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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[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 ____________________
Commission File number 011-12221
ALGOS PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3142274
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Collingwood Plaza, 4900 Route 33, Neptune, New Jersey, 07753-6804
(Address of principal executive offices)
908-938-5959
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 ____
The aggregate number of shares of the Registrant's common stock outstanding on
November 6, 1996 was 15,669,123.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 September 30
1995 1996
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2) $ 3,707,100 $ 3,284,024
Restricted cash (Note 8) 500,000
Prepaid expenses (Note 4) 11,057 318,416
------------ ------------
Total current assets 3,718,157 4,102,440
Property and equipment, net 100,704 71,714
Other assets (Note 5) 1,591 1,039,208
------------ ------------
Total assets $ 3,820,452 $ 5,213,362
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 6) $ 158,297 $ 1,631,059
Other current liabilities (Note 7) 141,335 758,643
------------ ------------
Total current liabilities 299,632 2,389,702
------------ ------------
Commitments
Stockholders' equity (Notes 2 and 9):
Preferred stock, $.01 par value, 10,000,000
shares authorized:
Convertible Series A; 872,000 shares
authorized; 702,500 and 707,500 shares
issued and outstanding; respectively;
$10,537,500 and $10,612,500 aggregate
liquidation preference, respectively 7,025 7,075
Convertible Series B; 0 and 100,000 shares
authorized, respectively; 0 and 100,000
shares issued and outstanding, respectively;
$0 and $100,000 aggregate liquidation
preference, respectively 1,000
Common stock, $.01 par value, 50,000,000 shares
authorized, 6,010,030 and 6,171,876 shares
issued and outstanding,respectively 60,100 61,719
Additional paid-in-capital 7,341,890 9,570,231
Unearned compensation expense (965,607)
Deficit accumulated during the development stage (3,888,195) (5,850,758)
------------ ------------
Total stockholders' equity 3,520,820 2,823,660
------------ ------------
Total liabilities and stockholders' equity $ 3,820,452 $ 5,213,362
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
For the three months ended For the nine months ended from
September 30, September 30, inception to
-------------------------- ------------------------- September 30,
1995 1996 1995 1996 1996
---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ 1,500,000 $ 1,811,000
----------- ---------- ----------- ----------- -----------
Operating expenses:
Research and development 389,005 609,221 1,189,789 1,612,806 4,046,463
General and administrative 203,029 345,104 599,487 1,973,288 4,161,550
----------- ---------- ----------- ----------- -----------
Total operating expenses 592,034 954,325 1,789,276 3,586,094 8,208,013
----------- ---------- ----------- ----------- -----------
Loss from operations (592,034) (954,325) (1,789,276) (2,086,094) (6,397,013)
Interest income 60,128 46,519 198,801 123,531 546,255
----------- ---------- ----------- ----------- -----------
Net loss $ (531,906) $ (907,806) $(1,590,475) $(1,962,563) $(5,850,758)
=========== ========== =========== =========== ===========
Pro forma:
Net loss per common share $ (0.04) $ (0.07) $ (0.13) $ (0.16)
=========== ========== =========== ===========
Weighted average common 12,206,123 12,360,301 12,197,931 12,339,229
shares outstanding =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
For the nine months ended from
September 30, inception to
-------------------------- September 30,
1995 1996 1996
---- ---- ----
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities $ (1,431,490) $ (341,550) $ (3,725,502)
Cash flows from investing activities:
Purchases of property and equipment (12,319) (4,055) (172,018)
------------ ----------- ------------
Net cash used in investing activities (12,319) (4,055) (172,018)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 50,000 6,659,015
Proceeds from issuance of common stock 24,950 19,570 669,570
Deferred financing costs (147,041) (147,041)
------------ ----------- ------------
Net cash provided by financing activities 24,950 (77,471) 7,181,544
------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents (1,418,859) (423,076) 3,284,024
Cash and cash equivalents, beginning of
period 5,633,971 3,707,100 -
------------ ----------- ------------
Cash and cash equivalents, end of period $ 4,215,112 $ 3,284,024 $ 3,284,024
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim financial statements of Algos Pharmaceutical Corporation
(the "Company") presented herein have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
rules and regulations of the Securities and Exchange Commission and are
unaudited. In the opinion of management, the financial statements reflect all
adjustments (which consist of normal recurring accruals and adjustments)
necessary for a fair statement of the results of the interim periods presented.
The results of the interim periods presented are not necessarily indicative of
results to be expected for the full fiscal year. The year-end balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. The financial
statements should be read in conjunction with the audited financial statements
included in the Company's Registration Statement on Form S-1.
2. INITIAL PUBLIC OFFERING
In October 1996, the Company completed an initial public offering of
3,625,000 shares of Common Stock, including 125,000 shares issued under an
overallotment option granted to the underwriters, resulting in net proceeds to
the Company of $47,197,500 after underwriting discounts and commissions and
before other expenses of the offering. The accompanying balance sheet as of
September 30, 1996 does not reflect the delivery of shares or receipt of net
proceeds by the Company. In connection with the offering, all of the outstanding
shares of Series A Preferred Stock were automatically converted into shares of
Common Stock at the rate of 8.3 for 1.
3. EARNINGS PER SHARE
Pro forma net loss per share is based on the net loss and the weighted
average number of shares of common stock outstanding after giving effect to the
conversion of all preferred stock as of January 1, 1995. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83, all shares of common
and convertible preferred stock and stock options issued during the twelve
months prior to the filing date of the Registration Statement have been included
in the calculation of weighted average number of shares of common stock
outstanding as if they were outstanding for all periods presented. Outstanding
stock options and warrants granted prior to this twelve-month period have not
been included in the calculation of historical net loss per common share because
inclusion of such shares would be antidilutive.
Historical net loss per common share is as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
1995 1996 1995 1996
---- ---- ---- ----
Net loss per common share $ (0.09) $ (0.15) $ (0.27) $ (0.32)
Weighted average common shares
outstanding 6,009,660 6,171,880 6,001,468 6,153,334
</TABLE>
Historical net loss per common share is based on the weighted average
number of common shares outstanding during the periods presented.
4. PREPAID EXPENSES
Included in prepaid expenses at September 30, 1996 is $294,238 of
prepaid insurance premiums.
4
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
5. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
---- ----
<S> <C> <C>
Financing costs $ 799,103
Insurance premiums 238,514
Other $ 1,591 1,591
------------- -------------
$ 1,591 $ 1,039,208
============= ==============
</TABLE>
6. ACCOUNTS PAYABLE
Accounts payable at September 30, 1996 includes unpaid charges related
to deferred financing costs and insurance premiums.
7. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
---- ----
<S> <C> <C>
Deferred revenue $ 0 $ 500,000
Accrued research expenses 118,100 160,543
Accrued compensation 23,235 98,100
------------- --------------
$ 141,335 $ 758,643
============= ==============
</TABLE>
8. REVENUES
In June 1996, the Company entered into a license agreement with McNeil
Consumer Products Company which provides McNeil with exclusive worldwide rights
to develop, manufacture, and market certain products. The Company received an
inital payment of $2,000,000 in July 1996, $500,000 of which is restricted to
fund future development costs, and may receive additional payments based on the
achievement of specified milestones. McNeil will be responsible for
substantially all of the remaining development costs in excess of $500,000. In
addition, the Company will receive royalties based on sales of licensed
products, if any. The agreement may be terminated by McNeil after one year. In
connection with the transaction, the Company recorded revenue of $1,500,000 and
deferred revenue of $500,000.
9. STOCKHOLDERS' EQUITY
In June 1996, the Company issued 100,000 shares of convertible Series B
Preferred Stock in connection with an amendment to a license agreement with a
university and recorded an administrative expense of $915,000. Shares of Series
B Preferred Stock are convertible into an equal number of shares of Common Stock
at any time on or after February 1, 1997.
In the nine months ended September 30, 1996, the Company adopted the
1996 Stock Option Plan and the 1996 Non-Employee Director Stock Option Plan and
authorized a total of 498,000 shares of Common Stock for issuance under the
plans. During the same period, options for the purchase of an aggregate of
283,190 shares of Common Stock were granted under the Company's various stock
option plans at exercise prices ranging from $0.12 to $14 per share. Unearned
compensation expense amounting
5
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ALGOS PHARMACEUTICAL CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
to $1,246,440 was recorded in connection with the grants which will be amortized
over the vesting periods, generally four years.
10. TRANSFER OF INTANGIBLE ASSETS
In August 1996, the Company contributed certain intangible assets having
no book value to a newly formed company and received preferred stock with an
aggregate stated value and liquidation preference of $2,800,000 and all of the
new company's common stock. Such common stock was subsequently distributed to
the Company's stockholders, warrant holders, and employees. The preferred stock
provides for an annual cumulative dividend of 30%, which may be paid in the form
of cash or the issuing company's common stock, and a share of other earnings and
may be redeemed by either the Company or the issuer under certain circumstances.
The Company recorded no gain in connection with the transaction as management
believes that at the present time realization of the redemption value is not
assured.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information set forth herein contains forward-looking statements
as such term is defined in Section 27A of the Securities Act of 1933 and Section
21E of the Exchange Act. Certain factors discussed herein and under the caption
"Risk Factors" in the Company's Registration Statement on Form S-1 could cause
actual results to differ materially from those in the forward-looking
statements.
General
Algos, a development stage company, is engaged primarily in the
development and commercialization of proprietary pain management pharmaceutical
products. Since its formation in January 1992, the Company has devoted a
substantial amount of its efforts to licensing technology, recruiting key
management and staff, developing products, filing patents and other regulatory
applications and raising capital.
The Company has incurred losses since its inception and expects to incur
significant operating losses in the future. The Company expects that its product
development expenses will increase significantly in future years as the
drugs that the Company currently has under development move into advanced
clinical trials and as additional drugs are considered for development. In
addition, the Company expects that its personnel costs will increase
significantly in the future, primarily as a result of the planned development of
a direct sales force.
Results of Operations
Three Months Ended September 30, 1995 and 1996
Research and Development:
In the three months ended September 30, 1996, research and development
expenses increased $220,000 to $609,000 from $389,000 in the 1995 period.
Expenses increased primarily as a result of investigator payments and drug
supplies for current and future clinical trials of MorphiDex(TM), the Company's
most developmentally advanced product.
General and Administrative:
In the three months ended September 30, 1996, general and administrative
expenses increased $142,000 to $345,000 from $203,000 in the 1995 period. In the
1996 period, the Company amortized $69,000 of unearned compensation expense
associated with 1996 stock option grants. In addition, the Company incurred one
time administrative costs during the 1996 period in connection with the transfer
of intangible assets.
Interest Income:
Interest income decreased $13,000 to $47,000 in the three months ended
September 30, 1996 from $60,000 in the 1995 period, due to a lower average cash
balance during the period.
Nine Months Ended September 30, 1995 and 1996
Revenues:
Revenues in the nine months ended September 1996 amounted to $1,500,000.
This amount represents an initial payment of $2,000,000 received under a license
agreement executed in the period less $500,000 which is currently restricted for
the funding of future development costs.
7
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Research and Development:
In the nine months ended September 30, 1996, research and development
expenses increased $423,000 to $1,613,000 from $1,190,000 in the 1995 period.
Investigator payments and drug supplies for the Company's clinical studies
increased in the current period, primarily as a result of
the initiation of new studies of MorphiDex(TM). These costs and increases in
employee and consultant compensation were partially offset by lower spending on
preclinical studies of MorphiDex(TM) and other product candidates.
General and Administrative:
In the nine months ended September 30, 1996, general and administrative
expenses increased $1,374,000 to $1,973,000 from $599,000 in the 1995 period.
The 1996 period includes non-cash charges of (a) $915,000 for the issuance of
preferred stock in connection with an amendment to a license agreement and (b)
$258,000 of compensation expense related to 1996 stock option grants.
Professional fees and other employee compensation also contributed to the
increase.
Interest Income:
Interest income decreased $75,000 to $124,000 in the nine months ended
September 30, 1996 from $199,000 in the 1995 period due to a lower average cash
balance during the period.
Liquidity and Capital Resources
As a result of its drug development efforts, the Company has experienced
cumulative net cash outflows from operations of $3,725,502 from its inception in
1992 through September 30, 1996. Investments by the Company's founders and a
private placement of preferred stock in 1994 provided operating funds in this
period. In the nine months ended September 30, 1996, cash outflows from
operations amounted to $341,550, compared to $1,431,490 in the prior year
period. In 1996, the receipt of an initial license payment under an agreement
with McNeil Consumer Products Company partially offset continuing research and
development expenses.
The Company expects that its spending will increase significantly as its
development programs expand and additional preclinical studies and clinical
trials of its products are initiated. The Company completed an initial public
offering of 3,625,000 shares of common stock in October 1996, resulting in net
proceeds of approximately $47 million which Algos intends to use primarily to
fund research and development activities and the planned establishment of a
direct sales force and for general corporate purposes. Based upon the Company's
currently anticipated schedule of clinical trials, the Company believes that
these funds will be sufficient to fund its operations for approximately three
years. However, the Company is subject to a number of risks and uncertainties
common to companies in similar stages of development and its funding
requirements will depend on a number of factors including the results of its
development efforts, the timing and costs of obtaining required regulatory
approvals to market products, the development of competing technologies, the
amount of resources required for the establishment of marketing and distribution
capabilities, and the cost of prosecuting and defending patents. In addition,
Algos is currently considering alternatives for the relocation and expansion of
its office facilities in anticipation of increased development activities and
staff. However, it has not yet determined the cost of such relocation and
expansion. The Company's funding requirements will also depend on current and
possible future licensing or other collaborative research agreements. The
license agreement with McNeil Consumer Products Company provides for up to $8
million of payments to the Company, after the first anniversary of the
agreement, contingent upon the achievement of certain specified milestones.
8
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In September 1996, by unanimous consent of the shareholders eligible to vote,
the Company's Amended and Restated Certificate of Incorporation and its Amended
and Restated By-Laws as filed as exhibits to the Company's Registration
Statement on Form S-1 were approved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
11 Computation of Pro Forma Per Share Earnings
27 Financial Data Schedule (EDGAR)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALGOS PHARMACEUTICAL CORPORATION
Date November 14, 1996 /s/ JOHN W. LYLE
- ---------------------- -------------------------------------
John W. Lyle
President and Chief Executive Officer
Date November 14, 1996 /s/ GARY R. ANTHONY
- ---------------------- -------------------------------------
Gary R. Anthony
Chief Financial Officer and Principal
Accounting Officer
9
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as .... (TM)
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EXHIBIT 11. COMPUTATION OF PRO FORMA PER SHARE EARNINGS
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (531,906) $ (907,806) $(1,590,475) $(1,962,563)
=========== ========== =========== ===========
Weighted average number of
common shares outstanding:
Weighted average number of
common shares outstanding 6,009,660 6,171,880 6,001,468 6,153,334
Common shares issuable upon
conversion of Series A
Preferred Stock 5,830,750 5,872,250 5,830,750 5,853,856
Common shares issuable upon
conversion of Series B
Preferred Stock issued within
one year of the initial
public offering 100,000 100,000 100,000 100,000
Incremental common shares
outstanding from stock options
granted within one year of the
initial public offering 265,713 216,171 265,713 232,039
----------- ----------- ----------- -----------
12,206,123 12,360,301 12,197,931 12,339,229
=========== =========== =========== ===========
Net loss per common share $ (0.04) $ (0.07) $ (0.13) $ (0.16)
=========== =========== =========== ===========
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,284,024
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,102,440
<PP&E> 71,714
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,213,362
<CURRENT-LIABILITIES> 2,389,702
<BONDS> 0
<COMMON> 61,719
0
8,075
<OTHER-SE> 2,753,866
<TOTAL-LIABILITY-AND-EQUITY> 5,213,362
<SALES> 0
<TOTAL-REVENUES> 1,500,000
<CGS> 0
<TOTAL-COSTS> 3,586,094
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,962,563)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,962,563)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> 0
</TABLE>
