U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1998
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to ______________
Commission file number 0-26534
---------------------
VION PHARMACEUTICALS, INC.
--------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3671221
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4 Science Park, New Haven, CT 06511
-----------------------------------
(Address of Principal Executive Offices)
(203) 498-4210
--------------
(Issuer's Telephone Number, Including Area Code)
----------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the issuer's sole class of common
equity, as of September 30, 1998 is: 13,935,622 shares of common stock, $.01 par
value.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE>
Part 1 - Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
-------------
September 30,
1998
(Unaudited)
- - ---------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,843,962
Short-term investments 3,489,228
Accounts receivable 375,259
Other current assets 76,631
-------------
Total current assets 9,785,080
Property and equipment, net 1,054,540
Security deposits 39,094
Research contract prepayment 440,351
-------------
Total assets $ 11,319,065
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Obligation under capital lease - current $ 330,547
Accounts payable and accrued expenses 907,304
-------------
Total current liabilities 1,237,851
Obligation under capital lease - long term 194,840
-------------
Total Liabilities 1,432,691
Redeemable Preferred stock:
5% convertible preferred stock Series 1998, $0.01 par value, authorized: 4,814,356
15,000 shares; issued and outstanding: 5,000 shares (redemption value $5,062,500)
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: 1998 - 601,604 and
1997 - 757,632 shares 6,017
Class B convertible preferred stock, $0.01 par value, authorized:
100,000 shares; issued and outstanding: 1998 - 0 shares 1997
4,592 shares 0
Class C convertible preferred stock, $0.01 par value, authorized:
25,000 shares; issued and outstanding: 0 shares 0
Common stock, $0.01 par value, authorized: 35,000,000 shares;
issued and outstanding: 1998 - 13,933,796 shares 1997 - 9,833,934 shares 139,338
Additional paid-in-capital 51,774,422
Deferred compensation (46,154)
Accumulated deficit (46,801,605)
-------------
5,072,018
-------------
Total liabilities and shareholders' equity $ 11,319,065
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 2
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
For The Period
From May 1, 1994
Three Months Ended Nine Months Ended (Inception) through
September 30, September 30, September 30, September 30, September 30,
----------------------------------- ----------------------------------------------
1998 1997 1998 1997 1998
(Unaudited) (Unaudited) (Unaudited)
- - ---------------------------------------------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract research grants $ 89,429 $0 $ 198,628 $ 48,221 $ 298,628
Research support 217,936 0 640,377 0 1,863,289
Technology license revenues 0 0 0 0 4,000,000
--------------------------- ----------------------------------------------------
Total revenues 307,365 0 839,005 48,221 6,161,917
Operating expenses:
Research and development 2,159,328 1,591,310 6,530,360 5,985,947 23,314,135
General and administrative 443,927 553,844 1,534,703 1,536,436 8,372,585
Nonrecurring collaboration restructuring fee 0 600,000 0 600,000 600,000
Purchased research and development 0 0 0 0 4,481,405
Amortization of finance charges 0 0 0 0 345,439
Interest Income (172,770) (60,153) (421,835) (238,182) (1,287,783)
Interest Expense 13,087 9,696 47,504 31,498 146,617
--------------------------- ----------------------------------------------------
Net Loss $(2,136,207) $(2,694,697) $(6,851,727) $(7,867,478) $ (29,810,481)
--------------------------- ---------------------------------
Preferred dividends and accretion $(1,537,170) $ (423,469) $(4,212,956) $ (705,775)
--------------------------- ---------------------------------
Loss applicable to common shareholders $(3,673,377) $(3,118,166) $(11,064,683) $(8,573,253)
=========================== =================================
Basic and diluted loss aplicable to common
shareholders per share $ (0.27) $ (0.35) $ (0.98) $ (0.98)
--------------------------- ---------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Vion Pharmaceuticals, Inc.
( A Development Stage Company)
<TABLE>
<CAPTION>
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>
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
Class A convertible preferred stock dividend 21,998 220
Issuance of common stock 29,418 294
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
Class A convertible preferred stock dividend 47,592 476
Issuance of Class B convertible preferred stock 4,850 49
Conversion of Class B convertible preferred stock (258) (3) 64,642 647
Accretion of dividend payable on Class B convertible
preferred stock
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
Compensation associated with stock option grants
Amortization of deferred compensation
Net loss
-----------------------------------------------------------------------
Balance at December 31, 1997 757,632 $7,576 4,592 $46 9,833,934 $98,339
-----------------------------------------------------------------------
Conversion of Class B convertible preferred stock (4,592) (46) 1,791,076 17,911
Accretion of dividend payable on Class B convertible
preferred stock
Premium conversion dividend on Class B convertible
preferred stock
Conversion of Class A convertible preferred stock (174,981) (1,749) 486,062 4,860
Class A convertible preferred stock dividend 18,953 190
Discount on Series 1998 convertible preferred stock
Series 1998 convertible preferred stock accretion
Issuance of common stock 1,792,952 17,930
Exercise of stock options 13,500 135
Exercise of warrants 16,272 163
Compensation associated with stock option grants
Amortization of deferred compensation
Net loss
-----------------------------------------------------------------------
Balance at September 30, 1998 601,604 $6,017 0 ($0) 13,933,796 $139,338
-----------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (continued)
Vion Pharmaceuticals, Inc.
( A Development Stage Company)
<TABLE>
<CAPTION>
Additional Total
Paid-in Deferred Accumulated Stockholders'
Capital Compensation Deficit Equity
-------------------------------- --------------- ----------------
<S> <C> <C> <C> <C>
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)
Class A convertible preferred stock dividend 255,661 (255,881) 0
Issuance of common stock 102,426 102,720
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
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
Conversion of Class B convertible preferred stock (644) 0
Accretion of dividend payable on Class B convertible
preferred stock 138,365 (138,365) 0
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
Compensation associated with stock option grants 55,643 55,643
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
-----------------------------------------------------------------
Conversion of Class B convertible preferred stock (53,975) ($0) (36,110)
Accretion of dividend payable on Class B convertible
preferred stock 286,776 (286,776) 0
Premium conversion dividend on Class B convertible
preferred stock 2,049,391 (2,049,391) 0
Conversion of Class A convertible preferred stock (3,111) 0
Class A convertible preferred stock dividend 203,821 (204,011) (0)
Discount on Series 1998 convertible preferred stock 1,597,218 (1,597,218) 0
Series 1998 convertible preferred stock accretion 8,442,115 (75,560) (75,560)
Issuance of common stock (8,502,737) (42,692)
Exercise of stock options 50,265 50,400
Exercise of warrants 4,581 4,744
Compensation associated with stock option grants 38,439 38,439
Amortization of deferred compensation 25,974 25,974
Net loss (6,851,727) (6,851,727)
-----------------------------------------------------------------
Balance at September 30, 1998 $51,774,422 ($46,154) ($46,801,605) 5,072,018
-----------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4
<PAGE>
Consolidated Statement of Cash Flows
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
<TABLE>
<CAPTION>
For the period
from May 1, 1994
For the Nine Months (inception) through
Ended September 30, September 30,
--------------------------------------------------------
1998 1997 1998
(Unaudited) (Unaudited)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from operating activities:
Net loss $ (6,851,727) $ (7,867,478) $ (29,810,481)
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 348,249 223,149 803,455
(Increase) in other current assets 395,762 38,917 (450,903)
(Increase) in other assets (27,606) 296,905 (477,730)
Increase in accounts payable and
accrued expense 32,954 (84,689) 872,772
Accretion on Class B preferred stock - - -
Extension/reissuance of placement agent warrants 0 0 168,249
Stock issued for services 0 600,000 600,417
Stock options issued for compensation 64,413 68,804 778,335
-----------------------------------------------------
Net cash (used in) operating activities (6,037,955) (6,724,392) (22,689,042)
-----------------------------------------------------
Cash flows used for investing activities:
Purchase of marketable securities 0 (2,194,725) (22,209,166)
Maturities of marketable securities 3,599,312 5,757,937 18,719,938
Cash portion of MelaRx acquisition 0 0 4,061
Acquisition of fixed assets (101,110) (600,821) (913,563)
-----------------------------------------------------
Net cash provided by (used in) investing activities 3,498,202 2,962,391 (4,398,730)
-----------------------------------------------------
Cash flows provided by financing activities:
Initial public offering 0 0 9,696,210
Net proceeds from issuance of common stock (39,189) 20,000 3,166,888
Net proceeds from issuance of preferred stock 4,749,597 4,481,850 20,762,499
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 4,730 (3) 4,727
Receipts from sale of unit purchase option 0 0 250
Repayment of equipment capital lease (222,044) (119,134) (402,389)
-----------------------------------------------------
Net cash provided by (used in) financing activities 4,493,094 4,382,713 32,931,734
-----------------------------------------------------
Net increase in cash 1,953,341 620,712 5,843,962
Cash and cash equivalents at beginning of period 3,890,621 3,788,369 0
-----------------------------------------------------
Cash and cash equivalents at end of period $ 5,843,962 $ 4,409,081 $ 5,843,962
=====================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Note A) - 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. 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, which was renamed OncoRx, Inc. after the merger,
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. In August 1995, the Company completed an initial public
offering resulting in net proceeds to the Company of approximately $9,696,000.
In April 1996, the name of the Company was changed from OncoRx, Inc. to Vion
Pharmaceuticals, Inc.
(Note B) - Basis of Presentation:
---------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals and the
adjustments described in Note M) considered necessary for a fair presentation
have been included. Operating results for the three month and nine month periods
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998. For further information,
refer to the financial statements and footnotes thereto included in the
Company's Annual Report for the fiscal year ended December 31, 1997 on Form
10-KSB (File No. 0-26534) and any amendments thereto.
Page 6
<PAGE>
(Note C) - Class B Convertible Preferred Stock Conversion Agreement
--------------------------------------------------------
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 were convertible into shares of common stock including an
accretion of 8% per annum. Shares of the Class B Preferred Stock were eligible,
under certain circumstances, to receive dividends paid in Class C Preferred
Stock. The Class C Preferred Stock was immediately 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 was not entitled to dividends. Conversions of Class B Preferred Stock for
the period July 1 through August 11, 1998 resulted in Class C dividends
representing 307,293 shares of common stock valued at $1,081,265. These
dividends were recorded as a charge against accumulated deficit, with a
corresponding increase in additional paid in capital. The dividends have been
included in the dividend requirement on Preferred Stock and the loss applicable
to common shareholders.
On August 11, 1998, the Company reached agreement with each of the
holders of its Class B Convertible Preferred Stock that the holders of the Class
B Preferred Stock would convert an aggregate of 2,892 shares of Class B
Preferred Stock, constituting all of the outstanding Class B Preferred Stock,
into an aggregate of 867,806 shares of Common Stock. As part of this agreement,
an additional 101,569 common shares were issued to holders of the Class B
Preferred Stock. In accordance with Financial Accounting Standards Board
Emerging Issues Task Force D-42 "The Effect on the Calculation of Earnings Per
Share for the Redemption or Induced Conversion of Preferred Stock" (EITF D-42),
the excess of the fair value of the common stock issued upon conversion over the
fair value of the common stock issuable pursuant to the original conversion
terms ($357,117), has been added to the dividend requirement to arrive at loss
applicable to common shareholders. In addition, holders of the Class B Preferred
Stock waived their "anti-dilution" rights arising from the issuance of the
Series 1998 Preferred Stock. (See Note D)
(Note D) - Private Placement of 5% Convertible Preferred Stock Series 1998
---------------------------------------------------------------
On June 30, 1998, the Company completed a private placement of 5,000
shares of non-voting 5% Convertible Preferred Stock Series 1998("Series 1998
Preferred Stock"). The Series 1998 Preferred Stock was issued at $1,000 per
share, resulting in net proceeds to the Company of $4,749,597. Each share of
Series 1998 Preferred Stock is convertible into 277.777 shares of the Company's
common stock. The shares of Series 1998 Preferred Stock accrue quarterly
dividends of 5% per annum. The Series 1998 Preferred Stock is manditorily
redeemable at $1,000 per share plus dividends on June 30, 2003. In connection
with the sale of the Series 1998 Preferred Stock, the Company imputed a one-time
non-cash dividend of approximately $1.6 million as a result of the difference
between the conversion price and the quoted market price of the Company's common
stock at the date of issuance as required by Financial Accounting Standards
Board Emerging Issues Task Force D-60 "Accounting for the
Page 7
<PAGE>
Issuance of Convertible Preferred Stock and Debt Securities with a Nondetachable
Conversion Feature" (EITF D-60). Such amount was recognized upon issuance of the
Series 1998 Preferred Stock as a charge against the accumulated deficit with a
corresponding increase to 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. The dividend requirement on
Preferred Stock also reflects the amortization of the costs of completing the
offering and the accretion of the 5% per annum dividend. The issuance of the
Series 1998 Preferred Stock at closing also triggered certain antidilution
adjustment provisions of the Company's outstanding warrants, resulting in the
issuance of additional warrants. (See Note E)
(Note E) - Antidilution Adjustment
-----------------------
As a result of the sale on June 30, 1998 of 5,000 shares of Series 1998
Preferred Stock, and pursuant to the Warrant Agreement governing the rights of
the Company's 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 September 8, 1998 (the "Payment Date") each holder of
a Class A Warrant at the close of business on August 26, 1998 (the "Record
Date") received an additional 0.02 (2 per 100 outstanding) Class A Warrants and
the exercise price of the Class A Warrants was reduced from $4.73 to $4.63. In
addition, on the Payment Date each holder of a Class B Warrant at the close of
business on the Record Date received an additional 0.02 (2 per 100 outstanding)
Class B Warrants and the exercise price of the Class B Warrants was reduced from
$6.37 to $6.23.
(Note F) - Warrant Exchange Offer
----------------------
On May 19, 1998, the Company commenced an offer to exchange each
outstanding Class A Warrant, at the option of the holder, for either (A) 0.438
shares of the Company's Common Stock or (B) 0.254 shares of Common Stock and
$0.66 in cash. The Company simultaneously offered to exchange each outstanding
Class B Warrant, at the holder's option, for either (A) 0.212 shares of Common
Stock or (B) 0.123 shares of Common Stock and $0.32 in cash. The Exchange Offer
was not conditioned upon the exchange of a minimum number of Class A Warrants or
Class B Warrants. As a result of the Exchange Offer 3,209,806 Class A Warrants
and 1,881,835 Class B Warrants were exchanged for 1,395,027 and 397,925 shares
of the Company's Common Stock and $39,007 and $3,686 in cash, respectively. The
market values on the exchange date, June 29, 1998, of the Common Stock exchanged
for the Class A and Class B Warrants were $6,582,435 and $1,877,609,
respectively.
(Note G) - 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.
Page 8
<PAGE>
In exchange for these rights, the Company received $4,000,000 in
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 has
also reimbursed 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
$9,333,190 at September 30, 1998. This balance includes $2,233,342 of restricted
investments for future Promycin development expenses from the original
$4,000,000 received in 1997 from BI. The Company recorded $640,377 of reimbursed
Promycin development expenses as revenue during the first nine months of 1998.
(Note H) - 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. During the twelve months ending December 31, 1998, the
Company estimates it will make payments of $1,400,000 to Covance under the
Agreement. For the nine months ended September 30, 1998, the Company has
incurred $1,103,014 under this agreement which has been expensed as incurred.
Page 9
<PAGE>
(Note J) - Per Share Data
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
-------------------- -------------------- ---------------------- --------------------
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
- - -------------------------------------- -------------------- -------------------- ---------------------- --------------------
Numerator:
- - -------------------------------------- -------------------- -------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Net loss ($2,136,207) ($2,694,697) ($6,851,727) ($7,867,478)
- - -------------------------------------- -------------------- -------------------- ---------------------- --------------------
Preferred stock dividends and
accretion (1,537,170) (423,469) (4,212,956) (705,775)
- - -------------------------------------- -------------------- -------------------- ---------------------- --------------------
Numerator for basic and diluted
loss per share applicable to
common stockholders
($3,673,377) ($3,118,166) ($11,064,683) ($8,573,253)
- - -------------------------------------- -------------------- -------------------- ---------------------- --------------------
Denominator:
- - -------------------------------------- -------------------- -------------------- ---------------------- --------------------
Denominator for basic and
diluted loss per share
applicable to common
stockholders 13,514,209 8,905,594 11,347,308 8,721,398
- - -------------------------------------- -------------------- -------------------- ---------------------- --------------------
Basic and diluted loss per share
applicable to common stockholders
($0.27) ($0.35) ($0.98) ($0.98)
- - -------------------------------------- -------------------- -------------------- ---------------------- --------------------
</TABLE>
For additional disclosures regarding warrants and Class A, B and Series
1998 Convertible Preferred Stock see Note C, D, E and F. These potentially
dilutive securities were not included in diluted loss per share applicable to
common stockholders as the effect would be antidilutive. Under the Financial
Accounting Standards Board Statement No. 128, which the Company has adopted, the
dilutive effect of stock options has been excluded.
(Note K) - Small Business Innovation Research Grants
-----------------------------------------
On February 27, 1998 and April 22, 1998 the Company was awarded a Small
Business Innovation Research ("SBIR") grant from the National Cancer Institute
for the Reduced Toxicity of Tumor-Targeted Salmonella and the Inhibitors of
Ribonucleotide Reductase programs, respectively. The awards were for
reimbursable direct costs of up to $100,000 and $373,565, respectively and
expire on August 31, 1998 and April 30, 1999, respectively. As of September 30,
1998 the Company recognized $100,000 and $98,628 of revenue, respectively, from
the SBIR grants for reimbursement of expenses incurred for the duration of the
grants through September 30, 1998.
Page 10
<PAGE>
(Note L) - Subsequent Event: Adoption of Shareholder Rights Plan
------------------------------------------------------
At a meeting held on October 15, 1998, the Board of Directors approved
the adoption of a Shareholder Rights Plan under which all shareholders of record
as of October 26, 1998 will receive rights to purchase new shares of Common
Stock. The rights will be distributed as a non-taxable dividend and will expire
on October 25, 2008. The rights will be exercisable only if a person or group
acquires 20 percent or more of Vion's Common Stock or announces a tender offer
for 20 percent or more of the Common Stock. If a person acquires 20 percent or
more of Vion's Common Stock, all rightsholders except the buyer will be entitled
to acquire Vion Common Stock at a discount. The effect will be to discourage
acquisitions of more than 20 percent of Vion Pharmaceuticals' Common Stock
without negotiations with the Board.
The rights will trade with Vion Common Stock, unless and until they are
separated upon the occurrence of certain future events. Vion's Board of
Directors may redeem the rights prior to the time a person acquires more than 20
percent of Vion Common Stock. The Board may also redeem the rights after such
time if such redemption is in connection with a merger or other business
combination in which all of the Common Stock is treated alike. Additional
details regarding the Rights Plan are contained in the registration statement on
Form 8-A filed with the Securities and Exchange Commission on October 26, 1998
and a Current Report on Form 8-K filed on the same date (File No. 0-26534).
( Note M) - Restatement of Financial Statements
------------------------------------
While preparing financial statements for the quarter ended September
30, 1998, the Company identified errors in previously issued financial
statements. The Company intends to amend its' Form 10-KSB for the year ended
December 31,1997 and its' quarterly reports on Form 10-QSB for the quarterly
periods ended June 30,1998, March 31,1998, and other appropriate periods as
necessary. The unaudited financial statements for the three and nine month
periods ended September 30,1998 and 1997 reflect the recording of the following
adjustments.
On May 22,1996, the Company completed a private placement of 1,250,000
shares of Class A Convertible Preferred Stock. 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. 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 of preferred stock is immediately convertible into common
Page 11
<PAGE>
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 dividend of approximately $255,000 in 1996,
$624,000 in 1997 and $204,000 in April 1998. The imputed non-cash dividend has
been included in the dividend requirement on Preferred Stock and the loss
applicable to common shareholders in the appropriate periods. The company
originally recorded these dividends based on the par value of the preferred
stock issued.
On August 20, 1997, the Company completed a private placement of 4,850
shares of Class B Convertible Preferred Stock (see Note C). 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 for the three and
nine month period ended September 30, 1997. As originally filed, the financial
statements 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. 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.
As discussed in Note C, conversions of Class B Preferred Stock were
entitled, under certain circumstances, to receive dividends paid in Class C
Preferred Stock. The Class C Preferred Stock was immediately converted into
common stock. During the quarters ended March 31,1998 and June 30,1998
conversions of Class B Preferred Stock resulted in Class C stock dividends
representing 155,200 and 21,836 shares of common stock valued at $509,300 and
$101,700, respectively, which has been recognized as a charge against
accumulated deficit with a corresponding increase in additional paid in capital.
The non-cash dividends have been included in the dividend requirement on
Preferred Stock and the loss applicable to common shareholders. As originally
filed, the financial statements for the three and six month periods ended March
31 and June 30,1998 included the non-cash dividends as an issuance of common
stock at par value.
The Company has retroactively adjusted previously recorded dividend
accretion for an increase in the non-cash dividend on the Class B Preferred
Stock of approximately $85,000 and $110,500 for the three month periods ended
March 31, 1998 and June 30, 1998, respectively. The Company has also
retroactively increased additional paid in capital for the total amount of the
dividend accretion that was previously included in accounts payable and accrued
expenses.
On June 30, 1998, the company issued 5,000 shares of 5% Convertible
Preferred Stock Series 1998. As originally recorded, the Company reported this
Preferred Stock as equity. The Preferred Stock is manditorily redeemable on June
30, 2003 at the issue price plus accreted dividends. Accordingly, the Company
has reclassified this Preferred stock out of shareholders' equity and has
increased the carrying value for accretion of the Preferred Stock dividends and
the expenses of the offering. The Company has also retroactively recorded an
imputed one-time non-cash dividend of approximately $1.6 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 EITF D-60. The
$1.6million 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 three and six month periods ended June 30,1998 did not
include recognition of
Page 12
<PAGE>
the non-cash dividend and included the redeemable preferred stock in
shareholder's equity.
Page 13
<PAGE>
ITEM 2. PLAN OF OPERATION.
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 June, 1998 private financing, along with the equity investment, initial
payments and reimbursed cost sharing from the November 24, 1997 exclusive
worldwide licensing agreement with BI to fund its plan of operations, which
includes the following elements for the next 12 months:
o 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 two additional employees.
o Conduct Phase III clinical studies in the U.S. and Europe of
Promycin for treatment of cancer of the head and neck.
o Conduct Phase I clinical studies in the U.S. of the Company's
anticancer agent Triapine(TM) for safety and pharmacokinectics.
o File Investigational New Drug application(s) with the FDA and
conduct Phase I clinical studies in the U.S. for the safety,
tumor targeting and pharmacokinectics of several bacterial
constructs using the Company's TAPET(TM) cancer therapy delivery
technology.
o Continue to support research and development being performed at
Yale University and by other collaborators and seek additional
collaborative agreements.
The Company currently estimates that anticipated revenues, the
remaining net proceeds of its private placement in June, 1998, the equity
investment, initial payments and reimbursed cost sharing from the agreement with
BI and its existing cash and equivalents will be sufficient to fund its planned
operations for approximately the next 10 months. 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 sooner require additional funds. In addition,
Page 14
<PAGE>
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 September 30, 1998 the Company estimates that the amount
required to fund operations for the next twelve months will be approximately
$12,000,000 of which approximately $1,300,000 is subject to reimbursement under
the terms of the BI 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 received an opinion from its auditors for the fiscal year
ended December 31, 1997, expressing substantial doubt as to its ability to
continue as a going concern. The Company has addressed the immediate need for
additional capital by raising funds through a private placement of its
securities in June 1998, although the Company expects to require additional
financing to fund its longer-term activities and may require additional capital
to fund its operations, acquisitions and new development projects.
Impact of the Year 2000 Issue
- - -----------------------------
The Year 2000 Issue refers to potential problems with computer systems
or any equipment with computer chips or software that use dates where the date
has been stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any
clock or date recording mechanism incorporating date sensitive software which
uses only two digits to represent the year may recognize a date using 00 as the
Year 1900 rather than the Year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, perform laboratory analyses, or
engage in similar business activities.
The Company has not completed its review of its internal information
systems to determine the extent of any Year 2000 problem. However, based on an
initial review, the Company does not currently believe that it has material
exposure to the Year 2000 Issue with respect to its own information systems,
since its existing systems correctly define the Year 2000 or will correctly
define Year 2000 by December 31, 1999. Although the Company believes that the
information systems of its major vendors (insofar as they relate to the
Company's business), government research funding agencies, and development
partners will comply with Year 2000 requirements, there can be no assurance that
the Year 2000 requirements will not affect the information systems of the
Company's major vendors, government research funding agencies, and development
partners as they relate to the Company's business, or that any such impact of
the information system of a major vendor, government research funding agency, or
development partner would not have a material adverse effect on the Company.
Liquidity and Capital Resources
- - -------------------------------
At September 30, 1998, the Company had working capital of $8,547,229.
The Company's most recent principal sources of funds through September 30, 1998
have been $4,749,597 net proceeds from private financing through issuance
Page 15
<PAGE>
of 5,000 shares of Series 1998 Convertible Preferred Stock, $4,000,000 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
related to the BI agreement.
The Company has used and continues to use the proceeds of its financing
activities to implement its business plan, which includes hiring of additional
personnel; capital expenditures for the purchase of equipment, principally for
laboratory facilities; costs of research and development; payment of license
fees due under sponsored research agreements; and grants to Yale University to
fund certain research. During the twelve months ending December 31, 1998, the
Company will be required to make payments of an aggregate of $1,076,776 to Yale
University under sponsored research and license agreements. The Company requires
substantial new revenues and other sources of capital in order to meet such
budgeted expenditures and to continue its operations beyond the next 10 months.
The Company is seeking to enter into one or more 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. 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 an alliance. The Company may be required to seek to raise
funds through additional means, including (1) public offerings or 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.
As described in Notes C, D and F to the Company's financial statements
contained herein, the Company consummated an exchange offer for its Class A and
Class B Warrants and a private placement of 5% Convertible Preferred Stock
Series 1998 in June 1998, and agreed to the conversion of its outstanding Class
B Preferred Stock in August 1998. The effect of these transactions on the
Company's capital structure is summarized below:
VION PHARMACEUTICALS, INC. CAPITALIZATION
<TABLE>
<CAPTION>
Post
Pre Post Conversion of
Exchange Exchange Class B
(Expressed in Fully-Diluted Common Shares) Offer Offer Preferred
5/18/98 6/30/98 9/30/98
--------------------------------------------------
<S> <C> <C> <C>
Issued and outstanding Common Stock
Common stock (excluding exchange offer) 10,720,740 10,905,032 12,761,802
Common Issued in Exchange for Class A Warrants
1,395,027
</TABLE>
Page 16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Common Issued in Exchange for Class B Warrants
397,925
Common Issued in Conversion of Class B Preferred 1,171,994
--------------------------------------------------
Total issued and outstanding common stock 10,720,740 12,697,984 13,933,796
Additional shares of common stock if all warrants, convertible preferred stock
and options were exercised:
Class A convertible preferred stock 1,817,300 1,707,669 1,671,122
Class B convertible preferred stock 826,937 893,356
Class A Warrants 4,262,383 1,052,577 1,071,333
Class B Warrants 3,162,605 1,280,770 1,308,632
Class B Warrants Underlying Class A Warrants
4,262,383 1,052,577 1,071,333
Underwriter Unit Purchase Option 1,075,000 1,075,000 1,091,503
Private Placement Warrants 748,213 748,213 545,727
Qualified and Non-qualified options 1,480,274 1,468,274 1,623,674
--------------------------------------------------
Subtotal Fully Diluted Shares 28,355,835 21,976,420 22,317,120
5% Convertible Preferred Stock Series 1998 (Note D) 1,388,889 1,406,385
--------------------------------------------------
Total Fully Diluted Shares 28,355,835 23,365,309 23,723,505
==================================================
</TABLE>
Forward-Looking Statements - Cautionary Factors
- - -----------------------------------------------
Statements included in this Form 10-QSB 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
Page 17
<PAGE>
products, and the possibility that third parties will market a product
equivalent or superior to the Company's product candidates.
Page 18
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On August 11, 1998, the Company reached agreement with each of the
holders of its Class B Convertible Preferred Stock that the holders of the Class
B Preferred Stock would immediately convert an aggregate of 2,892 shares of
Class B Preferred Stock, constituting all of the outstanding Class B Preferred
Stock, into an aggregate of 1,171,994 shares of Common Stock. In addition,
holders of the Class B Preferred Stock waived their "anti-dilution" rights
arising from the issuance of the Series 1998 Preferred Stock.
The foregoing transaction was a private transaction not involving a
public offering and was exempt from the registration provisions of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. The sale
of securities was without the use of an underwriter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
--------
27. Article 5 Financial Data Schedule for third quarter 1998.
(b) Reports on Form 8-K.
-------------------
None
Page 19
<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: November 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANYS
FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,843,962
<SECURITIES> 3,489,228
<RECEIVABLES> 375,259
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,785,080
<PP&E> 1,054,540
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,319,065
<CURRENT-LIABILITIES> 1,237,851
<BONDS> 0
4,814,356
6,017
<COMMON> 139,338
<OTHER-SE> 4,926,663
<TOTAL-LIABILITY-AND-EQUITY> 11,319,065
<SALES> 0
<TOTAL-REVENUES> 839,005
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,065,063
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,504
<INCOME-PRETAX> (6,851,727)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,851,727)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,851,727)
<EPS-PRIMARY> (.98)
<EPS-DILUTED> (.98)
</TABLE>
