Filed Pursuant to Rule 424(b)(3)
File No. 333-113980
PROSPECTUS SUPPLEMENT NO. 3
(TO PROSPECTUS DATED APRIL 26, 2004)
VIOQUEST PHARMACEUTICALS, INC.
(FORMERLY KNOWN AS CHIRAL QUEST, INC.)
7,723,041 SHARES
COMMON STOCK
The information contained in this prospectus supplement amends and updates
our prospectus dated April 26, 2004, as supplemented by Prospectus Supplement
No.1 dated May 17, 2004 and Prospectus Supplement No. 2 dated August 16, 2004
(collectively, the "Prospectus"), and should be read in conjunction therewith.
Please keep this Prospectus Supplement with your Prospectus for future
reference.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS NOVEMBER 12, 2004
FORWARD-LOOKING STATEMENTS
Certain statements contained in this prospectus supplement that are
forward-looking in nature are based on the current beliefs of our management as
well as assumptions made by and information currently available to management,
including statements related to the markets for our products, general trends in
our operations or financial results, plans, expectations, estimates and beliefs.
In addition, when used in this prospectus, the words "may," "could," "should,"
"anticipate," "believe," "estimate," "expect," "intend," "plan," "predict" and
similar expressions and their variants, as they relate to us or our management,
may identify forward-looking statements. These statements reflect our judgment
as of the date of this prospectus supplement with respect to future events, the
outcome of which are subject to risks, which may have a significant impact on
our business, operating results or financial condition. You are cautioned that
these forward-looking statements are inherently uncertain. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein. We undertake no obligation to update forward-looking statements. The
risks identified under the heading "Risk Factors" in the Prospectus, among
others, may impact forward-looking statements contained in this prospectus
supplement.
INTERIM FINANCIAL STATEMENTS - QUARTER ENDED SEPTEMBER 30, 2004
Included in this prospectus supplement beginning at page F-1 are our
interim financial statements as of and for the three and nine months ended
September 30, 2004, included the accompanying footnotes thereto. These interim
financial statements, which were included in our Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2004, should be read in conjunction with the
audited financial statements as of and for the year ended December 31, 2003 that
were included in the Prospectus.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and
results of operations is derived from our Quarterly Report on Form 10-QSB for
the quarter ended September 30, 2004. We have not attempted to update this
discussion in any way. You should read the following discussion in conjunction
with our condensed consolidated financial statements as of and for the three and
nine months ended September 30, 2004 included in this prospectus supplement, as
well as our consolidated financial statements and related notes included in the
Prospectus.
OVERVIEW
Since our inception in October 2000, we have focused our efforts and
resources on the development of asymmetric catalysis technology, our primary
intellectual property to which we hold an exclusive worldwide license from the
Pennsylvania State Research Foundation ("PSRF"), the technology development arm
of the Pennsylvania State University ("Penn State"). Our license from PSRF
covers certain inventions discovered by our Chief Technology Officer ("CTO")
prior to November 8, 2002.
Since inception we have incurred an accumulated deficit of $6,224,849
through September 30, 2004. We expect our operating losses to continue at least
the next two years, primarily due to expansion of our research and development
programs, the hiring of additional chemists, and the expansion of our
manufacturing capabilities.
Our ability to achieve profitability depends upon, among other things, our
ability to discover and develop products (specifically new "ligands" which are
the Company's core proprietary technology consisting of molecular compounds that
create a chiral center), and to develop our products on a commercial scale
through a cost effective and efficient process. To the extent that we are unable
to produce, directly or indirectly, ligands in quantities required for
commercial use, we will not realize any significant revenues from our
technology. Moreover, there can be no assurance that we will ever achieve
significant revenues or profitable operations from the sale of any of our
products or technologies.
S-2
Since our inception, we have generated sales revenue but no net profits.
Our management believes that our research and development ("R&D") and
manufacturing capacity will need to grow in order for us to be able to obtain
significant licensing and manufacturing agreements with large fine chemical and
pharmaceutical companies. We believe that our manufacturing capacity will
continue to be enhanced with the expansions of our new office and laboratory
space located in Monmouth Junction, New Jersey that was leased in June 2003.
On February 18, 2003, we acquired Surg II, Inc., a Minnesota corporation
("Surg"), in a reverse merger transaction (the "Merger"). Pursuant to the terms
of the Merger, Chiral Quest, LLC merged with and into a wholly-owned subsidiary
of Surg. In exchange for all of the outstanding membership interests of Chiral
Quest, LLC, Surg issued to the former member of Chiral Quest, LLC a number of
shares of Surg's common stock that resulted in the members of Chiral Quest, LLC
owning two-thirds of Surg's outstanding shares following the Merger. In
connection with the Merger, Surg changed its name to Chiral Quest, Inc., a
Minnesota corporation, and adopted the business plan of Chiral Quest, LLC.
Accordingly, when we refer to our business or financial information relating to
periods prior to the Merger, we are referring to the business and financial
information of Chiral Quest, LLC, unless the context indicates otherwise. In
August 2004, we changed the Company's name to VioQuest Pharmaceuticals, Inc.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 VS.
2003
Our revenues for the three months ended September 30, 2004 were $367,265
as compared to $83,068 for the three months ended September 30, 2003. For the
three months ended September 30, 2004, approximately 8% of total revenue was
derived from the amortization of option fee income pertaining to the licensing
of our intellectual property and 92% of total revenue was derived from sales of
our ligands, feasibility screening and customized process development services
sold to third parties. For the three months ended September 30, 2003,
approximately 40% of total revenue was derived from the amortization of option
fee income and 60% of total revenue was comprised of sales or our ligands. It is
anticipated that sales of our ligands, molecular building blocks and customized
chiral services will continue to comprise a greater percentage of our revenues
in the future as we expand our manufacturing capabilities.
Cost of goods sold for three months ended September 30, 2004 was $192,349
as compared to $37,321 during the three months ended September 30, 2003. The
increase in cost of goods sold is attributable to the materials used in
production for projects completed and shipped along with the allocation of
direct labor and overhead expenses to finished goods.
Management and consulting expenses for the three months ended September
30, 2004 were $125,956 as compared to $128,691 during the three months ended
September 30, 2003. The overall change for the three months ended September 30,
2004 vs. September 30, 2003 was primarily caused by a decrease in management fee
expense. The Company incurred management fee expenses of $3,000 per month
primarily related to office space and administrative services provided by
Paramount BioCapital. The office space and administrative services were no
longer required as of the end of the first quarter of 2004.
Our R&D expenses for the three months ended September 30, 2004 were
$253,969 as compared to $76,995 during the three months ended September 30,
2003. This increase was primarily caused by increased utilization of the Penn
State research resources in connection with the development of new ligands. The
agreement with Penn State, which has been extended to April 14, 2005, provides
for the Company to fund services of four post-doctorate fellows whom under the
supervision of the CTO, conduct research and provide research quantities of
chiral ligands to the Company. The future obligation payable by the Company
through April 14, 2005 as of the end of the agreement is approximately $146,321.
This amount consists principally of four post-doctorate salaries, fringe
benefits, materials and supplies for the stated period. In addition, during the
second quarter of 2003, we opened an additional laboratory facility in New
Jersey, and have completed an expansion to the facility in April 2004, that
enabled us to produce both research and commercial quantities of our ligands, as
well as completing a second expansion in September 2004. In connection with the
new facility and its expansion, numerous lab supplies and chemicals were
purchased. Accordingly, we incurred increased expenses in the third quarter due
to the opening and expansions of the New Jersey facility, along with the
increased costs of using the facility and chemists at Penn State.
S-3
Selling, general and administrative ("SG&A") expenses for the three months
ended September 30, 2004 were $337,709 as compared to $230,705 during the three
months ended September 30, 2003. This increase in SG&A expenses was due in part
to increased usage of temporary contractors, higher legal and accounting fees,
increased rent expense for the New Jersey facility as a result of the facility's
expansions, additional spending on advertising and promotion expenses, increased
travel expenses for new business development opportunities and higher
administrative expenses associated with having more employees such as insurance
and employer payroll taxes.
Compensation expense was $225,734 for the three months ended September 30,
2004 as compared to $138,205 for the three months ended September 30, 2003. This
increase is attributed to hiring of a vice president of business development, a
controller, and several chemists to work at the new laboratory facility in New
Jersey. Compensation expense as it relates to direct labor for ongoing and
completed projects, has been capitalized as part of inventory work in process
and finished goods as these cost components relate directly to cost of goods
sold.
Depreciation and amortization expenses for the three months ended
September 30, 2004 were $33,622 as compared to $22,032 during the three months
ended September 30, 2003. This increase was related to patent amortization and
fixed asset purchases for office equipment, computer equipment, laboratory
equipment and leasehold improvements for the newly leased facility and
expansions in New Jersey.
Interest income for the three months ended September 30, 2004 was $11,246
as compared to $2,323 for the three months ended September 30, 2003. The
increase in interest income is attributed to having higher cash reserves as a
result of the funds received from the private placement of the Company's common
stock in February 2004.
Our net loss for the three months ended September 30, 2004 was $790,828 as
compared to $548,558 for the three months ended September 30, 2003. The
increased net loss for the three months ended September 30, 2004 as compared to
September 30, 2003 was attributable to higher R&D expenses incurred with funding
Penn State's research services provided to the Company, increased operational
expenditures comprised of higher total rent expense due to the newly leased, and
expansions to the New Jersey facility in June 2003, April and September 2004
respectively, higher legal and accounting expenses, higher payroll expenses
associated with having more employees along with increased usage of temporary
contractors. We expect losses to continue in the next year as we continue to
expand operations in New Jersey as well as commence operations in Jiashan.
RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 VS.
2003
Our revenues for the nine months ended September 30, 2004 were $1,102,388
as compared to $214,509 for the nine months ended September 30, 2003. For the
nine months ended September 30, 2004, approximately 8% of total revenue was
derived from the amortization of option fee income pertaining to the licensing
of our intellectual property and 92% of total revenue was derived from sales of
our ligands, feasibility screening and customized process development services
sold to third parties. For the nine months ended September 30, 2003,
approximately 47% of total revenue was derived from the amortization of option
fee income and 53% of total revenue was comprised of sales or our ligands. It is
anticipated that sales of our ligands, molecular building blocks and customized
chiral services will continue to comprise a greater percentage of our revenues
in the future as we expand our manufacturing capabilities.
S-4
Cost of goods sold for the nine months ended September 30, 2004 was
$569,598 as compared to $62,708 during the nine months ended September 30, 2003.
The increase in cost of goods sold is attributable to the materials used in
production for projects completed and shipped along with the allocation of
direct labor and overhead expenses to finished goods.
Management and consulting expenses for the nine months ended September 30,
2004 were $363,848 as compared to $254,700 during the nine months ended
September 30, 2003. The overall change for the nine months ended September 30,
2004 vs. September 30, 2003 was primarily caused by an increase in consulting
expense. Consulting expense increased due to the new consulting agreement we
entered into with our CTO at a rate of $10,000 per month effective May 15, 2003,
along with the Company utilizing the consulting services of a previous employee
during the second quarter 2004. In addition, consulting expense increased due to
the amortization of the fair value of stock options issued to consultants and
scientific advisory board members, during the second, third and fourth quarters
of 2003. The increased management and consulting expenses have been offset by a
decrease in management expenses, charged by Paramount BioCapital LLC, for
administrative services which are no longer required by the Company.
Our R&D expenses for the nine months ended September 30, 2004 were
$712,019 as compared to $283,470 during the nine months ended September 30,
2003. This increase was primarily caused by increased utilization of the Penn
State research resources in connection with the development of new ligands. The
agreement with Penn State, which has been extended to April 14, 2005, provides
for the Company to fund services of four post-doctorate fellows who, under the
supervision of the CTO, conduct research and provide research quantities of
chiral ligands to the Company. The future obligation payable by the Company
through April 14, 2005 as of the end of the agreement is approximately $146,321.
This amount consists principally of four post-doctorate salaries, fringe
benefits, materials and supplies for the stated period. In addition, during the
second quarter of 2003, we opened an additional laboratory facility in New
Jersey, and have completed an expansion to the facility in April 2004, that
enabled us to produce both research and commercial quantities of our ligands, as
well as completing a second expansion in September 2004. In connection with the
new facility and its expansions, numerous lab supplies and chemicals were
purchased. Accordingly, we incurred increased expenses for the nine months ended
September 30, 2004, due to the opening and expansions of the New Jersey
facility, along with the increased costs of using the facility and chemists at
Penn State.
Selling, general and administrative ("SG&A") expenses for the nine months
ended September 30, 2004 were $1,141,781 as compared to $654,071 during the nine
months ended September 30, 2003. This increase in SG&A expenses was due in part
to increased usage of temporary contractors, higher legal and accounting fees,
increased rent expense for the New Jersey facility as a result of the facility's
expansions, additional spending on advertising and promotion expenses, increased
travel expenses for new business development opportunities and higher
administrative expenses associated with having more employees such as insurance
and employer payroll taxes.
Compensation expense was $1,029,612 for the nine months ended September
30, 2004 as compared to $355,925 for the nine months ended September 30, 2003.
This increase was caused primarily by the resignation of the CEO effective April
16, 2004, which resulted in charge of $375,000 in severance costs. In addition,
compensation expense increased due to the hiring of a vice president of business
development, a controller, and several chemists to work at the new laboratory
facility in New Jersey.
S-5
Compensation expense as it relates to direct labor for ongoing and
completed projects, has been capitalized as part of inventory work in process
and finished goods as these cost components relate directly to cost of goods
sold.
Depreciation and amortization expenses for the nine months ended September
30, 2004 were $126,227 as compared to $64,672 during the nine months ended
September 30, 2003. This increase was primarily related to patent amortization
and fixed asset purchases for office equipment, computer equipment, laboratory
equipment and leasehold improvements for the newly leased facility and
expansions in New Jersey.
Interest income for the nine months ended September 30, 2004 was $27,053
as compared to $10,002 for the nine months ended September 30, 2003. The
increase in interest income is attributed to having higher cash reserves as a
result of the funds received from the private placement of the Company's common
stock in February 2004.
Our net loss for the nine months ended September 30, 2004 was $2,813,644
as compared to $1,451,035 for the nine months ended September 30, 2003. The
increased net loss for the nine months ended September 30, 2004 as compared to
September 30, 2003 was primarily due to the severance costs associated with the
resignation of the Company's CEO, higher R&D expenses incurred with funding Penn
State's research services provided to the Company, increased operational
expenditures comprised of higher total rent expense due to the newly leased, and
expansions to the New Jersey facility in June 2003, April and September 2004
respectively, higher legal and accounting expenses, higher payroll expenses
associated with having more employees along with increased usage of temporary
contractors. We expect losses to continue in the next year as we continue to
expand operations in New Jersey as well as commence operations in Jiashan.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, we had working capital of $3,958,757 and cash
and cash equivalents of $4,059,550. We believe our current capital resources,
together with anticipated increases in revenue, will be sufficient to fund our
operations through the second quarter of 2005. However, if we are unable to
increase our revenues as we anticipate, we will likely require additional
financing as early as the second quarter of 2005 in order to fund our
operations. The most likely source of financing includes private is of our
equity or debt securities or bridge loans to the Company from third party
lenders.
The Company's net cash used in operating activities for the nine months
ended September 30, 2004 was $2,982,054. The Company's net cash used in
operating activities primarily consisted of a net loss of $2,813,644, an
increase in accounts receivable of $237,173 and decreases in deferred revenue of
$162,305 and accrued expenses of $175,076, partially offset by an increase in
accounts payable of $185,697.
The Company's net cash used in investing activities for the nine months
ended September 30, 2004 totaled $359,145 which consisted of purchases of
equipment for $211,762 related to the laboratory expansions completed in April
and September 2004, along with patent applications expenditures of $147,383.
The Company's net cash provided by financing activities for the nine
months ended September 30, 2004 was $6,741,632. Financing activities consisted
of the cash received in the private placement of the Company's common stock on
February 25, 2004.
S-6
In February 2004, we sold in a private placement 4.8 million shares of our
common stock plus warrants to purchase an additional 2.4 million shares of
common stock for aggregate gross proceeds of $7.2 million. Management believes
that the remaining capital resulting from the private placement and anticipated
increased revenue, will provide sufficient resources to fund our continued
operational expansion and corporate development through approximately the second
quarter of 2005. Our long term liquidity is contingent upon achieving increased
sales and/or obtaining additional financing.
Our working capital requirements will depend upon numerous factors,
including, without limitation, the progress of our R&D programs, the resources
we devote to developing manufacturing and marketing capabilities, technological
advances, the status of competitors, and our ability to establish sales
arrangements with new customers. Working capital will also be affected by the
expansions of office and laboratory space lease agreements that were entered
into during the second quarter of 2003 and first and second quarters of 2004,
along with the hiring of additional employees, in addition to the establishment
and funding of the China subsidiary.
We have formed two China subsidiaries through which we intend to open a
laboratory facility in the People's Republic of China. We have provided $66,000
of capital to the China subsidiary during the second quarter of 2004. Our
management believes that by opening a facility in China to produce
non-proprietary chemical building blocks and related compounds, we will be able
to significantly decrease our manufacturing costs and expenses, enabling us to
cost-effectively produce our ligands and end products and make our products
substantially more competitive and even more attractive to current and potential
customers. We expect operations to commence on a limited basis by the end of
fiscal 2004.
S-7
INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Condensed Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003 .................................................... F-2
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2004 and 2003 ............................. F-3
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2004 ......................... F-4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003 .................................... F-5
Notes to Condensed Consolidated Financial Statements ...................... F-6
F-1
VIOQUEST PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
SEPTEMBER 30, 2004 DECEMBER 31,
(UNAUDITED) 2003
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,059,550 $ 659,117
Accounts receivable, net of allowance for doubtful accounts of
$7,270 at September 30, 2004 and $11,490 at December 31, 2003 288,878 51,705
Inventories 144,566 76,892
Prepaid expenses 74,601 50,052
------------ ------------
Total Current Assets 4,567,595 837,766
PROPERTY AND EQUIPMENT, NET 385,458 254,649
SECURITY DEPOSITS 68,700 31,000
DEFERRED FINANCING COSTS -- 50,000
INTELLECTUAL PROPERTY RIGHTS, NET 514,550 412,442
------------ ------------
TOTAL ASSETS $ 5,536,303 $ 1,585,857
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 459,111 $ 273,414
Accrued expenses 52,325 226,200
Due to related party -- 1,201
Deferred revenue, current portion 97,402 220,592
------------ ------------
Total Current Liabilities 608,838 721,407
LONG-TERM LIABILITIES
Deferred revenue, long-term portion -- 39,116
------------ ------------
TOTAL LIABILITIES 608,838 760,523
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized,
17,827,924 shares issued and outstanding at September 30, 2004 and
13,001,018 shares issued and outstanding at December 31, 2003 178,279 130,010
Additional paid-in capital 11,508,715 4,865,353
Deferred expenses (534,680) (758,824)
Accumulated deficit (6,224,849) (3,411,205)
------------ ------------
Total Stockholders' Equity 4,927,465 825,334
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,536,303 $ 1,585,857
============ ============
See accompanying notes to condensed consolidated financial statements.
F-2
VIOQUEST PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------ ------------------ ------------------
REVENUE $ 367,265 $ 83,068 $ 1,102,388 $ 214,509
COST OF GOODS SOLD (192,349) (37,321) (569,598) (62,708)
------------ ------------ ------------ ------------
GROSS PROFIT 174,916 45,747 532,790 151,801
------------ ------------ ------------ ------------
OPERATING EXPENSES
Management and consulting fees 125,956 128,691 363,848 254,700
Research and development 253,969 76,995 712,019 283,470
Selling, general and administrative 337,709 230,705 1,141,781 654,071
Compensation 225,734 138,205 1,029,612 355,925
Depreciation and amortization 33,622 22,032 126,227 64,672
------------ ------------ ------------ ------------
Total Operating Expenses 976,990 596,628 3,373,487 1,612,838
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (802,074) (550,881) (2,840,697) (1,461,037)
INTEREST INCOME, NET 11,246 2,323 27,053 10,002
------------ ------------ ------------ ------------
NET LOSS $ (790,828) $ (548,558) $ (2,813,644) $ (1,451,035)
============ ============ ============ ============
NET LOSS PER COMMON
SHARE - BASIC AND DILUTED $ (.04) $ (.04) $ (.17) $ (.12)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC AND
DILUTED 17,827,924 13,001,018 16,841,403 12,324,550
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
F-3
VIOQUEST PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
ADDITIONAL TOTAL
PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
COMMON STOCK CAPITAL EXPENSES DEFICIT EQUITY
-------------------------- ----------- ----------- ----------- -----------
SHARES AMOUNT
------ ------
Balance, January 1, 2004 13,001,018 $ 130,010 $ 4,865,353 $ (758,824) $(3,411,205) $ 825,334
Private placement of common
stock, net of expenses of $57,841 4,826,906 48,269 6,643,362 -- -- 6,691,631
Amortization of deferred expenses -- -- -- 224,144 -- 224,144
Net loss -- -- -- -- (2,813,644) (2,813,644)
---------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 2004 17,827,924 $ 178,279 $11,508,715 $ (534,680) $(6,224,849) $ 4,927,465
========== =========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
F-4
VIOQUEST PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,813,644) $(1,451,035)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 126,227 64,672
Amortization of deferred expenses 224,144 163,424
Changes in operating assets and liabilities:
(Increase) in accounts receivable (237,173) (88,918)
(Increase) in inventories (67,674) (54,059)
(Increase) in prepaid expenses (24,549) (51,792)
(Increase) in security deposits (37,700) (21,000)
Increase (Decrease) in accounts payable 185,697 (32,383)
Decrease in accrued expenses and due to related party (175,076) (26,274)
Decrease in deferred revenue (162,306) (6,642)
----------- -----------
Net Cash Used In Operating Activities (2,982,054) (1,504,007)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchased equipment (211,762) (203,888)
Payments for intellectual property rights (147,383) (87,245)
----------- -----------
Net Cash Used In Investing Activities (359,145) (291,133)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of note payable -- (336,625)
Cash received in merger and recapitalization -- 3,017,243
Private placement of common stock 6,741,632 --
----------- -----------
Net Cash Provided By Financing Activities 6,741,632 2,680,618
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,400,433 885,478
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 659,117 33,520
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 4,059,550 $ 918,998
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reclassification of Deferred Financing Costs to Additional Paid-In Capital $ 50,000 $ --
=========== ===========
See accompanying notes to condensed consolidated financial statements.
F-5
VIOQUEST PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY
(A) BASIS OF PRESENTATION
The accompanying unaudited condensed 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 unaudited
condensed consolidated financial statements reflect all adjustments,
consisting of only normal recurring adjustments, considered necessary for
a fair presentation. Interim operating results are not necessarily
indicative of results that may be expected for the year ending December
31, 2004 or for any subsequent period. These unaudited condensed
consolidated financial statements should be read in conjunction with the
Annual Report on Form 10-KSB of VioQuest Pharmaceuticals, Inc. (formerly
Chiral Quest, Inc.) and its subsidiary (the "Company" or "VioQuest") as of
and for the year ended December 31, 2003.
(B)LIQUIDITY
Since the Company's inception, it has generated sales revenue but no net
profits. Management believes that the Company's research and development
("R&D") and manufacturing capacity will need to grow in order for the
Company to be able to obtain significant licensing and manufacturing
agreements with large fine chemical and pharmaceutical companies.
Management believes that the Company's manufacturing capacity will
continue to be enhanced with its new office and laboratory space located
in Monmouth Junction, New Jersey that was leased in June 2003.
Since inception, the Company has incurred an accumulated deficit of
$6,224,849 through September 30, 2004. For the three and nine months ended
September 30, 2004 the Company had net losses of $790,828 and $2,813,644,
respectively. Management expects the Company's operating losses to
continue at least the next two years, primarily due to the expansion of
its R&D programs, the hiring of additional chemists, and the expansion of
its manufacturing capabilities. There can be no assurance that the Company
will ever be able to operate profitably.
As of September 30, 2004, the Company had working capital of $3,958,757
and cash and cash equivalents of $4,059,550. If the Company is unable to
significantly increase its revenues, it will most likely require
additional financing, perhaps as early as the second quarter of 2005 in
order to continue operations. The most likely sources of financing include
private placements of the Company's equity or debt securities or bridge
loans to the Company from third party lenders.
The Company's net cash used in operating activities for the nine months
ended September 30, 2004 was $2,982,054. The Company's net cash used in
operating activities primarily consisted of a net loss of $2,813,644, an
increase in accounts receivable of $237,173 and decreases in deferred
revenue of $162,306 and accrued expenses of 175,076, offset by an increase
in accounts payable of $185,697.
The Company's net cash used in investing activities for the nine months
ended September 30, 2004 totaled $359,144 which consisted of purchases of
equipment for $211,762 related to the laboratory expansions completed in
April and September 2004, along with patent applications expenditures of
$147,383.
F-6
VIOQUEST PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
The Company's net cash provided by financing activities for the nine
months ended September 30, 2004 was $6,741,632. Financing activities
consisted of the cash received in the private placement of the Company's
common stock on February 25, 2004.
Management anticipates that the Company's capital resources will be
adequate to fund its operations through June 30, 2005, assuming the
Company achieves expected increases in revenue. If the Company is unable
to increase revenues as expected, however, additional financing will
likely be required as early as the second quarter of 2005 in order to fund
operations. The most likely source of financing includes private is of our
equity or debt securities or bridge loans to the Company from third party
lenders. However, changes may occur that would consume available capital
resources before that time. The Company's combined capital requirements
will depend on numerous factors, including: competing technological and
market developments, changes in our existing collaborative relationships,
the cost of filing, prosecuting, defending and enforcing patent claims and
other intellectual property rights and the outcome of any potentially
related litigation or other dispute, the purchase of additional capital
equipment, acquisition of technologies, the establishment and funding of
the Chiral Quest, Jiashan, China facility, and the development and
regulatory approval progress of its customers' product candidates into
which the Company's technology will be incorporated.
Additional capital that may be needed by the Company in the future may not
be available on reasonable terms, or at all. If adequate financing is not
available, the Company may be required to terminate or significantly
curtail its operations, or enter into arrangements with collaborative
partners or others that may require the Company to relinquish rights to
certain of its technologies, or potential markets that the Company would
not otherwise relinquish.
The Company's ability to achieve profitability depends upon, among other
things, its ability to discover and develop products (specifically new
"ligands" which are the Company's core proprietary technology consisting
of molecular compounds that create a chiral center), and to develop its
products on a commercial scale through a cost effective and efficient
process. To the extent that the Company is unable to produce, directly or
indirectly, ligands in quantities required for commercial use, it will not
realize any significant revenues from its technology. Moreover, there can
be no assurance that it will ever achieve significant revenues or
profitable operations from the sale of any of its products or
technologies.
(C) STOCK-BASED COMPENSATION
The Company accounts for its employee and director stock option plans
using the intrinsic value method in accordance with APB Opinion No. 25, "
Accounting For Stock Issued To Employees, " and related interpretations.
The Company measures compensation expense for employee and director stock
options as the aggregate difference between the market value of its common
stock and exercise prices of the options on the date that both the number
of shares the grantee is entitled to receive and the exercise prices are
known. For pro forma disclosure purposes, the Company values option
issuances using the Black-Scholes option pricing model. If the Company had
elected to recognize compensation cost for all outstanding options granted
by the Company to employees by applying the fair value recognition
provisions of SFAS No. 123 "Accounting for Stock Based Compensation," to
employee stock options, net loss and net loss per share for the three and
nine months ended September 30, 2004 and 2003 would have been increased to
the pro forma amounts indicated below:
F-7
VIOQUEST PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss as reported $ (790,828) $ (548,558) $(2,813,644) $(1,451,035)
Total stock-based employee compensation
expenses using the fair value based
method for all awards, net of related
tax effects (35,733) (12,691) (83,938) (144,305)
----------- ----------- ----------- -----------
Net loss, pro forma $ (826,561) $ (561,249) $(2,897,582) $(1,595,340)
=========== =========== =========== ===========
Basic and diluted net loss per common share:
As reported $ (.04) $ (.04) $ (.17) $ (.12)
Pro forma $ (.05) $ (.04) $ (.17) $ (.13)
Black-Scholes option pricing assumptions
Risk-free interest rate 3%-4.5% 2.3%-4% 3.6%-4.5% 2.3%-4%
Volatility 64%-77% 64%-128% 39%-127% 64%-128%
Lives in years 10 3-10 10 3-10
Dividend yield 0% 0% 0% 0%
In addition, options are issued to non-employees such as consultants,
scientific advisory board members and directors. Any options issued to
non-employees are recorded in the consolidated financial statements as
deferred expenses in the stockholders' equity section using the fair value
method and then amortized to expense over the applicable service periods.
(D) LOSS PER SHARE
Basic net loss per share is calculated by dividing net loss by the
weighted-average number of shares outstanding for each period presented.
Diluted net loss per share is the same as basic net loss per share, since
potentially dilutive securities from the assumed exercise of stock options
and stock warrants would have had an antidilutive effect because the
Company incurred a net loss during each period presented. The amount of
potentially dilutive securities excluded from the calculation was
2,083,877 at September 30, 2004. There were 2,506,047 potentially dilutive
securities at September 30, 2003.
NOTE 2 INVENTORIES
The principal components of inventory are as follows:
September 30, 2004 December 31,
(Unaudited) 2003
------------------ ------------
Raw material compounds $ 17,231 $ 25,796
Work in process 123,335 42,251
Finished goods 4,000 8,845
-------- --------
Total Inventory $144,566 $ 76,892
======== ========
NOTE 3 STOCKHOLDERS' EQUITY
On February 25, 2004, the Company completed the sale of its securities in
a private placement to accredited investors for gross proceeds of
approximately $7.2 million. Investors in the private placement purchased
an aggregate of approximately 4.8 million shares of the Company's common
stock at a price per share of $1.50. Additionally, investors received one
5-year warrant to purchase one share of common stock at $1.65 per share
for every two common shares purchased in the offering (a total of 2.4
million warrants). ThinkEquity Partners LLC, Paramount BioCapital, Inc.
and Casimir Capital L.P. acted as the placement agents for this offering
and received fees of approximately $500,000 of which Paramount BioCapital,
Inc., a related party, received $300,000. Net proceeds to the Company,
after deducting placement agent fees and other expenses relating to the
private placement, were approximately $6.7 million.
F-8
VIOQUEST PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
The table below illustrates the number of stock options issued to:
employees, scientific advisory board members, board of directors and
consultants which were issued for services provided:
For the Nine
Months Ended
September 30,
2004
-------------
Balance, January 1, 2004 2,841,857
Granted 205,000
Exercised 0
Expired (250)
Terminated (962,730)
----------
Balance, September 30, 2004 2,083,877
==========
NOTE 4 COMMITMENTS AND CONTINGENCIES
In April 2004, the Company appointed Ronald Brandt to be its President and
Chief Executive Officer on an interim basis. In June 2004, the Company
appointed Mr. Brandt to serve as President and Chief Executive Officer of
its chiral ligand operating subsidiary. In connection with that
appointment, Mr. Brandt entered into a new employment agreement with such
subsidiary, which superseded his October 2003 employment agreement with
the Company. Mr. Brandt's new employment agreement provides for a term
expiring in October 2006 and maintains his annual base salary of $200,000.
Mr. Brandt is also entitled to receive bonuses based on the Company's
gross revenues, as follows:
(i) A one time payment of $50,000 upon the completion of the first
two consecutive fiscal quarters in which the Company has gross revenue in
excess of $1,000,000;
(ii) A one time payment of $75,000 upon the completion of the first
two consecutive fiscal quarters in which the Company has gross revenue in
excess of $2,500,000;
(iii) For each fiscal quarter in which the Company has gross revenue
in excess of $2,500,000 following the first two consecutive fiscal
quarters described in (ii) above, the Company will remit to the Executive
a payment of $10,000.
(iv) A one time payment of $100,000 upon the completion of the first
two consecutive fiscal quarters in which the Company has gross revenue in
excess of $5,000,000; and
(v) For each fiscal quarter in which the Company has gross revenue
in excess of $5,000,000 following the first two consecutive fiscal
quarters described in (iv) above, the Company will remit to the Executive
a payment of $10,000 (in addition to the $100,000 payment in (iv) above).
F-9
VIOQUEST PHARMACEUTICALS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
Mr. Brandt is also entitled to a $100,000 bonus upon such time as the
Company sells the operating subsidiary for gross proceeds of at least $40
million.
In the event Mr. Brandt's employment is terminated by the Company upon a
"change of control" (as defined in the employment agreement), or for a
reason other than "disability" or "cause" (as those terms are defined in
the employment agreement), the Company has agreed to pay Mr. Brandt his
base salary for 6 months, plus accrued bonuses, provided, that the
Company's obligation to continue paying his base salary for a 6-month
period will be reduced by the amount Mr. Brandt earns from other
employment during that period.
In connection with his employment agreement, Mr. Brandt also received
options to purchase an aggregate of 400,000 shares of Company common stock
at a fair market value price at $1.01 per share (the fair market value at
the date of grant). Of such options, the right to purchase 100,000 shares
vests in three equal annual installments beginning June 2004. The right to
purchase the remaining 300,000 shares vests as follows: (1) 100,000 shares
vest at such time as the closing bid price for the Company's common stock
exceeds $3.00 per share for 10 consecutive trading days during the term of
the employment agreement; (2) 100,000 shares vest at such time as the
closing bid price for the Company's common stock exceeds $5.00 per share
for 10 consecutive trading days during the term of the employment
agreement; and 100,000 shares vest at such time as the closing bid price
for the Company's common stock exceeds $7.00 per share for 10 consecutive
trading days during the term of the employment agreement. Mr. Brandt
further received an option to purchase 2.5% of the subsidiary's common
stock at a price of $.01 per share, which will vest in 3 annual
installments commencing June 2005.
On August 6, 2004, the Company received a letter from a competitor
notifying the Company of the competitor's belief that one of the Company's
proprietary ligands was infringing on a European patent held by such
competitor. Although the Company does not believe the competitor's claims
have any merit, even if the Company were prevented from selling or
otherwise marketing the ligand, such prohibition would not have a material
adverse effect on the Company's financial condition or results of
operations or cash flows.
F-10