SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September
30, 2006
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from |
|
to
|
|
|
Commission
file number 001-16043
|
ALTEON
INC.
|
|
|
(Exact
name of registrant as specified in its
charter)
|
|
|
Delaware
|
|
13-3304550
|
|
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification
No.)
|
|
|
6
Campus Drive, Parsippany, New Jersey
07054
|
|
|
(Address
of principal executive
offices)
|
|
|
(Zip
Code)
|
|
|
(201)
934-5000
|
|
|
(Registrant's
telephone number, including area
code)
|
|
|
Not
Applicable
|
|
|
(Former
name, former address and former fiscal
year,
|
|
|
if
changed since 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
xNo
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). Large
accelerated filer o Accelerated filer
o
Non-accelerated
filer 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
On
November 7, 2006, 129,318,858 shares of the registrant’s Common Stock were
outstanding.
ALTEON
INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
|
|
Item 1. |
Condensed Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
Condensed Consolidated Balance Sheets
as of
September 30, 2006 |
|
|
and December 31, 2005
|
3
|
|
|
|
|
Condensed Consolidated Statements of
Operations for the three and nine months |
|
|
ended September 30, 2006 and 2005
|
4
|
|
|
|
|
Condensed Consolidated Statement of
Changes
in Stockholders’ Equity |
|
|
for the nine
months ended September 30, 2006
|
5
|
|
|
|
|
Condensed Consolidated Statements of
Cash
Flows for the nine months |
|
|
ended September 30, 2006 and 2005
|
6
|
|
|
|
|
Notes to Condensed Consolidated Financial
Statements
|
7
|
|
|
|
Item 2. |
Management’s Discussion and Analysis
of |
|
|
Financial Condition and Results of
Operations
|
15
|
|
|
|
Item 3. |
Qualitative and Quantitative Disclosures about
Market
Risk
|
20
|
|
|
|
Item 4. |
Controls and Procedures
|
20
|
|
|
|
PART II - OTHER INFORMATION
|
|
|
|
Item 1A. |
Risk Factors
|
22
|
|
|
|
Item 6. |
Exhibits
|
37
|
|
|
|
SIGNATURES
|
|
38
|
|
|
|
INDEX TO EXHIBITS |
39
|
PART
I - FINANCIAL INFORMATION
ITEM
l. Condensed
Consolidated Financial Statements (Unaudited).
ALTEON
INC.
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
(Unaudited)
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,308,323
|
|
$
|
6,582,958
|
|
Other
current assets
|
|
|
402,705
|
|
|
216,290
|
|
Total
current assets
|
|
|
2,711,028
|
|
|
6,799,248
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
21,671
|
|
|
55,154
|
|
Restricted
cash
|
|
|
150,000
|
|
|
150,000
|
|
Other
assets
|
|
|
529,264
|
|
|
129,195
|
|
Total
assets
|
|
$
|
3,411,963
|
|
$
|
7,133,597
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
806,060
|
|
$
|
351,232
|
|
Accrued
expenses
|
|
|
461,663
|
|
|
790,705
|
|
Total
current liabilities
|
|
|
1,267,723
|
|
|
1,141,937
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 1,993,329 shares authorized,
|
|
|
|
|
|
|
|
0
shares issued and outstanding at September 30, 2006 and
|
|
|
|
|
|
|
|
1,389
shares of Series G Preferred Stock, and 4,172 shares of
|
|
|
|
|
|
|
|
of
Series H Preferred Stock issued and outstanding
|
|
|
|
|
|
|
|
at
December 31, 2005
|
|
|
-
|
|
|
56
|
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; 300,000,000 shares
|
|
|
|
|
|
|
|
authorized
and 129,318,858 and 57,996,711 shares issued
|
|
|
|
|
|
|
|
and
outstanding, as of September 30, 2006 and December 31,
|
|
|
|
|
|
|
|
2005
|
|
|
1,293,189
|
|
|
579,967
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
243,057,880
|
|
|
228,225,082
|
|
|
|
|
|
|
|
|
|
Accumulated
deficit
|
|
|
(242,206,829
|
)
|
|
(222,813,445
|
)
|
Total
stockholders' equity
|
|
|
2,144,240
|
|
|
5,991,660
|
|
Total
liabilities and stockholders' equity
|
|
$
|
3,411,963
|
|
$
|
7,133,597
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
ALTEON
INC.
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OPERATIONS
|
|
(Unaudited)
|
|
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income
|
|
$
|
38,560
|
|
$
|
87,235
|
|
$
|
165,122
|
|
$
|
286,789
|
|
Other
income
|
|
|
—
|
|
|
—
|
|
|
50,000
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income
|
|
$
|
38,560
|
|
$
|
87,235
|
|
$
|
215,122
|
|
$
|
386,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
635,126
|
|
|
1,981,136
|
|
|
1,579,902
|
|
|
8,115,615
|
|
In-process
research and development
|
|
|
11,379,348
|
|
|
—
|
|
|
11,379,348
|
|
|
—
|
|
General
and administrative
|
|
|
2,100,282
|
|
|
1,062,503
|
|
|
3,996,577
|
|
|
3,245,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
14,114,756
|
|
|
3,043,639
|
|
|
16,955,827
|
|
|
11,361,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(14,076,196
|
)
|
$
|
(2,956,404
|
)
|
$
|
(16,740,705
|
)
|
$
|
(10,974,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
283,608
|
|
|
1,142,016
|
|
|
2,652,679
|
|
|
3,319,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common shares
|
|
$
|
(14,359,804
|
)
|
$
|
(4,098,420
|
)
|
$
|
(19,393,384
|
)
|
$
|
(14,294,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.13
|
)
|
$
|
(0.07
|
)
|
$
|
(0.25
|
)
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
110,638,065
|
|
|
57,996,711
|
|
|
78,667,458
|
|
|
57,518,794
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
ALTEON
INC.
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Total
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-in
|
|
Accumulated
|
|
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
5,561
|
|
$
|
56
|
|
|
57,996,711
|
|
$
|
579,967
|
|
$
|
228,225,082
|
|
$
|
(222,813,445
|
)
|
$
|
5,991,660
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(16,740,705
|
)
|
|
(16,740,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
placement of common stock
|
|
|
-
|
|
|
-
|
|
|
10,960,400
|
|
|
109,604
|
|
|
2,366,402
|
|
|
-
|
|
|
2,476,006
|
|
Issuance
of Series G and H preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
dividends
|
|
|
238
|
|
|
2
|
|
|
-
|
|
|
-
|
|
|
2,652,677
|
|
|
(2,652,679
|
)
|
|
-
|
|
Common
stock issued in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection
with the merger
|
|
|
-
|
|
|
-
|
|
|
37,399,065
|
|
|
373,991
|
|
|
8,426,009
|
|
|
-
|
|
|
8,800,000
|
|
Preferred
stock converted to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
as a result of the merger
|
|
|
(5,799
|
)
|
|
(58
|
)
|
|
13,492,349
|
|
|
134,923
|
|
|
(134,865
|
)
|
|
-
|
|
|
-
|
|
Assumption
of HaptoGuard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vested
stock options
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
235,000
|
|
|
-
|
|
|
235,000
|
|
Private
placement of common stock
|
|
|
-
|
|
|
-
|
|
|
9,470,333
|
|
|
94,704
|
|
|
1,235,316
|
|
|
-
|
|
|
1,330,020
|
|
Stock-based
compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
34,652
|
|
|
-
|
|
|
34,652
|
|
Options
issued for consulting services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,666
|
|
|
-
|
|
|
7,666
|
|
Compensation
costs related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted
stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,941
|
|
|
-
|
|
|
9,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2006
|
|
|
-
|
|
$
|
-
|
|
|
129,318,858
|
|
$
|
1,293,189
|
|
$
|
243,057,880
|
|
$
|
(242,206,829
|
)
|
$
|
2,144,240
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
ALTEON
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
Months Ended September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(16,740,705
|
)
|
$
|
(10,974,772
|
)
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to cash
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
34,652
|
|
|
28,300
|
|
Options
issued for consulting services
|
|
|
7,666
|
|
|
-
|
|
Compensation
costs related to restricted stock
|
|
|
9,941
|
|
|
-
|
|
In-process
research and development
|
|
|
11,379,348
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
37,945
|
|
|
49,497
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
(496,576
|
)
|
|
(297,500
|
)
|
Other
assets
|
|
|
(529,264
|
)
|
|
-
|
|
Accounts
payable and accrued expenses
|
|
|
(161,739
|
)
|
|
(1,316,708
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(6,458,732
|
)
|
|
(12,511,183
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
-
|
|
|
(13,108
|
)
|
Acquisition
costs, net of cash acquired
|
|
|
(1,621,929
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(1,621,929
|
)
|
|
(13,108
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
3,806,026
|
|
|
9,532,295
|
|
Net
cash provided by financing activities
|
|
|
3,806,026
|
|
|
9,532,295
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(4,274,635
|
)
|
|
(2,991,996
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
6,582,958
|
|
|
11,175,762
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,308,323
|
|
$
|
8,183,766
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing
|
|
|
|
|
|
|
|
activities:
|
|
|
|
|
|
|
|
Common
stock and other equity consideration issued as
|
|
|
|
|
|
|
|
a
result of the merger
|
|
$
|
9,035,058
|
|
$
|
-
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
ALTEON
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 - Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions
to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all
of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
In
the opinion of management, all adjustments (consisting of only normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 2006 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2006. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K
for
the year ended December 31, 2005, the Company’s Proxy Statement on Schedule 14A
dated June 22, 2006, and the Company’s Current Report on Form 8-K/A dated
September 5, 2006 as filed with the Securities and Exchange
Commission.
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of Alteon
Inc.
and its wholly-owned subsidiary, HaptoGuard, Inc. (from July 21, 2006, date
of
acquisition), collectively the “Company”. All intercompany balances and
transactions have been eliminated in consolidation.
Note
2 – Liquidity
The
Company has devoted substantially all of its resources to research, drug
discovery and development programs. To date, it has not generated any revenues
from the sale of products and does not expect to generate any such revenues
for
a number of years, if at all. As a result, Alteon has incurred net losses since
inception, has an accumulated deficit of $242,206,829
as of September 30, 2006, and expects to incur net losses, potentially greater
than losses in prior years, for a number of years, assuming the Company is
able
to continue as a going concern, of which there can be no assurance.
The
Company has financed its operations through proceeds from the sale of common
and
preferred equity securities, revenue from former collaborative relationships,
reimbursement of certain of its research and development expenses by
collaborative partners, investment income earned on cash and cash equivalent
balances and short-term investments and the sale of a portion of the Company’s
New Jersey state net operating loss carryforwards and research and development
tax credit carryforwards.
As
of
September 30, 2006, the Company had working capital of $1,443,305, including
$2,308,323 of cash and cash equivalents. The Company’s net cash used in
operating activities was $6,458,732 for the nine months ended September 30,
2006, $12,511,183 for the nine months ended September 30, 2005, and $14,032,796
for the year ended December 31, 2005.
On
July
19, 2006, the Company’s shareholders approved a merger with HaptoGuard, Inc.,
formerly a privately-held development-stage biotechnology company. The two
companies have combined operations and intend to pursue clinical development
of
their complementary product platforms. The merger transaction, which was
completed on July 21, 2006, included the granting of certain royalty and
negotiation rights to Genentech, Inc., as part of the restructuring of
Genentech’s former preferred stock position in Alteon. The merger was accounted
for in accordance with Statement of Financial Accounting Standards (“SFAS”) No.
141, “Business Combinations”. (See Note 6 - Merger with
HaptoGuard).
As
a
result of the merger with HaptoGuard, which closed on July 21, 2006, the Company
was required to make payments of severance and insurance costs in the amount
of
approximately $2.0 million. In addition, the Company has incurred transaction
fees and expenses of $1,758,928 through September 30, 2006, in connection with
the merger.
The
Company is urgently continuing to pursue fund-raising possibilities through
the
sale of its equity securities. If the Company is unsuccessful in its efforts
to
raise additional funds through the sale of additional equity securities or
if
the level of cash and cash equivalents falls below anticipated levels, Alteon
will not have the ability to continue as a going concern after
2006.
The
amount and timing of the Company’s future capital requirements will depend on
numerous factors, including the timing and extent of resuming its research
and
development programs, the number and characteristics of product candidates
that
it pursues, the conduct of preclinical tests and clinical studies, the status
and timelines of regulatory submissions, the costs associated with protecting
patents and other proprietary rights, the ability to complete strategic
collaborations and the availability of third-party funding, if
any.
Selling
securities to satisfy the Company’s capital requirements may have the effect of
materially diluting the current holders of its outstanding stock. The Company
may also seek additional funding through corporate collaborations and other
financing vehicles. There can be no assurance that such funding will be
available at all or on terms acceptable to the Company. The Company has
significantly curtailed its research and development programs, until additional
financing is obtained, if ever. If funds are obtained through arrangements
with
collaborative partners or others, the Company may be required to relinquish
rights to certain of its technologies or product candidates and alter its plans
for the development of its product candidates. If the Company is unable to
obtain the necessary funding, it will likely need to cease operations. There
can
be no assurance that the products or technologies acquired in the merger will
result in revenues to the combined company or any meaningful return on
investment to its stockholders.
Note
3 – Net Loss Per Share Applicable to Common
Stockholders
Basic
net
loss per share is computed by dividing net loss applicable to common
stockholders by the weighted average number of shares outstanding during the
period. Diluted net loss per share is the same as basic net loss per share
applicable to common stockholders, since the assumed exercise of stock options
and warrants and the conversion of preferred stock would be antidilutive. The
amount of potentially dilutive shares excluded from the calculation as of
September 30, 2006 and 2005, was 33,172,066 and 188,203,378 shares,
respectively. (See Note 6 - Merger with HaptoGuard).
Note
4 – Stock-Based Compensation
The
Company has stockholder-approved stock incentive plans for employees, directors,
officers and consultants. Prior to January 1, 2006, the Company accounted for
the employee, director and officer plans using the intrinsic value method under
the recognition and measurement provisions of Accounting Principles Board
(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and
related interpretations, as permitted by Statement of Financial Accounting
Standards (“SFAS” or “Statement”) No. 123, “Accounting for Stock-Based
Compensation.”
Effective
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,”
(“Statement 123(R)”) for employee options using the modified prospective
transition method. Statement 123(R) revised Statement 123 to eliminate the
option to use the intrinsic value method and required the Company to expense
the
fair value of all employee options over the vesting period. Under the modified
prospective transition method, the Company recognized compensation cost for
the
three- and nine-month periods ending September 30, 2006 which includes
compensation cost related to share-based payments granted on or after January
1,
2006, based on the grant date fair value estimated in accordance with Statement
123(R). In accordance with the modified prospective method, the Company has
not
restated prior period results.
On
December 15, 2005, the Compensation Committee of the Board of Directors of
the
Company approved the acceleration of the vesting date of all previously issued,
outstanding and unvested options, effective December 31, 2005. As such there
was
no compensation recognized under Statement 123(R) related to options granted
prior to January 1, 2006.
Options
granted to consultants and other non-employees are accounted for in accordance
with EITF No. 96-18 "Accounting for Equity Instruments That Are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." Accordingly, such options are recorded at fair value at the
date of grant and subsequently adjusted to fair value at the end of each
reporting period until such options vest, and the fair value of the
options, as adjusted, is charged to consulting expense over the related
vesting period. For the three- and nine-month periods ended September 30,
2006, the Company recognized research and development consulting expenses of
$7,666.
The
Company recognized compensation cost of $9,941, which was recorded as general
and administrative expense for the three- and nine-month periods ended September
30, 2006 as a result of the granting of 960,000 shares of restricted
stock.
A
summary
of the status of the Company’s nonvested shares as of September 30, 2006 and
changes during the nine months ended September 30, 2006, is presented
below:
Nonvested
Shares
|
|
Shares
|
|
Weighted
average grant date fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at January 1,
2006
|
|
|
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
Granted
|
|
|
960,000
|
|
$
|
0.15
|
|
Vested
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Nonvested
at September
30, 2006
|
|
|
960,000
|
|
$
|
0.15
|
|
As
of
September 30, 2006, there was $134,059 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted. That cost
is
expected to be recognized over a weighted-average period of 2.94 years. The
total fair value of shares vested during the nine months ended September 30,
2006 was $0.
For
the
three- and nine-month periods ended September 30, 2006, the Company recognized
share-based employee compensation cost of $34,652 in accordance with Statement
123(R), which was recorded as general and administrative expense. This expense
related to the granting of stock options to employees, directors and officers
on
or after January 1, 2006. None of this expense resulted from the grants of
stock
options prior to January 1, 2006. The Company recognized compensation expense
related to these stock options, taking into consideration a forfeiture rate
of
ten percent based on historical experience, on a straight line basis over the
vesting period. The Company did not capitalize any share-based compensation
cost.
As
a
result of adopting Statement 123(R), net losses for the three- and nine-month
periods ended September 30, 2006 were greater than if the Company had continued
to account for share-based compensation under APB 25 by $34,652. The effect
of
adopting Statement 123(R) on basic and diluted earnings per share for the three-
and nine-month periods ended September 30, 2006 was immaterial.
As
of
September 30, 2006, the total compensation cost related to non-vested option
awards not yet recognized is $154,145. The weighted average period over which
it
is expected to be recognized is approximately 1.06 years.
The
net
loss for the three- and nine-month periods ended September 30, 2005 does not
include any compensation charges related to options granted to employees. The
following table illustrates the pro forma effect on net loss and loss per share
assuming the Company had applied the fair value recognition provisions of SFAS
No. 123 instead of the intrinsic value method under APB 25 to stock-based
employee compensation:
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2005
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common shares, as reported
|
|
$
|
(2,956,404
|
)
|
$
|
(10,974,772
|
)
|
Deduct:
Total stock-based employee and director
compensation expense
determined
under fair value method
|
|
|
(231,914
|
)
|
|
(943,493
|
)
|
Net
loss, pro forma
|
|
|
(3,188,318
|
)
|
|
(11,918,265
|
)
|
Preferred
stock dividends
|
|
|
(1,142,016
|
)
|
|
(3,319,787
|
)
|
|
|
|
|
|
|
|
|
Net
loss applicable to common shares, pro forma
|
|
$
|
(4,330,334
|
)
|
$
|
(15,238,052
|
)
|
Net
loss per common share – basic and diluted
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.07
|
)
|
$
|
(0.25
|
)
|
Pro
forma
|
|
$
|
(0.07
|
)
|
$
|
(0.26
|
)
|
As
noted
above, the Company has shareholder-approved stock incentive plans for employees
under which it has granted non-qualified and incentive stock options. Options
granted under these plans must be at a price per share not less than the fair
market value per share of common stock on the date the option is granted. The
options generally vest over a four-year period and expire ten years from the
date of grant.
In
March
2005, the Company’s Board of Directors approved the adoption of the Alteon Inc.
2005 Stock Plan, (the “2005 Stock Plan”). Upon shareholder approval of the 2005
Stock Plan at the Company’s 2005 annual meeting of stockholders, the two
existing stock option plans were terminated. However, between the three plans,
9,630,078 stock options remain outstanding. The 2005 Stock Plan provided for
options to purchase up to 5,000,000 shares of the Company’s common stock. On
July 19, 2006, the Company’s stockholders approved an amendment to the 2005
Stock Plan which was previously approved by the Company’s Board of Directors,
providing for an increase in the number of shares available under the 2005
Stock
Plan from 5,000,000 shares to 10,000,000 shares, an increase of 5,000,000
shares. The options have a maximum term of ten years and vest over a period
to
be determined by the Company’s Board of Directors (generally over a four-year
period) and are issued at an exercise price equal to the fair market value
of
the shares at the date of grant. The 2005 Stock Plan expires on April 19, 2015
or may be terminated at an earlier date by vote of the shareholders or the
Board
of Directors of the Company. Under the 2005 Stock Plan, the Company granted
directors options to purchase an aggregate of 520,000 shares of common stock
at
an exercise price of $0.15 in the third quarter of 2006. In addition, under
the
2005 Stock Plan, the Company assumed options related to HaptoGuard option
holders (see Note 6 - Merger with HaptoGuard) in the amount of 2,816,800 shares
of common stock at an exercise price of $0.16 in the third quarter of 2006.
The
Company estimated the fair value of each option award on the date of grant
using
the Black-Scholes model. The Company based expected volatility on historical
volatility. The expected term of options granted represents the period of time
that options granted are expected to be outstanding. The Company estimated
the
expected term of stock options using historical exercise and employee forfeiture
experience.
The
following table shows the weighted average assumptions the Company used to
develop the fair value estimates for the determination of the compensation
charges in 2006:
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Expected
volatility
|
|
|
139
|
%
|
|
150
|
%
|
|
139
|
%
|
|
150
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
term (in years)
|
|
|
6.11
|
|
|
5
|
|
|
6.11
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.50
|
%
|
|
3.40
|
%
|
|
4.50
|
%
|
|
3.40
|
%
|
A
summary of the status of the Company’s stock options outstanding as of
September 30, 2006 and changes during the nine months then ended is presented
below:
|
|
Shares
|
|
Weighted
average exercise price
|
|
Weighted
Average Remaining Contractual Term (years)
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at December
31, 2005
|
|
|
6,486,665
|
|
$
|
2.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted/assumed
|
|
|
3,336,800
|
|
|
0.16
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(193,387
|
)
|
|
4.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September
30, 2006
|
|
|
9,630,078
|
|
$
|
1.40
|
|
|
6.27
|
|
$
|
105,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at September
30, 2006
|
|
|
8,092,800
|
|
$
|
1.64
|
|
|
5.78
|
|
$
|
53,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
fair
value of options granted
during the nine
months ended September 30, 3006
|
|
$
|
0.14 |
|
|
|
|
|
|
|
|
|
|
Note
5 – Stockholders’ Equity
On
April 21, 2006, the Company closed a private placement of Units, consisting
of common stock and warrants, for gross proceeds of approximately
$2.6 million. Each Unit consisted of one share of Company common stock and
one warrant to purchase one share of Company common stock, comprising a total
of
10,960,400 shares of Company common stock and warrants to purchase 10,960,400
shares of Company common stock.
The
offering was made to accredited investors, as defined in and pursuant to an
exemption from registration under Regulation D promulgated under the
Securities Act of 1933, as amended (the “Securities Act”).
The
Units
were sold at a price of $0.25 per Unit, and the warrants will be exercisable
for
a period of five years commencing six months from the date of issue at a price
of $0.30 per share. Investors in the private placement have a right to
participate in any closing of a subsequent financing by the Company of its
common stock or common stock equivalents up to an aggregate amount equal to
50%
of such subsequent financing until June 14, 2008, the second anniversary of
the
declaration of effectiveness by the Securities and Exchange Commission (“SEC”),
of the registration statement for the resale of the shares of common stock
and
the shares of common stock underlying the warrants sold in the private
placement. Rodman & Renshaw, LLC served as placement agent in the
transaction and received a 6% placement fee which was paid in
Units.
Prior
to
the merger with HaptoGuard, Series G Preferred Stock and Series H Preferred
Stock dividends were payable quarterly in shares of preferred stock at a rate
of
8.5% of the accumulated balance. Each share of Series G Preferred Stock and
Series H Preferred Stock was convertible, upon 70 days’ prior written notice,
into the number of shares of common stock determined by dividing $10,000 by
the
average of the closing sales price of the common stock, as reported on the
American Stock Exchange, for the 20 business days immediately preceding the
date
of conversion. For the three months ended September 30, 2006 and 2005, preferred
stock dividends of $283,608 and $1,142,016, respectively, were recorded. As
of
September 30, 2006, the Series G and Series H Preferred Stock had been cancelled
or converted into common stock as a result of the merger. The Series G and
Series H Preferred Stock had no voting rights. (See
Note
6 - Merger with HaptoGuard).
As
a
result of the July 21, 2006 merger with HaptoGuard, the Company issued
37,399,065 shares of common stock to the shareholders of HaptoGuard. In
addition, the Company issued 13,492,349 shares of common stock to Genentech
upon
conversion of the preferred stock described above as a result of the merger.
(See Note 6 - Merger with HaptoGuard).
On
September 13, 2006, the Company completed a private placement of Units,
consisting of common stock and warrants, for net proceeds, after expenses and
fees, of approximately $1.3 million. Each Unit consisted of one share of
Company common stock and one warrant to purchase one share of Company common
stock, comprising a total of 9,470,333 shares of Company common stock and
warrants to purchase 9,470,333 shares of Company common stock. In addition,
the
Company issued a warrant to purchase 520,200 shares of Company common stock
to
the placement agent. The offering was made to accredited investors, as defined
in and pursuant to an exemption from registration under Regulation D promulgated
under the Securities Act of 1933, as amended.
The
Units
were sold at a price of $0.15 per Unit, and the warrants are exercisable for
a
period of five years, commencing six months from the date of issuance, at an
exercise price of $0.1875 per share. Rodman & Renshaw, LLC served as
placement agent in the transaction and received a 6% placement fee on 8,670,000
of the shares issued, which was paid in cash and warrants. On October 20, 2006,
the Company paid an aggregate of $28,411 as a penalty to the investors of the
September 13, 2006 private placement as a result of the Company’s failure to
timely file a registration statement covering the resale of such Units pursuant
to a certain Registration Rights Agreement dated as of September 13, 2006.
This
Registration Rights Agreement specifies in certain instances a cash penalty
of
2% of the gross amount of the financing for each month the Company is out of
compliance. This is subject to an overall limit of 18%, or $255,699. These
instances include failure to file a registration statement within 30 days of
the
date of the Registration Rights Agreement, failure to achieve an effective
registration within 90 days of the date of the Registration Rights Agreement
(120 days in the case of a full review by the Securities and Exchange
Commission), and failure to maintain an effective registration for more than
15
consecutive calendar days or more than an aggregate of 25 calendar days during
any 12-month period.
Note
6 – Merger with HaptoGuard
On
April 19, 2006, the Company (“Alteon”), entered into a definitive Agreement
and Plan of Merger (the “Merger Agreement”) with Alteon Merger Sub, Inc., a
Delaware corporation and wholly-owned subsidiary of Alteon (“Merger Sub”),
HaptoGuard, Inc., a Delaware corporation (“HaptoGuard”), and Genentech, Inc., a
Delaware corporation (“Genentech”). The Merger Agreement provided that upon the
terms and subject to the conditions set forth in the Merger Agreement, Merger
Sub merge with and into HaptoGuard, with HaptoGuard becoming the surviving
corporation (the “Surviving Corporation”) and a wholly-owned subsidiary of
Alteon (the “Merger”). On July 19, 2006, Alteon’s ’s shareholders approved the
Merger and on July 21, 2006, the Merger was completed.
The
Merger of the two companies was structured as an acquisition by Alteon. Under
the terms of the Merger Agreement, HaptoGuard shareholders received a total
of
37.4 million shares of Alteon common stock. As
an
additional part of the merger,
a
portion of existing shares of Alteon preferred stock held by Genentech, Inc.
was
converted into 13,492,349
shares of Alteon common stock.
Key
components of the transactions completed in July 2006 between Alteon, HaptoGuard
and Genentech were as follows:
Ø |
Alteon
acquired all outstanding equity of HaptoGuard. In exchange, HaptoGuard
shareholders received from Alteon $5.3 million in Alteon common stock,
or
approximately 22.5 million shares.
|
Ø |
Genentech
converted a portion of its existing Alteon preferred stock to Alteon
common stock. A portion of Alteon preferred stock held by Genentech,
which, when converted to Alteon common stock is equal to $3.5 million
in
Alteon common stock, was transferred to HaptoGuard shareholders.
|
Ø |
The
remaining Alteon preferred stock held by Genentech was cancelled.
|
Ø |
Genentech
will receive milestone payments and royalties on any future net sales
of
alagebrium, and received a right of first negotiation on
ALT-2074.
|
The
acquisition of HaptoGuard has been accounted for by the Company under the
purchase method of accounting in accordance with Statement of Financial
Accounting Standards No. 141, “Business Combinations”. Under the purchase
method, assets acquired and liabilities assumed by the Company are recorded
at
their estimated fair values and the results of operations of the acquired
company are consolidated with those of the Company from the date of
acquisition.
On
July
21, 2006, the Company assumed the obligations of HaptoGuard under an employment
agreement between HaptoGuard and Dr. Noah Berkowitz dated March 1, 2005.
Under the terms of the agreement, Dr. Berkowitz serves as President and Chief
Executive Officer of the Company and performs such other executive and
administrative duties as he may reasonably be expected to be capable of
performing on behalf of the Company as may from time to time be authorized
or
directed by the Company’s Board of Directors. Dr. Berkowitz’s employment by the
Company is at-will and not for any specified period and may be terminated at
any
time, with or without cause by either Dr. Berkowitz or the Company.
The
Company will pay Dr. Berkowitz an annual base salary of $240,000 . Dr. Berkowitz
will also be granted an annual cash bonus of up to 30% of his base salary for
that year based on the achievement of certain milestones. Subject to the
approval by the Board of Directors, the Company shall grant Dr. Berkowitz an
option to purchase common stock of the Company on at least an annual basis.
The
options shall vest monthly over a period of three years. In addition, the
agreement provides for severance payments to Dr. Berkowitz in the event he
is
terminated for disability, cause, or he leaves the Company for good reason,
each
as more specifically set forth in the agreement.
The
excess purchase price paid by the Company to acquire the net assets of
HaptoGuard was allocated to acquired in-process research and development
totaling $11,379,348. As required by FASB Interpretation No. 4, “Applicability
of FASB Statement No. 2 to Business combinations Accounted for by the Purchase
Method (“FIN4”), the Company recorded a charge in its statements of
operations for the nine months ended September 30, 2006 for the in-process
research and development. Alteon and HaptoGuard have complementary product
platforms in cardiovascular diseases, diabetes and other inflammatory diseases,
including two Phase 2 clinical-stage compounds focused on cardiovascular
diseases in diabetic patients. Results of operations of HaptoGuard are included
in the condensed consolidated financial statements since July 21,
2006.
A
summary
of the allocation of the purchase price, including acquisition costs of
$1,758,928 is as follows:
Assets
purchased:
|
|
|
|
Cash
|
|
$
|
5,314
|
|
Prepaid
expenses and other current assets
|
|
|
25,839
|
|
Property
and equipment
|
|
|
4,462
|
|
Other
assets
|
|
|
2,490
|
|
Acquired
in-process research and development
|
|
|
11,379,348
|
|
Total
|
|
|
11,417,453
|
|
Liabilities
assumed:
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
623,467
|
|
Net
purchase price
|
|
$
|
10,793,986
|
|
Common
stock and other equity consideration issued
|
|
|
9,035,058
|
|
Acquisition costs
incurred
|
|
$
|
1,758,928
|
|
The
following unaudited pro forma financial information presents the condensed
consolidated results of operations of the Company and HaptoGuard, as if the
acquisition had occurred on January 1, 2005 instead of July 21, 2006, after
giving effect to certain adjustments, including the issuance of the Company’s
common stock as part of the purchase price. The unaudited pro forma information
does not necessarily reflect the results of operations that would have occurred
had the entities been a single company during these periods.
|
|
Three
months ended
|
|
Nine
months
ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,696,848
|
)
|
$
|
(3,299,415
|
)
|
$
|
(6,417,150
|
)
|
$
|
(23,667,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
121,701,416
|
|
|
108,888,125
|
|
|
116,136,960
|
|
|
108,410,208
|
|
Loss
per common share - basic and fully diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.22
|
)
|
The
nine-month period ended September 30, 2005 includes a one-time non-recurring
acquired in-process research and development charge of $11,379,348.
ITEM
2. |
Management's
Discussion and Analysis of Financial Condition and
Results of
Operations.
|
Overview
We
are a
product-based biopharmaceutical company engaged in the development of small
molecule drugs to treat and prevent cardiovascular disease in diabetic patients.
We have identified several promising product candidates that we believe
represent novel approaches to some of the largest pharmaceutical
markets.
In
July
2006, we completed a merger with HaptoGuard, Inc., whereby the two companies’
combined operations, including their complementary product platforms in
cardiovascular diseases, diabetes and other inflammatory diseases. The
newly-combined company has two lead products in clinical development:
· |
ALT-2074,
formerly HaptoGuard’s licensed lead compound BXT-51072, is a glutathione
peroxidase mimetic in clinical development for reducing the morbidity
and
mortality of patients with diabetes following a myocardial infarction.
The
compound has demonstrated the ability to reduce infarct size by
approximately 85 percent in a mouse model of heart attack called
ischemia
reperfusion injury. A Phase 2 clinical study for this compound was
opened
for enrollment in May, but progress was slowed in the current quarter
by
virtue of limited financial resources and the eruption of the conflict
in
the Middle East, as many of the sites open for patient enrollment
are in
northern Israel. The Company also owns a license to a proprietary
genetic
biomarker that has shown the potential to identify patients who are
most
responsive to ALT-2074.
|
· |
Alagebrium
chloride (formerly ALT-711), Alteon's lead compound, is an Advanced
Glycation End-product Crosslink Breaker being developed for diastolic
heart failure (“DHF”). The most recent data on alagebrium from one Phase 2
clinical study presented at the American Heart Association meeting
in
November 2005 demonstrated the ability of alagebrium to improve overall
cardiac function, including measures of diastolic and endothelial
function. In this study, alagebrium also demonstrated the ability
to
significantly reduce left ventricular mass. The compound has been
tested
in approximately 1000 patients, which represents a sizeable human
safety
database, in a number of Phase 2 clinical studies.
|
o |
We announced
that the Juvenile Diabetes Research Foundation (“JDRF”) awarded a grant to
one of our independent researchers, Mark Cooper, M.D., Ph.D., Professor
at
the Baker Heart Research Institute, Melbourne, Australia. This grant
will
fund a multinational Phase 2 clinical study of alagebrium on renal
function in patients with type 1 diabetes and microalbuminuria. Alagebrium
will be tested for its ability to reverse kidney damage caused by
diabetes, and to reverse the protein excretion which is characteristic
of
diabetic nephropathy. Dr. Cooper has demonstrated promising preclinical
results with alagebrium in diabetic kidney disease. The trial is
expected
to be initiated in the first quarter of 2007.
|
o |
Additionally, we
have filed an Investigational New Drug Application (“IND”) with the
U.S. Food & Drug Administration's (“FDA”) Division of Cardio-Renal
Drug Products for a Phase 2b clinical study of our lead A.G.E.
Crosslink Breaker compound, alagebrium, in diastolic heart failure
(“DHF”). The IND has passed the 30-day review period for the proposed
study’s clinical protocol, and we are allowed to initiate the
study at our discretion.
|
The
merger of the two companies was structured as an acquisition by Alteon. Under
the terms of the merger agreement, HaptoGuard shareholders received 37.4 million
shares of Alteon common stock (approximately 31% of the shares after completion
of the merger). As an additional part of the merger, a portion of existing
shares of Alteon preferred stock held by Genentech, Inc. was converted into
Alteon common stock.
Key
components of the transactions completed in July 2006 between Alteon, HaptoGuard
and Genentech were as follows:
Ø |
Alteon
acquired all outstanding equity of HaptoGuard. In exchange, HaptoGuard
shareholders received from Alteon $5.3 million in Alteon common stock,
or
approximately 22.5 million shares.
|
Ø |
Genentech
converted a portion of its existing Alteon preferred stock to Alteon
common stock. A portion of Alteon preferred stock held by Genentech,
which, when converted to Alteon common stock is equal to $3.5 million
in
Alteon common stock, was transferred to HaptoGuard shareholders.
|
Ø |
The
remaining Alteon preferred stock held by Genentech was cancelled.
|
Ø |
Genentech
will receive milestone payments and royalties on any future net sales
of
alagebrium, and received a right of first negotiation on
ALT-2074.
|
We
had
been evaluating potential preclinical and clinical studies in other therapeutic
indications in which alagebrium may address significant unmet needs. During
the
period ended September 30, 2006 we have curtailed such studies to conserve
cash.
In addition to our anticipated clinical studies in renal disease, ischemia
reperfusion injury and heart failure, we have conducted early research studies
focusing on atherosclerosis; Alzheimer's disease; photoaging of the skin; eye
diseases, including age-related macular degeneration (“AMD”), and glaucoma; and
other diabetic complications, including renal diseases.
Since
our
inception in October 1986, we have devoted substantially all of our resources
to
research, drug discovery and development programs. To date, we have not
generated any revenues from the sale of products and do not expect to generate
any such revenues for a number of years, if at all. We have incurred an
accumulated deficit of $242,206,829 as of September 30, 2006, and expect to
incur net losses, potentially greater than losses in prior years, for a number
of years.
We
have
financed our operations through proceeds from public offerings of common stock,
private placements of common and preferred equity securities, revenue from
former collaborative relationships, reimbursement of certain of our research
and
development expenses by our collaborative partners, investment income earned
on
cash and cash equivalent balances and short-term investments and the sale of
a
portion of our New Jersey State net operating loss carryforwards and research
and development tax credit carryforwards.
Our
business is subject to significant risks, including, but not limited to, (1)
our
ability to obtain sufficient additional funding to resume the development of
alagebrium in heart failure, enroll patients in the study opened for ALT-2074,
and continue operations, (2) our ability to complete enrollment in our clinical
studies of alagebrium and ALT-2074 should we have adequate financial and other
resources to do so, (3) the risks inherent in our research and development
efforts, including clinical trials and the length, expense and uncertainty
of
the process of seeking regulatory approvals for our product candidates, (4)
our
reliance on alagebrium and ALT-2074, which are our only significant drug
candidates, (5) uncertainties associated with obtaining and enforcing our
patents and with the patent rights of others, (6) uncertainties regarding
government healthcare reforms and product pricing and reimbursement levels,
(7)
technological change and competition, (8) manufacturing uncertainties, and
(9)
dependence on collaborative partners and other third parties. Even if our
product candidates appear promising at an early stage of development, they
may
not reach the market for numerous reasons. These reasons include the
possibilities that the products will prove ineffective or unsafe during
preclinical or clinical studies, will fail to receive necessary regulatory
approvals, will be difficult to manufacture on a large scale, will be
uneconomical to market or will be precluded from commercialization by
proprietary rights of third parties. These risks and others are discussed under
the heading Part II, Item 1A - Risk Factors.
ITEM
2. |
Management's
Discussion and Analysis of Financial Condition and
Results of Operations –
Continued.
|
Results
of Operations
Three
Months ended September 30, 2006 and 2005
Total
revenues for the three months ended September 30, 2006 and 2005, were
$38,560
and $87,235, respectively. Revenues were derived from interest earned on cash
and cash equivalents and other income. The decrease from 2005 to 2006 was
attributed to lower investment balances and partially offset by higher interest
rates.
Our
total
expenses were $14,114,756 for the three months ended September 30, 2006,
compared to $3,043,639 for the three months ended September 30, 2005. The
increase was primarily a result of an in-process research and development charge
of $11,379,348 in the third quarter of 2006 as a result of the merger with
HaptoGuard. In addition, general and administrative expenses increased by
$1,037,779 over the prior year. Partially offsetting the increase in total
expenses was a decrease in research and development expenses of $1,346,010
from
the prior year.
Research
and development expenses were $635,126 for the three months ended September
30,
2006, as compared to $1,981,136 for the same period in 2005, a decrease of
$1,346,010, or 68%. This decrease was attributed to decreased pre-clinical
and
clinical trial costs as well as a reduction in research and development
personnel and personnel related costs. In 2006, of the total amount spent on
research and development expenses, we incurred $123,341 in personnel and
personnel-related expenses, $49,799 in product liability insurance and $129,855
in third-party consulting. In 2005, we incurred $893,333 in personnel and
personnel-related expenses, $472,276 in preclinical expenses, $220,934 in
clinical trial expense and $88,061 related to manufacturing (packaging and
distribution). Research and development expenses normally include third-party
expenses associated with preclinical and clinical studies, manufacturing costs,
including the development and preparation of clinical supplies, personnel and
personnel-related expenses and facility expenses.
General
and administrative expenses were $2,100,282 for the three months ended September
30, 2006, as compared to $1,062,503 for the same period in 2005. The increase
for 2006 is in large part a result of severance costs of $1,230,702 in the
three
months ended September 30, 2006 which we did not have in the prior year. This
increase is partially offset by a decrease in normal personnel costs of $247,782
over the prior year.
Our
net
loss applicable to common shares was $14,359,804 for the three months ended
September 30, 2006, compared to $4,098,420 in the same period in 2005, an
increase of 250%. This increase was primarily a result of an in-process research
and development charge of $11,379,348 as a result of the merger with HaptoGuard.
This increase was partially offset by the fact that preferred stock dividends
of
$1,142,016 were paid in the three months ended September 30, 2005 as compared
with $283,608 in the three months ended September 30, 2006, as a result of
the
merger.
Nine
Months ended September 30, 2006 and 2005
Total
revenues for the nine months ended September 30, 2006 and 2005, were
$215,122
and $386,789, respectively. Revenues were derived from interest earned on cash
and cash equivalents and other income. The decrease from 2005 to 2006 was
attributed to lower investment balances and partially offset by higher interest
rates. In 2006 and 2005, other income included $50,000 and $100,000,
respectively, received from a licensing agreement with Avon Products,
Inc.
Our
total
expenses were $16,955,827 for the nine months ended September 30, 2006, as
compared to $11,361,561 for the nine months ended September 30, 2005. The
increase was primarily a result of an in-process research and development charge
of $11,379,348 in the third quarter of 2006 as a result of the merger with
HaptoGuard. In addition, general and administrative expenses increased by
$750,631 from the prior year. Offsetting the increase was a decrease in research
and development expenses of $6,535,713.
Research
and development expenses were $1,579,902 for the nine months ended September
30,
2006, as compared to $8,115,615 for the same period in 2005, a decrease of
$6,535,713, or 81%. This decrease was attributed to decreased clinical trial
costs and manufacturing expenses as a result of the discontinuation in June
2005
of our Systolic Pressure Efficacy and Safety Trial of Alagebrium (“SPECTRA”). In
2006, of the total amount spent on research and development expenses, we
incurred $471,742 in personnel and personnel-related expenses, $214,229 in
product liability insurance and $360,287 in third party consulting. In 2005,
we
incurred $3,087,654
in
personnel and personnel-related expenses, $2,217,790 in clinical trial expenses
primarily related to SPECTRA, $1,307,373 in preclinical expenses, $541,657
related to manufacturing (packaging and on-going stability studies), $353,076
in
third-party consulting fees and $281,664 of facility and other overhead related
costs. Research and development expenses normally include third-party expenses
associated with preclinical and clinical studies, manufacturing costs, including
the development and preparation of clinical supplies, personnel and
personnel-related expenses and facility expenses.
ITEM
2. |
Management's
Discussion and Analysis of Financial Condition and
Results of Operations –
Continued.
|
General
and administrative expenses were $3,996,577 for the nine months ended September
30, 2006, as compared to $3,245,946 for the same period in 2005. The increase
for 2006 is in large part a result of severance costs of $1,616,809 in the
nine
months ended September 30, 2006 which we did not have in the prior year. This
increase is partially offset by a decrease in normal personnel costs of $642,871
over the prior year.
Our
net
loss applicable to common shares was $19,393,384 for the nine months ended
September 30, 2006, as compared to $14,294,559 in the same period in 2005,
an
increase of 36%. This increase was primarily a result of an in-process research
and development charge of $11,379,348 as a result of the merger with HaptoGuard.
The increase is partially offset by a reduction of research and development
expenses of $6,535,713. Included in the net loss applicable to common shares
are
preferred stock dividends of $2,652,679 and $3,319,787 for the nine months
ended
September 30, 2006 and 2005, respectively. The reduction of preferred stock
dividends in the current period is a result of the fact that we have ceased
paying these dividends subsequent to the merger with HaptoGuard.
Liquidity
and Capital Resources
We
had
cash and cash equivalents at September 30, 2006, of $2,308,323, as compared
to
$6,582,958 at December 31, 2005. The decrease is attributable to $6,458,732
of net cash used in operating activities and $1,621,929 used in investing
activities. At September 30, 2006 we had working capital of
$1,443,305.
We
are
urgently continuing to pursue fund-raising possibilities through the sale of
our
equity securities. If we are unsuccessful in our efforts to raise additional
funds through the sale of additional equity securities or if the level of cash
and cash equivalents falls below anticipated levels, we will not have the
ability to continue as a going concern after 2006. As a result of the merger
with HaptoGuard, which closed on July 21, 2006, we were required to make payment
of severance and insurance costs in the amount of approximately $2.0 million.
In
addition, we incurred transaction costs of approximately $1,759,000 in
connection with the merger.
The
amount and timing of our future capital requirements will depend on numerous
factors, including the timing of resumption of our research and development
programs, if at all, the number and characteristics of product candidates that
we pursue, the conduct of preclinical tests and clinical studies, the status
and
timelines of regulatory submissions, the costs associated with protecting
patents and other proprietary rights, the ability to complete strategic
collaborations and the availability of third-party funding, if any.
Selling
securities to satisfy our capital requirements may have the effect of materially
diluting the current holders of our outstanding stock. We may also seek
additional funding through corporate collaborations and other financing
vehicles. There can be no assurance that such funding will be available at
all
or on terms acceptable to us. We are in the process of significantly curtailing
our research and development programs, until additional financing is obtained.
If funds are obtained through arrangements with collaborative partners or
others, we may be required to relinquish rights to certain of our technologies
or product candidates and alter our plans for the development of our product
candidates. If we are unable to obtain the necessary funding, we may need to
cease operations. There can be no assurance that the products or technologies
acquired in the merger will result in revenues to the combined company or any
meaningful return on investment to our stockholders.
ITEM
2. |
Management's
Discussion and Analysis of Financial Condition and
Results of Operations –
Continued.
|
We
do not
have any approved products and currently derive cash from sales of our
securities, sales of our New Jersey state net operating loss carryforwards
and
interest on cash and cash equivalents. We are highly susceptible to conditions
in the global financial markets and in the pharmaceutical industry. Positive
and
negative movement in those markets will continue to pose opportunities and
challenges to us. Previous downturns in the market valuations of biotechnology
companies and of the equity markets more generally have restricted our ability
to raise additional capital on favorable terms.
In
April
2006, we completed an equity financing that resulted in net proceeds to Alteon
of approximately $2.5 million. (See Note 5 - Stockholders’ Equity).
On
April
19, 2006, we entered into a definitive merger agreement pursuant to which we
have combined operations with HaptoGuard, Inc. The merger and associated
preferred stock restructuring transactions were subject to the approval of
Alteon and HaptoGuard shareholders and closed on July 21, 2006. (See Note 6
-
Merger with HaptoGuard).
In
September 2006, we completed an equity financing that resulted in net proceeds
to Alteon of approximately $1.3 million. On October 20, 2006, we paid an
aggregate of $28,411 as a penalty to the investors of the September 13, 2006
private placement as a result of the Company’s failure to timely file a
registration statement covering the resale of such Units pursuant to a certain
Registration Rights Agreement dated as of September 13, 2006. This Registration
Rights Agreement specifies in certain instances a cash penalty of 2% of the
gross amount of the financing for each month the Company is out of compliance.
This is subject to an overall limit of 18%, or $255,699. These instances include
failure to file a registration statement within 30 days of the date of the
Registration Rights Agreement, failure to achieve an effective registration
within 90 days of the date of the Registration Rights Agreement (120 days in
the
case of a full review by the Securities and Exchange Commission), and failure
to
maintain an effective registration for more than 15 consecutive calendar days
or
more than an aggregate of 25 calendar days during any 12-month period. (See
Note
5 - Stockholders’ Equity).
On
October 13, 2006, we reported that we had received a notice from the staff
(the
“Staff'') of the American Stock Exchange, Inc. (“AMEX'') indicating that we are
not in compliance with certain AMEX continued listing standards set forth
in
Section 1003(a) of the AMEX Company Guide due to (i) sustaining losses
from
continuing operations and/or net losses in two out of our three most recent
fiscal years with stockholders' equity below $2,000,000; (ii) sustaining
losses
from continuing operations and/or net losses in three out of our four
most recent fiscal years with stockholders' equity below $4,000,000; and
(iii)
sustaining losses from continuing operations and/or net losses in our five
most recent fiscal years with stockholders' equity below
$6,000,000.
We
were
afforded the opportunity to submit a plan of compliance (a “Plan'') to AMEX by
November 8, 2006 advising AMEX of the action we have taken, or will take,
that
would bring us into compliance with all the continuing listing standards
of the
Company Guide by April 9, 2008. We submitted our plan to regain
compliance to AMEX on November 7, 2006. If AMEX accepts the Plan, we will
be able to continue our listing during the Plan period for up to seventeen
months, during which time we will be subject to periodic review to determine
whether it is making progress consistent with the Plan. If AMEX does not
accept
our Plan or if we do not make progress consistent with the Plan during
the Plan
period or if we are not in compliance with the continued listing standards
at
the end of the Plan period, AMEX may then initiate delisting proceedings.
However, there is no assurance that the Plan will be accepted by AMEX,
or that
we will be able to make progress consistent with the Plan if it is
accepted.
While
the
Plan is under review by AMEX, we expect that our common stock will continue
to
trade without interruption on AMEX; however, the trading symbol for our
common
stock will have an indicator (.BC) added as an extension to signify
noncompliance with the continued listing standards. Within five days of
the
October 9, 2006 letter from AMEX, we were included in a list on the AMEX
website
of issuers that do not comply with the listing standards. The .BC indicator
will
remain as an extension on our trading symbol until we have regained compliance
with all applicable continued listing standards.
Critical
Accounting Policies
In
December 2001, the SEC issued a statement concerning certain views of the SEC
regarding the appropriate amount of disclosure by publicly held companies with
respect to their critical accounting policies. In particular, the SEC expressed
its view that in order to enhance investor understanding of financial
statements, companies should explain the effects of critical accounting policies
as they are applied, the judgments made in the application of these policies
and
the likelihood of materially different reported results if different assumptions
or conditions were to prevail. We have since carefully reviewed the disclosures
included in our filings with the SEC, including, without limitation, this
Quarterly Report on Form 10-Q and accompanying unaudited financial statements
and related notes thereto. We believe the effect of the following accounting
policy is significant to our results of operations and financial condition.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”), which replaces “Accounting for Stock-Based
Compensation,” (“SFAS 123”) and supersedes Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
beginning with the first annual reporting period that begins after December
15,
2005. Under SFAS 123R, the pro forma disclosures previously permitted under
SFAS
123 are no longer an alternative to financial statement
recognition.
The
Company accounts for employee stock-based compensation, awards issued to
non-employee directors, and stock options issued to consultants and contractors
in accordance with SFAS 123R, SFAS No. 148 “Accounting for Stock-Based
Compensation—Transition and Disclosure” and Emerging Issues Task Force Issue No.
96-18, “Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services.” For
the three- and nine-month periods ended September 30, 2006, the Company
recognized research and development consulting expenses of $7,666.
The
Company has adopted the new standard, SFAS 123R, effective January 1, 2006
and
has selected the Black-Scholes method of valuation for share-based compensation.
The Company has adopted the modified prospective transition method which
requires that compensation cost be recorded, as earned, for all unvested stock
options and restricted stock outstanding at the beginning of the first quarter
of adoption of SFAS 123R, and is recognized over the remaining service period
after the adoption date based on the options’ original estimate of fair value.
For
the
three- and nine-month periods ended September 30, 2006, the Company recognized
share-based employee compensation cost of $34,652 in accordance with SFAS 123R,
which was recorded as general and administrative expense.
On
December 15, 2005, the Compensation Committee of the Board of Directors of
the
Company approved the acceleration of the vesting date of all previously issued,
outstanding and unvested options, effective December 31, 2005. As such there
was
no compensation recognized under Statement 123(R) related to options granted
prior to January 1, 2006.
Prior
to
adoption of SFAS 123R, the Company applied the intrinsic-value method under
APB
Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations, under which no compensation cost (excluding those options
granted below fair market value) has been recognized. SFAS 123, “Accounting for
Stock-Based Compensation,” established accounting and disclosure requirements
using a fair-value based method of accounting for stock-based employee
compensation plans. As permitted by SFAS 123, the Company elected to continue
to
apply the intrinsic-value based method of accounting described above, and
adopted only the disclosure requirements of SFAS 123, as amended, which were
similar in most respects to SFAS 123R.
Forward-Looking
Statements and Cautionary Statements
Statements
in this Form 10-Q that are not statements or descriptions of historical facts
are "forward-looking" statements under Section 21E of the Securities Exchange
Act of 1934, as amended, and the Private Securities Litigation Reform Act of
1995, and are subject to numerous risks and uncertainties. These forward-looking
statements and other forward-looking statements made by us or our
representatives are based on a number of assumptions. The words "believe,"
"expect," "anticipate," "intend," "estimate" or other expressions, which are
predictions of or indicate future events and trends and which do not relate
to
historical matters, identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, as they involve
risks and uncertainties, and actual results could differ materially from those
currently anticipated due to a number of factors, including those set forth
in
this section and elsewhere in this Form 10-Q. These factors include, but are
not
limited to, the risks set forth below.
The
forward-looking statements represent our judgments and expectations as of the
date of this Report. We assume no obligation to update any such forward-looking
statements. See Part II, Item 1A - Risk Factors.
ITEM
3. Qualitative
and Quantitative Disclosures about Market Risk.
Our
exposure to market risk for changes in interest rates relates primarily to
our
investment in marketable securities. We do not use derivative financial
instruments in our investments. All of our investments resided in money market
accounts. Accordingly, we do not believe that there is any material market
risk
exposure with respect to derivative or other financial instruments that would
require disclosure under this Item.
ITEM
4. Controls
and Procedures.
a)
Evaluation of Disclosure Controls and Procedures. Our management has evaluated,
with the participation of our Chief Executive Officer and our acting principal
financial officer, the effectiveness of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934,
as
amended (the "Exchange Act")) as of the end of the fiscal quarter covered
by
this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief
Executive Officer and the acting principal financial officer concluded
that as
of the end of such fiscal quarter, our current disclosure controls and
procedures were not effective because of the material weakness in internal
control over financial reporting described below. We have taken, and are
continuing to take, steps to address this weakness as described
below.
b)
Material Weaknesses and Changes in Internal Controls. During the audit
of our
financial statements for the year ended December 31, 2005, the review
of our
financial statements for the three months ended March 31, 2006 and the
review of
our financial statements for the three- and nine-month periods ended
September
30, 2006, our independent registered public accounting firm identified
a
material weakness, as of December 31, 2005, March 31, 2006 and September
30,
2006, regarding our internal controls over the identification of and
the
accounting for non-routine transactions, including certain costs related
to
potential strategic transactions, severance benefits, the financial statement
recording and disclosure of stock options that we have granted to non-employee
consultants in accordance with Emerging Issues Task Force (“EITF”) 96-18,
accounting for the acquisition of HaptoGuard and the adoption of SFAS
123(R). As
defined by the Public Company Accounting Oversight Board Auditing Standard
No.
2, a material weakness is a significant control deficiency or a combination
of
significant control deficiencies that results in there being more than
a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. This material weakness
did not
result in the restatement of any previously reported financial statements
or any
other related financial disclosure. In addition, the changes that would
have
resulted in the financial statements for the year ended December 31,
2005, as a
consequence of the material weakness, were deemed to be immaterial but
were
nevertheless recorded by the Company. Management is in the process of
implementing remedial controls to address these matters, including additional
third party review of non-routine strategic transactions and Board of
Director
meeting minutes as well as the hiring of outside financial consultants
to handle
accounting and financial reporting.
c)
There
were changes in our internal control over financial reporting (as defined
in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter
covered by this Quarterly Report on Form 10-Q that have materially affected,
or
are reasonably likely to materially affect, our internal control over financial
reporting. These changes included the hiring of outside financial consultants
to
address the deficiencies described above.
PART
II - OTHER INFORMATION
ITEM
1A. Risk Factors.
Risks
Related to Our Business
If
we are unable to obtain sufficient additional funding in the near term, we
may
be forced to cease operation.
While
we
intend to pursue development of alagebrium in high potential cardiovascular
indications such as heart failure, any continued development of alagebrium
by us
is contingent upon additional funding or a strategic partnership.
The
Company is urgently continuing to pursue fund-raising possibilities through
the
sale of its equity securities. If the Company is unsuccessful in its efforts
to
raise additional funds through the sale of additional equity securities or
if
the level of cash and cash equivalents falls below anticipated levels, Alteon
will not have the ability to continue as a going concern after 2006.
As
of
September 30, 2006, we had working capital of $1,443,305, including $2,308,323
of cash and cash equivalents. Our cash used in operating activities for the
nine
months ended September 30, 2006 was $6,458,732.
As
a
result of the merger with HaptoGuard, which closed on July 21, 2006, the Company
was required to make payment of severance and insurance costs in the amount
of
approximately $2.0 million. In addition, the Company has incurred transaction
fees and expenses of approximately $1,759,000 in connection with the merger,
which fees and expenses are currently due and payable. There
can
be no assurance that the products or technologies acquired in the merger will
result in revenues to the combined company or any meaningful return on
investment to our stockholders.
As
a
result of a decrease in our available financial resources, we have significantly
curtailed the research, product development, preclinical testing and clinical
trials of our product candidates.
The
amount and timing of our future capital requirements will depend on numerous
factors, including the timing
of
resuming
our
research and development programs, if
at
all, the
number and characteristics of product candidates that we pursue, the conduct
of
preclinical tests and clinical studies, the status and timelines of regulatory
submissions, the costs associated with protecting patents and other proprietary
rights, the ability to complete strategic collaborations and the availability
of
third-party funding, if any.
Selling
securities to satisfy our capital requirements may have the effect of materially
diluting the current holders of our outstanding stock. We may also seek
additional funding through corporate collaborations and other financing
vehicles. If funds are obtained through arrangements with collaborative partners
or others, we may be required to relinquish rights to our technologies or
product candidates.
We
need additional capital, but access to such capital is uncertain.
Our
current resources are insufficient both to fund our commercialization efforts
and to continue our future operations beyond 2006. As of September 30, 2006,
we
had cash on hand of $2,308,323. In September 2006, we closed on approximately
$1.4 million in financing. Prior to the financing, we were expending
approximately $450,000 in cash per month. Following the merger, we currently
expect to spend approximately $560,000 in cash per month. Our capital needs
beyond 2006 will depend on many factors, including our research and development
activities and the success thereof, the scope of our clinical trial program,
the
timing of regulatory approval for our products under development and the
successful commercialization of our products. Our needs may also depend on
the
magnitude and scope of the activities, the progress and the level of success
in
our clinical trials, the costs of preparing, filing, prosecuting, maintaining
and enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in or terminations of existing
collaboration and licensing arrangements, the establishment of new collaboration
and licensing arrangements and the cost of manufacturing scale-up and
development of marketing activities, if undertaken by us. We currently do
not
have committed external sources of funding and may not be able to secure
additional funding on any terms or on terms that are favorable to us. If
we
raise additional funds by issuing additional stock, further dilution to our
existing stockholders will result, and new investors may negotiate for rights
superior to existing stockholders. If adequate funds are not available, we
may
be required to:
· |
delay,
reduce the scope of or eliminate one or more of our development programs;
|
· |
obtain
funds through arrangements with collaboration partners or others
that may
require us to relinquish rights to some or all of our technologies,
product candidates or products that we would otherwise seek to develop
or
commercialize ourselves;
|
· |
license
rights to technologies, product candidates or products on terms that
are
less favorable to us than might otherwise be available;
|
· |
seek
a buyer for all or a portion of our business; or
|
· |
wind
down our operations and liquidate our assets on terms that are unfavorable
to us.
|
Alteon’s
ability to continue as a going concern is dependent on future financing.
J.H.
Cohn
LLP, our independent registered public accounting firm, has included an
explanatory paragraph in their report on our financial statements for the fiscal
year ended December 31, 2005, which expresses substantial doubt about our
ability to continue as a going concern. The inclusion of a going concern
explanatory paragraph in J.H. Cohn LLP’s report on our financial statements
could have a detrimental effect on our stock price and our ability to raise
additional capital.
Our
financial statements have been prepared on the basis of a going concern, which
contemplates the realization of assets and the satisfaction of liabilities
in
the normal course of business. We have not made any adjustments to the financial
statements as a result of the outcome of the uncertainty described above.
Accordingly, the value of the company in liquidation may be different from
the
amounts set forth in our financial statements.
Our
continued success will depend on our ability to continue to raise capital in
order to fund the development and commercialization of our products. Failure
to
raise additional capital may result in substantial adverse circumstances,
including delisting of our common stock shares from the American Stock Exchange,
which could substantially decrease the liquidity and value of such shares,
or
ultimately result in our liquidation.
Alteon
and HaptoGuard have each historically incurred operating losses and we expect
these losses to continue.
Alteon
and HaptoGuard have each historically incurred substantial operating losses
due
to their research and development activities and expect these losses to continue
after the merger for the foreseeable future. As of December 31, 2005, Alteon
and
HaptoGuard had an accumulated deficit of $222,813,445 and $2,425,258,
respectively. Alteon’s fiscal year 2005, 2004 and 2003 net losses were
$12,614,459, $13,958,646, and $14,452,418, respectively. HaptoGuard’s fiscal
year 2005 and 2004 net losses were $1,654,695 and $770,563, respectively.
Alteon’s fiscal year 2005, 2004 and 2003 net losses applicable to common
stockholders were $17,100,795, $18,093,791 and $18,243,265, respectively. If
we
are able to obtain sufficient additional funding, we expect to expend
significant amounts on research and development programs for alagebrium and
ALT-2074. Research and development activities are time consuming and expensive,
and will involve the need to engage in additional fund-raising activities,
identify appropriate strategic and collaborative partners, reach agreement
on
basic terms, and negotiate and sign definitive agreements. We are actively
seeking new financing to provide financial support for our research and
development activities. However, at this time, we are not able to assess the
probability of success in our fundraising efforts or the terms, if any, under
which we may secure financial support from strategic partners or other
investors. We expect to continue to incur significant operating losses for
the
foreseeable future.
Clinical
studies required for our product candidates are time-consuming, and their
outcome is uncertain.
Before
obtaining regulatory approvals for the commercial sale of any of our products
under development, we must demonstrate through preclinical and clinical studies
that the product is safe and effective for use in each target indication.
Success in preclinical studies of a product candidate may not be predictive
of
similar results in humans during clinical trials. None of our products has
been
approved for commercialization in the United States or elsewhere. In December
2004, we announced that findings of a routine two-year rodent toxicity study
indicated that male Sprague Dawley rats exposed to high doses of alagebrium
over
their natural lifetime developed dose-related increases in liver cell
alterations and tumors, and that the liver tumor rate was slightly over the
expected background rate in this gender and species of rat. In February 2005,
based on the initial results from one of the follow-on preclinical toxicity
experiments, we voluntarily and temporarily suspended enrollment of new subjects
into each of the ongoing clinical studies pending receipt of additional
preclinical data. We withdrew our IND for the EMERALD study in February 2006
in
order to focus our resources on the development of alagebrium in cardiovascular
indications.
In
June
2005, our Phase 2b SPECTRA trial in systolic hypertension was discontinued
after
an interim analysis found that the data did not indicate a treatment effect
of
alagebrium, and we have ceased development of alagebrium for this indication.
We
cannot
predict at this time when enrollment in any of our clinical studies of
alagebrium will resume, if ever. If we are unable to resume enrollment in our
clinical studies of alagebrium in a timely manner, or at all, our business
will
be materially adversely affected.
If
we do
not prove in clinical trials that our product candidates are safe and effective,
we will not obtain marketing approvals from the FDA and other applicable
regulatory authorities. In particular, one or more of our product candidates
may
not exhibit the expected medical benefits in humans, may cause harmful side
effects, may not be effective in treating the targeted indication or may have
other unexpected characteristics that preclude regulatory approval for any
or
all indications of use or limit commercial use if approved.
The
length of time necessary to complete clinical trials varies significantly and
is
difficult to predict. Factors that can cause delay or termination of our
clinical trials include:
· |
slower
than expected patient enrollment due to the nature of the protocol,
the
proximity of subjects to clinical sites, the eligibility criteria
for the
study, competition with clinical trials for other drug candidates
or other
factors;
|
· |
adverse
results in preclinical safety or toxicity
studies;
|
· |
lower
than expected recruitment or retention rates of subjects in a clinical
trial;
|
· |
inadequately
trained or insufficient personnel at the study site to assist in
overseeing and monitoring clinical
trials;
|
· |
delays
in approvals from a study site’s review board, or other required
approvals;
|
· |
longer
treatment time required to demonstrate effectiveness or determine
the
appropriate product dose;
|
· |
lack
of sufficient supplies of the product
candidate;
|
· |
adverse
medical events or side effects in treated
subjects;
|
· |
lack
of effectiveness of the product candidate being tested;
and
|
Even
if
we obtain positive results from preclinical or clinical studies for a particular
product, we may not achieve the same success in future studies of that product.
Data obtained from preclinical and clinical studies are susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. In
addition, we may encounter delays or rejections based upon changes in FDA policy
for drug approval during the period of product development and FDA regulatory
review of each submitted new drug application. We may encounter similar delays
in foreign countries. Moreover, regulatory approval may entail limitations
on
the indicated uses of the drug. Failure to obtain requisite governmental
approvals or failure to obtain approvals of the scope requested will delay
or
preclude our licensees or marketing partners from marketing our products or
limit the commercial use of such products and will have a material adverse
effect on our business, financial condition and results of operations.
In
addition, some or all of the clinical trials we undertake may not demonstrate
sufficient safety and efficacy to obtain the requisite regulatory approvals,
which could prevent or delay the creation of marketable products. Our product
development costs will increase if we have delays in testing or approvals,
if we
need to perform more, larger or different clinical or preclinical trials than
planned or if our trials are not successful. Delays in our clinical trials
may
harm our financial results and the commercial prospects for our products.
The
FDA regulates the development, testing, manufacture, distribution, labeling
and
promotion of pharmaceutical products in the United States pursuant to the
Federal Food, Drug, and Cosmetic Act and related regulations. We must receive
pre-market approval by the FDA prior to any commercial sale of any drug
candidates. Before receiving such approval, we must provide preclinical data
and
proof in human clinical trials of the safety and efficacy of our drug
candidates, which trials can take several years. In addition, we must show
that
we can produce any drug candidates consistently at quality levels sufficient
for
administration in humans. Pre-market approval is a lengthy and expensive
process. We may not be able to obtain FDA approval for any commercial sale
of
any drug candidate. By statute and regulation, the FDA has 180 days to
review an application for approval to market a drug candidate; however, the
FDA
frequently exceeds the 180-day time period, at times taking up to
18 months. In addition, based on its review, the FDA or other regulatory
bodies may determine that additional clinical trials or preclinical data are
required. Except for any potential licensing or marketing arrangements with
other pharmaceutical or biotechnology companies, we will not generate any
revenues in connection with any of our drug candidates unless and until we
obtain FDA approval to sell such products in commercial quantities for human
application.
Even
if a
clinical trial is commenced, the FDA may delay, limit, suspend or terminate
clinical trials at any time, or may delay, condition or reject approval of
any
of our product candidates, for many reasons. For example:
· |
ongoing
preclinical or clinical study results may indicate that the product
candidate is not safe or effective;
|
· |
the
FDA may interpret our preclinical or clinical study results to indicate
that the product candidate is not safe or effective, even if we interpret
the results differently; or
|
· |
the
FDA may deem the processes and facilities that our collaborative
partners,
our third-party manufacturers or we propose to use in connection
with the
manufacture of the product candidate to be
unacceptable.
|
Our
success will also depend on the products and systems formerly under development
by HaptoGuard, including ALT-2074, and we cannot be sure that the efforts to
commercialize ALT-2074 will succeed.
ALT-2074,
HaptoGuard’s lead compound prior to the merger, is in development for the
treatment of heart complications in patients with diabetes. It has demonstrated
efficacy in mouse models.
ALT-2074
is still in early clinical trials and any success to date should not be seen
as
indicative of the probability of any future success. The failure to complete
clinical development and commercialize ALT-2074 for any reason or due to a
combination of reasons will have a material adverse impact on our business.
We
are
dependent on the successful outcome of clinical trials and will not be able
to
successfully develop and commercialize products if clinical trials are not
successful.
HaptoGuard
received approval from Israel’s Ministry of Health to conduct Phase 2
trials in diabetic patients recovering from a recent myocardial infarction
or
acute coronary syndrome. The purpose of the study is to evaluate the biological
effects on cardiac tissue in patients treated with ALT-2074. HaptoGuard
received Institutional Review Board approval for three sites in Israel, and
the
study was opened for enrollment in May 2006. The Israel-Lebanon conflict
that occurred in July 2006 has adversely impacted our ability to recruit
patients for the study. While we are evaluating modifications to the protocol
to
simplify its management in Israel, including transferring management of the
project from a Contract Research Organization, or CRO, to our internal team,
we
believe that the conflict has continued to compromise any benefit that is likely
to be realized from those operational modifications. Additionally, the
continuation of that trial is contingent on the successful raising of additional
financing by the Company.
If
we are unable to form the successful collaborative relationships that our
business strategy requires, our programs will suffer and we may not be able
to
develop products.
Our
strategy for developing and deriving revenues from our products depends, in
large part, upon entering into arrangements with research collaborators,
corporate partners and others. The potential market, preclinical and clinical
study results and safety profile of our product candidates may not be attractive
to potential corporate partners. A two-year toxicity study found that male
rats
exposed to high doses of alagebrium over their natural lifetime developed
dose-related increases in liver cell alterations, including hepatocarcinomas,
and that the alteration rate was slightly over the expected background rate
in
this gender and species of rat. Also, our Phase 2a EMERALD study in erectile
dysfunction, the IND for which has since been withdrawn, was placed on clinical
hold by the FDA’s Reproductive and Urologic Division, which may adversely affect
our ability to enter into research and development collaborations with respect
to alagebrium. We face significant competition in seeking appropriate
collaborators, and these collaborations are complex and time-consuming to
negotiate and document. We may not be able to negotiate collaborations on
acceptable terms, or at all. If that were to occur, we may have to curtail
the
development of a particular product candidate, reduce or delay our development
program or one or more of our other development programs, delay our potential
commercialization or reduce the scope of our sales or marketing activities,
or
increase our expenditures and undertake development or commercialization
activities at our own expense. If we elect to increase our expenditures to
fund
development or commercialization activities on our own, we may need to obtain
additional capital, which may not be available to us on acceptable terms, or
at
all. If we do not have sufficient funds, we will not be able to bring our
product candidates to market and generate product revenue.
If
we are able to form collaborative relationships, but are unable to maintain
them, our product development may be delayed and disputes over rights to
technology may result.
We
may
form collaborative relationships that, in some cases, will make us dependent
upon outside partners to conduct preclinical testing and clinical studies and
to
provide adequate funding for our development programs.
In
general, collaborations involving our product candidates pose the following
risks to us:
· |
collaborators
may fail to adequately perform the scientific and preclinical studies
called for under our agreements with
them;
|
· |
collaborators
have significant discretion in determining the efforts and resources
that
they will apply to these
collaborations;
|
· |
collaborators
may not pursue further development and commercialization of our product
candidates or may elect not to continue or renew research and development
programs based on preclinical or clinical study results, changes
in their
strategic focus or available funding or external factors, such as
an
acquisition that diverts resources or creates competing
priorities;
|
· |
collaborators
may delay clinical trials, provide insufficient funding for a clinical
program, stop a clinical study or abandon a product candidate, repeat
or
conduct new clinical trials or require a new formulation of a product
candidate for clinical testing;
|
· |
collaborators
could independently develop, or develop with third parties, products
that
compete directly or indirectly with our products or product candidates
if
the collaborators believe that competitive products are more likely
to be
successfully developed or can be commercialized under terms that
are more
economically attractive; collaborators with marketing and distribution
rights to one or more products may not commit enough resources to
their
marketing and distribution;
|
· |
collaborators
may not properly maintain or defend our intellectual property rights
or
may use our proprietary information in such a way as to invite litigation
that could jeopardize or invalidate our proprietary information or
expose
us to potential litigation;
|
· |
disputes
may arise between us and the collaborators that result in the delay
or
termination of the research, development or commercialization of
our
product candidates or that result in costly litigation or arbitration
that
diverts management attention and resources;
and
|
· |
collaborations
may be terminated and, if terminated, may result in a need for additional
capital to pursue further development of the applicable product
candidates.
|
In
addition, there have been a significant number of business combinations among
large pharmaceutical companies that have resulted in a reduced number of
potential future collaborators. If a present or future collaborator of ours
were
to be involved in a business combination, the continued pursuit and emphasis
on
our product development program could be delayed, diminished or terminated.
If
we are unable to attract and retain the key personnel on whom our success
depends, our product development, marketing and commercialization plans could
suffer.
We
depend
heavily on the principal members of our management and scientific staff to
realize our strategic goals and operating objectives. Over the past year, due
to
the reduction in our clinical trial activities, the number of our employees
has
decreased from 22 as of September 30, 2005 to 7 as of September 30, 2006.
Following the merger with HaptoGuard, we depend on Dr. Noah Berkowitz as the
combined company’s Chief Executive Officer and Dr. Malcolm MacNab as the
combined company’s Vice-President of Clinical Development. The loss of services
in the near term of any of our principal members of management and scientific
staff could impede the achievement of our development priorities. Furthermore,
recruiting and retaining qualified scientific personnel to perform research
and
development work in the future will also be critical to our success, and there
is significant competition among companies in our industry for such personnel.
We may be required to provide additional retention and severance benefits to
our
employees in the future if we prepare to effect a strategic transaction, such
as
a sale or merger with another company. However, we cannot assure you that we
will be able to attract and retain personnel on acceptable terms given the
competition between pharmaceutical and healthcare companies, universities and
non-profit research institutions for experienced managers and scientists, and
given the recent clinical and regulatory setbacks that we have experienced.
In
addition, we rely on consultants to assist us in formulating our research and
development strategy. All of our consultants are employed by other entities
and
may have commitments to or consulting or advisory contracts with those other
entities that may limit their availability to us.
If
we do not successfully develop any products, or are unable to derive revenues
from product sales, we will never be profitable.
Virtually
all of our revenues to date have been generated from collaborative research
agreements and investment income. We have not received any revenues from product
sales. We may not realize product revenues on a timely basis, if at all, and
there can be no assurance that we will ever be profitable.
At
September 30, 2006, we had an accumulated deficit of $242,206,829. We anticipate
that we will incur substantial, potentially greater, losses in the future as
we
continue our research, development and clinical studies. We have not yet
requested or received regulatory approval for any product from the FDA or any
other regulatory body. All of our product candidates, including our lead
candidate, alagebrium, are still in research, preclinical or clinical
development. We may not succeed in the development and marketing of any
therapeutic or diagnostic product. We do not have any product candidates other
than alagebrium and ALT-2074 in clinical development, and there can be no
assurance that we will be able to bring any other compound into clinical
development. Adverse results of any preclinical or clinical study could cause
us
to materially modify our clinical development programs, resulting in delays
and
increased expenditures, or cease development for all or part of our ongoing
studies of alagebrium.
To
achieve profitable operations, we must, alone or with others, successfully
identify, develop, introduce and market proprietary products. Such products
will
require significant additional investment, development and preclinical and
clinical testing prior to potential regulatory approval and commercialization.
The development of new pharmaceutical products is highly uncertain and
expensive
and subject
to a number of significant risks. Potential products that appear to be promising
at early stages of development may not reach the market for a number of reasons.
Potential products may be found ineffective or cause harmful side effects during
preclinical testing or clinical studies, fail to receive necessary regulatory
approvals, be difficult to manufacture on a large scale, be uneconomical, fail
to achieve market acceptance or be precluded from commercialization by
proprietary rights of third parties. We may not be able to undertake additional
clinical studies. In addition, our product development efforts may not be
successfully completed, we may not have
the
funds to complete any ongoing clinical trials, we may not obtain
regulatory approvals, and our products, if introduced, may not be successfully
marketed or achieve customer acceptance. We do not expect any of our products,
including alagebrium, to be commercially available for a number of years, if
at
all.
Failure
to remediate the material weaknesses in our internal controls and to achieve
and
maintain effective internal control in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business
and stock price.
During
the audit of our financial statements for the year ended December 31, 2005,
the
review of our financial statements for the three months ended March 31, 2006
and
the review of our financial statements for the three- and nine-month periods
ended September 30, 2006, our independent registered public accounting firm
identified a material weakness, as of December 31, 2005, March 31, 2006 and
September 30, 2006, regarding our internal controls over the identification
of
and the accounting for non-routine transactions, including certain costs related
to potential strategic transactions, severance benefits, the financial statement
recording and disclosure of stock options that we have granted to non-employee
consultants in accordance with Emerging Issues Task Force (“EITF”) Issue No.
96-18, accounting for the acquisition of HaptoGuard and the adoption of SFAS
123(R). As defined by the Public Company Accounting Oversight Board Auditing
Standard No. 2, a material weakness is a significant control deficiency or
a
combination of significant control deficiencies that results in there being
more
than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. This material weakness
did not result in the restatement of any previously reported financial
statements or any other related financial disclosure. Management continues
the
process of implementing remedial controls to address these matters. In addition,
the changes that would have resulted in the financial statements for the year
ended December 31, 2005, March 31, 2006 and September 30, 2006 as a consequence
of the material weakness, were deemed by the Company to be immaterial but were
nevertheless recorded by the Company.
On
April
22, 2005, we filed an amendment to our Annual Report on Form 10-K for the fiscal
year ended December 31, 2004 (the “10-K Amendment”), in which we reported that,
as of December 31, 2004, and as required by Section 404 of the Sarbanes-Oxley
Act of 2002, management, with the participation of our principal executive
officer and principal financial officer, had assessed the effectiveness of
our
internal control over financial reporting based on the framework established
in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Management’s assessment
included an evaluation of the design of our internal control over financial
reporting and testing of the operational effectiveness of our internal control
over financial reporting. Management reviewed the results of its assessment
with
the Audit Committee of our Board of Directors, and based on this assessment,
management determined that as of December 31, 2004, there were three material
weaknesses in our internal control over financial reporting. In light of these
material weaknesses, management concluded that, as of December 31, 2004, we
did
not maintain effective internal control over financial reporting.
The
three
material weaknesses identified were in the areas of audit committee oversight
of
the internal control review process, information technology controls and process
controls, and control over cash disbursements. With respect to each of these
matters, as set forth in the Form 10-K Amendment, management has implemented
remedial measures or procedures to address these matters. However, we cannot
currently assure you that the remedial measures that are currently being
implemented will be sufficient to result in a conclusion that our internal
controls no longer contain any material weaknesses, and that our internal
controls are effective. In addition, we cannot assure you that, even if we
are
able to achieve effective internal control over financial reporting, our
internal controls will remain effective for any period of time. The failure
to
maintain effective internal control over financial reporting could have a
material adverse effect on our business and stock price.
Our
product candidates will remain subject to ongoing regulatory review even if
they
receive marketing approval. If we fail to comply with continuing regulations,
we
could lose these approvals and the sale of our products could be suspended.
Even
if
we receive regulatory approval to market a particular product candidate, the
approval could be granted with the condition that we conduct additional costly
post-approval studies or that we limit the indicated uses included in our
labeling. Moreover, the product may later cause adverse effects that limit
or
prevent its widespread use, force us to withdraw it from the market or impede
or
delay our ability to obtain regulatory approvals in additional countries. In
addition, the manufacturer of the product and its facilities will continue
to be
subject to FDA review and periodic inspections to ensure adherence to applicable
regulations. After receiving marketing approval, the manufacturing, labeling,
packaging, adverse event reporting, storage, advertising, promotion and record
keeping related to the product will remain subject to extensive regulatory
requirements. We may be slow to adapt, or we may never adapt, to changes in
existing regulatory requirements or adoption of new regulatory requirements.
If
we
fail to comply with the regulatory requirements of the FDA and other applicable
United States and foreign regulatory authorities or if previously unknown
problems with our products, manufacturers or manufacturing processes are
discovered, we could be subject to administrative or judicially imposed
sanctions, including:
· |
restrictions
on the products, manufacturers or manufacturing
processes;
|
· |
civil
or criminal penalties;
|
· |
product
seizures or detentions;
|
· |
voluntary
or mandatory product recalls and publicity
requirements;
|
· |
suspension
or withdrawal of regulatory
approvals;
|
· |
total
or partial suspension of production;
and
|
· |
refusal
to approve pending applications for marketing approval of new drugs
or
supplements to approved
applications.
|
In
similar fashion to the FDA, foreign regulatory authorities require demonstration
of product quality, safety and efficacy prior to granting authorization for
product registration which allows for distribution of the product for commercial
sale. International organizations, such as the World Health Organization, and
foreign government agencies, including those for the Americas, Middle East,
Europe, Asia and the Pacific, have laws, regulations and guidelines for
reporting and evaluating the data on safety, quality and efficacy of new drug
products. Although most of these laws, regulations and guidelines are very
similar, each of the individual nations reviews all of the information available
on the new drug product and makes an independent determination for product
registration. A finding of product quality, safety or efficiency in one
jurisdiction does not guarantee approval in any other jurisdiction, even if
the
other jurisdiction has similar laws, regulations and guidelines.
If
we cannot successfully form and maintain suitable arrangements with third
parties for the manufacturing of the products we may develop, our ability to
develop or deliver products may be impaired.
We
have
no experience in manufacturing products and do not have manufacturing
facilities. Consequently, we will depend on contract manufacturers for the
production of any products for development and commercial purposes. The
manufacture of our products for clinical trials and commercial purposes is
subject to current good manufacturing practices, or cGMP, regulations
promulgated by the FDA. In the event that we are unable to obtain or retain
third-party manufacturing capabilities for our products, we will not be able
to
commercialize our products as planned. Our reliance on third-party manufacturers
will expose us to risks that could delay or prevent the initiation or completion
of our clinical trials, the submission of applications for regulatory approvals,
the approval of our products by the FDA or the commercialization of our products
or result in higher costs or lost product revenues. In particular, contract
manufacturers:
· |
could
encounter difficulties in achieving volume production, quality control
and
quality assurance and suffer shortages of qualified personnel, which
could
result in their inability to manufacture sufficient quantities of
drugs to
meet our clinical schedules or to commercialize our product
candidates;
|
· |
could
terminate or choose not to renew the manufacturing agreement, based
on
their own business priorities, at a time that is costly or inconvenient
for us;
|
· |
could
fail to establish and follow FDA-mandated cGMP, as required for FDA
approval of our product candidates, or fail to document their adherence
to
cGMP, either of which could lead to significant delays in the availability
of material for clinical study and delay or prevent filing or approval
of
marketing applications for our product candidates;
and
|
· |
could
breach, or fail to perform as agreed, under the manufacturing
agreement.
|
Changing
any manufacturer that we engage for a particular product or product candidate
may be difficult, as the number of potential manufacturers is limited, and
we
will have to compete with third parties for access to those manufacturing
facilities. cGMP processes and procedures typically must be reviewed and
approved by the FDA, and changing manufacturers may require re-validation of
any
new facility for cGMP compliance, which would likely be costly and
time-consuming. We may not be able to engage replacement manufacturers on
acceptable terms quickly or at all. In addition, contract manufacturers located
in foreign countries may be subject to import limitations or bans. As a result,
if any of our contract manufacturers are unable, for whatever reason, to supply
the contracted amounts of our products that we successfully bring to market,
a
shortage would result which would have a negative impact on our revenues.
Drug
manufacturers are subject to ongoing periodic unannounced inspection by the
FDA,
the U.S. Drug Enforcement Agency and corresponding state and foreign agencies
to
ensure strict compliance with cGMP, other government regulations and
corresponding foreign standards. While we are obligated to audit the performance
of third-party contractors, we do not have control over our third-party
manufacturers’ compliance with these regulations and standards. Failure by our
third-party manufacturers or us to comply with applicable regulations could
result in sanctions being imposed on us, including fines, injunctions, civil
penalties, failure of the government to grant pre-market approval of drugs,
delays, suspension or withdrawal of approvals, seizures or recalls of product,
operating restrictions and criminal prosecutions. Our dependence upon others
for
the manufacture of any products that we develop may adversely affect our profit
margin, if any, on the sale of any future products and our ability to develop
and deliver such products on a timely and competitive basis.
If
we are not able to protect the intellectual property rights that are critical
to
our success, the development and any possible sales of our product candidates
could suffer and competitors could force our products completely out of the
market.
Our
success will depend on our ability to obtain patent protection for our products,
preserve our trade secrets, prevent third parties from infringing upon our
proprietary rights and operate without infringing upon the proprietary rights
of
others, both in the United States and abroad.
The
degree of patent protection afforded to pharmaceutical inventions is uncertain
and our potential products are subject to this uncertainty. Competitors may
develop competitive products outside the protection that may be afforded by
the
claims of our patents. We are aware that other parties have been issued patents
and have filed patent applications in the United States and foreign countries
with respect to other agents that have an effect on A.G.E.s, or the formation
of
A.G.E. crosslinks. In addition, although we have several patent applications
pending to protect proprietary technology and potential products, these patents
may not be issued, and the claims of any patents that do issue, may not provide
significant protection of our technology or products. In addition, we may not
enjoy any patent protection beyond the expiration dates of our currently issued
patents.
We
also
rely upon unpatented trade secrets and improvements, unpatented know-how and
continuing technological innovation to maintain, develop and expand our
competitive position, which we seek to protect, in part, by confidentiality
agreements with our corporate partners, collaborators, employees and
consultants. We also have invention or patent assignment agreements with our
employees and certain, but not all, corporate partners and consultants. Relevant
inventions may be developed by a person not bound by an invention assignment
agreement. Binding agreements may be breached, and we may not have adequate
remedies for such breach. In addition, our trade secrets may become known to
or
be independently discovered by competitors.
If
we are unable to operate our business without infringing upon intellectual
property rights of others, we may not be able to operate our business
profitably.
Our
success depends on our ability to operate without infringing upon the
proprietary rights of others. We are aware that patents have been applied for
and/or issued to third parties claiming technologies for A.G.E.s or glutathione
peroxidase mimetics that may be similar to those needed by us. To the extent
that planned or potential products are covered by patents or other intellectual
property rights held by third parties, we would need a license under such
patents or other intellectual property rights to continue development and
marketing of our products. Any required licenses may not be available on
acceptable terms, if at all. If we do not obtain such licenses on reasonable
terms, we may not be able to proceed with the development, manufacture or sale
of our products.
Litigation
may be necessary to defend against claims of infringement or to determine the
scope and validity of the proprietary rights of others. Litigation or
interference proceedings could result in substantial additional costs and
diversion of management focus. If we are ultimately unsuccessful in defending
against claims of infringement, we may be unable to operate profitably.
ALT-2074
and other former HaptoGuard compounds are licensed by third parties and if
we
are unable to continue licensing this technology, our future prospects may
be
materially adversely affected.
We
are a
party to various license agreements with third parties that give us exclusive
and partial exclusive rights to use specified technologies applicable to
research, development and commercialization of our products, including
alagebrium and ALT-2074. We anticipate that we will continue to license
technology from third parties in the future. To maintain the license for certain
technology related to ALT-2074 that we received from Oxis International, we
are
obligated to meet certain development and clinical trial milestones and to
make
certain payments. There can be no assurance that we will be able to meet any
milestone or make any payment required under the license with Oxis
International. In addition, if we fail to meet any milestone or make any
payment, there can be no assurance that we may be able to negotiate an
arrangement with Oxis, as we have successfully done in the past, whereby we
will
continue to have access to the ALT-2074 technology.
The
technology HaptoGuard licensed from third parties would be difficult or
impossible to replace and the loss of this technology would materially adversely
affect our business, financial condition and any future prospects.
The
effect of accounting rules relating to our equity compensation arrangements
may
have an adverse effect on our stock price, financial condition and results
of
operations.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”), which replaces “Accounting for Stock-Based
Compensation,” (“SFAS 123”) and supersedes Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
effective for us on January 1, 2006. Under SFAS 123R, the pro forma disclosures
previously permitted under SFAS 123 are no longer an alternative to financial
statement recognition.
We
account for employee stock-based compensation, awards issued to non-employee
directors, and stock options issued to consultants and contractors in accordance
with SFAS 123R and Emerging Issues Task Force Issue No. 96-18, “Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring or
in
Conjunction with Selling Goods or Services.” For the three- and nine-month
periods ended September 30, 2006, we recognized research and development
consulting expenses of $7,666.
We
have
adopted the new standard, SFAS 123R, effective January 1, 2006 and have selected
the Black-Scholes method of valuation for share-based compensation. We have
adopted the modified prospective transition method which requires that
compensation cost be recorded, as earned, for all unvested stock options and
restricted stock outstanding at the beginning of the first quarter of adoption
of SFAS 123R, and that such costs be recognized over the remaining service
period after the adoption date based on the options’ original estimate of fair
value. For the three- and nine-month periods ended September 30, 2006, we
recognized share-based employee compensation cost of $34,652 in accordance
with
SFAS 123R, which was recorded as general and administrative expense.
On
December 15, 2005, the Compensation Committee of our Board of Directors approved
the acceleration of the vesting date of all previously issued, outstanding
and
unvested options, effective December 31, 2005. As such there was no compensation
recognized under SFAS 123R related to options granted prior to January 1,
2006.
Prior
to
adoption of SFAS 123R, we applied the intrinsic-value method under APB Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related interpretations,
under which no compensation cost (excluding those options granted below fair
market value) had been recognized. SFAS 123 established accounting and
disclosure requirements using a fair-value based method of accounting for
stock-based employee compensation plans. As permitted by SFAS 123, we elected
to
continue to apply the intrinsic-value based method of accounting described
above, and adopted only the disclosure requirements of SFAS 123, as
amended.
If
we are not able to compete successfully with other companies in the development
and marketing of cures and therapies for cardiovascular diseases, diabetes,
and
the other conditions for which we seek to develop products, we may not be able
to continue our operations.
We
are
engaged in pharmaceutical fields characterized by extensive research efforts
and
rapid technological progress. Many established pharmaceutical and biotechnology
companies with financial, technical and human resources greater than ours are
attempting to develop, or have developed, products that would be competitive
with our products. Many of these companies have extensive experience in
preclinical and human clinical studies. Other companies may succeed in
developing products that are safer, more efficacious or less costly than any
we
may develop and may also be more successful than us in production and marketing.
Rapid technological development by others may result in our products becoming
obsolete before we recover a significant portion of the research, development
or
commercialization expenses incurred with respect to those products.
Certain
technologies under development by other pharmaceutical companies could result
in
better treatments for cardiovascular disease, and diabetes and its related
complications. Several large companies have initiated or expanded research,
development and licensing efforts to build pharmaceutical franchises focusing
on
these medical conditions, and some companies already have products approved
and
available for commercial sale to treat these indications. It is possible that
one or more of these initiatives may reduce or eliminate the market for some
of
our products. In addition, other companies have initiated research in the
inhibition or crosslink breaking of A.G.E.s.
Our
ability to compete successfully against currently existing and future
alternatives to our product candidates and systems, and competitors who compete
directly with us in the small molecule drug industry will depend, in part,
on
our ability to:
· |
attract
and retain skilled scientific and research personnel;
|
· |
develop
technologically superior products;
|
· |
develop
competitively priced products;
|
· |
obtain
patent or other required regulatory approvals for our products;
|
· |
be
early entrants to the market; and
|
· |
manufacture,
market and sell our products, independently or through
collaborations.
|
We
depend on third parties for research and development activities necessary to
commercialize certain of our patents.
We
utilize the services of several scientific and technical consultants to oversee
various aspects of our protocol design, clinical trial oversight and other
research and development functions. We contract out most of our research and
development operations using third-party contract manufacturers for drug
inventory and shipping services and third-party contract research organizations
in connection with preclinical and/or clinical studies in accordance with our
designed protocols, as well as conducting research at medical and academic
centers.
Because
we rely on third parties for much of our research and development work, we
have
less direct control over our research and development. We face risks that these
third parties may not be appropriately responsive to our time frames and
development needs and could devote resources to other customers. In addition,
certain of these third parties may have to comply with FDA regulations or other
regulatory requirements in the conduct of this research and development work,
which they may fail to do.
If
governments and third-party payers continue their efforts to contain or decrease
the costs of healthcare, we may not be able to commercialize our products
successfully.
In
the
United States, we expect that there will continue to be federal and state
initiatives to control and/or reduce pharmaceutical expenditures. In certain
foreign markets, pricing and/or profitability of prescription pharmaceuticals
are subject to government control. In addition, increasing emphasis on managed
care in the United States will continue to put pressure on pharmaceutical
pricing. Cost control initiatives could decrease the price that we receive
for
any products for which we may receive regulatory approval to develop and sell
in
the future and could have a material adverse effect on our business, financial
condition and results of operations. Further, to the extent that cost control
initiatives have a material adverse effect on our corporate partners, our
ability to commercialize our products may be adversely affected.
Our
ability to commercialize pharmaceutical products may depend, in part, on the
extent to which reimbursement for the products will be available from government
health administration authorities, private health insurers and other third-party
payers. Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products, and third-party payers, including Medicare,
frequently challenge the prices charged for medical products and services.
In
addition, third-party insurance coverage may not be available to subjects for
any products developed by us. Government and other third-party payers are
attempting to contain healthcare costs by limiting both coverage and the level
of reimbursement for new therapeutic products and by refusing in some cases
to
provide coverage for uses of approved products for disease indications for
which
the FDA has not granted labeling approval. If government and other third-party
payers for our products do not provide adequate coverage and reimbursement
levels, the market acceptance of these products would be adversely affected.
If
the users of the products that we are developing claim that our products have
harmed them, we may be subject to costly and damaging product liability
litigation, which could have a material adverse effect on our business,
financial condition and results of operations.
We
may
face exposure to product liability and other claims due to allegations that
our
products cause harm. These risks are inherent in the clinical trials for
pharmaceutical products and in the testing, and future manufacturing and
marketing of, our products. Although we currently maintain product liability
insurance, such insurance is becoming increasingly expensive, and we may not
be
able to obtain adequate insurance coverage in the future at a reasonable cost,
if at all. If we are unable to obtain product liability insurance in the future
at an acceptable cost or to otherwise protect against potential product
liability claims, we could be inhibited in the commercialization of our
products, which could have a material adverse effect on our business. The
coverage will be maintained and limits reviewed from time to time as the
combined company progresses to later stages of its clinical trials, and as
the
length of the trials and the number of patients enrolled in the trials changes.
We
intend
to obtain a combined coverage policy that includes tail coverage in order to
cover any claims that are made for any events that have occurred prior to the
merger. We currently have a policy covering $10 million of product liability
for
our clinical trials, for which our annual premium is approximately $118,000.
However, insurance coverage and our resources may not be sufficient to satisfy
any liability resulting from product liability claims. A successful product
liability claim or series of claims brought against us could have a material
adverse effect on our business, financial condition and results of operations.
Risks
Relating to the Merger
Failure
to integrate the operations of Alteon and HaptoGuard successfully could result
in delays and increased expenses in the companies’ clinical trial
programs.
Alteon
and HaptoGuard entered into the merger with the expectation that the merger
will
result in beneficial synergies, including:
· |
improved
ability to raise new capital through access to new classes of investors
focused on public companies engaged in small molecule drug
development;
|
· |
shared
expertise in developing innovative small molecule drug technologies
and
the potential for technology
collaboration;
|
· |
a
broader pipeline of products;
|
· |
greater
ability to attract commercial
partners;
|
· |
larger
combined commercial opportunities;
and
|
· |
a
broader portfolio of patents and
trademarks.
|
Achieving
these anticipated synergies and the potential benefits underlying the two
companies’ reasons for the merger will depend on a number of factors, some of
which include:
· |
the
ability of the combined company to obtain financing to fund its continued
operations;
|
· |
retention
of scientific staff;
|
· |
significant
litigation, if any, adverse to Alteon and HaptoGuard, including,
particularly, product liability litigation and patent and trademark
litigation;
|
· |
the
ability of the combined company to continue development of Alteon
and
HaptoGuard product candidates;
|
· |
success
of our research and development
efforts;
|
· |
increased
capital expenditures;
|
· |
general
market conditions
relating to small cap biotech investments;
and
|
· |
competition
from other drug development
companies.
|
Achieving
the benefits of the merger will depend in part on the successful integration
of
Alteon and HaptoGuard in a timely and efficient manner. The integration will
require significant time and efforts from each company, including the
coordination of research, development, regulatory, manufacturing, commercial,
administrative and general functions. Integration may be difficult and
unpredictable because of possible cultural conflicts and different opinions
on
scientific and regulatory matters. Delays in successfully integrating and
managing employee benefits could lead to dissatisfaction and employee turnover.
The combination of Alteon’s and HaptoGuard’s organizations may result in greater
competition for resources and elimination of research and development programs
that might otherwise be successfully completed. If we cannot successfully
integrate our operations and personnel, we may not recognize the expected
benefits of the merger.
Even
if
the two companies are able to integrate their operations, there can be no
assurance that these anticipated synergies will be achieved. The failure to
achieve such synergies could have a material adverse effect on the business,
financial condition and results of operations of the combined
company.
Integrating
Alteon and HaptoGuard may divert management’s attention away from our core
research and development activities.
Successful
integration of our operations, products and personnel may place a significant
burden on our management and our internal resources. The diversion of
management’s attention and any difficulties encountered in the transition and
integration process could result in delays in the companies’ clinical trial
programs and could otherwise significantly harm our business, financial
condition and results of operations.
We
expect
to incur significant costs integrating our operations, product candidates and
personnel, which cannot be estimated accurately at this time. These costs
include:
· |
conversion
of information systems;
|
· |
combining
research, development, regulatory, manufacturing and commercial teams
and
processes;
|
· |
reorganization
of facilities; and
|
· |
relocation
or disposition of excess equipment.
|
Alteon
and HaptoGuard incurred aggregate direct transaction costs of approximately
$3,758,000 associated with or resulting from the merger. If the benefits of
the
merger do not exceed the total costs of the merger, the financial results of
the
combined company could be adversely affected.
Risks
Related to Owning Alteon's Common Stock
We
have been notified by the American Stock Exchange ("AMEX") that we are
not in compliance with continued listing standards, which may result in a
delisting of our common stock if we cannot regain
compliance.
On October
13, 2006, we reported that we had received a notice
from AMEX indicating that we are below certain AMEX continuing listing
standards due to (i) sustaining losses from continuing operations and/or net
losses in two out of our three most recent fiscal years with stockholders'
equity below $2,000,000; (ii) sustaining losses from continuing operations
and/or net losses in three out of our four most recent fiscal years
with stockholders' equity below $4,000,000; and (iii) sustaining losses from
continuing operations and/or net losses in our five most recent fiscal
years with stockholders' equity below $6,000,000, and that, in accordance
with AMEX rules, we have until April 9, 2008 to regain compliance
with the continued listing standards. We had not regained compliance
with these standards as of November 14, 2006 and cannot assure you
that we will be able to achieve compliance with these standards.
AMEX has requested that we provide it with our plan to achieve and sustain
compliance with all listing standards by November 8, 2006 to
facilitate its review of our eligibility for continued listing. We
submitted our plan to regain compliance to AMEX on November 7, 2006.
We cannot assure you that AMEX will find our compliance plan acceptable or,
if it does, that we can achieve the plan in such a way as to regain
compliance with AMEX's continuing listing standards.
Our
stock price is volatile and you may not be able to resell your shares at a
profit.
We
first
publicly issued common stock on November 8, 1991 at $15.00 per share in our
initial public offering and it has been subject to fluctuations since that
time.
For example, during 2005, the closing sale price of our common stock has ranged
from a high of $1.43 per shares to a low of $0.17 per share. The market price
of
our common stock could continue to fluctuate substantially due to a variety
of
factors, including:
· |
quarterly
fluctuations in results of operations;
|
· |
material
weaknesses in our internal control over financial
reporting;
|
· |
the
announcement of new products or services by us or competitors;
|
· |
sales
of common stock by existing stockholders or the perception that these
sales may occur;
|
· |
adverse
judgments or settlements obligating the combined company to pay damages;
|
· |
developments
concerning proprietary rights, including patents and litigation matters;
and
|
· |
clinical
trial or regulatory developments in both the United States and foreign
countries.
|
In
addition, overall stock market volatility has often significantly affected
the
market prices of securities for reasons unrelated to a company’s operating
performance. In the past, securities class action litigation has been commenced
against companies that have experienced periods of volatility in the price
of
their stock. Securities litigation initiated against the combined company could
cause it to incur substantial costs and could lead to the diversion of
management’s attention and resources, which could have a material adverse effect
on revenue and earnings.
We
have a large number of authorized but unissued shares of common stock, which
our
Board of Directors may issue without further stockholder approval, thereby
causing dilution of your holdings of our common stock.
After
the
closing of the merger and the financings, there are approximately 170,681,000
shares of authorized but unissued shares of our common stock. Our management
will continue to have broad discretion to issue shares of our common stock
in a
range of transactions, including capital-raising transactions, mergers,
acquisitions, for anti-takeover purposes, and in other transactions, without
obtaining stockholder approval, unless stockholder approval is required for
a
particular transaction under the rules of the American Stock Exchange, Delaware
law, or other applicable laws. If our management determines to issue shares
of
our common stock from the large pool of such authorized but unissued shares
for
any purpose in the future without obtaining stockholder approval, your ownership
position would be diluted without your further ability to vote on that
transaction.
The
sale of a substantial number of shares of our common stock could cause the
market price of our common stock to decline and may impair the combined
company’s ability to raise capital through additional offerings.
We
currently have outstanding warrants to purchase an aggregate of 22,581,988
shares of our common stock, including warrants to purchase 9,990,533 shares
of
our common stock issued together with 9,470,333 shares of our common stock
in
connection with a private equity financing completed in September 2006. The
shares issued in the private placement financing, together with the shares
underlying the warrants issued in such financing, represent approximately 16%
of
the total number of shares of our common stock outstanding immediately prior
to
the financing.
Sales
of
these shares in the public market, or the perception that future sales of such
shares could occur, could have the effect of lowering the market price of our
common stock below current levels and make it more difficult for us and our
stockholders to sell our equity securities in the future.
Our
executive officers, directors and holders of more than 5% of our common stock
collectively beneficially own approximately 31.1% of the outstanding common
stock, which includes fully vested options to purchase common stock. In
addition, approximately 4,740,312 shares of common stock issuable upon
exercise of vested stock options could become available for immediate resale
if
such options were exercised.
Sale
or
the availability for sale, of shares of common stock by stockholders could
cause
the market price of our common stock to decline and could impair our ability
to
raise capital through an offering of additional equity securities.
Anti-takeover
provisions may frustrate attempts to replace our current management and
discourage investors from buying our common stock.
We
have
entered into a Stockholders’ Rights Agreement pursuant to which each holder of a
share of our common stock is granted a Right to purchase our Series F Preferred
Stock under certain circumstances if a person or group acquires, or commences
a
tender offer for, 20% of our outstanding common stock. We also have
severance obligations to certain employees in the event of termination of their
employment after or in connection with a triggering event as defined in the
Alteon Severance Plan. In addition, the Board of Directors has the
authority, without further action by the stockholders, to fix the rights and
preferences of, and issue shares of, Preferred Stock. The staggered board terms,
Fair Price Provision, Stockholders’ Rights Agreement, severance
arrangements, Preferred Stock provisions and other provisions of our charter
and
Delaware corporate law may discourage certain types of transactions involving
an
actual or potential change in control.
ITEM
6. Exhibits.
Exhibits
See
the
“Exhibit Index” on page 39 for exhibits required to be filed with this Quarterly
Report on Form 10-Q.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this Report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: November 14, 2006 |
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ALTEON
INC. |
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By: |
/s/ Noah
Berkowitz, M.D., Ph.D. |
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Noah
Berkowitz, M.D., Ph.D.
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President
and
Chief Executive Officer
(principal executive
officer)
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By: |
/s/ Nicholas
J. Rossettos, CPA |
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Nicholas
J. Rossettos, CPA |
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(acting
principal financial and accounting
officer) |
EXHIBIT
INDEX
Exhibit
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No.
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Description
of Exhibit
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31.1
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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31.2
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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32.1
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Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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