U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 ------------------------------ [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT For the transition period from to ---------------- ------------------------ Commission file number 0-26918 ------------------------------------------------ CYTOCLONAL PHARMACEUTICS INC. ----------------------------------------------------------------- (Exact Name of Small Business Issuer as Specified in Its Charter) Delaware 75-2402409 - -------------------------------- --------------------- (State or Other jurisdiction of (I.R.S. Employer incorporation or Organization) Identification Number) 9000 Harry Hines Boulevard, Suite 330, Dallas, Texas 75235 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices) (214)-353-2922 - ------------------------------------------------------------------------------- (Issuer's Telephone Number, Including Area Code) - ------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if changed since last report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----------------- ------------------ 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: 7,675,281 shares of common stock, $.01 par value, outstanding as of November 4, 1996. - ------------------------------------------------------------------------------- Transitional Small Business Disclosure Format (check one): Yes No X ---------------- -------------------- CYTOCLONAL PHARMACEUTICS INC TABLE OF CONTENTS
Page(s) ------- PART I. FINANCIAL INFORMATION Item 1 -- Financial Statements: Condensed Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 3 Condensed Statements of Operations for the Three Months Ended September 30, 1995 and 1996 (unaudited) and for the Nine Months Ended September 30, 1995 and 1996 (unaudited)and the Period From September 11, 1991 (Inception) Through September 30, 1996 4 Condensed Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1996 (unaudited) and the Period From September 11, 1991 (Inception) Through September 30, 1996 5 Notes to Financial Statements 6-7 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations 8-9 PART II. OTHER INFORMATION Item 6 -- Exhibits and Reports on Form 8-K 10 Signatures 11 Exhibit 11 12
Item 1. Financial Statements CYTOCLONAL PHARMACEUTICS INC. (a development stage company) BALANCE SHEETS
December 31, September 30, 1995 1996 ------------ ------------- ASSETS (unaudited) Current assets: Cash $5,442,000 $3,741,000 Prepaid expenses and other current assets 31,000 15,000 ---------- ---------- Total current assets 5,473,000 3,756,000 Equipment, net 60,000 94,000 Patent rights, less accumulated amortization of $312,000 and $370,000 938,000 880,000 Investment in joint venture - at equity 39,000 21,000 Other assets 5,000 6,000 ---------- ---------- T O T A L $6,515,000 $4,757,000 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses 235,000 517,000 Royalties payable 1,250,000 1,250,000 ---------- ---------- Total liabilities 1,485,000 1,767,000 ---------- ---------- Stockholders' equity: Preferred stock - $.01 par value, 10,000,000 shares authorized; 1,268,787 and 1,271,240 shares of Series A convertible preferred issued and outstanding at December 31, 1995 and September 30, 1996, respectively (liquidation value $3,172,000 and $3,178,000 at 13,000 13,000 December 31, 1995 and September 30, 1996, respectively) Common Stock - $.01 par value, 30,000,000 shares authorized: 7,563,500 and 7,687,932 shares issued and outstanding at December 31, 1995 and September 30, 1996, respectively 76,000 77,000 Additional paid-in capital 13,903,000 13,990,000 Deficit accumulated during the development stage (8,962,000) (11,090,000) ---------- ---------- Total Stockholders' Equity 5,030,000 2,990,000 T O T A L $6,515,000 $4,757,000 ========== ==========
3 CYTOCLONAL PHARMACEUTICS INC. (a development stage company) STATEMENT OF OPERATIONS (unaudited)
September 11, 1991 Three Months Ended Nine Months Ended (inception) September 30, September 30, through ----------------------- ------------------------- September 30, 1995 1996 1995 1996 1996 -------- -------- --------- ---------- ---------- Operating Expenses: Research and development $282,000 $454,000 $881,000 $1,183,000 $5,914,000 General and administrative 273,000 403,000 888,000 1,110,000 4,906,000 --------- --------- ----------- ----------- ------------ 555,000 857,000 1,769,000 2,293,000 10,820,000 --------- --------- ----------- ----------- ------------ Other (Income) expenses: Interest (income) (1,000) (49,000) (6,000) (165,000) (368,000) Interest expense 124,000 347,000 559,000 --------- --------- ----------- ----------- ------------ 123,000 (49,000) 341,000 (165,000) 191,000 --------- --------- ----------- ----------- ------------ NET (LOSS) ($678,000) ($808,000) ($2,110,000) ($2,128,000) ($11,011,000) ========= ========= =========== =========== ============ Net loss per common share ($0.14) ($0.12) ($0.44) ($0.31) ========= ========= =========== =========== Weighted average number of shares outstanding 5,249,000 7,687,000 5,328,000 7,631,000 ========= ========= =========== ===========
4 CYTOCLONAL PHARMACEUTICS INC. (a development stage company) STATEMENTS OF CASH FLOWS (unaudited)
September 11, 1991 Nine Months Ended (Inception) September 30, through ------------------------------ September 30, 1995 1996 1996 ------------ ------------ ------------- Cash flows from operating activities: Net (loss) ($2,110,000) ($2,128,000) ($11,011,000) Adjustments to reconcile net (loss) to net cash (used in) operating activities: Depreciation and amortization 85,000 86,000 540,000 Amortization of debt discount 162,000 0 269,000 Amortization of debt costs 318,000 0 554,000 Value assigned to warrants and options 0 88,000 104,000 Equity in loss of joint venture 17,000 18,000 211,000 Changes in operating assets and liabilities: (Increase) decrease in other assets 1,000 15,000 (25,000) Increase in accounts payable and accrued expenses 594,000 282,000 517,000 ----------- ----------- ------------ Net cash (used in) operating activities (933,000) (1,639,000) (8,841,000) ----------- ----------- ------------ Cash flows from investing activities: Purchase of equipment 0 (62,000) (183,000) Investment in joint venture 0 0 (233,000) ----------- ----------- ------------ Net cash (used in) investing activities 0 (62,000) (416,000) =========== =========== ============ Cash flows from financing activities: Net proceeds from sales of preferred and common stock 0 0 13,750,000 Proceeds from bridge loans, net of expenses 758,000 0 2,684,000 Deferred registration costs (213,000) 0 0 Repayment of bridge loans 0 0 (3,238,000) Principal payments of equipment notes 0 0 (76,000) Dividends paid 0 0 (122,000) ----------- ----------- ------------ Net cash provided by financing activities 545,000 0 12,998,000 ----------- ----------- ------------ NET (DECREASE) IN CASH (388,000) (1,701,000) 3,741,000 Cash at beginning of period 395,000 5,442,000 0 ----------- ----------- ------------ CASH AT END OF PERIOD $7,000 $3,741,000 $3,741,000 =========== =========== ============
5 CYTOCLONAL PHARMACEUTICS INC. NOTES TO FINANCIAL STATEMENTS September 30, 1996 (unaudited) (1) Financial Statement Presentation The unaudited financial statements of Cytoclonal Pharmaceutics Inc. (the "Company") herein have been prepared pursuant to the rules and regulations of the Securities and exchange Commission(SEC) 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, 1995. The results for the interim periods are not necessarily indicative of the results for the full fiscal year. (2) New Agreements In February 1996, the Company entered into two license agreements with the Regents of the University of California, granting to the Company exclusive rights to: (1) a pending patent, entitled Inhibition of Cyst Formation by Cytoskeletal Specific Drugs that makes use of various drugs, one of which is Taxol and (2) technology in the field of Pharmacological Treatment of Polycystic Kidney Disease. Pursuant to the agreements, the Company paid license issue fees and must pay yearly license maintenance fees until the Company is commercially selling a product based on the technology, at which time a royalty based on net sales will be due. In June 1996, the Company entered into a Patent License Agreement with the Board of Regents of the University of Texas System whereby the Company received an exclusive royalty-bearing license to manufacture, have manufactured, use, sell and/or sublicense products related to a U.S. patent Application entitled "A Method for Ranking Sequences to Select Target Sequence Zones of Nucleic Acids." The technology has identified optimum regions within genes to bind Antisense products. Antisense products are under development to control genes involved inhuman diseases such as cancer, diabetes or AIDS. This discovery potentially has broad applications to many human and viral genes involved in human disease. In July 1996, the Company entered into an agreement with the Washington State University Research Foundation ("WSURF") whereby the Company 6 received an exclusive, world-wide license to technology related to genes for enzymes in the biosynthetic pathway for Taxol. The Company is required to pay WSURF a yearly license fee as well as royalties on commercial sales. (3) R & D Agreement Extended The June 1992, agreement between the Company and the University of Texas at Dallas ("UTD") has been extended through May 1998. Pursuant to the amended agreement, UTD performs certain research and development activities relating to anti-sense compounds and related technology for use in humans as therapeutic and diagnostic products. (4) Stock Option Plan In April 1996, the Board of Directors of the Company adopted the Cytoclonal Pharmaceutics Inc. 1996 Stock Option Plan (the 1996 Plan) subject to shareholder approval. The 1996 Plan, which was approved by a majority of shareholders on June 3, 1996, provides for 750,000 shares of common stock to be reserved for issuance to officers, employees, consultants and advisors of the Company. Each Director of the Company was granted 50,000 options to purchase shares at an exercise price of $4.125 per share. As of November 5, 1996, 515,000 shares are available for future grant and options to acquire 235,000 remain outstanding under the 1996 Plan. The Plan provides for the grant of incentive stock options intended to qualify as such under Section 422 of the Internal Revenue Code of 1986, as amended, and nonstatutory stock options which do not so qualify. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cytoclonal Pharmaceutics Inc. (the "Company") was organized and commenced operations in September 1991. The Company is in the development stage, and its 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: o optimizing Taxol production from the Fungal Taxol Production System using fermentation technologies, inducers, media and strain improvements using Taxol specific genes, such as the Taxidiene Synthase gene. o establishing a diagnostic test using the 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. o developing a humanized antibody specific for the protein associated with the LCG gene and, if successful, submission of an IND for clinical trials. o further development of proprietary vectors which have been constructed for the expression of specific proteins that may be utilizable for vaccines for different diseases using Mycobacteria recipient strains. o further development of antisense algorithm under contract at the University of Texas and identification of optimum antisense reagents for various human genes of commercial value. o further animal studies at University of California, Los Angeles for taxol treatment of polycystic kidney disease. o development of TNF-PEG technology as an anti-cancer agent. o development of IL-T and IL-P. o making modest improvements to the Company's laboratory facilities. o 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 8 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, 1996 to September 30, 1996, the Company incurred a net loss $808,000 compared to a net loss of $678,000 for the same period in 1995. For the period from January 1, 1996 to September 30, 1996, the Company incurred a net loss of $2,128,000. The Company incurred a net loss of $2,110,000 for the nine months ended September 30, 1995. The increase from the previous year was attributable to an increase in research and development expenses and general and administrative expenses, partially offset by interest income generated from the proceeds of the Company's initial public offering of November 1995 and a decrease in interest expense. The Company expects to incur additional losses in the foreseeable future. The Company incurred general and administrative expenses of $273,000 and $403,000 for the three months ended September 1995 and September 1996, respectively and $888,000 and $1,110,000 for the nine months ended September 1995 and September 1996, respectively. The increase was attributable to increased public relations and technology marketing costs, legal and professional fees, travel expenses, as well as, to the acquisition of Directors and Officers liability insurance, partially offset by a decrease in financing costs. The Company incurred research and development expenses of $282,000 and $454,000 for the three months ended September 1995 and September 1996, respectively and $881,000 and $1,183,000 for the nine months ended September 1995 and September 1996, respectively. The increase was attributable to an increase in the purchase of laboratory supplies, an increase in research salaries, license fees paid to the Regents of University of California and WSURF and an increase in contract research and development expenses paid to UTD. Included in the research and development expense for the three months ended September 1996 was a noncash charge of $42,000 related to the valuation of warrants issued to WSURF. The Company believes that the net proceeds remaining from its initial public offering of November 1995 will be sufficient to finance the Company's plan of operation for approximately 12 months. 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. Statements in this report that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially from those currently anticipated. 9 PART II -- OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 11 Computation of per share earnings (b) Reports on Form 8-K - None 10 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 14, 1996 /s/ Daniel M. Shusterman ------------------------- Daniel M. Shusterman Vice President of Operations, Treasurer and Chief Financial Officer 11