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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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FORM 10-QSB
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Quarterly Report under Section 13 of the Securities Exchange Act of 1934
For the Quarterly period Ended Commission File No. 0-27282
March 31, 1999
Atlantic Pharmaceuticals, Inc.
1017 MAIN CAMPUS DRIVE, SUITE 3900
RALEIGH, NORTH CAROLINA, 27606
Telephone (919)513-7020
Incorporated in Delaware IRS ID # 36-3898269
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days:
Yes [ x ] No [ ]
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4,642,631 shares of common stock, $.001 par value per share were
outstanding on March 31, 1999
Transitional Small Business Disclosure Format Yes ( ) No (x )
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ATLANTIC PHARMACEUTICALS , INC. AND SUBSIDIARIES
PART ONE - FINANCIAL INFORMATION Page
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Item 1 - Financial Statements
Consolidated Balance Sheets
as of March 31, 1999 (unaudited) and December 31, 1998. 1
Consolidated Statements of Operations (unaudited)
for the quarters ended March 31, 1999 and 1998
and the period from July 13, 1993 (inception) to March 31, 1999. 2
Consolidated Statements of Cash Flows (unaudited)
for the quarters ended March 31, 1999 and 1998
and the period from July 13, 1993 (inception) to March 31, 1999. 3
Notes to Consolidated Financial Statements (unaudited) 4
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 5
PART TWO - OTHER INFORMATION
Item 6 - Exhibits and Report on Form 8-K 23
PART ONE- FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Balance Sheets
March 31, 1999 (unaudited) and December 31, 1998 (audited)
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Assets 3/31/99 12/31/98
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Current assets:
Cash and cash equivalents $ 5,002,900 $ 5,835,669
Prepaid expenses 31,871 42,108
Account receivable 302,026 381,015
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Total current assets 5,336,797 6,258,792
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Furniture and equipment, net of accumulated depreciation
of $346,914 and $316,639 at March 31,1999 (unaudited) and
December 31, 1998, respectively 236,594 262,173
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5,573,391 6,520,965
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Liabilities and Stockholders' Equity
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Current liabilities:
Accrued expenses 576,395 657,001
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Total current liabilities 576,395 657,001
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Stockholders' equity
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 1,375,000 designated as Series A convertible preferred
stock Series A convertible preferred stock, $.001 par value;
authorized 1,375,000 shares, 589,886 and 632,468 shares issued
and outstanding at March 31, 1999 (unaudited) and
December 31, 1998, respectively 590 632
Convertible preferred stock warrants, 117,195 issued
and outstanding at March 31, 1999 (unaudited)
and December 31, 1998, respectively 540,074 540,074
Common stock $.001 par value. Authorized 50,000,000 shares;
4,642,631 and 4,503,388 shares issued and outstanding
at March 31, 1999 (unaudited) and December 31,1998, respectively 4,643 4,503
Common stock subscribed. 182 shares
at March 31,1999 (unaudited) and December 31,1998 -- --
Additional paid-in capital 21,662,783 21,662,881
Deficit accumulated during development stage (17,210,552) (16,343,584)
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4,997,538 5,864,506
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
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Total stockholders' equity 4,996,996 5,863,964
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$ 5,573,391 $ 6,520,965
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See accompanying notes to consolidated financial statements.
1
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Operations (Unaudited)
Quarters ended March 31, 1999 and 1998 and the period from July 13, 1993
(inception) to March 31, 1999.
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Cumulative
Quarter ended March 31 from July 13,
----------------------------- 1993 (inception) to
1999 1998 March 31,1998
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Revenue:
License Revenue -- -- $ 2,500,000
Grant revenue -- -- $ 99,932
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Total Revenue -- -- $ 2,599,932
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Costs and expenses:
Research and development $ 560,339 $ 756,726 7,843,613
License fees -- -- 173,500
General and administrative 370,850 623,993 12,097,853
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Total operating expenses 931,189 1,380,719 20,114,966
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Other expense (income):
Interest income (64,221) (108,485) (930,057)
Interest expense -- -- 625,575
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Total other expense (income) (64,221) (108,485) (304,482)
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Net loss (866,968) (1,272,233) (17,210,552)
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Imputed convertible preferred stock dividend -- 1,016,702 5,331,555
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Net loss applicable to common shares (866,968) (2,288,935) (22,542,107)
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Net loss per common share -basic ($ 0.19) ($ 0.70) ($ 13.67)
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Shares used in calculation
of net loss per share 4,573,009 3,256,021 1,649,259
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See accompanying notes to consolidated financial statements.
2
ATLANTIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage company)
Consolidated Statements of Cash Flows (Unaudited)
Quarters ended March 31, 1999 and 1998 and the period
from July 13, 1993 (inception) to March 31, 1999
Cumulative from
July 13, 1993
Quarter ended (inception) to
March 31, March, 31
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1999 1998 1999
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Cash flows from operating activities:
Net loss $ (866,968) (1,272,233) (17,210,552)
Adjustments to reconcile net loss to net
cash used in operating activities:
Expense relating to issuance of warrants -- -- 298,202
Expense relating to issuance of options -- 34,518 81,952
Expense related to Channel merger -- -- 657,900
Compensation expense relating to stock options -- -- 208,782
Discount on notes payable - bridge financing -- -- 300,000
Depreciation 30,275 37,933 346,914
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses 10,237 (71,582) (31,871)
Increase (decrease) in accrued expenses (80,606) (149,728) 576,395
Increase (decrease) in accrued interest -- -- 172,305
(Increase) decrease in account receivable 78,989 -- (302,026)
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Net cash used in operating activities (828,073) (1,421,093) (14,901,999)
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Net cash used in investing activities - acquisition
of furniture and equipment (4,696) (128,365) (583,509)
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Cash flows from financing activities:
Proceeds from exercise of warrants -- -- 5,500
Proceeds from exercise of options -- -- 52,500
Proceeds from issuance of demand notes payable -- -- 2,395,000
Repayment of demand notes payable -- -- (125,000)
Proceeds from the issuance of notes payable -
bridge financing -- -- 1,200,000
Proceeds of issuance of warrants -- -- 300,000
Repayment of notes payable - bridge financing -- -- (1,500,000)
Repurchase of common stock -- -- (324)
Proceeds from the issuance of common stock -- 5,498 7,547,548
Proceeds from the issuance of convertible preferred stock -- -- 10,613,184
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Net cash provided by (used in) financing activities -- 5,498 20,488,408
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Net increase (decrease) in cash and cash equivalents (832,769) (1,543,959) 5,002,900
Cash and cash equivalents at beginning of period 5,835,669 8,543,495 --
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Cash and cash equivalents at end of period $ 5,002,900 6,999,536 5,002,900
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Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for
common stock subscriptions -- -- 7,027
Conversion of demand notes payable and the
related accrued interest to common stock -- -- $ 2,442,304
Cashless exercise of preferred warrant -- -- $ 30,069
Conversion of preferred to common stock $ 140 -- $ 1,555
See accompanying notes to consolidated financial statements.
3
Atlantic Pharmaceuticals, Inc. and Subsidiaries
(a development stage company)
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1999 and 1998
(1) BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
Generally Accepted Accounting Principles for interim financial information.
Accordingly, they do not include all information and footnotes required by
Generally Accepted Accounting Principles for complete financial statements. In
the opinion of management, the accompanying financial statements reflect all
adjustments, consisting of only normal recurring adjustments, considered
necessary for fair presentation. Operating results are not necessarily
indicative of results that may be expected for the year ending December 31, 1999
or for any subsequent period. These financial statements should be read in
conjunction with Atlantic Pharmaceuticals, Inc., and Subsidiaries' (the
"Company") Annual Report on Form 10 - KSB for the year ended December 31, 1998.
(2) COMPUTATION OF NET LOSS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS No. 128"). In accordance with this statement,
primary net loss per common share is replaced with basic loss per common share
which is calculated by dividing net loss by the weighted average number of
common shares outstanding for the period. Fully diluted net income per common
share is replaced with diluted net income per common share reflecting the
maximum dilutive effect of common stock issuable upon exercise of stock options,
stock warrants, stock subscriptions and conversion of preferred stock. Diluted
net loss per common share is not shown, as common equivalent shares from stock
options, stock warrants, stock subscriptions and convertible preferred stock
would have an antidilutive effect.
(3) LIQUIDITY
The accompanying financial statements have been prepared assuming that the
company will operate as a going concern. Management expects to raise adequate
capital to fund its research, product development and administrative expenses.
The ability of the Company to raise these funds is dependent on raising adequate
funds from investors and corporate partners. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
raise these funds.
4
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the Company's Annual
Report on Form 10 - KSB for the year ended December 31, 1998.
Results of Operations for the Quarter Ended March 31, 1998
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In accordance with its license and development agreement with the Company,
Bausch &Lomb Surgical ("Bausch & Lomb") reimbursed Atlantic's subsidiary, Optex
Ophthalmologics, Inc. ("Optex") in the amount of $540,347 for Optex's costs
related to the development of the Catarex(TM) technology in the first quarter.
This reimbursement reduced the Company's research and development expense by
$508,867 and general and administrative expenses by $31,480.
For the first quarter ended March 31, 1999, research and development
expense was $1,069,206 compared to $756,726 in the first quarter of 1998, an
increase of 41%. (The Company was reimbursed $508,867 by Bausch & Lomb and the
net research and development expense was $560,339) The increase is largely due
to accelerated spending on the CT -3 program and the Catarex technology.
For the first quarter ended March 31, 1999, general and administrative
expense was $402,330 compared to $623,993 in the first quarter of 1998, a
decrease of 35.5%. (The Company was reimbursed $31,480 by Bausch & Lomb and the
net general and administrative expense was $370,850). The decrease is largely
due to reduction in marketing and compensation expenses.
For the first quarter of 1999, interest income was $64,221 compared to
$108,485 in the first quarter of 1998, a decrease of 41%. The decrease is due to
the decline in the Company's cash reserves.
Liquidity and Capital Resources
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From inception to March 31, 1999 the Company had incurred an accumulated
deficit of $17,210,552 and expects to continue to incur additional losses
through the year ending December 31, 1999 and the foreseeable future.
The Company anticipates that its current resources will be sufficient to
finance the Company's currently anticipated needs for operating and capital
expenditures for at least the next fifteen months. In addition, the Company may
attempt to generate additional capital through a combination of collaborative
agreements, strategic alliances and public and private equity and debt
financings. However, no assurance can be provided that additional capital will
be obtained through these or other sources. If the Company is not able to obtain
continued financing, the Company may cease operation and in all likelihood all
the Company's security holders will lose their entire investment.
RESEARCH AND DEVELOPMENT ACTIVITIES
Preclinical studies with all four of the Company's primary technologies are
proceeding according to plan.
Optex's development of the Catarex device is continuing in cooperation with
Bausch & Lomb. Recent work has been focused on the validation of the production
design prototype. The Company anticipates that Bausch & Lomb will file a 510(k)
application with the U.S. Food and Drug Administration ("FDA") in 1999.
5
Gemini Technologies, Inc.s', ("Gemini") research on the antisense enhancing
technology is continuing. The primate proof-of-principle studies are currently
scheduled to begin in the second quarter of 1999. Production of the
oligonucletoide to be tested in these studies was delayed by several weeks due
to technical difficulties in scaling up the production of the molecules. The
Company believes that these problems have been solved and delivery is scheduled
at the testing laboratory. In addition to the Respiratory Syncytial Virus
("RSV') work, refinements to the chemical synthesis process are continuing along
with basic work on the anti-telomerase molecules.
The toxicology program for CT-3 has completed all dosing. Bioanalytical
analyses are ongoing, as is completion of reports on the toxicology studies. To
date, these studies have not resulted in any data that would cause the
discontinuation or delay in the development of CT-3. The results of these
studies will be summarized for submission to an ethics committee. Ethics
committee approval is required prior to beginning the planned studies to
determine the safety and tolerance of rising doses of CT-3 in normal volunteers.
The design of this study is in progress. The Company believes that it is crucial
to conduct studies to determine the safety and tolerance of CT-3 in addition to
assessing the potential for any detrimental central nervous system side effects
of CT-3. The design of the clinical program will require additional toxicology
testing and formulation development prior to beginning large-scale clinical
trials.
In addition to the work to support the above-mentioned studies with CT-3,
studies on the mechanism of action of CT-3 are underway. The studies are
designed to determine if there is any addiction or tolerance potential, which
are significant drawbacks of narcotic analgesics. To date, no information is
available from these studies.
No work was conducted on the Company's cyclodextrin technology during the
first quarter of 1999. The Company is currently seeking an alliance to continue
the development of CT-1.
Future Outlook
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Except for the historical information contained herein, this Quarterly
Report may contain certain forward looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. In addition to historical information, this report
contains predictions, estimates and other forward-looking statements within the
meaning of section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from any future performance suggested in this report as a result of
many factors including the risk factors set forth below and in the Company's
Annual Report on Form 10-KSB filed with the Securities and Exchange Commission
on March 25, 1999 as well as those set forth elsewhere herein.
6
RISK FACTORS
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO
THE OTHER INFORMATION IN THIS FORM 10-QSB, YOU SHOULD CAREFULLY CONSIDER THE
RISKS BELOW IN EVALUATING AN INVESTMENT DECISION IN OUR COMPANY. THE RISKS BELOW
ARE NOT THE ONLY RISKS FACING OUR COMPANY. THERE MAY BE ADDITIONAL RISKS AND
UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE HAVE DEEMED IMMATERIAL WHICH
COULD ALSO NEGATIVELY IMPACT OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS WOULD LIKELY BE MATERIALLY ADVERSELY AFFECTED. IN THAT EVENT, THE
TRADING PRICE OF OUR SECURITIES COULD DECLINE AND YOU COULD LOSE ALL OR PART OF
YOUR INVESTMENT. THIS FORM 10-QSB MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS FOR REASONS INCLUDING THE
RISKS DESCRIBED BELOW AS WELL AS THE OTHER INFORMATION IN THIS FORM 10-QSB.
WE HAVE A DIVIDED BOARD
Certain members of our Board of Directors currently have significant
disagreements with one another, including disagreements concerning the
composition of the board of directors, the strategic direction of our
company, corporate governance and operations matters. Preliminary and
definitive proxy statements, which have been filed with the U.S. Securities
and Exchange Commission (the "SEC") by us and by a group of individuals
including one of our board members, are available for review at
http://www.sec.gov, and describe the directors' disagreements in more
detail. Among the proposals for which the Company and the insurgents are
soliciting stockholder consent are the removal of various board members and
the election of others. Consequently, the board's composition may change in
the near future, and the new directors may express different views as to
the Company's strategic direction. We currently do not know when or how
these disagreements will be resolved. We cannot take any action requiring
board approval until a majority of our board is in agreement on the matter.
Actions that require board approval include election of our president and
chief executive, embarking on significant new research initiatives,
engaging in merger or acquisition activity, issuing our securities and
entering into material agreements. For example, we are currently without a
president and chief executive officer. Consequently, the Company's ability
to undertake any significant activity has been and will continue for the
foreseeable future to be, limited to those matters on which a majority of
directors agree.
HOLDERS OF OUR SERIES A PREFERRED STOCK HAVE RIGHTS SUPERIOR TO THOSE OF THE
HOLDERS OF OUR COMMON STOCK
Holders of shares of our outstanding Series A Preferred Stock can
convert each share into 3.27 shares of Common Stock without payment of any
cash to us. The conversion price of the Series A Preferred Stock is $3.06
per share. Both the conversion rate and the conversion price may be
adjusted in favor of the holders of the Series A Preferred Stock upon
certain triggering events. Accordingly, the number of shares of Common
Stock that holders of the Series A Preferred Stock receive upon conversion
may increase, which could adversely affect the prevailing market price of
our other securities.
In addition, each February 7 and August 7 we are obligated to pay
dividends, in arrears, to the holders of the Series A Preferred Stock, and
the dividends consist of 0.065 additional shares of
7
Series A Preferred Stock for each outstanding share of Series A Preferred
Stock. Our obligation to issue additional shares of Series A Preferred
Stock without payment of any cash to us could adversely affect the
prevailing market price of our other securities. No dividends were declared
in the first quarter ended March 31,1999.
If we are liquidated, sold to or merged with another entity (and we
are not the surviving entity after the merger), we are obligated to pay the
holders of the Series A Preferred Stock a liquidation preference of $13.00
per share before any payment is made to the holders of the Common Stock.
After payment of the liquidation preference, we might not have any assets
remaining to pay the holders of the Common Stock. The liquidation
preference could adversely affect the market price of our other securities.
We need to obtain the approval of a supermajority (66.67%) of the
outstanding shares of the Series A Preferred Stock, voting separately as a
class, to approve certain actions that we may wish to take and have failed
in the past to obtain a quorum or a supermajority in connection with
certain proposals. Accordingly, if we continue to be unable to obtain the
required approval on a timely basis from the holders of the Series A
Preferred Stock, our ability to conduct business may be impaired, which
could adversely affect our business, financial condition and results of
operations.
The holders of the Series A Preferred Stock have rights in addition to
those summarily described above. A complete description of the rights of
the Series A Preferred Stock is contained in the Certificate of
Designations for such securities filed with the Secretary of State of the
State of Delaware and incorporated by reference in our Annual Report on
form 10KSB as filed with the SEC on March 25, 1999.
OUR FUTURE PROFITABILITY IS UNCERTAIN
Our Company was incorporated in 1993 and has incurred significant
operating losses in each of our fiscal years since then. As of March 31,
1999, our accumulated deficit was $17,210,552. We have not completed
development of any of our products or generated any product sales to date.
All of our technologies and products under development are in the research
and development stage, which requires substantial expenditures. Our
operating revenue of $2,599,932 from inception through March 31, 1999
consists of a government grant and up-front and milestone payments made by
Bausch & Lomb. Except for additional milestone payments from Bausch & Lomb,
which we do not anticipate receiving until at least the year 2000, we do
not expect to generate any revenues in the near future. It is possible that
we may not receive any additional payments from Bausch & Lomb. We expect to
incur significant operating losses over the next several years, primarily
due to continuation and expansion of our research and development programs,
including preclinical studies and clinical trials for our products and
technologies under development, as well as costs incurred in identifying
and, possibly, acquiring, additional technologies. To generate revenues or
profits, we (alone or with corporate partners) must successfully develop,
test, obtain regulatory approval for, manufacture and commercialize our
potential products. It is possible that our product development efforts may
not be successful or that we may not obtain required regulatory approvals.
Even if our products are developed and introduced, they may not be
successfully commercialized.
8
WE HAVE CONTINUING FUTURE CAPITAL NEEDS; WE ARE UNSURE WHETHER ADDITIONAL
FUNDING WILL BE AVAILABLE
As of March 31, 1999, we had cash, cash equivalents and short-term
investment balances of $5,002,900. Based on a budget prepared by our
management team, we currently anticipate that we will spend all of our
current cash resources by the end of the first quarter of 2000, although
unanticipated expenses could cause us to spend all of our current cash
resources prior to that time. We will require substantial additional
resources to continue to conduct the development and testing of our
potential products, to obtain regulatory approvals and to manufacture and
commercialize any products that may be developed. Our future capital
requirements will depend on numerous factors, including:
o A change in our strategic focus or direction;
o the progress of our research and development programs;
o the cost of acquiring additional products and technologies, if
any;
o the progress of our ongoing and planned preclinical and clinical
testing;
o the time and costs involved in obtaining regulatory approvals;
o the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
o competing technological and market developments;
o changes in our existing collaborative and licensing
relationships;
o our ability to establish additional collaborative relationships
for the development, testing, obtaining regulatory approvals,
manufacture and commercialization of our potential products;
o the status of competitors;
o the level of resources we must devote to the development of
manufacturing and commercialization capabilities; and
o our need, if any, to purchase capital equipment.
We will need to obtain additional funding through public or private
equity or debt financings, collaborative arrangements or from other sources
to continue our research and development activities, to fund operating
expenses and to pursue regulatory approvals and commercialization for our
products in development. Current stockholders may experience significant
dilution if we raise funds by issuing equity securities. In addition, if
one of our subsidiaries raises additional funds by issuing equity
securities, our interest and that of our stockholders in the subsidiary
could be diluted. Moreover, if our voting interest in any of our
subsidiaries fell below 50%, we might not be able to exercise an adequate
degree of control over the affairs of the subsidiary. If we obtain
additional funds through collaborative agreements, we may be required to
relinquish rights to certain of our technologies, product candidates,
products or marketing territories that we would otherwise seek to develop
or commercialize ourselves. Additional financing sources may not be
available on acceptable terms, if at all. If adequate funds are not
available, significant reductions in spending and the delay, scaling back
or elimination of one or more of our research, discovery or development
programs may be necessary, which would materially and adversely affect our
business, financial condition and results of operations.
9
OUR CAPITALIZATION STRUCTURE MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK
AND IMPEDE OUR ABILITY TO OBTAIN ADDITIONAL FUNDING
As of March 31, 1999, our outstanding convertible securities (other
than those relating to the Series A Preferred Stock), both vested and
unvested, were convertible into 4,663,549 shares of Common Stock at prices
ranging from $1.00 to $10.00 per share. As of March 31, 1999, there were
outstanding 589,886 shares of Series A Preferred Stock and warrants to
purchase 117,195 shares of Series A Preferred Stock, which may be converted
into shares of Common Stock at a conversion rate of 3.27 shares of Common
Stock for each share of Series A Preferred Stock. The exercise of these
convertible securities or the conversion of the Series A Preferred Stock
into shares of Common Stock may adversely affect the market price of the
Common Stock as well as the market price of our publicly traded Redeemable
Warrants and Units. The Certificate of Designations of the Series A
Preferred Stock provides that we may not issue securities that have
superior rights to the Series A Preferred Stock without the consent of the
holders of the Series A Preferred Stock. Accordingly, so long as these
convertible securities remain unexercised and shares of the Series A
Preferred Stock remain unconverted, the terms under which we could obtain
additional funding, if at all, may be adversely affected.
RISKS CONCERNING COMMERCIALIZATION OF CATAREX
In May 1998, we entered into a worldwide licensing and development
agreement with Bausch & Lomb to complete the development of Catarex, the
cataract removal technology developed by Optex. Under the terms of the
agreement, Optex and Bausch & Lomb committed to jointly pursue the
development of Catarex and Bausch & Lomb assumed responsibility for
clinical testing, obtaining regulatory approvals, manufacturing and
commercializing Catarex globally. Bausch & Lomb has reimbursed some of
Optex's development expenses, has paid Optex up-front and milestone
payments and may be obligated to pay Optex additional milestone payments.
In addition, Bausch & Lomb has committed to pay ongoing royalties on
potential future sales of Catarex products. However, Bausch & Lomb and we
may not be able to complete the development of Catarex, the milestones that
trigger payment obligations from Bausch & Lomb might not be reached or
Bausch & Lomb might not be able to successfully complete clinical testing,
obtain regulatory approvals or manufacture and commercialize Catarex.
Consequently, we may not receive any further payment or revenue in
connection with the Catarex technology.
RISKS CONCERNING DEVELOPMENT OF CT-3
We have decided to focus our research and development resources
related to CT-3 on toxicology testing and subsequent Phase I studies to
determine the potential for any detrimental central nervous systems effects
of CT-3. If the toxicology testing or Phase I studies indicates significant
central nervous effects of CT-3, we may elect to sublicense or relinquish
our rights to the CT-3 technology. If the Phase I studies do not indicate
significant detrimental central nervous system effects of CT-3, our current
plan, because of the expense involved in clinical development after Phase I
studies, is to withhold additional development of CT-3 until we reach a
collaborative agreement with a partner to help fund the development of
CT-3. We may not be successful in negotiating or entering into such an
agreement on terms favorable to us or at all, and any
10
agreement, if entered into, may be unsuccessful. A failure to successfully
enter into such an agreement may result in our sublicensing or
relinquishing all of our rights to the CT-3 technology. Consequently, we
may not receive any payment or revenue in connection with the CT-3
technology.
RISKS CONCERNING FUNDING OF DEVELOPMENT OF CYCLODEXTRIN TECHNOLOGY
We have decided to focus our research and development resources
related to the cyclodextrin technology on the CT-1 compound and to
discontinue research and development on our other cyclodextrin compounds.
We have decided not to fund any additional research and development on the
CT-1 compound until we reach a collaborative agreement with a partner to
help further fund the research and development of CT-1. We may not be
successful in negotiating or entering into such an agreement on terms
favorable to us or at all, and any agreement, if entered into, may be
unsuccessful. A failure to successfully enter into such an agreement may
result in our relinquishing all of our rights to the cyclodextrin
technology. Consequently, we may not receive any payment or revenue in
connection with the cyclodextrin technology.
WE DEPEND ON OTHERS FOR CLINICAL DEVELOPMENT, REGULATORY APPROVALS AND THE
MANUFACTURE AND COMMERCIALIZATION OF OUR PRODUCTS
We do not have the resources to directly conduct full clinical
development, obtain regulatory approvals, manufacture or commercialize any
of our proposed products and we have no current plans to acquire such
resources. Optex has entered into a License & Development Agreement with
Bausch & Lomb, and we anticipate that we may enter into additional
collaborative agreements with pharmaceutical and/or biotechnology companies
for the research and development, clinical testing, seeking of regulatory
approval, manufacturing or commercialization of our proposed products. If
we were unable to enter into such third party arrangements on commercially
acceptable terms it would materially and adversely affect our business.
These agreements could limit our control over the resources devoted to
these activities as well as our flexibility in considering alternatives for
the commercialization of such products. We can give no assurance that we
will be able to enter into any additional arrangements for the development,
clinical testing, seeking of regulatory approval, manufacturing and
commercialization of our products, or that, if such arrangements are
entered into, such future partners will be successful in commercializing
products or that we will derive any revenues from such arrangements.
RISKS RELATED TO TECHNOLOGICAL UNCERTAINTY AND THE EARLY STAGE OF OUR PRODUCT
DEVELOPMENT
To achieve profitable operations, we must, alone or with others,
successfully commercialize our technologies and products under development.
However, our technologies and product candidates are in the early stages of
development, will require significant further research, development and
testing and are subject to the risks of failure inherent in the development
of products based on innovative or novel technologies. Our product
candidate with the most advanced development is the Catarex technology and
we do not anticipate that this product
11
candidate will enter into clinical testing until the year 2000. The
agreements with our licensors do not contain any representations by the
licensors as to the safety or efficacy of the inventions or discoveries
licensed to us. It is possible that:
o we will not be able to maintain our current research and
development schedules;
o we will not be able to successfully develop any or all of our
technologies and products;
o we will not be able to enter into human clinical trials with any
of our products because of scientific, governmental and/or
financial reasons;
o we will encounter problems in clinical trials that will cause us
to delay or suspend product development;
o our technologies and products will be found to be ineffective or
unsafe;
o our technologies and products will fail to meet applicable
regulatory standards; or
o our technologies and products will fail to obtain required
regulatory approvals.
Similarly, it is possible that our technologies and product
candidates, once developed, although effective,
o are uneconomical to commercialize;
o are not eligible for third party reimbursement from government or
private insurers;
o cannot be effectively commercialized by us because third parties
hold proprietary rights that preclude us from commercializing
such technologies and products;
o cannot be effectively commercialized by us because third parties
market superior or equivalent technologies and products;
o cannot be effectively commercialized by us because third parties
have superior resources to market similar products or
technologies; or
o cannot be effectively commercialized by us because the
technologies and products have undesirable or unintended side
effects that prevent or limit their commercial use.
The failure of any of our product candidates to be commercialized
could materially and adversely affect our business, financial condition and
results of operations.
CERTAIN INTERLOCKING RELATIONSHIPS; POTENTIAL CONFLICTS OF INTEREST
Lindsay A. Rosenwald, M.D., one of our principal stockholders, is the
president and sole stockholder of Paramount Capital, Incorporated, a New
York-based merchant and investment banking firm specializing in the
biotechnology industry, ("Paramount"). Paramount was the
12
placement agent for our 1997 private placement of Series A Preferred Stock.
Michael S. Weiss, our secretary, is the Senior Managing Director, Head of
Investment Banking of Paramount. Yuichi Iwaki, M.D., Ph.D., one of our
directors, is a director of the Aries Fund, an affiliate of Paramount.
Steven H. Kanzer, one of our directors, was the Senior Managing Director,
Head of Venture Capital of Paramount until December 31, 1998. A. Joseph
Rudick, Jr., M.D., a director of two of our subsidiaries, Channel
Therapeutics, Inc. and Optex Ophthalmologics, Inc., was an associate of
Paramount and Paramount Capital Investments, LLC, a company wholly owned by
Dr. Rosenwald, until December 31, 1998. Dr. Rudick is also a nominee for
election to Atlantic's board of directors, pursuant to the proxy statement
filed with the SEC by Mr. Kanzer, Dr. Rudick and Frederic Zotos. In the
regular course of its business, Paramount identifies, evaluates and pursues
investment opportunities in biomedical and pharmaceutical products,
technologies and companies. Generally, Delaware corporate law requires that
any transactions between us and any of our affiliates be on terms that,
when taken as a whole, are substantially as favorable to us as those
reasonably obtainable from a person who is not an affiliate in an
arms-length transaction. We are bound by agreements with Paramount pursuant
to which Paramount agreed to provide financial advisory services to us and
pursuant to which Paramount agreed to provide placement advisory services
in connection with the private placement of the Series A Preferred Stock.
Nevertheless, none of Paramount, Dr. Rosenwald, Mr. Kanzer, Mr. Weiss or
Dr. Rudick is obligated pursuant to any agreement or understanding with us
to make any additional products or technologies available to us, nor can
there be any assurance, and we do not expect and securityholders should not
expect, that any biomedical or pharmaceutical product or technology
identified by Paramount, Dr. Rosenwald, Mr. Kanzer, Mr. Weiss or Dr. Rudick
in the future will be made available to us. In addition, some of our
officers and directors may from time to time serve as officers or directors
of other biopharmaceutical or biotechnology companies. We can give no
assurance that such other companies will not, in the future, have interests
in conflict with ours.
OUR EXISTING STOCKHOLDERS HAVE SIGNIFICANT CONTROL OVER OUR COMPANY
Dr. Rosenwald and VentureTek, L.P., a limited partnership controlled
by certain relatives of Dr. Rosenwald but as to the partnership interests
of which Dr. Rosenwald disclaims beneficial ownership, together
beneficially own approximately 22% of the outstanding shares of our Common
Stock and Dr. Rosenwald and certain affiliates of Paramount own warrants to
purchase approximately 7% of the Series A Preferred Stock. Generally, the
holders of the Common Stock and the Series A Preferred Stock vote together
as a single class. Accordingly, such holders, if acting together, may have
the ability to exert significant influence over the election of our Board
of Directors and other matters submitted to our stockholders for approval.
The voting power of these holders may discourage or prevent any proposed
takeover of our company.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
Our success depends in large part on our ability, alone or with our
collaborative partners, to obtain and maintain patents, protect trade
secrets and operate without infringing upon the proprietary rights of
others. However, others may have filed patent applications, may have been
issued patents or may obtain additional patents and proprietary rights
relating to competitive products or processes. Our patent applications may
not be approved, we may be unable to develop additional proprietary
products that are patentable, issued patents may not provide us with
adequate protection for our inventions or they may be challenged,
invalidated or circumvented by others, the patents of others may impair our
ability to commercialize our products or our patents
13
might not provide us with competitive advantages. The issuance of a patent
is not conclusive as to its validity or enforceability. The patent position
of companies in the biotechnology or pharmaceutical industries is highly
uncertain, involves complex legal and factual questions and has recently
been the subject of much litigation. No consistent policy has emerged from
the U.S. Patent and Trademark Office, or PTO, or the courts regarding the
breadth of claims allowed or the degree of protection afforded under
pharmaceutical and biotechnology patents. There is considerable variation
between countries as to the level of protection afforded under patents and
other proprietary rights. Such differences may expose us to differing risks
of commercialization in each foreign country in which we may sell products.
Others may independently develop similar products, duplicate any of our
products or design around any of our patents.
We rely on certain United States patents and pending United States and
foreign patent applications relating to various aspects of our products and
technologies. With the exception of intellectual property owned by Optex,
all of these patents and patent applications are owned by third parties and
are licensed or sublicensed to us. Although Optex owns the patents and the
patent applications relating to the Catarex technology, Optex has licensed
those rights to Bausch & Lomb. Accordingly, our control over these patents
may be limited by our contractual rights. In addition, the patent
application and issuance process can be expected to take several years and
entail considerable expense to us because we are responsible for such costs
under the terms of our license agreements.
Our competitive position is also dependent upon unpatented trade
secrets. Others may independently develop substantially equivalent
information and techniques or otherwise gain access to our trade secrets,
our trade secrets may be disclosed or we may be unable to effectively
protect our rights to unpatented trade secrets. Our management and
scientific consultants have been recruited primarily from other scientific
companies, pharmaceutical companies and academic institutions. Furthermore,
most of our scientific consultants are currently employed by employers
unrelated to us. To the extent that we or our consultants or research
collaborators use intellectual property owned by others in their work with
us, disputes may also arise as to the rights in related or resulting
know-how and inventions. Such disputes could, regardless of merit, be time
consuming, expensive to defend, and materially and adversely affect our
business, results of operations and financial condition.
Patent applications in the United States are generally maintained
under conditions of confidentiality until the patents are issued. Because
publication of inventions in the scientific or patent literature tends to
lag behind actual inventions by several months and we cannot evaluate any
inventions being claimed in pending patent applications filed by our
competitors, we cannot be certain that we were the first to invent the
inventions covered by our pending patent applications or the first to file
patent applications on such inventions. Our patent applications may not
result in issued patents and issued patents may not afford comprehensive
protection against potential infringement. Litigation, which could result
in substantial cost to us, may be necessary to defend or enforce our patent
and license rights or to determine the scope and validity of others'
proprietary rights. Defense and enforcement of patent claims can be
expensive and time consuming, even in those instances in which the outcome
is favorable to us, and can result in the diversion of substantial
resources from our other activities. An adverse outcome could subject us to
significant liabilities to third parties, require us to obtain licenses
from third parties, require us to alter our products or technologies or
require us to cease altogether any related research and development
activities or product sales, any of which could materially and adversely
affect our business, results of operations and financial condition.
14
The issuance of a patent does not provide the patent holder with
freedom to operate without infringing the patent rights of others.
Accordingly, the practice of a patentable invention may require litigation
to resolve ownership rights or a license from the holder of dominant patent
rights. We have certain proprietary rights and in the future we may require
additional licenses from other parties to develop, manufacture and
commercialize products effectively. Our commercial success could depend in
part on obtaining and maintaining such licenses. We can give no assurance
that such licenses could be obtained or maintained on commercially
reasonable terms, if at all, that the patents underlying such licenses
would be valid and enforceable or that the proprietary nature of the
patented technology underlying such licenses would remain proprietary.
OUR MARKETS ARE HIGHLY COMPETITIVE
Technological changes in the pharmaceutical and medical device
industries are rapid and substantial, and competition from pharmaceutical
and biotechnology companies and universities is intense. Many of these
entities have significantly greater research and development capabilities,
than we do, as well as substantial technical, marketing, manufacturing,
distribution, financial and managerial resources and represent significant
competition for us. In addition, some of our competitors have experience in
undertaking testing and clinical trials of new or improved products similar
in nature or that have a similar therapeutic effect to that which we are
developing. Developments by others may render our products or technologies
noncompetitive, and we may not be able to keep pace with technological
developments. Competitors have, and continue to develop, technologies that
are, or in the future may be, the basis for competitive products and
competitors may introduce such products and technologies before we are able
to do so. Some of these products may have an entirely different approach or
means of accomplishing the desired therapeutic effect than the products we
may develop. These competing products may be more effective, more widely
accepted or less costly than the products we develop. The development of
competing compounds, medical devices and other forms of medical treatment
could materially and adversely affect our business, financial condition and
results of operations. We can give no assurance that developments by others
will not render our products or technologies noncompetitive or that we will
be able to keep pace with technological developments. Further, it is
expected that competition in our fields will intensify. We can give no
assurance that we will be able to compete successfully in the future.
RISKS RELATED TO REGULATORY APPROVALS
The federal government, principally the FDA, and comparable agencies
in state and local jurisdictions and in foreign countries extensively and
rigorously regulate all new drugs and medical devices, including our
products and technologies under development. These authorities,
particularly the FDA, impose substantial requirements upon preclinical and
clinical testing, manufacturing and commercialization of pharmaceutical and
medical device products. Before a drug may be approved for
commercialization in the United States, the manufacturer of the drug must:
o satisfactorily complete preclinical laboratory and animal tests;
o submit to the FDA an Investigational New Drug Application, or
IND, for human clinical testing;
o conduct adequate and well controlled human clinical trials to
establish the safety and efficacy of the drug;
15
o submit to the FDA a New Drug Application, or NDA; and
o satisfactorily complete an FDA inspection of the manufacturing
facility or facilities at which the drug or device is made to
assess compliance with Good Manufacturing Practices, or GMP.
We hope to obtain FDA approval for the Catarex device through the
submission of a 510(k) application, which is a procedure allowed if we can
show that the Catarex device is "substantially equivalent" to a medical
device that has already received FDA approval. The FDA recently has been
requiring more rigorous demonstration of "substantial equivalence" than in
the past. Although the FDA generally takes from 4 to 12 months from
submission to issue 510(k) clearance, we do not know how long, if at all,
it will us take to obtain FDA clearance for the Catarex device. If we are
able to obtain 510(k) clearance for the Catarex device, any modifications
or enhancements to the device that could significantly alter safety or
effectiveness, or constitute a major change to the intended use of the
device, will require new 510(k) submissions and consequently delay 510(k)
clearance, if it is obtained at all.
There are many costly and time-consuming procedures required for
approval of a new drug, including lengthy and detailed preclinical and
clinical testing and validation of manufacturing and quality control
processes. Several years may be needed to satisfy these requirements, and
this time period may vary substantially depending on the type, complexity
and novelty of the product candidate. Government regulation can delay or
prevent marketing of potential products for a considerable period of time
and impose costly procedures upon our activities. Moreover, the FDA or
other regulatory agency may not grant approval for any products developed
or not grant approval on a timely basis, and success in preclinical or
early stage clinical trials does not assure success in later stage clinical
trials.
Data obtained from preclinical and clinical activities are susceptible
to varying interpretations, which could delay, limit or prevent regulatory
approval. Even if regulatory approval of a product is granted, limitations
may be imposed on the indicated uses of a product. Further, later discovery
of previously unknown problems with a product may result in added
restrictions on the product, including withdrawal of the product from the
market. Any delay or failure in obtaining regulatory approvals would
materially and adversely affect our business, financial condition and
results of operations.
A drug and medical device manufacturer (either us or one of our
third-party manufacturers) must conform to GMP regulations strictly
enforced by the FDA on an ongoing basis through their facilities inspection
programs. Contract manufacturing facilities must pass a pre-approval
inspection of their manufacturing facilities before the FDA will approve an
NDA. Certain material manufacturing changes that occur after approval are
also subject to FDA review and clearance or approval. FDA or other
regulatory agencies may not approve the process or the facilities by which
any of our products may be manufactured. Our dependence on third parties
for the manufacture of our products may adversely affect our ability to
develop and deliver products on a timely and competitive basis. If we are
required to manufacture our own products we will be required to build or
purchase a manufacturing facility, will be subject to the regulatory
requirements described above, to similar risks regarding delays or
difficulties encountered in manufacturing any such products and will
require substantial additional capital. We may be unable to manufacture any
such products successfully or in a cost-effective manner.
16
The FDA's policies may change and additional government regulations
and policies may be instituted, both of which could prevent or delay
regulatory approval of our potential products. Moreover, increased
attention to the containment of health care costs in the United States
could result in new government regulations that could materially and
adversely affect our business. We are unable to predict the likelihood of
adverse governmental regulations that could arise from future legislative
or administrative action, either in the United States or abroad.
We will also be subject to a variety of foreign regulations governing
clinical trials, registration and sales of our products. Regardless of
whether FDA approval is obtained, approval of a product by comparable
regulatory authorities of foreign countries must be obtained prior to
marketing the product in those countries. The approval process varies from
country to country and the time needed to secure approval may be longer or
shorter than that required for FDA approval. Delays in the approval process
or failure to obtain such foreign approvals would materially and adversely
affect our business, financial condition and results of operations.
RISKS RELATED TO THE UNCERTAINTY OF PRODUCT PRICING AND REIMBURSEMENT; HEALTH
CARE REFORM AND RELATED MEASURES
The continuing efforts of governmental and third party payors to
contain or reduce the costs of health care may adversely affect our
revenues and profitability. For example, in certain foreign markets,
pricing or profitability of health care products is subject to government
control. In the United States there have been, and we expect that there
will continue to be, a number of federal and state proposals to implement
similar governmental control. Although we cannot predict what legislative
or regulatory proposals or reforms will be adopted or what actions will be
taken by third party payors, the announcement of such proposals or reforms
could materially and adversely affect our ability to raise capital or form
collaborations and, therefore, the adoption of such proposals or reforms
could materially and adversely affect our business, financial condition and
results of operations.
In addition, in both the United States and elsewhere, sales of health
care products depend in part on the availability of reimbursement from
third party payors, such as government and private insurance plans.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and third party payors are increasingly
challenging the prices charged for health care products. Even if we succeed
in bringing one or more products to the market, third party payors may not
reimburse us adequately, or at all.
WE DEPEND UPON OUR KEY PERSONNEL AND CONSULTANTS
Our ability to maintain our competitive position depends in part upon
the continued contributions of our officers, directors, Scientific Advisory
Board members, consultants and collaborating scientists and our ability to
attract and retain qualified management and scientific personnel. Our
management team currently consists of only three people. In July 1998, Jon
D. Lindjord resigned as our President and Chief Executive Officer and we
have not replaced Mr. Lindjord. Our search for a replacement is currently
on hold pending resolution of the proxy contest in which we are involved.
Competition for qualified management and scientific personnel is intense,
and we may be unable to attract, assimilate, retain or motivate qualified
management and scientific
17
personnel. The loss of key personnel or the failure to recruit additional
personnel or to develop needed expertise could materially and adversely
affect our business, financial condition and results of operations. The
proxy contest and a subsequent change in the composition of our board of
directors could also affect our strategic focus or direction and delay or
re-prioritize our products under development.
WE DEPEND UPON OUR KEY LICENSE AGREEMENTS
With the exception of the Catarex technology, we depend on license
agreements from third parties that form the basis of our proprietary
technology. If we do not meet our financial, development or other
obligations under our license agreements in a timely manner, we could lose
the rights to some or all of our proprietary technologies, which could
materially and adversely affect our business and financial condition and
results of operations. In addition, our rights to the 2-5A Chimeric
Antisense Technology are contingent on the Cleveland Clinic upholding its
obligations concerning the 2-5A Chimeric Antisense Technology to the
National Institutes of Health. We could lose our rights to the 2-5A
Chimeric Antisense Technology if the Cleveland Clinic did not properly
discharge its obligations to the National Institutes of Health, which could
materially and adversely affect our business, financial condition and
results of operations.
WE CAN GIVE NO ASSURANCE THAT WE WILL BE ABLE TO IDENTIFY ADDITIONAL PROJECTS
We develop and hope to commercialize biomedical and pharmaceutical
product candidates and technologies. From time to time, if our resources
allow, we may explore the acquisition and subsequent development and
commercialization of additional biomedical and pharmaceutical products and
technologies. However, we cannot assure you that we will be able to
identify any additional products or technologies and, even if suitable
products or technologies are identified, we may not have sufficient
resources to pursue them.
RISKS RELATED TO OUR ABILITY TO REDEEM OUR REDEEMABLE WARRANTS
Under certain conditions, we may redeem our outstanding Redeemable
Warrants. Our stated intention to redeem the Redeemable Warrants could
encourage holders to exercise the Redeemable Warrants and pay the exercise
price at a time when it may be disadvantageous for the holders to do so, to
sell the Redeemable Warrants at the current market price when they might
otherwise wish to hold the Redeemable Warrants or to accept the redemption
price, which may be substantially less than the market value of the
Redeemable Warrants at the time of redemption. The holders of the
Redeemable Warrants will automatically forfeit their rights to purchase the
shares of Common Stock issuable upon exercise of the Redeemable Warrants
unless the Redeemable Warrants are exercised before they are redeemed. The
holders of Redeemable Warrants do not possess any rights as Atlantic
stockholders unless and until the Redeemable Warrants are exercised.
18
RISKS RELATED TO THE SECURITIES LAW RESTRICTIONS ON THE EXERCISE OF OUR
REDEEMABLE WARRANTS
A holder of Redeemable Warrants has the right to exercise the
Redeemable Warrants for the purchase of shares of Common Stock only if we
have filed with the SEC a current prospectus covering the resale of the
shares of Common Stock issuable upon exercise of the Redeemable Warrants
and only if the resale of the shares of Common Stock has been registered or
qualified, or is deemed to be exempt from registration or qualification
under the securities laws of the state of residence of the holder of the
Redeemable Warrant. We have filed and have undertaken to keep effective and
current a prospectus permitting the purchase and sale of the Common Stock
underlying the Redeemable Warrants, but we cannot assure you that we will
be able to keep the prospectus effective and current. Although we intend to
seek to qualify for sale the resale of the shares of Common Stock
underlying the Redeemable Warrants in those states in which the securities
are to be offered, no assurance can be given that this qualification will
occur. The Redeemable Warrants may be deprived of any value if a prospectus
covering the shares of Common Stock issuable upon the exercise thereof is
not kept effective and current or if the underlying shares are not, or
cannot be, registered in the applicable states.
WE HAVE NOT DECLARED DIVIDENDS ON OUR COMMON STOCK AND ANY DECLARATION OF
DIVIDENDS ON OUR SERIES A PREFERRED STOCK WILL HAVE A DILUTIVE EFFECT
We have not paid any dividends on the Common Stock and do not
anticipate paying any dividends in the foreseeable future. We are obligated
to pay dividends in shares of Series A Preferred Stock on the outstanding
shares of Series A Preferred Stock, which could have a dilutive effect on
the value of the Common Stock. We anticipate that all of our earnings and
other resources, if any, will be retained by us for investment in its
business.
A DELISTING FROM NASDAQ AND THE RESULTING MARKET ILLIQUIDITY COULD ADVERSELY
AFFECT OUR SECURITYHOLDERS AND ABILITY TO RAISE FUNDS
Although our Common Stock, Redeemable Warrants and Units are quoted on
the SmallCap tier of The Nasdaq Stock Market ("Nasdaq"), continued
inclusion of such securities on Nasdaq will require that (i) we maintain at
least $2,000,000 in net tangible assets, (ii) the minimum bid price for the
Common Stock be at least $1.00 per share, (iii) the public float consist of
at least 500,000 shares of Common Stock, valued in the aggregate at more
than $1,000,000, (iv) the Common Stock have at least two active market
makers, (v) the Common Stock be held by at least 300 holders and (vi) we
adhere to certain corporate governance requirements. If we are unable to
satisfy these maintenance requirements, our securities may be delisted from
Nasdaq. In that event, trading, if any, in the securities would thereafter
be conducted in the over-the-counter market in the "pink sheets" or the
National Association of Securities Dealers' "Electronic Bulletin Board."
Consequently, the liquidity of our securities could be materially impaired,
not only in the number of securities that could be bought and sold at a
given price, but also through delays in the timing of transactions and
reduction in security analysts' and the media's coverage of us, which could
result in lower prices for our securities than might otherwise be attained
and could also result in a larger
19
spread between the bid and asked prices for our securities. In addition, if
our securities were delisted it could materially and adversely affect our
ability to raise funding.
In addition, if our securities are delisted from trading on Nasdaq and
the trading price of the Common Stock is less than $5.00 per share, trading
in the securities would also be subject to the requirements of Rule 15g-9
promulgated under the, Securities Exchange Act of 1934, as amended. Under
this rule, broker/dealers who recommended such low-priced securities to
persons other than established customers and accredited investors must
satisfy special sales practice requirements, including a requirement that
they make an individualized written suitability determination for the
purchaser and receive the purchaser's written consent prior to the
transaction. The Securities Enforcement Remedies and Penny Stock Reform Act
of 1990 also requires additional disclosure in connection with any trades
involving a stock defined as a penny stock (generally, according to recent
regulations adopted by the SEC, any equity security not traded on an
exchange or quoted on Nasdaq that has a market price of less than $5.00 per
share, subject to certain exceptions), including the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny
stock market and the risks associated therewith. Such requirements could
severely limit the market liquidity of our Common Stock, Redeemable
Warrants or Units. We can give no assurance that such securities will not
be delisted or treated as "penny stock".
RISKS RELATED TO THE REDUCED LIQUIDITY OF YOUR INVESTMENT AND THE LOW TRADING
VOLUME OF OUR SECURITIES
Our securities are traded on the Nasdaq SmallCap Market and lack the
liquidity of securities traded on the principal trading markets.
Accordingly, an investor may be unable to promptly liquidate an investment
in our securities. Similarly, the sale of a larger block of our securities
could depress the price of our securities to a greater degree than a
company that typically has a higher volume of trading in its securities.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
The securities markets have, from time to time, experienced
significant price and volume fluctuations that may be unrelated to the
operating performance of particular companies or industries. Thus, the
market price of our securities, like the stock prices of many publicly
traded biotechnology and smaller companies, has been and may continue to be
especially volatile. Announcements regarding technological innovations,
regulatory matters, new commercial products by us or our competitors,
developments or disputes concerning patent or proprietary rights, publicity
regarding actual or potential medical results relating to products under
development by us or our competitors, regulatory developments in both the
United States and foreign countries, public concern as to the safety of
pharmaceutical products and economic and other external factors, as well as
continued operating losses by us and period-to-period fluctuations in our
financial results and the volatility of the U.S. and worldwide economies
and securities markets generally, may have a significant impact on the
market price of our securities.
20
RISKS RELATED TO POTENTIAL PRODUCT LIABILITY AND OUR LACK OF PRODUCT LIABILITY
INSURANCE
If we develop and commercialize any products, through third-party
arrangements or otherwise, we may be exposed to product liability claims.
We presently do not carry product liability insurance. Some of our license
agreements require us to obtain product liability insurance, if and when we
begin clinical testing or commercialization of our proposed products and to
indemnify our licensors against product liability claims brought against
them as a result of the products developed by us. If necessary, we may not
be able to obtain such insurance at all, in sufficient amounts to protect
us against such liability or at a reasonable cost. None of our licensors
has made, nor is expected to make, any representations to us as to the
safety or efficacy of the inventions covered by the license agreements or
as to any products which may be made or used under rights granted therein.
In addition, Optex is required to indemnify Bausch & Lomb for certain
matters under the terms of their Development & License Agreement. Product
liability claims brought against us or a party that we are obligated to
indemnify could materially and adversely affect our business, financial
condition and results of operations.
RISKS RELATED TO ENVIRONMENTAL REGULATION
Federal, state and local laws, rules, regulations and policies govern
our use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials and wastes. Although
we believe that we have complied with these laws and regulations in all
material respects and have not been required to take any action to correct
any noncompliance, we may be required to incur significant costs to comply
with environmental and health and safety regulations in the future. In
addition, our research and development activities involve the controlled
use of hazardous materials and we cannot eliminate the risk of accidental
contamination or injury from these materials, although we believe that our
safety procedures for handling and disposing of such materials complies
with the standards prescribed by state and federal regulations. In the
event of an accident, we could be held liable for any resulting damages and
we do not have insurance to cover this contingency. Such liability could
materially and adversely affect our business, financial condition and
results of operations.
WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY
Our Restated Certificate of Incorporation authorizes the issuance of
shares of "blank check" preferred stock. Our Board of Directors has the
authority to issue the preferred stock in one or more series and to fix the
relative rights, preferences and privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting any series or the designation of such
series. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of our company without further
action by our stockholders. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of
the Common Stock, including the loss of voting control to others.
21
We are also subject to Section 203 of the Delaware General Corporation
Law, which, subject to certain exceptions, prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder
for a period of three years following the date that such stockholder became
an interested stockholder. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person. This
statute could have the effect of discouraging others from making tender
offers for our shares and, as a consequence, may inhibit fluctuations in
the market price of our shares that could result from actual or rumored
takeover attempts. This statute also may have the effect of preventing
changes in our management.
WE HAVE THE ABILITY TO LIMIT THE LIABILITY AND TO INDEMNIFY OUR OFFICERS AND
DIRECTORS FROM LIABILITY
Our Certificate of Incorporation limits, to the maximum extent
permitted by Delaware law, the personal liability of directors for monetary
damages for breach of their fiduciary duties as a director. Our Certificate
of Incorporation and Bylaws provide that we must indemnify our officers and
directors and may indemnify our employees and other agents to the fullest
extent permitted by law. We have entered into indemnification agreements
with our officers and directors containing provisions that are in some
respects broader than the specific indemnification provisions contained in
Delaware law. The indemnification agreements may require us, among other
things, to indemnify our officers and directors against liabilities that
may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable
nature) and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. Section 145
of the Delaware General Corporation Law provides that a corporation may
indemnify a director, officer, employee or agent made or threatened to be
made a party to an action by reason of the fact that he was a director,
officer, employee or agent of the corporation or was serving at the request
of the corporation against expenses actually and reasonably incurred in
connection with such action if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Delaware law does not
permit a corporation to eliminate a director's duty of care, and the
provisions of our Certificate of Incorporation and Bylaws have no effect on
the availability of equitable remedies, such as injunction or rescission,
for a director's breach of the duty of care.
POTENTIAL YEAR 2000 PROBLEMS COULD ADVERSELY AFFECT OUR BUSINESS
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, next year
computer systems and/or software used by many companies may need to be upgraded
to comply with the "Year 2000" requirements. Significant uncertainty exists
concerning the potential effects associated with this compliance. We have
reviewed our internal system and have concluded that it is Year 2000 compliant
without incurring any significant expense. All of our hardware and software was
purchased or licensed less than four years ago. We have received verbal
assurances from our service providers that they will be Year 2000 compliant in a
timely fashion. Accordingly, we do not expect Year 2000 issues to have any
material effect on our business, financial condition or operating results.
22
Part Two - Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Form 8-K Reports
No Current reports on Form 8-K were filed in the quarter ended March 31, 1999.
23
SIGNATURES
- ----------
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Atlantic Pharmaceuticals, Inc.
May 5, 1999
/S/ Robert A. Fildes, PH.D
--------------------------
Robert A. Fildes
Chairman of the Board
/S/ Shimshon Mizrachi
---------------------
Shimshon Mizrachi
Chief Financial Officer
(Principal Accounting and Financial Officer)
5
3-MOS
DEC-31-1999
JAN-01-1999
MAR-31-1999
5,002,900
0
302,026
0
0
5,336,797
236,594
346,914
5,573,391
576,395
0
0
590
4,643
22,202,857
5,573,391
0
0
0
0
931,189
0
(64,221)
(866,968)
0
(866,968)
0
0
0
(866,968)
(0.19)
(0.19)
