UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2005
| ¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File No. 000-32877
PRO-PHARMACEUTICALS, INC.
| Nevada | 04-3562325 | |
| (State or other jurisdiction of incorporation) |
(I.R.S. Employer Identification No.) | |
| 189 Wells Avenue, Newton, Massachusetts | 02459 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
(617) 559-0033
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES ¨ NO x
The number of shares outstanding of the registrant’s common stock as of May 10, 2005 was 27,315,411.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
| PAGE | ||||
| PART I – FINANCIAL INFORMATION | ||||
| ITEM 1. |
Unaudited Consolidated Financial Statements | |||
| Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 |
3 | |||
| 4 | ||||
| 5 | ||||
| Notes to Unaudited Condensed Consolidated Financial Statements |
6 | |||
| ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 | ||
| ITEM 3. |
Quantitative and Qualitative Disclosures about Market Risk | 14 | ||
| ITEM 4. |
Controls and Procedures | 14 | ||
| PART II – OTHER INFORMATION | ||||
| ITEM 1. |
Legal Proceedings | 15 | ||
| ITEM 6. |
Exhibits | 15 | ||
| 16 | ||||
2
(A Development-Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands)
| March 31, 2005 |
December 31, 2004 |
|||||||
| ASSETS |
||||||||
| CURRENT ASSETS: |
||||||||
| Cash and cash equivalents |
$ | 9,078 | $ | 10,704 | ||||
| Prepaid expenses and other current assets |
144 | 120 | ||||||
| Total current assets |
9,222 | 10,824 | ||||||
| PROPERTY AND EQUIPMENT - NET |
94 | 103 | ||||||
| INTANGIBLE ASSETS – NET |
184 | 156 | ||||||
| DEPOSITS AND OTHER ASSETS |
27 | 27 | ||||||
| TOTAL ASSETS |
$ | 9,527 | $ | 11,110 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| CURRENT LIABILITIES: |
||||||||
| Accounts payable |
$ | 369 | $ | 206 | ||||
| Accounts payable - related party |
4 | — | ||||||
| Other accrued expenses |
450 | 799 | ||||||
| Total current liabilities |
823 | 1005 | ||||||
| CONTINGENCIES (Note 5) |
||||||||
| STOCKHOLDERS’ EQUITY: |
||||||||
| Common stock, $0.001 par value; 100,000,000 shares authorized, 27,315,411 issued and outstanding; Undesignated shares, $.01 par value; 10,000,000 shares authorized, none issued and outstanding |
27 | 27 | ||||||
| Additional paid-in capital |
29,980 | 29,965 | ||||||
| Deferred compensation |
— | (1 | ) | |||||
| Deficit accumulated during the development stage |
(21,303 | ) | (19,886 | ) | ||||
| Total stockholders’ equity |
8,704 | 10,105 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 9,527 | $ | 11,110 | ||||
See notes to unaudited condensed consolidated financial statements.
3
(A Development-Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (dollars in thousands)
| Three Months Ended March 31, |
Cumulative 2005 |
|||||||||||
| 2005 |
2004 |
|||||||||||
| OPERATING EXPENSES: (a) |
||||||||||||
| Research and development |
$ | 601 | $ | 852 | $ | 8,070 | ||||||
| General and administrative |
852 | 1,022 | 11,261 | |||||||||
| Total operating expenses |
$ | (1,453 | ) | $ | (1,874 | ) | $ | (19,331 | ) | |||
| INTEREST AND OTHER INCOME |
36 | 20 | 279 | |||||||||
| INTEREST AND OTHER EXPENSES: |
||||||||||||
| Amortization of debt discount on convertible notes |
— | — | 1,258 | |||||||||
| Debt conversion expense |
— | — | 503 | |||||||||
| Interest expense on convertible notes |
— | — | 486 | |||||||||
| Other interest expense |
— | — | 4 | |||||||||
| Total interest and other expenses |
— | — | (2,251 | ) | ||||||||
| NET LOSS |
$ | (1,417 | ) | $ | (1,854 | ) | $ | (21,303 | ) | |||
| NET LOSS PER SHARE—BASIC AND DILUTED |
$ | (0.05 | ) | $ | (0.08 | ) | ||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC AND DILUTED |
27,315,411 | 24,079,300 | ||||||||||
(a) The following summarizes the allocation of the stock-based compensation charge: |
||||||||||||
| Research and development |
$ | 1 | $ | 3 | $ | 141 | ||||||
| General and administrative |
15 | 80 | 909 | |||||||||
| Total |
$ | 16 | $ | 83 | $ | 1,050 | ||||||
See notes to unaudited condensed consolidated financial statements.
4
(A Development-Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
| Three Months Ended March 31, |
Cumulative Period from Inception (July 10, 2000) to March 31, 2005 |
|||||||||||
| 2005 |
2004 |
|||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
| Net loss |
$ | (1,417 | ) | $ | (1,854 | ) | $ | (21,303 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
| Depreciation and amortization |
16 | 23 | 242 | |||||||||
| Stock-based compensation expense |
16 | 83 | 1,050 | |||||||||
| Amortization of deferred extension costs through interest expense |
— | — | 167 | |||||||||
| Settlement of accrued interest through issuance of common stock |
— | — | 10 | |||||||||
| Amortization of debt discount on convertible notes |
— | — | 1,258 | |||||||||
| Write off of intangible assets |
— | — | 116 | |||||||||
| Debt conversion expense |
— | — | 503 | |||||||||
| Interest expense related to issuance of warrants to purchase common stock |
— | — | 236 | |||||||||
| Changes in current assets and liabilities: |
||||||||||||
| Prepaid expenses and other current assets |
(24 | ) | (43 | ) | (141 | ) | ||||||
| Deposits and other assets |
— | — | (27 | ) | ||||||||
| Accounts payable and accrued expenses |
(182 | ) | 754 | 942 | ||||||||
| Net cash used in operating activities |
(1,591 | ) | (1,037 | ) | (16,947 | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
| Purchases of property and equipment |
(3 | ) | — | (298 | ) | |||||||
| Increase in patents costs and other assets |
(32 | ) | (27 | ) | (230 | ) | ||||||
| Net cash used in investing activities |
(35 | ) | (27 | ) | (528 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
| Net proceeds from issuance of common stock and warrants |
— | — | 25,309 | |||||||||
| Net proceeds from issuance of convertible notes payable |
— | — | 1,321 | |||||||||
| Repayment of convertible notes payable |
— | — | (86 | ) | ||||||||
| Proceeds from shareholder advances |
— | — | 9 | |||||||||
| Net cash provided by financing activities |
— | — | 26,553 | |||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS |
(1,626 | ) | (1,064 | ) | 9,078 | |||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
10,704 | 7,608 | — | |||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 9,078 | $ | 6,544 | $ | 9,078 | ||||||
| SUPPLEMENTAL DISCLOSURE – Cash paid for interest |
$ | — | $ | — | $ | 19 | ||||||
| NONCASH FINANCING ACTIVITIES |
||||||||||||
| Issuance of warrants in connection with equity offerings |
$ | — | $ | — | $ | 6,645 | ||||||
| Conversion of accrued expenses into common stock |
— | — | 303 | |||||||||
| Cashless exercise of employee stock options |
— | — | 74 | |||||||||
| Conversion of convertible notes and accrued interest into common stock |
— | — | 1,220 | |||||||||
| Conversion of extension costs related to conversion of convertible notes into common stock |
— | — | 171 | |||||||||
| Issuance of warrants to induce conversion of notes payable |
— | — | 503 | |||||||||
| Issuance of stock to acquire Pro-Pharmaceuticals-NV |
— | — | 107 | |||||||||
See notes to unaudited condensed consolidated financial statements.
5
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands)
| 1. | BASIS OF PRESENTATION |
The consolidated financial statements as reported in Form 10-Q reflect all adjustments which are, in the opinion of management, necessary to present fairly the financial position as of March 31, 2005 and the results of its operations and cash flows for the three months ended March 31, 2005 and March 31, 2004. All adjustments made to the interim financial statements included all those of a normal and recurring nature. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.
The unaudited condensed consolidated financial statements of Pro-Pharmaceuticals, Inc. (the “Company”) should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2004.
As shown in the consolidated financial statements, the Company incurred net losses of $21,303 for the cumulative period from inception (July 10, 2000) through March 31, 2005. The Company’s net losses have resulted principally from costs associated with research and development expenses, including clinical trial costs, and general and administrative activities. As a result of planned expenditures for future research, discovery, development and commercialization activities and potential legal cost to protect its intellectual property, the Company expects to incur additional losses and use additional cash in its operations for the foreseeable future. From inception (July 10, 2000) through March 31, 2005, the Company has raised $26,630 in capital through (i) the issuance of convertible notes; (ii) the sale of common stock through a public offering; and (iii) the sale of common stock and warrants through private placements. From inception (July 10, 2000) through March 31, 2005, the Company used $16,947 in its operations. At March 31, 2005, the Company had $9,078 of cash and cash equivalents to fund future operations. Management believes there is sufficient cash to fund operations through at least May 2006.
The Company is subject to a number of risks similar to those of other development-stage companies, including dependence on key individuals, uncertainty of product development and generation of revenues, dependence on outside sources of capital, risks associated with clinical trials of products, dependence on third-party collaborators for research operations, need for regulatory approval of products, risks associated with protection of intellectual property, and competition with larger, better-capitalized companies. Successful completion of the Company’s development program and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill its development activities and achieving a level of revenues adequate to support the Company’s cost structure. There are no assurances, however, that the Company will be able to obtain additional financing on favorable terms, or at all, or successfully market its products.
| 2. | STOCK-BASED COMPENSATION |
Stock-Based Compensation – The Company accounts for stock-based compensation to employees and non-employee directors under the intrinsic method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and the related interpretations. Under APB No. 25, no compensation expense is recognized for stock options and restricted stock awards granted at fair market value and with fixed terms.
Stock or other equity-based compensation granted to non-employees is accounted for under the fair value method in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” and the Emerging Issues Task Force (“EITF”) Abstract No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” and the related interpretations. Under this method, compensation is recorded at the fair value of the consideration received or the fair value of the equity instrument until the final measurement date, which is the earlier of performance completion or vesting. Compensation related to stock appreciation rights and other variable stock option or award plans are remeasured at the end of each reporting period. Fluctuations in the quoted market price of the Company’s stock covered by unvested equity instruments are reflected as an adjustment to deferred compensation and compensation expense over the