credit -- (375,000) --
Proceeds from Minority Investment 50,000 -- 50,000
---------- ---------- ----------
Net Cash - Financing Activities $2,682,168 $ (792,708) $9,615,009
---------- ----------- ----------
Net Increase (Decrease) in Cash
And Cash Equivalents $ (74,243) $ (956,029) $ 50,824
Cash and Cash Equivalents -
Beginning of Periods 125,067 1,075,073 --
---------- ---------- ----------
Cash and Cash Equivalents -
End of Periods $ 50,824 $ 119,044 $ 50,824
========== ========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest - Related Party $ 20,641 $ 24,043 $ 115,426
Interest - Other $ 2,347 $ 49,778 $ 133,818
Income Taxes $ -- $ -- $ --
See Accompanying Notes to Consolidated Financial Statements.
8
<PAGE>
</TABLE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
-------------------------------------------------------------
--------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
----------------------------------------------------------------
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
In accordance with the terms of the Stock Plan (see Note 4), 2,600 and 79,200
options were exercised at a nominal price during each of the nine months ended
September 30, 1996 and September 30, 1995 respectively. The difference between
the fair market value of the Common Stock at the time of exercise and the amount
paid was charged to compensation expense.
In April 1995, the Company issued 100,000 shares of its common stock to Apotex
U.S.A., Inc. in accordance with a series of agreements for the development,
manufacture and marketing of two niche generic anticancer compounds, paclitaxel
and bleomycin. The fair market value of the Common Stock was charged to
compensation expense. These agreements were subsequently restructured and Apotex
U.S.A., Inc. returned 75,000 of the 100,000 shares of Common Stock.
In March 1996, the Company received a gap loan of $400,000 from an entity, which
contemplated the conversion of the principal amount of the loan to Class C
Series 1 Preferred Stock with interest on the loan payable in 12,500 shares of
the Company's Common Stock. This transaction was completed on April 16, 1996.
In May 1996, the Company entered into a settlement agreement with Ocean Marine
Services ("Ocean Marine"). The lawsuit was settled by an agreement with the
Company to make a cash payment of $115,000 and issue 25,000 shares of
unregistered Common Stock to Ocean Marine (see Note 8).
On August 29, 1996, the Company and its wholly-owned subsidiary, XetaPharm,
Inc., entered into a Memorandum of Understanding with Petron International, Inc.
(see Note 10). The minority interest in XetaPharm, Inc. was for a loss of $3,600
for the month of September, 1996.
As a result of these various agreements and transactions, the Company's
statement of operations reflects non-cash interest and compensation expense of
$62,501 for the nine months ended September 30, 1996 and $1,041,034 for the nine
months ended September 30, 1995.
See Accompanying Notes to Consolidated Financial Statements.
9
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
- ------------------------------------------------------------------------------
[1] Significant Accounting Policies
Significant accounting policies and other matters of Xechem International, Inc.
and its wholly-owned subsidiaries, Xechem, Inc., Xechem Laboratories, Inc. and
its majority owned subsidiary, XetaPharm, Inc.(collectively the "Company"), are
set forth in the financial statements for and as of the year ended December 31,
1995 included in the Company's Form 10-KSB, as filed with the Securities and
Exchange Commission.
[2] Basis of Reporting
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, such statements include all
adjustments (consisting only of normal recurring item) which are considered
necessary for a fair presentation of the consolidated financial position of the
Company at September 30, 1996 and the consolidated results of its operations for
the nine months ended September 30, 1996 and 1995 and for the cumulative period
from March 15, 1990 (date of inception) to September 30, 1996 and its cash flows
for the nine months ended September 30, 1996 and 1995 and for the cumulative
period from March 15, 1990 (date of inception) to September 30, 1996. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Form 10-KSB for the year ended December 31, 1995. The results of operations for
the nine month periods ended September 30, 1996 and 1995 are not necessarily
indicative of the operating results for a full year.
[3] Loss per Share
Loss per share amounts are based on the weighted average number of shares
outstanding. Shares issuable upon the exercise of stock options are excluded
from the computation since the effect on the net loss per common share would be
anti-dilutive. The holders of Class B 8% Preferred Stock and C Series 1
Preferred Stock are entitled to cumulative dividends on the $100 per share
liquidation preference at the rate of 8% per annum payable quarterly. This
dividend has been reflected in the computation of loss per share available to
common stockholders. The loss attributable to the minority interest has also
been reflected in the computation of loss per share available to common
shareholders.
[4] Stock Plan
As a result of the exercise of 2,600 and 79,200 stock options during the nine
months ended September 30, 1996 and September 30, 1995, respectively, the
Company's statements of operations reflect a charge to non-cash compensation
expense of $5,163 and $866,034, respectively. The offsetting amount was
reflected as paid-in capital. The charge reflects the market value of the
Company's Common Stock issued over the exercise price paid.
10
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
- ------------------------------------------------------------------------------
[5] Capital Transactions
On March 29, 1995, Kensington Wells, Incorporated ("KWI"), the underwriter of
the Company's initial public offering, signed a letter of intent in which it
agreed to act as a placement agent in a private offering of the Company's Common
Stock. The offering was on a best efforts, all-or-none basis, and was
subsequently amended to a minimum - maximum offering prior to the placement of
any shares, and called for a closing no later than February 15, 1996. A total of
$594,500 was raised, before offering costs, and the Company closed the offering
on February 15, 1996. As part of this offering, the majority stockholder agreed
to return to the Company for $4, one share of Common Stock for each three shares
of Common Stock sold by KWI. In the first quarter 1996, gross proceeds from the
private placement totaled $60,000 for 20,000 shares of Common Stock and the
majority stockholder returned 6,667 common shares to the Company. The costs
associated with this portion of the private placement amounted to $7,215,
resulting in net proceeds of $52,785.
In March 1996, the Company received a gap loan of $400,000 from an entity, which
contemplated the conversion of the principal amount of the loan to Class C
Series 1 Preferred Stock with interest on the loan payable in 12,500 shares of
the Company's Common Stock. This transaction was completed on April 16, 1996.
On March 26, 1996, the Company entered into an agreement with a new placement
agent for a non-public offering of Class C Series 1 Preferred Stock at $100 per
share convertible into Common Stock, at any time following 60 days from
issuance, together with demand registration rights for the Common Stock and a
penalty clause if such shares are not registered following demand. The Preferred
Stock is entitled to an 8% cumulative dividend, and must convert to Common Stock
at maturity, if not converted prior to maturity. Conversion rights commenced 60
days after the initial issuance of April 9, 1996. The conversion price of the
Preferred Stock is subject to a floor of $1.25 per share and a ceiling, as
amended, of $2.75 per share. The offering was made in reliance upon an exemption
from registration pursuant to Regulation S promulgated under the Securities Act
of 1933.
The offering was closed on April 30, 1996.
A total of 22,500 shares of Class C Series 1 Stock were sold, resulting in net
proceeds of $2,137,500 being received by the Company, including the conversion
of a $400,000 gap loan into 4,000 of such shares.
As of September 30, 1996, 12,800 shares of Class C Series 1 Stock were converted
into 1,017,583 shares of Common Stock at a conversion price ranging from $1.25 -
$1.70 per share. As of November 4, 1996, a total of 13,500 shares of Class C
Series 1 Stock have been converted into 1,073,583 shares of Common Stock at a
conversion price ranging from $1.25 - $1.70 per share.
In May 1996, the Company entered into a settlement agreement with Ocean Marine
Services ("Ocean Marine"). The lawsuit was settled by an agreement with the
Company to make a cash payment of $115,000 and issue 25,000 shares of
unregistered Common Stock to Ocean Marine (see Note 8).
11
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
- ------------------------------------------------------------------------------
In accordance with the restructured Apotex Agreements, Apotex U.S.A., Inc.
returned to the Company 75,000 of the 100,000 shares of Common Stock previously
issued to it by the Company.
These shares of Common Stock were cancelled in May, 1996.
[6] Notes Payable - Related Party
The majority stockholder had made advances to the Company prior to the Public
Offering. The principal amounts advanced (including accrued salary of $110,000)
totaled $517,451 at December 31, 1995 and are evidenced by an eight percent (at
simple interest) note payable due April 25, 1999.
During 1995, the majority stockholder made advances to the Company aggregating
$435,000. At December 31, 1995 such advances are evidenced by an eight percent
(at simple interest) promissory note due December 31, 1996.
The majority stockholder advanced an additional $155,000 through March 31, 1996
under the same terms as the 1995 advances.
[7] Notes Payable - Other
Individuals made loans to the Company during 1995 amounting to $180,000. Each of
these loans is evidenced by a ten percent (at simple interest) promissory note
due one year from the date of the loan. An additional $150,000 was received from
different individuals through August 3, 1996 under the same interest terms. In
September 1996, an individual made two loans to the Company in the amounts of
$50,000 and $65,000. Each of those loans is evidenced by a ten percent and
twelve percent (at simple interest) promisory note due six months from the date
of the loan.
[8] Settlement of Litigation
On October 12, 1994, counsel for Ocean Marine requested additional information
from Dr. Pandey, alleging that it would not have entered into a settlement
agreement in 1992 had it known that discussions were ongoing with Regal One
Corporation regarding a possible business transaction. In April 1995 Ocean
Marine instituted an action against Dr. Pandey seeking to set aside the
settlement agreement based upon its assertion that such discussions were not
disclosed to it, and seeking remedies under applicable state and federal
securities laws, including interest, attorneys fees and costs, which had
cumulated over $525,000 by April 20, 1996 according to Ocean Marine, and which
could include additional attorneys fees, interest and costs through the
determination of such action. Dr. Pandey denied that any wrongdoing had
occurred. However, the Company, which had previously agreed to indemnify Dr.
Pandey against liabilities to Ocean Marine, determined that it was in the
Company's best interest to settle such action, given the cost of defending such
action, together with the possibility, however remote, that an adverse outcome
could have a material adverse effect on the Company. In addition, the Company
determined that the time and effort necessary to defend such action would
detract from Dr. Pandey's ability to exert full time efforts in executing the
Company's business plan. Accordingly, the lawsuit was settled in May 1996 by the
agreement of the Company to pay $115,000 and to issue 25,000 shares of
unregistered Common Stock to the plaintiffs, pursuant to its indemnification
obligation to Dr. Pandey.
12
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
- ------------------------------------------------------------------------------
[9] Dividends
The Company's Class B and Class C Preferred Stock accrues cumulative dividends
at varying rates. The Company has not declared payment of such accrued
dividends.
[10] Minority Interest
On August 29, 1996, the Company and its then wholly-owned subsidiary, XetaPharm,
Inc. ("XetaPharm"), entered into a Memorandum of Understanding (the "MOU") with
Petron International, Inc. ("Petron"), wherein Petron agreed to purchase 96
shares of common stock of XetaPharm (48.98% of the shares to be outstanding) for
a total of $500,000. The MOU provided that Petron would pay for the XetaPharm
shares as follows: $50,000 on or before September 5, 1996; $100,000 on September
30, 1996; $150,000 on October 30, 1996; and $200,000 on November 30, 1996. The
Company had agreed to make its existing facility and personnel available to
XetaPharm at a cost of $25,000 per month for twelve months ending August 31,
1997.
After each payment, Petron would receive that number of XetaPharm shares for
which full payment had been made.
In the MOU, Petron also agreed to purchase 1,250,000 shares of the Company's
Common Stock for a total of $500,000. The MOU provided that Petron would pay for
the Company's shares as follows: $50,000 on or before September 5, 1996 and
$50,000 on the first day of each of the following nine months. After each
payment, Petron would receive that number of shares for which full payment had
been made. Petron granted the Company an option to repurchase up to 250,000 of
such shares any time before August 29, 1999 at a price of $0.75 per share.
On September 5, 1996, XetaPharm and the Company each received the initial
payment of $50,000. Petron defaulted on its payments of $100,000 to XetaPharm
due September 30, 1996 and $50,000 to the Company due October 1, 1996 (see Note
11).
Petron now owns 125,000 shares of the Company's Common Stock and an 8.3%
minority interest in XetaPharm.
[11] Subsequent Events
On October 14, 1996, the Company notified Petron that due to non-payment of
amounts due under the MOU, the MOU was terminated.
13
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
- ------------------------------------------------------------------------------
Petron subsequently advised the Company that it wished to return its purchased
shares in the Company and XetaPharm for its investment amount. The Company is
evaluating whether to accept such offer, to exercise its option to purchase back
the shares of the Company' Common Stock, or take other action.
On November 19, 1996, the Company entered into and closed the initial stage of a
Stock Purchase Agreement providing for the sale of up to 55,000 shares of the
Company's Class C Series 2 Convertible Preferred Stock for a purchase price of
$100 per share ($5,500,000 in the aggregate) over approximately nine months. At
the initial closing, The Edward Blech A. Trust, purchased 5,000 shares of Series
2 Stock for $500,000. Mr. David Blech has the right under the Stock Purchase
Agreement to designate the purchasers (which may include himself) to purchase an
additional 5,000 shares of Series 2 Stock on or before December 2, 1996 (which
right has also been assigned to the Trust); 5,000 shares on or before December
16, 1996; 7,500 shares on or before January 15, 1997; 17,500 shares on or before
February 17, 1997; 10,000 shares on or before June 2, 1997; and a final 5,000
shares on or before July 15, 1997. Mr. Blech has the right to designate third
party purchasers, reasonably acceptable to the Company, to purchase any and all
of such shares. The Stock Purchase Agreement also provides that the Company's
President and Chief Executive Officer, Dr. Ramesh Pandey, will exchange certain
indebtedness of the Company owed to him and the Class B 8% Preferred Stock of
the Company held by him for 13,180 shares of the Company's Class C Series 3
Convertible Preferred Stock at the January 1997 closing.
The shares of Series 2 Stock and Series 3 Stock will be automatically converted
into the Company's Common Stock upon amendment of the Company's certificate of
incorporation to authorize the issuance of sufficient shares of Common Stock for
such conversion (or, if later, the January 1997 closing). The conversion price
of the Series 2 Stock will be $.05 per share if the November 1996 and January
1997 purchases are completed, and will be $.0625 per share if such purchases are
not completed. The conversion price of the Series 3 Stock will be $.0625 per
share. If such conversion is effected prior to a scheduled closing, the
underlying shares of Common Stock will be acquired in lieu of acquiring shares
of Series 2 Stock or Series 3 Stock. If all the Series 2 and Series 3 shares are
issued and converted to Common Stock, Mr. Blech's designees will acquire
110,000,000 shares of Common Stock and Dr. Pandey will acquire 21,088,000 shares
of Common Stock. The holders of the shares of Series 2 Stock or Series 3 Stock
are entitled to vote with the holders of the Common Stock, casting a number of
votes per share equal to the number of shares of Common Stock into which the
Series 2 Stock or Series 3 Stock is convertible. Pursuant to the Stock Purchase
Agreement, Dr. Pandey and Mr. Blech and his designees have agreed to vote or
execute a written consent to approve such an amendment to the certificate of
incorporation. The Company anticipates submitting such amendment for stockholder
approval as soon as practicable. As a result of the voting rights of the Series
2 Stock, The Edward A. Blech Trust owns securities entitling it to cast
14
<PAGE>
XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
- ------------------------------------------------------------------------------
approximately 49% of the aggregate votes entitled to be cast at an election of
directors and Mr. Blech and his designees collectively will be entitled to cast
approximately 77% of such votes if all transactions contemplated by the Purchase
Agreement are completed.
Pursuant to the Stock Purchase Agreement, the Company, Dr. Pandey, and Mr. Blech
have also entered into a stockholders agreement, which, among other things: (i)
generally prohibits the sale of any of Dr. Pandey's shares of capital stock of
the Company for a period of 5 years, except with the consent of Mr. Blech; (ii)
provides Mr. Blech and his designees with the right to sell a pro rata portion
(relative to the holdings of Dr. Pandey) of any proposed sale of shares by Dr.
Pandey, and a reciprocal right in favor of Dr. Pandey to sell his pro rata
portion of any shares sold by Mr. Blech and his designees; (iii) requires Mr.
Blech and his designees to vote for Dr. Pandey as a director of the Company, and
to use his efforts to cause Dr. Pandey to remain Chairman, President and CEO of
the Company; (iv) requires the Company and its directors (subject to their
fiduciary duties to the Company and its stockholders) to take such actions after
the January 1997 closing as Mr. Blech may request to elect his nominees to
constitute a majority of the directors of the Company; and (v) provides for
certain demand and piggyback registration rights in favor of Mr. Blech and his
designees.
The Company will pay a commission of $50,000 and issue an option to purchase
200,000 shares of Common Stock to the investment banking firm which introduced
Mr. Blech to the Company.
The Company has received an opinion from The Griffing Group, Inc., an
independent valuation and financial advisory firm, as to the fairness of the
above transactions, from a financial point of view, to the shareholders of the
Company.
15
<PAGE>
Item 2. Management's Discussion and Analysis
General
Xechem International, Inc. (the "Company" or "Xechem") is the holder of
all of the capital stock of Xechem, Inc., a development stage bio-pharmaceutical
company engaged in research, development, and production of generic and
proprietary drugs from natural sources, Xechem Laboratories, Inc. and 91.7%
of XetaPharm, Inc. Xechem, Inc. was formed in March 1990 to acquire
substantially all of the assets of a subsidiary of LyphoMed, Inc.
(later known as Fujisawa/LyphoMed, Inc.), a publicly traded company.
<TABLE>
Results of Operations:
the Nine Month Period Ended September 30, 1996 vs. The Nine Month Period
Ended September 30, 1995
The following table sets forth certain statement of operations data of the
Company for the cumulative period from inception [March 15, 1990] to September
30, 1996 and for each of the nine month periods ended September 30, 1996 and
September 30, 1995:
Cumulative
Nine Months Ended Sept. 30 Inception to
Sept. 30
1996 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenue $ 206.2 $ 2.9 $ 573.0
Research and development expense $ 1,105.0 $ 1,340.0 $ 4,145.4
Rent, general and administrative expenses $ 1,295.7 $ 1,346.2 $ 4,816.0
(Loss) from operations $ (2,194.5)$ (2,683.3)$ (8,388.4)
</TABLE>
The $203,300 increase in revenue from the nine month period ended September
30, 1995 to the nine month period ended September 30, 1996 was attributable to
an increase in sales of services and products. Service sales increased by
$119,000 in the 1996 period as compared to the 1995 period. Included in this
amount is $86,700 from the National Cancer Institute for a Small Business
Innovative Research Phase I grant, and a net increase of $32,300 from other
service work. Sales of paclitaxel for research purposes for the nine month
period ended September 30, 1996 increased $74,900 over the same 1995 period. The
balance of product sales, $9,400, comes from the Company's subsidiary,
XetaPharm, Inc., which introduced its first natural health product, melatonin,
in June 1996.
16
<PAGE>
The Company=s research and development expenditures continue to emphasize
compounds for generic anticancer, antiviral and antibiotic products which enjoy
significant market demand but are no longer subject to patent protection.
Research and development expenditures decreased by $235,700 to $1,104,500 or
17.9% for the nine months ended September 30, 1996 as compared to the nine
months ended September 30, 1995. Expenditures on the development of Xechem=s
process for producing paclitaxel totaled $304,200, an increase of $6,200 or 2.1%
as compared to the nine month period ended September 30, 1995.
Research and development costs for bleomycin were $15,300 for the nine
month period ended September 30, 1996, a decrease of $97,500 or 84.3% as
compared to the nine month period ended September 30, 1995.
The Company's subsidiary, XetaPharm, Inc., has been formed to market, on
an initially modest scale, certain natural health products. It spent $125,300
for market readiness on alternative medicines and nutraceuticals in the nine
months ended September 30, 1996.
The Company's other research and development projects, both for customers
and in-house research, totaled $659,600 for the nine month period ended
September 30, 1996, a decrease of $270,000 or 29.0% from the same period in
1995. The single largest cause for decrease in expenses from the nine month
period ended September 30, 1995 was the reduction of $513,800 in non-cash
charges resulting from exercises of stock options by employees and
non-employees. Excluding this non-cash expense, general research and development
costs increased $278,100 as a result of additional staffing, payroll taxes,
group insurance and other overhead for the nine month period ended September 30,
1996 over the same period in 1995. The Company anticipates that research and
development expenditures will continue to increase for paclitaxel, as well as
the development of other anticancer, antiviral and memory enhancing drugs.
Rent, general and administrative expenses decreased $50,500 or 3.8% for
the nine month period ended September 30, 1996 compared to the nine month period
ended September 30, 1995, due primarily to a 1996 decrease of $523,100 in
non-cash expenses related to exercised stock options by employees and
consultants. This was offset by the expense of $147,800 for the settlement in
April 1996 of the Ocean Marine Service claim against Dr. Pandey (described
below). Legal and accounting expenses totaled $230,100 for the nine month period
ended September 30, 1996 and were $33,600 or 12.7% lower than the $263,700 for
the comparable 1995 period. Other general and administrative costs increased
$339,300 or 72.4% to $807,800 in 1996 compared to the same period in 1995.
The most significant item in the increase of $339,300 was trade show
expenses ($75,300). This expense was related to increased marketing activities
for XetaPharm and Xechem. There was no comparative cost for the same period
ended September 30, 1995. Salaries and wages increased $74,700, or 52%, to
$218,900. Consulting, travel, office expense and advertising increased by
$43,200, $32,000, $24,500 and $23,100, respectively, and contributed to the
overall Rent, General and Administrative increase in the nine month period ended
September 30, 1996 compared to the same period in 1995.
17
<PAGE>
The Company anticipates that, provided adequate funding is available to
the Company, general and administrative expenses will increase as a result of
expansion of its operations and marketing efforts. Xechem=s planned activities
will require the addition of new personnel, including management, and the
development of additional expertise in areas such as preclinical testing,
clinical trial management, regulatory affairs, manufacturing and marketing. The
exact number and nature of persons hired, and the Company's expenses for such
persons, will depend on many factors, including the capabilities of those
persons who seek employment with the Company and the availability of funding to
finance these efforts.
The Company's loss from operations totaled $2,194,500, a decrease of
$488,800 or 18.2% for the nine month period ended September 30, 1996 as compared
to the same period in 1995, and is primarily a result of the foregoing.
Interest expense increased approximately $63,700 or 117.5% to $117,900 in
the nine month period ended September 30, 1996 as compared to the nine month
period ended September 30, 1995. In the 1996 period, these expenses were the
result of gap financing loaned to the Company.
Liquidity and Capital Resources; Plan of Operations
On September 30,1996, Xechem had cash and cash equivalents of $50,800, a
working capital deficit of $173,000 and stockholder's equity of $1,162,000.
On November 19, 1996, the Company announced that it had entered into and
closed the initial stage of a Stock Purchase Agreement providing for the sale of
up to 55,000 shares of the Company's Class C Series 2 Convertible Preferred
Stock for a purchase price of $100 per share ($5,500,000 in the aggregate) over
approximately nine months. At the initial closing, The Edward A. Blech Trust
purchased 5,000 shares of Series 2 Stock for $500,000. Mr. David Blech has the
right under the Stock Purchase Agreement to designate the purchasers (which may
include himself) to purchase an additional 5,000 shares of Series 2 Stock on or
before December 2, 1996 (which right has also been assigned to the Trust); 5,000
shares on or before December 16, 1996; 7,500 shares on or before January 15,
1997; 17,500 shares on or before February 17, 1997; 10,000 shares on or before
June 2, 1997; and a final 5,000 shares on or before July 15, 1997. Mr. Blech has
the right to designate third party purchasers, reasonably acceptable to the
Company, to purchase any and all of such shares. The Stock Purchase Agreement
also provides that the Company's President and Chief Executive Officer, Dr.
Ramesh Pandey, will exchange certain indebtedness of the Company owed to him and
the Class B 8% Preferred Stock of the Company held by him for 13,180 shares of
the Company's Class C Series 3 Convertible Preferred Stock at the January 1997
closing.
The shares of Series 2 Stock and Series 3 Stock will be automatically
converted into the Company's Common Stock upon amendment of the Company's
certificate of incorporation to authorize the issuance of sufficient shares of
Common Stock for such conversion (or, if later, the January 1997 closing). The
conversion price of the Series 2 Stock will be $.05 per share the November 1996
and January 1997 purchases are completed, and will be $.0625 per share if such
purchases are not completed. The conversion price of the Series 3 Stock will be
$.0625 per share.
18
<PAGE>
If such conversion is effected prior to a scheduled closing, the underlying
shares of Common Stock will be acquired in lieu of acquiring shares of Series 2
Stock or Series 3 Stock. If all the Series 2 and Series 3 shares are issued and
converted to Common Stock, Mr. Blech's designees will acquire 110,000,000 shares
of Common Stock and Dr. Pandey will acquire 21,088,000 shares of Common Stock.
The holders of the shares of Series 2 Stock or Series 3 Stock are entitled to
vote with the holders of the Common Stock, casting a number of votes per share
equal to the number of shares of Common Stock into which the Series 2 Stock or
Series 3 Stock is convertible. Pursuant to the Stock Purchase Agreement, Dr.
Pandey and Mr. Blech and his designees have agreed to vote or execute a written
consent to approve such an amendment to the certificate of incorporation. The
Company anticipates submitting such amendment for stockholder approval as soon
as practicable. As a result of the voting rights of the Series 2 Stock, The
Edward A. Blech Trust owns securities entitling it to cast approximately 49% of
the aggregate votes entitled to be cast at an election of directors and Mr.
Blech and his designees collectively will be entitled to cast approximately 77%
of such votes if all transactions contemplated by the Purchase Agreement are
completed.
Pursuant to the Stock Purchase Agreement, the Company, Dr. Pandey, and Mr.
Blech have also entered into a stockholders agreement, which, among other
things: (i) generally prohibits the sale of any of Dr. Pandey's shares of
capital stock of the Company for a period of 5 years, except with the consent of
Mr. Blech; (ii) provides Mr. Blech and his designees with the right to sell a
pro rata portion (relative to the holdings of Dr. Pandey) of any proposed sale
of shares by Dr. Pandey, and a reciprocal right in favor of Dr. Pandey to sell
his pro rata portion of any shares sold by Mr. Blech and his designees; (iii)
requires Mr. Blech and his designees to vote for Dr. Pandey as a director of the
Company, and to use his efforts to cause Dr. Pandey to remain Chairman,
President and CEO of the Company; (iv) requires the Company and its directors
(subject to their fiduciary duties to the Company and its stockholders) to take
such actions after the January 1997 closing as Mr. Blech may request to elect
his nominees to constitute a majority of the directors of the Company; and (v)
provides for certain demand and piggyback registration rights in favor of Mr.
Blech and his designees.
The Company will pay a commission of $50,000 and issue an option to
purchase 200,000 shares of Common Stock to the investment banking firm which
introduced Mr. Blech to the Company.
The Company has received an opinion from The Griffing Group, Inc., an
independent valuation and financial advisory firm, as to the fairness of the
above transactions, from a financial point of view, to the shareholders of the
Company.
It should be noted that the Company may be unable to meet its current
obligations in the event Mr. Blech or his assignees fail to meet their funding
obligations and other funding cannot be obtained.
On March 29, 1995, Kensington Wells, Inc. ("KWI"), the underwriter of the
Company's initial public offering, signed a letter of intent in which it agreed
to act as a placement agent in a private offering of the Company's Common Stock.
The offering was on a best efforts, all-or-none basis, and was subsequently
amended to a minimum - maximum offering prior to the placement of any shares,
and called for a closing no later than February 15, 1996. A total of $441,600
was raised,
19
<PAGE>
after offering costs, and the Company closed the offering on February 15, 1996.
Of this total, $52,800, after offering costs, was raised in the first quarter,
1996.
Due to the continuing need for operating funds, the Company obtained loans
totaling $120,000 during the first quarter of 1996 and $30,000 in the third
quarter of 1996 from four individuals not affiliated with the Company. These
loans are evidenced by 10% promissory notes due one year from the dates of the
loans. These loans are in addition to the $180,000 in loans received in 1995,
from three different individuals under similar one year terms. In September
1996, a non-affiliated individual made two loans to the Company in the amounts
of $50,000 and $65,000. Each of these loans is evidenced by a 10% and 12% (at
simple interest) promissory note due six months from the dates of the loans.
The Company's majority stockholder has also made advances to the Company.
In the first quarter of 1996, the principal amount of $155,000 was advanced and
is evidenced by an 8% (at simple interest) promissory note due December 31,
1996. This was in addition to $435,000 advanced in 1995 by the same individual
under the same terms.
On March 26, 1996, the Company entered into an agreement with a new
placement agent for a non-public offering to issue Class C Series 1 Preferred
Stock at $100 per share convertible into Common Stock, at any time following 60
days from issuance, together with demand registration rights for the Common
Stock. The Class C Series 1 Preferred Stock is entitled to an 8% cumulative
dividend, and must convert to Common Stock at maturity (one year following
issuance). The conversion price of the Class C Series 1 Preferred Stock is
subject to a floor of $1.25 per share and ceiling, as amended, of $2.75 per
share. In March 1996, the Company received a gap loan of $400,000 from an
entity, which converted the principal amount of the loan to Class C Series 1
Preferred Stock, with interest on the loan payable totaling 12,500 shares of the
Company's Common Stock. In April 1996, the Company received $1,737,500, after
commissions, from this offering.
As a result of its net losses to December 31, 1995 and negative working
capital and accumulated deficit since inception, the Company's accountants, in
their report on the Company's financial statements for the year ended December
31, 1995, included an explanatory paragraph indicating there is substantial
doubt about the Company's ability to continue as a going concern. The Company's
research and development activities are at an early stage and the time and money
required to determine the commercial value and marketability of the Company's
proposed products cannot be estimated with precision. The Company expects
research and development activities to continue to require significant cost
expenditures for an indefinite period in the future.
The Company continues to apply to various governmental agencies to fund
its research on specific projects and in prior years had been awarded certain
grants. In March 1996 the Company was awarded a National Cancer Institute Small
Business Innovative Research grant in the amount of $86,700 for "Enhanced Xechem
Integrated Screening Techniques" ("EXIST") for paclitaxel.
In May 1995 the Company filed a Drug Master File with the Food and Drug
Administration for the Company's facilities. The Company is in the process of
completing its technology validation and anticipates, but can provide no
assurances, that a Drug Master File for paclitaxel will be filed in the first
quarter of 1997. The Company has sufficient inventory of raw materials to
produce
20
<PAGE>
commercial bulk paclitaxel which has a market value of approximately $2,000,000
at current prices and anticipates, but can provide no assurances, that it will
commence sales of paclitaxel in the international market in the third quarter of
1997. Prior to commencing such sales, the Company must file for and obtain
approvals from appropriate regulatory agencies in foreign jurisdictions. There
can be no assurance that such approvals will not be delayed or subject to
conditions or that the Company will be able to meet any such conditions. In
addition, the Company has no experience in marketing products for human
consumption and there can be no assurance that the Company will be able to
successfully market its paclitaxel product in bulk, or be able to obtain
satisfactory packaging of the product in single dosage vials from an independent
manufacturer.
From December 1989 to October 1990, Dr. Ramesh C. Pandey, the Company's
President/CEO, was a minority stockholder and director of Advanced Molecular
Technologies, Inc., a Washington-based corporation ("AMT") formed to gather
paclitaxel bark in the Pacific Northwest for sale. Dr. Pandey had no involvement
in AMT's day-to-day activities, and believes he was asked to serve on its board
of directors to add academic credibility to its efforts. Ocean Marine Services
("Ocean Marine") claimed to have made an investment of $225,000 in AMT in 1990.
AMT subsequently ceased operations. In January 1991, Ocean Marine filed a
lawsuit against Dr. Pandey and others in Federal District Court in Washington
State, alleging breaches of state and Federal securities laws in connection
Ocean Marine's investment and seeking damages. Dr. Pandey denied any wrongdoing
in connection with the litigation. However, given the time and expense
associated with a Washington-based lawsuit and the uncertainties of litigation,
an out-of-court settlement was reached in late 1992 by Dr. Pandey, with no
finding of wrongdoing by Dr. Pandey. The Company was not a party to such
proceedings, Dr. Pandey received a general release from Ocean Marine, and the
Company agreed to indemnify Dr. Pandey against any future claims by Ocean Marine
in his employment agreement.
On October 12, 1994, counsel for Ocean Marine requested additional
information from Dr. Pandey, alleging that it would not have entered into a
settlement agreement in 1992 had it known that discussions were ongoing with
Regal One Corporation regarding a possible business transaction. In April 1995
Ocean Marine instituted an action against Dr. Pandey seeking to set aside the
settlement agreement based upon its assertion that such discussions were not
disclosed to it, and seeking remedies under applicable state and federal
securities laws, including interest, attorneys fees and costs, which had
cumulated over $525,000 by April 20, 1996 according to Ocean Marine, and which
could include additional attorneys fees, interest and costs through the
determination of such action. Dr. Pandey denied that any wrongdoing has
occurred. However the Company, which had previously agreed to indemnify Dr.
Pandey against liabilities to Ocean Marine, determined that it was in the
Company's best interest to settle such action, given the cost of defending such
action, together with the possibility, however remote, that an adverse outcome
could have a material adverse effect on to the Company. In addition, the Company
determined that the time and effort necessary to defend such action would
detract from Dr. Pandey's ability to exert full time efforts in executing the
Company's business plan. Accordingly, the lawsuit was settled in May 1996 by the
agreement of the Company to pay $115,000 and to issue 25,000 shares of
unregistered Common Stock to the plaintiffs, pursuant to its indemnification
obligation to Dr. Pandey.
On August 29, 1996, the Company and its then wholly-owned subsidiary,
XetaPharm, Inc. ("XetaPharm"), entered into a Memorandum of Understanding (the
"MOU") with Petron
21
<PAGE>
International, Inc. ("Petron"), wherein Petron agreed to purchase 96 shares of
common stock of XetaPharm (48.98% of the shares to be outstanding) for a total
of $500,000. The MOU provided that Petron would pay for the XetaPharm shares as
follows: $50,000 on or before September 5, 1996; $100,000 on September 30, 1996;
$150,000 on October 30, 1996; and $200,000 on November 30, 1996. The Company had
agreed to make its existing facility and personnel available to XetaPharm at a
cost of $25,000 per month for twelve months ending August 31, 1997.
After each payment, Petron would receive that number of XetaPharm shares
for which full payment had been made.
In the MOU, Petron also agreed to purchase 1,250,000 shares of the
Company's Common Stock for a total of $500,000. The MOU provided that Petron
would pay for the Company's shares as follows: $50,000 on or before September 5,
1996 and $50,000 on the first day of each of the following nine months. After
each payment, Petron would receive that number of shares for which full payment
had been made. Petron granted the Company an option to repurchase up to 250,000
of such shares any time before August 29, 1999 at a price of $0.75 per share.
On September 5, 1996, XetaPharm and the Company each received the initial
payment of $50,000. Petron defaulted on its payments of $100,000 to XetaPharm
due September 30, 1996 and $50,000 to the Company due October 1, 1996.
On October 14, 1996, the Company notified Petron that due to non-payment
of amounts due under the MOU, the MOU was terminated.
Petron now owns 125,000 shares of the Company's Common Stock and an 8.3%
minority interest in XetaPharm.
Petron subsequently advised the Company that it wished to return its
purchased shares for its investment amount. The Company is evaluating whether to
accept such offer, to exercise its option to purchase back the shares of the
Company' Common Stock, or take other action.
Xechem has expended and will continue to expend substantial funds in
connection with the research and development of its products. As a result of
these expenditures, and even with revenues anticipated from commencement of
sales of paclitaxel, the Company anticipates that losses will continue for the
foreseeable future.
Xechem=s planned activities will require the addition of new personnel,
including management, and the continued development of expertise in areas such
as preclinical testing, clinical trial management, regulatory affairs,
manufacturing and marketing. Further, if Xechem receives regulatory approval for
any of its products, in the United States or elsewhere, it will incur
substantial expenditures to develop its manufacturing, sales, and marketing
capabilities. There can be no assurance that Xechem will ever recognize revenue
or profit from any such products. In addition, Xechem may encounter
unanticipated problems, including developmental, regulatory, manufacturing, or
marketable difficulties, some of which may be beyond Xechem=s ability to
resolve. Xechem may lack the capacity to produce its products in-house and there
can be no assurances that it will be able to locate suitable contract
manufacturers or be able to have them
22
<PAGE>
produce products at satisfactory prices.
The Company is developing a limited line of over-the-counter natural
products (not requiring FDA approval) for sale through health food outlets, drug
stores and physicians specializing in natural medicines. The Company has
selected several natural, over the counter products manufactured by contract
manufacturers under the Company's XetaPharm trademark. The emphasis of the
products will be the combination of the natural health benefits of these
products with the quality of a pharmaceutical firm. Initial marketing efforts
commenced in the third quarter of 1996; however, there can be no assurances as
to the level of success for this program, or that the Company will have adequate
financial resources to support such program.
23
<PAGE>
Part II
OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a).Exhibits
None
(b).Reports on Form 8-K
Form 8-K dated September 9, 1996, in which disclosure was made
under Item 5 Other Events.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
XECHEM INTERNATIONAL, INC.
Date: November 19, 1996
/s/ Ramesh C. Pandey
Ramesh C. Pandey, Ph.D.
President/Chief Executive Officer
/s/ Leonard A. Mudry
Leonard A. Mudry,
Vice President - Finance and Operations
25
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1996
<PERIOD-END> sep-30-1996
<CASH> 50,824
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,326,849
<CURRENT-ASSETS> 1,545,237
<PP&E> 1,167,874
<DEPRECIATION> 309,740
<TOTAL-ASSETS> 3,314,898
<CURRENT-LIABILITIES> 1,718,213
<BONDS> 0
0
0
<COMMON> 77
<OTHER-SE> 1,162,120
<TOTAL-LIABILITY-AND-EQUITY> 3,314,898
<SALES> 48,471
<TOTAL-REVENUES> 48,471
<CGS> 0
<TOTAL-COSTS> 657,562
<OTHER-EXPENSES> (2,648)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,762
<INCOME-PRETAX> (633,838)
<INCOME-TAX> 0
<INCOME-CONTINUING> (633,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (633,838)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>