-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EX3TQlWXdlQdzSCi7hud9ep0n4N9+vtnx0I7elJXagTvgPWOnzZhGyQ6K+wa99ra YU5kEEu1JQ5v3qQ4HK4YgQ== 0000707511-95-000010.txt : 19951119 0000707511-95-000010.hdr.sgml : 19951119 ACCESSION NUMBER: 0000707511-95-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALPHA 1 BIOMEDICALS INC CENTRAL INDEX KEY: 0000707511 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 521253406 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15070 FILM NUMBER: 95591170 BUSINESS ADDRESS: STREET 1: TWO DEMOCRACY CTR STREET 2: 6903 ROCKLEDGE DR STE 1200 CITY: BETHESDA STATE: MD ZIP: 20817 BUSINESS PHONE: 2025644400 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 OR [ ] 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 0-15070 Alpha 1 Biomedicals, Inc. (Exact name of registrant as specified in its charter) Delaware 52-1253406 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Two Democracy Center 6903 Rockledge Drive, Suite 1200 Bethesda, MD 20817 (Address of principal executive offices, including zip code) (301) 564-4400 (Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of October 31, 1995, 8,977,429 shares of the registrant's common stock, par value $.001 per share, were issued and outstanding. Page 2 of 14 ALPHA 1 BIOMEDICALS, INC. FORM 10-Q QUARTER ENDED September 30, 1995 Page No. Part I. Financial Information Item 1. Financial Statements Balance Sheets at September 30, 1995 (unaudited) and December 31, 1994 (audited) 3 Statements of Operations for the three-month and nine-month periods ended September 30, 1995 and 1994 (unaudited) 4 Statements of Cash Flows for the nine- month periods ended September 30, 1995 and 1994 (unaudited) 5 Notes to Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 Part II. Other Information Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Item 1. Financial Statements Page 3 of 14 ALPHA 1 BIOMEDICALS, INC. BALANCE SHEETS September 30 December 31 1995 1994 Assets (unaudited) Current assets Cash and cash equivalents $ 405,987 $ 13,705 Short term investments 805,419 3,747,035 Other current assets 170,990 484,323 Total current assets 1,382,396 4,245,063 Fixed assets, net 66,296 260,680 Proprietary rights, net 129,343 323,358 Other assets 20,610 87,910 Total assets $ 1,598,645 4,917,011 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 53,797 $ 386,955 Accrued expenses 246,781 475,063 Total current liabilities 300,578 862,018 Deferred compensation - 371,250 Total liabilities 300,578 1,233,268 Stockholders' equity Preferred stock, $.001 par value per share, 1,000,000 authorized; no shares issued Common stock, par value $.001 per share, 20,000,000 shares authorized; 8,977,429 issued and outstanding 8,977 8,977 Additional paid-in capital 35,578,289 35,207,039 Accumulated deficit (34,289,199) (31,532,273) Total stockholders' equity 1,298,067 3,683,743 Total liabilities and stockholders' $ 1,598,645 $ 4,917,011 equity ALPHA 1 BIOMEDICALS, INC. STATEMENTS OF OPERATIONS Page 4 of 14 Three months ended Nine months ended September 30, September 30, 1994 1995 1994 1995 (unaudited) Revenues Product sales, royalties $ 5,589 $ 258,186 $ 51,483 $ 528,820 and consulting Total revenues 5,589 258,186 51,483 528,820 Expenses Cost of sales - - - 131,874 Research and product development 659,698 393,851 1,276,885 2,397,237 General and 346,015 3,059,555 1,596,432 7,325,750 administrative Total expenses 1,005,713 3,453,406 2,873,31 9,854,861 Operating loss (1,000,124) (3,195,220 (2,821,834) (9,326,041) Other income (expense) 39,650 (333,732) 245,934 (96,839) Equity in loss of VTI (37,620) (61,000) (181,026) (196,000) Net loss $ (998,094) $ (3,589,952) $(2,756,926) $(9,618,880) Net loss per common share $ (0.11) $ (0.40) $ (0.31) $ (1.07) Weighted average number of common shares 8,977,429 8,977,429 8,977,429 8,975,671 outstanding :: ALPHA 1 BIOMEDICALS, INC. STATEMENTS OF CASH FLOWS Page 5 of 14 Nine months ended September 30, 1995 1994 (unaudited) (unaudited) Cash flows from operating activities: Net loss $ (2,756,926) $ (9,618,880) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 41,181 248,963 Amortization 194,015 194,015 Equity in losses of VTI 181,026 196,000 Loss on short term investment 356,040 Loss on disposal/writedown of fixed 32,703 1,099,072 assets Changes in operating assets and liabilities: Decrease in inventory - 483,787 Decrease (increase) in other current 313,333 (19,964) assets Decrease (increase) in other assets 67,300 (35,762) Decrease in accounts payable (333,158) (560,184) (Decrease) increase in accrued (228,282) 111,436 expenses Decrease in unearned revenue - (383,331) Decrease in other liabilities - (49,901) Net cash used in operating (2,488,808) (7,978,709) activities Cash flows from investing activities: Sale of short term investments, net 2,941,616 5,146,766 Advances to VTI (181,026) (196,000) Purchases of fixed assets - (1,104,451) Proceeds from the sale of fixed 120,500 - assets Net cash provided by investing 2,881,090 3,846,315 activities Cash flows from financing activities: Proceeds from issuance of common - 37,125 stock/warrants Net cash provided by financing - 37,125 activities Net increase (decrease) in cash and 392,282 (4,095,269) cash equivalents Cash and cash equivalents at 13,705 4,672,766 beginning of period Cash and cash equivalents at end of $ 405,987 $ 577,497 period Page 6 of 14 ALPHA 1 BIOMEDICALS, INC. NOTES TO FINANCIAL STATEMENTS Alpha 1 Biomedicals, Inc. (the "Company"), a Delaware corporation, was incorporated in 1982. The Company was organized to engage in the development of pharmaceutical products for the treatment of diseases or conditions that arise as a result of immune system disorders, including chronic viral infections, cancer and autoimmune disease. Until the latter part of 1994, the primary focus of the Company's developmental efforts had been Thymosin alpha 1, particularly as a treatment for chronic hepatitis B. During 1994, several significant events relating to Thymosin alpha 1 had a fundamental impact on the business and the future direction of the Company. In April 1994, the Company's Phase III multicenter clinical trial evaluating the use of Thymosin alpha 1 as a treatment for chronic hepatitis B was unblinded. After review of the results of this trial, which did not appear to show statistically significant differences between the treatment group and the placebo group, the Company concluded that without further testing the efficacy results would not support a New Drug Application to the U.S. Food and Drug Administration as a sole treatment for chronic hepatitis B. Effective September 30, 1994, as part of the settlement of an arbitration proceeding, the Company entered into a new license agreement with SciClone Pharmaceuticals, Inc. ("SciClone") expanding the scope of the exclusive license previously granted to SciClone to manufacture, use and sell Thymosin alpha 1 for all uses. As expanded, the license covers all countries of the world, except for Italy, Spain and Portugal (where the rights to Thymosin alpha 1 currently are held by other licensees of the Company). In consideration for the expanded license, the Company will be entitled to receive a royalty on SciClone's net sales revenue from products covered by the license that ranges from 3% to 7% depending on whether SciClone's rights in the country in which the sales occur were acquired under the new license agreement or the original license agreement and on whether SciClone enjoys patent protection or comparable market exclusivity in such country. The Company's right to receive royalties continues until September 30, 2002, except that, if by September 30, 2002 the Company has not realized royalty payments of at least $35 million, SciClone's royalty obligation will continue until the earlier of (i) the payment to the Company of royalties aggregating $35 million or (ii) September 30, 2009. Under the new license agreement, the Page 7 of 14 decision whether to continue the commercial development of Thymosin alpha 1 is at the sole discretion of SciClone. In December 1994, the Company reached a decision to focus its development efforts on Thymosin beta 4 (TB4), a chemically synthesized copy of a natural human peptide that has shown promise in animal testing and in laboratory studies. The Company believes that TB4 could have application in the treatment of cystic fibrosis, sepsis, adult respiratory distress syndrome, chronic bronchitis, and asthma. Preclinical activities are underway. Financial Statements The Balance Sheet as of September 30, 1995, the Statements of Operations for the three-month and nine-month periods ended September 30, 1995 and 1994, and the Statements of Cash Flows for the nine-month periods ended September 30, 1995 and 1994, have been prepared without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at September 30, 1995 and the results of operations and changes in cash flows for such periods have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1994 audited financial statements. The results of operations for the three-month and nine-month periods ended September 30, 1995 are not necessarily indicative of the operating results for the full year. Page 8 of 14 ALPHA 1 BIOMEDICALS, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations for the Three-Month Period Ended September 30, 1995 Compared to the Three-Month Period Ended September 30, 1994 Revenues. Revenues for the three-month period ended September 30, 1995 were $5,589, primarily consisting of amounts collected under a consulting agreement. Revenues in the comparable period a year earlier were $258,186 consisting of payments received from a licensee for product sales and related charges. Expenses. Expenses for the three-month period ended September 30, 1995 were $1,005,713 a decrease of $2,447,693 from the comparable period a year earlier. The decrease reflected the net effect of an increase in research and development and a decrease in general and administrative expense. Research and development for the current quarter was $659,698 as compared to $393,851 for the same period a year earlier reflecting an increase of $265,847. The increased expense was primarily attributable to the cost of acquiring Thymosin beta 4 material to be used in the conduct of preclinical studies. General and administrative expenses for the current quarter were $346,015 as compared to $3,059,555 for the same period a year earlier reflecting a decrease of $2,713,540. The decrease in expenses in the current quarter from the prior year was primarily the result of closing the Company's Sunnyvale, California facility, a reduction in workforce, decreased legal and consulting expenses, and the conclusion in 1994 of the arbitration proceedings with SciClone. Other Items. Other Income (expense) for the current three- month period totaled $39,650 in income as compared to an expense of $333,732 for the comparable period a year earlier. The current period income reflects interest earned and increased valuation of investments. The expense reported in 1994 was primarily the result of the recognition of losses on certain U.S. Government securities due to rising interest rates. Equity in loss of VTI during the current period was $37,620, a decrease of $23,380 from the comparable period in 1994 primarily reflecting the Company's entry into an agreement with CEL-SCI Corporation to terminate the Viral Technologies joint venture. Page 9 of 14 Results of Operations for the Nine-Month Period Ended September 30, 1995 Compared to the Nine-Month Period Ended September 30, 1994 Revenues. Revenues for the nine-month period ended September 30, 1995 were $51,483 as compared to $528,820 for the same period a year earlier. The current period primarily consisted of payments received from a consulting agreement. The 1994 period primarily reflected payments received from a licensee for product sales. Expenses. Expenses for the nine-month period ended September 30, 1995 were $2,873,317 a decrease of $6,981,544 for the comparable period a year earlier. The decrease in expenses was primarily due to the conclusion of the Phase III clinical study and closing of the Company's Sunnyvale, California facility, a writedown of product inventory, and a reduction in workforce. A reduction in consulting and legal expense, as a result of the conclusion in 1994 of the arbitration proceeding with SciClone, also contributed to a decrease in general and administrative expenses. General and administrative expense during the current nine-month period includes the estimated cost of the settlement of a law suit pending against the Company. See "Legal Proceedings." Other Items. Other income (expenses) for the nine-months ended September 30, 1995 totaled $245,934 in income as compared to an expense of $96,839 for the comparable period a year earlier. The expense recorded to the 1994 period included the recognition of losses on certain U.S. Government securities due to rising interest rates, whereas the current period reflects interest earned and increased valuation of investments. Capital Resources and Liquidity Since its inception in 1982, the Company's efforts have been directed toward conducting research and development, sponsoring clinical trials of its proprietary products, the construction and equipping of laboratory and production facilities, and the manufacture of product for research, testing and clinical trials. The Company's accumulated deficit of $34,289,199 through September 30, 1995, has been funded primarily by the proceeds from the issuance of equity securities (and interest earned on such funds), the licensing of technology developed or acquired by the Company and limited product sales. Page 10 of 14 The revenues realized by the Company from operations have been substantially below the level required to recover fully the Company's expenses, to generate a profit or to provide adequate cash flow. The Company currently believes that, based on its existing resources, it will have sufficient cash to sustain its operations at the current level of activity through the fourth calendar quarter of 1995. Additional cash resources will be required to continue such research activities beyond this period. On November 13, 1995, the Company entered into an Agreement of Merger with Alpha 1 Acquisition Corp. ("Acquisition"), a corporation formed by affiliates of The Castle Group, Ltd. ("Castle"), pursuant to which Acquisition, upon the satisfaction of certain conditions precedent, would be merged into the Company. Among the conditions precedent is that Acquisition, which currently has no assets, complete a financing which results in gross proceeds of at least $5 million to Acquisition (before giving effect to commissions and expenses to be paid to an affiliate of Castle). If Acquisition is successful in raising at least $5 million in gross proceeds, of which there is no assurance, the Company would issue to Acquisition in the Merger a total of 24 million shares of Common Stock, plus three shares of Common Stock for each $1.00 in additional gross proceeds raised by Acquisition in excess of $5 million up to $10 million. The Merger is subject to the approval of the stockholders of the Company and Acquisition. In connection with the Merger, the Company would effect a reverse stock split intended to raise the market price of the Common Stock to a level sufficient to allow for relisting the Nasdaq Small-Cap Market. A second condition precedent to the Merger is the licensing by Acquisition from the National Institutes of Health ("NIH") of a new technology identified by the companies. If the Merger is completed, the net proceeds from the Acquisition financing would be combined with the remaining resources of the Company to fund the continued development of Thymosin beta 4 and the new technology. If Acquisition is successful in raising sufficient funds to complete the Merger, it is anticipated that a special meeting of the stockholders of the Company would be held in the first quarter of 1996 to vote on the Merger. If the Merger is approved, the closing would occur shortly thereafter. In order to fund the operations of the Company until the Merger can be consummated, Acquisition has agreed to make a bridge loan to the Company in the amount up to $2 million. This obligation is contingent upon Acquisition raising sufficient financing to satisfy this obligation. If the Merger with Acquisition is not Page 11 of 14 successful, the Company will be required to reduce further its current level of expenditures. As a result of licensing Thymosin alpha 1 to SciClone for further commercial development, the Company has reduced its staff from 29 in early 1994 to a current staff of five and eliminated the Company's manufacturing and research facilities. On October 31, 1995, the Company completed the sale of its 50% interest in Viral Technologies, Inc. ("VTI"), to CEL-SCI Corporation. VTI was formed by the two companies in 1986 to conduct research and to develop a proprietary peptide which may be of clinical benefit in the prevention, diagnosis or treatment of Acquired Immune Deficiency Syndrome (AIDS). In consideration for its 50% interest in VTI, the Company received 159,170 shares of CEL-SCI common stock, which on the date of the closing had a market value of approximately $650,000. The Company is permitted to sell the shares at a maximum rate of 10,000 shares per week. The Company has agreements with several vendors for the manufacture and supply to the Company of Thymosin beta 4. As of the end of October 1995, the Company has placed orders for the manufacture of product totaling $2.5 million of which $675,000 has been paid. With minor exceptions, these agreements are cancelable upon the payment to the manufacturers of expenses accrued through the date of cancellation. The effect of inflation and changing prices on the continuing operation of the Company is not expected to be significant. Page 12 of 14 ALPHA 1 BIOMEDICALS, INC. Part II - Other Information Item 1. Legal Proceedings On April 29, 1994, a suit was filed in United States District Court for the District of Maryland (the "District Court") against the Company, Dr. Allan Goldstein and Dr. Vincent F. Simmon, the Company's former President and Chief Executive Officer. The named plaintiff in the suit was Schulman, Rogers, Gandal, Pordy & Ecker, P.A. The suit, as to which the plaintiff sought certification as a class action, alleged that during the period May 11, 1993, through April 27, 1994, the Company and certain of its officers made or are responsible for certain false or misleading public statements regarding the Company, Thymosin alpha 1, the results of Thymosin alpha 1 in the treatment of chronic hepatitis B, and the prospects for success of Thymosin alpha 1 in clinical trials and the impact on the Company. The complaint contended that these alleged misleading statements violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder. The complaint further alleged that Dr. Goldstein and Dr. Simmon are liable for such statements by reason of their status as controlling persons of the Company. On May 26, 1994, a second suit was filed in the District Court by Harry T. Cole against the Company, Dr. Goldstein and Dr. Simmon. This suit, which also sought certification as a class action, alleged violations of Rule 10b-5, negligent representations and control person liability based on substantially the same facts alleged in the Schulman complaint. On May 27, 1994, a suit was filed in the District Court by Allison and Sidney Formal against the Company, Dr. Goldstein and Dr. Simmon. The allegations and the relief sought in this suit were identical to those in the Schulman complaint. The three suits have been consolidated as a single action captioned In re Alpha 1 Biomedicals, Inc. Securities Litigation. In a consolidated amended complaint, the plaintiffs expanded their claims to include the allegation that the Company made false or misleading public statements concerning its ability to satisfy its contractual obligation to supply product to SciClone. On March 13, 1995, the District Court issued an order dismissing all but one of the claims. On September 26, 1995, the parties filed a Stipulation of Settlement with the District Court under which the Company would issue 500,000 shares of its common stock and make a $100,000 payment in settlement of the remaining claim. The settlement is subject to the approval of the District Court. While the Company continues to believe that the remaining claim is without merit, it has entered into the settlement agreement to avoid the continuing cost of litigation. Page 13 of 14 Item 6. Exhibits and Reports on Form 8-K (a) Two Current Reports on Form 8-K were filed during the quarter ended September 30, 1995 September 13, 1995 (Item 5 and 7) September 28, 1995 (Item 5 and 7) Page 14 of 14 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. Alpha 1 Biomedicals, Inc. (Registrant) Date: November 13, 1995 By: /s/ R.J. Lanham R.J. Lanham Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----