U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
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[ ] 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 0-27282
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ATLANTIC TECHNOLOGY VENTURES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 36-3898269
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 Fifth Avenue, Suite 5507, New York, New York 10118
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(Address of principal executive offices)
(212) 267-2503
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(Issuer's telephone number)
150 Broadway, Suite 1110, New York, New York 10038
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(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
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Number of shares of common stock outstanding as of August 12, 2002: 16,989,596
Transitional Small Business Disclosure Format (check one): Yes No X
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INDEX
Page
PART I-- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (unaudited)
as of June 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations (unaudited)
for the three and six months ended June 30, 2002 and 2001,
and the period from July 13, 1993 (inception) to June 30, 2002 4
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2002 and 2001, and the
period from July 13, 1993 (inception) to June 30, 2002 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
PART II-- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 24
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2002 2001
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 445,375 1,591,761
Accounts receivable 501,667 --
Prepaid expenses 5,000 38,593
------------ ------------
Total current assets 952,042 1,630,354
Property and equipment, net 83,756 105,153
Other assets 22,337 22,838
------------ ------------
Total assets $ 1,058,135 1,758,345
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 427,737 508,613
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 10,000,000
shares; 1,375,000 shares designated as Series A
convertible preferred stock -- --
Series A convertible preferred stock, $.001 par value
Authorized 1,375,000 shares; 356,039 and 346,357 shares issued and
outstanding at June 30, 2002 and December 31, 2001, respectively
(liquidation preference aggregating $4,628,507 and $4,502,641 at
June 30, 2002 and December 31, 2001, respectively) 356 346
Convertible preferred stock warrants, 112,896 issued and outstanding at
June 30, 2002 and December 31, 2001 520,263 520,263
Common stock, $.001 par value. Authorized 50,000,000
shares; 16,989,596 and 15,965,359 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively 16,990 15,965
Common stock subscribed. 182 shares at June 30, 2002
and December 31, 2001 -- --
Additional paid-in capital 27,411,577 27,442,106
Deficit accumulated during development stage (27,318,246) (26,728,406)
------------ ------------
630,940 1,250,274
Less common stock subscriptions receivable (218) (218)
Less treasury stock, at cost (324) (324)
------------ ------------
Total stockholders' equity 630,398 1,249,732
------------ ------------
Total liabilities and stockholders' equity $ 1,058,135 1,758,345
============ ============
See accompanying notes to unaudited consolidated financial statements.
3
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
Cumulative
period from
July 13, 1993
(inception) to
Three months ended June 30, Six months ended June 30, June 30,
-----------------------------------------------------------------
2002 2001 2002 2001 2002
-------------- ------------- -------------- -------------- ----------------
Revenues:
Development revenue $ -- $ -- $ -- $ 2,461,922 $ 8,713,720
License revenue 500,000 -- 500,000 -- 3,000,000
Grant revenue -- -- -- 250,000 616,659
-------------- ------------- -------------- -------------- ----------------
Total revenues 500,000 -- 500,000 2,711,922 12,330,379
-------------- ------------- -------------- -------------- ----------------
Costs and expenses:
Cost of development revenue -- -- -- 2,082,568 7,084,006
Research and development 139,935 295,316 341,777 602,083 10,733,403
Acquired in-process research and
development -- -- -- -- 2,653,382
General and administrative 333,114 1,155,325 762,337 1,837,273 19,436,970
Compensation expense (benefit)
relating to stock warrants
(general and administrative), net (4,376) 22,695 (5,845) 34,666 1,093,631
License fees -- -- -- -- 173,500
-------------- ------------- -------------- -------------- ----------------
Total operating expenses 468,673 1,473,336 1,098,269 4,556,590 41,174,892
-------------- ------------- -------------- -------------- ----------------
Operating income (loss) 31,327 (1,473,336) (598,269) (1,844,668) (28,844,513)
Other (income) expense:
Interest and other income (2,907) (14,334) (8,429) (34,352) (1,301,575)
(Gain) loss on sale of Optex assets -- 240,000 -- (2,569,451) (2,569,451)
Loss on sale of Gemini assets -- 334,408 -- 334,408 334,408
Interest expense -- -- -- -- 625,575
Equity in loss of affiliate -- 17,963 -- 21,684 146,618
Distribution to minority shareholders -- 69,760 -- 837,274 837,274
-------------- ------------- -------------- -------------- ----------------
Total other (income) expense (2,907) 647,797 (8,429) (1,410,437) (1,927,151)
-------------- ------------- -------------- -------------- ----------------
Net income (loss) $ 34,234 $(2,121,133) $ (589,840) $ (434,231) $ (26,917,362)
-------------- ------------- -------------- -------------- ----------------
Imputed convertible preferred stock
dividend -- -- -- 600,000 5,931,555
Dividend paid upon repurchase of Series B -- -- -- 167,127 400,884
Preferred stock dividend issued in
preferred shares -- -- 39,162 64,144 1,429,674
-------------- ------------- -------------- -------------- ----------------
Net income (loss) applicable to common
shares $ 34,234 $(2,121,133) $ (629,002) $ (1,265,502) $ (34,679,475)
============== ============= ============== ============== ================
Net income (loss) per common share:
Basic $ 0.00 $ (0.32) $ (0.04) $ (0.19)
============== ============= ============== ==============
Diluted $ 0.00 $ (0.32) $ (0.04) $ (0.19)
============== ============= ============== ==============
Weighted average shares of common stock
outstanding:
Basic 16,965,763 6,608,751 16,929,568 6,515,753
============== ============= ============== ==============
Diluted 19,888,843 6,608,751 16,929,568 6,515,753
============== ============= ============== ==============
See accompanying notes to unaudited consolidated financial statements.
4
ATLANTIC TECHNOLOGY VENTURES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
Cumulative
period from
July 13, 1993
(inception) to
Six months endec June 30,
-----------------------------------------
2002 2001 2002
----------- ----------- -----------
Cash flows from operating activities:
Net loss $ (589,840) (434,231) (27,541,436)
Adjustments to reconcile net loss to
net cash used in operating activities:
Acquired in-process research and
development -- -- 1,800,000
Expense relating to issuance
of common stock and warrants 13,500 444,000 799,802
Expense relating to the issuance of options -- -- 81,952
Expense related to Channel merger -- -- 657,900
Change in equity of affiliate -- 21,684 146,618
Compensation expense (benefit) relating to
stock options and warrants (5,845) 34,666 1,300,207
Discount on notes payable - bridge
financing -- -- 300,000
Depreciation 24,087 43,911 608,029
Gain on sale of Optex assets -- (2,569,451) (2,569,451)
Distribution to Optex minority shareholders -- 837,274 837,274
Loss on sale of Gemini assets -- 334,408 334,408
Loss on disposal of furniture and equipment -- -- 73,387
Changes in assets and liabilities:
(Increase) decrease in accounts (501,667) 192,997 (501,667)
receivable
Decrease in prepaid expenses 33,593 12,784 13,519
Decrease in deferred revenue -- (1,294,615) --
Decrease in accrued expenses (80,876) (706,118) (223,328)
Increase (decrease) in accrued interest -- -- 172,305
Decrease (increase) in other assets 501 (19,937) (22,337)
----------- ----------- -----------
Net cash used in operating activities (1,106,547) (3,102,628) (23,732,818)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of furniture and equipment (2,690) (101,834) (924,021)
Investment in affiliate -- -- (146,618)
Proceeds from sale of Optex assets -- 3,000,000 3,000,000
Proceeds from sale of furniture and equipment -- -- 6,100
----------- ----------- -----------
Net cash provided by (used in)
investing activities (2,690) 2,898,166 1,935,461
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of warrants -- -- 5,500
Proceeds from exercise of stock options -- -- 397,098
Proceeds from issuance of demand notes payable -- -- 2,395,000
Repayment of demand notes payable -- -- (125,000)
Proceeds from the issuance of notes payable -
bridge financing -- -- 1,200,000
Proceeds from issuance of warrants -- -- 300,000
Repayment of notes payable - bridge financing -- -- (1,500,000)
Repurchase of common stock -- -- (324)
Preferred stock dividend paid (512) (577) (2,329)
Net proceeds from the issuance of common stock (36,637) -- 9,412,568
Proceeds from issuance of convertible
preferred stock -- -- 11,441,672
Repurchase of convertible preferred stock -- (617,067) (1,128,875)
Distribution to Optex minority shareholders -- (811,114) (811,114)
----------- ----------- -----------
Net cash provided by (used in)
financing activities (37,149) (1,428,758) 21,584,196
----------- ----------- -----------
Net decrease in cash and cash (1,146,386) (1,633,220) (213,161)
equivalents
Cash and cash equivalents at beginning of period 1,591,761 2,663,583 --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 445,375 1,030,363 (213,161)
=========== =========== ===========
Supplemental disclosure of noncash financing activities:
Issuance of common stock in exchange for
common stock subscriptions $ -- -- 7,027
Conversion of demand notes payable and the related
accrued interest to common stock -- -- 2,442,304
Cashless exercise of preferred warrants -- -- 49,880
Conversion of preferred to common stock 40 409 2,929
Preferred stock dividend issued in shares 39,162 64,144 1,311,653
=========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
ATLANTIC TECHNOLOGY VENTURES, INC. and SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2002
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. 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 consolidated financial statements reflect all adjustments,
consisting of only normal recurring adjustments, considered necessary for fair
presentation. Interim operating results are not necessarily indicative of
results that may be expected for the year ending December 31, 2002 or for any
subsequent period. These consolidated financial statements should be read in
conjunction with the Annual Report on Form 10-KSB, as amended, of Atlantic
Technology Ventures, Inc. and its subsidiaries ("Atlantic") as of and for the
year ended December 31, 2001.
(2) LIQUIDITY
Atlantic has reported net losses of $1,734,945, $5,802,478, and
$2,446,515 for the years ended December 31, 2001, 2000 and 1999, respectively.
Atlantic has reported a net loss of $589,840 for the six months ended June 30,
2002. The loss from date of inception, July 13, 1993, to June 30, 2002 amounts
to $26,917,362. Also, Atlantic has $445,375 in cash and cash equivalents and
$501,667 in accounts receivable as of June 30, 2002 being received in cash on
July 8, 2002. Atlantic's cash reserves are primarily the result of a private
placement of its common stock in December 2001. In addition, on June 28, 2002,
Atlantic licensed the exclusive worldwide rights to the CT-3 compound to Indevus
Pharmaceuticals, Inc. As a result of this agreement, Atlantic received a
licensing fee of $500,000, which is included in accounts receivable at June 30,
2002 and was received on July 8, 2002. Aside from this, Atlantic currently has
no revenue-generating activities. Atlantic anticipates that its current
resources will be sufficient to finance for the next several months its
currently anticipated needs for operating and capital expenditures. Atlantic
plans to achieve this by continuing to reduce expenses, including by means of
voluntary salary deferrals. As a result of these changes, Atlantic expects that
its average monthly cash outlay will be approximately $130,000. Atlantic does
not currently have any committed sources of financing, and due to the trading
price of its common stock it is not currently able to access funding under its
agreement with Fusion Capital Fund II, LLC. These factors raise substantial
doubt about its ability to continue as a going concern. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts or
classification of liabilities which might result from the outcome of this
uncertainty.
Atlantic's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances and its ability to
realize the full potential of its technology in development. As stated above, in
June 2002, Atlantic licensed the rights to the CT-3 compound to Indevus
Pharmaceuticals, Inc. in exchange for, among other things, a licensing fee of
$500,000 being received in cash on July 8, 2002. During December 2001, Atlantic
received net proceeds of approximately $1,848,000 from the private placement of
securities with various individual investors and $100,000 from Fusion Capital.
During the second quarter of 2002, Fusion also purchased 10,000 shares of
Atlantic common stock for $1,667. Additional funds are currently not available
on acceptable terms and may not become available, and there can be no assurance
that any additional funding that Atlantic does obtain will be sufficient to meet
Atlantic's needs in the short and long term. To date, a significant portion of
Atlantic's financing has been through private placements of common stock and
warrants, the issuance of common stock for stock options and warrants exercised,
debt financing and the licensing of its technologies. Until Atlantic's
operations generate significant revenues, Atlantic will continue to fund
operations from cash on hand and through the sources of capital previously
described.
Atlantic's common stock was delisted from the Nasdaq SmallCap Market
effective at the close of business August 23, 2001 for failing to meet the
minimum-bid-price requirements set forth in the NASD Marketplace Rules. As of
August 23, 2001, Atlantic's common stock trades on the Over-the-Counter Bulletin
Board under the symbol "ATLC.OB". Delisting of Atlantic's common stock from
Nasdaq could have a material adverse effect on its ability to raise additional
capital, its stockholders' liquidity and the price of its common stock.
6
(3) COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is calculated by dividing net
income (loss) applicable to common shares by the weighted-average number of
common shares outstanding for the period plus contingently issuable shares for
little or no consideration. Diluted net income (loss) per common share for the
three months ended June 30, 2002 is calculated by dividing net income (loss)
applicable to common shares by the weighted-average common shares outstanding
for the period plus 2,923,080 common stock equivalents from assumed conversions
of the Series A preferred stock. Assumed exercise of stock options and warrants
were excluded since their effect is antidilutive. Diluted net loss per common
share for the three months ended June 30, 2001 and the six-month periods ended
June 30, 2002 and 2001, respectively equals basic net loss per common share,
since common stock equivalents from stock options, stock warrants, stock
subscriptions and convertible preferred stock would have an anti dilutive effect
because Atlantic incurred a net loss for these periods. The common stock
equivalents from stock options, stock warrants, stock subscriptions, and
convertible preferred stock which have not been included in the diluted
calculations since their effect is antidilutive were 17,511,305 for the six
months ended June 30, 2002 and 3,793,037 for the six months ended June 30, 2001.
(4) INCOME TAXES
Atlantic incurred a net loss for the six months ended June 30, 2002. In
addition, Atlantic does not expect to generate book income for the year ended
December 31, 2002. Therefore, no income taxes have been reflected for the three-
and six-month periods ended June 30, 2002.
(5) PREFERRED STOCK DIVIDEND
On February 7, 2002 and January 16, 2001, Atlantic's board of directors
declared a payment-in-kind dividend of 0.065 of a share of Series A convertible
preferred stock for each share of Series A convertible preferred stock held as
of a specified record date. The estimated fair value of these dividends of
$39,162 and $64,144 was included in Atlantic's calculation of net income (loss)
per common share for the six month periods ended June 30, 2002 and 2001,
respectively.
(6) ISSUANCE OF STOCK, STOCK OPTIONS AND WARRANTS
On March 8, 2001, Atlantic entered into an agreement with The Investor
Relations Group, Inc. ("IRG") under which IRG will provide Atlantic investor
relations services. Pursuant to this agreement, Atlantic issued to Dian Griesel,
the principal of IRG, warrants to purchase 120,000 shares of its common stock at
an exercise price of $0.875 per share and agreed to pay IRG $7,500 per month.
These warrants vest monthly in 5,000 share increments over a 24-month period. As
part of its effort to reduce expenses, Atlantic concluded the agreement with IRG
as of May 31, 2002 and therefore, the 45,000 unvested warrants have terminated.
In addition, in lieu of paying $15,000 for services rendered in April and May
2002, IRG agreed to accept 75,000 common shares. The estimated fair value of
these shares of $13,500 was recorded as a general and administrative expense
during the second quarter of 2002. In addition, pursuant to EITF Issue No.
96-18, "Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services,"
Atlantic recorded compensation expense of $22,695 and $34,666 for the three- and
six-month periods ended June 30, 2001 relating to the original issuance of the
stock warrants to purchase 120,000 shares. As a result of a decline in
Atlantic's common stock price during the three- and six-month periods ended June
30, 2002 and the termination of 45,000 warrants, the cumulative expense
associated with these warrants was reduced. The reduction in the estimated fair
value of the warrants previously recorded and the current period expense
resulted in a net reversal of compensation expense of $4,376 and $5,845, which
reversal is recorded as a benefit during the three- and six-month periods ended
June 30, 2002.
Compensation for these warrants relates to investor relations services
and represents a general and administrative expense (benefit).
During the six months ended June 30, 2002, Atlantic granted employees
an aggregate of 2,000,000 options outside of the Atlantic Pharmaceuticals, Inc.
1995 Stock Option Plan. Of these options, 475,000 options represent the annual
issuance of stock options to Atlantic employees on terms similar to those of
prior year. They vest 25% upon issuance and the remaining options vest in 25%
7
increments on an annual basis. In addition, 950,000 of these options were issued
as incentive options and will vest upon the earlier of the achievement of
certain milestones by Atlantic or five years. The remaining 575,000 options were
issued and fully vested in March 2002 as part of voluntary revisions to
compensation arrangements with certain employees which principally resulted in
the employees deferring a significant portion of their salary. This deferred
salary is payable on the earlier of Atlantic's discretion, the employee's
termination, and, in certain cases, at the conclusion of the employee's contract
and as such Atlantic continues to accrue for those salary costs. The 2,000,000
options were granted at the stock price on the day of issuance, and are
exercisable for a period of ten years regardless of whether the grantee
continues to be employed by Atlantic.
(7) REDEEMABLE SERIES B PREFERRED SHARES
As described further in Atlantic's Form 10-KSB for the year ended
December 31, 2001, Atlantic entered into a convertible preferred stock and
warrants purchase agreement (the "Purchase Agreement"), with BH Capital
Investments, L.P. and Excalibur Limited Partnership (together, the "Investors"),
for the issuance of Atlantic's Series B convertible preferred stock and
warrants.
Pursuant to Atlantic's subsequent renegotiations with the Investors,
the conversion price per share of the Series B preferred stock on any given day
was amended to be the lower of (1) $1.00 or (2) 90% of the average of the two
lowest closing bid prices on the principal market of the common stock out of the
fifteen trading days immediately prior to conversion. The change in conversion
price upon the renegotiations on January 9, 2001 resulted in a difference
between the conversion price of the Series B preferred stock and the market
price of the common stock on the effective date of the renegotiation. This
amount, estimated at $600,000, was recorded as an imputed preferred-stock
dividend within equity and is deducted from net income (loss) to arrive at net
income (loss) applicable to common shares during the six month period ended June
30, 2001.
On January 19, 2001, 41,380 shares of Series B preferred stock were
converted by the Investors into 236,422 shares of Atlantic's common stock. On
March 9, 2001, Atlantic and the Investors entered into a second stock repurchase
agreement pursuant to which Atlantic repurchased from the Investors, for an
aggregate purchase price of $617,067, all 165,518 shares of Atlantic's Series B
preferred stock held by the Investors on March 9, 2001. The carrying amount of
the 165,518 shares was equal to $480,000; therefore the amount in excess of the
carrying amount, plus the estimated fair value of the warrants retained by the
Investors, which equals $167,127, was recorded as a dividend upon repurchase of
shares of Series B preferred stock and is deducted from net loss to arrive at
net loss applicable to common shares.
(8) DEVELOPMENT REVENUE
In accordance with a now-terminated license and development agreement,
Bausch & Lomb Surgical paid Atlantic's subsidiary, Optex Ophthalmologics, Inc.
("Optex"), for developing its Avantix (formerly known as Catarex) technology.
For the six months ended June 30, 2002, this agreement provided no development
revenue and no related cost-of-development revenue as compared to $2,461,922 of
development revenue (including $1,067,345 in project-completion bonuses paid out
and recognized at the completion of the project in March 2001) and related
cost-of-development revenue of $2,082,568 for the six months ended June 30,
2001. The decrease in revenues and related expenses from Bausch & Lomb over last
year was due to the fact that there were no revenues and related expenses since
termination of the agreement in March 2001. With termination of the above
agreement at the conclusion of the sale of substantially all of Optex's assets
(mostly intangible assets with no book value) in March 2001, as described in
note 9 below, Atlantic will no longer have the revenues or profits associated
with that agreement.
(9) SALE OF OPTEX ASSETS
Pursuant to an asset purchase agreement dated January 31, 2001, among
Bausch & Lomb Incorporated, a Bausch & Lomb affiliate, Atlantic, and Optex, on
March 2, 2001, Optex sold to Bausch & Lomb substantially all of its assets
(mostly intangible assets with no book value), including all those related to
the Avantix (formerly known as Catarex) technology. The purchase price was $3
million paid at closing (of which approximately $564,000 has been distributed to
Optex's minority shareholders). In addition, Optex is entitled to receive
additional consideration, namely $1 million once Bausch & Lomb receives
regulatory approval to market the Avantix device in Japan,
8
royalties on net sales on the terms stated in the original development agreement
dated May 14, 1998, between Bausch & Lomb and Optex, as amended, and minimum
royalties of $90,000, $350,000, and $750,000 for the first, second, and third
years, respectively, starting on first commercial use of the Avantix device or
January 1, 2004, whichever is earlier. Optex also has the option to repurchase
the acquired assets from Bausch & Lomb at fair value if it ceases developing the
Avantix technology.
Upon the sale of Optex assets, Bausch & Lomb's development agreement
with Optex was terminated and Optex has no further involvement with Bausch &
Lomb. As a result of this transaction, Atlantic recorded a net gain on the sale
of Optex assets of $2,569,451 for the six-month period ended June 30, 2001. This
includes a net loss of $240,000 for the quarter ended June 30, 2001, as
described below. The purchase price of $3,000,000 is nonrefundable and upon the
closing of the asset purchase agreement in March 2001, Optex had no further
obligation to Bausch & Lomb or with regard to the assets sold. In the asset
purchase agreement, Optex agreed to forgo future contingent payments provided
for in the earlier development agreement. Optex has recorded a profit
distribution for the six months ended June 30, 2001 of $837,274, representing
the minority shareholders' percentage of the cumulative profit from the Bausch &
Lomb development and asset purchase agreements up to and including proceeds from
the sale of Optex's assets. (This figure includes the $564,000 referred to
above.)
On May 9, 2001, Atlantic's board of directors, after considering all
the relevant facts and circumstances and consulting counsel agreed to authorize
an aggregate payment of $240,000 to three former employees of Optex (who are now
employed by Bausch & Lomb). The payments were made on May 11, 2001, and
represented the settlement of claims made by the employees subsequent to the
asset purchase agreement referred to above for severance monies allegedly due
under their employment agreement. Atlantic did not believe these monies were due
pursuant to the terms of the transaction or the respective employment
agreements. The board of directors elected to acquiesce to the demands of the
former employees and resolve the matter in light of the potential future
royalties from Bausch & Lomb and the importance of these individuals to the
ongoing development activities. The payment was recorded as an expense netted
against gain on the sale of Optex assets during the second quarter of 2001.
(10) PRIVATE PLACEMENT OF COMMON SHARES
On November 6, 2001, Atlantic entered into an agreement with Joseph
Stevens & Company, Inc. in which Joseph Stevens agreed to act as placement agent
for a private placement of shares of Atlantic's common stock. In that private
placement, the price of each share of Atlantic's common stock was $0.24 and the
minimum and maximum subscription amounts were $2,000,000 and $3,000,000,
respectively. In addition, each investor received a warrant to purchase one
share of Atlantic's common stock for every share of Atlantic's common stock
purchased by that investor. The warrants have an exercise price of $0.29 and are
exercisable for five years from the closing date. On December 3, 2001, Atlantic
issued to certain investors an aggregate of 8,333,318 shares of common stock for
the minimum subscription of $2,000,000. In connection with the private
placement, Atlantic paid Joseph Stevens a placement fee of $140,000, equal to 7%
of the aggregate subscription amount, a warrant to purchase 833,331 shares of
Atlantic's common stock, which represented 10% of the number of shares issued to
the investors and 833,331 shares of Atlantic common stock. The term of the
warrant is five years and the per share exercise price is $0.29. In conjunction
with this private placement, Atlantic received net proceeds of approximately
$1,848,000 in December 2001.
(11) SERIES A ANTIDILUTION PROVISION
The conversion price and conversion rate of the Series A preferred
stock is subject to adjustment upon the occurrence of certain events, including
the issuance of common stock at a per-share price less than either the
conversion price or the then market price. Recent issuances of stock, options
and warrants, including in connection with Atlantic's recent private placement,
have necessitated that Atlantic adjust the conversion rate and conversion price
of the Series A preferred stock. Accordingly, the conversion price of the Series
A preferred stock has been decreased from $3.058 to $1.22, and the conversion
rate has been increased from 3.27 to 8.21 to reflect all recent issuances of
stock options and warrants through December 31, 2001. In connection with these
changes, Atlantic has issued 66,666 make-up shares of common stock to certain
former Series A preferred stock holders which are included in the net loss per
common share calculation for the six months ended June 30, 2002. During the
second quarter of 2002, the conversion rate was increased further to 8.22 as a
result of the issuance of 75,000 shares to IRG and 10,000 shares to Fusion
Capital.
9
(12) LICENSING OF CT-3 TO INDEVUS PHARMACEUTICALS, INC.
On June 28, 2002, Atlantic entered into a license agreement with
Indevus Pharmaceuticals, Inc. in which Atlantic licensed to Indevus the
exclusive worldwide rights to CT-3, its novel anti-inflammatory and analgesic
compound currently in clinical development. Indevus will be responsible for all
further development of CT-3, and Atlantic will have no future involvement with
Indevus or CT-3 other than its rights under the license agreement to royalties
and milestone payments. Under the license agreement, Atlantic received an
initial licensing fee of $500,000. In accordance with SAB No. 101, "Revenue
Recognition," Atlantic recognized $500,000 of licensing revenue during the
quarter ended June 30, 2002, since it has no further obligations under the
license agreement. Atlantic is entitled to additional milestone payments on
occurrence of certain events specified in the license agreement, including
commencement and completion of various clinical trials, the FDA's acceptance for
filing of a New Drug Application, or "NDA," and Indevus securing other
regulatory approvals for CT-3 in the United States and Europe, and Atlantic will
be entitled to royalties once the compound begins to generate revenue.
(13) LICENSING OF ANTIMICROBIAL AGENT ATV-02
Atlantic has licensed from its inventors the worldwide rights to
ATV-02, a potent and broad-spectrum antimicrobial agent for the local treatment
of topical infections. This compound is more commonly known as N-Chlorotaurine,
or "NCT." This compound has completed safety and tolerability studies in a
limited number of subjects and has begun a series of Phase II human clinical
studies for the treatment of several indications, including viral and bacterial
conjunctivitis and acute and chronic sinusitis.
Under the terms of the license agreement, Atlantic has exclusively
licensed the inventors' rights (including the right to sublicense) pertaining to
any novel therapeutic use or formulation of the compound. Atlantic has no
clinical-development obligations under the license agreement, but it plans to
continue developing ATV-02 in Europe in cooperation with the inventors using
their philanthropic funding sources and plans to file an IND in the United
States to develop the compound according to FDA regulations for approval in the
United States. Atlantic was not required to pay a license fee under the license
agreement, but if Atlantic proceeds with clinical development of the compound it
would be required to make payments to the investors upon achieving certain
milestones. Such payments would be payable in cash or company stock, at
Atlantic's discretion. The milestone payments as set forth in the license
agreement include (a) $100,000 upon the first new patent issuance, (b) $250,000
upon successful completion of a Phase III clinical trial, and (c) $1,000,000
upon receiving new drug approval. Atlantic would also be required to pay the
inventors a total royalty of 4% of the net sales of the licensed products sold
by Atlantic and 20% of the royalties which Atlantic receives from sublicensees.
Atlantic is responsible for preparing, filing, prosecuting, and maintaining the
patent applications and patent rights.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion of our results of operations
and financial condition in conjunction with our Annual Report on Form 10-KSB for
the year ended December 31, 2001. This discussion includes "forward-looking"
statements that reflect our current views with respect to future events and
financial performance. We use words such as we "expect," "anticipate,"
"believe," and "intend" and similar expressions to identify forward-looking
statements. Investors should be aware that actual results may differ materially
from our expressed expectations because of risks and uncertainties inherent in
future events, particularly those risks identified in the "Risk Factors" section
of our most recent Annual Report on Form 10-KSB, and should not unduly rely on
these forward looking statements.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED JUNE 30, 2002 VS. 2001
In the quarter ended June 30, 2002, Indevus Pharmaceuticals, Inc. paid
us a $500,000 license fee as part of the consideration for our having licensed
to Indevus, under a license agreement effective June 28, 2002, exclusive
worldwide rights to CT-3, our novel anti-inflammatory and analgesic compound
currently in clinical development. Indevus will be responsible for all further
development of CT-3, and we will have no future involvement with Indevus or CT-3
other than in connection with our rights to royalties and milestone payments
under the license agreement. Those milestone payments are contingent on
occurrence of certain events specified in the agreement, including commencement
and completion of various clinical trials, the FDA's acceptance for filing of an
NDA, and Indevus securing other regulatory approvals for CT-3 in the United
States and Europe. In accordance with SAB No. 101, "Revenue Recognition," we
recognized $500,000 of licensing revenue during the quarter ended June 30, 2002,
since we have no further obligations under the license agreement. We will record
as additional revenue any additional payments we receive under the license
agreement.
For the quarter ended June 30, 2002, research and development expense
was $139,935 as compared to $295,316 for the second quarter of 2001. The
cessation of research and development activities on the antisense technology as
a result of sale of the assets of our subsidiary Gemini Technologies, Inc.
("Gemini") accounted for approximately $81,000 of this decrease and a one time
purchase of the CT-3 compound in the first quarter of 2002 accounted for $80,000
of the decrease since no similar purchase was required during the second quarter
of 2002.
For the quarter ended June 30, 2002, general and administrative expense
was $333,114 as compared to $1,155,325 for the quarter ended June 30, 2001. A
significant portion of this decrease is a result of the $444,000 estimated fair
value of the 600,000 commitment shares we issued to Fusion Capital Fund II, LLC
during the second quarter of 2001 in conjunction with a common stock purchase
agreement entered into with Fusion Capital Fund II, LLC. Fusion's obligation to
purchase our shares under this agreement is subject to certain conditions. A
material contingency that affects our ability to raise funds under this
agreement is our stock price. Currently, our stock price is below the floor
price of $0.68 specified in the Fusion agreement and as a result we are
currently unable to draw funds pursuant to that agreement. As the Fusion
agreement is currently structured, we cannot guarantee that we will be able to
draw any funds. In addition, the decrease was also due to reduced spending due
to an increased effort to conserve cash as well as reduced levels of general and
administrative activity. We had a decrease in payroll of approximately $73,000,
a decrease in legal expenses of approximately $76,000, a decrease in investor
relations services expenses of about $63,000, a decrease in accounting expense
of about $52,000, a decrease in travel expenses of approximately $31,000, and a
decrease of approximately $83,000 in other expenses.
For the quarter ended June 30, 2002, we had a reduction in compensation
expense relating to stock warrants of $4,376 as compared to an expense relating
to stock warrants of $22,695 in the prior year. This expense was associated with
warrants issued to Dian Griesel during March 2001 as partial compensation for
investor relations services provided to us by The Investor Relations Group, Inc.
("IRG"). The reduction of compensation expense associated with these warrants is
due to the decrease in our stock price during the quarter and the reversal of
expense associated with 45,000 unvested warrants which were terminated on May
31, 2002. With the termination of the agreement with IRG there will be no more
vesting of warrants and therefore we will not incur any additional compensation
expense associated with the Dian Griesel warrants. Compensation expense relating
to these investor relations services represents a general and administrative
expense.
11
For the second quarter of 2002, interest and other income was $2,907,
compared to $14,334 for the second quarter of 2001. The decrease in interest
income is primarily due to the decline in our cash reserves.
Net income applicable to common shares for the quarter ended June 30,
2002, was $34,234 as compared to net loss applicable to common shares of
$2,121,133 for the quarter ended June 30, 2001. The difference between the net
income applicable to common shares for the quarter ended June 30, 2002 and the
net loss applicable to common shares of $2,121,133 for the quarter ended June
30, 2001 is due in part to $500,000 of licensing revenue we recorded in
connection with our licensing to Indevus exclusive worldwide rights to CT-3. In
addition, research and development expenses decreased by $155,381 and general
and administrative expenses, including compensation expenses relating to stock
options and warrants, decreased by $849,282. Also, in the quarter ended June 30,
2001, we agreed to authorize an aggregate payment of $240,000 to three former
employees of Optex; this payment was recorded as an expense netted against gain
on the sale of Optex assets during the second quarter of 2001. In addition, we
recorded a loss of $334,408 on the sale of the assets of our subsidiary Gemini,
and our subsidiary Optex made an earnings distribution to its minority
shareholders of $69,760. Currently, we do not have a recurring source of
revenue.
SIX-MONTH PERIOD ENDED JUNE 30, 2002 VS. 2001
In the six-month period ended June 30, 2002, Indevus Pharmaceuticals,
Inc. paid us a $500,000 license fee as part of the consideration for our having
licensed to Indevus, under a license agreement effective June 28, 2002,
exclusive worldwide rights to CT-3, our novel anti-inflammatory and analgesic
compound currently in clinical development. Indevus will be responsible for all
further development of CT-3, and we will have no future involvement with Indevus
or CT-3 other than in connection with our rights to royalties and milestone
payments under the license agreement. Those milestone payments are contingent on
occurrence of certain events specified in the agreement, including commencement
and completion of various clinical trials, the FDA's acceptance for filing of an
NDA, and Indevus securing other regulatory approvals for CT-3 in the United
States and Europe. In accordance with SAB No. 101, "Revenue Recognition," we
recognized $500,000 of licensing revenue during the quarter ended June 30, 2002,
since we have no further obligations under the license agreement. We will record
as additional revenue any additional payments we receive under the license
agreement.
In accordance with a now-terminated license and development agreement,
Bausch & Lomb Surgical paid our subsidiary, Optex Ophthalmologics, Inc.
("Optex"), for developing its Avantix (formerly known as Catarex) technology.
For the six months ended June 30, 2002, this agreement provided no development
revenue and no related cost-of-development revenue as compared with $2,461,922
of development revenue (including $1,067,345 in project-completion bonuses paid
out and recognized at the completion of the project in March 2001) and related
cost-of-development revenue of $2,082,568 for the six months ended June 30,
2001. The decrease in revenues and related expenses from Bausch & Lomb over last
year was due to the fact that there were no revenues and related expenses since
termination of the agreement in March 2001.
For the six months ended June 30, 2002, research and development
expense was $341,777 as compared to $602,083 for the six months ended June 30,
2001. The cessation of research and development activities on our antisense
technology as a result of the sale of the assets of Gemini accounted for
approximately $156,000 of this decrease. In addition, research and development
consulting expense decreased by approximately $86,000 and research and
development salaries decreased by about $26,000.
For the six months ended June 30, 2002, general and administrative
expense was $762,337 as compared to $1,837,273 for the six months ended June 30,
2001. A significant portion of this decrease is a result of a finder's fee of
$120,000 and the $444,000 estimated fair value of the 600,000 commitment shares
we issued to Fusion Capital Fund II, LLC in conjunction with a common stock
purchase agreement with Fusion Capital Fund II, LLC we entered into during 2001.
Fusion's obligation to purchase our shares under this agreement is subject to
certain conditions. A material contingency that affects our ability to raise
funds under this agreement is our stock price. Currently, our stock price is
below the floor price of $0.68 specified in the Fusion agreement and as a result
we are currently unable to draw funds pursuant to that agreement. As the Fusion
agreement is currently structured, we cannot guarantee that we will be able to
draw any funds. In addition, the decrease was also due to reduced spending as a
result of increased efforts to conserve cash as well as reduced levels of
general and administrative activity. We had a decrease in payroll of
approximately $69,000, a decrease in legal expenses of approximately $195,000, a
decrease
12
in investor relations services of about $77,000,a decrease in due diligence fees
and Nasdaq fees of approximately $46,000 a decrease in accounting expense of
about $44,000, a decrease in travel of approximately $27,000, and a decrease of
approximately $53,000 in other expenses.
For the six months ended June 30, 2002, we had a reduction in
compensation expense relating to stock warrants of $5,845 as compared to an
expense relating to stock warrants of $34,666 in the prior year. This expense
was associated with warrants issued to Dian Griesel during March 2001 as partial
compensation for investor relations services provided to us by IRG. The
reduction of compensation expense associated with these warrants is due to the
decrease in our stock price as compared to 2001 and the reversal of previously
recorded expense associated with 45,000 unvested warrants which were terminated
as of May 31, 2002. Compensation expense relating to these investor relations
services represents a general and administrative expense. With the termination
of the agreement with IRG there will be no more vesting of warrants and
therefore we will not incur any additional compensation expense associated with
the Dian Griesel warrants.
For the six months ended June 30, 2002, interest and other income was
$8,429, compared to $34,352 for the six months ended June 30, 2001. The decrease
in interest income is primarily due to the decline in our cash reserves.
Net loss applicable to common shares for the six months ended June 30,
2002, was $629,002 as compared to $1,265,502 for the six months ended June 30,
2001. This decrease in net loss applicable to common shares is attributable in
part to $500,000 of licensing revenue we recorded in connection with our
licensing to Indevus exclusive worldwide rights to CT-3. A gain on the sale of
the assets of our subsidiary, Optex, was recognized during the six months ended
June 30, 2001 in the amount of $2,569,451, partially offset by a distribution to
the minority shareholders of Optex of $837,274. In addition, with the
termination of our agreement with Bausch & Lomb, we no longer have available to
us the revenue or profits associated with that agreement; as a result, we had no
profit from this agreement for the six months ended June 30, 2002 as compared
with $379,354 of profit for the same period in 2001. We recorded grant revenue
of $250,000 for the six months ended June 30, 2001 that we did not have in six
months ended June 30, 2002. The net loss applicable to common shares was further
decreased by a reduction in research and development expenses and general and
administrative expenses, including compensation expense relating to stock
options and warrants of $260,306 and $1,115,447, respectively, for the six
months ended June 30, 2002 as compared with the six months ended June 30, 2001.
In the six months ended June 30, 2001, we also recorded a loss of $334,408 on
sale of the assets of our subsidiary Gemini.
Net loss applicable to common shares for the six months ended June 30,
2001 also included a beneficial conversion on our Series B preferred stock in
the amount of $600,000 and a dividend of $167,127 paid on our repurchase of the
outstanding Series B preferred stock, both recorded during the six months ended
June 30, 2001. We also issued preferred stock dividends on our Series A
preferred stock, for which the estimated fair value of $39,162 and $64,144 was
included in the net income (loss) applicable to common shares for the six months
ended June 30, 2002 and 2001, respectively. The decrease in the estimated fair
value of these dividends as compared to the prior year is primarily a reflection
of a decline in our stock price and a reduction of the number of shares of
shares of Series A preferred stock outstanding.
LIQUIDITY AND CAPITAL RESOURCES
From inception to June 30, 2002, we incurred an accumulated deficit of
$27,318,246, and we expect to continue to incur additional losses through the
year ending December 31, 2002 and for the foreseeable future. This loss has been
incurred primarily through research and development activities related to the
various technologies under our control.
Pursuant to an asset purchase agreement dated January 31, 2001, among
Bausch & Lomb Incorporated, a Bausch & Lomb affiliate, Atlantic, and Optex, on
March 2, 2001, Optex sold to Bausch & Lomb substantially all its assets (mostly
intangible assets with no book value), including all those related to the
Avantix (formerly known as Catarex) technology. As a result of this sale,
Atlantic and Optex no longer have any obligations to Bausch & Lomb in connection
with development of the Avantix technology. The purchase price was $3 million
paid at closing (approximately $564,000 of which was distributed to minority
shareholders). In addition, Optex is entitled to receive additional
consideration, namely $1 million once Bausch & Lomb receives regulatory approval
to market the
13
Avantix device in Japan, royalties on net sales on the terms stated in the
original development agreement dated May 14, 1998, between Bausch & Lomb and
Optex, as amended, and minimum royalties of $90,000, $350,000, and $750,000 for
the first, second, and third years, respectively, starting on first commercial
use of the Avantix device or January 1, 2004, whichever is earlier. Optex also
has the option to repurchase the acquired assets from Bausch & Lomb if it ceases
developing the Avantix technology at fair value. Upon the sale of Optex assets,
Bausch & Lomb's development agreement with Optex was terminated. In the asset
purchase agreement, Optex agreed to forgo future contingent payments provided
for in the earlier development agreement. As a result of this transaction, we
recorded a gain on the sale of Optex assets of $2,569,451. We made a profit
distribution of $837,274 to Optex's minority shareholders, representing their
share of the cumulative profit from the development agreement with Bausch & Lomb
and the proceeds from the sale of Optex' assets.
On November 6, 2001, we entered into an agreement with Joseph Stevens &
Company, Inc. in which Joseph Stevens agreed to act as placement agent for a
private placement of shares of our common stock. In that private placement, the
price of each share of our common stock was $0.24 and the minimum and maximum
subscription amounts were $2,000,000 and $3,000,000, respectively. In addition,
each investor received a warrant to purchase one share of our common stock for
every share of our common stock purchased by that investor. The warrants have an
exercise price of $0.29 and are exercisable for five years from the closing
date. On December 3, 2001, we issued to certain investors an aggregate of
8,333,318 shares of common stock for the minimum subscription of $2,000,000. In
connection with the private placement, we paid Joseph Stevens a placement fee of
$140,000, equal to 7% of the aggregate subscription amount, a warrant to
purchase 833,331 shares of Atlantic's common stock, which represented 10% of the
number of shares issued to the investors and 833,331 shares of our common stock.
The term of this warrant is five years and the per share exercise price is
$0.29. In conjunction with this private placement, we received net proceeds of
approximately $1,848,000 in December 2001.
On June 28, 2002, we licensed to Indevus Pharmaceuticals, Inc. the
exclusive worldwide rights to CT-3 in exchange for a $500,000 licensing fee.
Atlantic is also entitled to additional milestone payments on occurrence of
certain events specified in the license agreement, including commencement and
completion of various clinical trials, the FDA's acceptance for filing of a New
Drug Application, or "NDA," and Indevus securing other regulatory approvals for
CT-3 in the United States and Europe, and Atlantic will be entitled to royalties
once the compound begins to generate revenue. Under the license agreement,
Indevus is responsible for the clinical development, regulatory activities and
commercializing this compound.
We have financed our operations since inception primarily through
equity and debt financing, our now-terminated collaborative arrangement with
Bausch & Lomb and our licensing of CT-3 to Indevus. During the three- and
six-month periods ended June 30, 2002, we had a net decrease in cash and cash
equivalents of $487,850 and $1,146,386, respectively.
This decrease primarily resulted from net cash used in operating
activities for the six months ended June 30, 2002 of $1,120,047. Total cash
resources as of June 30, 2002 were $445,375 compared to $1,591,761 at December
31, 2001. In addition, $501,667 of accounts receivable was collected subsequent
to June 30, 2002.
Our available working capital and capital requirements will depend upon
numerous factors, including progress of our research and development programs,
our progress in and the cost of ongoing and planned pre-clinical and clinical
testing, the timing and cost of obtaining regulatory approvals, the cost of
filing, prosecuting, defending, and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
changes in our existing collaborative and licensing relationships, the resources
that we devote to developing manufacturing and commercializing capabilities,
technological advances, the status of our competitors, our ability to establish
collaborative arrangements with other organizations and our need to purchase
additional capital equipment.
Our current liabilities as of June 30, 2002 were $427,737 compared to
$508,613 at December 31, 2001, a decrease of $80,876. The decrease was primarily
due to reduced spending due to an increased effort to conserve cash. As of June
30, 2002, our working capital was $524,305, primarily the result of receiving a
$500,000 licensing fee from Indevus and of receiving $1,948,000 in net proceeds
from two private placements of our common stock during December 2001.
14
Our continued operations will depend on whether we are able to raise
additional funds through various potential sources, such as equity and debt
financing, other collaborative agreements, strategic alliances, and our ability
to realize the full potential of our technology in development. Such additional
funds may not become available as we need them or be available on acceptable
terms. To date, a significant portion of our financing has been through private
placements of common and preferred stock and warrants, the issuance of common
stock for stock options and warrants exercised, and debt financing. Until our
operations generate significant revenues, we will continue to fund operations
from cash on hand and through the similar sources of capital previously
described. We can give no assurances that any additional capital that we are
able to obtain will be sufficient to meet our needs.
We anticipate that our current resources (including the $500,000
received in July 2002 from Indevus) will be sufficient to finance for the next
several months our currently anticipated needs for operating and capital
expenditures. We plan to achieve this by continuing to reduce expenses,
including by means of voluntary salary deferrals. We expect that after
implementing these cost-saving measures, our cash utilized for operations for
the next year will be approximately $130,000 per month (including approximately
$35,000 per month for research and preclinical development expenses and
approximately $95,000 for general and administrative expenses). Our major
outstanding contractual obligations relate to our operating (facilities) leases.
Our facilities lease expense in future years extends through May 2003 at an
aggregate rate of $7,675 per month, net of monthly sublease income of $750 per
month which commenced March 2002.
The report of our independent auditors on our 2001 consolidated
financial statements includes an explanatory paragraph that states that our
recurring losses and our limited liquid resources raise substantial doubt about
our ability to continue as a going concern. Our consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Subsequent to an oral hearing before a Nasdaq Listing Qualifications
Panel, on August 23, 2001, our securities were delisted from the Nasdaq Stock
Market for failing to meet the minimum-bid-price requirements set forth in the
NASD Marketplace Rules, as our common stock had traded for less than $1.00 for
more than 30 consecutive business days. Our common stock trades now on the OTC
Bulletin Board under the symbol "ATLC.OB". Delisting our common stock from
Nasdaq could have a material adverse effect on our ability to raise additional
capital, our stockholders' liquidity and the price of our common stock.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their
most "critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Our
significant accounting policies are described in Note 1 to our consolidated
financial statements included in our annual report filed on Form 10-KSB as
amended for the year ended December 31, 2001, however, we believe that none of
them are considered to be critical.
RESEARCH AND DEVELOPMENT ACTIVITIES
Optex and the Avantix(TM) (formerly Catarex(TM)) Technology
Our majority-owned (81.2%) subsidiary, Optex, is entitled to royalties
and other revenues in connection with commercialization of the Catarex
technology. Bausch & Lomb Incorporated, a multinational ophthalmics company, is
developing this technology under the new trade name "Avantix" to overcome the
limitations and deficiencies of traditional cataract-extraction techniques.
Optex had been the owner of this technology and was developing it under a
development agreement with Bausch & Lomb, but on March 2, 2001, Optex sold to
Bausch & Lomb substantially all of its assets (mostly intangible assets with no
book value), including those related to the Avantix technology, and delivered
2,400 "First-Generation" Avantix handpieces to Bausch & Lomb for use in human
feasibility studies and clinical trials.
15
Bausch & Lomb, which has committed over $15 million on the project to
date, has assumed full responsibility for developing and marketing the
technology and will pay Optex royalties on sales of the device and the
associated system. Under the agreement governing Bausch & Lomb's purchase of
Optex's assets, Bausch & Lomb is required to meet certain development
milestones. The next such milestone is completion by December 31, 2002, of a
clinical study designed by Bausch & Lomb to assess the functionality of the
Avantix handpiece in human cataract surgery. We continue to work closely with
Bausch & Lomb to monitor their progress in developing this technology, and, to
the extent permitted by our agreement with Bausch & Lomb, we will report
achievement of any development milestones.
CT-3 Anti-inflammatory/Analgesic Compound
On June 28, 2002, we licensed exclusive world wide rights of our
proprietary compound CT-3 to Indevus Pharmaceuticals, Inc. CT-3 is a patented
synthetic derivative of carboxylic tetrahydrocannabinol (THC-7C) and is an
alternative to nonsteroidal anti-inflammatory drugs, or "NSAIDs," such as
aspirin and ibuprofen. Over 130 million Americans suffer from chronic pain and
40 million suffer from arthritis. Worldwide prescription sales of
analgesic/anti-inflammatory drugs exceeded $9 billion in 1999. The overall field
of inflammation and pain management is large and not fully satisfied, and a
compound such as CT-3 may have broad applications in these major markets.
CT-3 is being developed as a new medication for painful inflammatory
conditions such as arthritis, post-operative pain, musculoskeletal injuries,
headache and neuropathic pain. In addition, the compound possesses activity in
preclinical models of multiple sclerosis and the cutaneous inflammation
associated with exposure to the chemical warfare blister agent sulfur mustard.
The U.S. Army Medical Research Institute is pursuing further work on this
application.
The principle mechanism of action of the compound appears to be the
potent inhibition of the inflammatory cytokines, particularly interleukin-1 and
TNF-alpha. Preliminary studies have shown that CT-3 demonstrates
analgesic/anti-inflammatory properties at microgram doses without central
nervous system or gastrointestinal side effects and also reduces joint damage
caused by rheumatoid arthritis.
An IND (investigational new drug application) has been filed with the
U.S. Food and Drug Administration for CT-3, and an initial Phase I clinical
trial designed to assess the safety of CT-3 showed that it was well tolerated,
with no clinical significant adverse events and no evidence of psychotropic
activity. The compound is currently being studied in Europe in a small Phase II
study in patients with chronic neuropathic pain.
On acquiring CT-3 Indevus paid us a licensing fee, and under the terms
of our licensing agreement with Indevus it is required to pay us development
milestones and royalties. Indevus will be responsible for developing and
commercializing CT-3 and obtaining any required approvals. A director of Indevus
is one of our shareholders; the transaction was approved by all the
disinterested directors of Indevus.
ATV-02 Antimicrobial Agent (N-Chlorotaurine/NCT)
We have licensed from its inventors the worldwide rights to the ATV-02,
a potent and broad-spectrum antimicrobial agent for the local treatment of
topical infections. This compound is more commonly known as N-Chlorotaurine or
"NCT." The compound has completed safety and tolerability studies in a limited
number of subjects and has begun a series of phase II human clinical studies for
the treatment of several indications, including viral and bacterial
conjunctivitis and acute and chronic sinusitis.
Under the terms of the agreement, the company has exclusively licensed,
including the right to sublicense, the inventors rights pertaining to any novel
therapeutic use or formulation of N-Chlorotaurine and any of its derivatives or
analogs, including pending and future patent applications for methods of using
N-Chlorotaurine for a variety of clinical indications. Under the terms of the
agreement there was no initial license fee, but we are required to pay the
inventors milestone payments payable in cash or company stock at our discretion
of (a) $100,000 upon the first new patent issuance, (b) $250,000 upon successful
completion of a Phase III clinical trial, and (c) $1,000,000 upon receiving new
drug approval. We are also required to pay the inventors a total royalty of 4%
of
16
the net sales of the licensed products sold by the Company, and 20% of the
royalties which the company receives from sublicensees. Although the Company has
no clinical development obligations under the license agreement, it plans to
continue developing ATV-02 in Europe in cooperation with the inventors using
their philanthropic funding sources and begin filing an IND in the US to develop
it according to FDA regulations for approval in the US. The Company has assumed
the responsibility for the preparation, filing, prosecution and maintenance of
the patent applications and patent rights.
As a broad-spectrum drug with bacterial, virucidal and fungicidal
activity, ATV-02 has the potential to be a viable alternative to the use of
antibiotics for the treatment of local infections. Since their discovery over a
half a century ago, the misuse and overuse of antibiotics has caused a crisis of
antibiotic resistant bacteria. In contrast to antibiotics, ATV-02 is a human
disinfectant that is not expected to promote drug resistant bacteria.
ATV-02 is a long-lived endogenous oxidant that is normally produced in
the body by human granulocytes and monocytes. It demonstrates immune modulatory
properties exerted by down regulation of pro-inflammatory cytokines such as
tumor necrosis factor, nitric oxide, and protaglandins. Oxidants are important
tools that stimulate human phagocytes used to attack and kill pathogens. Besides
its immune controlling function, ATV-02 has demonstrated broad-spectrum
bactericidal, virucidal, fungicidal and vermicidal activity, along with very low
cytotoxicity against human cells and sufficient stability.
All the human clinical studies completed to date have been conducted at
the University of Innsbruck, Austria under the direction of the inventors: Dr.
Waldemar Gottardi, Dr. Markus Nagl and Dr. Andreas Neher. These studies have all
been approved by the Innsbruck Ethics Committee, were registered by the Austrian
Ministry of Health, and funded by various philanthropic sources including the
Austrian Science Fund and the Jubilee Research Fund of the Austrian National
Bank.
The Company will continue to evaluate the safety and efficacy of ATV-02
throughout the completion of the ongoing clinical studies being conducted in
Innsbruck. Upon successful completion of these studies and the filing and
approval of a US IND, the Company plans to initiate a licensing program to
sublicense ATV-02 to a suitable strategic partner to assist in the clinical
development, regulatory approval filing, manufacturing and marketing of ATV-02.
About Sinusitis
Sinusitis, or inflammation of the membrane lining the sinuses, is
usually caused or complicated by a bacterial, viral or fungal infection. It's
the most common reason for office-visit prescription of antibiotics in adults in
the United States, and affects an estimated 14 percent of the population
according to a report published in the June issue of The Journal of Allergy and
Clinical Immunology. It is estimated to result in over 13 million office visits
per year. Figures suggest the total annual direct cost of treatment, including
drugs, office visits to doctors and surgery, is in excess of US $2.4 billion.
About Conjunctivitis
Conjunctivitis, or "pink eye", is a bacterial or viral infection of the
eye's conjunctiva, and is probably the most common infection seen in eye
doctors' offices. It is a very contagious disease and causes symptoms such as
tearing, redness and swelling of the conjunctiva, purulent discharge and light
sensitivity. Conjunctivitis usually takes up to two weeks to run its course, and
there remains no effective treatment to date for viral conjunctivitis.
17
PART II -- OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
Exhibits
The following documents are referenced or included in this report.
Exhibit No. Description
3.1(1) Certificate of incorporation of Atlantic, as amended to date.
3.2(1) Bylaws of Atlantic, as amended to date.
3.3(5) Certificate of designations of Series A Convertible Preferred Stock.
3.4(6) Certificate of increase of Series A Convertible Preferred Stock.
3.5(9) Certificate of designations, preferences and rights of Series B
convertible preferred stock of Atlantic, filed on September 28, 2000.
3.6(9) Certificate of amendment of the certificate of designations,
preferences and rights of Series B convertible preferred stock of
Atlantic, filed on November 17, 2000.
3.7(10) Certificate of amendment of the certificate of designations,
preferences and rights of Series B convertible preferred stock of
Atlantic, filed on January 9, 2001.
3.8(10) Certificate of amendment of the certificate of designations,
preferences and rights of Series B convertible preferred stock of
Atlantic, filed on January 19, 2001.
4.2(1) Form of unit certificate.
4.3(1) Specimen common stock certificate.
4.4(1) Form of redeemable warrant certificate.
4.5(1) Form of redeemable warrant agreement by and between Atlantic and
Continental Stock Transfer & Trust Company.
4.6(1) Form of underwriter's warrant certificate.
4.7(1) Form of underwriter's warrant agreement by and between Atlantic and
Joseph Stevens & Company, L.P.
4.8(1) Form of subscription agreement by and between Atlantic and the Selling
Stockholders.
4.9(1) Form of bridge note.
4.10(1) Form of bridge warrant.
4.11(2) Investors' rights agreement by and among Atlantic, Dreyfus Growth and
Value Funds, Inc. and Premier Strategic Growth Fund.
4.12(2) Common stock purchase agreement by and among Atlantic, Dreyfus Growth
and Value Funds, Inc. and Premier Strategic Growth Fund.
18
10.2(1) Employment agreement dated July 7, 1995, between Atlantic and Jon D.
Lindjord.
10.3(1) Employment agreement dated September 21, 1995, between Atlantic and
Dr. Stephen R. Miller.
10.4(1) Employment agreement dated September 21, 1995, between Atlantic and
Margaret A. Schalk.
10.5(1) Letter agreement dated August 31, 1995, between Atlantic and Dr. H.
Lawrence Shaw.
10.6(1) Consulting agreement dated January 1, 1994, between Atlantic and John
K. A. Prendergast.
10.8(1) Investors' Rights agreement dated July 1995, between Atlantic, Dr.
Lindsay A. Rosenwald and VentureTek, L.P.
10.9(1) License and assignment agreement dated March 25, 1994, between Optex
Ophthalmologics, Inc., certain inventors and NeoMedix Corporation, as
amended.
10.10(1) License agreement dated May 5, 1994, between Gemini Gene Therapies,
Inc. and the Cleveland Clinic Foundation.
10.11(1)+ License agreement dated June 16, 1994, between Channel Therapeutics,
Inc., the University of Pennsylvania and certain inventors, as
amended.
10.12(1)+ License agreement dated March 28, 1994, between Channel Therapeutics,
Inc. and Dr. Sumner Burstein.
10.13(1) Form of financial advisory and consulting agreement by and between
Atlantic and Joseph Stevens & Company, L.P.
10.14(1) Employment agreement dated November 3, 1995, between Atlantic and
Shimshon Mizrachi.
10.15(3) Financial advisory agreement between Atlantic and Paramount dated
September 4, 1996 (effective date of April 15, 1996).
10.16(3) Financial agreement between Atlantic, Paramount and UI USA dated June
23, 1996.
10.17(3) Consultancy agreement between Atlantic and Dr. Yuichi Iwaki dated July
31, 1996.
10.18(3) 1995 stock option plan, as amended.
10.19(3) Warrant issued to an employee of Paramount Capital, LLC to purchase
25,000 shares of Common Stock of Atlantic.
10.20(3) Warrant issued to an employee of Paramount Capital, LLC to purchase
25,000 shares of Common Stock of Atlantic.
10.21(3) Warrant issued to an employee of Paramount Capital, LLC to purchase
12,500 shares of Common Stock of Atlantic.
10.22(4) Letter agreement between Atlantic and Paramount Capital, Inc. dated
February 26,1997.
10.23(4) Agreement and plan of reorganization by and among Atlantic, Channel
Therapeutics, Inc. and New Channel, Inc. dated February 20, 1997.
10.24(4) Warrant issued to John Prendergast to purchase 37,500 shares of
Atlantic's Common Stock.
19
10.25(4) Warrant issued to Dian Griesel to purchase 24,000 shares of Atlantic's
Common Stock.
10.26(7) Amendment No. 1 to development & license agreement by and between
Optex and Bausch & Lomb Surgical, Inc. dated September 16, 1999.
10.27(8) Financial advisory and consulting agreement by and between Atlantic
and Joseph Stevens & Company, Inc. dated January 4, 2000.
10.28(8) Warrant No. 1 issued to Joseph Stevens & Company, Inc. to purchase
150,000 shares of Atlantic's Common Stock exercisable January 4, 2000.
10.29(8) Warrant No. 2 issued to Joseph Stevens & Company, Inc. to purchase
150,000 shares of Atlantic's Common Stock exercisable January 4, 2001.
10.30(8) Warrant No. 3 issued to Joseph Stevens & Company, Inc. to purchase
150,000 shares of Atlantic's Common Stock exercisable January 4, 2002.
10.31(9) Preferred stock purchase agreement dated May 12, 2000, between
Atlantic and TeraComm Research, Inc.
10.32(9) Warrant certificate issued May 12, 2000, by Atlantic to TeraComm
Research, Inc.
10.33(9) Stockholders agreement dated May 12, 2000, among TeraComm Research,
Inc., the common stockholders of TeraComm, and Atlantic.
10.34(9) Registration rights agreement dated May 12, 2000, between Atlantic and
TeraComm Research, Inc. with respect to shares of TeraComm preferred
stock issued to Atlantic.
10.35(9) Registration rights agreement dated May 12, 2000, between Atlantic and
TeraComm Research, Inc. with respect to shares of Atlantic common
stock issued to TeraComm.
10.36(9) Employment agreement dated as of April 10, 2000, between Atlantic and
A. Joseph Rudick.
10.37(9) Employment agreement dated as of April 3, 2000, between Atlantic and
Frederic P. Zotos.
10.38(9) Employment agreement dated as of April 10, 2000, between Atlantic and
Nicholas J. Rossettos, as amended.
10.39(9) Employment agreement dated as of May 15, 2000, between Atlantic and
Walter Glomb.
10.40(9) Employment agreement dated as of April 18, 2000, between Atlantic and
Kelly Harris.
10.41(10) Amendment dated as of July 18, 2000, to the Preferred Stock Purchase
agreement dated May 12, 2000, between Atlantic and TeraComm Research,
Inc.
10.42(10) Convertible preferred stock and warrants purchase agreement dated
September 28, 2000, among Atlantic, BH Capital Investments, L.P. and
Excalibur Limited Partnership.
10.43(10) Registration rights agreement dated September 28, 2000, among
Atlantic, BH Capital Investments, L.P., and Excalibur Limited
Partnership.
10.44(10) Escrow agreement dated September 28, 2000, among Atlantic, BH Capital
Investments, L.P., and Excalibur Limited Partnership.
20
10.45(10) Form of stock purchase warrants issued on September 28, 2000, to BH
Capital Investments, L.P., exercisable for shares of common stock of
Atlantic.
10.46(10) Form of stock purchase warrants issued on September 28, 2000, to
Excalibur Limited Partnership, exercisable for shares of common stock
of Atlantic.
10.47(10) Amendment No. 1 dated October 31, 2000, to convertible preferred stock
and warrants purchase agreement dated September 28, 2000, among
Atlantic, BH Capital Investments, L.P., and Excalibur Limited
Partnership.
10.48(12) Stock repurchase agreement dated December 4, 2000, among Atlantic, BH
Capital Investments, L.P., and Excalibur Limited Partnership.
10.49(14) Letter agreement dated December 28, 2000, among Atlantic and BH
Capital Investments, L.P., and Excalibur Limited Partnership.
10.50(11) Amendment No. 2 dated January 9, 2001, to convertible preferred stock
and warrants purchase agreement dated September 28, 2000, among
Atlantic, BH Capital Investments, L.P., and Excalibur Limited
Partnership.
10.51(14) Amendment No. 1 dated January 9, 2001, to registration rights
agreement dated September 28, 2000, among Atlantic and BH Capital
Investments, L.P. and Excalibur Limited Partnership.
10.52(11) Amendment No. 3 dated January 19, 2001, to convertible preferred stock
and warrants purchase agreement dated September 28, 2000, among
Atlantic, BH Capital Investments, L.P., and Excalibur Limited
Partnership.
10.53(14) Letter agreement dated January 25, 2001, among Atlantic and BH Capital
Investments, L.P., and Excalibur Limited Partnership.
10.54(13) Stock repurchase agreement No. 2 dated March 9, 2001, among Atlantic,
BH Capital Investments, L.P., and Excalibur Limited Partnership.
10.55(15) Common stock purchase agreement dated March 16, 2001, between Atlantic
and Fusion Capital Fund II, LLC. 10.56(15) Warrant certificate issued
March 8, 2001 by Atlantic to Dian Griesel.
10.57(16) Common stock purchase agreement dated as of May 7, 2001, between
Atlantic and Fusion Capital Fund II, LLC.
10.58(16) Form of registration rights agreement between Atlantic and Fusion
Capital Fund II, LLC.
10.59(17) Asset purchase agreement dated as of January 31, 2001, between Bausch
& Lomb Incorporated, Bausch & Lomb Surgical, Inc., Optex
Ophthalmologics, Inc. and Atlantic (the "January 31 Asset Purchase
Agreement).
10.60(17) Amendment No. 1 dated March 2, 2001, to the January 31 Asset Purchase
Agreement.
10.61(17) Asset purchase agreement dated as of April 23, 2001, between Atlantic,
Gemini Technologies, Inc., and IFN, Inc.
10.62(18) Securities purchase agreement dated as of November 2, 2001, between
Atlantic and certain investors.
10.62(18) Placement agreement dated as of November 6, 2001, between Joseph
Stevens & Company, Inc. and Atlantic.
21
10.64* License agreement dated October 18, 2001, between Dr. Waldemar
Gottardi, Dr. Markus Nagl and Dr. Andreas Neher and Atlantic.
10.65*++ License agreement dated June 28, 2002, between Atlantic and Indevus
Pharmaceuticals, Inc.
21.1(1) Subsidiaries of Atlantic.
99.1* Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act.
99.2* Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act.
------
+ Confidential treatment has been granted as to certain portions of these
exhibits.
++ Confidential treatment has been requested as to certain portions of these
exhibits.
* Filed herewith.
(1) Incorporated by reference to exhibits of Atlantic's registration
statement on Form SB-2, Registration #33-98478, as filed with the
Securities and Exchange Commission (the "SEC") on October 24, 1995 and
as amended by Amendment No. 1, Amendment No. 2, Amendment No. 3,
Amendment No. 4 and Amendment No. 5, as filed with the SEC on November
9, 1995, December 5, 1995, December 12, 1995, December 13, 1995 and
December 14, 1995, respectively.
(2) Incorporated by reference to exhibits of Atlantic's Current Report on
Form 8-K, as filed with the SEC on August 30, 1996.
(3) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for
the period ended September 30, 1996.
(4) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for
the period ended March 31, 1996.
(5) Incorporated by reference to exhibits of Atlantic's Current Report on
Form 8-KSB, as filed with the SEC on June 9, 1997.
(6) Incorporated by reference to exhibits of Atlantic's Registration
Statement on Form S-3 (Registration No. 333-34379), as filed with the
Commission on August 26, 1997, and as amended by Amendment No. 1 as
filed with the SEC on August 28, 1997.
(7) Incorporated by reference to exhibits of Atlantic Form 10-QSB for the
period ended September 30, 1999.
(8) Incorporated by reference to exhibits of Atlantic's Form 10-KSB for
the period ended December 31, 1999.
(9) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for
the period ended June 30, 2000.
(10) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for
the period ended September 30, 2000.
22
(11) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on
January 24, 2001.
(12) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on
December 11, 2000.
(13) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on
March 14, 2001.
(14) Incorporated by reference to exhibits of Atlantic's Form 10-KSB filed
on April 17, 2001.
(15) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for
the period ended March 31, 2001.
(16) Incorporated by reference to exhibits of Atlantic's Registration
Statement on Form SB-2 (Registration No. 333-61974), as filed with the
Commission on May 31, 2001, and as amended by Amendment No. 1 as filed
with the SEC on June 29, 2001.
(17) Incorporated by reference to exhibits of Atlantic's Form 10-QSB for
the period ended September 30, 2001.
(18) Incorporated by reference to exhibits of Atlantic's Form 8-K filed on
December 6, 2001.
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
23
SIGNATURES
In accordance with the requirements of the Exchange Act, Atlantic
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ATLANTIC TECHNOLOGY VENTURES, INC.
Date: August 14, 2002 /s/ Frederic P. Zotos
------------------------------------
Frederic P. Zotos
President, Chief Executive Officer, and Director
Date: August 14, 2002 /s/ Nicholas J. Rossettos
------------------------------------
Nicholas J. Rossettos
Chief Financial Officer
24