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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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 0-26918
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CYTOCLONAL PHARMACEUTICS INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 75-2402409
(State or Other jurisdication (I.R.S. Employer
of incorporation Identification Number)
or Organization)
9000 Harry Hines Boulevard, Suite 330, Dallas, Texas 75235
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(Address of Principal Executive Offices)
(214)-353-2922
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(Issuer's Telephone Number, Including Area Code)
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(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
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 10,208,441 SHARES OF
COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AS OF NOVEMBER 9, 1998.
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CYTOCLONAL PHARMACEUTICS INC.
TABLE OF CONTENTS
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Page(s)
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PART I. FINANCIAL INFORMATION
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Item 1. -- Financial Statements:
Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997 3
Statements of Operations for the Three Months
Ended September 30, 1998 and 1997 (unaudited)
and for the Nine Months Ended September 30, 1998
and 1997 (unaudited) 4
Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (unaudited) 5
Notes to Financial Statements 6
Item 2. -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II. OTHER INFORMATION
Item 2. -- Changes in Securities and use of Proceeds 10
Item 6. -- Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit 11 Computation of per share earnings 12
Exhibit 27 Financial Data Schedule 12
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYTOCLONAL PHARMACEUTICS INC.
BALANCE SHEETS
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SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
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ASSETS
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Current assets:
Cash (principally money market) $ 7,801,000 $ 1,849,000
Prepaid expenses and other current assets 108,000 35,000
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Total current assets 7,909,000 1,884,000
Equipment, net 133,000 127,000
Patent rights, less accumulated amortization of
$521,000 and $463,000 729,000 787,000
Other assets 4,000 4,000
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TOTAL $ 8,775,000 $ 2,802,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 473,000 460,000
Deferred revenue from research and development
collaborative contract 267,000
Current portion of royalties payable 141,000 94,000
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Total current liabilities 881,000 554,000
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Royalties payable less current portion 1,031,000 1,125,000
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Total liabilities 1,912,000 1,679,000
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Stockholders' equity:
Preferred stock - $.01 par value, 10,000,000 shares
authorized; 764,003 and 934,563 shares of Series A
convertible preferred issued and outstanding at
September 30, 1998 and December 31, 1997, respectively
(liquidation value $1,910,000 and $2,336,000 at
September 30, 1998 and December 31, 1997,
respectively) 8,000 9,000
Common Stock - $.01 par value, 30,000,000 shares
authorized: 10,191,252 and 8,793,998 shares issued
and outstanding at September 30, 1998 and
December 31, 1997, respectively 102,000 88,000
Additional paid-in capital 23,792,000 16,130,000
Accumulated Deficit (17,039,000) (15,104,000)
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Total Stockholders' Equity 6,863,000 1,123,000
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TOTAL $ 8,775,000 $ 2,802,000
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3
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CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenue:
Licensing & research collaborative
agreement $ 194,000 - $ 983,000 -
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Operating Expenses:
Research and development $351,000 $ 362,000 $ 1,173,000 $ 1,050,000
General and administrative 919,000 603,000 1,930,000 1,490,000
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1,270,000 965,000 3,103,000 2,540,000
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Operating (loss) (1,076,000) (965,000) (2,120,000) (2,540,000)
----------- ---------- ----------- -----------
Other (Income) expenses:
Interest (income) (100,000) (20,000) (187,000) (80,000)
Interest expense - - 2,000 2,000
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(100,000) (20,000) (185,000) (78,000)
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NET (LOSS) $ (976,000) $ (945,000) $(1,935,000) $(2,462,000)
Basic and diluted
loss per common share $(0.10) $(0.12) $(0.22) $(0.33)
Weighted average number of
shares outstanding - basic and
diluted 10,172,000 8,261,000 9,585,000 8,136,000
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CYTOCLONAL PHARMACEUTICS INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
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1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(1,935,000) $(2,462,000)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and amortization 93,000 86,000
Value assigned to warrants and options 197,000 133,000
Equity in loss of joint venture - 16,000
Changes in:
Other assets (73,000) 19,000
Deferred revenue 267,000 -
Accounts payable and accrued expenses 41,000 (2,000)
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Net cash (used in) operating activities (1,410,000) (2,210,000)
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Cash flows from investing activities:
Purchase of equipment (69,000) (41,000)
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Net cash (used in) investing activities (69,000) (41,000)
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Cash flows from financing activities:
Net proceeds from private placement 4,838,000 -
Proceeds from exercise of options and warrants 2,640,000 576,000
Payment of royalties (47,000) (24,000)
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Net cash provided by financing activities 7,431,000 552,000
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NET INCREASE (DECREASE) IN CASH 5,952,000 (1,699,000)
Cash at beginning of period 1,849,000 2,858,000
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CASH AT END OF PERIOD $ 7,801,000 $ 1,159,000
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5
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CYTOCLONAL PHARMACEUTICS INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
(1) FINANCIAL STATEMENT PRESENTATION
The unaudited financial statements of Cytoclonal Pharmaceutics Inc., a
Delaware corporation (the "Company"), included herein have been prepared in
accordance with the rules and regulations promulgated by the Securities and
Exchange Commission and, in the opinion of management, reflect all
adjustments (consisting only of normal recurring accruals) necessary to
present fairly the results of operations for the interim periods presented.
Certain information and footnote disclosures normally included in financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. However, management believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements and the notes thereto should be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1997. The
results for the interim periods are not necessarily indicative of the
results for the full fiscal year.
Through March 31, 1998, the Company was in the development stage and its
efforts had been principally devoted to research and development, capital
formation and organizational development.
(2) RESEARCH AND COLLABORATIVE AGREEMENT
In June 1998, the Company entered into a license and research agreement
with Bristol-Myers Squibb ("BMS") on two technologies related to production
of paclitaxel, the active ingredient in BMS's largest selling cancer
product, Taxol-Registered Trademark-. The agreement includes fees,
milestone payments, research and development support and minimum and sales
based royalties.
(3) LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128
"Earnings Per Share". Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of option, warrants and convertible
securities. Dilutive earnings per share is very similar to the previously
reported fully diluted earnings per share. In accordance with Statement
No. 128, which was adopted by the Company in 1997, basic and diluted net
loss per common share is based on the net loss increased by dividends on
preferred stock divided by the weighted average number of common shares
outstanding during the year. No effect has been given to outstanding
options, warrants or convertible preferred stock in the diluted computation
as their effect would be antidilutive.
(4) PRIVATE PLACEMENT
In April and May 1998, the Company completed a private placement for an
aggregate of 671,035 shares of Common Stock and 335,540 Class E Warrants
and received net proceeds of $4,838,000.
(5) REVENUE RECOGNITION
Revenue from licensing and research agreements is recognized as the
expenses for research and development activities performed under the
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terms of the agreements are incurred. Revenues from nonrefundable
licenses and up front fees is recognized upon signing the agreement.
Revenue resulting from the achievement of milestones is recognized when
the milestone is achieved. Amounts received in advance of services to
be performed are recorded as deferred revenue.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE FINANCIAL STATEMENTS AND THE NOTES
THERETO INCLUDED IN THIS REPORT. THIS DISCUSSION CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "EXPECT" AND SIMILAR EXPRESSIONS AS THEY RELATE
TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR
IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. HISTORICAL OPERATING
RESULTS ARE NOT NECESSARILY INDICATIVE OF THE TRENDS IN OPERATING
RESULTS FOR ANY FURTHER PERIOD.
Cytoclonal Pharmaceutics Inc., a Delaware corporation (the
"Company"), was duly organized and commenced operations in September
1991. To date, the Company's efforts have been principally devoted to
research and development activities and organizational efforts,
including the development of products for the treatment of cancer and
infectious diseases, recruiting its scientific and management personnel
and advisors and raising capital.
The Company's plan of operation for the next 12 months will consist
of research and development and related activities aimed at:
- continued collaboration with Bristol-Myers Squibb on the development
of Paclitaxel production from Microbial Fermentation and Paclitaxel-
specific genes.
- further development of the Paclitaxel treatment of polycystic kidney
disease, a potential new Paclitaxel indication and establishing a
strategic partnership.
- evaluation of potential new proprietary microbial anticancer drugs
with Bristol-Myers Squibb.
- further development of a diagnostic test using the patented LCG gene
and related MAb to test in vitro serum, tissue or respiratory aspirant
material for the presence of cells which may indicate a predisposition
to, or early sign of, lung or other cancers.
- further testing of peptide from UCLA for inhibition of breast cancer
via steroid receptors.
- further analysis of TNF-PEG technology as an anti-cancer agent in
animal studies.
- testing proprietary vectors which have been constructed for the
expression of specific proteins that may be utilizable for vaccines
for different diseases using Mycobacteria.
- further development and potential marketing of the anti-sense
technology currently being conducted at the University of Texas at
Dallas.
8
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- developing a humanized antibody or peptide specific for the protein
associated with the LCG gene and, if successful, submission of an IND
for clinical trials.
- making modest improvements to the Company's laboratory and corporate
facilities.
- hiring additional research technicians and a financial vice president.
- seeking to establish strategic partnerships for the development,
marketing, sales and manufacturing of the Company's proposed products.
The actual research and development and related activities of the
Company may vary significantly from current plans depending on numerous
factors, including changes in the cost of such activities from current
estimates, the results of the Company's research and development
programs, the results of clinical studies, the timing of regulatory
submissions, technological advances, determinations as to commercial
potential and the status of competitive products. The focus and
direction of the Company's operations will also be dependent upon the
establishment of collaborative arrangements with other companies, the
availability of financing and other factors.
For the period from July 1, 1998 to September 30, 1998, the Company
incurred a net loss of $976,000 compared to a net loss of $945,000 for
the same period in 1997. For the period from January 1, 1998 to
September 30, 1998, the Company incurred a net loss of $1,935,000
compared to a net loss of $2,462,000 for the same period in 1997. The
decrease for the nine month period from the previous year was
attributable to revenue received from licensing and research and
development agreements and an increase in interest income The Company
expects to incur additional losses in the foreseeable future.
The Company incurred general and administrative expenses of
$1,930,000 and $1,490,000 for the nine months ended September 1998 and
September 1997, respectively. The increase from the previous year was
attributable to increased legal and professional fees, including
increased patent expenses, as well as, increased insurance costs,
increased public relations and financial relations expenses and
increased contract labor expenses, partially offset by a decrease in
consulting fees and rent expenses.
The Company incurred research and development expenses of
$1,173,000 and $1,050,000 for the nine months ended September 1998 and
September 1997, respectively. The increase was attributable to
increased funding for the research programs at Washington State
University and Research & Development Institute, Inc. (RDI), an increase
in laboratory rental costs, and an increase in royalty payable to RDI,
partially offset by a decrease in laboratory supply costs.
The Company believes that the net proceeds from its initial public
offering of November 1995, the exercise of the placement agent purchase
options in February 1997, the net proceeds of approximately $4,838,000
from the private placement in April and May 1998, and proceeds of
approximately $2,640,000 from the exercise of warrants and options
through September 1998
9
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will be sufficient to finance the Company's plan of operation through
the end of 1999. There can be no assurance that the Company will
generate sufficient revenues to fund its operations after such period or
that any required financings will be available, through bank borrowings,
debt or equity offerings, or otherwise, on acceptable terms or at all.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 7, 1998 the Company issued an option to acquire up to 75,000
shares of its Common Stock to Synergy Group International, Inc. in
connection with the execution of a financial advisory agreement with
the Company. The options are exercisable at prices ranging from $7.00
per share to $9.00 per share. Such issuance was made in reliance upon
an exemption from registration provisions of the Securities Act of
1933 set forth in Section 4(2) thereof.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 Computation of net (loss) per share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K - None
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
CYTOCLONAL PHARMACEUTICS INC.
Date: November 13, 1998 /s/ Daniel M. Shusterman
-------------------------------
Daniel M. Shusterman
Vice President of Operations,
Treasurer and Chief Financial
Officer
11
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EXHIBIT 11
CYTOCLONAL PHARMACEUTICS INC.
COMPUTATION OF NET (LOSS) PER COMMON SHARE
(unaudited)
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<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net (loss) $ (976,000) $ (945,000) $(1,935,000) $(2,462,000)
Add cumulative preferred dividend (48,000) (69,000) (143,000) (207,000)
------------ ------------ ------------ ------------
NET (LOSS) USED FOR COMPUTATION $(1,024,000) $(1,014,000) $(2,078,000) $(2,669,000)
Weighted average number of common
shares outstanding - basic and
diluted 10,172,000 8,261,000 9,585,000 8,136,000
------------ ------------ ------------ ------------
Net (loss) per common share -
basic and diluted $ (0.10) $ (0.12) $ (0.22) $ (0.33)
</TABLE>
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,801
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,909
<PP&E> 386
<DEPRECIATION> 253
<TOTAL-ASSETS> 8,775
<CURRENT-LIABILITIES> 881
<BONDS> 0
0
8
<COMMON> 102
<OTHER-SE> 6,753
<TOTAL-LIABILITY-AND-EQUITY> 8,775
<SALES> 0
<TOTAL-REVENUES> 983
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,103
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,935)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
