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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
Commission File No. 0-24972
INKINE PHARMACEUTICAL COMPANY, INC.
(Exact name of Registrant as specified in its charter)
New York 13-3754005
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1787 Sentry Parkway West
Building 18, Suite 440
Blue Bell, PA 19422
(Address of principal executive offices)
215-283-6850
(Registrant's telephone number)
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 [ ]
At August 14, 2002, the registrant had outstanding 34,965,010 shares of
common stock, par value $.0001 per share.
INKINE PHARMACEUTICAL COMPANY, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BALANCE SHEETS - as of June 30, 2002 (unaudited) and
December 31, 2001...............................................................................3
STATEMENTS OF OPERATIONS (unaudited) - for the Three and Six-Months
Ended June 30, 2002 and 2001....................................................................4
STATEMENTS OF CASH FLOWS (unaudited) - for the Six-Months Ended June 30, 2002 and 2001..........5
NOTES TO FINANCIAL STATEMENTS (unaudited).......................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........8
Item 3. Quantitative and Qualitative Disclosures About Market Risks....................................12
PART II - OTHER INFORMATION......................................................................................14
Item 4. Submission of Matters to a Vote of Security Holders............................................14
Item 6. Exhibits and Reports on Form 8-K...............................................................14
SIGNATURES.......................................................................................................16
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
INKINE PHARMACEUTICAL COMPANY, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
June 30, 2002 December 31, 2001
------------- -----------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents........................................ $ 7,690 $ 7,379
Short-term investments........................................... --- 4,787
Accounts receivable.............................................. 851 400
Inventory........................................................ 914 204
Prepaid expenses and other current assets........................ 230 89
------------ ------------
Total current assets......................................... 9,685 12,859
Deposits and other long-term assets................................... 410 607
Fixed assets.......................................................... 346 399
------------ ------------
Total assets................................................. $ 10,441 $ 13,865
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............................ $ 3,867 $ 3,550
Line of credit................................................... 2,402 2,401
Current portion of convertible subordinated notes................ 9,869 ---
------------ ------------
Total current liabilities.................................... 16,138 5,951
Convertible subordinated notes........................................ --- 9,801
------------ ------------
Total liabilities............................................ 16,138 15,752
Shareholders' deficit:
Preferred stock, $.0001 par value; authorized 5,000,000
shares; none issued and outstanding ......................... --- ---
Common stock, $.0001 par value; authorized 75,000,000
shares; issued 34,965,010 and 34,777,720 shares, respectively 3 3
Less common stock held in treasury (16,515 shares)............... (37) (37)
Additional paid-in capital....................................... 58,767 58,302
Deferred compensation............................................ (58) (115)
Accumulated deficit.............................................. (64,372) (60,040)
------------ -------------
Total shareholders' deficit.................................. (5,697) (1,887)
------------ -------------
Total liabilities and shareholders' deficit.................. $ 10,441 $ 13,865
============ =============
See accompanying notes to unaudited financial statements.
3
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three-Months Ended Six-Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Product revenue.................................. $ 1,963 $ 1,754 $ 2,921 $ 3,355
Other revenue.................................... 44 --- 63 ---
--------- ---------- ---------- ----------
Total revenue............................... 2,007 1,754 2,984 3,355
Cost of goods sold............................... (504) (657) (789) (1,424)
--------- --------- --------- ---------
Gross profit............................... 1,503 1,097 2,195 1,931
Research and development......................... 870 1,045 2,472 1,939
Sales and marketing.............................. 1,350 2,310 2,380 4,227
General and administrative....................... 577 969 1,170 1,984
--------- --------- --------- ---------
Operating expenses......................... 2,797 4,324 6,022 8,150
--------- --------- ---------- ---------
Loss from operations....................... (1,294) (3,227) (3,827) (6,219)
Interest income.................................. 33 111 64 268
Interest expense................................. (294) (85) (569) (123)
Other............................................ --- --- --- (6)
--------- --------- ---------- ---------
Net loss................................... $ (1,555) $ (3,201) $ (4,332) $ (6,080)
========= ========== ========== =========
Net loss per share - basic and diluted..... $ (0.04) $ (0.09) $ (0.12) $ (0.18)
Weighted average shares outstanding -
basic and diluted ....................... 34,899 34,206 34,867 34,044
See accompanying notes to unaudited financial statements.
4
INKINE PHARMACEUTICAL COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six-Months Ended
June 30,
2002 2001
---- ----
Operating activities:
Net loss....................................................... $ (4,332) $ (6,080)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation............................................... 82 84
Amortization of deferred compensation...................... 57 587
Stock issued for interest earned on convertible
subordinated notes...................................... 275 ---
Loss on sale of fixed asset................................ --- 6
Amortization of warrant value.............................. 68 68
Changes in operating assets and liabilities:
(Increase) in accounts receivable........................ (451) (735)
(Increase) decrease in inventory......................... (710) 153
(Increase) decrease in prepaid expenses and other assets. 56 (1,141)
Increase in accounts payable and accrued expenses........ 317 2,291
--------- ---------
Net cash used in operating activities........................ (4,638) (4,767)
Investing activities:
Purchases of investments....................................... --- (493)
Proceeds from maturities and sales of investments.............. 4,787 9,773
Proceeds from sale of fixed asset.............................. --- 12
Capital expenditures........................................... (29) (132)
--------- --------
Net cash provided by investing activities................... 4,758 9,160
Financing activities:
Net proceeds from exercise of options and warrants............ 190 599
Borrowings, net of repayments on line of credit............... 1 333
Proceeds from sale of convertible subordinated notes........... --- 10,000
--------- ---------
Net cash provided by financing activities.................... 191 10,932
--------- ---------
Net increase in cash and cash equivalents......................... 311 15,325
Cash and cash equivalents - beginning of period................... 7,379 2,240
--------- ---------
Cash and cash equivalents - end of period......................... $ 7,690 $ 17,565
========= =========
See accompanying notes to unaudited financial statements.
5
INKINE PHARMACEUTICAL COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying financial statements are unaudited and have been
prepared by InKine Pharmaceutical Company, Inc. (the "Company") in accordance
with accounting principles generally accepted in the United States.
Certain information and footnote disclosures normally included in the
Company's audited annual financial statements have been condensed or omitted in
the Company's interim financial statements. In the opinion of management, the
interim financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair representation of the results for
the interim periods presented.
The results of operations for the interim periods may not necessarily
be indicative of the results of operations expected for the full year, although
the Company expects to incur a loss for the year ending December 31, 2002. These
interim financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 2001, which are contained
in the Company's most recent Annual Report on Form 10-K.
2. Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date(s) of the financial statements and the reported amounts
of revenues and expenses during the reporting period(s). Actual results could
differ from those estimates.
3. Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
4. Allowance for Sales Returns
The Company maintains an allowance for potential future sales returns.
This allowance is evaluated on a quarterly basis based on product
characteristics, industry averages, wholesaler stocking patterns, and
prescription trends. At June 30, 2002, the Company had a $269,000 returns
allowance that was included in accounts payable and accrued expenses on the
balance sheet. The following is an analysis of the sales returns allowance for
the six-months ended June 30, 2002:
Allowance at December 31, 2001 $441,000
Provision for estimated sales returns 443,000
Actual sales returns (615,000)
--------
Allowance at June 30, 2002 $269,000
=========
5. Line of Credit
The Company maintains a $7,500,000 line of credit with a financial
institution, which expires January 31, 2003. Monthly interest-only payments are
made at a variable per annum rate of 2.20% plus the 30-day Dealer Commercial
Paper Rate. Amounts outstanding under this credit line were $2,402,000 and
$2,401,000 at June 30, 2002 and December 31, 2001, respectively. Average
interest rates for the six and twelve-month periods ended June 30, 2002 and
December 31, 2001, respectively, were 3.96% and 6.06%, respectively.
6
6. Convertible Subordinated Notes
On June 15, 2001, the Company completed a private placement of
$10,000,000 of 5.50% convertible subordinated notes due June 2003 together with
265,487 warrants. The notes are convertible into the Company's common stock at a
conversion price of $4.52 per share and the warrants have an exercise price of
$5.42 per share. The conversion price of $4.52 is subject to weighted average
anti-dilution provisions if the Company were to issue or sell its common stock
below the $4.52 conversion price. In accordance with APB Opinion No. 14, the
Company allocated the fair value of the proceeds to the debt and warrants
issued. The warrants were valued using the Black-Scholes valuation methodology.
The allocation was determined based upon the relative fair values of the two
securities at the time of issuance. In addition, the Company incurred debt
issuance costs that has been deferred and included in Deposits and other
long-term assets on the Balance Sheet. The Company will incur non-cash charges
to interest expense over the life of the note related to the amortization of the
fair value of the warrants and the deferred issuance costs. When considering the
amortization of the warrant value and deferred issuance costs, the effective
interest rate on this note payable is approximately 10.79%. At June 30, 2002,
the Company had $10,000,000 of these notes outstanding, net of $131,000 of
deferred warrant costs. In addition, unamortized deferred issuance costs were
$377,000 at June 30, 2002.
Under the current terms of the Company's convertible subordinated
notes, an event of default would have occurred when the Company's common stock
ceased to be listed on the Nasdaq National Market. Prior to an event of default
occurring, however, the Company secured a waiver of this listing requirement.
One of the conditions to this waiver is that the Company's common stock be
listed on the Nasdaq Small Cap Market. The Company is currently out of
compliance with the continuing listing standards of the Nasdaq Small Cap Market.
The Company is currently negotiating with the note holders and expects to
resolve this issue in the third quarter of 2002 and as a result may incur a
significant charge.
7. Shareholders Equity
During the six-months ended June 30, 2002, the Company received net
proceeds of approximately $190,000 from the exercise of stock options and
warrants.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In addition to historical facts or statements of current condition,
this report contains some forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
provide our current expectations or forecasts of future events. These may
include statements regarding anticipated scientific progress on our research
programs, development of potential pharmaceutical products, interpretation of
clinical results, prospects for regulatory approval, manufacturing development
and capabilities, market prospects for our products, sales and earnings
projections, and other statements regarding matters that are not historical
facts. You may identify some of these forward-looking statements by the use of
words in the statements such as "anticipate," "estimate," "expect," "project,"
"intend," "plan," "believe" or other words and terms of similar meaning. Our
performance and financial results could differ materially from those reflected
in these forward-looking statements due to general financial, economic,
regulatory and political conditions affecting the biotechnology and
pharmaceutical industries as well as more specific risks and uncertainties such
as those set forth in our report on form 10-K filed with the Securities and
Exchange Commission. Given these risks and uncertainties, any or all of these
forward-looking statements may prove to be incorrect. Therefore, you should not
rely on any such factors or forward-looking statements. Furthermore, we do not
intend (and we are not obligated) to update publicly any forward-looking
statements.
General
We are a biopharmaceutical company engaged in the research, development
and commercialization of products that may be used in the diagnosis and
treatment of cancer and autoimmune diseases. We pursue these objectives through
products and technology platforms consisting of Visicol(TM), IBStat(TM), the
FcReceptor Technology (Colirest(TM) and Hematrol(TM)) and the Thrombospondin
Technology.
We began generating sales revenue in January 2001 with the commercial
introduction of our lead product, Visicol(TM). During the quarter ended June 30,
2002, we launched a new Visicol(TM) formulation and IBStat(TM), our second
commercial product. Operations were previously funded primarily from the
proceeds of public and private placements of securities. We have incurred net
losses in each year since our inception, and expect to incur additional losses
for at least the remainder of 2002. Prospectively, we expect that losses will
decline each quarter over the next year and that profitability may be achieved
in 2003. At June 30, 2002, our accumulated deficit was approximately
$64,372,000.
Critical Accounting Policies and Practices
Management's Discussion and Analysis of Financial Condition and Results
of Operations discusses our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires that we make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, we evaluate judgments and estimates
made, including those related to stock options, revenue recognition,
inventories, income taxes, contingencies and litigation. We base our judgments
and estimates on historical experience and on various other factors that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We consider the following policies to be most critical in understanding
the more complex judgments that are involved in preparing our financial
statements and the uncertainties that could impact results of operations,
financial condition, and cash flows.
Stock Options. It is our policy, which is consistent with most public
company policies, to apply Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", to account for our stock
option plans rather than Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"). Had we applied SFAS
No. 123, our net loss for the three and six-months ended June 30, 2002 and 2001
would have been larger.
8
Revenue Recognition. We recognize product revenues when
our products are delivered to our customer's location. Product revenues are
recorded net of estimated allowances for discounts and returns. Estimated
discount and return rates are calculated based on actual experience and our
monitoring of distribution channels taking into account the expiration dating
and prescription trends of our products. Product discount and return rates are
periodically updated to reflect actual experience and changes to other factors
affecting future product discounts and returns.
Inventory. Our inventories are valued at the lower of cost or market,
determined on a first-in, first-out basis, and include the cost of raw
materials, manufacturing, distribution and royalties. Our inventories are
subject to expiration dating. We continually evaluate the carrying value of our
inventories and when factors indicate that impairment has occurred, either a
reserve is established against the inventories' carrying value or the
inventories are completely written off. Our opinion as to whether impairment has
occurred is based on inventory levels on hand in relation to forecasted product
demand and expiration dating. Although we make every effort to ensure the
accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand could have a significant impact on the carrying
value of our inventories and reported operating results.
Income Taxes. We have incurred significant losses to date and as a
result have generated sizeable federal and state tax net operating loss ("NOL")
carryforwards. Generally accepted accounting principles require that we record a
valuation allowance against the deferred tax asset associated with these NOL
carryforwards if it is more likely than not that the we will not be able to
utilize the NOL carryforwards to offset future taxes. Due to the size of the NOL
carryforwards in relation to historical prescription trends, we have not
recognized any of this net deferred tax asset. It is possible that we could be
profitable in the future at levels that could cause us to conclude that it is
more likely than not that the we will be able to realize all or a portion of the
NOL carryforwards. Upon reaching such a conclusion, we would immediately record
the estimated net realizable value of the deferred tax asset at that time and
would then begin to provide for income taxes at a rate equal to the our combined
federal and state effective rates, which we believe would approximate 40%.
Subsequent revisions to the estimated net realizable value of the deferred tax
asset could cause our provision for income taxes to vary significantly from
period to period.
Contingencies and Litigation. In the ordinary course of business, we
have entered into various contractual relationships with strategic corporate
partners, customers, universities, licensors, licensees, suppliers, vendors and
other parties. As such, we could be subject to litigation, claims or assessments
arising from any or all of these relationships. We account for contingencies
such as these in accordance with Statement of Financial Accounting Standards
("SFAS") No. 5, "Accounting for Contingencies". SFAS No. 5 requires us to record
an estimated loss contingency when information available prior to issuance of
our financial statements indicates that it is probable that an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated. Accounting
for contingencies arising from contractual or legal proceedings requires that we
use our best judgment in estimating an accrual related to such contingencies. As
additional information becomes known, such accrual for a loss contingency could
fluctuate, thereby creating variability in our reported results of operations
from period to period. Likewise, an actual loss arising from a loss contingency
which significantly exceeds the amount accrued for in our financial statements
could have a material adverse impact on our reported operating results for the
period in which such actual loss becomes known.
Results of Operations
We incurred losses of $1,555,000 and $4,332,000 or $0.04 and $0.12 per
share for the three and six-month periods ended June 30, 2002, as compared to
$3,201,000 and $6,080,000 or $0.09 and $0.18 per share for the three and
six-month periods ended June 30, 2001, respectively. The reduced loss per share
was driven by the combination of increased product sales and ongoing cost
control measures. We expect to incur losses for the remainder of the year as we
continue to introduce our newly formulated Visicol(TM) tablets and our second
commercial product, IBStat(TM).
Our gross profit was $1,503,000 and $2,195,000 for the three and
six-months ended June 30, 2002, as compared to $1,097,000 and $1,931,000 for the
same periods a year ago. Gross profit as a percentage of sales for product
revenue were 74% and 73% for the three and six-month periods ended June 30, 2002
as compared to 63% and 58% for the same periods a year ago. Gross profit and
gross profit as a percent of sales for product revenue are
9
expected to increase during 2002 as a result of increasing product revenues
along with decreased manufacturing and distribution costs.
We incurred research and development expenses of $870,000 and
$2,472,000 for the three and six-months ended June 30, 2002 as compared to
$1,045,000 and $1,939,000 for the same periods a year ago. The decrease for the
three-month period was the result of less development costs associated with the
new Visicol(TM) formulation and the internalized management of previously
outsourced functions related to the ongoing Colirest(TM) clinical trial. The
increase for the six-month period was mostly attributable to costs associated to
our ongoing Colirest(TM) clinical trial, partially offset by reductions in
development costs for Visicol(TM). We expect that research and development costs
will continue to decrease due to the scale back and internalization of certain
activities related to the Colirest(TM) clinical trial.
Sales and marketing costs of $1,350,000 and $2,380,000 were incurred
for the three and six-months ended June 30, 2002 as compared to $2,310,000 and
$4,227,000 for the same periods a year ago. Sales and marketing costs are for
initiatives related to the introduction of the new and old Visicol(TM)
formulations and the launch of IBStat(TM). During the second quarter 2002, the
Company began the process of hiring a sales force to complement the Visicol
sales efforts of Procter and Gamble Pharmaceuticals and detail IBStat to the
gastroenterology community. Additionally, the Company initiated renewed
marketing campaigns that include targeted direct to consumer advertising.
Decreased sales and marketing costs for the three and six-month periods compared
to the same periods a year ago are attributable to the fourth quarter 2001
termination of the Company's arrangement with a contract sales organization
partially offset by costs related to the establishment and maintenance of an
internal sales infrastructure.
In earlier public statements and filings we disclosed that a
significant charge for the transition to the new Visicol(TM) formulation could
become necessary to cover credits to customers for returns of the old
formulation and other product transition costs. While at this time we do not
have enough data to calculate what our total returns for the old formulation
will be, prescription trends and actual product returns to date suggest that our
current reserves may be adequate and that an additional charge to earnings may
not be incurred.
General and administrative expenses were $577,000 and $1,170,000 for
the three and six-months ended June 30, 2002 as compared to $969,000 and
$1,984,000 for the same periods a year ago. The decreases are the result of
significant payroll reductions, reduced fees paid to outside vendors and
consultants and reduced deferred compensation. Included in general and
administrative expenses is amortization of deferred compensation of $57,000 and
$587,000 for the six-months ended June 30, 2002 and 2001, respectively.
Decreased interest income compared to the same periods a year ago are
the result of significantly reduced interest rates and decreased average cash
and investment balances for the three and six-months ended June 30, 2002.
Increased interest expense compared to the same period a year ago are the result
of interest related to our June 2001 placement of $10,000,000 in convertible
subordinated notes.
Liquidity and Capital Resources
At June 30, 2002, we had cash and cash equivalents of $7,690,000, which
includes net proceeds from warrant and option exercises during the six-months
ended June 30, 2002 of $190,000.
We believe that our financial resources are adequate for our operations
until June 15, 2003, the maturity date of our convertible subordinated notes.
Our future short and long-term capital requirements will depend on numerous
factors, including our ability to refinance, extend and/or payoff our
convertible subordinated notes and marketplace acceptance of our new Visicol(TM)
formulation and IBStat(TM).
In addition to our outstanding convertible subordinated notes and
market acceptance of our commercial products, other factors which cannot be
quantified and many of which we cannot control will also impact our short and
long-term capital requirements, including: continued commercial costs of
Visicol(TM) and IBStat(TM), continued progress in our research and development
activities, progress with pre-clinical studies and clinical trials, prosecuting
and enforcing patent claims, technological and market developments, the ability
to establish product development
10
arrangements, the cost of manufacturing development, effective marketing
activities and arrangements, and licensing or acquisition activity.
We are currently conducting a clinical trial of Colirest(TM) in Crohn's
disease and continue to market and sell Visicol(TM) and IBStat(TM) to
distributors and drug store chains. During the next twelve-months, we expect to
spend approximately $500,000 on the Colirest(TM) study, and $5 million on
Visicol(TM) and IBStat(TM) sales and marketing costs. These activities will be
funded by our current cash balance and future product sales. If product sales
fall short of current expectations or other factors negatively impact our cash
balance, we may seek to obtain additional funds through equity or debt
financing, collaborative or other arrangements with corporate partners, and from
other sources. No assurance can be given that necessary additional financing
will be available on terms acceptable to us, if at all. If adequate additional
funds are not available when required, we may have to delay, scale-back or
eliminate certain of our research, drug discovery or development activities or
certain other aspects of our operations and our business will be materially and
adversely affected.
We anticipate that we will incur additional losses for at least the
remainder of 2002. Prospectively, we expect that losses will decline each
quarter over the next year and that profitability will be achieved in 2003. To
achieve profitability, we, alone or with others, must successfully develop and
commercialize our technologies and products, maintain required regulatory
compliance and successfully manufacture and market such technologies and
products. Our ability and the time required to reach profitability is highly
uncertain, and there can be no assurance that we will be able to achieve
profitability on a sustained basis, if at all.
In June 2001, we completed a private placement of $10,000,000 of 5.50%
convertible subordinated notes due June 2003 together with 265,487 warrants. The
notes are convertible into our common stock at a conversion price of $4.52 per
share and the warrants have an exercise price of $5.42 per share. The conversion
price of $4.52 is subject to weighted average anti-dilution provisions if we
were to issue or sell its common stock below the $4.52 conversion price.
Under the current terms of our convertible subordinated notes, an event
of default would have occurred when our common stock ceased to be listed on the
Nasdaq National Market. Prior to an event of default occurring, however, we
secured a waiver of this listing requirement. One of the conditions to this
waiver is that our common stock be listed on the Nasdaq Small Cap Market. We are
currently out of compliance with the continuing listing standards of the Nasdaq
Small Cap Market. We are currently negotiating with the note holders and expect
to resolve this issue in the third quarter of 2002 and as a result may incur a
significant charge. Our future short and long-term capital requirements are
highly dependent on our ability to restructure, refinance and/or redeem our
current outstanding convertible subordinated notes.
Research and Development Programs
We have three significant research and development projects relating
to: (i) Visicol(TM); (ii) the Fc Receptor Technology (which includes
Colirest(TM) and Hematrol(TM)); and (iii) the Thrombospondin Technology.
Visicol(TM). We have focused our Visicol(TM) research and development
on cleansing of the colon prior to colonoscopy. In addition, we are also
developing Visicol(TM) for cleansing of the colon prior to sigmoidoscopy and
treating constipation. The current status of these projects are as follows:
(i) for cleansing of the colon prior to colonoscopy, the United States Food and
Drug Administration, commonly known as the FDA, has approved both our New Drug
Application as well as our Supplemental New Drug Application; (ii) for cleansing
of the colon prior to sigmoidoscopy, we have completed a Phase I study; and
(iii) for treating constipation, we have completed a Phase I study. We are
presently marketing Visicol(TM) for cleansing of the colon prior to colonoscopy.
At this time, we do not intend to do any further clinical studies regarding to
use of Visicol(TM) for cleansing of the colon prior to sigmoidoscopy and
treating constipation. As of June 30, 2002, we have incurred total costs of
approximately $11,000,000 in connection with our Visicol(TM) research and
development. During the three months ended June 30, 2002, we incurred an
aggregate of $870,000 in research and development expenses, a de minimus amount
of which is attributable to Visicol(TM).
11
Fc Receptor Technology. We are developing Colirest(TM) for treatment of
IBD and Hematrol(TM) for treatment of idiopathic thrombocytopenic purpura or
ITP. With respect to Colirest(TM), we have completed a Phase II study of Crohn's
disease and a Phase II study of ulcerative colitis. In June 2001, we began a
Colirest(TM) Phase IIb study of Crohn's disease. We anticipate completion of the
studies and submission of a New Drug Application for Colirest(TM) to the FDA in
2004/2005. With respect to Hematrol(TM), we have completed a Phase II and a
single dose pharmacokinetic study. Our Phase III study of Hematrol(TM) is
presently on hold. In order to focus our efforts on gastrointestinal products,
we are currently considering sublicensing Hematrol(TM) to other pharmaceutical
companies that have a hematology focus. If this strategy is not successful, we
will consider resuming clinical development of Hematrol(TM). As of June 30,
2002, we have incurred total costs of approximately $6,400,000 in connection
with our Fc Receptor Technology research and development. During the three
months ended June 30, 2002, we incurred an aggregate of $870,000 in research and
development expenses, approximately $600,000 of which is attributable to the Fc
Receptor Technology.
Thrombospondin Technology. We are developing the Thrombospondin
Technology for prevention of metastatic cancer including but not limited to
breast, lung, prostate, pancreas and squamous cell cancer. We are in the
pre-clinical stage of our research and development relating to the
Thrombospondin Technology. We have identified a hexapeptide structure that
appears to prevent the spread of human tumors in animals by blocking the TSP-1
receptor. In addition, we have cloned the TSP-1 receptor, thus providing us with
chemical screening capability that did not previously exist. Preclinical testing
is to be conducted to determine if the pharmacokinetics and safety profile
warrant the introduction of this molecule into humans. In order to develop the
Thrombospondin Technology, we intend to explore corporate partnerships because
of the expense involved in developing an agent used to treat or prevent the
spread of cancer. Due to the early stage of development of the Thrombospondin
Technology, we are unable to estimate a completion date for research and
development of the Thrombospondin Technology. As of June 30, 2002, we have
incurred total costs of approximately $2,000,000 in connection with the
Thrombospondin Technology research and development. During the three months
ended June 30, 2002, we incurred an aggregate of $870,000 in research and
development expenses, a de minimus amount of which is attributable to the
Thrombospondin Technology.
Recently Issued Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued SFAS No,
146 "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses
significant issues regarding the recognition, measurement and reporting of costs
associated with exit and disposal activities, including restructuring
activities. SFAS No. 146 also addresses recognition of certain costs related to
terminating a contract that is not capital lease, costs to consolidate
facilities or relocate employees, and termination of benefits provided to
employees that are involuntarily terminated under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred compensation contract. The impact, if any, on the Company's financial
position or results of operations from adopting SFAS No. 146 has not been
determined.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
We are exposed to market risk associated with changes in interest rates
on our line of credit and certain investments. We do not manage the risk of
fluctuations in interest rates associated with the line of credit, as it is a
short-term borrowing with a maturity date in 2003. The interest rate on the line
of credit has fluctuated from 3.81% to 4.24% over the past six-months and the
outstanding balance at June 30, 2002 was approximately $2,402,000.
Typically, a substantial portion of our assets are investment grade
debt instruments such as direct obligations of the U.S. Treasury, securities of
federal agencies which carry the direct or implied guarantee of the U.S.
government and bank certificates of deposit. The market value of such
investments fluctuates with current market interest rates. In general, as rates
increase, the market value of a debt instrument would be expected to decrease.
The opposite is also true. To minimize such market risk, we have in the past
and, to the extent possible, will continue in the future to hold such debt
instruments to maturity at which time the debt instrument will be redeemed at
its stated or face value. Due to the short duration and nature of these
instruments, we do not believe that we have a material exposure to interest rate
risk related to our investment portfolio. At June 30, 2002, all of our
12
investments had matured and the proceeds from such maturities were held in cash
and cash equivalents, typically government backed money market funds.
We do not anticipate any material changes in our primary market risk
exposures in 2002. We do not hold or issue any derivatives.
13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's annual meeting of shareholders was held on May 20, 2002.
At this meeting, shareholders of the Company:
(i) Approved the election of six (6) directors.
The number of votes cast for, and withheld from, each nominee is set
forth below.
For Withheld
--- --------
Leonard S. Jacob, M.D., Ph.D. 30,419,923 1,279,721
J.R. LeShufy 30,963,330 736,314
Steven B. Ratoff 30,988,337 711,307
Thomas P. Stagnaro 30,982,672 716,972
Robert A. Vukovich, Ph.D. 30,985,172 714,472
Jerry A. Weisbach, Ph.D. 30,986,177 713,467
(ii) Approved an amendment to the InKine Pharmaceutical Company, Inc.
1999 Equity Compensation Plan increasing the maximum number shares of common
stock available for issuance from 2.500,000 to 4,000,000.
For Against Abstain
--- ------- -------
29,029,044 2,629,959 40,641
(iii) Ratified the election of KPMG, LLP as independent auditors of
the Company.
For Against Abstain
--- ------- -------
31,531,695 157,799 10,150
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 Chief Executive Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
14
(b) Reports on Form 8-K.
None.
15
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.
INKINE PHARMACEUTICAL
COMPANY, INC.
Date: August 14, 2002 By: /s/ Robert F. Apple
-------------------
Robert F. Apple
Chief Financial Officer, (Authorized Officer
and Principal Financial Officer)
16
Exhibits Index
99.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002