UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 1997
Commission File No. 0-26534
VION PHARMACEUTICALS, INC.
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(Name of Small Business Issuer as specified in its charter)
DELAWARE 13-3671221
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4 SCIENCE PARK
NEW HAVEN, CONNECTICUT 06511
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (203) 498-4210
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SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS
Units
Common Stock, $0.01 par value
Class A Warrants
Class B Warrants
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB. [X]
The Registrant's revenues for the most recent fiscal year were: $5,271,133.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of December 31, 1997 based upon of the last sale price of such
stock on that date as reported by the NASDAQ SmallCapSM Market was $30,580,218.
The number of shares of the Registrant's Common Stock outstanding as of December
31, 1997 was 9,833,934.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's Proxy Statement for its Annual Meeting of Stockholders
to be held on May 19, 1998 are incorporated by reference in Part III of this
Report. Except as expressly incorporated by reference, Registrant's Proxy
Statement shall not be deemed to be part of this Form 10-KSB/A.
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
GENERAL
Vion Pharmaceuticals, Inc. (the 'Company') is a development stage
biopharmaceutical company which has sponsored research projects and is engaged
primarily in research and development of therapeutic products for the treatment
of cancer. Pursuant to a license agreement entered into with Yale University
('Yale') in August 1994 (the 'Yale/OncoRx Agreement'), the Company has acquired
the rights to certain oncology and antiviral related patents and technology. The
Company believes that the licensed rights include several novel technologies
which provide a broad technology base for the future development of therapeutic
products.
Research and Development. The Company's strategy is two-fold. First,
the Company intends to engage principally in research and development with
respect to anticancer and antiviral technologies through in-house research and
through collaborative and sponsored research agreements. The Company's initial
research and development will focus on the following core technologies: (i)
porfiromycin (Promycin(R)), a hypoxic cancer cell therapeutic which targets
oxygen-depleted cells that are otherwise resistant to radiation therapy, (ii)
alkylating agent prodrugs, which are designed to be activated in cancer cells or
the surrounding area and destroy cancer cells, (iii) novel nucleoside analogs
which inhibit the Hepatitis B virus, (iv) ribonucleotide reductase inhibitors
such as Triapine(TM), which may block the formation of the precursors of DNA and
thereby inhibit the replication of cancer cells and (v) Tumor Amplified Protein
Expression Therapy, or TAPET(TM), a novel gene therapy vector for the treatment
of cancer. In addition to its core technologies, the Company has rights to
several additional product candidates, including MelasynTM, a synthetic form of
melanin. The Company's early research and development efforts were performed by
academic collaborators. Since its initial public offering in August, 1995, the
Company has recruited a scientific staff which is engaged directly in research
and development although the Company also expects to continue to sponsor
academic collaborators.
The Company has developed small molecular weight, pharmaceutical agents
with known mechanisms of activity. The Company initially intends to target
projects for such agents based upon (i) the likelihood that commercially-viable
products can successfully be developed using technology currently available to
the Company with no additional acquisition or licensing costs, (ii) the
potential commercial market for the product and (iii) the projected time to
market of the product.
Strategic Partnerships. Second, the Company has concluded and will
continue to pursue strategic partnerships with other companies to more
effectively develop and eventually market technologies in its portfolio. In
November, 1997, the Company and Boehringer Ingelheim International GmbH of
Germany entered into an exclusive worldwide licensing agreement for the
development and marketing of Promycin(R) (porfiromycin), Vion's lead anti-cancer
agent. If the Company's TAPET program proves its ability to deliver
growth-inhibiting therapy to tumor tissue, the Company intends to further
develop TAPET as a platform technology in several ways. The Company intends to
select existing effective anti-cancer agents for delivery using TAPET, and the
Company may also contract with other pharmaceutical companies to use TAPET to
deliver new, proprietary anti-cancer agents. Other technologies which are
candidates for strategic partnerships include Triapine, (beta)-L-Fd4C and
Melasyn.
OVERVIEW OF CANCER
Cancer is characterized by uncontrolled cell division resulting in the
development of a mass of cells, commonly known as a tumor, and invasion and
spread (metastasis) of the cells. Cancerous tumors can arise in almost any
tissue or organ within the human body. Cancer is believed to occur as a result
of a number of factors, such as genetic predisposition, chemical agents, viruses
and irradiation. These factors may result in genetic changes affecting the
ability of cells to normally regulate their growth and differentiation. When a
normal cell becomes cancerous
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it can spread (metastasize) to various sites in the body. Cancer is a
devastating disease with tremendous unmet medical needs. It has been estimated
by the American Cancer Society that there were 1.38 million new cases of cancer
and 560,000 deaths from cancer in 1997 in the United States. Sixty percent of
new cases of cancer are expected to result in death within five years. Cancer is
the second leading cause of death in the U.S., exceeded only by heart disease.
Since 1990, approximately 4 million Americans have died from cancer. The market
for cancer therapeutics was approximately $6 billion in 1992 and is projected to
total approximately $14 billion by the year 2000.
Although several types of tumors can now be effectively treated with
drugs, it is only in recent years that we have begun to see improvement in the
survival rates for the most common tumors. The Company believes that recent
developments in the understanding of the processes that regulate the
proliferation and metastasis of malignant cells provides opportunities to
discover and develop innovative products and approaches to treat cancer.
The three most common methods of treating patients with cancer are
surgery, radiation therapy and chemotherapy. A cancer patient often receives a
combination of two or all three of these modalities. Surgery and radiation
therapy are particularly effective in patients in which the disease is localized
and has not yet spread to other tissues or organs. Surgery involves the removal
of the tumor and adjacent tissue. In many cases where metastases have not yet
occurred, however, surgery still cannot be performed because of the inaccessible
location of the tumor or the danger of removing too much normal tissue along
with the cancerous tissue.
Radiation therapy involves the exposure of the tumor and surrounding
tissue to ionizing radiation. The objective of radiation therapy is to kill the
cancer cells with certain ionized molecules (free radicals) that are created in
the parts of the body exposed to the ionizing radiation. Radiation, however,
also kills or damages normal cells. Radiation therapy can result in varying
levels of effectiveness, as well as in patient weakness, loss of appetite,
nausea and vomiting, and loss of normal body functions, which may include bone
marrow depression, gastrointestinal complications, kidney damage and damage to
the peripheral nervous system. In some cases, radiation-induced mutations in
bone marrow cells can lead to new secondary cancers, such as leukemia, years
after treatment for other forms of cancer.
Chemotherapy is the principal approach used for tumors that have
metastasized. Chemotherapy seeks to interfere with the molecular and cellular
processes that control the development, growth and survival of malignant tumor
cells. Chemotherapy involves the administration of cytotoxic drugs designed to
kill cancer cells or the administration of hormone analogs to either reduce the
production of, or block the action of, certain hormones such as estrogens and
androgens which affect the growth of certain tumors. In many cases, chemotherapy
consists of the administration of several different drugs in combination.
In recent years, there have been significant advances in molecular
biology, immunology and other related fields of biotechnology which have led to
a better understanding of how malfunctioning genes can result in the formation
of tumors. It is anticipated that these advances in biotechnology will lead to
better ways to diagnose cancer and to prevent tumors from forming or becoming
malignant. Other research has focused on mechanisms to efficiently deliver
therapies to tumors. Ultimately, these emerging technologies may lead to
genetic-based therapies aimed specifically at the genes which have malfunctioned
and caused the cancer to form or spread, and to therapies that can selectively
deliver antineoplastic agents to tumors.
The Company believes that, for the foreseeable future, the principal
means of combating cancer will continue to be through the surgical removal of
tumors and the destruction of malignant cells through radiation therapy and
chemotherapy, delivered systemically or in ways that make anticancer agents
selectively more toxic to tumors. Therefore, the Company intends to take a
balanced approach in its research and development efforts. It will continue to
develop chemically defined small molecules based upon unique cellular targets
discovered through biotechnology, while also pursuing development of vectors to
deliver therapeutic agents to tumors.
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RESEARCH AND DEVELOPMENT
The Company is currently focusing on the following principal areas of
research: (i) hypoxic cancer cell therapeutics, (ii) alkylating agent prodrugs,
(iii) novel nucleoside analogs, (iv) ribonucleotide reductase inhibitors and (v)
Tumor Amplified Protein Expression Therapy, or TAPET. All of these technologies
were licensed by the Company pursuant to the Yale/OncoRx Agreement and/or the
Yale/MelaRx Agreement and are in the early development stage and require
significant further research, development, testing and regulatory clearances.
The Company's current research and development efforts were initiated by
academic collaborators at Yale University and are being pursued at the Company
and Yale with Company sponsorship.
Hypoxic Cancer Cell Therapeutics. Solid tumors have been shown to
contain cells with severe oxygen depletion known as hypoxic cells. The Company
believes that one possible explanation for the failure of radiation therapy is
the existence within tumors of hypoxic cells, although there is no direct proof
in humans. The hypoxic tumor cells can often constitute 1-15% of the malignant
cells contained in a tumor. Because radiation therapy requires oxygenation of
the tissue in order to be effective, hypoxic cells are less susceptible to
radiation therapy and tend to form a therapeutically resistant group within
solid tumors. Even small quantities of hypoxic cells within a tumor provide the
basis for tumor cells to survive and proliferate after most of the non-hypoxic
malignant cells in the tumor have been eradicated by radiation treatment.
Hypoxic cells also exhibit resistance to most standard chemotherapeutic agents.
Investigators in Dr. Alan C. Sartorelli's laboratory at Yale have
sought to develop chemotherapeutic agents which by virtue of their chemical and
metabolic properties could be selectively toxic to hypoxic cells. One such agent
identified by Dr. Sartorelli was Promycin, a bioreductive alkylating agent.
Laboratory studies indicated that Promycin destroyed a greater percentage of
hypoxic cells relative to oxygenated cells than other agents being tested. A
Phase I/II trial was conducted at Yale on a limited number of people. In this
initial study, of the 21 patients treated with radiation (and, in some cases,
surgery) in conjunction with Promycin for certain types of cancer of the head
and neck, seven remained alive with no evidence of the disease or the cancer
after a median follow-up of 60 months. The Company believes that these results
are better than would have been expected without the use of Promycin, although
there can be no assurance that Promycin will prove to be efficacious in a more
extensive study. Based on these findings, a Phase III trial has been initiated
of Promycin in patients with head and neck cancer, which is designed to
determine the efficacy of Promycin as an adjunct to radiation therapy for these
conditions. The Phase III trial was initially conducted at Yale and the Company
has expanded the Phase III program to include additional sites in Europe and the
United States. The Company also plans to evaluate Promycin in other tumor types.
The Company has obtained an exclusive license from Yale for the data
regarding Yale's research on Promycin and the clinical studies of Promycin
conducted by Yale. Because composition of matter patent protection is
unavailable for Promycin, the Company has received Orphan Drug status with
respect to the use of Promycin to treat head and neck cancer. In March, 1997,
the Company also received Orphan Drug status with respect to the use of Promycin
to treat cervical cancer.
Alkylating Agent Prodrugs. Alkylating agents are used to treat a
variety of cancers, with different alkylating agents being used to treat
different malignancies. These drugs are highly reactive (i.e., react with a
number of different types of cells) and, as a consequence, cause undesirable
side effects. This reactivity may be controlled by converting alkylating agents
to prodrug forms. This conversion is accomplished by the attachment of a prodrug
component to the alkylating agent so as to block the reactivity of the compound.
The prodrug component can be designed to be released by a variety of enzymes
found predominantly in tumors or in the area surrounding the tumor cells.
Cleavage of the prodrug component from the alkylating agent, so as to restore
the reactivity of the alkylating agent, occurs within the target tumor or in the
area
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surrounding the tumor, thus permitting greater tumor selectivity and activity
and lowering the potential for toxicity.
The Company has licensed several classes of alkylating agent prodrugs
from Yale, including certain prodrugs which are the subject of three issued
patents. Each of these alkylating agent prodrugs may target a unique property of
a cancer cell, thereby destroying it. The Company is in the process of
evaluating several lead candidates for development. The Company intends to
extend its preclinical studies, which will include analytical studies,
formulation and toxicological evaluation, and, if successful, intends to file an
Investigational New Drug Application (IND).
Novel Nucleoside Analogs. Antimetabolites are anticancer and antiviral
agents which resemble natural cellular metabolites and therefore interfere with
natural metabolic processes. Certain of the more significant antimetabolites
inhibit the function of enzymes which are necessary for the synthesis of
nucleotides (which are the building blocks of DNA and RNA) and therefore inhibit
cell growth. Pursuant to the Yale/OncoRx Agreement, the Company has licensed
from Yale a patent application relating to the nucleoside analog 3TC and its use
as an anti-hepatitis B virus ('HBV') agent, and several patent applications
relating to the nucleoside analogs (beta)-L-FddC and (beta)-L-Fd4C and their use
as anti-HBV agents. These nucleoside analogs are antimetabolites and have shown,
in preclinical studies, the ability to inhibit the replication of HBV. HBV is a
causative agent of both acute and chronic forms of hepatitis which affects about
300 million people worldwide. HBV also predisposes its victims to the
development of liver cancer. At present, no clinically useful drug is on the
market for the treatment of HBV infections.
The Company is aware of numerous patent applications and/or patents
owned by third parties that also relate to 3TC and (beta)-L-FddC, and/or their
uses as anti-HBV agents. The Company cannot predict whether its or its
competitors' patent applications will result in valid patents being issued. See
'--Patents, Licenses and Trade Secrets.' In October 1996 the U.S. Patent and
Trademark Office issued a patent to Yale University covering the composition of
matter and method of use of (beta)-L-Fd4C for treating HBV, and Yale has
licensed to the Company exclusive worldwide rights to the patent including the
use of (beta)-L-Fd4C for the treatment of HBV and AIDS. Due to the resources
required, the Company intends to seek a strategic partner to further develop
these anti-HBV agents.
Ribonucleotide Reductase Inhibitors. The conversion of ribonucleotides
to deoxyribonucleotides, which is catalyzed by ribonucleotide reductase, is a
critical step in the synthesis of DNA in cells. If DNA is not synthesized, cells
can replicate. The Company believes that a strong inhibitor of ribonucleotide
reductase which targets cancer cells could act as a therapeutic agent. The
Company has initiated a program to develop inhibitors of ribonucleotide
reductase based on technology developed by Dr. Sartorelli and licensed under the
Yale/OncoRx Agreement. The Company has licensed from Yale patented technology
related to ribonucleotide reductase inhibitors. The Company has completed animal
studies necessary to determine the pharmacological and toxicological profiles of
its lead compound, Triapine (previously known as 3-AP or OCX-0191) . Triapine
has demonstrated significant in vitro and in vivo activity against murine L1210
leukemia, the murine M109 lung carcinoma, and the human A2780 ovarian carcinoma.
The Company filed an Investigational New Drug (IND) application for Triapine in
December, 1997 and received clearance one month later from the FDA to proceed
with Phase I clinical trials. The Company is in the process of initiating these
studies at the University of Miami Hospital and Miami VA Hospital. Triapine's
target indications are for solid tumors such as lung, breast, and colorectal
cancer, and melanoma.
TAPET. TAPET stands for Tumor Amplified Protein Expression Therapy, an
enabling platform technology featuring a novel gene therapy vector for the
treatment of cancer. Originated at Yale University and advanced at Vion and Yale
with Vion's sponsorship, the TAPET system uses genetically-engineered bacteria
as vectors to effectively target cancerous tumors, amplify within tumors and
deliver prodrug converting enzymes and genes that are capable of regulating cell
growth in tumor tissue. Screened for their significant activity in tumors, TAPET
organisms selectively target and infect tumors, rapidly multiplying in them by
several orders of magnitude relative to normal tissue. Bacteria from the
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genus Salmonella, attenuated for virulence, were chosen because they multiply
rapidly, can be easily modified genetically and have been found to grow under
both aerobic (air) and anaerobic (lack of air) conditions, such as those that
occur within solid tumors. The microorganisms have been designed to be highly
selective for tumor tissue, greater than in normal tissue, and as an additional
safeguard, the possibility for infection of normal tissue has been attenuated by
bioengineering the organisms. In addition, TAPET vectors are designed to remain
fully sensitive to antibiotics. This sensitivity allows for greater control
since the vector can be cleared from the body in the presence of an antibiotic
at any time during therapy. Tumor localization has been shown in animal models
using TAPET strains in 12 tumor models including models of melanoma, breast,
lung, colon, renal and liver cancer. Having developed this vector, the
expression of multiple genes that are capable of regulating prodrug converting
enzymes has been achieved. For example, the program has demonstrated in vivo
activity for a bacterial strain which expresses the herpes simplex virus
thymidine kinase gene for the conversion of ganciclovir to its toxic
phosphorylated forms. To Vion's knowledge, the TAPET discovery effort is the
only vector-based research program currently underway that is studying the use
of bacterial as opposed to viral vectors for the treatment of cancer. Whereas
viral vectors are delivered locally, TAPET bacterial vectors are delivered
systemically, allowing for the potential treatment of tumors throughout the body
whether their location is known or not. As a platform technology, Vion is
developing a portfolio of TAPET organisms for itself and potential partners to
deliver prodrug converting enzymes and/or cytokines to tumors. The Company
believes that TAPET is unique in its ability to target solid tumor tissue and
the vector's ability toreproduce at high levels within tumor tissue. Vion is
developing TAPET in preclinical studies.
Other Programs. The Company also intends to pursue other research and
development projects leading to the development of anticancer therapeutics. The
Company intends to seek collaborations with academic institutions, including
additional arrangements with Yale, to obtain additional rights. The Company
believes that its relationship with Dr. Sartorelli and Dr. Yung-Chi Cheng of
Yale, both of whom are on the Company's Scientific Advisory Board, may provide
the Company with the ability to obtain rights in connection with work being done
in their laboratories. However, the Yale/OncoRx Agreement only granted to the
Company rights to specific technologies and the Company does not have any right
to obtain a license to any of the work being conducted in their laboratories and
any such rights would be subject to reaching an agreement with Yale as to the
terms of such license.
OTHER POTENTIAL PRODUCT CANDIDATES
Melasyn(TM). Pursuant to a license agreement with Yale (the "Melasyn
License"), the Company has obtained rights to a synthetic form of melanin which
the Company has named Melasyn. Melanin is a pigment formed by cells in the skin
which gives skin its color and protects it from sun damage by absorbing
ultraviolet rays. Melasyn is a readily soluble form of melanin making it a novel
and useful ingredient for formulation of skin care products and cosmeceuticals.
In February, 1998 Vion agreed to license its Melasyn technology in an exclusive
worldwide agreement with San Mar Laboratories, a leading manufacturer of private
label cosmetics and pharmaceuticals. Under the terms of the agreement, Vion will
grant an exclusive worldwide license to San Mar for the manufacture and sales of
products containing Melasyn. Vion will receive a royalty on products sold by San
Mar with guaranteed annual royalties over an initial three year period.
The Company has also funded research projects relating to compounds to
control pigmentation and chemotherapeutic products for treating melanoma. To
date, such research has not provided any other products or product candidates
which the Company presently plans to pursue, although the Company still has
substantial financial commitments to Yale pursuant to such agreement. See
'--Sponsored Research and License Agreements.'
Termination of Berkeley Agreement. In October, 1997 the Company
terminated a research agreement with The Regents of the University of California
on behalf of the Berkeley Campus with regard to certain microfiltration
technology and decided not to pursue negotiations to obtain
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licenses or options to obtain licenses for certain inventions resulting from
this research. There are no continuing liabilities to the Company stemming from
prior funding of this research.
COLLABORATIVE ARRANGEMENTS
The Company is seeking collaborative agreements with pharmaceutical or
biotechnology companies to develop certain of its product candidates. The
Company believes that these arrangements will permit the Company to develop
certain of its product candidates without incurring the substantial costs
associated with development and may also provide an additional source of
financing.
In November, 1997 Boehringer Ingelheim International GmbH of Ingelheim,
Germany and the Company announced that the two companies entered into an
exclusive worldwide licensing agreement for the development and marketing of
Promycin (porfiromycin), the Company's lead anti-cancer agent. Promycin, a
bioreductive alkylating agent, is currently being investigated in Phase III
clinical trials for use in combination with radiation therapy for solid tumors
of the head and neck.
The strategic agreement provides the Company with exclusive
co-promotion rights to Promycin in North America. Roxane Laboratories, Inc. (a
subsidiary of Boehringer Ingelheim) in the U.S. and the Company will co-promote
Promycin in the United States. Boehringer Ingelheim will have exclusive
worldwide rights to market and sell Promycin outside North America. In exchange
for these rights, Boehringer Ingelheim paid the Company up front licensing fees,
and is obligated to pay development milestones and royalties on future sales of
Promycin outside North America.
Both Boehringer Ingelheim and the Company will share in worldwide
development costs. In addition, Boehringer Ingelheim made an equity investment
in Vion at a premium to the then current market price. Vion will manufacture and
supply Promycin for all territories.
SPONSORED RESEARCH AND LICENSE AGREEMENTS
Yale/OncoRx Agreement. Pursuant to a License Agreement dated August 31,
1994, as amended, Yale granted to Vion an exclusive, non-transferable, worldwide
license to make, have made, use, sell and practice certain inventions and
research for therapeutic and diagnostic purposes. The licensed technology
includes several of the core technologies on which the Company initially intends
to focus. See '--Research and Development.' The term of the license is the
expiration of any patents relating to any inventions or, with respect to
non-patented inventions or research, 17 years. Yale has retained the right to
make, use and practice the inventions and research for non-commercial purposes.
The Yale/OncoRx Agreement also provides that if Yale, pursuant to its own
research, identifies potential commercial opportunities for the inventions and
research, Yale will give the Company a first option to negotiate a commercial
license for such commercial opportunities. Pursuant to the Yale/OncoRx
Agreement, the Company issued to Yale 159,304 shares of common stock, granted
certain registration rights to Yale with respect to these shares of Common Stock
and made a payment of $50,000. In addition, Yale is entitled to royalties on
sales, if any, of resulting products and sub-licensing revenues and, with regard
to one patent, milestone payments based on the status of clinical trials and
regulatory approvals. In July 1997 the Company and Yale amended this license
agreement and the Yale/MelaRx Agreement to reduce certain amounts payable by the
Company under such agreements. As a result, the Company issued an additional
150,000 shares of common stock to Yale. The Company has agreed with Yale that
the Company will plan and implement appropriate research and development with
respect to commercialization of products based on the licensed inventions and
research. In the event that the agreement is terminated for breach, all rights
under licenses previously granted terminate. Accordingly, a default as to one
product could affect the Company's rights in other products.
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Subsequent to entering into the Yale/OncoRx Agreement, the Company paid
$345,000 as unrestricted grants to fund certain research at Yale, including
research in Dr. Cheng's laboratory. The Company made additional unrestricted
grants to Yale of $345,000 in November 1995 and November 1996, and $86,250 in
September 1997 for continued support of this research. There can be no assurance
that these funds will be used to conduct research relating to products which the
Company desires to pursue. Additionally, to the extent that such research
results in technologies not covered by the Yale/OncoRx Agreement, the Company
may be unable to utilize such technologies unless it negotiates additional
license agreements.
Yale/MelaRx Agreement. Pursuant to a Research Agreement dated September
23, 1988, as amended and restated as of August 1, 1992, Yale has agreed to
perform a research program under the supervision of Dr. John Pawelek, while he
is employed by Yale. The research program has primarily involved synthetic
melanin and products designed to control the effects of ultraviolet radiation.
In addition, under the Company's TAPET program, Dr. Pawelek is conducting
certain research regarding the use of a bacterial vector in connection with
genetic therapy for melanoma. The Company has agreed to reimburse Yale for its
direct and indirect costs in connection with the research program in an amount
currently equal to $899,023 per year. Except to the extent of inventions made
solely by the Company's employees, Yale will be the owner of any inventions
resulting from the research and the Company will have an option to obtain an
exclusive license (to the extent Yale has the right to grant such a license)
with respect to the inventions. The Company and Yale entered into a License
Agreement dated December 15, 1995 pursuant to which the Company received a
non-transferable worldwide exclusive license to three inventions relating to
gene therapy for melanoma. Pursuant to this agreement the Company paid Yale a
$100,000 fee and has agreed to make milestone payments based on the status of
clinical trials and regulatory approvals. In addition, Yale is entitled to
royalties on sales, if any, of resulting products and sub-licensing revenues.
The Yale/MelaRx Agreement is for a term ending June 30, 1998, subject to earlier
termination by the Company if Dr. John W. Pawelek is no longer the principal
investigator. The Company is in discussions with Yale to extend this agreement.
Pursuant to the Yale/MelaRx Agreement, Yale and the Company have
entered into five license agreements which grant the Company exclusive licenses
to make, use, sell and practice the inventions covered by certain patents. Each
such license agreement requires the Company to pay to Yale royalties based on a
percentage of net sales of the products covered and sublicensing income. In
addition, the licenses provide that they are terminable in the event the Company
does not exercise due diligence in commercializing the licensed technology.
COMPETITION
Competition in the biopharmaceutical industry is intense and based
significantly on scientific and technological factors, the availability of
patent and other protection for technology and products, the ability to
commercialize technological developments and the ability to obtain governmental
approval for testing, manufacturing and marketing. Moreover, the
biopharmaceutical industry is characterized by rapidly evolving technology that
could result in the technological obsolescence of any products developed by the
Company. The Company competes with specialized biopharmaceutical firms in the
United States, Europe and elsewhere, as well as a growing number of large
pharmaceutical companies that are applying biotechnology to their operations.
Most of the Company's competitors have substantially greater financial,
technical and human resources than the Company and may be better equipped to
develop, manufacture and market products. In addition, many of these companies
have extensive experience in preclinical testing and human clinical trials and
in obtaining regulatory approvals. These companies, as well as academic
institutions, governmental agencies and private research organizations, also
compete with the Company in recruiting and retaining highly qualified scientific
personnel and consultants.
Existing therapies to treat cancer have varying degrees of success.
Many products are under development by competitors for the treatment of cancer,
some of which may compete directly with the Company's proposed products. Some of
these product candidates may be in advanced stages of clinical trials. The
existence of these products, or other products or treatments
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of which the Company is not aware, or products or treatments that may be
developed in the future, may adversely affect the marketability of products
developed by the Company. There can be no assurance that research and
development by others will not render the Company's potential products obsolete
or uneconomical or result in treatments or cures superior to any therapy
developed by the Company, or that any therapy developed by the Company will be
preferred to any existing or newly developed technologies.
The timing of market introduction of some of the Company's potential
products or of competitor's products may be an important competitive factor.
Accordingly, the relative speed with which the Company can develop products,
complete preclinical testing, clinical trials and regulatory approval processes
and supply commercial quantities to market are expected to be important
competitive factors. In addition, the Company may apply for Orphan Drug
designation by the FDA for its proposed products. To the extent that a
competitor of the Company develops and receives Orphan Drug designation and
marketing approval for a drug to treat the same indication prior to the Company,
the Company may be precluded from marketing its product for a period of seven
years. See '--Government Regulation.'
PATENTS, LICENSES AND TRADE SECRETS
The Company's policy is to protect its technology by, among other
things, filing patent applications for technology which it considers important
to the development of its business. The Company intends to file additional
patent applications, when appropriate, relating to new developments or
improvements in its technology and other specific products that it develops. The
Company also relies on trade secrets and improvements, unpatented know-how and
continuing technological innovation to develop and maintain its competitive
position.
In connection with the Yale/MelaRx Agreement, the Company is the
exclusive licensee of a number of filed patent applications relating to the
Company's TAPET platform technology which provide for methods for diagnosing
and/or treating various solid tumor cancers, including but not limited to
melanoma, lung cancer, breast cancer and colon cancer. The Company is also the
exclusive licensee of issued United States and foreign utility patents and
pending patent applications relating to synthetic melanins and methods for using
synthetic melanins, such as, for sunscreening or self-tanning agents. Of the
United States patents and patent applications, however, only two pending patent
applications are relevant to the Company's Melasyn product(s). The Company has
filed or plans to file corresponding applications relevant to the Melasyn
products for patent protection in foreign countries.
In connection with the Yale/OncoRx Agreement, the Company is the
exclusive licensee of four issued and one pending United States patents relating
to its alkylating agent prodrug technology, including patents relating to novel
sulfonylhydrazine methylating agents and their use for treatment of
trypanosomiasis and cancer and to novel 1-alkyl-2-acyl-1,2-disulfonylhydrazines
and their use for controlling neoplastic cell growth. The Company is also the
exclusive licensee of a number of issued and pending United States and foreign
patent applications relating to (beta)-L-Fd4C and (beta)-L-FddC, their
composition and use for the treatment of HIV and HBV infections and their use in
combination with other anti AIDS agents, a pending United States patent
application relating to 3TC and its use for the treatment of hepatitis B virus
(HBV) infection, as well as issued patents and patent applications related to
TriapineTM and other ribonucleotide reductase inhibitors.
Competitors or potential competitors have filed applications for, or
have been issued, patents and may obtain additional patents and proprietary
rights relating to compounds or processes competitive with those of the Company.
Accordingly, there can be no assurance that the patent applications licensed to
the Company will result in patents being issued or that, if issued, the patents
will afford protection against competitors with similar technology; nor can
there be any assurance that others will not obtain patents that the Company
would need to license or circumvent.
The U.S. Patent and Trademark Office has issued patents to Yale
University covering the composition of matter and method of use of (beta)-L-Fd4C
and of (beta)-L-FddC for treating HBV and
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<PAGE>
HIV, and Yale has licensed to the Company exclusive worldwide rights to the
patents including the use of (beta)-L-Fd4C for the treatment of HBV and AIDS. In
addition Yale has also licensed to the company rights to a pending patent
application covering the use of these agents in combination with other
nucleoside anti-HIV drugs.
With respect to (beta)-L-FddC, the Company is aware that patent
applications have been filed by Biochem Pharma, Inc. that relate to
(beta)-L-FddC and its use as an anti-HBV agent. These patent application(s)
claim priority to a United Kingdom patent application having a filing date
earlier than the filing dates of all the applications and issued patents
relating to (beta)-L-FddC that have been licensed to the Company. In the event
that an interference were to be declared the Company believes that it may be
able to prove that it is entitled in its licensed, issued patent to priority of
invention for claims directed to the composition and use of (beta)-L-FddC as an
anti-HBV agent. However, there is a risk that the Company will not prevail in
proving that it is so entitled, and that others will be awarded patent
protection for such claims.
The Company is aware that patent applications, some of which have
issued as patents, have been filed by IAF Biochem International, Inc., Emory
University, Glaxo Group Limited and the University of Georgia Research
Foundation, that relate to, enantiomerically enriched racemic mixtures
containing 3TC, methods of preparation, and use of 3TC or racemic mixtures
containing 3TC as an antiviral agent. Some of these patent applications have
earlier filing dates than the patent applications licensed to the Company, and
thus may prevent the Company from obtaining patent protection in the
applications it has licensed. The Company believes that it may be able to prove
that it is entitled in its licensed applications to priority of invention for
claims directed to the use of 3TC as an anti-HBV agent. However, there is a
substantial risk that the Company will not prevail in proving that it is so
entitled, and that others will be awarded patent protection for such claims. The
patent applications filed by third parties that relate to 3TC will likely
prevent the Company from obtaining product claims to 3TC in the patent
applications it has licensed. If the Company were able to obtain a patent with
claims directed to the use of 3TC as an anti-HBV agent, it would have the right
to exclude only from using 3TC as an anti-HBV agent. Other third parties, in
addition to those described above, may also have filed patent applications
relating to 3TC, (beta)-L-FddC and (beta)-L-Fd4C and/or their uses as anti-HBV
agents.
The Company or its licensors is prosecuting the patent applications
licensed to the Company with the United States Patent and Trademark Office but
the Company does not know whether any of its applications will result in the
issuance of any patents or, if any patents are issued, whether any issued patent
will provide significant proprietary protection or will be circumvented or
invalidated. During the course of patent prosecution, patent applications are
evaluated, inter alia, for utility, novelty, nonobviousness and enablement. The
United States Patent and Trademark Office may require that the claims of an
initially filed patent application be amended if it is determined that the scope
of the claims include subject matter that is not useful, novel, nonobvious or
enabled. Furthermore, in certain instances, the practice of a patentable
invention may require a license from the holder of dominant patent rights. In
cases where one party believes that it has a claim to an invention covered by a
patent application or patent of a second party, the first party may provoke an
interference proceeding in the United States Patent and Trademark Office or such
a proceeding may otherwise be declared by the Patent & Trademark Office. In
general, in an interference proceeding, the Patent and Trademark Office would
review the competing patents and/or patent applications to determine the
validity of the competing claims, including but not limited to determining
priority of invention. Any such determination would be subject to appeal in the
appropriate United States federal courts.
There can be no assurance that additional patents for the Company's
products will be obtained, or that issued patents will provide substantial
protection or be of commercial benefit to the Company. The issuance of a patent
is not conclusive as to its validity or enforceability, nor does it provide the
patent holder with freedom to operate without infringing the patent rights of
others. A patent could be challenged by litigation and, if the outcome of such
litigation were adverse to the patent holder, competitors could be free to use
the subject matter covered by the patent, or the patent holder may license the
technology to others in settlement of such litigation.
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The invalidation of key patents owned by or licensed to the Company or
non-approval of pending patent applications could create increased competition,
with potential adverse effects on the Company and its business prospects. In
addition, there can be no assurance that any application of the Company's
technology will not infringe patents or proprietary rights of others so that, as
a result of such infringement, licenses that might be required for the Company's
processes or products would be available on commercially reasonable terms, if at
all.
The Company cannot predict whether its or its competitors' patent
applications will result in valid patents being issued. Litigation, which could
result in substantial cost to the Company, may also be necessary to enforce the
Company's patent and proprietary rights and/or to determine the scope and
validity of others proprietary rights. The Company may participate in
interference proceedings that may in the future be declared by the United States
Patent and Trademark Office to determine priority of invention, which could
result in substantial cost to the Company. There can be no assurance that the
outcome of any such litigation or interference proceedings will be favorable to
the Company or that the Company will be able to obtain licenses to technology
that it may require or that, if obtainable, such technology can be licensed at a
reasonable cost.
The patent position of biotechnology and biopharmaceutical firms
generally is highly uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of claims
allowed in biotechnology and biopharmaceutical patents. Accordingly, there can
be no assurance that patent applications owned or licensed by the Company will
result in patents being issued or that, if issued, the patents will afford
protection against competitors with similar technology.
The Company also expects to rely on unpatented technology, trade
secrets and information and no assurance can be given that others will not
independently develop substantially equivalent information and techniques or
otherwise gain access to the Company's technology or disclose such technology,
or that the Company can meaningfully protect its rights in such unpatented
technology, trade secrets and information. The Company requires each of its
employees, consultants and advisors to execute a confidentiality agreement at
the commencement of an employment or consulting relationship with the Company.
The agreements generally provide that all inventions conceived by the individual
in the course of employment or in the providing of services to the Company and
all confidential information developed by, or made known to, the individual
during the term of the relationship shall be the exclusive property of the
Company and shall be kept confidential and not disclosed to third parties except
in limited specified circumstances. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's
information in the event of unauthorized use or disclosure of such confidential
information.
GOVERNMENT REGULATION
Overview. Regulation by state and federal governmental authorities in
the United States and foreign countries is a significant factor in the
manufacture and marketing of the Company's products and in its ongoing research
and product development activities. All the Company's products will require
regulatory clearances or approvals prior to commercialization. In particular,
drugs, biologicals and medical devices are subject to rigorous preclinical
testing and other approval requirements by the FDA pursuant to the Federal Food,
Drug and Cosmetic Act (the 'FDC Act') and the Public Health Service (PHS) Act
and regulations promulgated thereunder, as well as by similar health authorities
in foreign countries. Various federal statutes and regulations also govern or
influence the testing, manufacturing, safety, labeling, packaging, advertising,
storage, registration, listing and recordkeeping related to marketing of such
products. The process of obtaining these clearances or approvals and the
subsequent compliance with appropriate federal statutes and regulations require
the expenditure of substantial resources. Any failure by the Company or its
collaborators or licensees to obtain, or any delay in obtaining, regulatory
approval could adversely affect the manufacturing and marketing of products
being developed by the Company and its ability to receive product or royalty
revenues. There can be no assurance that any required FDA or other regulatory
approval will be granted or, if granted, will not be withdrawn.
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Drugs and Biologicals. Preclinical development of diagnostic and
therapeutic drugs and biological products is generally conducted in the
laboratory to evaluate the safety and the potential efficacy of a compound by
relevant in vitro (e.g., cell culture) and in vivo (e.g., animal model) testing.
When a product is tested prospectively to determine its safety for purposes of
obtaining FDA approvals or clearances, such testing must be performed in
accordance with good laboratory practices for nonclinical studies. The results
of preclinical testing are submitted to the FDA as part of an investigational
new drug application (IND). The IND must become effective, informed consent must
be obtained from clinical subjects, and the study must be approved by an
institutional review board (IRB) before human clinical trials can begin.
Regulatory approval often takes a number of years and involves the
expenditure of substantial resources. Approval time also depends on a number of
factors, including the severity of the disease in question, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Typically, clinical evaluation involves a three-phase process. In Phase
I, clinical trials are conducted with a small number of subjects to determine
the tolerated drug dose, early safety profile, proper scheduling, the pattern of
drug distribution, absorption and metabolism. In Phase II, clinical trials are
conducted with groups of patients afflicted with a specific disease in order to
determine efficacy, dose-response relationships and expanded evidence of safety.
In Phase III, large-scale, multi-center, controlled clinical trials are
conducted in order to (1) provide enough data for statistical proof of safety
and efficacy, (2) compare the experimental therapy to existing therapies, (3)
uncover any unexpected safety problems, such as side-effects, and (4) generate
product labeling. In the case of drugs for cancer and other life-threatening
diseases, the initial human testing is generally conducted in patients rather
than in healthy volunteers. Because these patients are already afflicted with
the target disease, it is possible that such studies will provide results
traditionally obtained in Phase II trials. These trials are referred to as
'Phase I/II' trials.
The results of the preclinical and clinical testing are submitted to
the FDA either as part of a New Drug Application ('NDA') (for drugs) or a
Product License Application ('PLA') (for biologics) for approval to commence
commercial distribution. For a biological, the manufacturer generally must also
obtain approval of an establishment license application (ELA). In responding to
an NDA or PLA, the FDA may grant marketing approval, request additional
information or deny the application if it determines that the application does
not satisfy its regulatory approval criteria. A minimum of several years is
generally required to obtain approval after submission of an NDA or PLA. There
can be no assurance that approvals will be granted on a timely basis, if at all.
The FDA also normally conducts a pre-approval inspection and other occasional
inspections of an applicant's facilities to assure compliance with current good
manufacturing practices. Further, stringent FDA regulatory requirements continue
after a product is approved for marketing, and changes to products or labeling
can require additional approvals. If products are approved for marketing, the
Company will be subject to stringent post-marketing requirements, and there can
be no assurance that regulatory or enforcement action will not occur, which
would potentially limit the Company's ability to market its products.
The Company also will be subject to widely varying foreign regulations
governing clinical trials and pharmaceutical sales. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The approval process varies from
country to country and the time may be longer or shorter than that required for
FDA approval. The Company intends, to the extent possible, to rely on foreign
licensees to obtain regulatory approval for marketing its products in foreign
countries.
Orphan Drug Designation. Under the Orphan Drug Act, a sponsor may
obtain designation by the FDA of a drug or biologic as an 'orphan' drug for a
particular indication. Orphan Drug designation is granted to drugs for rare
diseases or conditions, including many cancers, with a prevalence of less than
200,000 cases in the U.S. The sponsor of a drug that has obtained Orphan Drug
designation and which is the first to obtain approval of a marketing application
for such drug is entitled to marketing exclusivity for a period of seven years
for the designated indication. This
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<PAGE>
means that no other company can market the same Orphan Drug for the same
indication approved by the FDA for seven years after approval unless such
company proves its drug is clinically superior or the approved Orphan Drug
marketer cannot supply demand for the drug. Legislation is periodically
considered which could significantly affect the Orphan Drug law. The Company
received Orphan Drug designation for Promycin in September, 1995 to treat head
and neck cancer and in May, 1997 received FDA approval of its request for orphan
drug status for the use of Promycin to treat cervical cancer. It intends to seek
this designation for other products where appropriate. There can be no assurance
that future changes to the Orphan Drug Act would not diminish the value of any
orphan drug designation obtained by the Company.
Drugs for Life Threatening Illnesses. FDA regulatory procedures
established in 1988 are intended to speed further the availability of new drugs
intended to treat life-threatening and severely debilitating illnesses. These
procedures provide for early and continuous consultation with the FDA regarding
preclinical and clinical studies necessary to gain marketing approval. This
regulatory framework also provides that if Phase I results are promising, Phase
II clinical trials may be designed that obviate the need for lengthy, expensive
Phase III testing. Notwithstanding the foregoing, approval may be denied by the
FDA or traditional Phase III studies may be required. The FDA may also seek the
Company's agreement to perform post-approval Phase IV studies.
The FDA has announced that the accelerated approval concept is being
expanded for cancer drugs. The proposed changes are designed to speed drug
approvals by requiring less extensive preapproval testing in some circumstances.
Specifically, the FDA has stated that it may approve these drugs based on the
basis of surrogate markers. 'Partial responses,' such as a drug's effectiveness
at short-term tumor shrinkage, that the FDA believes are clear indicators of
therapeutic effect, would be sufficient to demonstrate efficacy for these drugs.
This is in contrast to requiring the traditional 'full-endpoint' measures of
improved survival or quality of life. Other provisions of the new initiatives
include proactive solicitation by the FDA of expanded access filings for
foreign- approved cancer agents and greater patient representation on the FDA's
Oncology Drugs Advisory Committee. Although agency officials have estimated that
the changes will reduce by as much as a year the normal development time for
most cancer drugs, it is uncertain whether and how these initiatives will
actually be implemented by FDA and whether they will have a significant impact
on the approval process for cancer drugs.
MANUFACTURING AND MARKETING
The Company has no experience in manufacturing or marketing products
and has not yet commercially introduced any products. The Company does not now
have resources to manufacture or market on a commercial scale any products that
it may develop. To be successful, the Company's products must be manufactured in
commercial quantities in compliance with regulatory requirements and at
acceptable costs. Initially, the Company intends to manufacture products through
contracts with manufacturers and believes that contract manufacturing will be
readily available. In the event that the Company decides to establish a
manufacturing facility, the Company will require substantial additional funds
and will be required to hire and retain significant additional personnel and
comply with the extensive GMP regulations mandated by FDA which are applicable
to such a facility.
Upon FDA approval of one of the Company's product candidates, the
Company would develop a sales force targeting oncology doctors and clinics to
market its products. The Company currently has no marketing or sales staff and
there can be no assurance that the Company will be able to establish such a
sales force or be successful in gaining market acceptance for its products.
HUMAN RESOURCES
As of December 31, 1997, the Company had 31 full-time employees,
including 22 scientists and technicians. The Company has plans to hire 11
additional employees over the next 12 months to support continuing progress in
both research and development. The Company's employees are not covered by any
collective bargaining agreement.
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ITEM 2. PROPERTIES
The Company is currently leasing approximately 19,000 square feet of
office and laboratory space on three floors of a building at 4 Science Park, New
Haven, Connecticut. The lease is for a three-year term ending in 1999 at a
rental of $164,245 per year, with a right to renew for an additional three
years. The Company believes that its current space will meet the Company's
requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There is no material legal proceeding pending against the Company or
any of its property, nor was any such proceeding terminated during the fourth
quarter of the year ended December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of Vion
Pharmaceuticals, Inc. during the fourth quarter of fiscal year 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Common Stock of the Company has traded on The Nasdaq SmallCap
MarketSM under the symbol VION since April 29, 1996. From August 14, 1995 to
April 26, 1996 the Common Stock traded on The Nasdaq SmallCap MarketSM under the
symbol OCRX. The following table reflects the range of high and low bid prices
of the Company's Common Stock for each of the calendar quarters in 1996 and
1997. This information is based on closing bid prices as reported by The Nasdaq
Stock MarketSM and such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
1996 1997
---------------------------- -------------------------------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter 4-3/4 3 6-1/4 3
Second Quarter 7-3/4 3-1/2 5-1/8 3-3/8
Third Quarter 5-1/4 3-3/4 5-7/16 3-5/8
Fourth Quarter 4-11/16 2-7/8 6 2-13/16
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
On August 20, 1997, the Company completed a private placement of 4,850
shares of Class B Convertible Preferred Stock, at $1,000 per share, resulting in
net proceeds to the Company of $4,481,450. Shares of the Class B Preferred Stock
may also be eligible, under certain circumstances, to receive dividends paid in
Class C Preferred Stock. At year-end, 3,903 shares of Class B Convertible
Preferred Stock were convertible into 987,766 shares of the Company's common
stock, including an accretion of 8% per annum. In addition, 689 shares of Class
B Convertible Preferred Stock were convertible into 225,700 shares of the
Company's common stock, including an accretion of 8% per annum and dividends.
The Class C Preferred Stock is convertible into shares of common stock at the
average closing bid price of the Company's common stock for thirty consecutive
business days ended on the closing date and is not entitled to dividends.
The sale of the shares described above were private transactions not
involving a public offering and were exempt from the registration provisions of
the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. The
sale of these securities was without the use of an underwriter.
On November 24, 1997, the Company and Boehringer Ingelheim
International GmbH of Germany entered into an exclusive worldwide licensing
agreement for the development and marketing of Promycin. In connection with this
transaction, the Company received net proceeds of $2,869,801 from the sale of
448,336 shares of common stock to Boehringer Ingelheim International GmbH at a
premium to the then current market price.
HOLDERS
At February 10, 1998 there were approximately 220 holders of record of
common stock.
DIVIDENDS
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The Company has paid no cash dividends and does not expect to pay cash
dividends in the foreseeable future. The certificate of designations for the
Company's Class A Convertible Preferred Stock ('Class A Preferred Stock')
precludes the Company from paying cash dividends on the Common Stock so long as
shares of Class A Preferred Stock are outstanding, without the consent of
holders of a majority of the Class A Preferred Stock. The holders of the
outstanding Class A Preferred Stock are entitled to receive semi-annual
dividends, on a cumulative basis, equal to five percent (5%) (on a per annum
basis) of the Class A Preferred Stock held by such holder, payable, in arrears,
in additional shares of Class A Preferred Stock. If and when the Company
declares any dividend or distribution on the Common Stock (other than a stock
dividend), the Company is required to declare a like dividend or distribution on
the number of shares of Common Stock into which shares of Class A Preferred
Stock is then convertible.
The certificate of designations for the Company's Class B Convertible
Preferred Stock (`Class B Preferred Stock') provides that holders of Class B
Preferred Stock may receive a special dividend payable in Class C Convertible
Preferred Stock if they convert their Class B Preferred Stock into the Company's
common stock under certain circumstances. Payment of such dividends is dependent
upon the holding period of the Class B Preferred Stock. The holders of the Class
C Convertible Preferred Stock are not entitled to receive dividends on the Class
C Convertible Preferred Stock.
The Company currently intends to retain any future earnings to finance
the growth and development of its business.
ITEM 6. PLAN OF OPERATIONS
GENERAL
The Company is a development stage biopharmaceutical company. Its
activities to date have consisted primarily of research and development
sponsored by it pursuant to two separate license agreements with Yale
University, negotiating and obtaining other collaborative agreements, recruiting
management and other personnel, securing its facilities and raising equity and
debt financing. The Company's revenues consist of research grants, technology
license fees and reimbursements for research expenses. The Company has not
generated any revenues from product sales and has incurred substantial operating
losses from its activities.
The Company intends to use a substantial portion of the net proceeds of
its August, 1997 private financing, equity investment, initial payments and
reimbursed cost sharing from the November 24, 1997 exclusive worldwide licensing
agreement with Boehringer Ingelheim International GmbH to fund its plan of
operations, which includes the following elements through December 1998:
Continue to develop internal research and development capabilities and
conduct research and development with respect to the Company's core
technologies and other product candidates which may be identified by the
Company. The Company expects to incur substantial expenditures for research
and development expenses. During the next twelve months, the Company plans
to hire eleven additional employees primarily in research and development
positions.
Conduct Phase III clinical studies in the U.S. and Europe of Promycin for
treatment of cancer of the head and neck.
Continue to support research and development being performed at Yale
University and by other collaborators and seek additional collaborative
agreements.
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Seek to acquire, generally through in-licensing, oncology-related products
that can be marketed without significant additional development activities.
The Company currently estimates that anticipated revenues, the
remaining net proceeds of its private placement in August, 1997, equity
investment, initial payments and reimbursed cost sharing from the agreement with
Boehringer Ingelheim International GmbH and its existing cash and equivalents
will be sufficient to fund its planned operations until approximately December
1998. In the event of delays or unexpected problems in product development, cost
overruns, or other unanticipated expenses commonly associated with a company in
an early stage of development, the Company will require additional funds. In
addition, the Company will need substantial additional financing, beyond this
period to fund further research and development and the Company's working
capital requirements. As of December 31, 1997 the Company estimates that the
amount required to fund operations for the next twelve months is at
approximately $15,400,000, of which approximately $6,100,000 is subject to
reimbursement under the terms of a collaboration agreement. However, the
Company's cash requirements may vary materially from those now planned because
of results of research and development, results of product testing,
relationships with strategic partners, changes in focus and direction of the
Company's research and development programs, competitive and technological
advances, the regulatory process in the United States and abroad and other
factors.
The Company has not made an assessment of its Year 2000 issues,
although the Company believes that there will not be a material impact on its
operations.
FORWARD-LOOKING STATEMENTS - CAUTIONARY FACTORS
Statements included in this Form 10-KSB which are not historical in
nature are forward-looking statements made pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements regarding the Company's future business prospects,
plans, objectives, expectations and intentions are subject to certain risks,
uncertainties and other factors that could cause actual results to differ
materially from those projected or suggested in the forward-looking statements,
including, but not limited to: the inability to raise additional capital, the
possibility that any or all of the Company's products or procedures are found to
be ineffective or unsafe, the possibility that third parties hold proprietary
rights that preclude the Company from marketing its products, and the
possibility that third parties will market a product equivalent or superior to
the Company's product candidates.
ITEM 7. FINANCIAL STATEMENTS
This information appears in a separate section of this report following
Part III.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
Incorporated herein by reference to the Registrant's Proxy Statement
for its Annual Meeting of Stockholders to be held in 1998.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Registrant's Proxy Statement
for its Annual Meeting of Stockholders to be held in 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Registrant's Proxy Statement
for its Annual Meeting of Stockholders to be held in 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Registrant's Proxy Statement
for its Annual Meeting of Stockholders to be held in 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
2.1 -- Agreement and Plan of Merger among MelaRx Pharmaceuticals, Inc.,
OncoRx Research Corp. andOncoRx, Inc. dated as of April 19, 1995(1)
2.2 -- Certificate of Merger, dated April 20, 1995(1)
3.1 -- Restated Certificate of Incorporation of the Registrant, as
amended(2)
3.2 -- By-laws of the Registrant(1)
4.1 -- Form of Bridge Note(1)
4.2 -- Form of Warrant Agreement for Warrants issued in connection with the
bridge financing(1)
4.3 -- Form of Underwriter's Unit Purchase Option(1)
4.4 -- Form of Placement Agent's Warrant(1)
4.5 -- Form of Warrant Agreement for Class A and Class B Warrants(1)
10.1 -- License Agreement between Yale University and Old OncoRx,
dated as of August 31, 1994(1)
10.2 -- Letter Agreement between YaleUniversity and Old OncoRx
dated August 19, 1994(1)
10.3 -- Extension Agreement between Yale University and MelaRx
Pharmaceuticals, Inc., dated as of July 1, 1992(1)
10.4 -- Form of License Agreement between Yale University and MelaRx
Pharmaceuticals, Inc.(1)
10.5 -- Letter Agreement between YaleUniversity and MelaRx
Pharmaceuticals, Inc., dated as of February 2, 1995(1)
10.6 -- Research Agreement between The Regents of the University of
California and MicroFab Biosystems, Inc., dated as of July 25, 1994
(1)
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<PAGE>
10.7 -- Option Agreement between The Regents of the University of California
and MicroFab Biosystems, Inc. dated as of July 25, 1994(1)
10.8 -- Consulting Agreement between Mauro Ferrari and MicroFab Biosystems,
Inc., dated as of July 25,1994(1)
10.9 -- Option Agreement between MelaRx Diagnostics Inc. and Response
Biomedical Corp., dated as of March 30, 1995(1)
10.10 -- Distribution Agreement between MelaRx Diagnostics Inc. and Response
Biomedical Corp., dated April 4, 1995(1)
10.11 -- Employment Agreement between the Registrant and John A.
Spears, dated as of January 16, 1995(1)
10.12 -- 1995 Stock Option Plan of Old OncoRx(1)
10.13 -- Stock Option Agreement between Old OncoRx and John A. Spears, dated
February 2, 1995(1)
10.14 -- Employment Letter from MelaRx Pharmaceuticals, Inc. to Thomas
Mizelle, dated as of July 29, 1994(1)
10.15 -- Marketing Services Agreement between MelaRx Pharmaceuticals, Inc.
and Creative Polymers, Inc. dated as of March 21, 1994(1)
10.16 -- Amended and Restated 1993 Stock Option Plan of the Registrant(3)
10.17 -- Lease Agreement between Science Park Development Corporation and
Vion Pharmaceuticals, Inc., dated as of February 1, 1996
10.18 -- Option Agreement between the Registrant and PMP, Inc., dated April
27, 1995(1)
10.19 -- Agreement between MelaRx Pharmaceuticals, Inc. and certain
shareholders, dated February 17, 1995(1)
10.20 -- Consulting and Finder's Agreement between MelaRx Pharmaceuticals,
Inc. and Jacob A. Melnick, dated June 4, 1992, as amended by
Agreement dated February 17, 1995(1)
10.21 -- Form of Indemnification Agreement(1)
10.22 -- Letter Agreement between Yale University and OncoRx, Inc. (formerly
MelaRx Pharmaceuticals, Inc.), dated July 5, 1995(1)
10.23 -- Lease between Science Park Development Corporation and OncoRx, Inc.
dated August 10, 1995(4)
10.24 -- Master Lease Agreement between Citicorp Leasing, Inc. and OncoRx,
Inc. dated September 27, 1995(4)
10.25 -- Sale and Leaseback Agreement and Master Equipment Lease Agreement
between FINOVA Technology Finance, Inc. and Vion Pharmaceuticals,
Inc. dated as of October 17, 1996 (5)
10.26 -- Clinical Development Agreement between Vion Pharmaceuticals, Inc.
Covance Clinical Research Unit Ltd. and Covance Inc. (Confidential
treatment has been granted with regard to certain provisions of this
exhibit) (6)
10.27 -- Amendment No. 1 to License Agreement between Yale University and Vion
Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of June 12, 1997
(6)
10.28 -- Amendment No. 2 to License Agreement between Yale University and Vion
Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of June 12, 1997
(6)
10.29 -- Collaborative Development and Distribution Agreement between
Boehringer Ingelheim International GmbH and Vion Pharmaceuticals,
Inc. dated November 24, 1997 (Confidential treatment has been
requested with regard to certain provisions of this exhibit)
10.30 -- Sale and Leaseback Agreement between FINOVA Technology Finance, Inc.
and Vion Pharmaceuticals, Inc. dated as of December 10, 1997
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Ernst & Young L.L.P.
27.1 -- Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 33-93468), effective August 14, 1995.
19
<PAGE>
(2) Incorporated by reference to the Company's Quarterly Report on form 10-QSB
for the quarterly period ended September 30, 1997.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 333-39407), effective November 4, 1997.
(4) Incorporated by reference to the Quarterly Report on form 10-QSB for the
quarter ended September 30, 1995.
(5) Incorporated by reference to the Annual Report on form 10-KSB for the fiscal
year ended December 31, 1996.
(6) Incorporated by reference to the Quarterly Report on form 10-QSB for the
quarter ended June 30, 1997.
(b) Reports on Form 8-K.
During the final quarter of the Company's 1997 fiscal year, the
Company filed with the Commission on December 1, 1997 a Current Report on
Form 8-K dated November 28, 1997 regarding consummation of its strategic
partnership with Boehringer Ingelheim International GmbH.
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VION PHARMACEUTICALS, INC.
(Registrant)
By: /s/ Thomas E. Klein
---------------------------
Thomas E. Klein
Vice President - Finance
(Duly authorized signatory and
Chief Financial Officer)
Date: December 29, 1998
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Audited Consolidated Financial Statements
Restated
Years ended December 31, 1997 and 1996
CONTENTS
Report of Independent Auditors............................................F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheet................................................F-2
Consolidated Statements of Operations.....................................F-3
Consolidated Statements of Changes in Shareholders' Equity................F-4
Consolidated Statements of Cash Flows.....................................F-5
Notes to Consolidated Financial Statements................................F-6
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Vion Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheet of Vion
Pharmaceuticals, Inc. (a Development Stage Company) as of December 31, 1997 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the years ended December 31, 1997 and 1996 and the period from
May 1, 1994 (inception) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vion
Pharmaceuticals, Inc. at December 31, 1997 and the consolidated results of its
operations and its cash flows for the years ended December 31, 1997 and 1996 and
the period from May 1, 1994 (inception) to December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Vion Pharmaceuticals, Inc. will continue as a going concern. As more fully
described in Note 1, since commencement of operations, the Company has incurred
recurring operating losses and requires substantial amounts of additional
funding to continue its operations. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments to reflect the possible
future effect on the recoverability and classification of assets or the amounts
or classification of liabilities that may result from the outcome of this
uncertainty.
As described in Note 10, the 1997 and 1996 and the period from May 1, 1994
(inception) to December 31, 1997 consolidated financial statements have been
restated to correct errors related to the accounting for preferred stock issued
by the Company.
/s/ Ernst & Young LLP
----------------------
Hartford, Connecticut
February 6, 1998,
except for Notes 2, 5, 6 and 10, as to which
the date is November 27, 1998
F-1
<PAGE>
CONSOLIDATED BALANCE SHEET
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
----------------------
RESTATED
----------------------
DECEMBER 31, 1997
- ------------------------------------------------------------------------------------ ----------------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,890,621
Short-term investments (Includes $2,777,088 restricted) 7,088,540
Accounts receivable 728,899
Other current assets 118,752
-------------
Total current assets 11,826,812
Property and equipment, net 1,301,680
Security deposits 34,894
Research contract prepayments 416,945
-------------
Total assets $ 13,580,331
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Obligation under capital lease - current $ 274,853
Accounts payable and accrued expenses 874,350
Total current liabilities 1,149,203
Obligation under capital lease - long term 472,578
-------------
Total Liabilities 1,621,781
-------------
Shareholders' equity:
Preferred stock, $0.01 par value - 5,000,000 shares authorized consisting
of: Class A convertible preferred stock, $0.01 par value, authorized:
3,500,000 shares; issued and outstanding: 757,632 shares 7,576
-Liquidation preference $7,576,000
Class B convertible preferred stock, $0.01 par value, authorized: 46
100,000 shares; issued and outstanding: 4,592 shares
-Liquidation preference $4,726,000
Class C convertible preferred stock, $0.01 par value, authorized: 0
25,000 shares; issued and outstanding: 0 shares
Common stock, $0.01 par value, authorized: 35,000,000 shares; 98,339
issued and outstanding: 9,833,934
Additional paid-in capital 47,661,639
Deferred compensation (72,128)
Accumulated deficit (35,736,922)
-------------
11,958,550
-------------
Total liabilities and shareholders' equity $ 13,580,331
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
RESTATED
-----------------------------------------------------------------
FOR THE PERIOD FROM
MAY 1, 1994 (INCEPTION)
THROUGH DECEMBER 31,
YEAR ENDED DECEMBER 31,
---------------- ---------------------- --------------------------
1997 1996 1997
- ------------------------------------------------------------
------------------- ------------------- --------------------------
<S> <C> <C> <C>
Revenues:
Contract research grants $ 48,221 $ 51,779 $ 100,000
Research support 1,222,912 0 1,222,912
Technology license revenues 4,000,000 0 4,000,000
------------------- ------------------- --------------------------
Total revenues 5,271,133 51,779 5,322,912
Operating expenses:
Research and development 7,675,486 5,975,089 16,783,775
General and administrative 2,639,486 2,113,077 6,837,882
Nonrecurring collaboration restructuring fee 600,000 0 600,000
Purchased research and development 0 0 4,481,405
Amortization of finance charges 0 0 345,439
Interest income (343,911) (437,993) (865,948)
Interest expense 43,666 10,285 99,113
------------------- ------------------- --------------------------
Net loss ($ 5,343,594) ($ 7,608,679) ($ 22,958,754)
=================== =================== ==========================
Preferred stock dividends and accretion (1,131,740) (11,627,404) (12,759,144)
------------------- ------------------- --------------------------
Loss applicable to common shareholders ($ 6,475,334) ($ 19,236,083) ($ 35,717,898)
=================== =================== ==========================
Basic and diluted loss applicable to common shareholders ($0.75) ($2.52)
per share ------------------- -------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Consolidated Statement of Changes in Shareholders' Equity
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
Restated
-----------------------------------------------------------------------------------------------------
Class A Class B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
---------------------- ---------------- --------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for cash - July 1994 0 $0 0 $0 2,693,244 $26,932
Common stock issued for services -
August 1994 159,304 1,593
Net loss
-----------------------------------------------------------------------
Balance - December 31, 1994 0 0 0 0 2,852,548 28,525
Stock options issued for compensation -
February 1995
Reverse acquisition of MelaRx
Pharmaceuticals, Inc. - April 1995 2,000,000 20,000
Shares repurchased pursuant to
employment agreements - April 1995 (274,859) (2,749)
Private placement of common stock -
April 1995 76,349 763
Warrants issued with bridge notes -
April 1995
Initial public offering of units of one common share,
one Class A warrant and one Class B warrant at
$4.00 per unit - August 1995 and September 1995 2,875,000 28,750
Issuance of common stock 1,250 13
Receipts from sale of unit purchase option
Net loss
-----------------------------------------------------------------------
Balance at December 31, 1995 0 0 0 0 7,530,288 75,302
Issuance of Class A convertible preferred stock 1,250,000 12,500
Conversion of Class A convertible preferred stock (164,970) (1,650) 458,255 4,582
Issuance of common stock 29,418 294
Class A convertible preferred stock dividend 21,998 220
Compensation associated with stock option grants
Amortization of deferred compensation
Net loss
-----------------------------------------------------------------------
Balance at December 31, 1996 1,107,028 $11,070 0 $0 8,017,961 $80,178
Conversion of Class A convertible preferred stock (396,988) (3,970) 1,102,757 11,028
Conversion of Class B convertible preferred stock (258) (3) 64,642 647
Compensation associated with stock options grants
Extension/reissuance of underwriter warrants
Exercise of warrants 238 3
Issuance of common stock 598,336 5,983
Exercise of stock options 50,000 500
Class A convertible preferred stock dividend 47,592 476
Issuance of Class B convertible preferred stock 4,850 49
Accretion of dividend payable on Class B convertible
preferred stock
Amortization of deferred compensation
Net loss
-----------------------------------------------------------------------
Balance at December 31, 1997 757,632 $7,576 4,592 $46 9,833,934 $98,339
-----------------------------------------------------------------------
</TABLE>
Consolidated Statement of Changes in Shareholders' Equity (continued)
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
Restated
--------------------------------------------------------------------------------------------------
Additional Total
- Paid-in Deferred Accumulated Stockholders'
Capital Compensation Deficit Equity
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock issued for cash - July 1994 $0 $0 ($19,877) $7,055
Common stock issued for services -
August 1994 (1,176) 417
Net loss (475,946) (475,946)
---------------------------------------------------------------------
Balance - December 31, 1994 0 0 (496,999) (468,474)
Stock options issued for compensation -
February 1995 540,000 540,000
Reverse acquisition of MelaRx
Pharmaceuticals, Inc. - April 1995 4,300,000 4,320,000
Shares repurchased pursuant to
employment agreements - April 1995 2,029 (720)
Private placement of common stock -
April 1995 205,237 206,000
Warrants issued with bridge notes -
April 1995 200,000 200,000
Initial public offering of units of one common share,
one Class A warrant and one Class B warrant at
$4.00 per unit - August 1995 and September 1995 9,667,460 9,696,210
Issuance of common stock 488 501
Receipts from sale of unit purchase option 250 250
Net loss (9,530,535) (9,530,535)
---------------------------------------------------------------------
Balance at December 31, 1995 14,913,435 0 (10,025,505) 4,963,232
Issuance of Class A convertible preferred stock 22,890,075 (11,371,523) 11,531,052
Conversion of Class A convertible preferred stock (2,932) 0
Issuance of common stock 102,426 102,720
Class A convertible preferred stock dividend 255,661 (255,881) 0
Compensation associated with stock option grants 190,407 (190,407) 0
Amortization of deferred compensation 83,647 83,647
Net loss (7,608,679) (7,608,679)
---------------------------------------------------------------------
Balance at December 31, 1996 $38,349,072 ($106,760) ($29,261,588) $9,071,972
Conversion of Class A convertible preferred stock (7,058) 0
Conversion of Class B convertible preferred stock (644) 0
Compensation associated with stock options grants 55,643 55,643
Extension/reissuance of underwriter warrants 168,249 168,249
Exercise of warrants (6) (3)
Issuance of common stock 3,463,818 3,469,801
Exercise of stock options 19,500 20,000
Class A convertible preferred stock dividend 623,038 (623,514) 0
Issuance of Class B convertible preferred stock 4,851,662 (369,861) 4,481,850
Accretion of dividend payable on Class B convertible
preferred stock 138,365 (138,365) 0
Amortization of deferred compensation 34,632 34,632
Net loss (5,343,594) (5,343,594)
---------------------------------------------------------------------
Balance at December 31, 1997 $47,661,639 ($72,128) ($35,736,922) $11,958,550
---------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
RESTATED
------------------------------------------------------------------
FOR THE PERIOD FROM
MAY 1, 1994
(INCEPTION) THROUGH
YEAR ENDED DECEMBER 31, DECEMBER 31,
-------------------- --------------------- -----------------------
1997 1996 1997
-------------------- --------------------- -----------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,343,594) $ (7,608,679) $ (22,958,754)
Adjustments to reconcile net loss to cash flows used
in operating activities
Purchased research and development 0 0 4,481,405
Amortization of financing costs 0 0 345,439
Depreciation and amortization 303,746 125,838 455,206
(Increase) in other current assets (741,016) (87,810) (846,665)
Decrease/(Increase) in other assets 192,670 (176,906) (450,124)
Increase in accounts payable and
accrued expenses 380,223 185,054 839,818
Extension/reissuance of placement agent warrants 168,249 0 168,249
Stock issued for services 600,000 0 600,417
Stock options issued for compensation 90,275 83,647 713,922
-------------------- --------------------- -----------------------
Net cash used in operating activities (4,349,447) (7,478,856) (16,651,087)
-------------------- --------------------- -----------------------
Cash flows used for investing activities:
Purchase of marketable securities (8,121,720) (11,796,338) (22,209,166)
Maturities of marketable securities 5,661,626 9,459,000 15,120,626
Acquisition of fixed assets (299,131) (262,907) (812,453)
Cash portion of MelaRx acquisition 0 0 4,061
-------------------- --------------------- -----------------------
Net cash used in investing activities (2,759,225) (2,600,245) (7,896,932)
-------------------- --------------------- -----------------------
Cash flows provided by financing activities:
Initial public offering 0 0 9,696,210
Net proceeds from issuance of common stock 2,889,801 2,720 3,206,077
Net proceeds from issuance of preferred stock 4,481,850 11,531,052 16,012,902
Repurchase of common stock 0 0 (720)
Net proceeds from bridge financing 0 0 1,704,269
Repayments of bridge financing 0 0 (2,000,000)
Advances from stockholders 0 0 250,000
Repayments to stockholders 0 0 (250,000)
Exercise of warrants (3) 0 (3)
Receipts from sale of unit purchase option 0 0 250
Repayment of equipment capital lease (160,724) (17,235) (180,345)
-------------------- --------------------- -----------------------
Net cash provided by financing activities 7,210,924 11,516,537 28,438,640
-------------------- --------------------- -----------------------
Net increase in cash 102,252 1,437,436 3,890,621
Cash and cash equivalents at beginning of year 3,788,369 2,350,933 0
-------------------- --------------------- -----------------------
Cash and cash equivalents at end of year $ 3,890,621 $ 3,788,369 $ 3,890,621
==================== ===================== -----------------------
</TABLE>
Supplemental schedule of noncash investing and financing activities:
o Capital lease obligations of $239,866 and $593,489 were incurred for the
years ended December 31, 1996 and December 31, 1997, respectively, when the
Company entered into leases for laboratory and office equipment.
o An investor of the Company did not exercise the option to require the Company
to repurchase shares of preferred stock for $100,000, and the investor
received 23,859 shares of common stock during 1996, which had been converted
from previously held preferred stock.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
1. THE COMPANY
Vion Pharmaceuticals, Inc., formerly OncoRx, Inc., (the "Company") was
incorporated in May 1993 and began operations on May 1, 1994. The Company is in
the development stage and is principally devoted to the research and development
of therapeutic products for the treatment of cancer and cancer related
disorders.
In April 1995, the Company merged into OncoRx Research Corp. a previously
unaffiliated company ("Research"). The stockholders of the Company were issued
shares of common and preferred stock of MelaRx Pharmaceuticals Inc. ("MelaRx"),
the 100% owner of Research, in exchange for all of the outstanding shares of the
Company. In August 1995, the Company completed an initial public offering
("IPO") (see Note 5) resulting in net proceeds to the Company of approximately
$9,696,000. On April 20, 1995, the Company merged into OncoRx Research Corp., a
wholly-owned subsidiary of MelaRx, which was renamed OncoRx, Inc. after the
merger. The stockholders of the Company were issued 2,654,038 common and 23,859
preferred shares of MelaRx in exchange for 2,000,000 shares of common stock of
the Company valued at $2.16 per share (fair value).
As the shareholders of the Company obtained a majority interest in the merged
company for accounting purposes, the Company is treated as the acquirer.
Therefore, the transaction is recorded as a purchase in the Company's financial
statements which include the results of operations of the Company from inception
and MelaRx from the date of acquisition. The excess of cost over the fair value
of MelaRx's net tangible assets, $4,481,405, was treated as purchased research
and development and expensed immediately.
The accompanying financial statements are prepared assuming the Company will
continue as a going concern; however, at its current and planned rate of
spending, the Company's cash, cash equivalents and short term investments are
not sufficient to allow it to continue operations through the 1998 calendar
year. The Company requires substantial new revenues and other sources of capital
in order to meet such budgeted expenditures and to continue its operations
throughout the year. The Company is seeking to enter into significant strategic
partnerships with pharmaceutical companies for the development of its core
technologies, through which it would anticipate receiving some of the
substantial revenues and financing required to continue operations beyond the
year end. The Company has entered into discussions with several major
pharmaceutical companies concerning such strategic alliances, but there can be
no assurance that the Company will be successful in achieving such alliances,
nor can the Company predict what funds might be available to it if it can
achieve such alliances. The Company is also seeking to raise funds through
additional means, including (1) private placements and recapitalization of its
securities; (2) spin-off, refinancing, or partial sale or disposition of its
rights to certain of its non-core technologies; and (3) equipment lease
financing. No assurance can be given that the Company will be successful in
arranging financing through any of these alternatives.
Failure to obtain such financing will require the Company to delay, renegotiate,
or omit payment on its outside research funding commitments causing it to
substantially curtail its operations, resulting in a material adverse effect on
the Company.
F-6
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
FAIR VALUE AND CONCENTRATION OF CREDIT RISKS
The estimated fair value of amounts reported in the financial statements have
been determined by using available market information and appropriate valuation
methodologies. All current assets and current liabilities are carried at cost,
which approximates fair value, because of their short-term nature.
SHORT-TERM INVESTMENTS
The Company accounts for short-term investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company's investments in debt securities, which
typically mature in one year or less, are classified as available for sale and
are carried at fair value which approximates cost plus accrued interest through
December 31, 1997.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of equipment is computed
under the straight-line method over the estimated useful lives of the assets
(three to seven years).
INCOME TAXES
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under this method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
DEFINED CONTRIBUTION PLAN
The Company sponsors a defined contribution plan (the "Plan") that covers all
employees who meet the eligibility conditions set forth in the Plan. Employee
contributions to the Plan are voluntary and are based on eligible compensation,
as defined therein. In accordance with the terms of the Plan, no Company
contributions are made to the Plan.
F-7
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SMALL BUSINESS INNOVATION RESEARCH GRANT
On September 27, 1996 the Company was awarded a Small Business Innovation
Research ("SBIR") grant for the Inhibitors of Ribonucleotide Reductase program.
The award was for reimbursable direct costs of up to $100,000.
The SBIR grant expired on March 30, 1997. The Company recognized $48,221 and
$51,779 of revenue from the SBIR grant for reimbursement of expenses incurred
for the years ended December 31, 1997 and 1996, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. Certain 1996 amounts have been
reclassified to conform to the 1997 presentation.
PER SHARE DATA
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
-------------------- ---------------------
1997 1996
- ----------------------------------------------------------- -------------------- ---------------------
<S> <C> <C>
Numerator:
- ----------------------------------------------------------- -------------------- ---------------------
Net loss ($5,343,594) ($7,608,679)
- ----------------------------------------------------------- -------------------- ---------------------
Preferred stock dividends and accretion (1,131,740) (11,627,404)
- ----------------------------------------------------------- -------------------- ---------------------
Numerator for basic and diluted loss applicable to
common shareholders per share ($6,475,334) ($19,236,083)
- ----------------------------------------------------------- -------------------- ---------------------
Denominator:
- ----------------------------------------------------------- -------------------- ---------------------
Denominator for basic and diluted loss applicable to
common shareholders per share 8,670,717 7,641,546
- ----------------------------------------------------------- -------------------- ---------------------
Basic and diluted loss applicable to common shareholders
per share ($0.75) ($2.52)
- ----------------------------------------------------------- -------------------- ---------------------
</TABLE>
For additional disclosures regarding warrants and Class A and B Convertible
Preferred Stock see Note 5. For additional disclosures regarding stock options
see Note 6. These potentially dilutive securities were not included in diluted
loss applicable to common shareholders per share as the effect would be
antidilutive.
F-8
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as of December 31:
- -------------------------------------------------------- ----------------------
1997
- -------------------------------------------------------- ----------------------
Office equipment $ 177,331
Furniture and fixtures 163,251
Laboratory equipment 202,762
Leasehold improvements 285,765
Leased equipment under capital lease 927,777
----------------------
1,756,886
Less accumulated depreciation (455,206)
----------------------
Net property and equipment $1,301,680
- -------------------------------------------------------- ----------------------
4. RESEARCH AND LICENSE AGREEMENTS
BOEHRINGER INGELHEIM AGREEMENT
On November 24, 1997, the Company and Boehringer Ingelheim International GmbH of
Germany ("BI") entered into an exclusive worldwide licensing agreement for the
development and marketing of Promycin(R) (porfiromycin), Vion's most advanced
anticancer agent. The agreement provides the Company with exclusive co-promotion
rights to Promycin in the United States and Canada. BI will have exclusive
worldwide rights to market and sell Promycin outside the United States and
Canada. The Company is responsible for the manufacturing and supply of Promycin
for all territories.
In exchange for these rights, the Company received $4.0 million from upfront
technology access fees and net proceeds of $2,869,801 from the sale of 448,336
shares of common stock at a premium to the then current market price. BI will
also reimburse the Company for certain initial development costs to date and
will share in future worldwide development costs.
The Company has cash equivalents and short-term investments of $10,979,161 at
December 31,1997. This balance includes $2,777,088 of restricted investments for
Promycin development expenses. Pursuant to the BI Agreement the Company must use
the BI license fee of $4.0 million exclusively for Promycin development
expenses. Including permitted earlier expenses and expenses incurred subsequent
to November 24, 1997, the Company recorded $1,222,912 of Promycin development
expenses as revenue under the agreement during 1997.
F-9
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. RESEARCH AND LICENSE AGREEMENTS (CONTINUED)
COVANCE AGREEMENT
During the quarter ended June 30, 1997, the Company entered into a Clinical
Development Agreement (the "Agreement") with Covance Clinical Research Unit Ltd.
and Covance Inc. ("Covance"). Pursuant to the Agreement the Company is
contracting to Covance the selection and management of clinical sites and the
preparation of clinical trial reports arising from clinical trials performed by
Covance regarding the Company's product candidate Promycin for the inclusion in
a regulatory submission. The Company has incurred expenses of $1,633,974 for the
year ended December 31, 1997 under this agreement which has been expensed as
incurred as research and development.
YALE/MELARX AGREEMENT
Pursuant to a License Agreement between the Company and Yale University
("Yale"), as amended and restated as of August 1, 1992, the Company has obtained
rights to a synthetic form of melanin which the Company has named Melasyn. The
Company has entered into an agreement with Creative Polymers pursuant to which
Creative Polymers has agreed to be the exclusive selling agent for Melasyn and
will be entitled to 20% of the net sales of Melasyn.
The Company has an option to obtain an exclusive license for any inventions that
result from research projects by Yale which are relating to synthetic melanin
funded by the Company. The Company has agreed to reimburse Yale for its costs in
connection with the research projects in an amount currently equal to $899,023
per year (subject to increase by up to 5% per year). The agreement is for a term
ending June 30, 1998, subject to earlier termination as defined.
The Company and Yale entered into a License Agreement dated December 15, 1995
pursuant to which the Company received a nontransferable worldwide exclusive
license, expiring over the lives of the patents, to three inventions relating to
gene therapy for melanoma. Pursuant to this agreement, the Company has paid Yale
a $100,000 fee, and has agreed to pay milestone payments based on the status of
clinical trials and regulatory approvals. In addition, Yale is entitled to
royalties on sales, if any, of resulting products and sublicensing revenues.
YALE/ONCORX AGREEMENT
Pursuant to a License Agreement dated August 31, 1994, as amended, Yale granted
the Company an exclusive, nontransferable, worldwide license to make, have made,
use, sell and practice certain inventions and research for therapeutic and
diagnostic purposes. The term of the license is the expiration of any patents
relating to any inventions or, with respect to nonpatented inventions or
research, 17 years. Yale is entitled to royalties on sales, if any, of resulting
products and sublicensing revenues and, with regard to one patent, milestone
payments based on the status of clinical trials and regulatory approvals.
F-10
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. RESEARCH AND LICENSE AGREEMENTS (CONTINUED)
YALE SUBSCRIPTION ASSIGNMENT AND ASSUMPTION AGREEMENT
On June 4, 1992, the Company entered into a Subscription, Assignment and
Assumption Agreement (the "SAAA") with Yale. Pursuant to the agreement as
amended and extended, the Company is to provide funding for certain research in
the field of dermatology by Yale. The agreement expires in June 1998 and
provides for quarterly payments to Yale in accordance with agreed upon annual
budgets. The payments are recorded as expense when incurred. The Company was
granted exclusive licenses to inventions in countries where patents are
effective and nonexclusive licenses elsewhere expiring over the lives of the
patents and 20 years, respectively.
The Company is obligated to pay royalties on sales of licensed products.
BERKELEY AGREEMENT
In October 1997, the Company terminated a research agreement with The Regents of
the University of California on behalf of the Berkeley Campus with regard to
certain microfiltration technology and decided not to pursue negotiations to
obtain licenses or options to obtain licenses for certain inventions resulting
from this research. There are no continuing liabilities to the Company stemming
from prior funding of this research.
5. SHAREHOLDERS' EQUITY
On April 20, 1995, 2,000,000 shares of common stock valued at $2.16 per share
were issued in conjunction with the merger with MelaRx (see Note 1). Shortly
prior to the consummation of the Merger, the Company issued 76,349 shares of
common stock for net proceeds of $206,000 after deducting placement fees of
$14,000.
On August 17, 1995 and September 6, 1995, the Company completed an IPO of
2,875,000 units, consisting of an aggregate of 2,875,000 shares of common stock,
2,875,000 redeemable Class A Warrants and 2,875,000 redeemable Class B Warrants
at a price of $4.00 per unit. Each Class A Warrant entitles the holder to
purchase one share of common stock and one Class B Warrant. Each Class B Warrant
entitles the holder to purchase one share of common stock. These warrants are
exercisable through August 13, 2000. The net proceeds to the Company of the IPO
were approximately $9,696,000 before repayment of the bridge financing noted
below.
In conjunction with the Company's IPO, the Company granted the underwriter an
option, exercisable over a period of three years commencing two years from the
date of the offering, to purchase up to 250,000 units at $5.20 per unit, subject
to adjustment.
BRIDGE FINANCING
In April 1995, the Company issued $2,000,000 in 10% promissory notes and
warrants to purchase 1,000,000 shares of common stock at $3.00 per share for net
proceeds of $1,704,000. The promissory notes were recorded net of a discount of
$200,000, attributable to the fair value of the bridge warrants. The notes were
paid at the closing of the IPO of the Company's securities described above and
the warrants, which are exercisable over four years, were converted into Class A
Warrants at that time.
F-11
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
PRIVATE PLACEMENT OF CLASS A CONVERTIBLE PREFERRED STOCK
On May 22, 1996, the Company completed a private placement of 1,250,000 shares
of Class A Convertible Preferred Stock, at $10.00 per share, resulting in net
proceeds to the Company of $11,531,052. Each share of Class A Preferred Stock is
immediately convertible into 2.777777 shares of the Company's common stock and
is entitled to vote on all matters on an "as if" converted basis. The Company
recorded an imputed one-time non-cash dividend of approximately $11.4 million as
a result of the difference between the conversion price and the quoted market
price of the Company's common stock as of the date of issuance as required by
Financial Accounting Standards Board Emerging Issues Task Force D-60 "Accounting
for the Issuance of Convertible Preferred Stock and Debt Securities with a
Nondetachable Conversion Feature" ("EITF D-60"). The $11.4 million has been
recognized as a charge against accumulated deficit with a corresponding increase
in additional paid-in capital. The imputed non-cash dividend has been included
in the dividend requirement on Preferred Stock and the loss applicable to common
shareholders. In connection with the foregoing transaction, the Company also
issued to the placement agent warrants, exercisable over a five year period, to
purchase an aggregate of 546,875 shares of the Company's common stock at prices
ranging from $3.96 to $12.00. The shares of Class A Preferred Stock pay
semi-annual dividends of 5% per annum, payable in additional shares of Class A
Preferred Stock, which are immediately convertible into common stock of the
Company. The Company has recorded non-cash dividends as a charge against the
accumulated deficit and a credit to additional paid-in capital based on the
quoted market price of the common stock as of the date of the issuance of the
preferred dividends of $255,881 in 1996 and $623,514 in 1997. The dividends have
been included in the dividend requirement on Preferred Stock and the loss
applicable to common shareholders. The issue contains a provision for a 15% one
time dividend payable in additional Class A Preferred Stock if the Company
redeems the issue within 3 years. The issue also contains a provision for a
special dividend after 2 years under certain conditions if the Company's common
stock price falls below the conversion price of the Class A Preferred Stock.
Under certain circumstances relating to the Company's common stock closing bid
price, the Company can redeem the Class A Preferred Stock at the issue price
plus all declared and unpaid dividends thereon. If all of the 757,632
outstanding shares of the Company's Class A Preferred Stock as of December 31,
1997 were thusly redeemed, their redemption value would be $7,576,320. The
issuance of the Class A Preferred Stock at closing also triggered certain
antidilution adjustment provisions of the Company's outstanding warrants,
resulting in the issuance of additional warrants.
ANTIDILUTION ADJUSTMENT
As a result of the sale on May 22, 1996 of 1,250,000 shares of Class A
Convertible Preferred Stock, and pursuant to the Warrant Agreement governing the
rights of the Class A Warrants and the Class B Warrants, an adjustment was made
to the exercise price of the Class A Warrants and the Class B Warrants and there
was a corresponding distribution of additional Class A Warrants and Class B
Warrants. Specifically, on July 12, 1996 (the "Payment Date") each holder of a
Class A Warrant at the close of business on July 3, 1996 (the "Record Date") was
issued an additional 0.1 of a Class A Warrant and the exercise price of the
Class A Warrants was reduced from $5.20 to $4.73. In addition, on the Payment
Date each holder of a Class B Warrant on the close of business on the Record
Date was issued an additional 0.1 of a Class B Warrant and the exercise price of
the Class B Warrants was reduced from $7.00 to $6.37.
F-12
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
5. SHAREHOLDERS' EQUITY (CONTINUED)
PRIVATE PLACEMENT OF CLASS B CONVERTIBLE PREFERRED STOCK
On August 20, 1997, the Company completed a private placement of 4,850 shares of
non-voting Class B Convertible Preferred Stock, at $1,000 per share, resulting
in net proceeds to the Company of $4,481,450. Shares of Class B Preferred Stock
are immediately convertible into shares of common stock including an accretion
of 8% per annum. The difference between the conversion price and the quoted
market price of the Company's common stock at the date of issuance,
approximately $370,000, was recognized upon issuance of the preferred securities
as a charge against accumulated deficit, with a corresponding increase in
additional paid-in capital. The imputed non-cash dividend has been included in
the dividend requirement on Preferred Stock and the loss applicable to common
shareholders. Shares of the Class B Preferred Stock may also be eligible, under
certain circumstances, to receive dividends paid in Class C Preferred Stock. The
Class C Preferred Stock is convertible into shares of common stock at the
average closing bid price of the Company's common stock for thirty consecutive
business days ending on the private placement closing date and is not entitled
to dividends. With 30 days notice, one year after issuance, the Company may
redeem the Class B Convertible Preferred Stock at 130% of the issue price plus
an 8% accrued premium. If all of the 4,592 outstanding shares of the Company's
Class B Convertible Preferred Stock were thusly redeemed after one year, their
redemption value would be $6,468,647. At the second anniversary of the issue
date, the Class B Preferred Stock will automatically be converted into common
stock or redeemed for cash, at the Company's option. On August 11, 1998, the
Company reached agreement with each of the holders of its Class B Preferred
Stock that the holders would convert all of the outstanding shares of Class B
Preferred Stock into an aggregate of 867,806 shares of common stock.
ISSUANCE OF COMMON STOCK TO YALE UNIVERSITY
Effective July 24,1997, the Company and Yale amended two license agreements
between the parties pursuant to which Yale agreed to reduce certain amounts
payable by the Company under such agreements. As a result, the Company issued
150,000 shares of common stock to Yale valued at $600,000.
ISSUANCE AND EXTENSION OF PLACEMENT AGENT WARRANTS
In connection with its role as placement agent for two private financings of the
Company's predecessor, MelaRx, Inc., D.H. Blair Investment Banking Corporation
was issued warrants to purchase 56,504 and 11,929 shares of common stock at
$3.56 per share, expiring August 20, 1997 and November 1, 1997, respectively,
and warrants to purchase 23,632 shares at $4.44 per share, expiring March 3,
1998. The warrants to purchase 56,504 shares of common stock at $3.56 per share
expired, however on October 31, 1997 the Company agreed to reissue the expired
warrants and extend the expiration date of all such warrants to July 5, 1998.
The extension which was approved by the Board of Directors resulted in an
expense of $168,249.
F-13
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. EMPLOYEE STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In July 1995, the Board of Directors of the Company adopted the Amended and
Restated 1993 Stock Option Plan (the "Option Plan"). The Option Plan originally
provided for the granting of incentive stock options or non-qualified stock
options to employees, officers, directors, and consultants of the Company, to
purchase up to an aggregate of 534,750 shares of common stock. On January 31,
1996, the Board of Directors adopted, subject to stockholder approval, an
amendment to the plan increasing the number of shares which may be issued under
the plan from 534,750 to 1,000,000. The amendment to the plan was adopted by the
stockholders at the Company's annual meeting on April 18, 1996. On January 29,
1997, the Board of Directors adopted an amendment to the Plan increasing the
number of shares which may be issued under the Plan from 1,000,000 to 1,500,000
which was approved by the stockholders at the Company's annual meeting on April
16, 1997. Incentive options granted under the Option Plan are exercisable for a
period of up to ten years from the date of grant at an exercise price which is
not less than the fair market value of the common stock on the date of the grant
except that the term of an incentive option granted under the Option Plan to a
stockholder owning more than 10% of the outstanding voting power may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the Common Stock on the date of grant. Options granted under the Option
Plan become exercisable in no less than four equal annual installments
commencing no earlier than the first anniversary of the date of grant. No option
may be granted under the Option Plan after April 14, 2003.
Through December 31, 1996 and 1997, options to purchase an aggregate of 896,750
and 1,033,050 shares, respectively had been granted under the plan. The Company
recognized $55,643 of compensation expense in 1997 for options granted under the
plan which was a result of stock options granted to non-employees. The Company
recognized $83,647 of compensation expense in 1996 for options granted under the
plan which was a result of stock options granted to non-employees and the
issuance of certain stock options subject to approval by the shareholders of the
Company resulting in compensation expense of $51,907 and $31,740, respectively.
The provisions of the Option Plan provide for the automatic grant of
non-qualified stock options to purchase shares of common stock ("Director
Options") to directors of the Company who are not employees or principal
stockholders of the Company ("Eligible Directors"). Eligible Directors of the
Company elected subsequent to the public offering are granted a Director Option
to purchase 20,000 shares of common stock on the date such person is first
elected or appointed a director (an "Initial Director Option"). Each Eligible
Director, other than directors who received an Initial Director Option since the
last annual meeting, is granted a Director Option to purchase 5,000 shares of
Common Stock ("Automatic Grant") on the day immediately following the date of
each annual
F-14
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
meeting of stockholders, as long as such director is a member of the Board of
Directors. The exercise price for each share subject to a Director Option shall
be equal to the fair market value of the common stock on the date of grant.
Director Options are exercisable in four equal annual installments, commencing
one year from the date of grant. Director Options expire the earlier of ten
years after the date of grant or ninety days after the termination of the
director's service on the Board of Directors.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options granted under the Option Plan was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1997, respectively: risk-free interest
rates of 6.28% and 5.77%; volatility factors of the expected market price of the
Company's common stock of .563 and .490; and a weighted-average expected life of
the option of 7 years. The Company has assumed no dividend yield in 1996 and
1997 because it did not pay cash dividends on its common stock and does not
expect to pay cash dividends in the foreseeable future.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
- ---------------------------------------------- ------------------------- -------------------------
1996 1997
- ---------------------------------------------- ------------------------- -------------------------
<S> <C> <C>
Pro forma net loss $(7,824,863) $ (5,650,169)
Pro forma dividends and accretion (11,627,404) (1,131,740)
------------------------- -------------------------
Pro forma loss applicable to common
shareholders ($19,452,267) ($6,781,909)
------------------------- -------------------------
Pro forma basic and diluted loss
applicable to common shareholders
per share: ($2.55) ($0.78)
- ---------------------------------------------- ------------------------- -------------------------
</TABLE>
F-15
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
A summary of the Company's stock option activity under the Option Plan, and
related information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1997
------------------- --------------------------- ------------------- -------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE
- ------------------------------------- ------------------- --------------------------- ------------------- -------------------------
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 533 $ 3.86 885 $ 3.93
Granted 364 4.06 136 4.53
Exercised - -
Forfeited (12) 4.25 (40) 4.26
------------------- --------------------------- ------------------- -------------------------
Outstanding - end of year 885 $ 3.93 981 $ 4.00
------------------- --------------------------- ------------------- -------------------------
Exercisable at end of year 221 $ 3.71 422 $ 3.83
------------------- --------------------------- ------------------- -------------------------
Weighted-average fair
value of options granted
during the year $ 2.60 $ 2.65
------------------- --------------------------- ------------------- -------------------------
</TABLE>
A summary of the Company's ranges of exercise prices and weighted-average
remaining contractual life of options outstanding and of weighted-average
exercise price of options currently exercisable under the Option Plan as of
December 31, 1997 follows:
<TABLE>
<CAPTION>
- --------------------- ------------- ----------------------- ---------------- ------------------------ ----------------------------
NUMBER OF NUMBER OF WEIGHT-AVERAGE
OUTSTANDING WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE REMAINING CONTRACTUAL
SHARES EXERCISE PRICE OF EXERCISABLE EXERCISE PRICE OF LIFE OF
RANGE (000) OPTIONS OUTSTANDING (000) OPTIONS EXERCISABLE OPTIONS OUTSTANDING
- --------------------- ------------- ------------------------ ---------------- ----------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
$3.625- $5.625 932 $ 4.18 373 $ 4.24 7.88 years
$2.40 6 2.40 6 2.40 2.67 years
$.40 43 .40 43 .40 2.67 years
- --------------------- ------------- ------------------------ ---------------- ----------------------- -----------------------------
</TABLE>
F-16
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
A summary of the Company's stock option activity outside the Option Plan, and
related information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1997
------------------- -------------------------- ------------------- -------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE
- ------------------------------------- ------------------- -------------------------- ------------------- -------------------------
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 404 $ .21 398 $ .21
Granted - -
Exercised (6) .40 (50) .40
Forfeited - -
------------------- -------------------------- ------------------- -------------------------
Outstanding - end of year 398 $ .21 348 $ .18
------------------- -------------------------- ------------------- -------------------------
Exercisable at end of year 398 $ .21 348 $ .18
------------------- -------------------------- ------------------- -------------------------
</TABLE>
A summary of the Company's ranges of exercise prices and weighted-average
remaining contractual life of options outstanding and of weighted-average
exercise price of options currently exercisable outside the Option Plan as of
December 31, 1997 follows:
<TABLE>
<CAPTION>
- ------------------- ---------------- ------------------------- ---------------- ------------------------ ---------------------------
NUMBER OF NUMBER OF WEIGHT-AVERAGE
OUTSTANDING WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE REMAINING CONTRACTUAL
SHARES EXERCISE PRICE OF EXERCISABLE EXERCISE PRICE OF LIFE OF
RANGE (000) OPTIONS OUTSTANDING (000) OPTIONS EXERCISABLE OPTIONS OUTSTANDING
- ------------------- ---------------- ------------------------- ---------------- ------------------------ ---------------------------
<S> <C> <C> <C> <C> <C>
$ 5.00 .5 $ 5.00 .5 $ 5.00 2.67 years
$ .40 62 .40 62 .40 2.67 years
$ .13 286 .13 286 .13 1.08 years
- ------------------- ---------------- ------------------------- ---------------- ------------------------ ---------------------------
</TABLE>
F-17
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
7. INCOME TAXES
At December 31, 1997, the Company has available for federal income tax purposes
net operating loss carryforwards of approximately $2,390,000 and a general
business credit of $346,000 expiring in 2010 through 2013. The difference
between the deficit accumulated during the development stage for financial
reporting purposes and the net operating loss carryforwards for tax purposes is
primarily due to certain costs which are not currently deductible for tax
purposes and differences in accounting and tax basis resulting from the merger
described in Note 1. The ability of the Company to realize a future tax benefit
from a portion of its net operating loss carryforwards and general business
credits may be limited due to changes in ownership of the Company. The U.S.
statutory rate is 34%; however, the Company has recorded no provision or benefit
for income taxes in the financial statements due to recurring losses.
Accordingly, the Company has provided a full valuation reserve against its
deferred tax assets.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
DECEMBER 31
1997
- ------------------------------------------------------ -----------------------
Deferred tax assets:
Operating loss carryforwards $ 988,629
Research and development costs 6,110,481
General business tax credit 346,407
-----------------------
Total deferred tax assets 7,445,517
Valuation allowance for deferred tax assets (7,445,517)
-----------------------
Net deferred tax assets 0
-----------------------
Total net deferred tax assets (liabilities) $ 0
- ------------------------------------------------------ -----------------------
8. COMMITMENTS AND CONTINGENCIES
The Company is the lessee of equipment under capital leases expiring in 2000.
Effective February 1, 1996, the Company entered into a noncancelable operating
lease for its facility expiring in 1999. Effective April 1, 1996, the Company
entered into noncancelable operating leases for laboratory and office equipment
expiring in 2000. The future minimum lease payments under the capital and
operating leases as of December 31, 1997 are as follows:
F-18
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
------------------- --------------------
CAPITAL OPERATING
LEASE LEASE
- --------------------------------------------- ------------------- --------------------
<S> <C> <C>
Year ending December 31:
1998 $ 326,312 $ 216,600
1999 337,694 36,648
2000 177,626 1,616
Thereafter - -
------------------- --------------------
Total minimum lease payments 841,632 $ 254,864
=========
Less amount representing interest 94,201
-------------------
Present value of minimum lease payments $ 747,431
- --------------------------------------------- ===================
</TABLE>
The cost of assets under capital leases amounted to $927,777 at December 31,
1997. Accumulated amortization relating to the leased equipment amounted to
$185,204 at December 31, 1997. Amortization expense included in depreciation
expense, relating to the leased equipment, amounted to $159,791, $20,692, and
$185,204 for the year ended December 31, 1997, the year ended December 31, 1996,
and the period from May 1, 1994 (commencement of operations) through December
31, 1997, respectively.
Rent expense amounted to $249,799, $181,093 and $468,657 for the year ended
December 31, 1997, the year ended December 31, 1996, and the period from May 1,
1994 (commencement of operations) through December 31, 1997, respectively.
On December 10, 1997 the Company entered into a sale and leaseback agreement
with FINOVA Technology Finance, Inc. ("FINOVA") The cost of assets under the
capital lease is $360,284 which is being depreciated over the lease term of 3
years.
Under the terms of an employment agreement, the Company is obligated to pay the
chief executive officer of the Company an annual salary of $180,000, increased
annually by an amount no less than an annual cost-of-living adjustment, through
January 1998.
A former director of the Company is a party to a Consulting and Finder's
Agreement ("Agreement") with the Company. This Agreement entitles him to receive
an annual fee equal to 10% of the net after-tax profits of the Company
attributable to the sale or licensing of products or technology licensed
pursuant to the Company's agreement with Yale (see Note 4), until the cumulative
total of such fees equal $3,000,000. Such fee continues to be payable not
withstanding the director's death or incapacity until the $3,000,000 has been
paid.
The Company has various commitments relating to its research agreements (see
Note 4).
F-19
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
9. RELATED PARTY TRANSACTIONS
A director of the Company is a principal of a management consulting firm that
has rendered various consulting services for the Company. The Company paid the
firm $120,000 and $60,000 for services rendered for the years ended December 31,
1996 and 1997, respectively.
The Company and one of its directors, who is affiliated with Yale University,
entered into a five year consulting agreement on September 29, 1995 which is
renewable for one additional year, providing for various advisory services.
Under the agreement, the director receives an annual fee of $48,000.
10. RESTATEMENT FOR CORRECTION OF ERRORS
The financial statements for the years ended December 31, 1997 and 1996 and the
period from May 1, 1994 (inception) to December 31, 1997 were restated and
reflect the recording of adjustments for corrections of errors as follows:
On May 22, 1996, the Company completed a private placement of 1,250,000 shares
of Class A Convertible Preferred Stock (See Note 5). The Company has
retroactively recorded an imputed one -time non-cash dividend of approximately
$11.4 million as a result of the difference between the conversion price and the
quoted market price of the Company's common stock as of the date of issuance as
required by the Financial Accounting Standards Board Emerging Issues Task Force
D-60 "Accounting for the Issuance of Convertible Preferred Stock and Debt
Securities with a Nondetachable Conversion Feature" ("EITF D-60"). The $11.4
million has been recognized as a charge against accumulated deficit with a
corresponding increase in additional paid-in capital. The imputed non-cash
dividend has been included in the dividend requirement on Preferred Stock and
the loss applicable to common shareholders. As originally filed, the financial
statements for the year ended December 31,1996 did not include the restatement
required by EITF D-60, which was issued in March 1997, for the recognition of
the non-cash dividend.
The Class A Convertible Preferred Stock requires semi-annual dividends of 5%
per annum payable in additional shares of Class A Preferred Stock. Since this
dividend is immediately convertible into common stock of the Company, the
Company has retroactively recorded non-cash dividends as a charge against the
accumulated deficit and a credit to additional paid-in capital based on the
quoted market price of the common stock as of the date of the issuance of the
preferred dividends of $255,881 in 1996 and $623,514 in 1997. The non-cash
dividend has been included in the dividend requirement on Preferred Stock and
the loss applicable to common shareholders. The Company originally recorded
these dividends as a charge against accumulated deficit based on the par value
of the preferred stock issued.
The non-cash dividend on the issuance of the Class A Preferred and the 1996
dividend of additional shares of Class A Preferred total $11,627,404 and
increased the 1996 loss applicable to common shareholders previously reported
from ($7,608,679) to ($19,236,083) and the 1996 basic and diluted loss
applicable to common shareholders per share previously reported from ($1.00) to
($2.52) (See Note 2.)
F-20
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
10. RESTATEMENT FOR CORRECTION OF ERRORS (CONTINUED)
On August 20, 1997, the Company completed a private placement of 4,850 shares of
Class B Convertible Preferred Stock (see Note 5). The Company has retroactively
recorded an imputed one-time non-cash dividend of approximately $370,000 as a
result of the difference between the conversion price and the quoted market
price of the Company's common stock as of the date of issuance as required by
EITF D-60. The $370,000 has been recognized as a charge against accumulated
deficit with a corresponding increase in additional paid-in capital. The imputed
non-cash dividend has been included in the dividend requirement on Preferred
Stock and the loss applicable to common shareholders. As originally filed, the
financial statements for the year ended December 31, 1997 did not include
recognition of the non-cash dividend.
The Class B Preferred Stock, including an accretion of 8% per annum, is
convertible into shares of common stock (See Note 5). The Company has
retroactively increased additional paid-in capital by approximately $133,000 for
the amount of dividend accretion that was previously included in accounts
payable and accrued expenses at December 31, 1997. In addition, the Company has
retroactively recognized a charge against accumulated deficit with a
corresponding increase in additional paid-in capital of approximately $4,500 to
correct the accretion on shares of Class B Preferred converted during the fourth
quarter of 1997. The accretion has been included in the 1997 dividend
requirement on Preferred Stock and the loss applicable to common shareholders.
The non-cash dividend on the issuance of the Class B Preferred, the accretion of
the 1997 Class B dividends and the 1997 dividend of additional shares of Class A
Preferred total $1,131,740 and increased the 1997 loss applicable to common
shareholders previously reported from ($5,343,594) to ($6,475,334) and the 1997
basic and diluted loss applicable to common shareholders per share previously
reported from ($0.62) to ($0.75) (See Note 2.)
F-21
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-98738 and No.333-39407) pertaining to the Vion Pharmaceuticals,
Inc. Amended and Restated Stock Option Plan and in the Registration Statements
(Form S-3 No.333-37941 and 333-61477) of Vion Pharmaceuticals, Inc. and in the
related Prospectus of our report dated February 6, 1998 (except for Notes 2, 5,
6 and 10, as to which the date is November 27, 1998) with respect to the
consolidated financial statements of Vion Pharmaceuticals, Inc., as amended,
included in the Annual Report (Form 10-KSB/A Amendment No.1) for the year ended
December 31,1997.
ERNST & YOUNG LLP
Hartford, Connecticut
December 28, 1998
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