UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
x
QUARTERLY REPORT UNDER
SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended March 31, 2008
OR
o
TRANSITION REPORT UNDER SECTION 13 OR
15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from _______ to _______
Commission
File Number 0-16686
VIOQUEST
PHARMACEUTICALS, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
58-1486040
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
180
Mount
Airy Road, Suite 102, Basking Ridge, New Jersey 07920
(Address
of Principal Executive Offices)
(908)
766-4400
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed from last
report)
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
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
|
Accelerated
filer o
|
| Non-accelerated
filer
o (Do not check if a smaller
reporting company) |
Smaller reporting
company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
As
of May
12, 2008 there were 5,461,644 shares of the issuer’s common stock, $0.001 par
value, outstanding.
Index
| |
|
Page
|
|
PART
I
|
FINANCIAL
INFORMATION
|
|
|
Item
1.
|
Unaudited
Condensed Consolidated Financial Statements
|
1
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
21
|
|
Item
4T.
|
Controls
and Procedures
|
21
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
Item
1A.
|
Risk
Factors
|
22
|
|
Item
6.
|
Exhibits
|
23
|
| |
Signatures
|
23
|
| |
Index
To Exhibits Filed With This Report
|
24
|
PART
I – FINANCIAL INFORMATION
Item
1. Unaudited Condensed Consolidated Financial Statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
OF MARCH 31, 2008 (UNAUDITED) AND DECEMBER 31, 2007
| |
|
March 31, 2008
(Unaudited)
|
|
December 31, 2007
(Note 1A)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
305,561
|
|
$
|
694,556
|
|
|
Prepaid
clinical research costs
|
|
|
287,055
|
|
|
189,359
|
|
|
Deferred
financing costs
|
|
|
-
|
|
|
357,581
|
|
|
Other
current assets
|
|
|
57,925
|
|
|
66,836
|
|
|
Total
Current Assets
|
|
|
650,541
|
|
|
1,308,332
|
|
| |
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
32,464
|
|
|
34,789
|
|
|
SECURITY
DEPOSITS
|
|
|
15,232
|
|
|
15,232
|
|
|
TOTAL
ASSETS
|
|
$
|
698,237
|
|
$
|
1,358,353
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES,
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
DEFICIENCY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,635,869
|
|
$
|
1,873,500
|
|
|
Accrued
compensation and related taxes
|
|
|
|
|
|
373,460
|
|
|
Other
accrued expenses
|
|
|
|
|
|
665,273
|
|
|
Convertible
notes, net of unamortized debt discount of $0 and $917,612
|
|
|
-
|
|
|
2,930,388
|
|
|
TOTAL
LIABILITIES
|
|
|
3,452,147
|
|
|
5,842,621
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED STOCK; $0.001 par value: 10,000,000
shares authorized
|
|
|
|
|
|
|
|
|
Series
A mandatorily redeemable convertible preferred stock; 765 shares
issued
and outstanding at March 31, 2008
|
|
|
6,321
|
|
|
-
|
|
|
Series
B mandatorily redeemable convertible preferred stock; 3,910 shares
issued
and outstanding at March 31, 2008
|
|
|
3,910,165
|
|
|
-
|
|
|
Dividends
payable in shares of common stock
|
|
|
14,947
|
|
|
-
|
|
|
TOTAL
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK
|
|
|
3,931,433
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIENCY
|
|
|
|
|
|
|
|
|
Common
stock; $0.001 par value: 200,000,000 shares authorized, 5,462,112
shares
issued and outstanding
|
|
|
5,462
|
|
|
5,462
|
|
|
Additional
paid-in capital
|
|
|
35,822,473
|
|
|
34,942,567
|
|
|
Accumulated
deficit
|
|
|
(42,513,278
|
)
|
|
(39,432,297
|
)
|
|
Total
Stockholders' Deficiency
|
|
|
(6,685,343
|
)
|
|
(4,484,268
|
)
|
|
TOTAL
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIENCY
|
|
$
|
698,237
|
|
$
|
1,358,353
|
|
See
accompanying notes to condensed consolidated financial
statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
| |
|
For the Three
Months Ended
March 31, 2008
|
|
For the Three
Months Ended
March 31, 2007
|
|
| |
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
979,094
|
|
$
|
1,368,811
|
|
|
General
and administrative
|
|
|
690,339
|
|
|
913,651
|
|
|
Total
Operating Expenses
|
|
|
1,669,433
|
|
|
2,282,462
|
|
| |
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(1,669,433
|
)
|
|
(2,282,462
|
)
|
| |
|
|
|
|
|
|
|
|
INTEREST
(EXPENSE) / INCOME, NET
|
|
|
(1,411,548
|
)
|
|
25,684
|
|
| |
|
|
|
|
|
|
|
|
LOSS
FROM CONTINUING OPERATIONS
|
|
|
(3,080,981
|
)
|
|
(2,256,778
|
)
|
| |
|
|
|
|
|
|
|
|
LOSS
FROM DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
(261,475
|
)
|
| |
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(3,080,981
|
)
|
$
|
(2,518,253
|
)
|
| |
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
CONTINUING
OPERATIONS
|
|
$
|
(0.63
|
)
|
$
|
(0.49
|
)
|
|
DISCONTINUED
OPERATIONS
|
|
|
-
|
|
|
(0.06
|
)
|
| |
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE – BASIC AND DILUTED
|
|
$
|
(0.63
|
)
|
$
|
(0.55
|
)
|
| |
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
|
|
|
4,905,426
|
|
|
4,605,672
|
|
See
accompanying notes to condensed consolidated financial
statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
DEFICIENCY
FOR
THE THREE MONTHS ENDED MARCH 31, 2008
(UNAUDITED)
| |
|
Common Stock
|
|
Additional Paid-In Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders'
Deficiency
|
|
| |
|
Shares
|
|
Amount
|
|
|
Balance, January
1, 2008
|
|
|
5,462,112
|
|
$
|
5,462
|
|
$
|
34,942,567
|
|
$
|
(39,432,297
|
)
|
$
|
(4,484,268
|
)
|
|
Net
loss for the three months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
(3,080,981
|
)
|
|
(3,080,981
|
)
|
|
Value
of warrants issued to placement agents with March 14, 2008 Series
A
mandatorily redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
140,164
|
|
|
|
|
|
140,164
|
|
|
Value
of warrants issued to investors and beneficial conversion feature
embedded
in Series A mandatorily redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
531,286
|
|
|
|
|
|
531,286
|
|
|
Accretion
of discount on Series A mandatorily redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
(6,321
|
)
|
|
|
|
|
(6,321
|
)
|
|
Discount
on convertible notes
|
|
|
|
|
|
|
|
|
62,166
|
|
|
|
|
|
62,166
|
|
|
Stock-based
compensation to employees
|
|
|
|
|
|
|
|
|
152,599
|
|
|
|
|
|
152,599
|
|
|
Stock-based
compensation to consultants and finder
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
12
|
|
|
Balance,
March 31, 2008
|
|
|
5,462,112
|
|
$
|
5,462
|
|
$
|
35,822,473
|
|
$
|
(42,513,278
|
)
|
$
|
(6,685,343
|
)
|
See
accompanying notes to condensed consolidated financial
statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
| |
|
For the Three
Months Ended
March 31, 2008
|
|
For the Three
Months Ended
March 31, 2007
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,080,981
|
)
|
$
|
(2,518,253
|
)
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
261,475
|
|
|
Loss
from continuing operations
|
|
|
(3,080,981
|
)
|
|
(2,256,778
|
)
|
|
Adjustments
to reconcile loss from continuing operations to net cash used in
continuing operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,325
|
|
|
2,307
|
|
|
Stock-based
compensation to employees
|
|
|
152,599
|
|
|
221,771
|
|
|
Stock-based
compensation to consultants and finder
|
|
|
12
|
|
|
53,178
|
|
|
Amortization
of debt discount and deferred financing fees
|
|
|
1,399,524
|
|
|
-
|
|
|
Dividends
payable on mandatorily redeemable convertible preferred
stock
|
|
|
14,947
|
|
|
-
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid
clinical research costs
|
|
|
(97,696
|
)
|
|
17,215
|
|
|
Other
assets
|
|
|
8,911
|
|
|
(100,907
|
)
|
|
Accounts
payable
|
|
|
762,369
|
|
|
759,403
|
|
|
Accrued
expenses
|
|
|
(222,455
|
)
|
|
(43,297
|
)
|
|
Net
Cash Used in Continuing Operating Activities
|
|
|
(1,060,445
|
)
|
|
(1,347,108
|
)
|
|
Net
Cash Used in Discontinued Operating Activities:
|
|
|
-
|
|
|
(342,098
|
)
|
|
Net
Cash Used in Operating Activities
|
|
|
(1,060,445
|
)
|
|
(1,689,206
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments
for purchased equipment
|
|
|
-
|
|
|
(2,277
|
)
|
|
Net
Cash Used in Continuing Investing Activities
|
|
|
-
|
|
|
(2,277
|
)
|
|
Net
Cash Used in Discontinued Investing Activities:
|
|
|
-
|
|
|
(23,555
|
)
|
|
Net
Cash Used in Investing Activities
|
|
|
-
|
|
|
(25,832
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of mandatorily redeemable convertible preferred stock
with
warrants, net of cash costs of $93,550
|
|
|
671,450
|
|
|
-
|
|
|
Repayment
of note payable
|
|
|
-
|
|
|
(75,000
|
)
|
|
Net
Cash Provided By / (Used in) Continuing Financing
Activities
|
|
|
671,450
|
|
|
(75,000
|
)
|
| |
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(388,995
|
)
|
|
(1,790,038
|
)
|
|
CASH
AND CASH EQUIVALENTS – BEGINNING OF PERIOD
|
|
|
694,556
|
|
|
2,931,265
|
|
|
CASH
AND CASH EQUIVALENTS – END OF PERIOD
|
|
$
|
305,561
|
|
$
|
1,141,227
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
Schedule of Non-Cash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
Value
of warrants issued to the placement agent in connection with issuance
of
mandatorily redeemable convertible preferred stock
|
|
$
|
140,164
|
|
$
|
-
|
|
|
Value
of beneficial conversion feature related to mandatorily redeemable
convertible preferred stock
|
|
$
|
531,286
|
|
$
|
-
|
|
|
Conversion
of convertible notes into mandatorily redeemable convertible series
B
preferred stock
|
|
$
|
3,910,165
|
|
$
|
-
|
|
See
accompanying notes to condensed consolidated financial
statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008 (UNAUDITED)
NOTE
1 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY
(A)
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the rules and
regulations of the Securities and Exchange Commission. Accordingly, the
financial statements do not include all information and footnotes required
by
accounting principles generally accepted in the United States of America for
complete annual financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect
all
adjustments, consisting of only normal recurring adjustments, considered
necessary for a fair presentation. Interim operating results are not necessarily
indicative of results that may be expected for the year ending December 31,
2008
or for any subsequent period. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements included in the Annual Report on Form 10-KSB of VioQuest
Pharmaceuticals, Inc. for the year ended December 31, 2007. The accompanying
condensed consolidated balance sheet as of December 31, 2007 has been derived
from the audited balance sheet as of that date included in the Form 10-KSB.
References to the “Company,” the “Registrant,” “we,” “us,” “our” or in this
Quarterly Report on Form 10-Q refer to VioQuest Pharmaceuticals, Inc., a
Delaware corporation, and its consolidated subsidiaries, together taken as
a
whole, unless the context indicates otherwise. Xyfid™ is our trademark for 1%
uracil topical cream that we are developing for the treatment and prevention
of
palmar-plantar erythrodysesthesia (PPE), also known as hand-foot syndrome (HFS),
a relatively common dose-limiting side effect of cytotoxic chemotherapy and
to
treat dry skin conditions and to relieve and to manage the burning and itching
associated with various dermatoses including atopic dermatitis, irritant contact
dermatitis, radiation dermatitis and other dry skin conditions, by maintaining
a
moist wound and skin environment. Lenocta™, previously referred to as VQD-001,
or sodium stibogluconate, is our trademark for our oncology product candidate.
All other trademarks and trade names mentioned in this Form 10-Q are the
property of their respective owners.
The
accompanying consolidated financial statements include the accounts of VioQuest
Pharmaceuticals, Inc. and its current and former subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Our formerly wholly-owned, discontinued subsidiary, Chiral Quest, Ltd., Jiashan
China’s functional currency was the United States Dollar. As such, all
transaction gains and losses were recorded in discontinued
operations.
On
September 29, 2006, the Company’s Board of Directors determined to seek
strategic alternatives with respect to the Company’s Chiral Quest, Inc.
subsidiary (“Chiral Quest”), which included a possible sale or other disposition
of the operating assets of that business. Accordingly, the chiral products
and
services operations and the assets of Chiral Quest are presented in these
financial statements as discontinued operations. On July 16, 2007, the Company
completed the sale of Chiral Quest to Chiral Quest Acquisition Corp. (“CQAC”)
for total cash consideration of approximately $1,700,000. As a result of this
transaction, the Company reported a gain of $438,444, which is included in
its
loss from discontinued operations in the third quarter of 2007. Chiral Quest
had
accounted for all sales of the Company from its inception. The Company’s
continuing operations, which have not generated any revenues, will focus on
the
remaining drug development operations of VioQuest Pharmaceuticals, Inc. and
accordingly, the Company has only one segment. As a result of these
reclassifications, the Company no longer provides segment reporting. See Note
2
for a complete discussion on discontinued operations.
The
consolidated balance sheets as of December 31, 2007 and the consolidated
statements of operations for the three months ended March 31, 2008 and 2007
include reclassifications to reflect discontinued operations.
(B)
Nature of Operations
Since
August 2004, the Company has focused on acquiring technologies for purposes
of
development and commercialization of pharmaceutical drug candidates in the
areas
of supportive care products, oncology, and infectious diseases for which there
are unmet medical needs. Since October 2005, the Company has held license rights
to develop and commercialize its two oncology drug candidates, Lenocta (sodium
stibogluconate), formerly VQD-001, an inhibitor of specific protein tyrosine
phosphatases, and VQD-002 (triciribine phosphate monohydrate), an inhibitor
of
activated Akt. The rights to these two oncology drug candidates, Lenocta and
VQD-002, are governed by license agreements with The Cleveland Clinic Foundation
and the University of South Florida Research Foundation, respectively. In March
2007, the Company acquired license rights to develop and commercialize Xyfid
(1%
uracil topical), an adjunctive therapy for the treatment and prevention of
Hand-Foot Syndrome (“HFS”), a common and serious side effect of chemotherapy
treatments. The Company’s rights to Xyfid are governed by a license agreement
with Asymmetric Therapeutics, LLC and Onc Res, Inc., as assigned to the Company
by Fiordland Pharmaceuticals, Inc.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008 (UNAUDITED)
(C)
Liquidity
Since
inception, the Company has incurred an accumulated deficit of $42,513,278
through March 31, 2008. For the three months ended March 31, 2008 and 2007,
the
Company had losses from continuing operations of $3,080,981 and $2,256,778,
respectively, and used $1,060,445 and $1,347,108 of cash in continuing operating
activities for the three months ended March 31, 2008 and 2007, respectively.
For
the three months ended March 31, 2008 and 2007, the Company had a net loss
of
$3,080,981 and a net loss of $2,518,253 (which included $2,256,778 from
continuing operations), respectively. As of March 31, 2008, the Company had
a
working capital deficit of $2,801,606 and cash and cash equivalents of $305,561.
The Company has incurred negative cash flow from operating activities since
its
inception. The Company has spent, and expects to continue to spend, substantial
amounts in connection with executing its business strategy, including planned
development efforts relating to the Company’s drug candidates, clinical trials
and other research and development efforts. As a result, we have insufficient
funds to cover our current obligations or future operating expenses. To conserve
funds, we will continue to complete our current ongoing Phase I and Phase II
studies for VQD-002 and Lenocta, respectively, however we will not initiate
any
new clinical studies unless and until we receive additional funding. Our current
resources are inadequate to continue to fund operations; therefore, we will
need
to raise capital by the end of the third quarter of 2008 if not sooner.
Furthermore, based upon the amount of capital we are required to raise by the
end of the third quarter of 2008 to continue operations, we may need to raise
additional capital before then to continue to fund our operations at our desired
pace throughout 2008, by selling shares of our equity securities or issuing
debt, or by potentially sublicensing our rights to our products. These matters
raise substantial doubt about the ability of the Company to continue as a going
concern.
On
March
14, 2008, the Company received gross proceeds of $765,000 from the sale of
Series A Mandatorily Redeemable Convertible Preferred Stock (“Series A
Preferred”). See Note 4. The Company’s cash and cash equivalents at March 31,
2008 reflect the remaining cash proceeds to the Company from this
transaction.
Management
anticipates that the Company’s capital resources will be adequate to fund its
operations into the third quarter of 2008. Additional financing or potential
sublicensing of our rights to our product(s) will be required during the third
quarter of 2008 in order to continue to fund operations. The most likely sources
of additional financing include the private sale of the Company’s equity or debt
securities, including bridge loans to the Company from third party lenders.
The
Company’s working capital requirements will depend upon numerous factors, which
include the progress of its drug development and clinical programs, including
associated costs relating to milestone payments, maintenance and license fees,
manufacturing costs, patent costs, regulatory approvals and the hiring of
additional employees.
Additional
capital that is urgently needed by the Company may not be available on
reasonable terms, or at all. If adequate financing is not available, the Company
may be required to terminate or significantly curtail or cease its operations,
or enter into arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, or
potential markets that the Company would not otherwise relinquish.
(D)
Stock-Based Compensation
The
Company issued options and warrants to purchase an aggregate of 885,000 shares
of its common stock during the three months ended March 31, 2008, comprised
of
120,000 shares subject to stock options to employees and 765,000 shares subject
to warrants issued to investors and placement agents.
Vesting
terms for the Company’s stock option plans differ based on the type of grant
made. Generally, stock options and warrants granted to employees and
non-employee directors vest as to one-third of the shares on each of the first,
second and third anniversaries of the grant date. However, vesting has ranged
in
length from immediate vesting to vesting periods in accordance with the period
covered by employment contracts. There were stock options to purchase 15,000
shares of common stock granted to a non-employee director in the first quarter
of 2006, of which 7,500 vested immediately and 7,500 vested on the first
anniversary of the grant date, stock options to purchase 40,000 shares of common
stock granted to four non-employee directors in the third quarter of 2007,
of
which one-third vested immediately and one-third of the shares vest on each
of
the first and second anniversaries of the grant date, stock options to purchase
501,334 shares of common stock granted to the President and Chief Executive
Officer, which vest as to 25% of the shares on each of the first, second, third
and fourth anniversaries of the grant date and stock options to purchase 85,644
shares of common stock granted to the President and Chief Executive Officer,
which will vest in four equal annual installments commencing on the first
anniversary of the grant date. However, this option is only exercisable to
the
extent that the shares of the Company’s common stock held in an escrow account
in favor of the former stockholders of Greenwich Therapeutics, Inc. in
connection with the Company’s October 2005 acquisition of Greenwich are released
from escrow. As of March 31, 2008, 35% of the common stock held in escrow had
been released and the Company has determined that it is probable that another
35% of the common stock held in escrow will be released by the June 30, 2008
deadline.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008 (UNAUDITED)
Stock
options and warrants granted to parties other than employees and non-employee
directors vest over individually agreed upon terms. The Company issued 765,000
warrants that vested immediately to investors and the placement agent that
participated in the March 14, 2008 financing relating to the issuance and sale
of Series A Preferred stock. See Note 4.
Following
the vesting periods, options are exercisable until the earlier of 90 days after
an employee’s employment with the Company terminates or the tenth anniversary of
the initial grant, subject to adjustment under certain conditions. The Company
recorded total compensation charges in the three months ended March 31, 2008
related to the fair value of employee and non-employee director stock option
grants of $152,599.
The
Company uses the Black-Scholes option pricing model to calculate the fair value
of options and warrants granted under Statement of Financial Accounting
Standards (“SFAS”) No. 123R, Share-based Payment (“SFAS 123R”). The key
assumptions for this valuation method include the expected term of the option,
stock price volatility, risk-free interest rate, dividend yield, exercise price
and forfeiture rate. Many of these assumptions are judgmental and highly
sensitive in the determination of compensation expense. Under the assumptions
set forth below, the weighted average fair values of the stock options granted
during the three months ended March 31, 2008 were $0.12.
The
table
below sets forth the key assumptions used in the valuation calculations for
options granted in the three months ended March 31, 2008 and 2007:
| |
|
Three
Months Ended
March
31,
|
|
| |
|
2008
|
|
2007
|
|
|
Term
|
|
|
7
years
|
|
|
7
years
|
|
|
Volatility
|
|
|
298
|
%
|
|
232-233
|
%
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
Risk-free
interest rate
|
|
|
3.3
|
%
|
|
4.5-4.9
|
%
|
|
Forfeiture
rate
|
|
|
0%-26
|
%
|
|
22
|
%
|
The
following table summarizes information about the Company’s stock options as of
and for the three months ended March 31, 2008:
| |
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining Contractual
Life (Years)
|
|
Aggregate
Intrinsic Value
|
|
|
Balance,
January 1, 2008
|
|
|
1,013,339
|
|
$
|
9.90
|
|
|
|
|
|
|
|
|
Granted
|
|
|
120,000
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(18,600
|
)
|
$
|
6.00
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2008
|
|
|
1,114,739
|
|
$
|
4.60
|
|
|
7.75
|
|
$
|
-
|
|
|
Exercisable
at March 31, 2008
|
|
|
311,261
|
|
$
|
8.50
|
|
|
3.00
|
|
$
|
-
|
|
As
of
March 31, 2008, there was $2,026,372 of unrecognized compensation costs related
to stock options. These costs are expected to be recognized over a weighted
average period of approximately 3.28 years.
As
of
March 31, 2008, an aggregate of 235,261 shares remained available for future
grants and awards under the Company’s stock incentive plan, which covers stock
options and restricted stock awards. The Company issues unissued shares to
satisfy stock option exercises and restricted stock awards.
(E)
Warrants Issued With Convertible Debt and Mandatorily Redeemable Convertible
Preferred Stock
The
Company accounts for the value of warrants and the intrinsic value of beneficial
conversion rights arising from the issuance of convertible debt instruments
and
mandatorily redeemable convertible preferred stock with nondetachable conversion
rights that are in-the-money at the commitment date pursuant to the consensuses
for EITF Issue No. 98-5, EITF Issue No. 00-19 and EITF Issue No. 00-27. Such
values are determined by allocating an appropriate portion of the proceeds
received from the debt instruments to the debt and warrants based on their
relative fair value and an appropriate portion of the proceeds received from
the
preferred stock to the preferred stock and warrants based on their relative
fair
value.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008 (UNAUDITED)
The
fair
value allocated to the warrants issued with convertible debt is recorded as
additional paid-in capital and as debt discount, which is charged to interest
expense over the term of the debt instrument. The fair value allocated to the
warrants issued with mandatorily redeemable convertible preferred stock is
recorded as additional paid-in capital and as preferred stock discount, which
is
accreted through a charge to accumulated deficit through the date of earliest
conversion.
The
intrinsic value of the beneficial conversion rights at the commitment date
may
also be recorded as additional paid-in capital and debt or preferred stock
discount as of that date or, if the terms of the debt instrument or preferred
stock are contingently adjustable, may only be recorded if a triggering event
occurs and the contingency is resolved.
(F)
Net Loss Per Common Share
Basic
net
loss per common share is calculated by dividing net loss by the weighted-average
number of common shares outstanding for the period, excluding 556,686 common
shares held in escrow based upon clinical milestones of Lenocta and VQD-002,
as
a result of the acquisition of Greenwich Therapeutics. Diluted net loss per
share is the same as basic net loss per share, since potentially dilutive
securities from the assumed exercise of stock options and stock warrants would
have an antidilutive effect because the Company incurred a net loss applicable
to common shareholders during each period presented. The amount of potentially
dilutive securities including options and warrants in the aggregate excluded
from the calculation were 4,451,372 (including the 556,686
common
shares held in escrow, 2,779,947 warrants, and 1,114,739 stock options) at
March
31, 2008 and 3,130,459 at December 31, 2007.
(G)
Restatement of Net Loss Per Common Share
As
a
result of the Company effecting a 1-for-10 reverse stock split on April 25,
2008, all common shares, warrants and options have been restated as of December
31, 2007. In accordance with the reverse stock split, each share of the
Company’s common stock, warrants and options, were reissued and repriced to
purchase or receive one-tenth times the number of shares of common stock
immediately theretofor purchasable and the purchase price per is 1,000 percent
of the purchase price per share.
NOTE
2 DISCONTINUED
OPERATIONS
As
explained in Note 1, the Company determined that it would dispose of Chiral
Quest on September 29, 2006 and accordingly, the operations and assets of Chrial
Quest have been presented in these financial statements as discontinued
operations. On July 16, 2007, the Company completed the sale of Chiral Quest
to
CQAC for total cash consideration of approximately $1,700,000. As a result
of
this transaction, the Company reported a gain of $438,444 in the third quarter
of 2007. Retention bonuses of $106,761 and accrued severance of $90,000 paid
to
certain Chiral Quest employees have been offset against the gain on sale.
Revenues from discontinued operations for the three months ended March 31,
2008
and 2007 were $0 and $803,784, respectively. Loss from discontinued operations
for the three months ended March 31, 2008 and 2007, which consisted of revenues
less cost of goods sold, management and consulting fees, research and
development, selling, general and administrative expenses and depreciation
and
amortization, totaled $0 and $261,475, respectively.
On
July
16, 2007, the Company entered into a sublease agreement with CQAC that will
expire on May 30, 2008 to lease its office and laboratory space, which was
utilized by Chiral Quest before it was sold to CQAC. CQAC, the subtenant, agreed
to make all payments of base rent and additional rent totaling approximately
$28,000 per month for a total commitment of $56,000 remaining on the sublease
agreement payable directly to the landlord. If CQAC were to default on payment
during the sublease agreement’s term, the Company would be obligated to provide
payment on behalf of CQAC through the remainder of the original lease term,
and
the Company will have the right to cancel and terminate the sublease with CQAC
upon five days notice to subtenant. As of March 31, 2008, CQAC has fully
complied with the sublease agreement with the Company.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008 (UNAUDITED)
NOTE
3 CONVERTIBLE
NOTES
On
June
29, 2007 and July 3, 2007, the Company issued and sold a series of 8%
convertible promissory notes (the “Bridge Notes”) in the aggregate principal
amount of $3,700,000 with a term of one year from the date of final closing.
Investors could have elected, at any time during the term, to convert all unpaid
principal plus any accrued but unpaid interest thereon on the Bridge Notes
into
shares of the Company’s common stock. In the event that the investors had not
elected to convert the Bridge Notes, all unpaid principal plus any accrued
interest would have automatically converted into the Company’s common stock upon
the completion of an equity financing or series of related equity financings
by
the Company resulting in aggregate gross cash proceeds to the Company of at
least $7,000,000. If the Bridge Notes and accrued interest were not converted
into shares of the Company’s common stock, all unpaid principal plus any accrued
interest would be due and payable on the first anniversary of the final
closing.
The
face
value of the Bridge Notes issued on June 29, 2007 and July 3, 2007, was
$2,967,500 and $732,500, respectively. The Company incurred commissions and
related costs in association with the Bridge Notes of $245,450 and $50,750
(as
explained below) for the June 29, 2007 and July 3, 2007 closings, respectively.
The Company also issued to investors five-year warrants (“Bridge Warrants”) to
purchase an aggregate of approximately 243,000 (195,000 and 48,000 for the
June
29, 2007 and July 3, 2007 closings, respectively) shares of the Company’s common
stock at an exercise price of $4.00 per share, which had a fair value of
$736,935 and $172,301 as of June 29, 2007 and July 3, 2007, respectively. The
Company allocated proceeds from the sale to the Bridge Warrants of $590,334
and
$139,489 as of June 29, 2007 and July 3, 2007, respectively, based on their
relative fair values to the fair value of the Bridge Notes, which was recorded
as a discount to the Bridge Notes. Gross proceeds allocated to the Bridge Notes
were $2,377,166 for the June 29, 2007 issuances, and $593,011 for the July
3,
2007 issuances. The discount associated with the value of the warrants will
be
amortized to interest expense over the term of the Bridge Notes.
As
a
result of the allocation of proceeds to the Bridge Warrants, the Bridge Notes
contained a Beneficial Conversion Feature (“BCF”) of $590,334 for the June 29,
2007 closing, and $139,489 for the July 3, 2007 closing, which were attributable
to an effective conversion price for the Company’s common stock that was less
than the market values on the dates of issuance. Additional BCF’s are recorded
as convertible interest is accrued. These amounts are recorded as additional
debt discount and additional paid-in capital, which reduces the initial carrying
value of the Bridge Notes. The discount associated with the BCF will also be
amortized to interest expense over the term of the Bridge Notes.
In
connection with the Bridge Notes, the Company issued five-year warrants to
placement agents to purchase an aggregate of 120,250 shares of common stock,
which are exercisable at a price of $4.20 per share. Based on the Black-Scholes
option pricing model, the warrants had a fair value of $356,425 for the June
29,
2007 closing and $73,441 for the July 3, 2007 closing. Additionally, the Company
incurred commissions of $205,450, a non-accountable expense allowance of $24,271
to the placement agents and escrow fees of $5,000 for the June 29, 2007 closing
and commissions of $50,575 for the July 3, 2007 closing. The Company engaged
Paramount BioCapital, Inc. (“Paramount”) as one of its placements agents. Dr.
Lindsay A. Rosenwald is the Chairman, CEO and sole stockholder of Paramount
and
a substantial stockholder of the Company. Stephen C. Rocamboli, the Company’s
chairman, was employed by Paramount at the time of the Company’s engagement. Of
the total consideration provided to the placement agents, the Company issued
warrants to Paramount to purchase 45,000 shares of common stock and paid
commissions of approximately $119,700. The fair value of the warrants,
commissions and fees totaling $591,146 for the June 29, 2007 closing and
$124,016 for the July 3, 2007 closing have been recognized as deferred financing
costs, which will be amortized to interest expense over the term of the Bridge
Notes.
As
a
condition to the March 14, 2008 private placement, the majority of the holders
of the June 29, 2007 and July 3, 2007 convertible promissory notes agreed to
convert such notes, together with accrued interest, into approximately 3,910
shares of the Company’s newly-designated Series B Mandatorily Redeemable
Convertible Preferred Stock (“Series B Preferred”). See Note 4 for further
discussion. The conversion of the Bridge Notes to Series B Preferred stock
resulted in a loss on the early extinguishment of debt of $814,355, which is
included in interest expense for the three months ended March 31, 2008. The
loss
is related to non-cash items, such as write-off of unamortized debt issuance
costs, BCF and deferred financing costs.
The
following assumptions were used for the Black-Scholes calculations for the
warrants related to the Bridge Notes:
|
Term
|
|
|
5
years
|
|
|
Volatility
|
|
|
240
|
%
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
Risk-free
interest rate
|
|
|
4.9-5.0
|
%
|
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008 (UNAUDITED)
NOTE
4 MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED STOCK
On
March
14, 2008, the Company issued 765 shares of Series A Preferred stock at a price
of $1,000 per share together with five-year warrants to purchase an aggregate
of
approximately 637,500 shares of our common stock at an exercise price of $1.00
per share for an aggregate purchase price of $765,000. The Company received
approximately $671,000 in net cash proceeds after closing costs.
Each
share of Series A Preferred stock sold is convertible into shares of the
Company's common stock at $0.60 per share, or approximately 1,275,000 shares
of
common stock in the aggregate. A holder of Series A Preferred stock may convert
the shares of Series A Preferred stock to common stock at any time and from
time
to time upon the holder’s election. The Series A Preferred stock shall
automatically convert into common stock in the event that the closing price
of
the common stock is equal to at least $3.80 per share (as adjusted for stock
splits, combinations and similar events) for 20 consecutive trading days. In
the
event that there has not been a voluntary conversion or mandatory conversion
of
the Series A Preferred stock by July 3, 2009, the holders of Series A Preferred
stock shall have a right to require the Company to redeem their Series A
Preferred stock out of funds lawfully available.
In
the
event of a liquidation, bankruptcy, dissolution or similar proceeding, the
holders of the Series A Preferred stock shall rank pari passu with the Series
B
Preferred stock and shall receive an amount equal to 100% of the Series A
Preferred stock price plus any accrued but unpaid dividends. The Series A
Preferred stock will be protected against dilution if the Company effects a
subdivision or combination of its outstanding common stock or in the event
of a
reclassification, stock dividend or other distribution payable in securities
of
the Company and shall have full-ratchet antidilution protection, subject to
standard exceptions. The holders of Series A Preferred stock will vote together
with all other holders of the Company’s voting stock on all matters submitted to
a vote of holders generally, with the holder of each share of Series A Preferred
stock being entitled to one vote for each share of common stock into which
such
shares of Series A Preferred stock could then be converted.
Based
upon the Black-Scholes option pricing model, the investor warrants are estimated
to be valued at approximately $701,000. The Company allocated the consideration
received from the sale of the Series A Preferred stock between the Series A
Preferred stock and the warrants on the basis of their relative fair values
at
the date of issuance, allocating approximately $366,000 to the warrants. The
value of the warrants was recognized as an increase in additional paid-in
capital and as a discount to the Series A Preferred stock. Furthermore, the
fair
value of the common shares into which the Series A Preferred stock is
convertible on the date of issuance exceeded the proceeds allocated to the
Series A Preferred stock, resulting in a beneficial conversion feature of
approximately $165,000 that was recognized as an increase in additional paid-in
capital and as a discount to the Series A Preferred stock. The discounts are
being accreted to the redemption value of the Series A Preferred stock over
the
mandatory redemption period, using the effective interest method, through a
charge to additional paid-in capital.
In
connection with the offering, the Company engaged Paramount as our placement
agent. Dr. Lindsay A. Rosenwald is the Chairman, CEO and sole stockholder of
Paramount and a substantial stockholder of the Company. Dr. Rosenwald
participated in this financing through a family investment partnership, of
which
he is the managing member. The family investment partnership purchased 500
shares of Series A Preferred stock and received warrants to purchase 416,700
shares of common stock. Based upon the Black-Scholes option pricing model,
the
family investment partnership’s investor warrants are estimated to be valued at
approximately $458,000. In consideration for the placement agent’s services, the
Company paid an aggregate of approximately $54,000 in commissions to Paramount
in connection with the offering. The Company also paid to Paramount $35,000
as a
non-accountable expense allowance. In addition, the Company issued to Paramount
five-year warrants to purchase an aggregate of approximately 127,500 shares
of
common stock, which are exercisable at a price of $0.80 per share. Based upon
the Black-Scholes option pricing model, the warrants issued to Paramount are
estimated to be valued at approximately $140,000. The fair value of the
warrants, commissions and fees totaling approximately $234,000 that was
recognized as a decrease to the Series A Preferred stock. The discount is being
accreted to Series A Preferred stock over the mandatory redemption period,
using
the effective interest method, through a charge to additional paid-in capital.
For the three months ended March 31, 2008, the Company accreted $6,321 of Series
A Preferred stock discount.
The
Series A Preferred stock shall be entitled to an annual dividend equal to 6%
of
the applicable issuance price per annum, payable semi-annually in cash or shares
of common stock, at the option of the Company. If the Company chooses to pay
the
dividend in shares of common stock, the price per share of common stock to
be
issued shall be equal to 90% of the average closing price of the common stock
for the 20 trading days prior to the date that such dividend becomes payable.
During the three months ended March 31, 2008, the Company accrued $1,913
associated with this dividend obligation, which was recorded as interest expense
on the accompanying condensed consolidated statements of
operations.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008 (UNAUDITED)
As
a
condition to the March 14, 2008 closing of the private placement, the majority
of the holders of the June 29, 2007 and July 3, 2007 convertible promissory
notes agreed to convert such notes, together with accrued interest, into
approximately 3,910 shares of Series B Preferred stock. The Series B Preferred
stock contains substantially the same economic terms as the previously
outstanding senior convertible notes. A holder of Series B Preferred stock
may
convert the shares of Series B Preferred stock to common stock at any time
and
from time to time upon the holder’s election. The Series B Preferred stock shall
automatically convert into common stock in the event that the closing price
of
the common stock is equal to at least $3.80 per share (as adjusted for stock
splits, combinations and similar events) for 20 consecutive trading days. The
Series B Preferred stock is subject to mandatory redemption on July 3,
2009.
Each
share of Series B Preferred stock sold is convertible into shares of the
Company's common stock at $3.80 per share, or approximately 1,029,000 shares
of
common stock in the aggregate. The Series B Preferred stock shall be entitled
to
an annual dividend equal to 8% of the applicable issuance price per annum,
payable semi-annually in cash or shares of common stock, at the option of the
Company. If the Company chooses to pay the dividend in shares of common stock,
the price per share of common stock to be issued shall be equal to 90% of the
average closing price of the common stock for the 20 trading days prior to
the
date that such dividend becomes payable. During the three months ended March
31,
2008, the Company accrued $13,034 associated with this dividend obligation,
which was recorded as interest expense on the accompanying condensed
consolidated statements of operations.
In
the
event of a liquidation, bankruptcy, dissolution or similar proceeding, the
holders of the Series B Preferred stock shall rank pari passu with the Series
A
Preferred stock and shall receive an amount equal to 100% of the Series B
Preferred stock price plus any accrued but unpaid dividends.
The
following assumptions were used for the Black-Scholes calculations for the
warrants related to the financing:
|
Term
|
|
|
5
years
|
|
|
Volatility
|
|
|
301
|
%
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
Risk-free
interest rate
|
|
|
2.4
|
%
|
NOTE
5 SUBSEQUENT
EVENTS
On
April
15, 2008, the Company’s Board of Directors authorized an amendment to the
Company’s certificate of incorporation to provide for the combination of the
Company’s common stock in the form of a 1-for-10 reverse stock split. In
accordance with the reverse stock split, each share of the Company’s common
stock was reissued and repriced for each 10 shares of common stock exchanged
by
the holders of record at 12:01 a.m. on April 25, 2008 (the “Effective Time”).
Further, each option to purchase shares of common stock outstanding as of the
Effective Time and any other outstanding and unexercised warrants or similar
rights to purchase or receive shares of common stock outstanding immediately
prior to the Effective Time provides the right to purchase or receive one-tenth
times the number of shares of common stock immediately theretofor purchasable
and the purchase price per share shall be 1,000 percent of the purchase price
per share immediately theretofor payable. The number of shares reserved for
issuance under the Company’s 2003 Stock Option Plan shall become one-tenth the
number of shares reserved for issuance as of the Effective Time.
On
April
14, 2008, the Company appointed Vernon L. Alvarez, Ph.D., as Vice President
of
Research and Development.
On
April
11, 2008, Edward C. Bradley, M.D., the Company’s Chief Scientific Officer,
resigned from his part-time position with the Company. In consideration of
Dr.
Bradley’s service, the Company accelerated the vesting of Dr. Bradley’s stock
options to purchase an additional 23,333 shares of the Company’s common stock.
Furthermore, the exercise period for his vested options is extended until
December 31, 2008. Incremental compensation cost is incurred when the terms
of
his award are modified. Based upon the Black-Scholes option pricing model,
the
incremental cost is approximately $15,000, which is measured by comparing the
fair value of the modified award with the fair value of the award immediately
before the modification.
On
April
9, 2008, the Company issued 2,194.5 shares of Series A Preferred stock at a
price of $1,000 per share together with five-year warrants to purchase an
aggregate of approximately 1.83 million shares of our common stock at an
exercise price of $1.00 per share for an aggregate purchase price of $2,195,000.
The Company received approximately $2,041,000 in net cash proceeds after closing
costs. In addition, the Company reissued the 765 shares of Series A Preferred
stock originally sold on March 14, 2008, on the same terms as if the shares
had
been purchased on April 9, 2008.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008 (UNAUDITED)
Each
share of Series A Preferred stock sold is convertible into shares of the
Company's common stock at $0.60 per share, or approximately 3.66 million shares
of common stock in the aggregate. A holder of Series A Preferred stock may
convert the shares of Series A Preferred stock to common stock at any time
and
from time to time upon the holder’s election. The Series A Preferred stock shall
automatically convert into common stock in the event that the closing price
of
the common stock is equal to at least $3.80 per share (as adjusted for stock
splits, combinations and similar events) for 20 consecutive trading days. The
Series A Preferred stock is subject to mandatory redemption on July 3, 2009.
As
of
April 1, 2008, the Series B Preferred stockholders are foreclosed from
exercising their Series B Preferred stock participation rights and may not
convert any of their Series B Preferred stock into the securities. A “Series B
Participation Right” means the right of the Series B Preferred stockholder to
convert all or any portion of such Series B Preferred stockholder’s shares of
Series B Preferred stock into the securities, as follows: for each $1.00 of
new
money invested in the April 9, 2008 offering by the Series B Preferred
stockholder, such Series B Preferred stockholder shall be entitled to convert
$1.00 of Series B Preferred stock into the securities at a price equal to the
April 9, 2008 offering price.
Certain
Series B Preferred stockholders exercised their right to convert Series B
Preferred stock into Series A Preferred stock by investing new money in the
April 9, 2008 offering. These holders invested $505,000 of new money in the
April 9, 2008 offering and earned the right to convert $505,000 of Series B
Preferred stock, convertible into shares of the Company’s common stock at $3.80
per share, into Series A Preferred stock, convertible into shares of the
Company’s common stock at $0.60 per share. As such, the Company will record a
charge for the induced conversion of Series B Preferred stock of approximately
$709,000, which will be included in net loss applicable to common shareholders.
The converting stockholders received 505 shares of Series A Preferred
Stock.
In
connection with the offering, the Company engaged Paramount as our placement
agent. In consideration for the placement agent’s services, the Company paid an
aggregate of approximately $153,000 in commissions to Paramount in connection
with the offering. In addition, the Company issued to Paramount five-year
warrants to purchase an aggregate of approximately 365,800 shares of common
stock, which are exercisable at a price of $0.80 per share. Based upon the
Black-Scholes option pricing model, the warrants issued to Paramount are
estimated to be valued at approximately $366,000. The Series A Preferred stock
shall be entitled to an annual dividend equal to 6% of the applicable issuance
price per annum, payable semi-annually in cash or shares of common stock, at
the
option of the Company. If the Company chooses to pay the dividend in shares
of
common stock, the price per share of common stock to be issued shall be equal
to
90% of the average closing price of the common stock for the 20 trading days
prior to the date that such dividend becomes payable.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
We
are a
biopharmaceutical company focused on the acquisition, development and
commercialization of clinical stage drug therapies targeting both the molecular
basis of cancer and side effects of cancer treatment. Our lead compound under
development is Xyfid (1% topical uracil) for the treatment and prevention of
Hand-Foot Syndrome (“HFS”), a common and serious side effect of chemotherapy
treatments. In parallel, Xyfid is also being developed to treat dry skin
conditions and manage the burning and itching associated with various diseases
of the skin, or dermatoses. We expect to initiate a Phase IIb program for Xyfid
in 2008 for HFS, and are exploring a parallel 510(k) Premarket Notification
submission during 2008 for Xyfid to treat various dermatoses. Additionally,
we
are developing VQD-002 (triciribine phosphate monohydrate or TCN-P), a small
molecule anticancer compound that inhibits activation of protein kinase B (PKB
or AKT), a key component of a signaling pathway known to promote cancer cell
growth and survival as well as resistance to chemotherapy and radiotherapy.
VQD-002 is currently in Phase I clinical development for multiple tumor types
and we expect to advance VQD-002 into Phase II clinical development during
2008.
We are also developing Lenocta (sodium stibogluconate), which we previously
referred to as VQD-001, a selective, small molecule inhibitor of certain protein
tyrosine phosphatases (“PTPs”), such as SHP-1, SHP-2 and PTP1B, with
demonstrated anti-tumor activity against a wide spectrum of cancers both alone
and in combination with other approved immune activation agents, including
IL-2
and interferons. Lenocta is currently in a Phase IIa clinical trial as a
potential treatment for melanoma, renal cell carcinoma, and other solid tumors.
In addition to its potential role as a cancer therapeutic, sodium stibogluconate
has been approved in most of the world for first-line treatment of
leishmaniasis, an infection typically found in tropic and sub-tropic developing
countries. Based on historical published data and a large observational study
by
the U.S. Army, data from approximately 400 patients could be utilized to support
a New Drug Application (“NDA”) with the U.S. Food and Drug Administration
(“FDA”) in 2008. Lenocta has been granted Orphan Drug status for leishmaniasis.
To date, we have not received approval for the sale of any of our drug
candidates in any market and, therefore, have not generated any product sales
from our drug candidates.
Through
our drug development business, we acquire, develop, and intend to commercialize
novel drug therapies targeting both the molecular basis of cancer and side
effects of treatment. Through our acquisition of Greenwich Therapeutics, Inc.
in
October 2005, we obtained the rights to develop and commercialize two oncology
drug candidates - Lenocta and VQD-002. We hold our rights to Lenocta and
VQD-002, pursuant to license agreements with The Cleveland Clinic Foundation
and
the University of South Florida Research Foundation, respectively. In March
2007, the Company acquired license rights to develop and commercialize Xyfid.
The Company’s rights to Xyfid are governed by a license agreement with
Asymmetric Therapeutics, LLC and Onc Res, Inc., as assigned to the Company
by
Fiordland Pharmaceuticals, Inc. These licenses give us the right to develop,
manufacture, use, commercialize, lease, sell and/or sublicense Lenocta, VQD-002
and Xyfid.
| |
·
|
Xyfid™
(1% uracil topical).
VioQuest has been developing Xyfid for the treatment and prevention
of
palmar-plantar erythrodysesthesia (PPE), also known as hand-foot
syndrome
(HFS), a relatively common dose-limiting side effect of cytotoxic
chemotherapy - most frequently fluoropyrimidines, such as continuous
infusion 5-fluorouracil (5-FU), and the oral 5-FU prodrug capecitabine
(Xeloda® by Roche). Fluoropyrimidines are among the most commonly used
cancer chemotherapeutics nearly 50 years after their introduction.
Fluoropyrimidines, alone or in combination therapy, are commonly
given for
cancers of the head and neck, breast, cervix, and gastrointestinal
tract.
|
There
are
currently no treatments or preventative agents for HFS, which is characterized
by the progressive redness and cracking of the hands and feet. The severity
of
HFS is typically defined by three grade levels: Grade 1: numbness, tingling,
painless swelling; Grade 2: painful discomfort, swelling; Grade 3: ulceration,
blistering, severe pain and discomfort, unable to work or perform activities
of
daily living. Up to 60% of all capecitabine patients experience HFS and up
to
20% experience severe HFS (Grade 3). According to the prescribing information
for capecitabine, if grade 2 or 3 HFS occurs, administration of capecitabine
should be interrupted until the event resolves or decreases in intensity to
grade 1. Following grade 3 HFS, subsequent doses of capecitabine should be
decreased.
Uracil,
the active ingredient in Xyfid, is a naturally occurring substrate for enzymes,
such as thymidine phosphorylase (TP) and and dihydropyrimidine dehydrogenase
(DPD), that metabolize fluoropyrimidines into toxic metabolites. Addition of
uracil to systemic fluoropyrimidine treatment regimens, such as tegafur-uracil,
or UFT, is well-established to significantly diminish the incidence of HFS.
Whereas such combination products have been licensed in Japan and much of
Europe, they have not been approved for use in the United States due, in part,
to FDA questions regarding the demonstrable non-inferiority of the combination
drug compared with fluoropyrimidines alone.
In
contrast to systemic exposure, topical application of uracil would potentially
allow for the treatment and prevention of HFS without compromising the efficacy
of systemic fluoropyrimidine therapy. In a small pilot study, Xyfid has been
effective at preventing the both the incidence and recurrence of dose limiting
HFS when applied topically.
VioQuest
is considering parallel regulatory paths for two separate indications for
Xyfid:
510(k)
Premarket Notification
During
March 2008, we signed an agreement with Medical Device Consultants, Inc. (MDCI)
for MDCI to assist us in obtaining clearance to market Xyfid pursuant to Section
510(k) of the Food, Drug and Cosmetic Act, or FDCA, and in particular, the
“premarket notification” provisions of Section 510(k). To qualify for 510(k)
premarket notification, a product must be substantially equivalent to another
device that is legally marketed in the U.S. A device is substantially equivalent
if, in comparison to a predicate it:
| |
·
|
has
the same intended use as the predicate; and
|
| |
·
|
has
the same technological characteristics as the
predicate.
|
A
claim
of substantial equivalence does not mean the new and predicate devices must
be
identical. Substantial equivalence is established with respect to intended
use,
design, energy used or delivered, materials, chemical composition, manufacturing
process, performance, safety, effectiveness, labeling, biocompatibility,
standards, and other characteristics, as applicable.
We
believe that Xyfid may be substantially equivalent to several predicate devices
designed to improve dry skin conditions and to relieve and to manage the burning
and itching associated with various dermatoses including atopic dermatitis,
irritant contact dermatitis, radiation dermatitis and other dry skin conditions,
by maintaining a moist wound and skin environment.
New
Drug Application (NDA) Process
A
pilot
clinical study in patients has demonstrated that topical application of Xyfid
to
the hands and feet may be effective in preventing the recurrence of dose
limiting HFS. On this basis, an investigational new drug application (IND)
was
submitted and accepted by the FDA. Subsequently, Xyfid was granted fast track
designation for the prevention of HFS in patients receiving capecitabine
for the
treatment of advanced metastatic breast cancer.
Pursuant
to this IND, we expect to evaluate the safety, tolerability and activity
of
Xyfid and its ability to reduce the incidence of HFS. We are considering
a
30-patient Phase IIb study in breast cancer patients receiving capecitabine
that
could begin during 2008. The outcome of the Phase IIb study could support
plans
for registration of Xyfid under the NDA process. Xyfid has been awarded
fast-track status by the FDA in this setting.
| |
·
|
VQD-002
(triciribine phosphate monohydrate).
VQD-002, a tricyclic nucleoside that inhibits the activation of Akt,
has
demonstrated anti-tumor activity against a wide spectrum of cancers
in
preclinical and clinical studies. Amplification, overexpression,
or
activation of Akt, also named protein kinase B, have been detected
in a
number of human malignancies, including prostate, breast, ovarian,
colorectal, pancreatic, and hematologic cancers. Activation of Akt
is
associated with cell survival, malignant transformation, tumor
invasiveness, and chemo-resistance, while inhibition of Akt activity
has
been shown to cause cell death. These attributes make Akt an attractive
target for cancer therapy.
|
VQD-002
was first synthesized in 1971 and identified as an antineoplastic agent. Phase
I
clinical trials on VQD-002 proved that its safety and side effects were dose
dependent. However, as a single drug in Phase II trials, VQD-002 failed to
show
efficacy against advanced breast, colon, and lung cancer even at very high
doses.
A
few
years ago, researchers at Moffitt Cancer Center found that VQD-002 inhibits
Akt
activation and has antitumor activity as a single agent against tumors with
activated Akt. Inhibition of Akt activation plays a key role in VQD-002’s
antitumor activity. Thus, Phase I trials of VQD-002 have been initiated for
tumors with activated Akt using much lower doses of VQD-002 than those
previously used that caused toxicity.
During
October 2007, preclinical study results were published demonstrating that
combining VQD-002 with trastuzumab (Herceptin® by Genentech) may be a clinically
applicable strategy to overcome trastuzumab resistance, particularly that caused
by loss of PTEN, a tumor suppressor protein. Trastuzumab resistance is a
clinically devastating problem and this study suggests a rational improvement
to
trastuzumab-based therapy, which could directly affect the clinical management
of breast cancer patients in general and particularly those with PTEN-deficient
tumors.
During
January 2008, preclinical study results were published demonstrating that
VQD-002 disrupts a specific signaling pathway associated with chemoresistance
and cancer cell survival in ovarian cancer. The preclinical study results
indicate that VQD-002 could play a role in reversing drug resistance in ovarian
cancer for patients treated with chemotherapy in the years ahead.
In
our
current Phase I solid tumor study, VQD-002 was administered intravenously over
a
28-day cycle on days 1, 8, and 15. Cohorts of 3 patients received escalating
doses of VQD-002 at 15, 25, 35, and 45 mg/m2. Patients had progressive disease
despite receiving a median of 3 prior treatment regimens (range 1-4).
Preliminary Phase I data from this solid tumor study demonstrated that VQD-002
was well tolerated; one melanoma subject had stable disease for 8
months.
In our
Phase I hematological malignancies study, VQD-002 was administered intravenously
over a 28-day cycle on days 1, 8, and 15. Cohorts of 3 patients received
escalating doses of VQD-002 at 15, 25, 35, 45 and 55 mg/m2. Enrollment to higher
doses is ongoing, which we are currently at 65 mg/m2. Patients had progressive
disease despite receiving a median of 3 prior treatment regimens (range 1-4).
Interim results of a Phase I trial in hematologic malignancies demonstrate
that
VQD-002 is well-tolerated and shows signs of clinical activity in patients
with
advanced leukemias. The Phase I trial is designed to assess the safety,
tolerability and pharmacokinetics of VQD-002 and to establish a recommended
Phase II dose for further studies among patients. In results presented to date,
a total of 38 patients have been enrolled at two clinical sites. Twenty-nine
patients are evaluable for toxicity and response, six patients are evaluable
for
toxicity only, and three patients are not evaluable.
Preliminary
results from this trial show that patients with relapsed, refractory acute
myeloid leukemia, or AML, experienced a decrease in peripheral blood
myeloblasts, a measure of clinical activity. In particular, four patients
treated at the 25 mg/m2 or 35 mg/m2 dose level of VQD-002 experienced up to
50
percent reductions in peripheral blast cells. Additional hematological
improvements included six patients achieving major improvements in platelet
count lasting up to 36 days and seven patients achieving major improvements
in
neutrophil count lasting up to 40 days while on therapy. VQD-002 was
well-tolerated at the doses studied.
We
filed
with the FDA an IND relating to VQD-002, which was accepted in April 2006.
Pursuant to this IND, we are currently evaluating the safety, tolerability
and
activity of VQD-002 in two Phase I clinical trials, including one at the Moffitt
Cancer Center in up to 42 patients with hyper-activated, phosphorylated Akt
in
solid tumors and a second clinical trial, with up to 40 patients, at the M.D.
Anderson Cancer Center and the Moffitt Cancer Center in hematological tumors,
with particular attention in leukemias. We expect to complete our Phase I
studies in 2008. During 2008, the FDA granted orphan drug designation to VQD-002
for the treatment of multiple myeloma. We expect to advance VQD-002 into Phase
II clinical development during 2008.
| |
·
|
Lenocta™
(sodium stibogluconate).
Lenocta is a selective, small molecule inhibitor of certain protein
tyrosine phosphatases (PTPs), such as SHP-1, SHP-2 and PTP1B, with
demonstrated anti-tumor activity against a wide spectrum of cancers
both
alone and in combination with other approved immune activation agents,
including IL-2 and interferons. PTPs are a family of proteins that
regulate signal transduction pathways in cells and have been implicated
in
a number of diseases including cancer, diabetes, and
neurodegeneration.
|
Lenocta
has been shown to have anti-proliferative activity against a broad number of
tumor cell lines, including melanoma and renal cell lines. Pre-clinical work
in
nude mice with cancer xenografts has shown that Lenocta can control malignancies
in vivo as well. These effects were seen whether used as part of a combination
therapy with existing treatments, including interferon and interleukin-2, or
alone. In addition, preclinical data also suggests that monotherapy with Lenocta
may be useful to treat certain other tumor types, including prostate
cancer.
The
preclinical data suggests that Lenocta utilizes multiple modes of action,
including having a direct effect on cancer cells, as well as generally enhancing
the body’s immune system. These multiple modes of action, along with Lenocta’s
known historical toxicity profile, demonstrate that Lenocta is a potentially
attractive drug candidate to evaluate as an anti-cancer agent.
Phase
I
data from our combination trial of Lenocta and alpha interferon (“IFN
a-2b”)
demonstrated pharmacodynamic activity in some solid tumors as demonstrated
by
increases in the activities of natural killer cells, CD8 and type II dendritic
cells, and two patients with ocular melanoma (1) and adenocystic carcinoma
(1)
have remained stable by Response Evaluation Criteria in Solid Tumors, or RECIST,
on first assessment. There have been seventeen subjects evaluable for
response.
A
complete treatment cycle is for six weeks, with week 1 the patient is
intravenously dosed with Lenocta for five days as a monotherapy, week 2 the
patient is dosed with Lenocta and IFN a-2b,
week
3 is a rest period, weeks 4 and 5 the patient is dosed with Lenocta and IFN
a-2b,
and
then there is a week rest before a subsequent cycle is initiated. Patients
have
been given five different dose cohorts: 400 mg/m2, 600 mg/m2, 900 mg/m2, 1350
mg/m2 and a dose reduced cohort of 1125 mg/m2. Lenocta with IFN a-2b
has
been well tolerated at doses up to 900 mg/m2. We plan to initiate an expansion
phase for 20 patients to have twelve subjects evaluable for response at a dose
of 900 mg/m2.
We
filed
with the FDA an IND for Lenocta, which the FDA accepted in August 2006, allowing
us to commence clinical trials of Lenocta. Lenocta is currently being studied
at
the M.D. Anderson Cancer Center and the University of New Mexico in a Phase
IIa
corporate-sponsored clinical trial in combination with IFN a-2b
in up
to 54-patients with melanoma, renal cell carcinoma, and other solid tumors
that
have been non-responsive in previous cytokine therapy. In November 2007, we
dosed our first patient in our Phase IIa solid tumor study. We expect to
complete enrollment in our Phase IIa solid tumor study in 2008. The Phase IIa
trial has been designed to evaluate the clinical efficacy and biological
effectiveness of Lenocta at the highest tolerable does in combination with
IFN
a-2b
in
patients with advanced-stage solid tumors.
Additional
Potential Indication of Lenocta
As
we
continue to develop Lenocta for indications primarily used for an oncology
drug
candidate, we are also in the process of evaluating its potential development
as
a treatment for leishmaniasis. According to the World Health Organization,
leishmaniasis currently threatens 350 million men, women and children in 88
countries around the world. The leishmaniases are parasitic diseases with a
wide
range of clinical symptoms, including skin ulcers, partial or total destruction
of the mucus membrane and irregular bouts of fever, substantial weight loss,
swelling of the spleen and liver, and anaemia (occasionally serious). In
collaboration with the U.S. Army, through an executed Cooperative Research
and
Development Agreement, we are evaluating the potential development of Lenocta
in
the treatment of leishmaniasis. Lenocta was granted orphan drug designation
by
the FDA in the second half of 2006 for the treatment of leishmaniasis. The
Company has also convened an advisory board to evaluate the potential submission
of an NDA to the FDA for Lenocta for the treatment of leishmaniasis in
2008.
To
date,
we have not received approval for the sale of any drug candidates in any market
and, therefore, have not generated any revenues from our drug candidates. The
successful development of our product candidates is highly uncertain. Product
development costs and timelines can vary significantly for each product
candidate and are difficult to accurately predict. Various laws and regulations
also govern or influence the manufacturing, safety, labeling, storage, record
keeping and marketing of each product. The lengthy process of seeking these
approvals, and the subsequent compliance with applicable statutes and
regulations, require the expenditure of substantial resources. Any failure
by us
to obtain, or any delay in obtaining, regulatory approvals could materially
adversely affect our business.
Developing
pharmaceutical products is a lengthy and very expensive process. Assuming we
do
not encounter any unforeseen safety issues during the course of developing
our
product candidates, we do not expect to complete the development of a product
candidate until approximately 2008 for the treatment of leishmaniasis, 2008
for
Xyfid through a 510(k) submission, 2010 for Xyfid through an NDA submission,
and
2013 for oncology indications of VQD-002 and then 2013 for oncology indications
of Lenocta, if ever. In addition, as we continue the development of our product
candidates, our research and development expenses will significantly increase.
To the extent we are successful in acquiring additional product candidates
for
our development pipeline, our need to finance further research and development
will continue to increase. Accordingly, our success depends not only on the
safety and efficacy of our product candidates, but also on our ability to
finance the development of these product candidates. Our major sources of
working capital have been proceeds from various private financings, primarily
private sales of our common stock and other equity securities.
Research
and development expenses consist primarily of salaries and related personnel
costs, fees paid to consultants and outside service providers for clinical
development, legal expenses resulting from intellectual property protection,
business development and organizational affairs and other expenses relating
to
the acquiring, design, development, testing, and enhancement of our product
candidates, including milestone payments for licensed technology. We expense
our
research and development costs as they are incurred.
Results
of Operations – For the Three Months Ended March 31, 2008 vs. March 31,
2007
Continuing
Operations:
The
Company has had no revenues from its continuing operations through March 31,
2008.
Research
and development, or R&D, expenses for the three months ended March 31, 2008
were $979,094 as compared to $1,368,811 during the three months ended March
31,
2007. R&D expense consists of clinical development costs, milestone license
fees, maintenance fees paid to our licensing institutions, outside manufacturing
costs, outside clinical research organization costs, regulatory and patent
filing costs associated with our three oncology compounds, Lenocta, VQD-002
and
Xyfid.
The
following table sets forth the research and development expenses per compound,
for the periods presented.
| |
|
Three
Months Ended March 31,
|
|
| |
|
2008
|
|
2007
|
|
Cumulative
amounts during
development
|
|
|
Lenocta
|
|
$
|
285,330
|
|
$
|
456,525
|
|
$
|
3,165,324
|
|
|
VQD-002
|
|
|
530,613
|
|
|
477,624
|
|
|
3,663,633
|
|
|
Xyfid
|
|
|
163,151
|
|
|
434,662
|
|
|
958,018
|
|
|
Total
|
|
$
|
979,094
|
|
$
|
1,368,811
|
|
$
|
7,786,975
|
|
The
following table sets forth the research and development expenses for the three
months ended March 31, 2008 by expense category, for our three oncology
compounds.
| |
|
Drug
Candidate
|
|
|
|
| |
|
Lenocta
|
|
VQD-002
|
|
Xyfid
|
|
Three Months
Ended March
31, 2008
|
|
|
Clinical
Research Costs
|
|
$
|
160,759
|
|
$
|
217,708
|
|
$
|
104,293
|
|
$
|
482,760
|
|
|
Labor
Costs
|
|
|
64,403
|
|
|
167,448
|
|
|
25,761
|
|
|
257,612
|
|
|
Regulatory
/ Legal Fees
|
|
|
51,118
|
|
|
132,907
|
|
|
20,447
|
|
|
204,472
|
|
|
Licensing
/ Milestone Fees
|
|
|
8,750
|
|
|
6,250
|
|
|
-
|
|
|
15,000
|
|
|
Other
|
|
|
300
|
|
|
6,300
|
|
|
12,650
|
|
|
19,250
|
|
|
Total
|
|
$
|
285,330
|
|
$
|
530,613
|
|
$
|
163,151
|
|
$
|
979,094
|
|
The
following table sets forth the research and development expenses for the three
months ended March 31, 2007 by expense category, for our three oncology
compounds.
| |
|
Drug
Candidate
|
|
|
|
| |
|
Lenocta
|
|
VQD-002
|
|
Xyfid
|
|
Three Months
Ended March
31, 2007
|
|
|
Clinical
Research Costs
|
|
$
|
182,497
|
|
$
|
329,474
|
|
$
|
-
|
|
$
|
511,971
|
|
|
Labor
Costs
|
|
|
137,227
|
|
|
77,227
|
|
|
-
|
|
|
214,454
|
|
|
Regulatory
/ Legal Fees
|
|
|
76,864
|
|
|
60,048
|
|
|
37,490
|
|
|
174,402
|
|
|
Licensing
Fees
|
|
|
8,752
|
|
|
6,250
|
|
|
369,588
|
|
|
384,590
|
|
|
Other
|
|
|
51,185
|
|
|
4,625
|
|
|
27,584
|
|
|
83,394
|
|
|
Total
|
|
$
|
456,525
|
|
$
|
477,624
|
|
$
|
434,662
|
|
$
|
1,368,811
|
|
The
decrease in R&D expenses for the three months ended March 31, 2008 as
compared to the three months ended March 31, 2007 is primarily attributable
to
fees incurred during the three months ended March 31, 2007 in acquiring the
worldwide license to certain patents for Xyfid. In addition, there was a
reduction in clinical research costs, offset by increased labor costs and
regulatory and legal fees related to our oncology drug candidates: VQD-002,
Lenocta and Xyfid. Our R&D expense for the first quarter 2008 is primarily
composed of outside clinical research organization costs of $482,760, employee
costs of $257,612 and outside regulatory and legal fees of $204,472, which
have
been allocated to each of our three pharmaceutical product candidates. To
conserve funds, we will continue to complete our current ongoing Phase I and
Phase II studies for VQD-002 and Lenocta, respectively, however we will not
initiate any new clinical studies unless and until we receive additional
funding. We expect R&D spending to increase over the remainder of the year
as we continue our existing clinical development programs and incur costs
related to license fees, manufacturing of our products, regulatory costs, and
the hiring of additional people in the clinical development area.
General
and administrative, or G&A, expenses for the three months ended March 31,
2008 were $690,339 as compared to $913,651 during the three months ended March
31, 2007. This decrease in G&A expenses for the three months ended March 31,
2008 as compared to the three months ended March 31, 2007 was primarily due
to
having fewer employees which resulted in reduced employee and non-employee
director stock option expense in accordance with SFAS 123R as a result of
forfeitures, a reduction of bonus expenses over prior year, no recruitment
expenses and no employment agency fees.
Interest
expense, net of interest income for the three months ended March 31, 2008 was
$1,411,548 as compared to interest income, net of interest expense for the
three
months ended March 31, 2007 of $25,684. Interest expense for the three months
ended March 31, 2008 was primarily composed of interest expenses recorded upon
the extinguishment of the Bridge Notes of $1,399,524 and dividends payable
on
mandatorily redeemable convertible preferred stock of $14,947, which was offset
by interest income of $2,923.
Our
loss
from continuing operations for the three months ended March 31, 2008 was
$3,080,981 as compared to $2,256,778 for the three months ended March 31, 2007.
The increased loss from continuing operations for the three months ended March
31, 2008 as compared to the three months ended March 31, 2007 was attributable
primarily to interest expenses recorded upon the extinguishment of the Bridge
Notes, offset by decreased R&D and G&A expenses. The decrease in R&D
expenses were related to fees incurred during the three months ended March
31,
2007 in acquiring the worldwide license to certain patents for Xyfid. In
addition, there was a reduction in clinical research costs, offset by increased
labor costs and regulatory and legal fees related to our oncology drug
candidates: Lenocta, VQD-002 and Xyfid. The decrease in G&A expenses were
primarily due to having fewer employees which resulted in reduced employee
and
non-employee director stock option expense in accordance with SFAS 123R as
a
result of forfeitures and workforce reductions, a reduction of bonus expenses
and lower recruitment and employment agency fees.
Discontinued
Operations:
Our
loss
from discontinued operations for the three months ended March 31, 2008 and
2007
was $0 and $261,475, respectively. Their were no discontinued operations for
the
three months ended March 31, 2008 due to the sale of Chiral Quest to Chiral
Quest Acquisition Corp. during the third quarter of 2007.
Liquidity
and Capital Resources:
In
August
2004, we decided to focus on acquiring technologies for purposes of development
and commercialization of pharmaceutical drug candidates for the treatment of
oncology and antiviral diseases and disorders for which there are unmet medical
needs. In accordance with this business plan, in October 2005, we acquired
Greenwich Therapeutics, Inc., a privately-held New York-based biotechnology
company that held exclusive rights to develop and commercialize two oncology
drug candidates: Lenocta and VQD-002. The rights to these two oncology drug
candidates are governed by license agreements with The Cleveland Clinic
Foundation and the University of South Florida Research Foundation,
respectively. As a result of our acquisition of Greenwich Therapeutics, we
hold
exclusive rights to develop, manufacture, use, commercialize, lease, sell and/or
sublicense Lenocta and VQD-002. In March 2007, we acquired license rights to
develop and commercialize Xyfid an adjunctive therapy for a common and serious
side effect of cancer chemotherapy. Our rights to Xyfid are governed by a
license agreement with Asymmetric Therapeutics, LLC and Onc Res, Inc., as
assigned to us by Fiordland Pharmaceuticals, Inc., an entity affiliated with
Dr.
Rosenwald, who is a significant stockholder of our Company.
As
a
result of acquiring the license rights to Lenocta, VQD-002 and Xyfid, we
immediately undertook funding their development, which has significantly
increased our expected cash expenditures and will continue to increase our
expected cash expenditures over the next 12 months and thereafter. The
completion of development of Lenocta, VQD-002 and Xyfid, all of which are only
in early stages of clinical development, is a very lengthy and expensive
process. Until such development is complete and the FDA (or the comparable
regulatory authorities of other countries) approves Lenocta, VQD-002, or Xyfid
for sale, we will not be able to sell these products.
Since
inception, we have incurred an accumulated deficit of $42,513,278 through March
31, 2008. For the three months ended March 31, 2008, we had losses from
continuing operations of $3,080,981, and used $1,060,445 in cash from continuing
operating activities. As of March 31, 2008, we had a working capital deficit
of
$2,801,606 and cash and cash equivalents of $305,561. As a result, we have
insufficient funds to cover our current obligations or future operating
expenses. To conserve funds, we will continue to complete our current ongoing
Phase I and Phase II studies for VQD-002 and Lenocta, respectively, however
we
will not initiate any new clinical studies unless and until we receive
additional funding. We expect our operating losses to increase over the next
several years, due to the expansion of our drug development business, and
related costs associated with the clinical development programs of Lenocta,
VQD-002 and Xyfid, in addition to costs related to license fees, manufacturing
of our products, regulatory costs, and the hiring of additional people in the
clinical development area. These matters raise substantial doubt about our
ability to continue as a going concern.
We
anticipate that our capital resources will be adequate to fund our operations
into the third quarter of 2008. Additional financing will be required during
the
third quarter of 2008 in order to continue to fund continuing operations. The
other most likely sources of additional financing include the private sale
of
our equity or debt securities. However, changes may occur that would consume
available capital resources before that time. Our working capital requirements
will depend upon numerous factors, which include, the progress of our drug
development and clinical programs, including associated costs relating to
milestone payments, maintenance and license fees, manufacturing costs, patent
costs, regulatory approvals, and the hiring of additional
employees.
Our
net
cash used in continuing operating activities for the three months ended March
31, 2008 was $1,060,445. Our net cash used in continuing operating activities
primarily resulted from a net loss of $3,080,981 offset by noncash items
consisting of the impact of expensing employee and director stock options in
accordance with SFAS 123R of $152,599 the impact of expensing scientific
advisory board member consultants’ options and non-employee finder’s fee options
related to the license acquisition of Xyfid in accordance with Emerging Issues
Task Force (“EITF”) 96-18 for $12, amortization of the discount on our bridge
note of $1,399,524, dividends payable on mandatorily redeemable convertible
preferred stock of $14,947 and depreciation of $2,325. Other uses of cash in
continuing operating activities include a decrease in prepaid clinical research
organization costs of $97,696 attributed to our three oncology compounds’
development and accrued expenses of $222,455, which was attributed to clinical
development costs, professional fees and compensation, offset by an increase
in
other assets of $8,911 and an increase in accounts payable of $762,369, as
a
result of conserving cash.
We
did
not use cash in continuing investing activities for the three months ended
March
31, 2008.
Our
net
cash provided by continuing financing activities for the three months ended
March 31, 2008 was $671,450, which was attributed to the issuance of preferred
stock issued to investors for $765,000, net of cash costs of $93,550 for
placement agents’ commissions and other related costs associated with issuing
the stock.
We
currently have three full-time employees and two consultants. We anticipate
hiring additional full-time employees in the medical and clinical functions
pending available financial resources. We intend to and will continue to use
senior advisors, consultants, clinical research organizations and third parties
to perform certain aspects of our products’ development, manufacturing, clinical
and preclinical development, and regulatory and quality assurance
functions.
At
our
current and desired pace of clinical development of our three products,
currently in Phase I/IIa clinical trials, over the next 12 months we expect
to
spend approximately $5.3 million on clinical trials and research and development
(including milestone payments that we expect to be triggered under the license
agreements relating to our product candidates, maintenance fees payments that
we
are obligated to pay to the institutions we licensed our two oncology compounds
from, salaries and consulting fees, pre-clinical and laboratory studies),
approximately $200,000 on facilities, rent and other facilities costs, and
approximately $1.4 million on general corporate and working
capital.
On
June
29, 2007 and July 3, 2007 we issued a series of convertible promissory notes
resulting in aggregate gross proceeds of $3.7 million. We also issued to
investors five-year warrants to purchase an aggregate of approximately 243,000
shares of the Company’s common stock at an exercise price of $4.00 per share.
Based upon the Black-Scholes option pricing model, the investor warrants are
estimated to be valued at approximately $909,000. In connection with the
offering, we engaged Paramount as one of our placements agents. Dr. Lindsay
A.
Rosenwald is the Chairman, CEO and sole stockholder of Paramount and a
substantial stockholder of the Company. Stephen C. Rocamboli, a director of
the
Company, was employed by Paramount at the time of the Company’s engagement. In
consideration for the placement agents’ services, we paid an aggregate of
approximately $256,000 in commissions to the placement agents in connection
with
the offering, of which $119,700 was paid to Paramount. We also paid to placement
agents approximately $24,000 as a non-accountable expense allowance. In
addition, we issued placement agents five-year warrants to purchase an aggregate
of approximately 120,000 shares of common stock, of which 45,000 shares of
common stock were issued to Paramount, which are exercisable at a price of
$4.20
per share. Based upon the Black-Scholes option pricing model, the placement
agents’ warrants are estimated to be valued at approximately
$430,000.
On
July
16, 2007, we completed the sale of our discontinued operations Chiral Quest,
Inc., and received $1.7 million in gross proceeds, of which we recognized
$197,000 in accrued compensation costs related to a severance agreement and
retention bonuses payable to certain key employees. Additionally, the purchaser
assumed liabilities in the aggregate amount of approximately $807,000 pursuant
to the purchase agreement.
On
March
14, 2008, we issued 765 shares of Series A Preferred stock at a price of $1,000
per share resulting in aggregate gross proceeds of $765,000. Each share of
Series A Preferred stock sold is convertible into shares of the Company's common
stock at $0.60 per share, or approximately 1.275 million shares of common stock
in the aggregate. We also issued to investors five-year warrants to purchase
an
aggregate of approximately 640,000 shares of our common stock at an exercise
price of $1.00 per share. Based upon the Black-Scholes option pricing model,
the
investor warrants are estimated to be valued at approximately $701,000. In
connection with the offering, we engaged Paramount as our placement agent.
Dr.
Lindsay A. Rosenwald is the Chairman, CEO and sole stockholder of Paramount
and
a substantial stockholder of the Company. Dr. Rosenwald participated in this
financing, through a family investment partnership, of which he is the managing
member. The family investment partnership purchased 500 shares of Series A
Preferred stock and received warrants to purchase 416,700 shares of common
stock. In consideration for the placement agent’s services, we paid an aggregate
of approximately $54,000 in commissions to Paramount in connection with the
offering. We also paid to Paramount $35,000 as a non-accountable expense
allowance. In addition, we issued to Paramount five-year warrants to purchase
an
aggregate of approximately 127,500 shares of common stock, which are exercisable
at a price of $0.80 per share. Based upon the Black-Scholes option pricing
model, the warrants issued to Paramount are estimated to be valued at
approximately $140,000. The Series A Preferred stock shall be entitled to an
annual dividend equal to 6% of the applicable issuance price per annum, payable
semi-annually in cash or shares of common stock, at the option of the Company.
If the Company chooses to pay the dividend in shares of common stock, the price
per share of common stock to be issued shall be equal to 90% of the average
closing price of the common stock for the 20 trading days prior to the date
that
such dividend becomes payable. As a condition to the initial closing of the
private placement, the majority of the holders of the June 29, 2007 and July
3,
2007 convertible promissory notes agreed to convert such notes, together with
accrued interest, into approximately 3,910 shares of the Company’s
newly-designated Series B Preferred stock. The Series B Preferred stock contains
substantially the same economic terms as the previously outstanding senior
convertible notes.
On
April
9, 2008, we issued 2,194.5 shares of Series A Preferred stock at a price of
$1,000 per share resulting in aggregate gross proceeds of $2,195,000. Each
share
of Series A Preferred stock sold is convertible into shares of the Company's
common stock at $0.60 per share, or approximately 3.66 million shares of common
stock in the aggregate. In addition, we issued 505 shares of Series A Preferred
stock to two investors that converted their Series B Preferred stock into Series
A Preferred stock on a dollar-for-dollar basis. We also issued to investors
five-year warrants to purchase an aggregate of approximately 1.83 million shares
of our common stock at an exercise price of $1.00 per share. Based upon the
Black-Scholes option pricing model, the investor warrants are estimated to
be
valued at approximately $182,800. In connection with the offering, we engaged
Paramount as our placement agent. In consideration for the placement agent’s
services, the Company paid an aggregate of approximately $153,000 in commissions
to Paramount in connection with the offering. In addition, the Company issued
to
Paramount five-year warrants to purchase an aggregate of approximately 366,000
shares of common stock, which are exercisable at a price of $0.80 per share.
Based upon the Black-Scholes option pricing model, the warrants issued to
Paramount are estimated to be valued at approximately $366,000. The Series
A
Preferred stock shall be entitled to an annual dividend equal to 6% of the
applicable issuance price per annum, payable semi-annually in cash or shares
of
common stock, at the option of the Company. If the Company chooses to pay the
dividend in shares of common stock, the price per share of common stock to
be
issued shall be equal to 90% of the average closing price of the common stock
for the 20 trading days prior to the date that such dividend becomes payable.
As
a condition to the initial closing of the private placement, the majority of
the
holders of the June 29, 2007 and July 3, 2007 convertible promissory notes
agreed to convert such notes, together with accrued interest, into approximately
3,910 shares of the Company’s newly-designated Series B Preferred stock. The
Series B Preferred stock contain substantially the same economic terms as the
previously outstanding senior convertible notes.
Our
working capital requirements will depend upon numerous factors. For example,
with respect to our drug development business, our working capital requirements
will depend on, among other factors, the progress of our drug development and
clinical programs, including associated costs relating to milestone payments,
license fees, manufacturing costs, regulatory approvals, and the hiring of
additional employees. Additional capital that we may need in the future may
not
be available on reasonable terms, or at all. If adequate financing is not
available, we may be required to terminate or significantly curtail our
operations, or enter into arrangements with collaborative partners or others
that may require us to relinquish rights to certain of our technologies, or
potential markets that we would not otherwise relinquish.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
We
have
no material exposures relating to our debt, as our debt bears interest at fixed
rates.
Forward-looking
Information
An
investment in our securities involves a high degree of risk. Prior to making
an
investment, prospective investors should carefully consider the following
factors, among others, and seek professional advice. In addition, this Form
10-Q
contains certain “forward-looking statements” within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. Such forward-looking
statements, which are often identified by words such as “believes”,
“anticipates”, “expects”, “estimates”, “should”, “may”, “will” and similar
expressions, represent our expectations or beliefs concerning future events.
Numerous assumptions, risks, and uncertainties could cause actual results to
differ materially from the results discussed in the forward-looking statements.
Prospective purchasers of our securities should carefully consider the
information contained herein or in the documents incorporated herein by
reference.
This
Form
10-Q contains certain estimates, predictions, projections 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) that involve
various risks and uncertainties. While these forward-looking statements, and
any
assumptions upon which they are based, are made in good faith and reflect
management’s current judgment regarding the direction of the business, actual
results will almost always vary, sometimes materially, from any estimates,
predictions, projections, or other future performance suggested
herein.
Such
factors include, but are not limited to, the following:
| |
·
|
the
possibility that the results of clinical trials will not be
successful;
|
| |
·
|
the
possibility that our development efforts relating to our product
candidates, including Lenocta, VQD-002 and Xyfid, will not be
successful;
|
| |
·
|
the
inability to obtain regulatory approval of our product
candidates;
|
| |
·
|
our
reliance on third-parties to develop our product
candidates;
|
| |
·
|
our
lack of experience in developing and commercializing pharmaceutical
products;
|
| |
·
|
the
possibility that our licenses to develop and commercialize our product
candidates may be terminated;
|
| |
·
|
our
ability to obtain additional
financing;
|
| |
·
|
our
ability to protect our proprietary
technology.
|
Any
forward-looking statement speaks only as of the date on which it is made. For
further details and a discussion of these and other risks and uncertainties,
investors and security holders are cautioned to review the VioQuest 2007 Annual
Report on Form 10-KSB, including the Forward-Looking Statement section therein,
and other subsequent filings with the U.S. Securities and Exchange Commission
including Current Reports on Form 8-K. The Company undertakes no obligation
to
publicly release the result of any revisions to any such forward-looking
statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Item
4T. Controls and Procedures.
Under
the
supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures as required by Exchange
Act Rule 13a-15(b) as of the end of the period covered by this report. Based
on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are
effective.
Report
of Management On Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting is a process to provide reasonable assurance regarding
the
reliability of our financial reporting for external purposes in accordance
with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records that
in
reasonable detail accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary for preparation
of our consolidated financial statements; providing reasonable assurance that
receipts and expenditures of company assets are made in accordance with
management authorization; and providing reasonable assurance that unauthorized
acquisition, use or disposition of company assets that could have a material
effect on our consolidated financial statements would be prevented or detected
on a timely basis. Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance that a
misstatement of our consolidated financial statements would be prevented or
detected.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management concluded that the Company’s
internal control over financial reporting was effective as of March 31, 2008.
There were no changes in our internal control over financial reporting during
the quarter ended March 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
Item
1A. Risk Factors
There
have been no material changes to our risk factors and uncertainties during
the
first three months of 2008. For a discussion of the Risk Factors, refer to
the
“Risk Factors” section of Item 1 in the Company's Annual Report on Form 10-KSB
for the period ended December 31, 2007.
Item
6. Exhibits
|
Exhibit No.
|
|
Description
|
|
3.1
|
|
Certificate
of Designation of Series A Convertible Preferred Stock and Series
B
Convertible Preferred Stock filed with the Delaware Secretary of
State on
March 14, 2008 (incorporated by reference to Exhibit 3.1 of the Company’s
Form 8-K filed on March 20, 2008)
|
|
4.1
|
|
Form
of warrant issued to investors by VioQuest Pharmaceuticals, Inc.
on March
14, 2008
|
|
4.2
|
|
Form
of First Amendment to Senior Convertible Promissory Note issued by
VioQuest Pharmaceuticals, Inc. on June 29, 2007 and July 3,
2007
|
|
10.1
|
|
Form
of Subscription Agreement between VioQuest Pharmaceuticals and various
investors accepted as of March 14, 2008
|
|
31.1
|
|
Certification
of Chief Executive Officer
|
|
31.2
|
|
Certification
of Chief Financial Officer
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
In
accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
| |
VIOQUEST
PHARMACEUTICALS, INC.
|
| |
|
|
| |
|
|
|
Date:
May 13, 2008
|
By:
|
/s/
Michael Becker
|
| |
|
Michael
Becker
President
& Chief Executive Officer
|
| |
|
|
|
Date:
May 13, 2008
|
By:
|
/s/
Brian Lenz
|
| |
|
Brian
Lenz
Chief
Financial Officer
|
INDEX
TO EXHIBITS FILED WITH THIS REPORT
|
Exhibit No.
|
|
Description
|
|
4.1
|
|
Form
of warrant issued to investors by VioQuest Pharmaceuticals, Inc.,
on March
14, 2008
|
|
4.2
|
|
Form
of First Amendment to Senior Convertible Promissory Note issued by
VioQuest Pharmaceuticals, Inc. on June 29, 2007 and July 3,
2007
|
|
10.1
|
|
Form
of Subscription Agreement between VioQuest Pharmaceuticals, Inc.,
and
various investors accepted as of March 14, 2008
|
|
31.1
|
|
Certification
of Chief Executive Officer
|
|
31.1
|
|
Certification
of Chief Financial Officer
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002
|