form10q_3q2008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_________________
FORM
10-Q
___________
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2008
Commission File No.
0-31261
ATHEROGENICS,
INC.
(Exact
name of registrant as specified in its charter)
|
Georgia
|
58-2108232
|
|
(State
of incorporation)
|
(I.R.S.
Employer Identification Number)
|
8995 Westside Parkway,
Alpharetta, Georgia 30009
(Address
of registrant's principal executive offices, including zip code)
_______________________
(Registrant's
telephone number, including area code): (678)
336-2500
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ] No
[ ]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company (as defined in Rule 12b-2 of the
Act).
Large accelerated
filer [ ] Accelerated
filer [ X ]
Non-accelerated
filer [ ] Smaller
reporting company [ ]
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [
X ]
As of November 7, 2008 there were
39,518,492 shares of the registrant's common stock outstanding.
_________________________
ATHEROGENICS,
INC.
(Debtor-in-Possession)
FORM
10-Q
INDEX
|
PART
I. FINANCIAL INFORMATION
|
Page No.
|
|
|
|
|
Item
1. Condensed Financial Statements (unaudited)
|
|
|
|
|
|
Condensed
Balance Sheets
|
|
|
September
30, 2008 and December 31,
2007
|
1
|
|
|
|
|
Condensed
Statements of Operations
|
|
|
Three
and nine months ended September 30, 2008 and
2007
|
2
|
|
|
|
|
Condensed
Statements of Cash Flows
|
|
|
Nine
months ended September 30, 2008 and
2007
|
3
|
|
|
|
|
Notes
to Condensed Financial
Statements
|
4
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial
Condition
|
|
|
and
Results of
Operations
|
9
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
15
|
|
|
|
|
Item
4. Controls and
Procedures
|
15
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
Item
1. Legal Proceedings
|
15
|
|
|
|
|
Item
1A. Risk
Factors
|
16
|
|
|
|
|
Item
3. Defaults Upon Senior
Securities
|
17
|
|
|
|
|
Item
6. Exhibits
|
17
|
|
|
|
|
SIGNATURES
|
18
|
|
|
|
PART
I. – FINANCIAL INFORMATION
Item
1. Financial Statements
ATHEROGENICS,
INC.
(Debtor-in-Possession)
CONDENSED
BALANCE SHEETS
(Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
$ |
52,722,834 |
|
|
$ |
74,795,388 |
|
|
Short-term
investments
|
|
— |
|
|
|
18,080,032 |
|
|
Accounts
receivable
|
|
41,429 |
|
|
|
2,634,422 |
|
|
Prepaid
expenses and other current
assets
|
|
1,414,080 |
|
|
|
1,290,260 |
|
|
Total
current
assets
|
|
54,178,343 |
|
|
|
96,800,102 |
|
|
|
|
|
|
|
|
|
|
|
Equipment
and leasehold improvements, net of accumulated
depreciation
|
|
|
|
|
|
|
|
|
and
amortization
|
|
1,680,024 |
|
|
|
2,361,053 |
|
|
Debt
issuance costs and other
assets
|
|
— |
|
|
|
3,977,873 |
|
|
Total
assets
|
$ |
55,858,367 |
|
|
$ |
103,139,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Deficit
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
$ |
— |
|
|
$ |
781,119 |
|
|
Accrued
research and
development
|
|
— |
|
|
|
3,765,745 |
|
|
Accrued
interest
|
|
— |
|
|
|
2,876,150 |
|
|
Accrued
compensation
|
|
259,745 |
|
|
|
2,258,051 |
|
|
Accrued
and other
liabilities
|
|
43,315 |
|
|
|
920,736 |
|
|
Current
portion of convertible notes
payable
|
|
— |
|
|
|
35,968,750 |
|
|
Total
current liabilities not subject to compromise
|
|
303,060 |
|
|
|
46,570,551 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities
subject to
compromise
|
|
306,728,421 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes payable, net of current
portion
|
|
— |
|
|
|
252,163,102 |
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
deficit:
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value: Authorized—5,000,000
shares
|
|
— |
|
|
|
— |
|
|
Common
stock, no par value:
|
|
|
|
|
|
|
|
|
Authorized—100,000,000
shares; issued and outstanding —
|
|
|
|
|
|
|
|
|
39,518,492
shares at September 30, 2008
|
|
|
|
|
|
|
|
|
and
December 31,
2007
|
|
218,706,283 |
|
|
|
215,243,310 |
|
|
Warrants
|
|
598,362 |
|
|
|
613,021 |
|
|
Accumulated
deficit
|
|
(470,477,759
|
) |
|
|
(411,465,815 |
) |
|
Accumulated
other comprehensive
gain
|
|
— |
|
|
|
14,859 |
|
|
Total
shareholders'
deficit
|
|
(251,173,114
|
) |
|
|
(195,594,625 |
) |
|
Total
liabilities and shareholders'
deficit
|
$ |
55,858,367 |
|
|
$ |
103,139,028 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed financial
statements.
ATHEROGENICS,
INC.
(Debtor-in-Possession)
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
27,083,333 |
|
|
Research
and
development
|
|
— |
|
|
|
7,438,867 |
|
|
|
— |
|
|
|
22,075,490 |
|
|
Total
revenues
|
|
— |
|
|
|
7,438,867 |
|
|
|
— |
|
|
|
49,158,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and
development
|
|
5,478,117 |
|
|
|
16,818,119 |
|
|
|
23,191,889 |
|
|
|
59,112,592 |
|
|
General
and
administrative
|
|
2,567,302 |
|
|
|
3,086,868 |
|
|
|
8,628,959 |
|
|
|
10,619,566 |
|
|
Restructuring
and impairment costs
|
|
(572,000
|
) |
|
|
— |
|
|
|
(572,000
|
) |
|
|
9,996,332 |
|
|
Total
operating
expenses
|
|
7,473,419 |
|
|
|
19,904,987 |
|
|
|
31,248,848 |
|
|
|
79,728,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
(7,473,419
|
) |
|
|
(12,466,120
|
) |
|
|
(31,248,848
|
)) |
|
|
(30,569,667
|
) |
|
Interest
and other
income
|
|
257,918 |
|
|
|
1,310,322 |
|
|
|
1,632,279 |
|
|
|
4,798,125 |
|
|
Interest
expense
|
|
(2,630,572
|
) |
|
|
(3,519,669
|
) |
|
|
(9,452,040
|
) |
|
|
(7,695,230
|
) |
|
Net
loss before reorganization items
|
|
(9,846,073
|
) |
|
|
(14,675,467
|
) |
|
|
(39,068,609
|
) |
|
|
(33,466,772
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization
items,
net
|
|
(19,943,335
|
) |
|
|
— |
|
|
|
(19,943,335
|
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$ |
(29,789,408
|
) |
|
$ |
(14,675,467
|
) |
|
$ |
(59,011,944
|
) |
|
$ |
(33,466,772
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and
diluted
|
$ |
(0.75
|
) |
|
$ |
(0.37
|
) |
|
$ |
(1.49
|
) |
|
$ |
(0.85
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
– basic and diluted
|
|
39,518,492 |
|
|
|
39,515,014 |
|
|
|
39,518,492 |
|
|
|
39,493,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed financial
statements.
ATHEROGENICS,
INC.
(Debtor-in-Possession)
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
loss
|
$ |
(59,011,944
|
) |
|
$ |
(33,466,772
|
) |
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
3,448,314 |
|
|
|
6,696,982 |
|
|
Amortization
on 4.5% convertible notes due 2011
|
|
19,734,898 |
|
|
|
980,424 |
|
|
Amortization
of debt issuance
costs
|
|
3,956,538 |
|
|
|
1,338,207 |
|
|
Depreciation
and
amortization
|
|
714,629 |
|
|
|
710,357 |
|
|
Amortization
of deferred
revenue
|
|
— |
|
|
|
(27,083,333
|
) |
|
Asset
impairment
costs
|
|
— |
|
|
|
9,005,153 |
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
2,592,993 |
|
|
|
(945,081
|
) |
|
Prepaid
expenses and other
assets
|
|
(102,485
|
) |
|
|
1,014,733 |
|
|
Accounts
payable
|
|
(532,899
|
) |
|
|
1,885,574 |
|
|
Accrued
research and
development
|
|
(2,853,953
|
) |
|
|
(7,759,460
|
) |
|
Accrued
interest
|
|
(5,199
|
) |
|
|
(1,633,462
|
) |
|
Accrued
compensation
|
|
(1,998,306
|
) |
|
|
59,643 |
|
|
Accrued
and other
liabilities
|
|
(577,963
|
) |
|
|
(184,029
|
) |
|
Deferred
revenue
|
|
— |
|
|
|
1,554,369 |
|
|
Net
cash used in operating
activities
|
|
(34,635,377
|
) |
|
|
(47,826,695
|
) |
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Sales
and maturities of short-term
investments
|
|
18,065,173 |
|
|
|
104,729,736 |
|
|
Purchases
of short-term
investments
|
|
— |
|
|
|
(59,963,664
|
) |
|
Purchases
of equipment and leasehold improvements
|
|
(33,600
|
) |
|
|
(2,594,274
|
) |
|
Net
cash provided by investing
activities
|
|
18,031,573 |
|
|
|
42,171,798 |
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Retirement
of 4.5% convertible notes due
2008
|
|
(5,468,750
|
) |
|
|
— |
|
|
Proceeds
from the exercise of common stock options
|
|
— |
|
|
|
23,074 |
|
|
Net
cash (used in) provided by financing activities
|
|
(5,468,750
|
) |
|
|
23,074 |
|
|
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash
equivalents
|
|
(22,072,554
|
) |
|
|
(5,631,823
|
) |
|
Cash
and cash equivalents at beginning of
period
|
|
74,795,388 |
|
|
|
87,846,079 |
|
|
Cash
and cash equivalents at end of
period
|
$ |
52,722,834 |
|
|
$ |
82,214,256 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures
|
|
|
|
|
|
|
|
|
Interest
paid
|
$ |
5,399,396 |
|
|
$ |
7,010,062 |
|
|
Reorganization
items
paid
|
|
309,744 |
|
|
|
— |
|
The
accompanying notes are an integral part of these condensed financial
statements.
ATHEROGENICS,
INC.
(Debtor-in-Possession)
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Organization;
Proceedings under Chapter 11 of the Bankruptcy Code
AtheroGenics,
Inc. (“AtheroGenics”) was incorporated on November 23, 1993 (date of inception)
in the State of Georgia to focus on the discovery, development and
commercialization of novel therapeutics for the treatment of chronic
inflammatory diseases, including diabetes and coronary heart
disease.
On
September 15, 2008, an involuntary petition under Chapter 7 of the United States
Bankruptcy Code (the “Bankruptcy Code”) was filed against AtheroGenics by
certain holders of AtheroGenics’ 4.5% Convertible Notes Due 2008 (the “2008
Notes”) in the United States Bankruptcy Court for the Northern District of
Georgia (the “Bankruptcy Court”). On October 6, 2008, AtheroGenics
consented to the bankruptcy filing and moved the Bankruptcy Court to convert the
Chapter 7 case to a case under Chapter 11 of the United States Bankruptcy Code
(the “Chapter 11 Proceeding”). This motion was granted on October 15,
2008. No trustee, receiver or examiner has been appointed, and
AtheroGenics expects to act as debtor-in-possession while being subject to the
supervision and order of the Bankruptcy Court.
AtheroGenics
currently contemplates that its non-cash assets will be sold in the Chapter 11
Proceeding, either through a motion under Section 363 of the Bankruptcy Code or
through confirmation of a plan pursuant to Section 1129 of the Bankruptcy Code,
and that the then-remaining cash assets together with the net proceeds generated
through the sale of the non-cash assets will be distributed to its stakeholders,
including its creditors. Due to the constraints imposed on
AtheroGenics by the Chapter 11 Proceeding, AtheroGenics does not anticipate
pursuing any clinical trials or other development activities relating to
AGI-1067 or its other products during the course of the Chapter 11
Proceeding.
As
of September 30, 2008, AtheroGenics had approximately $302.4 million of 2008
Notes, 4.5% Convertible Notes due 2011 (the “2011 Notes”) and 1.5% Convertible
Notes due (the “2012 Notes”) outstanding and cash and cash equivalents of $52.7
million. Under the priority scheme established by the Bankruptcy
Code, as a general rule, AtheroGenics’ creditors will be entitled to receive any
proceeds generated through the sale of AtheroGenics’ non-cash assets before
shareholders are entitled to receive any proceeds. The ultimate recovery by
creditors and shareholders, if any, will not be determined until confirmation
and implementation of a plan of liquidation. No assurance can be
given as to what recoveries, if any, will be assigned in the Chapter 11
Proceeding to each of these constituencies. A plan of liquidation could result
in AtheroGenics’ shareholders receiving no value for their interests and holders
of unsecured debt, including trade debt, receiving less, and potentially
substantially less, than payment in full for their claims. Because of such
possibilities, the value of the common stock and unsecured debt is highly
speculative. Accordingly, AtheroGenics urges that appropriate caution be
exercised with respect to existing and future investments in any of these
securities.
2. Basis
of Presentation
The
accompanying unaudited condensed financial statements reflect all adjustments
(consisting solely of normal recurring adjustments) which management considers
necessary for a fair presentation of the financial position, results of
operations and cash flows of AtheroGenics for the interim periods
presented. Certain footnote disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) have been condensed or omitted from the interim
financial statements as permitted by the rules and regulations of the Securities
and Exchange Commission (the “SEC”). Interim results are not
necessarily indicative of results for the full year.
The
condensed financial statements have been prepared in accordance with Statement
of Position (“SOP”) 90-7, Financial Reporting by Entities
under the Bankruptcy Code. SOP 90-7 does not ordinarily affect
or change the application of GAAP; however, it does require AtheroGenics to
distinguish transactions and events that are directly associated with the
reorganization in connection with the Chapter 11 Proceedings from the ongoing
operations of the business. The Condensed Balance Sheet at September
30, 2008 discloses the pre-petition current
liabilities
subject to compromise. Expenses incurred due to the Chapter 11
Proceeding are reported separately as reorganization items on the Statements of
Operations for the three and nine months ended September 30,
2008. Reorganization items are included in the supplemental
disclosures table as part of the Condensed Statements of Cash
Flows.
The interim results should be read in
conjunction with the financial statements and notes thereto included in
AtheroGenics' Annual Report on Form 10-K for the year ended December 31, 2007
(the “Form 10-K”). Shareholders are encouraged to review the Form
10-K and AtheroGenics’ other filings with the SEC for a broader discussion of
AtheroGenics' business and the risks associated therewith. Copies of
the Form 10-K and
AtheroGenics’ other SEC filings are available on request.
3. Accounts
Receivable
Accounts receivable consists of
receivables related to our license and collaboration agreement with AstraZeneca
(See Note 5) and a manufacturing and supply agreement with ISP Pharma Systems
LLC (See Note 12).
4. Reorganization
Items
AtheroGenics has recognized certain
charges for allowed claims or expected allowed claims in the Condensed Financial
Statements as of and for the three and nine months ended September 30,
2008. The Bankruptcy Court will ultimately determine liability
amounts that will be allowed for claims. As claims are resolved, or
when better information becomes available and is evaluated, adjustments will be
made to the liabilities recorded on the Condensed Financial Statements as
appropriate. These adjustments could be material to our financial
position and results of operations in any given period.
The amounts of liabilities subject to
compromise as of September 30, 2008 consisted of the following:
|
Accounts
payable
|
$
248,220
|
|
Accrued
interest
|
2,870,951
|
|
Accrued
research and
development
|
911,792
|
|
Accrued
other
|
299,458
|
|
2008
Notes
|
30,500,000
|
|
2011
Notes
|
71,898,000
|
|
2012
Notes
|
200,000,000
|
|
Total
liabilities subject to
compromise
|
$
306,728,421
|
The reorganization items recorded in
the Statements of Operations for the three and nine months ended September 30,
2008 consisted of the following:
|
Discount
on the 2011
Notes
|
$ (16,934,684
|
)
|
|
Premium
on the 2011
Notes
|
435,572
|
|
|
Debt
issuance costs on the 2012
Notes
|
(3,134,479
|
)
|
|
Professional
fees
|
(402,361
|
)
|
|
Interest
income
|
92,617
|
|
|
Total
reorganization
items
|
$
(19,943,335
|
)
|
5. Revenue
Recognition
AtheroGenics recognizes license fee
revenues in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 101,
Revenue Recognition in
Financial Statements, as amended by SAB No. 104, Revenue Recognition, (“SAB
104”). SAB 104 provides guidance in applying U.S. generally accepted
accounting principles to revenue recognition issues, and specifically addresses
revenue recognition for upfront, nonrefundable fees received in connection with
research collaboration agreements.
In accordance with SAB 104, license
fees, which are nonrefundable, are recognized over the period the related
license agreements specify that efforts or obligations are required of
AtheroGenics. In 2006, AtheroGenics received a
$50.0
million license fee in connection with its license and collaboration agreement
with AstraZeneca. The upfront nonrefundable license payment was being
recognized on a straight-line basis over the 24-month period that AtheroGenics
estimated it was obligated to provide services to the licensee. In
2007, AstraZeneca announced that it was ending the license and collaboration
agreements and any further obligations required of AtheroGenics at which time
the remaining unamortized deferred revenue was recognized.
During 2006, AstraZeneca separately
engaged AtheroGenics to perform FOCUS (Follow-up Of Clinical Outcomes: The
Long-term AGI-1067 plus Usual Care Study), a follow-up Phase III clinical trial
for patients who have completed ARISE (Aggressive Reduction of Inflammation
Stops Events). Revenues under the research and development agreement
pertaining to FOCUS were recognized in accordance with Emerging Issues Task
Force (“EITF”) Issue No. 99-19, Reporting Gross Revenue as a
Principal vs. Net as an Agent. According to the criteria
established by EITF Issue No. 99-19, AtheroGenics was the primary obligor of the
agreement because it was responsible for the selection, negotiation, contracting
and payment of the third party suppliers. In addition, any
liabilities resulting from the agreement were the responsibility of
AtheroGenics. Research and development revenues were recognized, on a
gross basis, as activities were performed under the terms of the related
agreement. FOCUS was concluded in 2007.
6. Restructuring
and Impairment Costs
In May 2007, AtheroGenics implemented
an organizational restructuring plan that reduced its workforce. This
action was designed to streamline AtheroGenics’ operations and was the first
step in the strategic plan to continue advancing the development of
AGI-1067. As a result, in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, AtheroGenics recorded a charge of
approximately $1.0 million in the second quarter of 2007.
In addition to the reduction in
workforce, AtheroGenics determined that in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, certain excess laboratory equipment and
related leasehold improvements, as well as commercial manufacturing equipment
had been impaired. As AtheroGenics has no assurance that such assets
will be utilized, an impairment test was performed in accordance with SFAS No.
144 based on estimates of cash flows associated with the
equipment. AtheroGenics recorded a non-cash impairment charge of
approximately $9.0 million in the second quarter of 2007.
Under the Manufacturing and Supply
Agreement with ISP Pharma Systems LLC (See Note 12), AtheroGenics exchanged
certain commercial manufacturing equipment, that had previously been impaired
under SFAS No. 144, for specific manufacturing activities related to
AtheroGenics’ product candidate, AGI-1067. Through September 30,
2008, ISP has performed manufacturing activities valued at $572,000 for
AtheroGenics. This transaction is recorded as a research and
development expense and a reduction to the restructuring and impairment
costs.
7. Income
Tax
AtheroGenics
files a U.S. federal and Georgia income tax return on an annual
basis. AtheroGenics is no longer subject to U.S. federal income or
state tax return examinations by tax authorities for years before
2002. However, since AtheroGenics has substantial tax net operating
losses originating in years before 2002, the tax authorities may review the
amount of the pre-2002 net operating losses. AtheroGenics is not
currently under examination by any tax authority.
AtheroGenics
adopted the provisions of the Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes ("FIN 48") effective January 1, 2007. No
cumulative adjustment was required or recorded as a result of the implementation
of FIN 48. As of September 30, 2008, AtheroGenics had no
unrecognized tax benefits. AtheroGenics will recognize accrued
interest and penalties related to unrecognized tax benefits in income tax
expense when and if incurred. AtheroGenics does not anticipate that
unrecognized benefits will be incurred within the next
12 months.
8. Net
Loss per Share
SFAS No. 128, Earnings per Share, requires
presentation of both basic and diluted earnings per share. Basic
earnings per share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the
period. Diluted earnings per share is computed in the same manner as
basic earnings per share except that diluted earnings per share reflects the
potential dilution that would occur if outstanding options, warrants and
convertible notes were exercised. Because AtheroGenics reported a net
loss for all periods presented, shares associated with stock options, warrants
and convertible notes are not included because their effect would be
antidilutive. Basic and diluted net loss per share amounts are the
same for the periods presented.
9. Stock-Based
Compensation
AtheroGenics
recognizes stock-based compensation in accordance with SFAS No. 123(R), Share-Based
Payment. Stock-based compensation of $785,000 and $3.4 million
was recorded for the three and nine months ended September 30, 2008, and $1.9
million and $6.7 million for the comparable periods in
2007. AtheroGenics’ net loss per share was increased by $(0.02) and
$(0.09) for stock-based compensation related to stock options for the three and
nine months ended September 30, 2008, respectively, compared to $(0.05) and
$(0.17) for the comparable periods in 2007. As of September 30, 2008
and 2007, AtheroGenics has a net operating loss carryforward and therefore no
excess tax benefits for tax deductions related to the stock options were
recognized.
For the three and nine months ended
September 30, 2008 and 2007, AtheroGenics calculated a forfeiture rate of 15.60%
and 8.65%, respectively, based on historical data. Expected
volatility is based on historical volatility of AtheroGenics’ common
stock. The expected term of the stock options granted is also based
on historical data and represents the period of time that stock options granted
are expected to be outstanding. The risk free interest rate is based
on the U.S. Treasury rates in effect at the time of the grant for periods
corresponding with the expected term of the options. No stock options
were granted during the three months ended September 30, 2008. During
the nine months ended September 30, 2008, AtheroGenics granted 219,800 stock
options from the 2004 AtheroGenics, Inc. Equity Ownership Plan (“2004
Plan”). During the three and nine months ended September 30, 2007,
AtheroGenics granted 38,100 and 1,087,129 stock options, respectively, from the
2004 Plan. For stock options granted during the three months and nine
months ended September 30, 2008 and 2007 the following weighted average
assumptions were used:
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
—
|
|
76.45%
|
|
89.14%
|
|
82.86%
|
|
Expected
term
|
—
|
|
5
years
|
|
5
years
|
|
3.5
years
|
|
Risk
free interest
rate
|
—
|
|
4.54%
|
|
3.21%
|
|
4.91%
|
|
Fair
value of
grants
|
—
|
|
$
1.10
|
|
$
0.41
|
|
$
1.41
|
10. Convertible
Notes Payable
In August
2003, AtheroGenics issued $100.0 million in aggregate principal amount of our
2008 Notes with interest payable semi-annually in March and
September. Net proceeds to AtheroGenics were approximately $96.7
million, after deducting expenses and underwriters’ discounts and
commissions. The issuance costs related to the notes were recorded as
debt issuance costs and other assets and were being amortized to interest
expense over the five-year life of the notes. The 2008 Notes could
have been converted at the option of the holder into shares of AtheroGenics
common stock prior to maturity at a conversion rate of 65.1890 shares per $1,000
principal amount of notes, representing a conversion price of approximately
$15.34 per share.
In
January 2006, AtheroGenics exchanged $14.0 million in aggregate principal amount
of the 2008 Notes for approximately 1.1 million shares of AtheroGenics common
stock. In accordance with SFAS No. 84, Induced Conversion of Convertible
Debt, this transaction resulted in a non-cash charge of approximately
$3.5 million related to the premium paid in excess of the conversion price in
order to induce conversion of the notes.
In July
2007, AtheroGenics extinguished $38.0 million in aggregate principal amount of
the 2008 Notes with certain holders and issued $60.4 million in aggregate
principal amount of 2011 Notes. This exchange was accounted for as an
extinguishment of the 2008 Notes in accordance with EITF 96-19, Debtor’s Accounting for a
Modification or Exchange of Debt Instruments. The 2011 Notes
were initially recorded at their fair value of $38.0 million. The
$22.4 million difference between the principal amount and the initial fair value
of the 2011 Notes, the discount, was to be accreted up to the face amount of
$60.4 million as additional interest expense using the effective interest method
over the remaining life of the new convertible notes.
In January 2008, AtheroGenics redeemed
$17.5 million of its 2008 Notes and, in exchange, issued $11.5 million of 2011
Notes along with $5.5 million of cash. This transaction was accounted
for as a modification in accordance with EITF 96-19. AtheroGenics
determined that the carrying value of the new 2011 Notes was $12.0
million. As $11.5 million of 2011 Notes were issued, this resulted in
a premium of approximately $500,000 that was to be amortized as an offset to
interest expense over the life of these 2011 Notes.
The terms of the 2011 Notes are
substantially similar to the 2008 Notes including the same customary default
events except that the 2011 Notes will mature in March 2011 as opposed to
September 2008. The 2011 Notes, like the 2008 Notes, bear an interest
rate of 4.5%, payable semiannually in arrears on March 1 and
September 1.
Like the 2008 Notes, the 2011 Notes are
convertible into shares of AtheroGenics common stock at any time prior to the
close of business on the final maturity date, subject to AtheroGenics’ right to
redeem the 2011 Notes prior to their maturity. The conversion rate
for the 2011 Notes is 65.1890 shares per $1,000 principal amount of 2011 Notes,
which represents a conversion price of approximately $15.34 per
share.
In
January 2005, AtheroGenics issued $200.0 million in aggregate principal amount
of 2012 Notes with interest payable semi-annually in February and
August. Net proceeds to AtheroGenics were approximately $193.6
million, after deducting expenses and underwriters’ discounts and
commissions. The issuance costs related to the notes were recorded as
debt issuance costs and other assets and were being amortized to interest
expense over the seven-year life of the notes. The 2012 Notes are
convertible into shares of common stock, at the option of the holder, at a
conversion rate of 38.5802 shares per $1,000 principal amount of notes, which
represents a conversion price of approximately $25.92 per share.
On
September 2, 2008, AtheroGenics defaulted on the principal and interest due on
the 2008 Notes. This default created an event of default under the
indentures governing the 2011 Notes and the 2012 Notes, which in turn caused the
2011 Notes and the 2012 Notes to become immediately due and
payable. In accordance with SFAS No. 78, Classifications of Obligations That
Are Callable by the Creditor, (“SFAS 78”) the 2011 Notes and the 2012
Notes, $71.9 million and $200.0 million, respectively, were reclassified as
liabilities subject to compromise. The remaining unamortized debt
issuance costs of $3.1 million related to the 2012 Notes was expensed upon the
event of default and recorded in reorganization items. In addition,
in connection with the 2011 Notes, the remaining unamortized discount of $16.9
million was also recorded as an expense in reorganization items and the
remaining unamortized premium of $436,000 was recorded as an offset to expense
in reorganization items. As of September 30, 2008, AtheroGenics
recorded $2.3 million of accrued interest expense related to the 2008 and 2011
Notes, which was due, but not paid on September 1, 2008. An
additional 15 days of interest, $192,000, has been accrued for the time period
of September 1 through September 15 when the Chapter 7 petition was
filed. In addition, AtheroGenics recorded $375,000 of accrued
interest expense related to the 2012 Notes, which includes the time period of
September 1 through September 15. Due to the Chapter 11 Proceedings,
no interest expense was recorded on the 2008 Notes, the 2011 Notes or the 2012
Notes after September 15, 2008.
11. Recently
Issued Accounting Standards
In September 2006, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements,
(“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. Available-for-sale securities are reflected on
AtheroGenics Condensed Balance Sheet in short-term investments and related gains
and losses are recorded in
accumulated
other comprehensive gain. The adoption of SFAS 157 on January 1, 2008
did not have an impact on AtheroGenics’ results of operations.
In February 2007, FASB issued SFAS No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities, (“SFAS 159”). SFAS
159 permits entities to choose to measure many financial instruments at fair
value rather than under other GAAP, such as historical costs. This
results in the financial instrument being marked to fair value every reporting
period with the gain or loss from a change in the fair value recorded in the
Statements of Operations. SFAS 159 is effective for fiscal years
beginning after November 17, 2007. AtheroGenics did not elect the
fair value option for any assets or liabilities previously recorded at
historical cost.
12. Commitments
and Contingencies
In April 2008, AtheroGenics entered
into a Manufacturing and Supply Agreement (the “Agreement”) with ISP Pharma
Systems LLC (“ISP”) for the manufacture and supply of the active pharmaceutical
ingredient and an intermediate product (the “Product”) of AtheroGenics’ product
candidate, AGI-1067.
The
initial term of the Agreement expires on April 1, 2013 and the Agreement is
automatically extended for successive two year terms thereafter if neither
AtheroGenics nor ISP gives notice of non-renewal 180 days prior to the
expiration of the initial or renewal term.
Under the
terms of the Agreement, ISP has agreed to accept certain equipment used in the
manufacture of the Product from AtheroGenics, in exchange for specific
manufacturing activities related to AtheroGenics’ product candidate,
AGI-1067. Through September 30, 2008, AtheroGenics has recognized
$572,000 of work performed by ISP in research and development expense with an
offsetting credit to restructuring and impairment costs. In addition,
ISP has agreed to supply, and AtheroGenics has agreed to purchase, specified
percentages, which change over time, of the worldwide production requirements
for the Product, if needed. AtheroGenics will pay ISP a specified
purchase price, which varies based on annual quantities of the Product
supplied. This purchase price is adjustable based on any changes in
Product specifications mandated by AtheroGenics, and, following the end of each
contract year, based upon certain industry price indices.
The
Agreement also contains certain provisions regarding the rights and
responsibilities of the parties with respect to manufacturing specifications,
forecasting and ordering, delivery arrangements, payment terms, change orders,
intellectual property rights, confidentiality and indemnification, as well as
other customary terms and provisions.
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
The
following contains forward-looking statements which are subject to certain risks
and should be read in conjunction with the information contained herein as well
as with the financial statements and related footnotes and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in AtheroGenics' Annual Report on Form 10-K for the fiscal year ended
December 31, 2007. The results discussed below are not necessarily
indicative of the results to be expected in any future
periods. In this report, "AtheroGenics," "we," "us" and "our"
refer to AtheroGenics, Inc.
Overview
AtheroGenics
is a research-based pharmaceutical company focused on the discovery, development
and commercialization of novel drugs for the treatment of chronic inflammatory
diseases, including diabetes and coronary heart disease. We currently have one
late stage clinical drug development program.
On
September 15, 2008, an involuntary petition under Chapter 7 of the United States
Bankruptcy Code (the “Bankruptcy Code”) was filed against us by certain holders
of our 4.5% Convertible Notes Due 2008 (the “2008 Notes”) in the United States
Bankruptcy Court for the Northern District of Georgia (the “Bankruptcy
Court”). On October 6, 2008, we consented to the bankruptcy filing
and moved the Bankruptcy Court to convert the Chapter 7 case to a case under
Chapter 11 of the United States Bankruptcy Code (the “Chapter 11
Proceeding”). This motion
was
granted on October 15, 2008. No trustee, receiver or examiner has
been appointed, and we expect to act as debtor-in-possession while being subject
to the supervision and order of the Bankruptcy Court.
We currently contemplate that our non-cash assets will be sold in the Chapter 11
Proceeding, either through a motion under Section 363 of the Bankruptcy Code or
through confirmation of a plan pursuant to Section 1129 of the Bankruptcy Code,
and that the then-remaining cash assets together with the net proceeds generated
through the sale of the non-cash assets will be distributed to our stakeholders
including our creditors.
As of September 30, 2008, we had approximately $302.4 million of 2008 Notes,
4.5% Convertible Notes due 2011 (the “2011 Notes”) and 1.5% Convertible Notes
due (the “2012 Notes”) outstanding and cash and cash equivalents of $52.7
million. Under the priority scheme established by the Bankruptcy
Code, as a general rule, our creditors will be entitled to receive any proceeds
generated through the sale of our non-cash assets before our shareholders are
entitled to receive any proceeds. The ultimate recovery by creditors and
shareholders, if any, will not be determined until confirmation and
implementation of a plan of liquidation. No assurance can be given as to what
recoveries, if any, will be assigned in the Chapter 11 Proceeding to each of
these constituencies. A plan of liquidation could result in our shareholders
receiving no value for their interests and holders of our unsecured debt
receiving less, and potentially substantially less, than payment in full for
their claims. Because of such possibilities, the value of our common stock and
our unsecured debt is highly speculative. Accordingly, AtheroGenics
urges that appropriate caution be exercised with respect to existing and future
investments in any of these securities.
In 2003,
we initiated a Phase III trial, referred to as ARISE (Aggressive Reduction of
Inflammation Stops Events), which evaluated the impact of our lead drug
candidate, AGI-1067, on a composite measure of heart disease outcomes, including
death due to coronary disease, myocardial infarction (heart attack), stroke,
coronary re-vascularization and unstable angina. Important measures
of glycemic control were included for patients with diabetes who also had
coronary heart disease. The study assessed the incremental benefits
of AGI-1067 versus the current standard of care therapies in this patient
population. As such, all patients in the trial, including those on
placebo, received other appropriate heart disease and diabetes medications,
including statins and other cholesterol-lowering therapies, and glycemic control
agents.
The ARISE
trial results were reported in March 2007 and demonstrated that while AGI-1067
did not show a difference from placebo in the composite primary endpoint, the
study did achieve a number of other important predefined
endpoints. These endpoints included a reduction in the composite of
“hard” atherosclerotic clinical endpoints, composed of cardiovascular death,
resuscitated cardiac arrest, myocardial infarction and
stroke. AGI-1067 achieved a significant reduction of 19% in the rate
of these combined hard endpoints. There were also improvements in the
key diabetes parameters of new-onset diabetes and glycemic control.
In August 2007, we commenced the first
registration study for diabetes called ANDES, a multi-center, double-blind study
with 6-month dosing using two doses (150mg and 75mg), designed to compare the
effects of AGI-1067 versus placebo on glycemic endpoints in subjects with
confirmed Type 2 diabetes. In July 2008, we announced top-line
results that showed both doses, 150mg and 75mg, of AGI-1067 met the primary
efficacy endpoint of the reduction in glycosylated hemoglobin (A1c) versus
placebo at the end of the study’s nine month dosing regimen. Although
we expect that an additional positive registration study in patients with
diabetes will be required to submit a New Drug Application for marketing
approval, due to the constraints imposed on us by the Chapter 11 Proceeding, we
do not anticipate pursuing any clinical trials or other commercialization
activities relating to AGI-1067 or our other products during the course of the
Chapter 11 Proceeding.
In 2005, we entered into a license and
collaboration agreement with AstraZeneca for the global development and
commercialization of AGI-1067. Under the terms of the agreement, we
received a license fee of $50 million. In April 2007, AstraZeneca
notified us that pursuant to the terms of the agreement, it was ending the
collaboration. The agreement was terminated in July
2007.
In the
second half of 2006, we were engaged by AstraZeneca to conduct FOCUS (Follow-up
Of Clinical Outcomes: The Long-term AGI-1067 plus Usual Care
Study). FOCUS was a follow-up Phase III clinical trial for patients
exiting ARISE, designed to collect extended safety
information. Pursuant to the terms of our license agreement,
AstraZeneca funded the entire cost of the trial, which has been
concluded.
AGI-1096, our second v-protectant®
candidate, is a novel antioxidant and selective anti-inflammatory agent to
address the accelerated inflammation of grafted blood vessels, known as
transplant arteritis, common in chronic organ transplant
rejection. We worked with Astellas Pharma Inc. (“Astellas”) to
further develop AGI-1096, with Astellas funding the costs for development
activities under the agreement. Astellas has informed us that they
have completed their current development activities and do not have further
development plans. We are not currently undertaking any development activities
on AGI-1096.
The following table provides
information regarding our research and development expenses for our major
product candidates:
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Direct
external AGI-1067
costs
|
$
2,038,833
|
|
$
12,545,833
|
|
$
12,177,777
|
|
$
38,157,320
|
|
Unallocated
internal costs and other programs
|
3,439,284
|
|
4,272,286
|
|
11,014,112
|
|
20,955,272
|
|
Total
research and
development
|
$
5,478,117
|
|
$
16,818,119
|
|
$
23,191,889
|
|
$
59,112,592
|
From inception, we have devoted the
large majority of our research and development efforts and financial resources
to support development of the AGI-1067 product candidate.
Our
common stock was previously listed on the Nasdaq Global
Market. Trading in our common stock on the Nasdaq Global Market was
suspended at the opening of business on October 14, 2008. Following
the delisting, our common stock has been traded on the Pink Sheets under the
symbol “AGIXQ.PK”.
Critical
Accounting Policies and Use of Estimates
The preparation of financial statements
in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions and select accounting policies that
affect the amounts reported in our financial statements and the accompanying
notes. Actual results could significantly differ from those
estimates. AtheroGenics considers certain accounting policies related
to use of estimates, research and development accruals, revenue recognition and
stock-based compensation to be critical policies. Other than the
adoption of SOP 90-7 discussed below, there have been no material changes in the
critical accounting policies from what was previously disclosed in our Form
10-K.
We applied Statement of Position
(“SOP”) 90-7, Financial
Reporting by Entities under the Bankruptcy Code. SOP 90-7
provides guidance on financial reporting by entities that have filed petitions
with the Bankruptcy Court and expect to reorganize as going concerns under
Chapter 11 of the Bankruptcy Code. In accordance with SOP 90-7 all of
the remaining unamortized debt issuance costs related to the 2012 Notes were
reported as reorganization items along with remaining unamortized discount and
premium related to the 2011 Notes. Professional fees that were
incurred due to the Chapter 11 Proceedings as well as interest income that would
not have been earned had the principal amount of the 2008 Notes been paid were
reported as reorganization items. Liabilities that were subject to
compromise were segregated from liabilities not subject to compromise as
required by SOP 90-7.
Results
of Operations
Comparison
of the Three and Nine Months Ended September 30, 2008 and 2007
Revenues
No revenues were recorded for the three
and nine months ended September 30, 2008 compared to total revenues of $7.4
million and $49.2 million, respectively, for the comparable periods in
2007. License fee revenues of $27.1 million for the nine months ended
September 30, 2007 were related to the AGI-1067 license agreement with
AstraZeneca that was concluded in 2007. The research and development
revenues of $7.4 million and $22.1
million
for the three and nine months ended September 30, 2007, respectively, were for
services performed for AstraZeneca related to the FOCUS clinical trial, which
was also concluded in 2007.
Expenses
Research and
Development. Research and development expenses were $5.5
million and $16.8 million for the three months ended September 30, 2008 and
2007, respectively, and $23.2 million and $59.1 million for the nine months
ended September 30, 2008 and 2007, respectively. The decrease in
research and development expenses in the three and nine months ended September
30, 2008 is primarily due to decreased expenditures for the ARISE and FOCUS
clinical trials, which were concluded in 2007, lower personnel costs, including
the elimination of the 2008 management incentive accrual and lower stock-based
compensation expense. This is partially offset by expenditures in the
three and nine months ended September 30, 2008 for the ANDES clinical trial
which commenced in the second half of 2007 and for work performed by ISP Pharma
under the manufacturing and supply agreement.
General and
Administrative. General and administrative expenses were $2.6
million and $3.1 million for the three months ended September 30, 2008 and 2007,
respectively, and $8.6 million and $10.6 million for the nine months ended
September 30, 2008 and 2007, respectively. The decrease in both
periods is primarily due to lower personnel related costs, including the
elimination of the 2008 management incentive accrual and lower stock-based
compensation expense, and professional fees.
Restructuring and Impairment
Costs. The reversal of restructuring and impairment costs of
$572,000 for the three and nine months ended September 30, 2008 was due to work
performed by ISP Pharma in exchange for certain commercial manufacturing
equipment that had been impaired and written-off during the restructuring in
2007. Restructuring and impairment costs of $10.0 million for the
nine months ended September 30, 2007 were incurred for the write-off of impaired
manufacturing assets, as a result of the transition of commercial manufacturing
activities from AstraZeneca, as well as severance and asset impairment costs
from an organization restructuring that occurred during the second quarter of
2007.
Interest
and Other Income
Interest and other income is primarily
comprised of income earned on our cash and short-term
investments. Interest and other income decreased to $258,000 for the
three months ended September 30, 2008 from $1.3 million for the comparable
period in 2007 and to $1.6 million for the nine months ended September 30, 2008
from $4.8 million for the comparable period in 2007. The decrease for
the three and nine months ended September 30, 2008 was primarily due to the
lower balance of cash and short-term investment funds than in the comparable
period in 2007 and lower interest rates as well as interest income that was
classified as a reorganization item due to the Chapter 11
Proceeding.
Interest
Expense
Interest expense decreased to $2.6
million for the three months ended September 30, 2008 from $3.5 million for the
comparable period in 2007. The decrease in the three months ended
September 30, 2008 is primarily due to the remaining unamortized discount and
premium on the 2011 Notes being recorded as an expense (net) in reorganization
items in connection with the Chapter 11 filing. For the nine months
ended September 30, 2008, interest expense increased to $9.5 million as compared
to $7.7 million for the same period in 2007. The increase in interest
expense for the nine months ended September 30, 2008 is due to the recognition
of eight months’ expense of the discount related to the 2011 Notes issued in
July 2007 as compared to only three months’ expense in prior
year. Due to the Chapter 11 Proceedings, no interest expense was
recorded on the 2008 Notes, the 2011 Notes or the 2012 Notes after September 15,
2008.
Reorganization
Items
In connection with the Chapter 11
Proceeding, we incurred $19.9 million of reorganization items which primarily
consists of the recognition of the remaining unamortized debt issuance cost of
$3.1 million for the 2012 Notes and the remaining unamortized discount of $16.9
million for the 2011 Notes, and professional fees. These amounts are
partially offset by the recognition of the remaining unamortized premium of
$436,000 for the 2011 Notes in addition
to
interest income that would not have been earned but for the proceedings during
the three and nine months ended September 30, 2008.
Liquidity
and Capital Resources
As previously discussed, on September
15, 2008, an involuntary petition under Chapter 7 of the Bankruptcy Code was
filed against us by certain holders of our 2008 Notes in the Bankruptcy
Court. On October 6, 2008, we consented to the bankruptcy filing and
moved the Bankruptcy Court to convert the Chapter 7 case to a case under Chapter
11 of the United States Bankruptcy Code which motion was granted on October 15,
2008. We currently contemplate that our non-cash assets will be sold
in the Chapter 11 Proceeding, either through a motion under Section 363 of the
Bankruptcy Code or through confirmation of a plan pursuant to Section 1129 of
the Bankruptcy Code, and that the then-remaining cash assets together with the
net proceeds generated through the sale of the non-cash assets will be
distributed to our stakeholders including our creditors.
During
the Chapter 11 Proceeding, we expect that our principal sources of liquidity
will be derived from our existing cash and cash equivalents on hand as of
September 30, 2008. Our principal uses of cash during the Chapter 11
Proceeding are expected to consist primarily of administrative expenses related
the Chapter 11 Proceeding and other operating expenses necessary to complete the
sale of our non-cash assets. We do not anticipate having access to
additional sources of financing during the Chapter 11 Proceeding.
Since inception, we have financed our
operations primarily through sales of equity securities and convertible
notes. At September 30, 2008, we had cash and cash equivalents of
$52.7 million compared with cash, cash equivalents and short-term investments of
$92.9 million at December 31, 2007. The decrease in cash, cash
equivalents and short-term investments was due to the use of funds for operating
purposes and retiring $5.5 million of the 2008 Notes. At September
30, 2008, our current liabilities exceeded our current assets by $252.9 million,
which includes liabilities subject to compromise, compared to working capital of
$50.2 million at December 31, 2007. The decrease in working capital
for the nine months ended September 30, 2008 is primarily due to the long-term
portion of the convertible notes payable being reclassified to liabilities
subject to compromise in connection with the default of the convertible notes,
along with the acceleration of the discount and premium on the 2011 Notes that
were previously being amortized over the life of the notes.
Net cash used in operating activities
was $34.6 million for the nine months ended September 30, 2008 compared to $47.8
million for the nine months ended September 30, 2007. The net cash
used in operating activities for the nine months ended September 30, 2008 was
primarily for expenditures related to the ANDES clinical trial. The
net cash used in operating activities for the nine months ended September 30,
2007 was principally for the closeout of ARISE, the ongoing FOCUS clinical
trial, and our other ongoing product development programs.
Net cash provided by investing
activities was $18.0 million for the nine months ended September 30, 2008
compared to $42.2 million for the nine months ended September 30,
2007. Net cash provided by investing activities for the nine months
ended September 30, 2008 and 2007 consisted primarily of the net sales of
short-term investments.
Net cash used in financing activities
was $5.5 million for the nine months ended September 30, 2008 compared to net
cash provided by financing activities of $23,000 for the nine months ended
September 30, 2007. Net cash used in financing activities for the
nine months ended September 30, 2008 was due to the retirement of $5.5 million
of the 2008 Notes. Net cash provided by financing activities in the
nine months ended September 30, 2007 consisted of the proceeds received upon
exercise of common stock options.
In August
2003, we issued $100 million in aggregate principal amount of 2008 Notes through
a Rule 144A private placement to qualified institutional
buyers. These notes were convertible into our common stock at a
conversion rate of 65.1890 shares per $1,000 principal amount of notes, or
approximately $15.34 per share. Net proceeds were approximately $96.7
million. Interest of 4.5% on the 2008 Notes was payable semi-annually
in arrears on March 1 and September 1. In January 2006, we exchanged
$14.0 million in aggregate principal amount of the 2008 Notes for 1,085,000
shares of our common stock. In July 2007, we extinguished $38.0
million of the 2008 Notes and in exchange, issued $60.4 million of 2011
Notes. The 2011 Notes were initially recorded at
their
fair
value of $38.0 million. The $22.4 million difference between the
principal amount and the initial fair value of the debt, the discount, was being
accreted up to the face amount as additional interest expense over the remaining
life of the 2011 Notes. On September 2, 2008, the remaining
unamortized balance of the discount, $16.9 million, was recorded as an expense
in reorganization items upon default of the 2011 Notes discussed
above. In January 2008, we redeemed $17.5 million in aggregate
principal amount of our 2008 Notes, and in exchange issued $11.5 million of 2011
Notes and repaid $5.5 million in cash. We recorded the new 2011 Notes
at their carrying value of $12.0 million. This resulted in a premium
of approximately $500,000 that was being amortized as an offset to interest
expense over the life of these 2011 Notes. On September 2, 2008,
the remaining unamortized balance of the premium, $435,000, was recorded as an
offset in expense to reorganization items as a result of the default on the 2011
Notes discussed above. As of September 30, 2008, we have recorded
$2.3 million of accrued interest expense related to the 2008 and 2011 Notes,
which was due, but not paid on September 1, 2008. An additional 15
days of interest, $192,000, has been accrued for the time period of September 1
through September 15 when the Chapter 7 petition was filed.
In January 2005, we issued $200 million
in aggregate principal amount of 2012 Notes through a Rule 144A private
placement to qualified institutional buyers. These notes are
convertible into shares of our common stock at a conversion rate of 38.5802
shares per $1,000 principal amount of notes, or approximately $25.92 per
share. Interest of 1.5% on the 2012 Notes is payable semi-annually in
arrears on February 1 and August 1. Net proceeds were approximately
$193.6 million. As of September 30, 2008, we have recorded $375,000
of accrued interest expense related to the 2012 Notes, which includes the time
period of September 1 through September 15 when the Chapter 7 petition was
filed.
The following table summarizes our
contractual obligations as of September 30, 2008:
|
|
Payment
Due by Period
|
|
|
Total
|
|
2008
|
|
2009-2010
|
|
Thereafter
|
|
Contractual
obligations
|
|
|
|
|
|
|
|
|
Convertible
notes
|
$
302,398,000
|
|
$
302,398,000
|
|
$ —
|
|
$ —
|
|
Interest
on convertible notes
|
2,870,951
|
|
2,870,951
|
|
—
|
|
—
|
|
Operating
leases
|
530,068
|
|
315,416
|
|
214,652
|
|
—
|
|
Total
contractual obligations
|
$
305,799,019
|
|
$
305,584,367
|
|
$ 214,652
|
|
$ —
|
FORWARD-LOOKING
STATEMENTS
The Private Securities Litigation
Reform Act of 1995 (the "Reform Act") provides a safe harbor for forward-looking
statements made by or on behalf of AtheroGenics. AtheroGenics and its
representatives may from time to time make written or oral forward-looking
statements, including statements contained in this report and our other filings
with the Securities and Exchange Commission and in our reports to our
shareholders. All statements which address operating performance,
events or developments that we expect or anticipate will occur in the future,
such as developments regarding the Chapter 11 Proceeding and the amount of the
expected proceeds from the sale of our non-cash assets are forward-looking
statements within the meaning of the Reform Act. The forward-looking
statements are and will be based on management's then current views and
assumptions regarding future events and operating performance, and speak only as
of their dates. AtheroGenics undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
The following are some of the factors
that could affect the recoveries, if any, by our creditors and our shareholders
from the Chapter 11 Proceedings and our future financial condition:
|
·
|
the
value ascribed to our non-cash assets by any bidder or potential bidder in
the Chapter 11 Proceeding;
|
|
·
|
our
ability to continue to operate as a debtor-in-possession during the
Chapter 11 Proceeding;
|
|
·
|
the
impact of current financial market conditions on our ability to complete
the sale of our non-cash assets in the Chapter 11
Proceeding;
|
|
·
|
the
approval of the terms of any sale of our non-cash assets by the Bankruptcy
Court;
|
|
·
|
our
ability to adequately protect or enforce our intellectual property rights
or secure rights to third party patents, which may affect the value
ascribed by a bidder in the Chapter 11 Proceeding to our non-cash
assets;
|
|
·
|
changes
in the Bankruptcy Code; and
|
|
·
|
our
ability to retain and motivate personnel necessary to complete the Chapter
11 Proceeding.
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Market risk represents the risk of loss
that may impact our financial position, operating results or cash flows due to
changes in U.S. interest rates. This exposure is directly related to
our normal operating activities. Our cash, cash equivalents and
short-term investments are invested with high quality issuers and are generally
of a short-term nature. Interest rates payable on our convertible
notes are fixed. As a result, we do not believe that near-term
changes in interest rates will have a material effect on our future results of
operations.
Item
4. Controls and Procedures
Evaluation of disclosure controls
and procedures. Our chief executive officer and chief
financial officer are responsible for establishing and maintaining "disclosure
controls and procedures" (as defined in the Securities Exchange Act of 1934
Rules 13a-15(e) and 15d-15(e)) for AtheroGenics. Our chief executive
officer and chief financial officer, after evaluating the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
quarterly report, have concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
that we file or submit under the Exchange Act is accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, to allow timely decisions regarding required disclosure.
Changes in internal control over
financial reporting. There were no changes in our internal
control over financial reporting that occurred during our most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
On
September 15, 2008, an involuntary petition under Chapter 7 of the Bankruptcy
Code was filed against us by certain holders of our 2008 Notes in the
Bankruptcy Court . On October 6, 2008, we consented to the bankruptcy
filing and moved the Bankruptcy Court to convert the Chapter 7 case to a case
under Chapter 11 of the Bankruptcy Code. This motion was granted on
October 15, 2008. No trustee, receiver or examiner has been
appointed, and we expect to act as debtor-in-possession while being subject to
the supervision and order of the Bankruptcy Court.
We
currently contemplate that our non-cash assets will be sold in the Chapter 11
Proceeding, either through a motion under Section 363 of the Bankruptcy Code or
through confirmation of a plan pursuant to Section 1129 of the Bankruptcy Code,
and that the then-remaining cash assets together with the net proceeds generated
through the sale of the non-cash assets will be distributed to our stakeholders
including our creditors.
Item
1A. Risk Factors
In connection with the Chapter 11
Proceedings, certain additional risks and uncertainties should also be
considered as discussed below.
The
proceeds from the sale of our non-cash assets may not exceed amounts owed to our
creditors, which may result in our shareholders receiving no value for their
common stock and our creditors receiving less than payment in full for their
claims.
Under
the priority scheme established by the Bankruptcy Code, as a general rule, our
creditors will be entitled to receive any proceeds generated through the sale of
our non-cash assets before shareholders are entitled to receive any proceeds.
The ultimate recovery by creditors and shareholders, if any, will not be
determined until confirmation and implementation of a plan of liquidation. No
assurance can be given as to what recoveries, if any, will be assigned in the
Chapter 11 Proceeding to each of these constituencies. A plan of liquidation
could result in our shareholders receiving no value for their interests and
holders of unsecured debt receiving less, and potentially substantially less,
than payment in full for their claims. Because of such possibilities, the value
of our common stock and unsecured debt is highly speculative.
The
sale of our non-cash assets in the Chapter 11 Proceeding could be negatively
affected by current adverse conditions in the financial markets.
The
financial markets have recently been, and continue to be, disrupted and
volatile. In particular, the cost and availability of financing has
been and may continue to be adversely affected by illiquid financial and credit
markets. As a result, potential bidders may not be able to obtain the
financing necessary to purchase our non-cash assets in the Chapter 11
Proceeding, which may diminish the proceeds available for distribution to our
stakeholders, including our creditors and shareholders.
Our
non-cash assets may be difficult to value, which may negatively affect the
proceeds available for distribution to our stakeholders, including our creditors
and shareholders.
Our
primary non-cash asset consists of AGI-1067, our investigational drug with
demonstrated anti-inflammatory and anti-oxidant properties. We have
not derived any commercial revenues from product sales, and the size of the
market for AGI-1067 remains uncertain. As a result, potential bidders
in the Chapter 11 Proceeding may have difficulty valuing AGI-1067, which may
negatively affect the proceeds available for distribution to our stakeholders,
including our creditors and shareholders.
Our
common stock was delisted from the Nasdaq Global Market and is currently quoted
on the Pink Sheets, which may make buying or selling shares of our common stock
difficult.
Item
3. Defaults Upon Senior Securities
On
September 2, 2008, we defaulted on the principal and interest due on our 2008
Notes. This default created an event of default under the indentures governing
the 2011 Notes and the 2012 Notes, which in turn caused the 2011 Notes and the
2012 Notes to become immediately due and payable.
The following represents total amounts
owed under our debt agreements which are shown as part of liabilities subject to
compromise at September 30, 2008 on our Condensed Balance Sheets.
|
Description
|
Principal
|
|
Interest
|
|
|
|
|
|
|
4.5%
convertible notes due September 1, 2008
|
$ 30,500,000
|
|
$ 743,437
|
|
4.5%
convertible notes due March 1, 2011
|
71,898,000
|
|
1,752,514
|
|
1.5%
convertible notes due February 1, 2012
|
200,000,000
|
|
375,000
|
|
Total
due
|
$
302,398,000
|
|
$
2,870,951
|
Item
6. Exhibits
Exhibits
|
Exhibit
31.1
|
-
|
Certifications
of Chief Executive Officer under Rule 13a-14(a).
|
|
|
|
|
|
Exhibit
31.2
|
-
|
Certifications
of Chief Financial Officer under Rule 13a-14(a).
|
|
|
|
|
|
Exhibit
32
|
-
|
Certifications
of Chief Executive Officer and Chief Financial Officer under Section
1350.
|
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
ATHEROGENICS,
INC.
|
|
|
|
|
Date: November
13, 2008
|
/s/MARK P. COLONNESE |
|
|
Mark
P. Colonnese
|
|
|
Executive
Vice President, Commercial Operations and
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|