10QSB 1 v043899_10qsb.txt Form 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2006 ------------------------------------------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ------------------ For Quarter Ended Commission File Number 0-23788 ------------- ----------------- Xechem International, Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 22-3284803 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 100 Jersey Avenue, Bldg. B, Suite. 310, New Brunswick, NJ 08901 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (732) 247-3300 ----------------------------- (Former name, former address and former fiscal year, if changed since last report.) Check whether the registrant (1) filed all reports required to be filed by Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Number of shares outstanding of the issuer's common stock, as of May 5th, 2006, was 1,093,471,115 shares. Transitional Small Business Disclosure Format Yes |_| No |X| XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES Page No. PART I. FINANCIAL INFORMATION ..............................................3 Item 1. Consolidated Balance Sheet as of March 31, 2006 [Unaudited] .......................................4 Consolidated Statements of Operations For the three month periods ended March 31, 2006 and 2005 and for the period from March 15,1990 (inception) to March 31, 2006 [Unaudited] ........................5 Consolidated Statement of Stockholders' Equity from March 15,1990 (inception) to March 31, 2006 [Unaudited]...........6 Consolidated Statements of Cash Flows For the three month periods ended March 31, 2006 and 2005 and for the period from March 15,1990 (inception) to March 31, 2006 [Unaudited] ......................14 Notes to Consolidated Financial Statements [Unaudited]..............16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...................28 Item 3. Controls and Procedures.............................................35 PART II. OTHER INFORMATION ................................................36 Item 1. Legal Proceedings ..................................................36 Item 2. Changes in Securities .............................................36 Item 3. Defaults Upon Senior Securities ....................................36 Item 4. Submissions of Matters to a Vote of Security Holders ...............36 Item 5. Other information ..................................................36 Item 6. Exhibits ...........................................................36 Signatures and Certifications ...............................................37 2 PART I. FINANCIAL INFORMATION Item 1. Financing Statements NOTE REGARDING FORWARD-LOOKING STATEMENTS Except with respect to historical financial information, the discussion in this report contains forward-looking statements that involve risk and uncertainties. These statements may be identified by use of forward-looking terminology such as "believes," "expects," "may," "should," or "anticipates," or similar expressions, or by discussions of strategy. The cautionary statements made in this report should be read as being applicable to all related forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed in this report. Factors that could cause our results to differ from those discussed in this report, include, but are not limited to, those discussed under the heading "Factors Affecting Future Performance" in our report on Form 10-KSB for the period ending December 31, 2005. 3 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEET
ASSETS March 31, 2006 (Unaudited) ----------------- CURRENT ASSETS Cash $ 138,000 Prepaid expenses and other current assets 237,000 ----------------- Total Current Assets 375,000 Equipment, less accumulated depreciation of $1,225,000 1,383,000 Leasehold improvements, less accumulated amortization of $857,000 158,000 Deposits 56,000 ----------------- TOTAL ASSETS $ 1,972,000 ================= LIABILITIES & STOCKHOLDERS' [DEFICIT] CURRENT LIABILITIES Accounts payable $ 595,000 Accrued expenses to related parties 384,000 Accrued expenses to others 727,000 Note payable to bank 55,000 Notes payable to related parties 984,000 Notes payable others 2,065,000 Other current liabilities 67,000 ----------------- Total Current Liabilities 4,877,000 Notes payable to related parties 265,000 Notes payable, net of discount of $1,589,000 1,142,000 Other liabilities 49,000 ----------------- TOTAL LIABILITIES 6,333,000 COMMITMENTS AND CONTINGENCIES -- STOCKHOLDERS' (DEFICIT) Class A voting preferred stock,$ .00001 par value, 2,500 shares authorized; 2,500 shares issued and outstanding -- Class B 8% convertible preferred stock,$ .00001 par value, 1,150 shares authorized; none outstanding -- Class C preferred stock,$ .00001 par value, 49,996,350 shares authorized; 15,931 issued and outstanding -- Common stock,$.00001 par value 1,950,000,000 shares authorized; 880,643,686 issued and outstanding 9,000 Additional paid in capital 68,702,000 Deficit accumulated during development stage (73,072,000) ----------------- Total Stockholders' (Deficit) (4,361,000) ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 1,972,000 =================
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 4 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Cumulative from MARCH 15, 1990 (Date THREE MONTHS ENDED of Inception) to MARCH 31, MARCH 31, -------------------------------------------- -------------------- 2006 2005 2006 -------------------- -------------------- -------------------- Revenues: $ 1,000 $ 1,000 $ 2,122,000 Expenses: Research and development 356,000 222,000 15,008,000 General and administrative 2,058,000 980,000 26,310,000 Writedown of inventory and intangibles -- -- 1,861,000 -------------------- -------------------- -------------------- 2,414,000 1,202,000 43,179,000 -------------------- -------------------- -------------------- Loss from Operations (2,413,000) (1,201,000) (41,057,000) -------------------- -------------------- -------------------- Other Income(Expense) - Net: Interest Expense - Related Parties (23,000) (13,000) (9,105,000) Interest Expense - Others (3,556,000) (758,000) (19,117,000) Other 4,200,000 (23,000) 4,228,000 Gain from Sale of Affiliate's Stock -- 2,930,000 Share of Net Loss from Affiliate -- (3,358,000) (13,587,000) -------------------- -------------------- -------------------- 621,000 (4,152,000) (34,651,000) -------------------- -------------------- -------------------- Net Loss before Income Benefit (1,792,000) (5,353,000) (75,708,000) Income Tax Benefit -- -- 2,636,000 -------------------- -------------------- -------------------- Net Loss $ (1,792,000) $ (5,353,000) $ (73,072,000) ==================== ==================== ==================== Basic and diluted loss per common share $ (0.00) $ (0.02) ==================== ==================== Weighted average number of common shares outstanding - Basic a Diluted 658,136,687 259,668,718 ==================== ====================
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 5 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE ENTERPRISE] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' [DEFICIT]
Common Stock ----------------------------- Unearned Additional Number of Compensation Paid-in ------------- ------------- ------------- ------------- Shares Issued Par Value Expense Capital ------------- ------------- ------------- ------------- Common stock issued to Dr. Pandey in 1990 in exchange for equipment recorded at transferor's cost -- $ -- $ -- $ 125,000 Laboratory and research equipment contributed to capital by Dr. Pandey in 1990 and 1991 -- -- -- 341,000 Contribution to capital relating to unconsummated acquisition in 1992 -- -- -- 95,000 Exchange of securities of newly formed parent for outstanding securities of entities owned by Dr. Pandey 1,000 -- -- 13,840,000 Initial public offering in 1995 at $5.00 per share, less related expenses 1,000 -- -- 4,543,000 Stock options granted at exercise prices below market: 1994 -- -- -- 51,000 1995 -- -- -- 1,110,000 1996 -- -- -- 18,000 1997 -- -- -- 31,000 Private placements, less related expenses: In 1995 at $3.00 per share -- -- -- 389,000 In 1996 at $3.00 per share, net of a related 66,000 shares returned by Dr. Pandey -- -- -- 53,000 In 1997 at $0.05 per share 15,000 -- -- 2,291,000 Stock issued in 1996 at $0.38 per share upon termination of agreement to sell a minority interest in a subsidiary -- -- -- 100,000 ------------- ------------- ------------- ------------- Totals - Forward 17,000 $ -- $ -- $ 22,987,000
Deficit Accumulated During Total Development Stockholders' ------------------- ------------- Stage [Deficit] ------------------- ------------- Common stock issued to Dr. Pandey in 1990 in exchange for equipment recorded at transferor's cost $ -- $ 125,000 Laboratory and research equipment contributed to capital by Dr. Pandey in 1990 and 1991 -- 341,000 Contribution to capital relating to unconsummated acquisition in 1992 -- 95,000 Exchange of securities of newly formed parent for outstanding securities of entities owned by Dr. Pandey -- 13,840,000 Initial public offering in 1995 at $5.00 per share, less related expenses -- 4,543,000 Stock options granted at exercise prices below market: 1994 -- 51,000 1995 -- 1,110,000 1996 -- 18,000 1997 -- 31,000 Private placements, less related expenses: In 1995 at $3.00 per share -- 389,000 In 1996 at $3.00 per share, net of a related 66,000 shares returned by Dr. Pandey -- 53,000 In 1997 at $0.05 per share -- 2,291,000 Stock issued in 1996 at $0.38 per share upon termination of agreement to sell a minority interest in a subsidiary -- 100,000 ------------------- ------------- Totals - Forward $ -- $ 22,987,000
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 6 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE ENTERPRISE] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' [DEFICIT]
Common Stock ----------------------------- Unearned Additional Number of Compensation Paid-in Shares Issued Par Value Expense Capital ------------- ------------- ------------- ------------- Totals - Forwarded 17,000 $ -- $ -- $ 22,987,000 Conversion of preferred stock into common stock at $1.25 to $1.75 per share less related costs: In 1996 1,000 -- -- 1,995,000 In 1997 15,000 1,000 -- 2,131,000 Conversion of debt into common stock in 1996 at $0.25 per share -- -- -- 369,000 Stock issued in settlement of a lawsuit in 1996 valued at $1.31 per share -- -- -- 33,000 Conversion of Dr. Pandey's preferred stock and debt into common stock in 1997 at $0.0625 per share 6,000 -- -- 1,214,000 Other -- -- -- 16,000 Private placement at $0.05 per share 4,000 -- -- 559,000 Contribution to capital by stockholders of equity interest in Xechem India -- -- -- 79,000 Conversion of debt into common stock at $0.05 per share 3,000 -- -- 440,000 Return of capital to David Blech or his designees -- -- -- (261,000) Sale of common stock in 1999 pursuant to Blech agreement at $0.01 per share 15,000 1,000 -- 444,000 Conversion of debt due related parties in 1999 at $0.01 per share 15,000 -- -- 360,000 Stock issued to directors, employees and consultants in 1999 for services valued at $0.037 per share 4,000 -- -- 410,000 Capital arising from issuance of Class C Stock (Note 7): Series 4 -- -- -- 400,000 Series 5 -- -- -- Net loss from inception to December 31, 1999 -- -- -- -- ------------- ------------- ------------- ------------- Balances At December 31, 1999 - Forward 80,000 $ 2,000 $ -- $ 32,740,000
Deficit Accumulated During Total Development Stockholders' Stage [Deficit] ------------------- ------------- Totals - Forwarded $ -- $ 22,987,000 Conversion of preferred stock into common stock at $1.25 to $1.75 per share less related costs: In 1996 -- 1,995,000 In 1997 -- 2,132,000 Conversion of debt into common stock in 1996 at $0.25 per share -- 369,000 Stock issued in settlement of a lawsuit in 1996 valued at $1.31 per share -- 33,000 Conversion of Dr. Pandey's preferred stock and debt into common stock in 1997 at $0.0625 per share -- 1,214,000 Other -- 16,000 Private placement at $0.05 per share -- 559,000 Contribution to capital by stockholders of equity interest in Xechem India -- 79,000 Conversion of debt into common stock at $0.05 per share -- 440,000 Return of capital to David Blech or his designees -- (261,000) Sale of common stock in 1999 pursuant to Blech agreement at $0.01 per share -- 445,000 Conversion of debt due related parties in 1999 at $0.01 per share -- 360,000 Stock issued to directors, employees and consultants in 1999 for services valued at $0.037 per share -- 410,000 Capital arising from issuance of Class C Stock (Note 7): Series 4 -- 400,000 Series 5 1,564,000 1,564,000 Net loss from inception to December 31, 1999 (32,493,000) (32,493,000) ------------------- ------------- Balances At December 31, 1999 - Forward $ (32,493,000) $ 249,000
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 7 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE ENTERPRISE] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' [DEFICIT]
Common Stock ----------------------------- Unearned Additional Number of Compensation Paid-in Shares Issued Par Value Expense Capital ------------- ------------- ------------- ------------- Balances At December 31, 1999 - Forwarded 80,000 $ 2,000 $ -- $ 32,740,000 Stock options exercised at $.01 per share -- -- -- 4,000 Issuance of 1,500,000 options at $.01 per share with a FMV of $ .06 per share for services rendered -- -- -- 75,000 Conversion of Class C preferred stock to common Stock 27,000 1,000 -- (1,000) Conversion of debt to Stock of Common Stock at $0.01 per share 5,000 -- -- 164,000 Private placement of Stock of Common Stock at $0.08 per share -- -- -- 80,000 Issuance of Common Stock at $0.096 per share for services rendered 1,000 -- -- 107,000 Stock options exercised at $.01 per share with a FMV of $0.076 per share -- -- -- 5,000 Conversion of debt to Stock of Common Stock at $0.01 per share 1,000 -- -- 22,000 Stock options exercised at $.01 per share -- -- -- 1,000 Beneficial Conversion feature of notes payable -- -- -- 286,000 Charge to operations resulting from Options granted to Directors, Consultants and Employees -- -- -- 192,000 Unearned Stock Compensation Expense Related to Options granted to Directors, Consultants and Employees -- -- (406,000) 406,000 Increase in Equity Interest in Xechem India -- -- -- 19,000 Net loss for year ended December 31, 2000 -- -- -- -- ------------- ------------- ------------- ------------- Balances At December 31, 2000 - Forward 114,000 $ 3,000 $ (406,000) $ 34,100,000
Deficit Accumulated During Total Development Stockholders' Stage [Deficit] ------------------- ------------- Balances At December 31, 1999 - Forwarded $ (32,493,000) $ 249,000 Stock options exercised at $.01 per share -- 4,000 Issuance of 1,500,000 options at $.01 per share with a FMV of $ .06 per share for services rendered -- 75,000 Conversion of Class C preferred stock to common Stock -- -- Conversion of debt to Stock of Common Stock at $0.01 per share -- 164,000 Private placement of Stock of Common Stock at $0.08 per share -- 80,000 Issuance of Common Stock at $0.096 per share for services rendered -- 107,000 Stock options exercised at $.01 per share with a FMV of $0.076 per share -- 5,000 Conversion of debt to Stock of Common Stock at $0.01 per share -- 22,000 Stock options exercised at $.01 per share -- 1,000 Beneficial Conversion feature of notes payable -- 286,000 Charge to operations resulting from Options granted to Directors, Consultants and Employees -- 192,000 Unearned Stock Compensation Expense Related to Options granted to Directors, Consultants and Employees -- -- Increase in Equity Interest in Xechem India -- 19,000 Net loss for year ended December 31, 2000 (1,971,000) (1,971,000) ------------------- ------------- Balances At December 31, 2000 - Forward $ (34,464,000) $ (767,000)
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 8 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE ENTERPRISE] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' [DEFICIT]
Common Stock ----------------------------- Unearned Additional Number of Compensation Paid-in Shares Issued Par Value Expense Capital ------------- ------------- ------------- ------------- Balances At December 31, 2000 - Forwarded 114,000 $ 3,000 $ (406,000) $ 34,100,000 Stock issued for services rendered 2,000 -- -- 68,000 Amortization of unearned stock compensation -- -- 197,000 -- Stock options exercised at $.01 per share -- -- -- 6,000 Beneficial Conversion feature of notes payable -- -- -- 216,000 Unearned Stock Compensation Expense Related to Options granted to Directors and Employees -- -- (75,000) 76,000 Stock Options Granted to Consultants -- -- -- 16,000 Stock issued for cancellation of indebtedness 1,000 -- -- 15,000 Stock issued upon conversion of debentures 9,000 1,000 -- 68,000 Net loss for year ended December 31, 2001 -- -- -- -- ------------- ------------- ------------- ------------- Balances At December 31, 2001 126,000 4,000 (284,000) 34,565,000 Stock issued upon conversion of debentures at $.001 per share 44,000 1,000 -- 188,000 Stock issued for services rendered at $.007 per share -- -- -- 10,000 Amortization of unearned stock compensation -- -- 45,000 -- Beneficial conversion feature of notes payable 52,000 -- 52,000 Stock issued upon conversion of debentures at $.001 per share 20,000 1,000 -- 74,000 Amortization of unearned stock compensation -- -- 44,000 -- Stock options issued at $.006/share: 16,000,000 options -- -- (160,000) 160,000 Amortization of stock options compensatory charge over service period -- -- 40,000 -- Stock options exercised at $.006/share 2,000 -- -- 30,000 ------------- ------------- ------------- ------------- Totals - Forward 192,000 $ 6,000 $ (315,000) $ 35,079,000
Deficit Accumulated During Total Development Stockholders' Stage [Deficit] ------------------- ------------- Balances At December 31, 2000 - Forwarded $ (34,464,000) $ (767,000) Stock issued for services rendered -- 68,000 Amortization of unearned stock compensation -- 197,000 Stock options exercised at $.01 per share -- 6,000 Beneficial Conversion feature of notes payable -- 216,000 Unearned Stock Compensation Expense Related to Options granted to Directors and Employees -- 1,000 Stock Options Granted to Consultants -- 16,000 Stock issued for cancellation of indebtedness -- 15,000 Stock issued upon conversion of debentures -- 69,000 Net loss for year ended December 31, 2001 (1,744,000) (1,744,000) ------------------- ------------- Balances At December 31, 2001 (36,208,000) (1,923,000) Stock issued upon conversion of debentures at $.001 per share -- 189,000 Stock issued for services rendered at $.007 per share -- 10,000 Amortization of unearned stock compensation -- 45,000 Beneficial conversion feature of notes payable Stock issued upon conversion of debentures at $.001 per share -- 75,000 Amortization of unearned stock compensation -- 44,000 Stock options issued at $.006/share: 16,000,000 options -- -- Amortization of stock options compensatory charge over service period -- 40,000 Stock options exercised at $.006/share -- 30,000 ------------------- ------------- Totals - Forward $ (36,208,000) $ (1,438,000)
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 9 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE ENTERPRISE] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' [DEFICIT]
Common Stock ----------------------------- Unearned Additional Number of Compensation Paid-in Shares Issued Par Value Expense Capital ------------- ------------- ------------- ------------- Totals - Forwarded 192,000 $ 6,000 $ (315,000) $ 35,079,000 Beneficial conversion feature of debentures -- -- -- 148,000 Record value of warrants issued -- -- -- 272,000 Beneficial conversion feature of notes payable -- -- -- 35,000 Stock issued upon conversion of debentures at $.001 per share 95,000 3,000 -- 318,000 Stock issued for services rendered at $.003 per share 7,000 -- -- 60,000 Amortization of unearned stock compensation -- -- 45,000 -- Amortization of beneficial conversion feature of notes payable -- -- -- 104,000 Amortization of stock options compensatory charge over service period -- -- 40,000 -- Stock issued upon conversion of debentures at $.0005 per share 362,000 11,000 -- 533,000 Stock issued for services rendered at $.0007 per share 3,000 -- -- 7,000 Amortization of unearned stock compensation -- -- 32,000 -- Amortization of beneficial conversion feature of notes payable -- -- -- 662,000 Amortization of stock options compensatory charge over service period -- -- 40,000 -- Finders fee for convertible debt issuance -- -- -- (130,000) Record debt discount on notes and debentures -- -- -- 1,068,000 Cost incurred with stock options issued for service -- -- -- 18,000 Net loss for the year ended December 31, 2002 -- -- -- -- ------------- ------------- ------------- ------------- Balances At December 31, 2002 - Forward 659,000 $ 20,000 $ (158,000) $ 38,174,000
Deficit Accumulated During Total Development Stockholders' Stage [Deficit] ------------------- ------------- Totals - Forwarded $ (36,208,000) $ (1,438,000 ) Beneficial conversion feature of debentures -- 148,000 Record value of warrants issued -- 272,000 Beneficial conversion feature of notes payable -- 35,000 Stock issued upon conversion of debentures at $.001 per share -- 321,000 Stock issued for services rendered at $.003 per share -- 60,000 Amortization of unearned stock compensation -- 45,000 Amortization of beneficial conversion feature of notes payable -- 104,000 Amortization of stock options compensatory charge over service period -- 40,000 Stock issued upon conversion of debentures at $.0005 per share -- 544,000 Stock issued for services rendered at $.0007 per share -- 7,000 Amortization of unearned stock compensation -- 32,000 Amortization of beneficial conversion feature of notes payable -- 662,000 Amortization of stock options compensatory charge over service period -- 40,000 Finders fee for convertible debt issuance -- (130,000) Record debt discount on notes and debentures -- 1,068,000 Cost incurred with stock options issued for service -- 18,000 Net loss for the year ended December 31, 2002 (3,599,000) (3,599,000) ------------------- ------------- Balances At December 31, 2002 - Forward $ (39,807,000) $ (1,771,000)
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 10 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE ENTERPRISE] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' [DEFICIT]
Common Stock ----------------------------- Unearned Additional Number of Compensation Paid-in Shares Issued Par Value Expense Capital ------------- ------------- ------------- ------------- Balances At December 31, 2002 - Forwarded 659,000 $ 20,000 $ (158,000) $ 38,174,000 Effect of Reverse Stock Split -- (19,000) -- 19,000 Stock issued upon conversion of notes at an average of $.0002 per share 422,000 -- -- 254,000 Stock issued upon conversion of notes at an average of $.00006 per share 972,000 -- -- 171,000 Stock issued upon conversion of notes & debentures at $.000025 per share 1,091,000 -- -- 84,000 Stock issued upon conversion of notes at an average of $.06 per share 789,000 -- -- 47,000 Stock issued upon conversion of notes at an average of $.055 per share 63,000 -- -- 3,000 Stock issued upon conversion of notes at an average of $.03 per share 10,673,000 -- -- 320,000 Stock issued upon conversion of notes at an average of $.0025 per share 49,571,000 -- -- 125,000 Amortization of unearned stock compensation -- -- 158,000 -- Fair value of Stock to be issued in conjunction with loans -- -- -- 78,000 Fair value of Stock to be issued in conjunction with consulting -- -- -- 25,000 Issuance of warrants -- -- -- 2,647,000 Beneficial conversion feature of loans -- -- -- 70,000 Net loss for the year ended December 31, 2003 -- -- -- -- ------------- ------------- ------------- ------------- Balances At December 31, 2003 - Forward 64,240,000 $ 1,000 $ -- $ 42,017,000
Deficit Accumulated During Total Development Stockholders' Stage [Deficit] ------------------- ------------- Balances At December 31, 2002 - Forwarded $ (39,807,000) $ (1,771,000) Effect of Reverse Stock Split -- -- Stock issued upon conversion of notes at an average of $.0002 per share -- 254,000 Stock issued upon conversion of notes at an average of $.00006 per share -- 171,000 Stock issued upon conversion of notes & debentures at $.000025 per share -- 84,000 Stock issued upon conversion of notes at an average of $.06 per share -- 47,000 Stock issued upon conversion of notes at an average of $.055 per share -- 3,000 Stock issued upon conversion of notes at an average of $.03 per share -- 320,000 Stock issued upon conversion of notes at an average of $.0025 per share -- 125,000 Amortization of unearned stock compensation -- 158,000 Fair value of Stock to be issued in conjunction with loans -- 78,000 Fair value of Stock to be issued in conjunction with consulting -- 25,000 Issuance of warrants -- 2,647,000 Beneficial conversion feature of loans -- 70,000 Net loss for the year ended December 31, 2003 (3,828,000) (3,828,000) ------------------- ------------- Balances At December 31, 2003 - Forward $ (43,635,000) $ (1,617,000)
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 11 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE ENTERPRISE] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' [DEFICIT]
Common Stock ----------------------------- Unearned Additional Number of Compensation Paid-in Shares Par Value Expense Capital ------------- ------------- ------------- ------------- Balances At December 31, 2003 - Forwarded 64,240,000 $ 1,000 $-- $ 42,017,000 During the 1st quarter of 2004, Stock issued upon conversion of notes at an average of $.0025 per share 185,886,000 2,000 -- 461,000 In March 2004 Stock issued pursuant to private placement for cash at $.07 per share 9,143,000 -- -- 640,000 In March 2004 Stock issued for services rendered at an average of $.12 per share 200,000 -- -- 24,000 In January 2004 Stock issued for services rendered and charged in prior year 200,000 -- -- -- Stock of Preferred Class C issued for Ceptor purchase -- -- -- 4,760,000 Beneficial conversion feature of loan -- -- -- 1,500,000 Capitalization of deferred finance charges -- -- -- 2,065,000 Stock sale by CepTor -- -- -- 9,135,000 Net loss for the year ended December 31, 2004 -- -- -- -- ------------- ------------- ------------- ------------- Balances At December 31, 2004 259,669,000 $ 3,000 $ -- $ 60,602,000 Beneficial conversion feature of loan -- -- -- 3,986,000 Shares issued upon conversion of notes @ $ .005 - $ .0075 per share 99,500,000 1,000 -- 775,000 Shares issued for services rendered @ $.013 per share 10,000,000 -- -- 130,000 ------------- ------------- ------------- ------------- Totals - Forward 369,169,000 $ 4,000 $ -- $ 65,493,000
Deficit Accumulated During Total Development Stockholders' Stage [Deficit] ------------------- ------------- Balances At December 31, 2003 - Forwarded $ (43,635,000) $ (1,617,000) During the 1st quarter of 2004, Stock issued upon conversion of notes at an average of $.0025 per share -- 463,000 In March 2004 Stock issued pursuant to private placement for cash at $.07 per share -- 640,000 In March 2004 Stock issued for services rendered at an average of $.12 per share -- 24,000 In January 2004 Stock issued for services rendered and charged in prior year -- -- Stock of Preferred Class C issued for Ceptor purchase -- 4,760,000 Beneficial conversion feature of loan -- 1,500,000 Capitalization of deferred finance charges -- 2,065,000 Stock sale by CepTor -- 9,135,000 Net loss for the year ended December 31, 2004 (17,606,000) (17,606,000) ------------------- ------------- Balances At December 31, 2004 $ (61,241,000) $ (636,000) Beneficial conversion feature of loan -- 3,986,000 Shares issued upon conversion of notes @ $ .005 - $ .0075 per share -- 776,000 Shares issued for services rendered @ $.013 per share -- 130,000 ------------------- ------------- Totals - Forward $ (61,241,000) $ 4,308,000
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 12 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE ENTERPRISE] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' [DEFICIT]
Common Stock ----------------------------- Unearned Additional Number of Compensation Paid-in Shares Issued Par Value Expense Capital ------------- ------------- ------------- ------------- Totals - Forward 369,169,000 $ 4,000 $ -- $ 65,493,000 Shares issued to Sickle Cell Advisory Board @ $ .013 per share 4,000,000 -- -- 52,000 Net loss for the year ended Dec. 31, 2005 -- -- -- ------------- ------------- ------------- ------------- Balances At December 31, 2005 373,169,000 $ 4,000 $ -- $ 65,545,000 ============= ============= ============= ============= Beneficial conversion feature of loan -- -- -- 685,000 Shares issued upon conversion of notes @ $.0025 - $.0075 per share 507,475,000 5,000 -- 2,472,000 Net loss for the 3 months ended March 31, 2006 -- -- ------------- ------------- ------------- ------------- Balances At March 31, 2006 880,644,000 $ 9,000 $ -- $ 68,702,000 ============= ============= ============= =============
Deficit Accumulated During Total Development Stockholders' Stage [Deficit] ------------------- ------------- Totals - Forward $ (61,241,000) $ 4,308,000 Shares issued to Sickle Cell Advisory Board @ $ .013 per share -- 52,000 Net loss for the year ended Dec. 31, 2005 (10,039,000) (10,039,000) ------------------- ------------- Balances At December 31, 2005 $ (71,280,000) $ (5,731,000) =================== ============= Beneficial conversion feature of loan -- 685,000 Shares issued upon conversion of notes @ $.0025 - $.0075 per share -- 2,477,000 Net loss for the 3 months ended March 31, 2006 (1,792,000) (1,792,000) ------------------- ------------- Balances At March 31, 2006 $ (73,072,000) $ (4,361,000) =================== =============
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 13 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cumulative from March 15, 1990 (date of inception) Three Months ended March 31, to March 31, -------------------------------- -------------------- 2006 2005 2006 Cash flows from operating activities: Net loss $ (1,792,000) $ (5,353,000) $ (73,072,000) Adjustments to reconcile net loss to net cash used in operating activities: Share of Net loss from unconsolidated affiliate -- 3,358,000 13,587,000 Depreciation 19,000 18,000 1,389,000 Amortization 17,000 13,000 1,030,000 Amortization of debt discount and beneficial conversion features 2,571,000 590,000 9,898,000 Amortization of warrants issued -- -- 215,000 Value of stock and stock options issued -- 708,000 Unearned compensation -- 284,000 Interest and compensation expense in connection with issuance of equity securities -- 19,036,000 Write down of inventories -- -- 1,344,000 Write down of patents -- -- 517,000 Loss on investment in related party -- -- 89,000 Amortization of deferred consulting charge -- -- 1,330,000 Gain from Sale of Affiliate's Stock -- (2,930,000) Changes in operating assets and liabilities (Increase) decrease in: Accounts receivable -- (1,000) (67,000) Inventories -- -- (1,339,000) Prepaid expenses and other current assets (29,000) (116,000) (42,000) Other (3,000) -- (23,000) Increase (decrease) in: Accounts payable (152,000) 123,000 617,000 Other current liabilities -- (1,000) (35,000) Accrued expenses (226,000) 172,000 1,105,000 -------------- -------------- -------------------- Net cash flows from (used in) operating activities - Forward: 405,000 (1,197,000) (26,359,000) -------------- -------------- -------------------- Cash flows from (used in) investing activities: Patent issuance costs -- -- (548,000) Purchases of equipment and leasehold improvements (136,000) (554,000) (3,299,000) Return of Investment in unconsolidated affiliate -- 916,000 3,669,000 Other -- (200,000) (7,000) -------------- -------------- -------------------- Net cash flows from (used in) investing activities - Forward: (136,000) 162,000 (185,000) -------------- -------------- --------------------
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 14 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
Cumulative from March 15, 1990 (date of inception) Three Months ended March 31, to March 31, -------------------------------- ------------------- 2006 2005 2006 Net cash flows from (used in) operating activities - Forwarded $ 405,000.00 $(1,197,000.00) $ (26,359,000.00) -------------- -------------- ------------------- Net cash flows from (used in) investing activities - Forwarded (136,000) 162,000 (185,000) -------------- -------------- ------------------- Cash flows from (used in) financing activities: Proceeds from related party loans -- -- 2,647,000 Proceeds from notes payable and convertible notes 550,000 1,568,000 11,776,000 Proceeds from short term loans -- -- 4,271,000 Capital contribution -- -- 95,000 Net payments on capital leases (10,000) (11,000) (92,000) Payments on interim loans -- -- (808,000) Payments on notes payable - others (1,000,000) -- (3,348,000) Payments on stockholder loans -- -- (773,000) Proceeds from issuance of capital stock -- -- 12,914,000 -------------- -------------- ------------------- Net cash flows from financing activities: (460,000) 1,557,000 26,682,000 -------------- -------------- ------------------- Net change in cash (191,000) 522,000 138,000 Cash, beginning of periods 329,000 342,000 -- -------------- -------------- ------------------- Cash, end of periods $ 138,000 $ 864,000 $ 138,000 ============== ============== =================== Supplemental disclosures of cash flow information: Cash paid during the periods for: Interest paid - related party $ 15,000 $ 13,000 $ 425,000 Interest paid - other $ 1,207,000 $ -- $ 1,933,000 Taxes $ -- $ -- $ -- Supplemental disclosures of Non-cash financing and investing activities in 2005 and 2004: Net assets of Xechem India contributed to capital and minority interest $ -- $ -- $ 118,000 Liabilities exchanged for preferred and common stock $ -- $ -- $ 1,270,000 Equipment purchased through financing $ -- $ -- $ 134,000 Securities issued as payment on related party note $ -- $ -- $ 20,000 Common stock issued upon conversion of debentures, notes and related accrued interest $ 2,477,000 -- $ 2,477,000 Convertible notes refinanced by notes payable $ -- $ -- $ 367,000 Warrants Issued -- -- 193,000 Warrants Issued for services -- -- 1,330,000 Beneficial Conversion Features to financing agreements $ 2,571,000 $ 590,000 $ 4,502,000 Common stock of subsidiary issued in conjunction with financing agreement $ -- $ -- $ 16,662,000 Preferred Stock issued in Ceptor acquisition $ -- $ -- $ 4,760,000 Assets acquired & Liabilities assumed in Asset acquisition: Long Term Debt $ -- $ -- $ 275,000 Prepaid Expenses $ -- $ -- $ 18,000 Accrued Expenses $ -- $ -- $ 36,000
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements. 15 XECHEM INTERNATIONAL, INC. AND SUBSIDIARIES [A DEVELOPMENT STAGE ENTERPRISE] -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED] -------------------------------------------------------------------------------- [1] Significant Accounting Policies The accompanying consolidated financial statements have been prepared assuming Xechem International, Inc. and its subsidiaries Xechem, Inc., Xechem Laboratories, Inc., XetaPharm, Inc., Xechem (India) Pvt. Ltd., Xechem UK, Ltd., and Xechem Pharmaceuticals Nigeria Ltd. will continue as a going concern. We have suffered recurring losses from operations and have a net working capital deficiency that raises substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Significant accounting policies and other matters relating to us and our wholly-owned subsidiaries, Xechem, Inc., Xechem Laboratories, Inc., XetaPharm, Inc, Xechem (India) Pvt. Ltd., Xechem UK, Ltd., and Xechem Pharmaceuticals Nigeria Ltd. are set forth in the financial statements for and as of the year ended December 31, 2005 included in our Form 10-KSB, as filed with the Securities and Exchange Commission. [2] Basis of Reporting The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such statements include all adjustments (of a normal recurring nature) which are considered necessary to make the interim financials not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Form 10-KSB for the year ended December 31, 2005. The results of operations for the three month period ended March 31, 2006 and 2005 are not necessarily indicative of the operating results for a full year. As a result of our net losses through December 31, 2005 and accumulated deficit since inception, our auditors, in their report on our financial statements for the year ended December 31, 2005, included an explanatory paragraph indicating there is substantial doubt about our ability to continue as a going concern. This condition has not changed as of March 31, 2006. Foreign Currency Translation - The consolidated financial statements of the foreign affiliates have been translated at current exchange rates for balance sheet items and at average rates for income and expense items. The effect of foreign currency translation is included in the consolidated statements of operations, as the effects are not material. Transaction adjustments are included in operations. 16 [3] Going Concern At present, substantially all of the resources and attention of the Company are being directed toward efforts to launch our drug NICOSAN(TM)/HEMOXIN(TM) (formerly named NIPRISAN), which has shown efficacy in the treatment of Sickle Cell Disease. Xechem plans to launch the drug in Nigeria through its majority owned subsidiary, Xechem Pharmaceuticals Nigeria Ltd. Xechem Nigeria is in the process of constructing a manufacturing facility on the outskirts of Abuja, Nigeria to produce the drug. Simultaneously, the Company plans to embark upon the stringent U.S. FDA approval process, which includes conducting pre-clinical and clinical trials in the United States in anticipation of the sale of the drug in this country. Substantial cash expenditures over a considerable period of time will be required to successfully launch NICOSAN(TM)/HEMOXIN(TM) and fund the cost of the clinical trials, and the Company is in the process of identifying potential sources of financing, including loans and equity infusions, that will allow it to accomplish these objectives. There can be no assurance that the necessary funds will be obtained or that the drug will be successfully launched in Nigeria or the United States. In order to meet these cash needs, we have entered into the following recent financing agreements: (1) On December 13, 2005, we entered into an agreement in principle concerning the settlement of the Xechem, Inc. and Xechem International, Inc. vs. Bristol-Myers Squibb Company, 03 C 1920 lawsuit. In return for Xechem's full release of all claims that were or could have been asserted against BMS in connection with the case, BMS agreed to pay us $4,200,000 and further agreed to release us from all claims BMS could have asserted against us in the case. Each party agreed to bear their own costs, fees and expenses. Further, BMS agreed to waive the $29,599 fee award granted by the Court on September 7, 2005. BMS made the settlement payment to us in January 2006. After payment of legal fees, costs, interest due on prior financings and prorations, we received approximately $1,700,000 from this settlement. (2) The agreement with Alembic Limited was restructured in December 2005 (See Note 7D). In accordance with the terms of the loan, in January 2006, from the proceeds from the BMS settlement, $1,000,000 of principal and $190,700 of accrued interest was paid. The remaining principal balance of $2,000,000 due on the Alembic Promissory Note, together with unpaid interest, is due and payable December 31, 2006. (3) We are in negotiations with UPS Capital Business Credit to obtain financing in the sum of $8,253,000 for our pharmaceutical project in Nigeria. In March 2006, we paid a $50,000 non-refundable good faith deposit to UPS and the loan facility proposal is being processed under the U.S. Ex-Im Bank Loan Guarantee Program. One requirement, among others, of the loan facility is the provision of a Nigerian bank guarantee in the amount of the proposed loan, from an identified Nigerian-based bank. Two Nigeria-based banks, have been identified which are qualified to provide the Nigerian bank guarantee required by UPS Capital and Ex-Im Bank. UPS has provided a loan offer to us, subject to our review and approval. The two Nigerian banks must also review, and approve the UPS offer. Upon the banks' acceptance of the loan offer, they will undergo discussions with UPS regarding the final terms. If UPS completes the negotiation to its satisfaction, a formal request will be submitted by UPS Capital to Ex-Im Bank for the credit guarantee approval. If Ex-Im Bank provides the loan guarantee, UPS Capital will be authorized to disburse the funds to us. 17 There is no way to predict whether UPS will provide its approval to fund the loan to us. Without this loan, or alternative capitalization, we have not identified alternative sources to fund the Nigerian Pharmaceutical Project or our ongoing operations. In the event the loan is obtained, we estimate that there will be additional expenses associated with the completion of the Nigerian facility and start-up of production. We are hopeful that these additional monies can come from potential local financing in Nigeria (debt, equity and/or possible prepayment for product) and/or from potential domestic funding sources, although no commitments have been obtained for such funding. In the event all of such financing can be obtained, we have the further risk that cost overruns and/or delays in bringing the product to market could adversely impact execution of our business plan. (4) In the period from January 1, 2006 through March 31, 2006, holders of Xechem debt converted Xechem debt (in the form of principal and interest) in the aggregate amount of $2,477,000 ($2,329,000 of which is principal and $148,000 of which is interest) into 507,475,000 shares of Xechem's common stock (exercised at conversion rates between $0.0025 - $0.0075 per share). Subsequently, in the period from April 1, 2006 through April 21, 2006, holders of Xechem debt converted Xechem debt (in the form of principal and interest) in the aggregate amount of $191,000 ($189,000 of which is principal and $2,000 of which is interest) into 76,571,460 shares of Xechem's common stock (exercised at conversion rates between $0.0025 - $0.0075 per share). The total conversions from January 1, 2006 through April 21, 2006 represented approximately 61% of Xechem's then issued and outstanding stock. (5) Through April 21, 2006, Xechem received convertible loans totaling $680,000 from Ms. Chassman and $25,000 from a related party. The notes for these loans are currently in negotiation and will include an interest rate, conversion to common stock features and with due dates of six months to two years. (6) Xechem is negotiating to obtain a $3,000,000 to $4,000,000 convertible loan with Ms. Chassman and certain other investors. The convertible loans are expected to bear interest rate at 8%, will be convertible into shares of common stock at a conversion price to be determined, and mature in December 31, 2007. The Company shall also issue to the investors five year warrants to purchase shares of common stock equal to the initial conversion price. The closing of the funding by the investors shall be dependent upon the negotiation of mutually agreeable definitive documentation. This loan is subject to approval by the board of directors, which approval may not be granted, in which case the funding may not occur. (7) It is anticipated that sales of our product NICOSAN(TM), a sickle cell drug, will commence in Nigeria in the second or third quarter of 2006. Initially, it is not anticipated that revenues will be significant but they should help in covering the costs of the operation. We expect to continue our development efforts with respect to antifungal, anticancer, antiviral (including anti-AIDS) and anti-inflammatory compounds, as well as antiaging and memory enhancing compounds. Although we do not expect product revenues from these sources in 2006, we anticipate that these development activities may allow us to enter into more favorable licensing and/or investment arrangements. We plan to secure financing through various loans and bridge financing, which we feel will meet our current needs, provided the funding of such loans is fully adhered to. We will need to generate funds from operations and/or debt and equity funding sources to enable us to repay such loans and our other outstanding debt. We are attempting to raise outside financing through the issuance of equity securities or other instruments, although no agreements are currently in place. In addition, we have issued, and plan to continue issuing equity securities, where possible, to obtain services, without expending cash. We also plan to continue receiving cash from the sale of our New Jersey net operating losses. 18 Our planned activities will require the addition of new personnel, including management, and the continued development of expertise in areas such as preclinical testing, clinical trial management, regulatory affairs, manufacturing and marketing. Further, if we receive regulatory approval for any of our products in the United States or elsewhere, we will incur substantial expenditures to develop manufacturing, sales and marketing capabilities and/or subcontract or joint venture these activities with others. There can be no assurance that we will ever recognize revenue or profit from any such products. In addition, we may encounter unanticipated problems, including developmental, regulatory, manufacturing or marketing difficulties, some of which may be beyond our ability to resolve. We may lack the capacity to produce our products in-house and there can be no assurances that we will be able to locate suitable contract manufacturers or be able to have them produce products at satisfactory prices. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue in existence. [4] Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. [5] Investments in Unconsolidated Affiliates Investments in unconsolidated affiliates, jointly owned companies and other investees in which the Company owns 20% to 50% interest and or exercises significant influence are carried at cost or equity, adjusted for the company's proportionate share of their undistributed earnings or losses. [6] Note Payable Bank Note payable bank at March 31, 2006 totaled $55,000. This loan has been collateralized by all tangible assets including accounts receivable. The $55,000 loan represented borrowings against a $60,000 line-of-credit at an interest rate of 9.75% as of March 31, 2006 from the Bank of New York. The line-of-credit renews annually. 19 [7] Notes Payable Notes Payable consists of the following: March 31, 2006 Secured Notes Payable (A) $ 124,000 Unsecured Loan (B) 1,022,000 Unsecured Loan (C) 1,000,000 Alembic Ltd (D) 2,000,000 Others-Non-Related Parties (E) 65,000 Unsecured Loan (F) 585,000 Less Debt Discount (1,589,000) ----------- Total Notes Payable 3,207,000 Less Current Portion 2,065,000 ----------- Total Long Term Notes Payable $ 1,142,000 =========== A) During 2002, we issued convertible notes totaling $367,000, which was increased by an additional funding of $767,000 by certain investors during the twelve months ended December 31, 2003, at which time debentures were converted into term notes. The new term notes bearing simple interest at 8% per annum, due on the earliest to occur of the settlement, dismissal or final adjudication of the Bristol-Myers Squibb lawsuit (the "BMS Lawsuit"), plus additional interest equal to forty percent (40%) with respect to the BMS Lawsuit, subject to an adjustment factor of the net recovery to us (after deduction of legal fees and costs). We granted the term loan holders a security interest in the BMS Lawsuit. These notes were due on the later of 18 months from the date of the Note Purchase Agreement or final Disposition of the Bristol-Myers Squibb lawsuit (provided that the additional interest, if any, as referenced above, was due on the disposition of the lawsuit). In December 2005, we entered into an agreement in principle to settle the BMS Lawsuit. BMS agreed to pay Xechem $4.2 million and $1,075,000 or 40% of the net settlement was paid to the note holder in January 2006. The Company entered into a $1,500,000 Bridge Loan and Debt Restructuring Agreement on August 25, 2005, with Ms. Chassman ("Chassman") and certain other investors introduced to the Company through Chassman ("the Investors"). On September 30, 2005, the parties entered into an amendment to the Term Sheet (the "Amended Term Sheet"). Under the terms of the Amended Term Sheet, the price of converting this note into shares of common stock was reset from $.015 per share to $.0025 - $.0075 per share. The intrinsic value of the beneficial conversion feature of $3,793,000 was allocated to paid-in capital. In December 2005, $318,000 in principal and $230,000 in accrued interest was converted into 99,500,000 shares of Common Stock. In the three months ended March 31, 2006, $692,000 in principal and $25,000 in accrued interest was converted into 106,120,660 shares of common stock. At March 31, 2006 we have a balance of $124,000 from this loan and $4,000 in accrued interest. The due date on this loan is April 2007. 20 (B) In the first quarter 2005, we received a loan of $3,800,000 from Chassman. On June 17, 2005 Ceptor purchased/redeemed 2,886,563 shares of Ceptor common stock from Xechem, at $0.80 per share for an aggregate purchase price of $2,309,250. We used a portion of the proceeds ($1,616,171) to pay and satisfy in full the total bridge loan principal ($1,567,639) and pay interest ($48,532) due under the Bridge Notes. We also used a portion of the proceeds ($141,168) to reduce the Chassman unsecured loan of $2,800,000 to $2,659,000. In December 2005, $35,000 was advanced to the company by Chassman. At December 31, 2005 we had a balance of $2,659,000 from this loan and recorded $59,000 in accrued interest. In the three months ended March 31, 2006, $1,637,000 in principal and $124,000 in accrued interest was converted into 401,576,310 shares of common stock (exercised at conversion rates between $.0025 - $.005 per share). At March 31, 2006, we have a balance of $1,022,000 from this loan and $28,000 in accrued interest. This agreement has not been signed in its final form; however, the Company and the Investor do not anticipate any material differences from the facts stated above. The due date on this loan is April 2007. (C) Pursuant to the Amended Term Sheet, Chassman and the Investors agreed to invest up to $1,500,000 into the Company. A total of $1,000,000 was funded. If the Company's allocation of tax credits for fiscal year 2004 from the State of New Jersey was less than $500,000, the Investors agreed to advance the difference between such allocation and $500,000 in the form of convertible notes. The Company received $566,000 in tax credits from the State and no additional investment was necessary. For each $100,000 of the first $1,000,000 of notes funded, the Company agreed to issue 1,500,000 shares of its $0.00001 per value per share common stock to the investor funding same for the aggregate issuance of 15,000,000 shares. The intrinsic value of the beneficial conversion feature of $194,000 was allocated to paid in capital. To date, these shares have not been issued. The notes are convertible into the Company's common stock. Prior to February 1, 2006, the notes and accrued interest were convertible at the rate of $0.05 per share. From February 1, 2006 and thereafter, the notes and accrued interest are convertible at the rate of $0.005 per share. The intrinsic value of the beneficial conversion of $540,000 has been allocated to paid in capital. As of March 31, 2006, we have a balance of $1,000,000 from this loan and $41,600 in accrued interest. (D) In April 2004, we executed definitive documents with Alembic Limited, which included a commitment to loan $3,000,000 to us. The entire $3,000,000 of the loan amount was funded. The note had an interest rate of 8% per annum and matured April 2008. The loan was convertible into our common stock, with maximum discount of 60% of FMV. The intrinsic value of the beneficial conversion feature of $3,000,000 on the debt funded as of December 31, 2004 had been allocated to paid in capital. Pursuant to the terms of the Alembic Agreements, we had a contractual commitment to issue them a fifteen percent (15%) ownership interest in Xechem Nigeria. On December 22, 2005, Xechem and Alembic agreed to terminate the Old Note and enter into the New Note. Pursuant to the terms of the New Note, Xechem agreed to repay Alembic in full the outstanding principal and interest remaining from the New Note as follows: $1,000,000 to be paid on or before January 31 2006 (the "Initial Payment"), with the balance (the "Remaining Balance") due on or before December 31, 2006. Furthermore, for every month beginning July 2006, in which any portion of the New Note remains unpaid, Xechem agreed to pay to Alembic as additional consideration the sum of $16,600, for a total of up to $99,600. Notwithstanding the foregoing, if Xechem increases its Initial Payment to $1,500,000, then the $16,600 monthly additional consideration payment will be reduced to $12,500. The New Note continues to bear interest at the rate of 8%. Unlike the Old Note, the New Note is not convertible into shares of Xechem's common stock. 21 The parties agreed to terminate the MOU and the Cooperation Agreement. Under the MOU and the Cooperation Agreement, Alembic had previously agreed to loan Xechem $3,000,000 (the "Old Note"). As additional consideration for the Old Note, Xechem agreed to pay Alembic a fee (the "Investment Fee") during the License Term (15 years) equal to the product of the Alembic Applicable Percentage multiplied by the Gross Product Sales Amount, as those terms are defined herein. The Gross Product Sales Amount means the amount of gross sales revenue generated by the company from sales of NICOSAN(TM)/HEMOXIN(TM) in Nigeria and other African countries, calculated on a cash received basis. For the period from the commencement date through the fifth anniversary, the Alembic Applicable percentage is 15%, for the period from the fifth to the tenth anniversary, the Alembic Applicable percentage is 10%, and for the period from the tenth anniversary to the end of the term, the Alembic Applicable percentage is 5%. During the License Term, the company also agreed to pay Alembic a U.S. Export Fee in an amount equal to one percent of the amount of purchase price paid by the company for any NICOSAN(TM)/HEMOXIN(TM) sold by the company in the United State and internationally, except Nigeria (the "Export Fee"). Xechem also issued Alembic a warrant to purchase 10,000,000 shares of Xechem's common stock at an exercise price of $0.20 per share (the "Warrant"). Alembic also agreed to provide certain production and regulatory compliance personnel to assist Xechem Nigeria, which services would be compensated upon terms agreeable to the parties (the "Services"). The company also gave Alembic the right of first offer regarding the licensing of any distribution rights with respect to NICOSAN(TM)/HEMOXIN(TM) in the territory of Africa and India (the "Distribution Rights"). All existing agreements and understandings between Xechem and Xechem Nigeria, on the one hand and Alembic on the other regarding the Cooperation Agreement, the MOU and the Old Note are terminated, including the Investment Fee, the Export Fee, the Warrant, the Services and the Distribution Rights. Notwithstanding the foregoing, the parties agreed that the provisions addressing the disclosure of confidential information, non-circumvention, confidentiality and nonsolicitation shall not be terminated and shall remain in full force and effect. Xechem and Alembic entered into a Security Agreement, as security for the payment of the Initial Payment and the Remaining Balance of the New Note. Xechem granted Alembic a security interest in: (a) 500,000 shares of restricted stock in Ceptor Corporation owned by Xechem (the "Ceptor Shares"), (b) 15% of the issued and outstanding shares of common stock of Xechem Nigeria; and (c) 5,000,000 shares of common stock of Xechem. Notwithstanding the foregoing, if Xechem increases its Initial Payment to $1,500,000, then the Ceptor Shares will be released. The parties also signed mutual releases. At December 31, 2005 we had a balance of $3,000,000 from this loan and $175,400 in accrued interest. In January 2006, from the proceeds received from the BMS settlement, $1,000,000 of principal and $190,700 of accrued interest was paid. As of March 31, 2006, we have a balance of $2,000,000 in principal and $29,800 in accrued interest. 22 E) In 2005 and cumulatively, five non-related parties loaned to the Company a total of $50,000 and $65,000, respectively, for six months to one year with an interest rate of 8% - 12%. The individuals also received five year stock options to purchase a total of 1,900,000 shares of common stock at $.01 per share. At March 31, 2006, accrued interest totaled $8,000. F) In December 2005 and the three months ended March 31, 2006, the Company received convertible loans totaling $585,000 from Ms. Chassman. The notes for the loans are currently in negotiation and will include a interest rate, conversion to common stock feature and with due dates of one year to two years. Anticipating a successful conclusion of these notes, have accrued interest of $3,300 as of March 31, 2006. [8] Notes Payable to Related Parties During the three months ended March 31, 2006, we made no payments to reduce the outstanding December 31, 2005 principal of $1,249,000. In the period from January 1, 2006 through May 5th, 2006, the Company's CEO agreed to deliver a series of Convertible Debt instruments in the aggregate principal amount of approximately $687,138, together with warrants, subject to board approval, which approval has not yet been granted. It is anticipated that the notes will bear interest at the rate of 8% -12 %, and be convertible into shares of common stock at a rate from $0.005 to $0.0253, for a total conversion of approximately 109,379,842 shares (excluding interest conversion figures). The Company also anticipates issuing to these lenders warrants to purchase 36,050,000 shares of our common stock, exercisable from $0.005 to $0.0253 per share, as part of the consideration for the funding of the loans. The monies were advanced by the lenders in anticipation of receipt of the board approval. In each case, the proposed lenders are believed to be "accredited investors" and/or "sophisticated investors" not affiliated with us unless otherwise noted, and funding the monies with an investment intent, and not with a view toward distribution. Of the proposed lenders, 4 of the 9 are relatives of an affiliate, and all have had preexisting relationships with us. We expect that the issuance of the above securities will be issuable pursuant to exemptions under Section 4(2) of the Securities Act or Regulation D promulgated thereunder. There will be no commissions payable in connection with any of the proposed placements. As of March 31, 2006, we had accrued interest totaling $6,300 and $244,000 for the quarter and cumulatively, to related parties. Notes Payable - Related Party consists of the following: As of March 31, 2006 -------------- Loans Payable - Dr. Renuka Misra $ 448,000 Loans Payable - Beverly Robbins 390,000 Loans Payable - Xechem China 140,000 Loans Payable - Employee 10,000 Loans Payable - Dr. Pandey 125,000 Loans Payable - Family Members of Dr. Pandey 136,000 -------------- Total Notes Payable $ 1,249,000 Less Current Portion 984,000 -------------- Total Long-Term Notes Payable $ 265,000 ============== 23 [9] Legal Proceedings On December 13, 2005, we entered into an agreement in principle concerning the settlement of the Xechem, Inc. and Xechem International, Inc. vs. Bristol-Myers Squibb Company, 03 C 1920 lawsuit. In return for Xechem's full release of all claims that were or could have been asserted against BMS in connection with the case, BMS agreed to pay us $4,200,000 and further agreed to release us from all claims BMS could have asserted against us in the case. Each party agreed to bear their own costs, fees and expenses. Further, BMS agreed to waive the $29,599 fee award granted by the Court on September 7, 2005. BMS made the settlement payment to us in January 2006. After payment of legal fees, costs, interest due on prior financings and prorations, we received approximately $1,700,000 from this settlement. [10] Net Income (Loss) Per Share Net income (loss) per share is presented under SFAS No. 128 "Earnings Per Share." Under SFAS No. 128, basic net income (loss) per share is computed by dividing net loss per share available to common stockholders by the weighted average shares of common stock outstanding for the period and excludes any potential dilution that would occur upon the exercise or conversion of all dilutive securities into common stock. Under SFAS No. 128, diluted net income per share is computed by dividing net income available to common stock shareholders by the weighted average share of common stock outstanding for the period and including dilution that would occur upon the exercise of conversion of all dilutive securities into common stock. As of March 31, 2006, the potentially dilutive securities totaled approximately 1.744 billion shares of common stock. [11] Stock Options and Warrants Options - During the three months ended March 31, 2006 and 2005, 32,626,000 and 0 options were granted, respectively. Warrants - During the three months ended March 31, 2006 and 2005, warrants for 0 and 52.3 million shares were granted, respectively. [12] Common Stock In the three months ended March 31, 2006, the Company issued 507,696,970 shares of Common Stock upon conversion by holders of Xechem debt (in the form of principal and interest) into Common Stock at conversion rates between $.0025 - $.0075 per share. 24 [13] Stock-Based Compensation On January 1, 2006, the Company adopted the provisions of SFAS No. 123-R "Share-Based Payment" using the modified prospective method. SFAS No. 123-R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards. Under the modified prospective method of adopting SFAS No. 123-R, the Company recognized compensation cost for all share-based payments granted after January 1, 2006, plus any awards granted to employees prior to January 1, 2006 that remain unvested at that time. Under this method of adoption, no restatement of prior periods is made. Prior to January 1, 2006 the Company recognized the cost of employee services received in exchange for equity instruments in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued Employees" (APB 25). APB 25 required the use of the intrinsic value method, which measures compensation cost as the excess, if any, of the quoted market price of the stock over the amount the employee must pay for the stock. Compensation expense for substantially of all the Company's equity based awards was measured under APB 25 on the date the shares were granted. Under APB 25, no compensation expense was recognized for stock options. There was no stock based compensation expense related to stock options during the fiscal first quarter of 2006 as no options were granted nor did any options vest during the three months period. There was no recognized tax benefits during the quarter ended March 31, 2006. During the fiscal first quarter of 2005 had the cost of employee services received in exchange for equity instruments been recognized based on the grant-date fair value of those instruments in accordance with the provisions of SFAS No. 123-R, the Company's net income and earnings per share would have been impacted as shown in the following table: Three Months Ended March 31, 2006 2005 -------------- -------------- Net Income (loss), as reported $ (1,792,000) $(6,405,00) Stock-based employee compensation expense under fair value method, net of related tax effects 0 0 -------------- -------------- Pro forma net income (loss) $ (1,792,000) $ (6,405,000) ============== ============== Income (loss) per share: Basic, as reported $ (0.00) $ (0.03) Basic, pro forma $ (0.00) $ (0.03) ============== ============== The historical pro-forma impact of applying the fair value method prescribed by SFAS No. 123-R is not representative of the impact that may be expected in the future due to changes resulting from additional grants in future years and changes in assumptions such as volatility, interest rates and expected life used to estimate fair value of the grants in future years. 25 [14] New Authoritative Pronouncements In May 2005, FASB issued FASB 154, Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement replaces APB Opinion No. 20, Accounting Changes and FASB No. 3, Reporting Accounting Changes in Interim Financial Statements. FASB 154 changes the requirements for the accounting for and the reporting of a change in the accounting principle. FASB 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instances that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transaction provisions, those provisions should be followed. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. In February 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 155, Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155 provides the framework for fair value re-measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation as well as establishing a requirement to evaluate interests in securitized financial assets to identify interests. SFAS 155 further amends FASB 140 to eliminate the prohibition of a qualifying special-purpose entity's holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The guidance in SFAS 155 also clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133 and which concentration of credit risk in the form of subordination are not embedded derivatives. This Statement is effective for financial instruments acquired or issued after the beginning of any entity's first fiscal year that begins after September 15, 2006. SFAS 155 is not expected to have a material impact on the Company's consolidated financial statements. In March 2006, FASB issued Statement No. 156 ("FASB 156"), Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140. FASB 156 requires the recognition of a servicing asset of servicing liability under certain circumstances when an obligation to service a financial asset by entering into a service contract. FASB 156 also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value utilizing the amortization method or fair market value method. FASB 156 is effective at the beginning of the first fiscal year that begins after September 15, 2006. FASB 156 is not expected to have a material effect on the Company's consolidated financial statements. [15] Subsequent Events In the period April 1, 2006 through April 21, 2006, holders of 918 shares of Xechem Class C Series 7 preferred stock converted into 4,594,269 shares of common stock. Also, in the period from April 1, 2006 through April 21, 2006, holders of Xechem debt converted Xechem debt (in the form of principal and interest) in the aggregate amount of $191,000 ($189,000 of which is principal and $2,000 of which is interest) into 76,571,460 shares of Xechem's common stock (exercised at conversion rates between $0.0025 - $0.0075 per share). 26 [16] Subsequent Subsequent Events In the period April 22, 2006 through May 5th, 2006, a holder of Xechem debt converted Xechem debt (in the form of principal and accrued interest) in the aggregate amount of $321,000 ($320,000 of which is principal and $1,000 of which is interest) into 128,426,296 shares of Xechem's common stock (exercised at a conversion rate of $.0025 per share). In the period April 22, 2006 through May 5, 2006, a holder of 647 shares of Xechem Class C Series 7 preferred stock converted into 3,235,404 shares of common stock. 27 Item 2. Management's Discussion and Analysis. THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. Overview -------- Xechem International, Inc., a Delaware corporation, is the holder of all of the capital stock of Xechem, Inc., a development stage biopharmaceutical company engaged in the research, development, and production of niche generic and proprietary drugs from natural sources. Xechem, Inc. was formed in March 1990 to acquire substantially all of the assets of a subsidiary of LyphoMed, Inc. (later known as Fujisawa/LyphoMed, Inc.), a publicly traded company. Xechem Laboratories (formed in 1993), XetaPharm, Inc. (formed in 1996), Xechem (India) Pvt. Ltd. (acquired in 1996), and Xechem UK, Ltd. (formed in 2005) are our subsidiaries. Xechem Pharmaceutical China Ltd., (formed in 2000) is an inactive affiliate. Xechem Pharmaceuticals Nigeria Limited (formed in 2002) is currently owned 100% by us. Xechem's principal product under development is NICOSAN(TM)/HEMOXIN(TM) which has shown efficacy in the treatment in Sickle Cell Disease. The development and production of NICOSAN(TM)/HEMOXIN(TM) is being conducted through Xechem Nigeria. We are in the process of launching our NICOSAN(TM) project in Nigeria and preparing for the clinical testing and trials of HEMOXIN(TM) in the United States. We anticipate that expenses will increase, with the expansion of our operations and marketing efforts, as described more fully herein. Our planned activities will require the addition of new personnel, including management, and the development of additional expertise in areas such as preclinical testing, clinical trial management, regulatory affairs, manufacturing and marketing. In order to pursue these activities, we must obtain additional financing, whether in the form of loans or equity infusions. There can be no certainty that we will be able to obtain the financing in the amounts or at the times required. Results of Operations --------------------- The Three months Ended March 31, 2006 vs. The Three months Ended March 31, 2005 The following table sets forth certain statement of operations data for the cumulative period from inception (March 15, 1990) to March 31, 2006 and for each of the three months ended March 31, 2006 and March 31, 2005. 28
Cumulative Three months Ended Inception to March 31, March 31, 2006 2005 2006 (in thousands) Revenue $ 1 $ 1 $ 2,122 Research and Development Expense $ 356 $ 222 $ 15,008 General and Administrative Expenses $ 2,058 $ 980 $ 26,310 Writedown of Inventory And Intangibles $ -- $ -- $ 1,861 Loss from Operations $ (2,413) $ (1,201) $ (41,057) Other Income (Expense) $ 621 $ (4,152) $ (34,651) Net Loss before Income Taxes $ (1,792) $ (5,353) $ (75,708) Income Tax Benefit $ -- $-- $ 2,636 Net Loss before Income Taxes $ (1,792) $ (5,353) $ (73,072)
Revenue ------- We had revenues of $1,000 for the three months ended March 31, 2006 and March 31, 2005. This represents the product sales by our subsidiary Xetapharm, Inc. Research and Development ------------------------ Our research and development expenditures have been directed primarily toward the development of our new Sickle Cell treatment drug NICOSAN(TM)/HEMOXIN(TM), which is being developed by our wholly-owned subsidiary, Xechem Nigeria. Our research and development expenditures are also made in conjunction with the development of compounds to make niche generic anticancer, antiviral and antibiotic products that enjoy significant market demand but are no longer subject to patent protection. In the three months ended March 31, 2006, our research and development expenditures increased by $134,000 to $356,000. In the three months ended March 31, 2006, our costs associated with the development of our Sickle Cell Disease drug NICOSAN(TM) totaled $242,000, an increase of $132,000, as compared to the same period for 2005. Other major expenses for the three months ended March 31, 2006 were: (a) salaries and wages of our research personnel which were approximately $57,000 for the three months ended March 31, 2006, as compared to approximately $64,000 for the three months ended March 31, 2005; (b) repairs and maintenance was $21,000 for the three months ended March 31, 2006 as compared to $28,000 for the three months ended March 31, 2005; (c) purchase discount was $0 for the three months ended March 31, 2006 as compared to $17,000 for the three months ended March 31, 2005; and (d) other fees decreased $6,000 from $7,000 for the three months ended March 31, 2005 to $1,000 for the three months ended March 31, 2006 We anticipate expenses to increase for the latter part of 2006 with our proposed launching of NICOSAN(TM) in Nigeria and the clinical testing and trials of HEMOXIN(TM) in the United States. In order to pursue these activities, we must obtain additional financing. There can be no certainty that we will be able to obtain the financing in the amounts or at the times required. 29 General and Administrative -------------------------- General and administrative expenses increased by $1,078,000 or 1.10% to $2,058,000 for the three months ended March 31, 2006 as compared to the three months ended March 31, 2005. The increase was primarily due to legal costs of approximately $1,485,000 paid as part of the Xechem, Inc. and Xechem International, Inc. vs. Bristol-Myers Squibb Company, 03 C 1920 lawsuit settlement. In return for Xechem's full release of all claims that were or could have been asserted against BMS in connection with the case, BMS agreed to pay us $4,200,000 and further agreed to release us from all claims BMS could have asserted against us in the case. Legal fees and costs totaled approximately $1,485,000. The other major expenses for the three months ended March 31, 2006 were: (a) salaries and wages of approximately $257,000 a decrease of approximately $43,000 or 14% as compared to 2005; (b) consulting fees which decreased to $8,000 for the three months ended March 31, 2006 as compared to $92,000 for the three months ended March 31, 2005; (c) rent expense decreased $13,000 from $59,000 for the three months ended March 31, 2005 to $46,000 for the three months ended March 31, 2006; (d) legal fees totaled $73,000 in 2005, as compared to $69,000 in 2004, an increase of $4,000; (e) directors and officers insurance decreased $9,000 from $35,000 for the three months ended March 31, 2005 to $26,000 for the three months ended March 31, 2006; (f) medical and property insurance decreased $17,000 from $45,000 for the three months ended March 31, 2005 to $28,000,000 for the three months ended March 31, 2006; (g) advertising expense increased approximately $6,000 from $3,000 for 2005 as compared to $9,000 in 2006; (h) private placement cost totaled $0 in 2006, as compared to $157,000 in 2005; (i) accounting fees decreased approximately $42,000 from $57,000 in 2005 to $15,000 in 2006; (j) travel expenses decreased approximately $23,000 from $60,000 in 2005 to $37,000 in 2006; (k) professional services decreased $8,000 from $10,000 in 2005 to $2,000 in 2006; (l) utilities and office expenses decreased approximately $1,000 from $20,000 in 2005 to $19,000 in 2006; and (m) other expenses decreased $21,000 from $73,000 for the three months ended March 31, 2005 to $52,000 for the three months ended March 31, 2006. Interest expense for non-related parties equaled approximately $3,556,000 for the three months ended March 31, 2006, an increase of approximately $2,798,000 as compared to the three months ended March 31, 2005. The increase in expense was the result of additional debt incurred in 2005 and approximately $2,571,000 was non-cash in nature due to borrowings evidenced by debentures and notes and the beneficial conversion feature of said debentures. Interest expense for related parties was approximately $23,000 for the three months ended March 31, 2006 as compared to $13,000 for the three months ended March 31, 2005 due to increased indebtedness. For the three months ended March 31, 2006, we had $4,200,000 of other income, as compared of $23,000 of other expense for the three months ended March 31, 2005, which was a result of Xechem, Inc. and Xechem International, Inc. vs. Bristol-Myers Squibb Company, 03 C 1920 lawsuit settlement. In return for Xechem's full release of all claims that were or could have been asserted against BMS in connection with the case, BMS agreed to pay us $4,200,000 and further agreed to release us from all claims BMS could have asserted against us in the case. 30 We anticipate expenses to increase for the remainder 2006 with our proposed launching of NICOSAN(TM) in Nigeria and the commencement of clinical testing and trials of HEMOXIN(TM) in the United States. We anticipate that general and administrative expenses will increase, with the expansion of our operations and marketing efforts. Our planned activities will require the addition of new personnel, including management, and the development of additional expertise in areas such as preclinical testing, clinical trial management, regulatory affairs, manufacturing and marketing. The exact number and nature of persons hired and our expenses for such persons will depend on many factors, including the capabilities of those persons who seek employment with us and the availability of additional funding to finance these efforts. We expect to incur continued costs related to the proposed launching of NICOSAN(TM) in Nigeria and the clinical testing and trials of our new drug HEMOXIN(TM) in the United States. In order to pursue these activities, we must obtain additional financing. There can be no certainty that we will be able to obtain the financing in the amounts or at the times required. Liquidity and Capital Resources; Plan of Operations --------------------------------------------------- On March 31, 2006, we had cash and cash equivalents of $138,000, negative working capital of $4,502,000 and stockholders' deficit of $73,072,000. As a result of our net losses through December 31, 2005 and accumulated deficit since inception, our accountants, in their report on our financial statements for the year ended December 31, 2005, included an explanatory paragraph indicating there is substantial doubt about our ability to continue as a going concern. This condition has not changed as of March 31, 2006. With respect to NICOSAN(TM)/HEMOXIN(TM), the Company is planning for the commercial launch of the drug in Nigeria on a limited basis by second or third quarter 2006 and to begin pursuit of the pre-clinical and clinical trials in the United States as required for Food and Drug Administration (FDA) approval. These planned activities are entirely dependent on additional financings. There can be no assurances that the required funding will be obtained or that the Company will succeed in its efforts to launch the drug in Nigeria or the United States. (1) On December 13, 2005, we entered into an agreement in principle concerning the settlement of the Xechem, Inc. and Xechem International, Inc. vs. Bristol-Myers Squibb Company, 03 C 1920 lawsuit. In return for Xechem's full release of all claims that were or could have been asserted against BMS in connection with the case, BMS agreed to pay us $4,200,000 and further agreed to release us from all claims BMS could have asserted against us in the case. Each party agreed to bear their own costs, fees and expenses. Further, BMS agreed to waive the $29,599 fee award granted by the Court on September 7, 2005. BMS made the settlement payment to us in January 2006. After payment of legal fees, costs, interest due on prior financings and prorations, we received approximately $1,700,000 from this settlement. (2) The agreement with Alembic Limited was restructured in December 2005 (See Note 7D). In accordance with the terms of the loan, in January 2006, from the proceeds from the BMS settlement, $1,000,000 of principal and $190,700 of accrued interest was paid. The remaining principal balance of $2,000,000 due on the Alembic Promissory Note, together with unpaid interest, is due and payable December 31, 2006. (3) We are in negotiations with UPS Capital Business Credit to obtain financing in the sum of $8,253,000 for our pharmaceutical project in Nigeria. In March 2006, we paid a $50,000 non-refundable good-faith deposit to UPS and the loan facility proposal is being processed under the U.S. Ex-Im Bank Loan Guarantee Program. One requirement, among others, of the loan facility is the provision of a Nigerian bank guarantee in the amount of the proposed loan, from an identified Nigerian-based bank. 31 Two Nigeria-based banks, have been identified which are qualified to provide the Nigerian bank guarantee required by UPS Capital and Ex-Im Bank. UPS has provided a loan offer to us, subject to our review and approval. The two Nigerian banks must also review, and approve the UPS offer. Upon the banks' acceptance of the loan offer, they will undergo discussions with UPS regarding the final terms. If UPS completes the negotiation to its satisfaction, a formal request will be submitted by UPS Capital to Ex-Im Bank for the credit guarantee approval. If Ex-Im Bank provides the loan guarantee, UPS Capital will be authorized to disburse the funds to us. There is no way to predict whether UPS will provide its approval to fund the loan to us. Without this loan, or alternative capitalization, we have not identified alternative sources to fund the Nigerian Pharmaceutical Project or our ongoing operations. In the event the loan is obtained, we estimate that there will be additional expenses associated with the completion of the Nigerian facility and start-up of production. We are hopeful that these additional monies can come from potential local financing in Nigeria (debt, equity and/or possible prepayment for product) and/or from potential domestic funding sources, although no commitments have been obtained for such funding. In the event all of such financing can be obtained, we have the further risk that cost overruns and/or delays in bringing the product to market could adversely impact execution of our business plan. (4) In the period from January 1, 2006 through March 31, 2006, holders of Xechem debt converted Xechem debt (in the form of principal and interest) in the aggregate amount of $2,477,000 ($2,329,000 of which is principal and $148,000 of which is interest) into 507,475,000 shares of Xechem's common stock (exercised at conversion rates between $0.0025 - $0.0075 per share). Subsequently, in the period from April 1, 2006 through April 21, 2006, holders of Xechem debt converted Xechem debt (in the form of principal and interest) in the aggregate amount of $242,000 ($239,000 of which is principal and $3,000 of which is interest) into 76,793,430 shares of Xechem's common stock (exercised at conversion rates between $0.0025 - $0.0075 per share). The total conversions from January 1, 2006 through April 21, 2006 represented approximately 61% of Xechem's then issued and outstanding stock. (5) Through April 21, 2006, Xechem received convertible loans totaling $680,000 from Ms. Chassman and $25,000 from a related party. The notes for these loans are currently in negotiation and will include an interest rate, conversion to common stock features and with due dates of six months to two years. (6) Xechem is negotiating to obtain a $3,000,000 to $4,000,000 convertible loan with Ms. Chassman and certain other investors. The convertible loans are expected to bear interest rate at 8%, will be convertible into shares of common stock at a conversion price to be determined, and mature in December 31, 2007. The Company shall also issue to the investors five year warrants to purchase shares of common stock equal to the initial conversion price. The closing of the funding by the investors shall be dependent upon the negotiation of mutually agreeable definitive documentation. This loan is subject to approval by the board of directors, which approval may not be granted, in which case the funding may not occur. (7) It is anticipated that sales of our product NICOSAN(TM), a sickle cell drug, will commence in Nigeria in the second or third quarter of 2006. Initially, it is not anticipated that revenues will be significant but they should help in covering the costs of the operation. We expect to continue our development efforts with respect to antifungal, anticancer, antiviral (including anti-AIDS) and anti-inflammatory compounds, as well as antiaging and memory enhancing compounds. Although we do not expect product revenues from these sources in 2006, we anticipate that these development activities may allow us to enter into more favorable licensing and/or investment arrangements. 32 We plan to secure financing through various loans and bridge financing, which we feel will meet our current needs, provided the funding of such loans is fully adhered to. We will need to generate funds from operations and/or debt and equity funding sources to enable us to repay such loans and our other outstanding debt. We have issued, and plan to continue issuing equity securities, where possible, to obtain services, without expending cash. We also plan to continue receiving cash from the sale of our New Jersey net operating losses. Our planned activities will require the addition of new personnel, including management, and the continued development of expertise in areas such as preclinical testing, clinical trial management, regulatory affairs, manufacturing and marketing. Further, if we receive regulatory approval for any of our products in the United States or elsewhere, we will incur substantial expenditures to develop manufacturing, sales and marketing capabilities and/or subcontract or joint venture these activities with others. There can be no assurance that we will ever recognize revenue or profit from any such products. In addition, we may encounter unanticipated problems, including developmental, regulatory, manufacturing or marketing difficulties, some of which may be beyond our ability to resolve. We may lack the capacity to produce our products in-house and there can be no assurances that we will be able to locate suitable contract manufacturers or be able to have them produce products at satisfactory prices. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that we cannot continue in existence. Critical Accounting Policies Consolidation Our Consolidated Financial Statements include the accounts of Xechem International, Inc. and all subsidiaries except where control is temporary or does not rest with us. All majority-owned entities in which our control is considered other than temporary are consolidated. For investments in companies in which we have the ability to exercise significant influence over operating and financial policies, including certain investments where there is a temporary majority interest, such entities are accounted for by the equity method. Our judgments regarding the level of influence or control of each equity method investment include considering key factors such as our ownership interest, representation on the board of directors, participation in policy making decisions and material inter-company transactions. Our investments in other companies that we do not control and for which we do not have the ability to exercise significant influence as discussed above are carried at cost or fair value, as appropriate. All significant inter-company accounts and transactions, including transactions with equity method investees, are eliminated from our financial results. Patents, Trademarks, and other Intellectual or Intangible Assets The costs of Patents, Trademarks, and other Intellectual or Intangible Assets are currently expensed in the period in which they are incurred. It is our opinion that while we realize there is an intrinsic value to these assets, the fair market value is not easily discernable because of the uncertainty of success and the time it takes to bring certain of these assets to market. 33 Beneficial Conversions Our policy for recognizing interest expense in connection with the issuance of convertible debt is to recognize the beneficial conversion feature upon the issuance of convertible debt, which contains such conversion features. Acquired In-Process Research and Development Charges In-process research and development charges are recorded in connection with acquisitions and represent the value assigned to acquired assets which have not yet reached technological feasibility and for which there is no alternative use. Fair value is generally assigned to these assets based on the net present value of the projected cash flows expected to be generated by those assets. Significant assumptions underlying these cash flows include our assessment of the timing and our ability to successfully complete the in-process research and development project, projected cash flows associated with the successful completion of the project, and interest rates used to discount these cash flows to their present value. 34 Item 3. Control and Procedures Evaluation of Disclosure Controls and Procedure We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our chief executive officer/chief financial officer, as of March 31, 2006, and have concluded that as of March 31, 2006, these disclosure controls and procedures have been effectively designed to ensure that information required to be disclosed in reports that we file with or submit to the United States Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and is accumulated and communicated to management as appropriate to allow timely decisions regarding this disclosure. Changes in Internal Control Over Financial Reporting No changes in our internal control over financial reporting have come to management's attention during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Review and evaluation of disclosure controls and procedures is an ongoing process that we will continue to refine as we perform quarterly evaluations. 35 Part II OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits 31 Certification of CEO and CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification Pursuant to 18 U.S.C., Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 36 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 19, 2006 XECHEM INTERNATIONAL, INC. /s/ Ramesh C. Pandey --------------------------------- Ramesh C. Pandey, Ph.D. Chairman/Chief Executive Officer 37