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NEOGENIX ONCOLOGY INC - 10-Q - : Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The statements regarding Neogenix Oncology, Inc. ("we," "our," "Neogenix" or the "Company") in this document that are not historical in nature, particularly those that utilize terminology such as "may," "will," "should," "likely," "expects," "intends," "anticipates," "estimates," "believes" or "plans" or comparable terminology, are forward-looking statements based on current expectations about future events, which we have derived from information currently available to us. These forward-looking statements involve known and unknown risks and uncertainties that may cause our results to be materially different from results implied by such forward-looking statements. These risks and uncertainties include, in no particular order, whether we will be able to: · obtain additional funding when needed or on terms reasonable or acceptable to the Company; · successfully complete our product development efforts, obtain FDA and other required regulatory approvals in a timely manner, manufacture our product candidates at an acceptable cost and with acceptable quality or market any approved products; · continue our relationship with our collaborative partners and other third-parties, including Selexis SA, Cytovance Biologics and Catalent Pharma Solutions LLC, on which we rely to adequately produce and test our therapeutic grade products; · successfully complete adequate and well-controlled clinical trials demonstrating, with substantial evidence, the efficacy and safety of our product candidates in the indications being studied; · develop commercially feasible products and services that remain competitive in light of the technological changes in our industry; · rely on contracted third parties and/or pharmaceutical partners for the manufacture of products in accordance with cGMP as prescribed by the FDA and other regulatory authorities and produce adequate supplies to meet future development and commercial requirements; · secure patents for our products and protect our trade secrets; · compete with companies in the medical technology field with substantially greater capital and other resources or greater experience in the manufacturing, marketing and distribution of products than us; · achieve market acceptance for our products with the medical community and consumer markets; · achieve a profitable level of operations or, if achieved, sustain profitability on an ongoing basis; · avoid costly patent litigation and product liability claims; and · successfully execute our business strategies, including evaluating and, where appropriate, entering into potential acquisitions of companies, assets or complementary technologies or strategic alliances. There are a number of additional important factors that could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, the factors set forth in "Item 1A. Risk Factors" in our Form 10-K for the year ended December 31, 2010, including any amendments thereto, and elsewhere, and any subsequent periodic or current reports filed by us with the SEC. In addition, any forward-looking statements represent our expectations only as of the day we filed this Quarterly Report with the SEC and should not be relied upon as representing our expectations as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change. The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Overview We are a development stage biotechnology company focused on developing and commercializing therapeutic and diagnostic products for the early detection and treatment of tumor specific cancers. The markets for diagnostic and therapeutic products for these cancers are substantial in size and growing, and the limitations of many current diagnostic and therapeutic products are widely recognized. Since our inception, we have devoted substantially all of our capital resources to the development of therapeutic and diagnostic monoclonal antibodies ("mAbs") targeted against both pancreatic and colorectal cancer. 11 -------------------------------------------------------------------------------- In 2008, we began our first Independent Review Board ("IRB") approved clinical study of a diagnostic product, using several of our mAbs, to detect pancreatic and colorectal cancers. In December 2009, we initiated a multi-center, FDA-approved Phase I clinical trial for our product candidate NEO-101, (also referred to as Ensituximab, or NPC-1C), our lead therapeutic product candidate for advanced pancreatic and colorectal cancer, at Johns Hopkins University Hospital ("JHU") and North Shore University Hospital, and in 2010 we initiated the same Phase I clinical trial at Duke University Medical Center. The current trials continue at JHU and Duke University Medical Center. In October 2010, the FDA granted orphan drug designation to NEO-101 for the treatment of pancreatic cancer. We have generated no product revenues since our inception. We have never been profitable and as of June 30, 2011 we have accumulated a deficit of approximately $108.8 million (this includes equity based expenses). We incurred net losses of approximately $6.1 million and $12.4 million in the three- and six-month periods ended June 30, 2011, respectively, and we expect to incur significant and increasing net losses for the next few years as we advance our products from discovery through preclinical studies to clinical trials. We have funded our business principally with the net proceeds from sales of our common stock in private placement transactions, and with government grants. We will need significant additional financing to support our planned operating activities. We devote significant time and effort to raising capital, and will continue to seek to fund our operations through public or private equity or debt financings or other sources, such as strategic partnerships, public funding and product licensing agreements; in June 2011 we engaged an investment banker to help us with raising institutional funding. Adequate additional funding may not be available to us on acceptable terms, or at all. Our condensed financial statements included elsewhere herein have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. The propriety of using the going concern basis is dependent upon, among other things, the achievement of future profitable operations and the ability to generate sufficient cash from operations, public and private financings and other funding sources to meet the Company's obligations. Management continues to devote substantial time to raise cash through the sale of common stock, and believes that such financing will support the Company through June 30, 2012. Recent Events Management Team: During 2011, we made several organizational changes, including a realignment of management and the appointment of several new key legal and financial advisors with industry expertise to support our legal and public reporting and compliance requirements. Our management changes have included the retirement of our chief financial officer, the hiring of a new chief operating officer (who is now also acting as our chief accounting officer), along with the departure of other members of management. We engaged two financial firms to assist us with our capital raising efforts and our financial accounting and reporting requirements. We also engaged two new outside legal firms to help us prosecute, maintain and protect our intellectual property and to provide transactional and securities counsel. Our realigned management team is focused on assessing our operating plans, increasing operating efficiencies and allocating resources appropriately to allow us to meet our research and commercial objectives on time and within reasonable budgets. Financing Activities: Pursuant to a private offering to accredited investors, in 2011, we sold 157,967 shares of our common stock at a per share price of $12.50, generating net proceeds of $1,824,173. The proceeds are being used to fund clinical trials, to develop diagnostic products and to fund our ongoing research and development programs, patent expenses, operating expense and to support general working capital needs. In June 2011, we engaged an investment banker to explore the possibility of raising additional capital through one or more private placements of our common stock, debt or other equity-linked securities. The agreement provides for the issuance of common stock and stock purchase warrants, a retainer fee and other contingent fees as is customary based on success of their investment raising efforts. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with U.S. GAAP 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 of the financial statements and the reported amounts of revenue and expenses during the reported period. Such estimates include the selection of assumptions underlying the calculation of the fair value of options and warrants, and the useful lives of fixed assets. Actual results could differ from those estimates. At this stage of our development, we believe that the assumptions, judgments and estimates involved in the accounting for stock-based compensation and research and development expenses have the greatest potential impact on our financial statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates, so we consider these to be critical accounting policies. 12 -------------------------------------------------------------------------------- Stock-Based Compensation. We account for stock-based compensation at fair value; accordingly we expense the estimated fair value of stock-based awards made in exchange for employee services over the requisite service period. Stock-based compensation cost for stock options is determined at the grant date using an option pricing model. The value of the award that is ultimately expected to vest is recognized as expense on a straight line basis over the employee's requisite service period. Determining the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatility, forfeiture rates, and expected terms. Since our stock is not traded on a public exchange, and there is limited historical data on the price of our shares, we have identified several similar companies which we use to estimate our expected volatility, based on historical and implied volatilities of these companies' common stock. The risk-free interest rates are based on the U.S. Treasury securities constant maturity rate that corresponds to the expected life of our stock-based awards. The expected life represents the average time that awards that vest are expected to be outstanding based on the vesting provisions and our historical exercise, cancellation and expiration patterns. We estimate pre-vesting forfeitures when recognizing stock-based compensation expense based on historical rates and forward-looking factors. Research and Development Expenses. Research and development expenses include personnel and facility-related expenses, outside contracted services, manufacturing and process development costs, research costs, costs of licenses and other consulting services. Research and development expenses also consist of costs incurred for proprietary and collaborative research and development for pre-clinical sponsored research. Research and development costs are expensed as incurred. We enter into agreements with third parties for research and development activities that may be fixed fee or fee for service contracts. At each balance sheet date, we review purchase commitments and accrue expenses based on factors such as estimates of work performed, costs incurred and other events. Accrued research costs are subject to revisions as projects progress to completion; such revisions are recorded in the period in which the facts that give rise to the revision become known. There is significant judgment involved in estimating the progress of research and development activities. Results of Operations - For the Three months ended June 30, 2011 and June 30, 2010 Revenue To date, we have not generated any revenue from product sales or operations. In the future, we may generate revenue from a combination of product sales, license fees, milestone and other payments or royalties resulting from the exclusive territorial rights for and the sales of products sold under licenses of our intellectual property; we do not expect to generate revenue from product sales or royalties until 2012 at the earliest. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected. Research and Development Expenses Research and development expenses consist of costs incurred in connection with the development of our monoclonal antibodies. These expenses consist primarily of: · employee-related expenses, which include salaries and benefits; · expenses incurred under agreements with contract research organizations, consultants and investigative sites that conduct our clinical trials and a substantial portion of our preclinical studies; · the cost of acquiring and manufacturing clinical trial materials; · the cost of preclinical studies and clinical trials; · facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, and depreciation of fixed assets; · license fees for any milestone payments related to licensed products and technology; · stock-based compensation expense to employees and non-employees involved in any research and development related activities; and · the cost associated with non-clinical activities and regulatory approvals. 13-------------------------------------------------------------------------------- We expense research and development costs as incurred, and we have incurred $37.5 million of research and development expenses since our inception. Conducting a significant amount of research and development is central to our business model. Research and development expenses have historically been focused exclusively on the development of NEO-101. Starting in 2010, minor research and development costs have been incurred for preliminary assessment of two other monoclonal antibodies, NEO-201 (formerly known as h16c3) and NEO-301 (formerly known as 31.1). For the three months ended June 30, 2011 and 2010, research and development expenses totaled approximately $2.2 million and $2.0 million, respectively. The increase in research and development expenses is attributable to an increase in external research and development expenses, partially offset by a decrease in salary, bonus and stock-based compensation expense (as a result of staff reductions). We anticipate completing our Phase 2 studies by the end of 2012. The timing of the completion is dependent upon many factors, including, but not limited to regulatory guidance and the expected completion may even be accelerated. During this period we will seek strategic partnership opportunities for the further development and commercialization of our first drug candidate (NEO-101). The form of such partnership opportunities may include any combination of: direct investment by the institutional sector that enables the Company to take the product through Phase 2 and/or Phase 3; and/or a licensing partnership that enables a domestic or multinational biotechnology or pharmaceutical company to complete development of NEO-101 and launch the product domestically or globally. In the case of the latter partnership, the Company would accelerate the proof of concept and clinical studies for its other candidates (NEO 201 and NEO 301). The company estimates that it will require an additional $50 million to complete Phase 2 and Phase 3 studies for the Pancreatic Cancer indication. Unforeseen challenges could create delays and such delays could result in additional costs beyond what we have budgeted and could cause difficulty raising additional capital. Without adequate capital we will not be able to complete development of NEO-101 While the costs incurred for the three months ended June 30, 2011 and 2010 for NEO-201 and NEO-301 are not significant we anticipate that the costs relating to NEO-201 and NEO-301 will increase as we proceed with Phase 2 trials for NEO 101 and begin Independent New Drug ("IND") studies and human trials for NEO 201. General and Administrative Expenses General and administrative expenses consists primarily of salaries and related expenses for personnel in administrative, legal, finance and business development. Other costs include advisory fees for legal (securities law and intellectual property), accounting and auditors expenses and subject matter experts in regulatory affairs. Other expenses are related to travel, administrative and other support expenses. For the three months ended June 30, 2011 and 2010, general and administrative expenses totaled $4.0 million and $3.3 million, respectively. The increase in general and administrative costs is primarily due to incremental stock-based compensation expenses of approximately $1.6 million as a result of certain stock options being returned by certain executives and officers, partially offset by decreases in legal expenses, salaries (as a result of staff reductions) and travel-related expenses. Other Income Other income consists primarily of interest income earned on funds invested in bank certificates of deposit. Interest income for each of the three months ended June 30, 2011 and 2010 was approximately $0.06 million. Results of Operations - For the Six months ended June 30, 2011 and June 30, 2010 Revenue To date, we have not generated any revenue from product sales or operations. 14 -------------------------------------------------------------------------------- Research and Development Expenses For the six months ended June 30, 2011 and 2010, research and development expenses totaled $4.7 million and $4.4 million, respectively. The increase in research and development expenses is attributable to incremental stock-based compensation expenses of approximately $0.9 million as a result of the modification of certain stock options in the first quarter of 2011, partially offset by a reduction in external research and development expenses of approximately $0.3 and in compensation of approximately $0.3 million. General and Administrative Expenses For the six months ended June 30, 2011 and 2010, general and administrative expenses totaled $8.4 million and $7.1 million, respectively. The increase in general and administrative costs is primarily due to a $1.8 million of incremental stock-based compensation expenses as a result of modifications to and the return of common stock options, partially offset by decreases in legal expenses, salaries (as a result of staff reductions) and travel-related expenses. Other Income Other income consists of interest income earned on funds invested in bank certificates of deposit and certain government research grants. Interest income for each of the six months ended June 30, 2011 and 2010 was $0.1 million. Other income of $0.5 million for the six months ended June 30, 2011 (none during the same period in 2010), consisted primarily of a U.S. government research grant. Liquidity and Capital Resources We have incurred operating losses since our inception and historically have financed our operations principally with the net proceeds from sales of our common stock in private placement transactions. We expect to continue to experience net operating losses for the foreseeable future. We anticipate raising additional capital within the next twelve months from investors, although we can provide no assurance whether additional funds will be available on terms acceptable to us, if at all. Our primary cash requirements are to fund our research and development and clinical programs, seek regulatory approvals, prosecute, defend and enforce any patent claims and other intellectual property rights, fund general and administrative expenses and meet our contractual obligations. Our cash requirements could change materially as a result of our research and development and clinical programs, licensing activities or other corporate developments. During the first six months of 2011, we sold 157,967 shares of common stock at $12.50 per share to accredited investors. Since our inception, we have raised net proceeds of approximately $51 million from the sale of our common stock. We maintain four lines of credit with three commercial banks, which are secured against certificates of deposit in the same amounts. We have a $5,000,000 line of credit which expires in February 2012, with an interest rate at the higher of the U.S. Prime Rate (3.25% at June 30, 2011) or 4%. We have a $100,000 line of credit which expires in July 2014, with interest at the U.S. Prime Rate. Also, we have two lines of credit with available limits of $2,000,000 and $125,000, respectively, expiring in June 2012; both have interest at the higher of the U.S. Prime Rate plus 1% or 6.5%. As of June 30, 2011, we had borrowed $1,450,000 on the $2,000,000 line of credit. The expiration of any of these lines of credit will not have an impact on our operations or cash flows. In January 2011, we received a U.S. government grant under the Qualifying Therapeutic Discovery Project ("QTDP") Program totaling $488,964. In February 2011, we received a $100,000 grant from the Montgomery County (Maryland) Department of Economic Development to assist with our move to new office space in Montgomery County. If we meet certain conditions relating to the number of employees located in Montgomery County during the next five years, the repayment of the grant will be forgiven. The $100,000 obligation is included in other long-term liabilities until the conditions for forgiveness of the loan have been met. At June 30, 2011, we had cash and cash equivalents and investments (net of borrowing under our lines of credit, which are collateralized by our investments), all of which are liquid, of approximately $7.9 million. We expect that this amount plus any additional amounts raised as a result of on-going capital raising efforts will be sufficient to fund our normal operating needs through June 30, 2012 . In June 2011, we engaged an investment banker to explore the possibility of raising additional capital through one or more private placements of our common stock, debt or other equity-linked securities. The agreement provides for the issuance of common stock and stock purchase warrants, a retainer fee and other contingent fees as is customary based on success of their investment raising efforts. If we are unable to raise additional funds, we believe that we would be able to reduce the level of our spending so that these funds would be sufficient to fund our operating needs through June 30, 2012 Our business will require additional investment that we have not yet secured. The amount of funds that we will need and the timing of any such investment will be determined by many factors, some of which are beyond our control. These factors include, but are not limited to: · the results of our Phase I clinical trial of our lead therapeutic product candidate and our clinical study of a diagnostic product; 15-------------------------------------------------------------------------------- · the start of additional therapeutic clinical trial programs; · our ability to successfully develop, obtain regulatory approval for, introduce, market and sell new products; · the level of our general and administrative expenses and research and development expenses; · the extent to which we enter into, maintain and derive revenue from licensing agreements; · the level of our expenses associated with the audit of our financial statements or with compliance with other corporate governance and regulatory developments or initiatives; and · regulatory changes and technological developments in our markets. General market conditions or other factors may not support capital raising transactions. If we are unable to obtain sufficient additional funds on a timely basis, we may need to delay, scale back or eliminate certain of our research and development programs or license to third parties products or technologies that we would otherwise undertake or retain ourselves, and there could be a material adverse effect on our financial condition or results of operations. Operating Activities Net cash used in operating activities for the six months ended June 30, 2011 was approximately $4.2 million, compared to approximately $7.1 million, for the same period in 2010. Our cash used in operating activities for the six months ended June 30, 2011 consisted mainly of our net loss of approximately $12.4 million, offset by non-cash stock-based compensation of approximately $6.8 million. Cash used in operating activities for the comparable 2010 period consisted mainly of our net loss of approximately $11.3 million, offset by non-cash stock-based compensation of approximately $4.1 million. The decrease in cash used in operations in 2011 as compared to 2010 primarily was a result of management's focused efforts on increasing operating efficiencies and allocating resources appropriately. As a development stage company, we continue to incur significant operating losses as research and development activities progress. Unless and until we obtain regulatory approval for our cancer diagnostic products, we expect to continue to incur increasing negative cash flows from operating activities. Investing Activities Net cash provided by investing activities for the six months ended June 30, 2011 was approximately $0.1 million, compared to cash used of approximately $0.4 million for the same period in 2010. Our cash provided by investing activities was primarily due to sales of certificates of deposit. Financing Activities Net cash provided by financing activities for the six months ended June 30, 2011 was approximately $2.5 million, compared to approximately $3.7 million, for the same period in 2010, which primarily represents net proceeds from the sale of common stock, net advances on our line of credit and proceeds for exercise of employee stock options. Off-Balance Sheet Arrangements We currently have no off-balance sheet arrangements. |