Unassociated Document
Filed
Pursuant to Rule 424(b)(3)
File
No.
333-129782
PROSPECTUS
SUPPLEMENT NO. 2
(To
Prospectus Dated April 28, 2005)
VioQuest
Pharmaceuticals, Inc.
46,729,519
Shares
Common
Stock
The
information contained in this Prospectus Supplement amends and updates our
prospectus dated April 28, 2006, as supplemented by Prospectus Supplement No.
1
dated May 12, 2006 (the “Prospectus”), and should be read in conjunction
therewith. Please keep this Prospectus Supplement with your Prospectus for
future reference.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
supplement or the Prospectus is truthful or complete. Any representation to
the
contrary is a criminal offense.
The
date of this Prospectus Supplement is August 14, 2006
Forward-Looking
Information
This
prospectus supplement, including the documents that we incorporate by reference,
contains forward-looking statements. Any statements about our expectations,
beliefs, plans, objectives, assumptions or future events or performance are
not
historical facts and may be forward-looking. These statements are often, but
not
always, made through the use of words or phrases such as anticipate, estimate,
plan, project, continuing, ongoing, expect, management believes, we believe,
we
intend and similar words or phrases. Accordingly, these statements involve
estimates, assumptions and uncertainties that could cause actual results to
differ materially from those expressed in them. Any forward-looking statements
are qualified in their entirety by reference to the factors discussed in this
prospectus or incorporated by reference.
Because
the factors discussed in this prospectus or incorporated by reference could
cause actual results or outcomes to differ materially from those expressed
in
any forward-looking statements made by us or on our behalf, you should not
place
undue reliance on any such forward-looking statements. These statements are
subject to risks and uncertainties, known and unknown, which could cause actual
results and developments to differ materially from those expressed or implied
in
such statements. Such risks and uncertainties relate to, among other factors:
the development of our drug candidates; the regulatory approval of our drug
candidates; our use of clinical research centers and other contractors; our
ability to find collaborative partners for research, development and
commercialization of potential products; acceptance of our products by doctors,
patients or payors; our ability to market any of our products; our history
of
operating losses; our ability to compete against other companies and research
institutions; our ability to secure adequate protection for our intellectual
property; our ability to attract and retain key personnel; availability of
reimbursement for our product candidates; the effect of potential strategic
transactions on our business; our ability to obtain adequate financing; and
the
volatility of our stock price. These and other risks are detailed in the
prospectus under the discussion entitled “Risk Factors,” as well as in our
reports filed from time to time under the Securities Act and/or the Exchange
Act. You are encouraged to read these filings as they are made.
Further,
any forward-looking statement speaks only as of the date on which it is made,
and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for us to predict
which
factors will arise. In addition, we cannot assess the impact of each factor
on
our business or the extent to which any factor, or combination of factors,
may
cause actual results to differ materially from those contained in any
forward-looking statements.
Interim
Financial Statements - Quarter Ended June 30, 2006
Included
in this prospectus supplement beginning at page F-1 are our interim financial
statements as of and for the three and six months ended June 30, 2006, included
the accompanying footnotes thereto. These interim financial statements, which
were included in our Quarterly Report on Form 10-QSB for the quarter ended
June
30, 2006, should be read in conjunction with the audited financial statements
as
of and for the year ended December 31, 2005, which were included in the
Prospectus.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion of our financial condition and results of operations should
be read in conjunction with the financial statements and the notes to those
statements included in this prospectus supplement. This discussion includes
forward-looking statements that involve risks and uncertainties. As a result
of
many factors, such as those set forth under “Risk Factors” in the Prospectus,
our actual results may differ materially from those anticipated in these
forward-looking statements.
Overview
Since
our
inception in October 2000, we have provided pharmaceutical and fine chemical
companies in all stages of the product lifecycles with innovative chiral
products and services. Since August 2004, we have provided such products and
services through our wholly-owned subsidiary, Chiral Quest, Inc. (“Chiral
Quest”). Chiral Quest develops chemical catalysts used in the synthesis of
desired isomers of chiral molecules using asymmetrical catalysis technology
owned by the Pennsylvania State University Research Foundation (“PSRF”), the
technology arm of The Pennsylvania State University (“PSU”). Chiral Quest has a
worldwide, exclusive license from PSRF for the inventions covered by the
license. The original license agreement was entered into on November 8, 2000.
The PSRF license agreement requires us to use our reasonable best efforts to
achieve gross revenues of at least $500,000 in calendar year 2006, and each
subsequent year thereafter. Should we fail to obtain this milestone, the PSRF
has the right, but not the obligation, to terminate the license agreement on
the
grounds that we did not use our best efforts to achieve those
milestones.
In
August
2004, we expanded our business plan to focus additionally on acquiring
technologies for purposes of development and commercialization of pharmaceutical
drug candidates for the treatment in oncology and antiviral diseases and
disorders for which there are unmet medical needs. In accordance with this
expanded business plan, in October 2005, we acquired, in a merger transaction
Greenwich Therapeutics, Inc., a privately-held New York-based biotechnology
company that held exclusive rights to develop and commercialize two oncology
drug candidates - Sodium Stibogluconate or VQD-001, and Triciribine-Phosphate
or
VQD-002. The rights to these two oncology drug candidates, VQD-001 and VQD-002,
are governed by license agreements with The Cleveland Clinic Foundation and
the
University of South Florida Research Foundation, respectively. As a result
of
our acquisition of Greenwich Therapeutics, we hold exclusive rights to develop,
manufacture, use, commercialize, lease, sell and/or sublicense VQD-001 and
VQD-002.
As
a
result of this acquisition, we immediately undertook funding development of
VQD-001 and VQD-002, which has significantly increased our expected cash
expenditures and will continue to increase our expenditures over the next 12
months and thereafter. The completion of development of VQD-001 and VQD-002,
both of which are only in early stages of clinical development, is very lengthy
and expensive process. Until such development is complete and the U.S. Food
and
Drug Administration (“FDA”) (or the comparable regulatory authorities of other
countries) approve VQD-001 and VQD-002 for sale, we will not be able to sell
these products.
On
April
11, 2006, we received an acceptance letter for our Investigational New Drug
Application (IND) for VQD-002 from the FDA. The FDA completed their review
of
our IND submission and have concluded that the clinical investigations (s)
described in the protocol may begin.
From
our
inception through June 30, 2006, we have generated sales but not any net
profits. With respect to our Chiral Quest operations, management believes that
our sales, marketing, and manufacturing capacities will need to grow in order
for us to be able to obtain significant licensing and manufacturing agreements
with large fine chemical and pharmaceutical companies. Management believes
that
our manufacturing capacity will continue to be enhanced with our expanded office
and laboratory space located in Monmouth Junction, New Jersey that was leased
in
May 2003, in addition to the laboratory space leased in December 2004, located
in Jiashan, China.
Our
ability to achieve profitability depends upon, among other things, our ability
to discover and develop products (specifically new “ligands”), and to sell our
products on a commercial scale through a cost-effective and efficient process.
To the extent that were are unable to produce, directly or indirectly, ligands
in quantities required for commercial use, we will not realize any significant
revenues from our technology. Moreover, there can be no assurance that we will
ever achieve significant revenues or profitable operations from the sale of
any
of our products or technologies.
The
accompanying condensed consolidated financial statements have been prepared
assuming that we will continue as a going concern. Since inception, we have
incurred an accumulated deficit of $23,949,490 through June 30, 2006. For the
three and six months ended June 30, 2006, we had net losses of $1,818,351 and
$3,680,098, respectively, and used $3,608,714 of cash in operating activities.
Management expects our losses to increase over the next several years, primarily
due to the costs related to the development and commercialization of our two
recently-acquired anti-cancer therapeutic compounds, in addition to the
expansion of our research and development programs, the hiring of additional
chemists, and the expansion of our manufacturing capabilities. There can be
no
assurance that we will ever be able to operate profitably.
On
October 18, 2005, we sold 11,179,975 shares of our common stock at a price
of
$0.75 per share resulting in gross proceeds of approximately $8.38 million.
In
addition to the shares of our common stock, investors also received 5-year
warrants to purchase an aggregate of 4,471,975 shares of our common stock at
an
exercise price of $1.00 per share. In connection with the private placement,
we
paid an aggregate of approximately $587,000 in commissions to Paramount
BioCapital, Inc., which served as the placement agent in connection with the
offering, together with an accountable expense allowance of $50,000, and issued
5-year warrants to purchase an aggregate of 1,117,997 shares of common stock
at
a price of $1.00 per share.
Our
net
proceeds, after deducting placement agent fees and other expenses relating
to
the private placement, were approximately $7.5 million.
As
of
June 30, 2006, we had working capital of $1,791,901 and cash and cash
equivalents of $2,326,919. Management anticipates that our capital resources
as
of June 30, 2006 will be adequate to fund our operations through the third
quarter of 2006. Additional financing will be required during 2006 in order
to
fund operations.
Our
combined capital requirements will depend on numerous factors, including:
acquiring, developing and commercializing therapies for oncology, metabolic
and
inflammatory diseases and disorders; competing technological and market
developments; changes in our existing collaborative relationships; the cost
of
filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights and the outcome of any potentially related
litigation or other dispute; the purchase of additional capital equipment;
the
establishment and funding of the Chiral Quest, Jiashan, China facility; the
development and regulatory approval progress of our customers’ product
candidates into which our technology will be incorporated; and the costs
associated with the drug development process related to acquiring, developing
and commercializing a drug candidate.
Results
of Operations - For the Three Months Ended June 30, 2006 vs. June 30, 2005
Our
revenues for the three months ended June 30, 2006 were $857,320 as compared
to
$1,502,171 for the three months ended June 30, 2005. For the three months ended
June 30, 2006, sales comprised of customized process development services sold
to third parties accounted for 73% of total revenue, sales of our proprietary
technology consisting of catalysts, ligands and building blocks accounted for
23% of total revenue, and 4% of total revenue was derived from feasibility
screening services and additional contract services. The decrease in revenues
is
attributed to a significant customer requiring a lesser quantity of product
for
a specific project in the second quarter of 2006 as compared to the second
quarter of 2005. Revenues from this customer are expected to continue throughout
2006 and beyond, however, these foreseeable revenues are predicated based upon
their clinical trial programs and progress.
Cost
of
goods sold for three months ended June 30, 2006 was $623,773 as compared to
$1,058,771 during the three months ended June 30, 2005. The decrease in cost
of
goods sold is attributed to producing and selling a lower quantity of product
to
a significant customer during the second quarter of 2006 as compared to the
second quarter of 2005.
Our
gross
profit percentage decreased to approximately 27% for the three months ended
June
30, 2006 as compared to 30% for the three months ended June 30, 2005. The
primary reason that the gross profit percentage decreased is attributed to
selling a greater quantity of our proprietary technology consisting of
catalysts, ligands and building blocks, which are produced from our New Jersey
facility, as compared to the three months ended June 30, 2005 when we sold
a
greater percentage of customized process development services, yielding higher
gross profits.
Management
and consulting fees for the three months ended June 30, 2006 were $87,085 as
compared to $139,374 during the three months ended June 30, 2005. Management
and
consulting fees consist of the consulting agreement with our Chief Technology
Officer (“CTO”), at a rate of $10,000 per month effective May 15, 2003.
Management and consulting fees also consist of approximately $21,000 of stock
option charges resulting from changes in the fair value of options issued to
consultants for the three months ended June 30, 2006, and scientific advisory
board members granted during 2003 accounted for under variable accounting.
The
decrease in management and consulting fees in 2006 compared to 2005 is a result
of our amortization for deferred consulting expenses for the CTO and PSRF
licensing arrangement, ending in the third quarter 2005, in addition to lower
expenses resulting from the issuance of stock options to consultants and
scientific advisory board members during the second quarter 2006.
Our
research and development (“R&D”) expenses for the three months ended June
30, 2006 were $430,833 as compared to $137,785 during the three months ended
June 30, 2005. R&D expenses primarily include costs associated with the
clinical development, manufacturing, licensing and regulatory costs of VQD-001
and VQD-002, in addition to purchases of laboratory materials and supplies
such
as chemicals, solvents, glassware used as part of the facility’s test pilot
programs for the formulation. Research and development expenses also include
costs associated with analyzing our proprietary catalysts, ligands, and our
next
generation technology of building blocks to determine their technological
feasibility, and sponsoring two post doctorates at PSU to develop reports on
the
technological feasibility of our proprietary technology through preparing sample
batches for analysis in the Monmouth Junction, New Jersey office. The primary
increase in R&D expenses is a result of our drug development costs
associated with the clinical development of VQD-001 and VQD-002, which commenced
in October 2005 through the acquisition of Greenwich Therapeutics.
Selling,
general and administrative (“SG&A”) expenses for the three months ended June
30, 2006 were $1,456,659 as compared to $1,250,146 during the three months
ended
June 30, 2005. This increase in SG&A expenses was due in part to the impact
of expensing employee and director stock options in accordance with FAS 123R,
increased rent expense for the New Jersey facilities as a result of our
expansions, additional spending on advertising and promotion expenses, increased
travel expenses for new business development opportunities and higher
administrative expenses associated with having more employees including our
President and CEO hired in February 2005, our Vice President of Corporate
Business Development hired in July 2005, and our Chief Medical Officer hired
in
March 2006, in addition to other related employee costs such as increased
insurance, and employer payroll taxes.
Depreciation
and amortization expenses for the three months ended June 30, 2006 were $79,453
as compared to $68,397 during the three months ended June 30, 2005. This
increase was primarily related to the fixed asset purchases for office, computer
equipment and laboratory equipment, leasehold improvements for the leased
facilities and recent expansions in New Jersey, in addition to the equipment
and
leasehold improvement expenditures related to the newly leased Jiashan facility
which was fully operational as of May 2005.
Interest
income, net of interest expense for the three months ended June 30, 2006 was
$2,132 as compared to $5,254 for the three months ended June 30, 2005. Interest
income received during the three months ended June 30, 2006 was approximately
$30,000 which was offset by interest expense of approximately $28,000, for
the
repayment of the final one third amount of debt owed, of approximately $264,000
to Paramount BioCapital, which was assumed as part of the October 2005
acquisition of Greenwich Therapeutics.
Our
net
loss for the three months ended June 30, 2006 was $1,818,351 as compared to
$1,147,048 for the three months ended June 30, 2005. The increased net loss
for
the three months ended June 30, 2006 as compared to the three months ended
June
30, 2005 was attributable to higher SG&A expenses, due in part to the impact
of expensing employee and director stock options of approximately $250,000
in
accordance with FAS 123R, increased rent expense for the New Jersey facilities
as a result of our expansions, additional spending on advertising and promotion
expenses, increased travel expenses for new business development opportunities
and higher administrative expenses associated with having more employees which
include the President and CEO hired in February 2005, the Vice President of
Corporate Business Development hired in July 2005, and the Chief Medical Officer
hired in March 2006, in addition to other related employee costs such as
increased insurance, and employer payroll taxes. Increased R&D expenses also
contributed to the higher net loss for the three months ended June 30, 2006
as
compared to the three months ended June 30, 2005, which were related to our
drug
development costs, including, manufacturing, licensing, and clinical development
costs for the VQD-001 and VQD-002 programs. We expect losses to continue in
the
next year from the costs associated with the drug development process related
to
developing our drug candidates, in addition to continue to expand operations
in
New Jersey and in Jiashan.
Results
of Operations - For the Six Months Ended June 30, 2006 vs. June 30, 2005
Our
revenues for the six months ended June 30, 2006 were $1,456,196 as compared
to
$2,099,939 for the six months ended June 30, 2005. For the six months ended
June
30, 2006, substantially all of our revenue was derived from customized process
development services sold to third parties (accounting for approximately 60%
of
total revenue), sales of our catalysts and ligands (accounting for approximately
34% of total revenue) and feasibility screening reports and other contract
services revenue accounting for approximately 6% of total revenue.
The
overall decrease in revenues for the six months ended June 30, 2006 compared
to
the same period in 2005 is primarily attributable to a significant customer
ordering a lesser quantity of product for a specific project during the six
months ended June 30, 2006 as compared to the six months ended June 30, 2005.
Revenues from this customer are expected to continue throughout 2006 and beyond,
however, these foreseeable revenues are predicated based upon their clinical
trial programs and progress.
Cost
of
goods sold for the six months ended June 30, 2006 was $941,922 as compared
to
$1,455,531 during the six months ended June 30, 2005. The decrease in cost
of
goods sold is primarily attributed to our producing and selling a lower quantity
of product to a significant customer during the six months ended 2006 as
compared to the six months ended 2005.
Our
gross
profit increased to approximately 35% for the six months ended June 30, 2006,
as
compared to approximately 31% for the six months ended June 30, 2005. The gross
profit increase is a result of achieving lower cost of good sold expenditures
for the six months ended June 30, 2006 compared to the to the same period in
2005, which is attributed to our utilizing a greater percentage of our China
facility and resources for our product manufacturing.
Management
and consulting expenses for the six months ended June 30, 2006 were $139,173
as
compared to $256,722 during the six months ended June 30, 2005. Management
and
consulting fees consist of the consulting agreement with our Chief Technology
Officer at a rate of $10,000 per month effective May 15, 2003. Management and
consulting expense also consist of approximately $37,000 of stock option charges
resulting from changes in the fair value of options for the six months ended
June 30, 2006, which were issued to consultants, scientific advisory board
members. The decrease in management and consulting fees in 2006 compared to
2005
is a result of our amortization for deferred consulting expenses for the CTO
and
PSRF licensing arrangement, ending in the third quarter 2005, in addition to
lower expenses resulting from the issuance of stock options to consultants,
and
scientific advisory board members during the second quarter 2006.
Our
R&D expenses for the six months ended June 30, 2006 were $1,025,870 as
compared to $661,798 during the six months ended June 30, 2005. R&D
primarily includes costs associated to the clinical development, manufacturing,
licensing and regulatory costs of VQD-001 and VQD-002, in addition to Clinical
Research Organizational costs, milestone fees incurred in connection with
receiving acceptance of our Investigational New Drug Application filing for
VQD-002 in April 2006. Also included in R&D expenses are the purchases of
laboratory materials and supplies such as chemicals, solvents, glassware used
as
part of the facility’s test pilot programs for the formulation and analyzing of
our proprietary catalysts, ligands, and our next generation technology of
building blocks to determine their technological feasibility and also costs
for
sponsoring two post doctorates at PSU to develop reports on our technological
feasibility of our proprietary technology through preparing sample batches
for
analysis in the Monmouth Junction, New Jersey office. The primary increase
is a
result of our drug development costs associated with the clinical development
of
VQD-001 and VQD-002, which commenced in October 2005 through the acquisition
of
Greenwich Therapeutics.
SG&A
expenses for the six months ended June 30, 2006 were $2,920,992 as compared
to
$2,061,040 during the six months ended June 30, 2005. This increase in SG&A
expenses was due in part to the impact of expensing employee and director stock
options in accordance with FAS 123R, increased rent expense for the New Jersey
facilities as a result of our expansions, additional spending on advertising
and
promotion expenses, increased travel expenses for new business development
opportunities and higher administrative expenses associated with having more
employees which include the President and CEO hired in February 2005, the Vice
President of Corporate Business Development hired in July 2005, and the Chief
Medical Officer hired in March 2006, in addition to other related employee
costs
such as increased insurance, and employer payroll taxes.
Depreciation
and amortization expenses for the six months ended June 30, 2006 were $157,637
as compared to $122,061 during the six months ended June 30, 2005. This increase
was primarily related to the fixed asset purchases for office equipment,
computer equipment, laboratory equipment and leasehold improvements for the
newly leased facility and expansions in New Jersey, in addition to the equipment
and leasehold improvement expenditures related to the Jiashan facility which
has
become fully operational as of May 2005.
Interest
income for the six months ended June 30, 2006 was $49,300 as compared to $11,740
for the six months ended June 30, 2005. Interest income received during the
six
months ended June 30, 2006 was approximately $77,000, which was offset by
interest expense of approximately $28,000, for the repayment of the final one
third amount of debt owed, of approximately $264,000, to Paramount BioCapital,
which was assumed as part of the October 2005 acquisition of Greenwich
Therapeutics.
Our
net
loss for the six months ended June 30, 2006 was $3,680,098 as compared to
$2,445,473 for the six months ended June 30, 2005. The increased net loss for
the six months ended June 30, 2006 as compared to June 30, 2005 was primarily
due to the to higher SG&A expenses due in part to the impact of expensing
employee and director stock options of approximately $514,000 in accordance
with
FAS 123R, increased rent expense for the New Jersey facilities as a result
of
our expansions, additional spending on advertising and promotion expenses,
increased travel expenses for new business development opportunities and higher
administrative expenses associated with having more employees which include
the
President and CEO hired in February 2005, the Vice President of Corporate
Business Development hired in July 2005, and the Chief Medical Officer hired
in
March 2006, in addition to other related employee costs such as increased
insurance, and employer payroll taxes. Increased R&D expenses also
contributed to the higher net loss for the six months ended June 30, 2006 as
compared to the six months ended June 30, 2005, which were related to our drug
development costs, including, manufacturing, licensing, and clinical development
costs. We expect losses to continue in the next year from the costs associated
with the drug development process related to developing our drug candidates,
in
addition to continue to expand operations in New Jersey and in Jiashan.
Liquidity
and Capital Resources
Since
inception, we have incurred an accumulated deficit of $23,949,490 through June
30, 2006. For the three and six months ended June 30, 2006, we had net losses
of
$1,818,351 and $3,680,098, respectively, and used $3,608,714 in cash from
operating activities for the six months ended June 30, 2006. As of June 30,
2006, we had working capital of $1,791,901 and cash and cash equivalents of
$2,326,919. We expect losses to increase over the next several years, primarily
due to the costs related to the development and commercialization of our two
anti-cancer therapeutic compounds, such as costs associated with clinical
trials, regulatory approvals, uses of consultants, license milestone payments
to
the Cleveland Clinic Foundation and the University of South Florida and patent
filing expenses, in addition to the expansion of our research and development
programs, the hiring of additional chemists, and the expansion of our
manufacturing capabilities. There can be no assurance that we will ever operate
profitably. Management anticipates that our capital resources will be adequate
to fund our operations through the third quarter of 2006. Additional financing
will be required during 2006 in order to fund operations. These matters raise
doubt about our ability to continue as a going concern.
Our
net
cash used in operating activities for the six months ended June 30, 2006 was
$3,608,714. Our net cash used in operating activities primarily resulted from
a
net loss of $3,680,098 offset by non-cash items consisting of the impact of
expensing employee and director stock options in accordance with FAS 123R of
$514,051, depreciation and amortization of $157,637, and the impact of expensing
consultants’ options in accordance with EITF 96-18 for $37,433. Other uses of
cash in operating activities include an increase in accounts receivable of
$202,366, and prepaid expenses and other assets of $250,255 which primarily
consists of payments to our Clinical Research Organization and clinical drug
development sites attributed to the development of our two drug compounds.
Additionally, a decrease in accounts payable and accrued expenses resulted
in
uses of cash totaling $49,167 and $42,940, respectively.
Our
net
cash used in investing activities for the six months ended June 30, 2006 totaled
$85,766, which resulted from capital expenditures of $34,892 were attributed
to
the purchases of laboratory, computer and office equipment for the New Jersey
and China facilities. Additionally, payments for intellectual property totaling
$50,874 were attributed to patent defense and filing costs.
We
had no
financing activities in the six months ended June 30, 2006 and 2005. However,
on
October 18, 2005, we sold 11,179,975 shares of our common stock at a price
of
$0.75 per share resulting in gross proceeds of approximately $8.38 million.
In
addition to the shares of common stock, investors received 5-year warrants
to
purchase an aggregate of 4,471,975 shares of our common stock at an exercise
price of $1.00 per share. In connection with the private placement, we paid
an
aggregate of approximately $587,000 in commissions to Paramount BioCapital,
Inc., which served as the placement agent in connection with the offering,
together with an accountable expense allowance of $50,000, and issued 5-year
warrants to purchase an aggregate of 1,117,997 shares of our common stock at
a
price of $1.00 per share. Our net proceeds after deducting placement agent
fees
and other expenses relating to the private placement were approximately $7.5
million.
We
have
formed two Chinese subsidiaries through which we have opened a laboratory
facility in the People’s Republic of China. We have provided approximately
$695,000 of capital to the Chinese subsidiary as of June 30, 2006. We believe
that by opening this facility in China to produce our proprietary ligands,
catalysts, chemical building blocks and related compounds, we will be able
to
significantly decrease our manufacturing costs and expenses, enabling us to
produce our ligands and end products cost-effectively, more competitively and
even more attractively to current and potential customers. The China facility’s
operations commenced in the third quarter of 2005.
Our
ability to achieve profitability depends upon, among other things, our ability
to discover and develop products (specifically new ligands), and to develop
our
products on a commercial scale through a cost-effective and efficient process.
To the extent that we are unable to produce, directly or indirectly, ligands
in
quantities required for commercial use, we will not realize any significant
revenues from our technology. Moreover, there can be no assurance that we will
ever achieve significant revenues or profitable operations from the sale of
any
of our products or technologies.
Our
working capital requirements will depend upon numerous factors. For example,
with respect to our drug development business, our working capital requirements
will depend on, among other factors, the progress of our drug development and
clinical programs, including associated costs relating to milestone payments,
license fees, manufacturing costs, regulatory approvals, and the hiring of
additional employees. Our working capital requirements will also depend on
factors relating to our Chiral Quest business, including without limitation,
the
resources we devotes to Chiral Quest’s sales and marketing capabilities, and
manufacturing expansions, the progress of our R&D programs’ technological
advances, the status of competitors, our ability to establish sales arrangements
with new customers, and the expansion of the China facility’s office and
laboratory space lease agreements, along with the hiring of additional
employees. We believe that by opening the facility in China, our Chiral Quest
business will be able to decrease manufacturing costs and expenses
significantly, which will enable us to produce ligands, catalysts, contract
synthesis development projects, and other end user products cost-effectively,
and more competitively to current and potential customers.
Additional
capital that we may need in the future may not be available on reasonable terms,
or at all. If adequate financing is not available, we may be required to
terminate or significantly curtail our operations, or enter into arrangements
with collaborative partners or others that may require us to relinquish rights
to certain of our technologies, or potential markets that we would not otherwise
relinquish.
Agreement
with Chief Financial Officer
On
August
8, 2006,we entered into a Severance Benefits Agreement with our Chief Financial
Officer, Brian Lenz. The Agreement provides that, in the event we terminate
Mr.
Lenz’s employment with us within one year following a “change of control” (as
defined in the Agreement) and such termination is either without “cause,” or
constitutes a “constructive termination” (as those terms are defined in the
agreement), then (A) Mr. Lenz shall be entitled to receive 12 months of his
then
annual compensation, payable in semi-monthly installments, (B) any and all
outstanding options to purchase shares of our common stock granted to Mr. Lenz
shall immediately vest and become immediately exercisable (whether entered
into
before or after this date of the agreement) and (C) Mr. Lenz shall be entitled
to participate in our healthcare and insurance benefits program for a period
of
12 months thereafter. If Mr. Lenz’s employment is terminated at a time other
than a one-year period following a change of control and without cause, then
Mr.
Lenz shall be entitled to receive (A) one-half of his then annual compensation,
payable in semi-monthly installments over a period of six months and (B) our
healthcare and insurance benefits program over a period of six months
thereafter.
| |
Page
|
|
Unaudited
Interim Financial Statements:
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2006 and December 31,
2005
|
F-2
|
|
Condensed
Consolidated Statements of Operations for the Three and Six Months
Ended
June 30,2006 and 2005
|
F-3
|
|
Condensed
Consolidated Statement of Changes in Stockholders’ Equity (Deficiency) for
the Six Months ended June 30, 2006
|
F-4
|
|
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June
30,
2006 and 2005
|
F-5
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
F-6
|
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
OF JUNE 30, 2006 (UNAUDITED) AND DECEMBER 31, 2005
|
|
|
June
30, 2006
(Unaudited)
|
|
December
31, 2005
(Note
1A)
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,326,919
|
|
$
|
6,021,399
|
|
|
Accounts
receivable
|
|
|
430,061
|
|
|
227,695
|
|
|
Inventory
|
|
|
716,695
|
|
|
625,158
|
|
|
Other
current assets
|
|
|
266,413
|
|
|
49,184
|
|
|
Total
Current Assets
|
|
|
3,740,088
|
|
|
6,923,436
|
|
| |
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
658,795
|
|
|
757,151
|
|
|
SECURITY
DEPOSITS
|
|
|
71,291
|
|
|
69,819
|
|
|
INTELLECTUAL
PROPERTY RIGHTS, NET
|
|
|
655,382
|
|
|
628,897
|
|
|
OTHER
ASSETS
|
|
|
33,026
|
|
|
-
|
|
|
TOTAL
ASSETS
|
|
$
|
5,158,582
|
|
$
|
8,379,303
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,086,514
|
|
$
|
1,135,681
|
|
|
Accrued
compensation
|
|
|
306,614
|
|
|
480,000
|
|
|
Accrued
expenses
|
|
|
250,436
|
|
|
119,990
|
|
|
Note
payable - Paramount BioCapital (See Note 5)
|
|
|
264,623
|
|
|
264,623
|
|
|
Deferred
revenue
|
|
|
40,000
|
|
|
40,000
|
|
|
TOTAL
LIABILITIES
|
|
|
1,948,187
|
|
|
2,040,294
|
|
| |
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock; $0.001 par value: 10,000,000 shares authorized, 0 shares
issued and
outstanding at June 30, 2006 and December 31, 2005
|
|
|
-
|
|
|
-
|
|
|
Common
stock; $0.001 par value: 100,000,000 shares authorized at June
30, 2006
and December 31, 2005, 46,729,519 shares issued and outstanding
at June
30, 2006 and December 31, 2005
|
|
|
46,729
|
|
|
46,729
|
|
|
Additional
paid-in capital
|
|
|
27,113,156
|
|
|
26,561,672
|
|
|
Accumulated
deficit
|
|
|
(23,949,490
|
)
|
|
(20,269,392
|
)
|
|
Total
Stockholders' Equity
|
|
|
3,210,395
|
|
|
6,339,009
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
5,158,582
|
|
$
|
8,379,303
|
|
See
accompanying notes to condensed consolidated financial statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
| |
|
For
the Three
Months
Ended
June
30, 2006
|
|
For
the Three
Months
Ended
June
30, 2005
|
|
For
the Six
Months
Ended
June
30, 2006
|
|
For
the Six
Months
Ended
June
30, 2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
857,320
|
|
$
|
1,502,171
|
|
$
|
1,456,196
|
|
$
|
2,099,939
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD (Excluding Depreciation)
|
|
|
623,773
|
|
|
1,058,771
|
|
|
941,922
|
|
|
1,455,531
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
233,547
|
|
|
443,400
|
|
|
514,274
|
|
|
644,408
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
and consulting fees
|
|
|
87,085
|
|
|
139,374
|
|
|
139,173
|
|
|
256,722
|
|
|
Research
and development
|
|
|
430,833
|
|
|
137,785
|
|
|
1,025,870
|
|
|
661,798
|
|
|
Selling,
general and administrative
|
|
|
1,456,659
|
|
|
1,250,146
|
|
|
2,920,992
|
|
|
2,061,040
|
|
|
Depreciation
and amortization
|
|
|
79,453
|
|
|
68,397
|
|
|
157,637
|
|
|
122,061
|
|
|
Total
Operating Expenses
|
|
|
2,054,030
|
|
|
1,595,702
|
|
|
4,243,672
|
|
|
3,101,621
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(1,820,483
|
)
|
|
(1,152,302
|
)
|
|
(3,729,398
|
)
|
|
(2,457,213
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
INCOME, NET
|
|
|
2,132
|
|
|
5,254
|
|
|
49,300
|
|
|
11,740
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(1,818,351
|
)
|
$
|
(1,147,048
|
)
|
$
|
(3,680,098
|
)
|
$
|
(2,445,473
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE - BASIC AND DILUTED
|
|
$
|
(0.05
|
)
|
$
|
(0.06
|
)
|
$
|
(0.10
|
)
|
$
|
(0.14
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
|
|
|
38,165,124
|
|
|
17,827,924
|
|
|
38,165,124
|
|
|
17,827,924
|
|
See
accompanying notes to condensed consolidated financial statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR
THE SIX MONTHS ENDED JUNE 30, 2006
(UNAUDITED)
| |
|
Common
Stock
|
|
|
|
|
|
|
|
| |
|
Shares
|
|
Amount
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
Total
Stockholders’
Equity
|
|
|
Balance,
January 1, 2006
|
|
|
46,729,519
|
|
$
|
46,729
|
|
$
|
26,561,672
|
|
$
|
(20,269,392
|
)
|
$
|
6,339,009
|
|
|
Impact
of employee
and director
stock-based compensation
|
|
|
—
|
|
|
—
|
|
|
514,051
|
|
|
—
|
|
|
514,051
|
|
|
Impact
of stock-based compensation to consultants
|
|
|
—
|
|
|
—
|
|
|
37,433
|
|
|
—
|
|
|
37,433
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,680,098
|
)
|
|
(3,680,098
|
)
|
|
Balance,
June 30, 2006
|
|
|
46,729,519
|
|
$
|
46,729
|
|
$
|
27,113,156
|
|
$
|
(23,949,490
|
)
|
$
|
3,210,395
|
|
See
accompanying notes to condensed consolidated financial statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
| |
|
For
the Six
Months
Ended
June
30, 2006
|
|
For
the Six
Months
Ended
June
30, 2005
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,680,098
|
)
|
$
|
(2,445,473
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
157,637
|
|
|
122,061
|
|
|
Impact
of employee and director stock-based compensation
|
|
|
514,051
|
|
|
-
|
|
|
Impact
of consultant stock-based compensation
|
|
|
37,433
|
|
|
145,697
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(202,366
|
)
|
|
89,205
|
|
|
Inventory
|
|
|
(91,537
|
)
|
|
(19,535
|
)
|
|
Other
assets
|
|
|
(250,255
|
)
|
|
(50,509
|
)
|
|
Security
deposits
|
|
|
(1,472
|
)
|
|
(29,756
|
)
|
|
Accounts
payable
|
|
|
(49,167
|
)
|
|
1,065,165
|
|
|
Accrued
expenses
|
|
|
(42,940
|
)
|
|
82,711
|
|
|
Deferred
revenue
|
|
|
-
|
|
|
(438,632
|
)
|
|
Net
Cash Used In Operating Activities
|
|
|
(3,608,714
|
)
|
|
(1,479,066
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments
for purchased equipment
|
|
|
(34,892
|
)
|
|
(407,600
|
)
|
|
Payments
for intellectual property rights
|
|
|
(50,874
|
)
|
|
(24,012
|
)
|
|
Net
Cash Used In Investing Activities
|
|
|
(85,766
|
)
|
|
(431,612
|
)
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(3,694,480
|
)
|
|
(1,910,678
|
)
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
6,021,399
|
|
|
3,065,547
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
$
|
2,326,919
|
|
$
|
1,154,869
|
|
See
accompanying notes to condensed consolidated financial statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006 (UNAUDITED)
NOTE
1 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY
(A)
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the rules
and
regulations of the Securities and Exchange Commission. Accordingly, the
financial statements do not include all information and footnotes required
by
accounting principles generally accepted in the United States of America
for
complete annual financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect
all
adjustments, consisting of only normal recurring adjustments, considered
necessary for a fair presentation. Interim operating results are not necessarily
indicative of results that may be expected for the year ending December 31,
2006
or for any subsequent period. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements included in the Annual Report on Form 10-KSB of VioQuest
Pharmaceuticals, Inc. as of and for the year ended December 31, 2005. The
accompanying condensed consolidated balance sheet as of December 31, 2005
has
been derived from the audited balance sheet as of that date included in the
Form
10-KSB. As used herein, the terms the “Company” or “VioQuest” refer to VioQuest
Pharmaceuticals, Inc. (formerly Chiral Quest, Inc.) together with its
subsidiaries.
The
accompanying consolidated financial statements include the accounts of VioQuest
Pharmaceuticals, Inc. and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The functional
currency of Chiral Quest, Ltd., Jiashan, China, a wholly-owned subsidiary
of the
Company, is the United States Dollar. As such, all transaction gains and
losses
are recorded in operations.
(B)
Nature of Operations
Since
its
inception in October 2000, the Company has provided innovative chiral products
and services to pharmaceutical and fine chemical companies in all stages
of
their products’ lifecycles. Since August 2004, the Company has provided such
products and services through its wholly-owned subsidiary, Chiral Quest,
Inc.
(“Chiral Quest”). Chiral Quest develops chemical catalysts used in the synthesis
of desired isomers of chiral molecules using asymmetrical catalysis technology
owned by the Pennsylvania State University Research Foundation (“PSRF”), the
technology arm of The Pennsylvania State University (“PSU”). Chiral Quest has a
worldwide, exclusive license from PSRF for the inventions covered by the
license. The original license agreement was entered into on November 8,
2000.
The PSRF
license agreement requires the Company to use its reasonable best efforts
to
achieve gross revenues of at least $500,000 in calendar year 2006, and each
subsequent year thereafter. Should the Company fail to obtain this milestone,
the PSRF has the right, but not the obligation, to terminate the license
agreement on the grounds that the Company did not use its best efforts to
achieve those milestones.
In
August
2004, the Company expanded its business plan to focus additionally on acquiring
technologies for
purposes
of development and commercialization of pharmaceutical drug candidates for
the
treatment of oncology and antiviral diseases and disorders for which there
are
unmet medical needs. In accordance with this expanded business plan, in October
2005, the Company acquired in a merger transaction Greenwich Therapeutics,
Inc.,
a privately-held New York-based biotechnology company that held exclusive
rights
to develop and commercialize two oncology drug candidates - Sodium
Stibogluconate or VQD-001, and Triciribine-Phosphate or VQD-002. The rights
to
these two oncology drug candidates, VQD-001 and VQD-002, are governed by
license
agreements with The Cleveland Clinic Foundation and the University of South
Florida Research Foundation, respectively. As a result of the Company’s
acquisition of Greenwich Therapeutics, the Company holds exclusive rights
to
develop, manufacture, use, commercialize, lease, sell and/or sublicense VQD-001
and VQD-002.
From
the
Company’s inception through June 30, 2006, Chiral Quest has accounted for all of
the sales generated by the Company, which have not provided any net profits.
With respect to the Company’s Chiral Quest operations, management believes that
the Company’s sales, marketing, and manufacturing capacities will need to grow
in order for the Company to be able to obtain significant licensing and
manufacturing agreements with large fine chemical and pharmaceutical companies.
Management believes that the Company’s manufacturing capacity will continue to
be enhanced with its expanded office and laboratory space located in Monmouth
Junction, New Jersey that was leased in May 2003, in addition to the laboratory
space located in Jiashan, China that was leased in December 2004.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006 (UNAUDITED)
(C)
Liquidity
Since
inception, the Company has incurred an accumulated deficit of $23,949,490
through June 30, 2006. For the three and six months ended June 30, 2006,
the
Company had net losses of $1,818,351 and $3,680,098, respectively, and used
$3,608,714 of cash in operating activities for the six months ended
June 30,
2006.
Management
expects the Company’s losses to increase over the next several years, primarily
due to the expansion of its drug development business, costs associated with
the
clinical development of VQD-001 and VQD-002, resources allocated to the
Company’s Chiral Quest subsidiary for the hiring of business development sales
personnel, the hiring of additional chemists, marketing and advertising
programs, and the expansion of its manufacturing capabilities. There can
be no
assurance that the Company will ever be able to operate profitably. These
matters raise substantial doubt about the ability of the Company to continue
as
a going concern.
The
accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred negative cash flow from operations since the business was started.
The
Company has spent, and expects to continue to spend, substantial amounts
in
connection with executing the business strategy, including planned development
efforts relating to the Company’s drug candidates, clinical trials, and research
and development efforts.
As
of
June 30, 2006, the Company had working capital of $1,791,901 and cash and
cash
equivalents of $2,326,919. Management anticipates that the Company’s capital
resources will be adequate to fund its operations through the third quarter
of
2006. Additional financing will be required during 2006 in order to fund
operations. The most likely source of financing includes the private sale
of the
Company’s equity or debt securities, or bridge loans to the Company from third
party lenders. However, changes may occur that would consume available capital
resources before that time. The Company’s working capital requirements will
depend upon numerous factors. For example, with respect to the Company's
drug
development business, its working capital requirements will depend on, among
other factors, the progress of its drug development and clinical programs,
including associated costs relating to milestone payments, license fees,
manufacturing costs, regulatory approvals, and the hiring of additional
employees. The Company's working capital requirements will also depend on
factors relating to its Chiral Quest business, including without
limitation, the resources it devotes to Chiral Quest's sales and marketing
capabilities, and manufacturing expansions, the progress of its R&D
programs' technological advances, the status of competitors, its ability
to
establish sales arrangements with new customers, and the expansion of the
China
facility's office and laboratory space lease agreements, along with the hiring
of additional employees. The Company's management believes that by opening
the facility in China, its Chiral Quest business will be able to decrease
manufacturing costs and expenses significantly, which will enable
the Company to produce ligands, catalysts, contract synthesis development
projects, and other end user products cost-effectively, and more competitively
to current and potential customers.
Additional
capital that may be needed by the Company in the future may not be available
on
reasonable terms, or at all. If adequate financing is not available, the
Company
may be required to terminate or significantly curtail its operations, or
enter
into arrangements with collaborative partners or others that may require
the
Company to relinquish rights to certain of its technologies, or potential
markets that the Company would not otherwise relinquish.
The
Company’s ability to achieve profitability depends upon, among other things, the
ability to discover and develop products (specifically new ligands), and
to sell
products on a commercial scale through a cost-effective and efficient process.
To the extent that the Company is unable to produce, directly or indirectly,
ligands in quantities required for commercial use, the Company will not realize
any significant revenues from its technology. Moreover, there can be no
assurance that the Company will ever achieve significant revenues or profitable
operations from the sale of any of its products or technologies.
(D)
Stock-Based Compensation
In
December 2004, the Financial Accounting Standards Board issued the Statement
of
Financial Accounting Standards No. 123(R) (“FAS 123R”), “Share-Based Payment”,
revising the Statement of Financial Accounting Standards No. 123 (“FAS 123”)
requiring that the fair value of all share-based payments to employees be
recognized in the financial statements over the service period. The Company
adopted FAS 123R effective January 1, 2006, using the modified-prospective
transition method. Under this method, the Company is required to recognize
compensation expense for the fair value of all awards granted to employees
after
the date of adoption and for the unvested portion of previously granted options
that remain outstanding as of the adoption date.
The
Company accounts for stock options granted to non-employees on a fair value
basis using the Black-Scholes option pricing method in accordance with FAS
123R
and Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction
with
Selling, Goods or Services.” The initial non-cash charge to operations for
non-employee options with vesting is subsequently adjusted at the end of
each
reporting period based upon the change in the fair value of the Company’s common
stock until such options vest.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006 (UNAUDITED)
The
Company has a stock incentive plan (the “Plan”) under which incentive stock
options may be granted. In January 2006, the Board approved an amendment
to the
Plan, increasing the number of common shares available for grant to
6,500,000 stock options for the purchase of its $0.001 par value of common
stock.
Grants
under the Plan may be made to employees (including officers), directors,
consultants, advisors, or other independent contractors who provide services
to
the Company or its subsidiaries.
The
Company issued options
to purchase an aggregate of 114,000
and 1,182,000 shares
of
its
common
stock, $0.001
par value per
share,
during
the three and six months ended June 30, 2006, respectively.
With
the
exception of the immediate vesting of 75,000 stock options granted to a
non-employee director in the first quarter of 2006, and 50,000 performance
-based
stock options granted to a consultant and 10,000 stock options granted to
Scientific Advisory Board members during the second quarter of 2006, options
granted to employees and non-employee directors during the three and six
months
ended June 30, 2006 vest as to 33% of the shares on the first, second and
third
anniversary of the vesting commencement date.
Following
the vesting periods, options are exercisable until the earlier of 90 days
after
the employee’s termination with the Company or the ten-year anniversary of the
initial grant, subject to adjustment under certain conditions.
The
Company recorded compensation expense in the three and six months ended June
30,
2006 for employee and director stock options of $249,513 and $514,051,
respectively.
Prior
to
adopting FAS 123R, the Company applied the intrinsic value-based method of
accounting prescribed in APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” (“APB 25”) and, accordingly, did not recognize compensation expense
for stock option grants to employees and directors made at an exercise price
equal to or in excess of the fair market value of the stock at the date of
grant.
The
following table details the pro forma effect on the Company’s net loss and basic
and diluted net loss per share had compensation expense for stock-based awards
been recorded in the three and six months ended June 30, 2005 based on the
fair
value method under FAS 123 instead of the intrinsic value method under APB
25:
|
|
|
Three
Months
Ended
June
30, 2005
|
|
Six
Months
Ended
June
30, 2005
|
|
|
Net
loss, as reported
|
|
$
|
(1,147,048
|
)
|
$
|
(2,445,473
|
)
|
|
Deduct:
Stock-based employee compensation
|
|
|
|
|
|
|
|
|
expense
determined under fair value based
|
|
|
|
|
|
|
|
|
method
for all awards, net of taxes
|
|
|
(130,637
|
)
|
|
(240,303
|
)
|
|
Pro
forma, net loss
|
|
$
|
(1,277,685
|
)
|
$
|
(2,685,776
|
)
|
| |
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share, as reported
|
|
$
|
(0.06
|
)
|
$
|
(0.14
|
)
|
|
Basic
and diluted net loss per share, pro forma
|
|
$
|
(0.07
|
)
|
$
|
(0.15
|
)
|
The
Company used the Black-Scholes option pricing model to calculate the fair
value
of options under FAS 123R and APB 25. The key assumptions for this valuation
method include the expected term of the option, stock price volatility,
risk-free interest rate, dividend yield, exercise price, and forfeiture rate.
Many of these assumptions are judgmental and highly sensitive in the
determination of compensation expense. Under the assumptions indicated below,
the weighted average fair values of the stock options issued at the dates
of
grant in the periods ended June 30, 2006 and 2005 were $0.84 and $0.85,
respectively. The table below indicates the key assumptions used in the
valuation calculations for options granted in the three and six months ended
June 30, 2006 and 2005:
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006 (UNAUDITED)
|
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
Term
|
|
|
7
years
|
|
|
10
years
|
|
|
7
years
|
|
|
10
years
|
|
|
Volatility
|
|
|
217.17
|
%
|
|
64%-128
|
%
|
|
210.14%-217.17
|
%
|
|
64%-128
|
%
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
Risk-free
interest rate
|
|
|
4.96
|
%
|
|
2%-5
|
%
|
|
4.37%-4.96
|
%
|
|
2%-5
|
%
|
|
Forfeiture
rate
|
|
|
23
|
%
|
|
|
|
|
22%-23
|
%
|
|
0
|
%
|
The
following table summarizes information about the Company’s stock incentive plan
for the six months ended June 30, 2006:
| |
|
Number
of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
|
Balance,
January 1, 2006
|
|
|
4,975,852
|
|
$
|
1.10
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
1,182,000
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
Options
cancelled
|
|
|
(80,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
Options
outstanding, June 30, 2006
|
|
|
6,077,852
|
|
$
|
0.86
|
|
|
7.5
|
|
$
|
1,144,508
|
|
|
Options
exercisable, June 30, 2006
|
|
|
1,930,612
|
|
$
|
1.28
|
|
|
6.1
|
|
$
|
610,221
|
|
As
of
June 30, 2006, there was $4,056,453 of total unrecognized compensation cost
related to stock options. These costs are expected to be recognized over
a
period of approximately 3 years.
There
were no options exercised during the three and six months ended June 30,
2006.
As
of
June 30, 2006, an aggregate of 422,148 shares remained available for future
grants and awards under the Company’s stock incentive plan, which covers stock
options and restricted stock awards. The Company issues unissued shares to
satisfy stock option exercises and restricted stock awards.
(E)
Loss Per Share
Basic
net
loss per share is calculated by dividing net loss by the weighted-average
number
of common shares outstanding for each period presented. Diluted net loss
per
share is the same as basic net loss per share, since potentially dilutive
shares
from the assumed exercise of stock options and stock warrants would have
had an
antidilutive effect because the Company incurred a net loss during each period
presented. The number of potentially dilutive shares excluded from the
calculation was 27,128,366 (of which 12,486,119 were warrants, 8,564,395
were
common shares held in escrow based upon clinical milestones of VQD-001 and
VQD-002, as a result of the acquisition of Greenwich Therapeutics, and 6,077,852
stock options) at June 30, 2006 and 6,296,405 at June 30, 2005.
NOTE
2 INVENTORY
The
principal components of inventory are as follows:
| |
|
June
30, 2006
(Unaudited)
|
|
December
31,
2005
|
|
|
Raw
material compounds
|
|
$
|
404,508
|
|
$
|
410,912
|
|
|
Work
in process
|
|
|
73,671
|
|
|
11,868
|
|
|
Finished
goods
|
|
|
238,516
|
|
|
202,378
|
|
|
Total
Inventory
|
|
$
|
716,695
|
|
$
|
625,158
|
|
NOTE
3 COMMITMENTS
In
January 2006, the Company entered into an amendment to its lease agreement,
extending the lease term to May 31, 2009 for its laboratory and office space
located in Monmouth Junction, New Jersey. Effective June 1, 2006, the Company’s
base rent for the remainder of the term is $19,439 per month.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006 (UNAUDITED)
Upon
six
months prior written notice to the landlord, the Company will have a one-time
option, without penalty, to terminate this lease effective as of May 31,
2008.
As of June 30, 2006, the Company’s total remaining lease commitment was
approximately $964,670 for rent, utilities and maintenance fees. In May 2003,
the Company also issued the landlord stock options to purchase 20,000 shares
of
common stock attributed. The fair value of the options issued to the landlord
of
$9,845 is being amortized on a straight-line basis over the term of the option
agreement and included in rent expense.
On
February 14, 2006, the Company entered into an employment agreement with
Pamela
Harris, M.D., F.A.C.P., its Chief Medical Officer. The agreement is for an
indefinite term beginning on March 15, 2006 and provides for an initial base
salary of $250,000, plus an annual target bonus of up to 20% of base salary
based upon personal performance and an additional amount of up to 10% of
base
salary based upon Company performance. The agreement provides that for fiscal
year 2006, Dr. Harris will be guaranteed at least 50% of the target bonus.
The
employment agreement also provides that Dr. Harris is entitled to receive
options to purchase 200,000 shares of the Company’s common stock. The options
will vest in three equal annual installments, commencing in March 15, 2007
and
will be exercisable at $0.84 per share. The options had an approximate fair
value of $159,000, which is being amortized over three years. In addition,
Dr.
Harris shall be entitled, based on performance, to receive options to purchase
an additional 200,000 shares of the Company’s common stock. These
performance-based options will be divided into three separate grants and
will
vest in annual installments over a 3-year period. Entitlement to the performance
based options and the exact vesting schedule have not yet been determined.
The
performance-based options criteria will be established by the President and
CEO
after consideration of the development timelines relating to the Company’s two
product candidates.
All
terms
of the options will be in accordance with the Company’s 2003 Stock Option Plan
(the “Plan”) and all of the options will be exercisable by Dr. Harris as long as
she remains employed by the Company; provided, however, that if a “change of
control” (as defined in the Plan) occurs during Dr. Harris’ employment, the
options will be deemed vested. Pursuant to the terms of the employment
agreement, Dr. Harris is entitled to a housing allowance of up to $10,000
and
relocation assistance for up to an additional $10,000. In the event that
the
Company terminates Dr. Harris’ employment without cause, Dr. Harris is entitled
to receive her then annualized base salary for a period of six months from
such
termination.
NOTE
4 SEGMENT
REPORTING
The
Company has two business segments: Drug Development and Chiral Products and
Services. The Company’s drug development business which is operated through
VioQuest, focuses on acquiring, developing and eventually commercializing
human
therapeutics in the areas of oncology, and antiviral diseases and disorders
for
which there are current unmet medical needs. The Company has the exclusive
rights to develop and commercialize two oncology drug candidates. The Company’s
chiral business, which is operated through Chiral Quest, provides innovative
chiral products, technology and custom synthesis development services to
pharmaceutical and fine chemical companies in all stages of a product lifecycle.
For the three and six months ended June 30, 2006, the Company’s drug development
business expenses primarily consisted of manufacturing, licensing, regulatory,
and clinical development costs, administrative and rent expenses, totaling
approximately $700,000 and $2,433,000, or approximately 34%
and 57%
of the Company’s total operating expenses, respectively. The Company’s chiral
business in the United States and China contributed all of the revenue and
the
other 66%
and 43%
of the Company’s operating expenses during the three and six months
ended
June 30,
2006 and
all of the revenue and substantially all of the operating expenses for
the
three and six months ended
June 30,
2005. Of
the Company’s total assets, approximately 8% are attributable to its Chiral
Quest, Ltd. Jiashan, China facility as of June 30, 2006. Chiral Quest,
Ltd., Jiashan, China contributed approximately 3% of the Company’s
overall net loss for the three
and six
months ended June 30, 2006.
NOTE
5 MERGER
On
October 18, 2005, the Company completed a merger with Greenwich Therapeutics,
Inc., (“Greenwich”), a New York-based biotechnology company. In exchange for
their shares of Greenwich common stock and pursuant to the merger agreement,
the
stockholders of Greenwich received an aggregate of 17,128,790 shares of the
Company’s common stock and five-year warrants to purchase an additional
4,000,000 shares of the Company’s common stock at an exercise price of $1.41 per
share.
Additionally,
as contemplated by the merger agreement, on October 18, 2005, the Company
assumed outstanding indebtedness of Greenwich of $823,869, all of which was
payable to Paramount BioCapital Investments, LLC, pursuant to a promissory
note
dated October 17, 2005, referred to as the (“Note”). As of June 30, 2006,
approximately $293,000 of principal and accrued interest remained outstanding
under the Note.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2006 (UNAUDITED)
At
the
closing of the merger, the Note was amended to provide that one-third would
be
converted into securities of the Company on the same terms as the Company’s
October 2005 private placement, one-third of the outstanding indebtedness
under
the Note would be repaid upon the completion by the Company of a financing
resulting in gross proceeds of at least $5 million, and the final one-third
would be payable upon completion by the Company of one or more financings
resulting in aggregate gross proceeds of at least $10 million (inclusive
of the
amounts raised in its previous $8.4 million financing).
Accordingly,
on October 18, 2005, upon completion of the private placement of common stock
for $7.5 million, net of expenses, the Company satisfied a portion of the
total
indebtedness outstanding under the Note by making a cash payment of $264,623
and
another portion by issuing to Paramount BioCapital Investments, LLC 392,830
shares valued at the $.75 offering price of the October 2005 private placement,
the equivalent of $294,623 of the Company’s common stock. In the event that the
Company does not complete the financing(s) resulting in aggregate gross proceeds
of at least $10 million prior to the Note’s maturity date, the Company will be
required to satisfy the final portion of $264,623 at maturity in October
2006.
The
acquisition of Greenwich on October 18, 2005 was accounted for under the
purchase method of accounting and accordingly, the results of operations
of
Greenwich have been have been consolidated with those of the Company only
from
the date of acquisition.
The
following unaudited pro forma financial information presents the condensed
consolidated results of operations of the Company and Greenwich for the three
and six months ended June 30, 2005 assuming the acquisition had been consummated
at the beginning of that period. The pro forma information does not necessarily
reflect the results of operations that would have occurred had the entities
been
a single company during the period ($000's, except per share
information).
|
|
|
Three
Months
Ended
June
30, 2005
|
|
Six
Months
Ended
June
30, 2005
|
|
|
Net
loss
|
|
$
|
(1,273
|
)
|
$
|
(3,171
|
)
|
| |
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share, as reported
|
|
$
|
(0.03
|
)
|
$
|
(0.08
|
)
|
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
37,965
|
|
|
37,965
|
|
NOTE
6 SUBSEQUENT
EVENTS
On
August
8, 2006, the Company entered into a Severance Benefits Agreement (the
“Agreement”) with the Company’s Chief Financial Officer, Brian Lenz. The
Agreement provides that, in the event Mr. Lenz’s employment is terminated within
one year following a Change of Control (as defined in the Agreement) and
such
termination is either without Cause, or is a Constructive Termination (as
such
terms are defined in the Agreement), then (A) Mr. Lenz shall be entitled
to
receive 12 months of his then annual compensation, payable in semi-monthly
installments, (B) any and all outstanding options to purchase shares of the
Company’s stock granted to Mr. Lenz shall immediately vest and become
immediately exercisable (whether entered into before or after this date of
this
Agreement) and (C) Mr. Lenz shall be entitled to participate in the Company’s
healthcare and insurance benefits program for a period of 12 months thereafter.
If Mr. Lenz’s employment is terminated at a time other than a one-year period
following a Change of Control and without Cause, then Mr. Lenz shall be entitled
to receive (A) one-half of his then annual compensation, payable in semi-monthly
installments over a period of six months and (B) the Company’s healthcare and
insurance benefits program over a period of six months thereafter.