** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

 

**FORM 10-Q**

 

 
| **ý** | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.  **                                                                                                                                                                                        |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | **For the quarterly period ended March 31, 2005.**                                                                                                                                                                                                                                                    |
| ** ** | ** **                                                                                                                                                                                                                                                                                            |
| **o**      | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.  **                                                                                                                                                                                       |
| ** ** | **For the transition period from                        to                      .** |

 

**CommissionFile Number**

**000-29815**

 

 

**AllosTherapeutics, Inc.**

(Exactname of Registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **54-1655029**                         |
|-----------------------------------------------------------------|------------|----------------------------------------|
| (State  or other jurisdiction of  incoporation or organization) |       | (I.R.S.  Employer  Identification No.) |

 

**11080 CirclePoint Road, Suite 200**

**Westminster,Colorado  80020**

**(303)426-6262**

(Address, including zip code, and telephone number,

including area code, of principal executive offices)

 

 

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes         ý                            No           o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

Yes         ý                            No           o

 

As of May 3, 2005, therewere 31,175,783 shares of the registrant’s Common Stock, par value$0.001 per share, outstanding.

 

 

This quarterly report on Form 10-Q consists of 19 pages.

 

 

 

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**ALLOS THERAPEUTICS, INC.**

 

**FORM 10-Q**

 

**TABLE OF CONTENTS**

 
| PART I.  Financial  Information |
|--------------------------------------|
| ITEM 1.                              | Financial Statements |
|                                 | Balance  Sheets  (unaudited) — as of December 31, 2004 and March 31,  2005 |
|                                 | Statements of Operations  (unaudited) — for the three months ended March 31, 2004 and 2005 and the  cumulative period from September 1, 1992 (date of inception) through  March 31, 2005 |
|                                 | Statements of Cash Flows  (unaudited) — for the three months ended March 31, 2004 and 2005 and the  cumulative period from September 1, 1992 (date of inception) through  March 31, 2005 |
|                                 | Notes to Financial  Statements (unaudited) |
| ITEM  2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| ITEM  3.                             | Quantitative  and Qualitative Disclosures About Market Risk |
| ITEM 4.                              | Controls and  Procedures |
| PART II.  Other  Information    |
| ITEM 1.                              | Legal Proceedings |
| ITEM 2.                              | Unregistered Sales of  Equity Securities and Use of Proceeds |
| ITEM 3.                              | Defaults Upon Senior  Securities |
| ITEM 4.                              | Submission  of Matters to a Vote of Security Holders |
| ITEM 5.                              | Other  Information |
| ITEM 6.                              | Exhibits |
| SIGNATURES                           |   |

 

NOTE:

 

                *Unless the contextrequires otherwise, references in this report to “Allos,” the “Company,” “we,”“us,” and “our” refer to Allos Therapeutics, Inc.*

 

*“Allos”,the Allos logo, EFAPROXYNTM (efaproxiral), and all other Allos names aretrademarks of Allos Therapeutics, Inc. in the United States and in otherselected countries. All other brand names or trademarks appearing in thisreport are the property of their respective holders.*

 

 

2

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** **

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1.****                                                    ****FINANCIALSTATEMENTS**

 

**ALLOS THERAPEUTICS, INC.**

**BALANCESHEETS**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                                                                            | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                                                                            | ** ** | **2004**              | ** ** | **2005**           | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                            |       |                  |       |               |       |
| Current assets:                                                                                                                                                                                                                                                                                       |       |                  |       |               |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                             |       | $                     | 1,108,726  |               | $          | 9,046,061 |   |
| Restricted cash                                                                                                                                                                                                                                                                                       |       | 550,000               |       | 550,000            |       |
| Investments in marketable securities                                                                                                                                                                                                                                                                  |       | 22,601,805            |       | 46,010,676         |       |
| Prepaid research and development expenses                                                                                                                                                                                                                                                             |       | 272,061               |       | 835,738            |       |
| Prepaid expenses and other assets                                                                                                                                                                                                                                                                     |       | 522,591               |       | 1,278,242          |       |
| Total current assets                                                                                                                                                                                                                                                                                  |       | 25,055,183            |       | 57,720,717         |       |
| Investments in marketable securities                                                                                                                                                                                                                                                                  |       | 138,055               |       | 12,776,709         |       |
| Property and equipment, net                                                                                                                                                                                                                                                                           |       | 980,242               |       | 905,091            |       |
| Total assets                                                                                                                                                                                                                                                                                          |       | $                     | 26,173,480 |               | $          | 71,402,517 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                                                                        |       |                  |       |               |       |
| Current liabilities:                                                                                                                                                                                                                                                                                  |       |                  |       |               |       |
| Trade accounts payable and accrued expenses                                                                                                                                                                                                                                                           |       | $                     | 648,345    |               | $          | 2,314,871 |   |
| Accrued research and development expenses                                                                                                                                                                                                                                                             |       | 894,977               |       | 837,281            |       |
| Accrued bonus and employee benefits                                                                                                                                                                                                                                                                   |       | 767,155               |       | 560,481            |       |
| Total current liabilities                                                                                                                                                                                                                                                                             |       | $                     | 2,310,477  |               | $          | 3,712,633 |   |
| Commitments and contingencies (Note 8)                                                                                                                                                                                                                                                                |       |                  |       |               |       |
| Series A Exchangeable Preferred Stock, $0.001 par value; no and  2,714,932 shares designated from authorized preferred stock at  December 31, 2004 and March 31, 2005, respectively; no and  2,352,443 shares issued and outstanding at December 31, 2004 and March 31,  2005, respectively |       | —                |       | 48,913,945         |       |
| Stockholders’ equity:                                                                                                                                                                                                                                                                            |       |                  |       |               |       |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized at  December 31, 2004 and March 31, 2005; no shares issued or  outstanding                                                                                                                                                  |       | —                |       | —             |       |
| Series A Junior Participating Preferred Stock, $0.001 par value;  1,000,000 shares designated from authorized preferred stock at  December 31, 2004 and March 31, 2005; no shares issued or outstanding                                                                                     |       | —                |       | —             |       |
| Common stock, $0.001 par value; 75,000,000 shares authorized at  December 31, 2004 and March 31, 2005; 31,175,783 shares issued and  outstanding at December 31, 2004 and March 31, 2005                                                                                          |       | 31,176                |       | 31,176             |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                            |       | 181,453,476           |       | 181,426,820        |       |
| Deferred compensation related to stock based compensation                                                                                                                                                                                                                                             |       | (34,820               | )          | (23,658            | )          |
| Deficit accumulated during the development stage                                                                                                                                                                                                                                                      |       | (157,586,829          | )          | (162,658,399       | )          |
| Total stockholders’ equity                                                                                                                                                                                                                                                                       |       | 23,863,003            |       | 18,775,939         |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                                       |       | $                     | 26,173,480 |               | $          | 71,402,517 |   |

*** ***

***The accompanying notes are an integral part of these financialstatements.***

 

 

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**ALLOS THERAPEUTICS, INC.**

**STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                                           | ** ** | **Three Months Ended  March 31,** | ** ** | **Cumulative Period  From September 1,  1992  (date of inception)  through March 31,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2004**                               | ** ** | **2005**                                                                                         | ** ** | **2005** | ** ** |
| Operating expenses:                                                  |       |                                   |       |                                                                                             |       |   |   |
| Research and development                                             |       | $                                      | 1,988,567  |                                                                                             | $          | 2,348,147 |   | $ | 84,665,966 |   |
| Clinical manufacturing                                               |       | 782,571                                |       | 359,746                                                                                          |       | 25,874,871 |   |
| Marketing, general and administrative                                |       | 2,513,002                              |       | 2,192,707                                                                                        |       | 61,431,193 |   |
| Restructuring costs                                                  |       | —                                 |       | 380,086                                                                                          |       | 1,018,156 |   |
| Total operating expenses                                             |       | 5,284,140                              |       | 5,280,686                                                                                        |       | 172,990,186 |   |
| Loss from operations                                                 |       | (5,284,140                             | )          | (5,280,686                                                                                       | )          | (172,990,186 | ) |
| Gain on settlement claims                                            |       | —                                 |       | —                                                                                           |       | 5,110,083 |   |
| Interest and other income, net                                       |       | 137,615                                |       | 209,116                                                                                          |       | 14,834,679 |   |
| Net loss                                                             |       | (5,146,525                             | )          | (5,071,570                                                                                       | )          | (153,045,424 | ) |
| Dividend related to beneficial conversion feature of preferred stock |       | —                                 |       | —                                                                                           |       | (9,612,975 | ) |
| Net loss attributable to common stockholders                         |       | $                                      | (5,146,525 | )                                                                                                | $          | (5,071,570 | ) | $ | (162,658,399 | ) |
| Net loss per share:                                                  |       |                                   |       |                                                                                             |       |   |   |
| Basic and diluted                                                    |       | $                                      | (0.17      | )                                                                                                | $          | (0.16 | ) |   |   |
| Weighted average common shares:                                      |       |                                   |       |                                                                                             |       |   |   |
| Basic and diluted                                                    |       | 31,109,944                             |       | 31,175,783                                                                                       |       |   |   |

 

***The accompanying notes are an integral part of these financialstatements.***

*** ***

 

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** **

**ALLOS THERAPEUTICS, INC.**

**STATEMENTSOF CASH FLOWS**

**(unaudited)**

** **
| ** **                                                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** | **Cumulative Period  From September 1, 1992  (date of inception)   through  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2004**                               | ** ** | **2005**                                                                                          | ** ** | **2005** | ** ** |
| Cash Flows From Operating Activities:                                                                         |       |                                   |       |                                                                                              |       |   |   |
| Net loss                                                                                                      |       | $                                      | (5,146,525 | )                                                                                                 | $          | (5,071,570 | ) | $ | (153,045,424 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities:                                   |       |                                   |       |                                                                                              |       |   |   |
| Depreciation and amortization                                                                                 |       | 142,562                                |       | 115,016                                                                                           |       | 2,488,923 |   |
| Stock-based compensation (recovery)                                                                           |       | 90,802                                 |       | (15,494                                                                                           | )          | 21,550,739 |   |
| Write-off of long-term investment                                                                             |       | —                                 |       | —                                                                                            |       | 1,000,000 |   |
| Other                                                                                                         |       | —                                 |       | —                                                                                            |       | 98,942 |   |
| Changes in operating assets and liabilities:                                                                  |       |                                   |       |                                                                                              |       |   |   |
| Prepaids and other assets                                                                                     |       | 616,296                                |       | (1,319,328                                                                                        | )          | (2,103,980 | ) |
| Interest receivable on investments                                                                            |       | 15,995                                 |       | (478,551                                                                                          | )          | (901,103 | ) |
| Trade accounts payable and accrued expenses                                                                   |       | 277,023                                |       | 1,666,526                                                                                         |       | 2,314,871 |   |
| Accrued research and development expenses                                                                     |       | 272,089                                |       | (57,696                                                                                           | )          | 837,281 |   |
| Accrued bonus and employee benefits                                                                           |       | (387,939                               | )          | (206,674                                                                                          | )          | 560,481 |   |
| Net cash used in operating activities                                                                         |       | (4,119,697                             | )          | (5,367,771                                                                                        | )          | (127,199,270 | ) |
| Cash Flows From Investing Activities:                                                                         |       |                                   |       |                                                                                              |       |   |   |
| Acquisition of property and equipment                                                                         |       | (4,798                                 | )          | (39,865                                                                                           | )          | (3,139,829 | ) |
| Purchases of marketable securities                                                                            |       | (6,884,188                             | )          | (44,483,974                                                                                       | )          | (367,349,134 | ) |
| Proceeds from sales of marketable securities                                                                  |       | 10,000,000                             |       | 8,915,000                                                                                         |       | 309,462,852 |   |
| Purchase of long-term investment                                                                              |       | —                                 |       | —                                                                                            |       | (1,000,000 | ) |
| Payments received on notes receivable                                                                         |       | —                                 |       | —                                                                                            |       | 49,687 |   |
| Net cash provided by (used in) investing activities                                                           |       | 3,111,014                              |       | (35,608,839                                                                                       | )          | (61,976,424 | ) |
| Cash Flows From Financing Activities:                                                                         |       |                                   |       |                                                                                              |       |   |   |
| Principal payments under capital leases                                                                       |       | —                                 |       | —                                                                                            |       | (422,088 | ) |
| Proceeds from sales leaseback                                                                                 |       | —                                 |       | —                                                                                            |       | 120,492 |   |
| Pledging restricted cash                                                                                      |       | —                                 |       | —                                                                                            |       | (550,000 | ) |
| Proceeds from issuance of preferred stock, net of issuance costs                                              |       | —                                 |       | 48,913,945                                                                                        |       | 89,199,754 |   |
| Proceeds from issuance of common stock, associated with  stock options  and employee stock purchase plan |       | 94,062                                 |       | —                                                                                            |       | 978,985 |   |
| Proceeds from issuance of common stock, net of issuance costs                                                 |       | (7,192                                 | )          | —                                                                                            |       | 108,894,612 |   |
| Net cash provided by financing activities                                                                     |       | 86,870                                 |       | 48,913,945                                                                                        |       | 198,221,755 |   |
| Net increase (decrease) in cash and cash equivalents                                                          |       | (921,813                               | )          | 7,937,335                                                                                         |       | 9,046,061 |   |
| Cash and cash equivalents, beginning of period                                                                |       | 4,642,305                              |       | 1,108,726                                                                                         |       | — |   |
| Cash and cash equivalents, end of period                                                                      |       | $                                      | 3,720,492  |                                                                                              | $          | 9,046,061 |   | $ | 9,046,061 |   |
| Supplemental Schedule of Non-cash Operating and Financing  Activities:                                   |       |                                   |       |                                                                                              |       |   |   |
| Cash paid for interest                                                                                        |       | $                                      | —     |                                                                                              | $          | — |   | $ | 1,033,375 |   |
| Issuance of stock in exchange for license agreement                                                           |       | —                                 |       | —                                                                                            |       | 40,000 |   |
| Capital lease obligations incurred for acquisition of property and equipment                                  |       | —                                 |       | —                                                                                            |       | 422,088 |   |
| Issuance of stock in exchange for notes receivable                                                            |       | —                                 |       | —                                                                                            |       | 139,687 |   |

*** ***

***The accompanying notes are an integral part of these financialstatements******.***

 

 

5

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**ALLOS THERAPEUTICS, INC.**

**NOTES TO FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.****               ****Basis of Presentation**

 

                The unaudited financial statements of AllosTherapeutics, Inc., a company in the development stage (referred to herein asthe “Company,” “we,” “us” or “our”), included herein reflect all adjustments,consisting only of normal recurring adjustments, which in the opinion ofmanagement are necessary to fairly state the financial position, results ofoperations and cash flows of the Company for the periods presented. Certaininformation and footnote disclosures normally included in audited financialinformation prepared in accordance with accounting principles generallyaccepted in the United States of America have been condensed or omittedpursuant to the Securities and Exchange Commission’s rules and regulations. Theresults of operations for the three months ended March 31, 2005 are notnecessarily indicative of the results to be expected for any subsequent quarteror for the entire fiscal year ending December 31, 2005. These financialstatements should be read in conjunction with the audited financial statementsand notes thereto which are included in our Annual Report on Form 10-K for theyear ended December 31, 2004 for a broader discussion of our business andthe opportunities and risks inherent in such business.

 

                Wehave never generated any revenue from product sales and have experiencedsignificant net losses since our inception in 1992. We have incurred theselosses principally from costs incurred in our research and development programsand from our general and administrative expenses. We expect to continueincurring net losses for the foreseeable future. The presence and size of thesepotential net losses will depend, in large part, on if and when we receiveregulatory approval in the United States or Europe to market EFAPROXYN as anadjunct to radiation therapy for the treatment of brain metastases originatingfrom breast cancer. Our ability to generate revenue and achieve profitabilityis dependent on our ability, alone or with partners, to successfully completethe development of our product candidates, conduct clinical trials, obtain thenecessary regulatory approvals, and manufacture and market our product candidates.

 

                Based upon the current status ofour product development and commercialization plans, we believe that ourexisting cash, cash equivalents, and investments in marketable securities willbe adequate to satisfy our capital needs through at least the first quarter of2007. We anticipate continuing our current development programs and/orbeginning other long-term development projects on new products or technologies.These projects may require many years and substantial expenditures to completeand may ultimately be unsuccessful. Therefore, we may need to obtain additionalfunds from outside sources to continue research and development activities,fund operating expenses, pursue regulatory approvals and build sales andmarketing capabilities, as necessary. However, our actual capital requirementswill depend on many factors, including:

•                  the status of our productdevelopment programs;

•                  the time and cost involvedin conducting clinical trials and obtaining regulatory approvals;

•                  the time and cost involvedin filing, prosecuting and enforcing patent claims;

•                  competing technological andmarket developments; and

•                  our ability to market anddistribute our future products and establish new collaborative and licensingarrangements.

**2.****             ****Cash, CashEquivalents, and Investments in Marketable Securities**

 

                All highly liquid investments with an originalmaturity of three months or less are considered to be cash equivalents. Thecarrying values of our cash equivalents and investments in marketablesecurities approximate their market values based on quoted market prices. Weaccount for investments in marketable securities in accordance with Statementof Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and Equity Securities*.Investments in marketable securities are classified as held to maturity and arecarried at cost plus accrued interest. Substantially all of our marketablesecurities are held in corporate notes with remaining maturities ranging fromone to twenty-three months.

 

**3.****             ****AccruedResearch and Development Expenses**

 

                Werecord accruals for contracted third-party development activity, includingestimated clinical study costs, which will be invoiced to us in a subsequentaccounting period. Clinical study costs represent costs incurred by clinicalresearch organizations and clinical sites. These costs are recorded as acomponent of research and development expenses. Management accrues costs forthese clinical studies based on the progress of the clinical trials, includingpatient enrollment, dosing levels of patients enrolled, estimated costs to dosepatients, invoices received and contracted costs when evaluating the adequacyof the accrued liabilities. Significant judgments and estimates are made andused in determining the accrued balance in any accounting period. Actualresults could differ from these estimates.

 

 

6

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**4.****               ****Series A Exchangeable Preferred Stock Financing**

 

                OnMarch 2, 2005, we entered into a Securities Purchase Agreement withWarburg Pincus Private Equity VIII, L.P. (“Warburg”) and certain otherinvestors pursuant to which we issued and sold an aggregate of 2,352,443 sharesof Series A Exchangeable Preferred Stock (the “Exchangeable Preferred”) ata price per share of $22.10 (the “Preferred Purchase Price”), for aggregategross proceeds of approximately $52.0 million (the "Preferred StockFinancing"). We incurred offering expenses of approximately$3.1 million in connection with the sale of the Exchangeable Preferred, resultingin net proceeds to the Company of approximately $48.9 million. The shareswere sold under our shelf Registration Statement on Form S-3 (FileNo. 333-113353) declared effective by the Securities and ExchangeCommission on April 21, 2004. The closing of the sale of 2,262,443 sharesof Exchangeable Preferred to Warburg occurred on March 4, 2005. Theclosing of the sale of an additional 90,000 shares of Exchangeable Preferred tocertain other investors occurred on March 8, 2005.

 

                Therights, preferences and privileges of the Exchangeable Preferred are set forthin the Certificate of Designations, Number, Voting Powers, Preferences andRights of Series A Exchangeable Preferred Stock of AllosTherapeutics, Inc. filed with the Secretary of State of the State ofDelaware on March 3, 2005 (the “Certificate of Designations”). Pursuant tothe Certificate of Designations, the Exchangeable Preferred ranks senior to ourcommon stock and each other class of our equity securities with respect todividend rights and rights upon liquidation, winding up or dissolution, and isnon-voting stock, except as otherwise required by Delaware law and subject to aright of its holders to consent to any amendment of its terms.

 

                Beginningon March 4, 2006 and for so long as the Exchangeable Preferred remainsoutstanding, the holders of the Exchangeable Preferred will be entitled toreceive, in preference to our common stock and each other class of our equitysecurities, cumulative dividends at an annual rate of 10% of the PreferredPurchase Price, compounded quarterly beginning with amounts accrued for thequarter ending March 31, 2006. Except as set forth below, such dividendswill be payable when and as declared by our board of directors, in cash,additional shares of Exchangeable Preferred or a combination thereof.

 

                Uponthe approval of the holders of our common stock as required by the applicablerules of the Nasdaq National Market, which will be considered at the Company’s2005 Annual Meeting of Stockholders to be held on May 18, 2005, and subject tothe receipt of any necessary approval pursuant to the Hart-Scott-RodinoAntitrust Improvements Act of 1976 (the “HSR Approval”), each share ofExchangeable Preferred will be automatically exchanged for 10 shares of commonstock (subject to appropriate adjustments in the event of any stock dividend,stock split, stock distribution or combination, subdivision, reclassificationor other corporate action having the similar effect with respect to our commonstock); provided that such approvals are obtained by June 4, 2006. Uponany such exchange (the “Share Exchange”), all accrued but unpaid dividends(whether or not declared) on the Exchangeable Preferred, if any, will be paidin shares of common stock in an amount equal to the dividends accrued throughthe exchange date divided by a price per share of $2.21 for such common stock.

 

                The$48.9 million of net proceeds from the Preferred Stock Financing is classifiedoutside of the stockholders’ equity section, as temporary equity, on the BalanceSheet as of March 31, 2005, because the redemption feature of the ExchangeablePreferred is not solely within the control of the Company. If the HSR Approvaland stockholder approval of the Share Exchange are not obtained by June 4,2006, then the Exchangeable Preferred will: a) remain outstanding pursuant toits terms and will not be exchanged for shares of common stock, and b) bedeemed mandatorily redeemable by the holders of Exchangeable Preferred asprescribed by SFAS 150, *Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*,which will result in a reclassification of the Exchangeable Preferred on theBalance Sheet from temporary equity to a liability. If the HSR Approval andstockholder approval of the Share Exchange are obtained, then the ExchangeablePreferred will be reclassified from temporary equity to stockholders’ equity.  The Company is not accreting the ExchangeablePreferred to its redemption value as the Company does not consider redemption probableat March 31, 2005.

 

                ThePreferred Purchase Price represented a 7.5% discount to the 20-day trailingaverage closing price of the Company’s common stock on the Nasdaq NationalMarket as of March 2, 2005, calculated on an as-exchanged for common stockbasis. In the event that the Share Exchange occurs, the Company will record adividend related to the beneficial conversion feature, or discounted conversionprice, of the Exchangeable Preferred equal to approximately $623,000 on thedate of the exchange.

 

 

7

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                If the Exchangeable Preferred remains outstanding onthe later of (i) March 4, 2009 or (ii) thirty days after wepublicly announce the results of our Phase 3 ENRICH trial (the “RedemptionEligibility Date”), the holders of a majority of the outstanding shares ofExchangeable Preferred will have the option, at any time thereafter, to causeus to redeem all (but not less than all) of their outstanding shares ofExchangeable Preferred for cash in a per share amount equal to the greater of(a) the Preferred Purchase Price plus all accrued but unpaid dividends(whether or not declared) through the date of such redemption or (b) tentimes the average closing price of our common stock on the Nasdaq National Marketfor the twenty trading days immediately preceding the date of any suchredemption (the “Redemption Price”). In addition, if the Exchangeable Preferredremains outstanding on the Redemption Eligibility Date, we will have theoption, at any time thereafter, to voluntarily redeem all (but not less thanall) of the outstanding shares of Exchangeable Preferred for cash in a pershare amount equal to the Redemption Price.

 

                Forso long as the Exchangeable Preferred remains outstanding, upon any voluntaryor involuntary liquidation, dissolution or winding up of the Company, theholders of the Exchangeable Preferred will have the right to receive, beforeany payments are made to the holders of our common stock or any other class ofour equity securities, an amount per share equal to the greater of (i) thePreferred Purchase Price plus all accrued but unpaid dividends (whether or notdeclared) through the date of payment or (ii) ten times the averageclosing price of our common stock on the Nasdaq National Market for the twentytrading days immediately preceding the date of payment. In addition, for solong as the Exchangeable Preferred remains outstanding, if we consummate a “changein control” (as defined in the Certificate of Designations), the holders of theExchangeable Preferred will have the right to receive, before any payments aremade to the holders of our common stock or any other class of our equitysecurities, an amount per share equal to the greater of (i) the PreferredPurchase Price plus all accrued and unpaid dividends (whether or not declared)through the date of such change in control or (ii) ten times the fairmarket value of the consideration per share of common stock received by theholders of our common stock in the change in control transaction. After paymentof the full amount of the distributions to which they are entitled inconnection with any liquidation or change in control, the holders of the ExchangeablePreferred will have no right or claim to any of our remaining assets.

 

                Inconnection with the sale of Exchangeable Preferred, we entered into aRegistration Rights Agreement dated March 4, 2005 pursuant to which wegranted certain registration rights with respect to the shares of common stock,if any, issued upon exchange of the Exchangeable Preferred.

 

                Pursuantto the Securities Purchase Agreement, for so long as Warburg owns at leasttwo-thirds of the number of shares of Exchangeable Preferred acquired by itunder the Securities Purchase Agreement (or two-thirds of the shares of commonstock issued upon exchange of such Exchangeable Preferred, if applicable), wewill nominate and use our reasonable best efforts to cause to be elected andcause to remain as directors on our board of directors two individualsdesignated by Warburg (each, an "Investor Designee" and collectively,the "Investor Designees"). If Warburg no longer has the right todesignate two members of our board of directors, then, for so long as Warburgowns at least 50% of the number of shares of the Exchangeable Preferredacquired by it under the Securities Purchase Agreement (or 50% of shares ofcommon stock issued upon exchange of such Exchangeable Preferred, ifapplicable), we will nominate and use our reasonable best efforts to cause tobe elected and cause to remain as a director on our board of directors, oneInvestor Designee. In addition, subject to applicable law and the rules andregulations of the Securities and Exchange Commission and The Nasdaq StockMarket, we will use our reasonable best efforts to cause one of the InvestorDesignees to be a member of each principal committee of our board of directors.Effective upon the closing of the sale of Exchangeable Preferred to Warburg onMarch 4, 2005, Messrs. Stewart Hen and Jonathan Leff, each of whom is a ManagingDirector of Warburg, were appointed to the board of directors pursuant toWarburg's right to nominate directors.

 

**5.****               ****Stock-Based Compensation**

 

                Weaccount for grants of stock options according to the intrinsic value method asprescribed by the Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB 25”) and related Interpretations. Pro forma net loss information, asrequired by SFAS No. 123,*Accountingfor Stock-Based Compensation* (“SFAS 123”), is presented belowin accordance with SFAS No. 148,*Accounting for Stock-Based Compensation—Transition and Disclosure* (“SFAS 148”).Any deferred stock-based compensation calculated according to APB 25 isamortized over the vesting period of the individual options, generallyfour years, in accordance with Financial Accounting Standards Board (“FASB”)Interpretation No. 28,*Accounting forStock Appreciation Rights and Other Variable Stock Option and Award Plans*(“FIN 28”).

 

 

8

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                The following table illustrates the effect on netloss and loss per share if we had applied the fair value recognition provisionsof SFAS 123 to stock-based compensation for the three months endedMarch 31, 2004 and 2005. Such pro forma disclosures may not berepresentative of the pro forma effect in future years because options vestover several years and additional grants may be made each year.

 
| ** **                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| Net loss - as reported                                                                    |       | $                                     | (5,146,525 | ) | $ | (5,071,570 | ) |
| Add: Stock-based compensation expense included in reported net loss                       |       | 90,802                                |       | 3,789 |   |
| Deduct: Recovery of stock-based compensation expense included in  reportednet loss        |       | —                                |       | (19,283 | ) |
| Deduct: Stock-based compensation expense as determined under the fair  value based method |       | (544,088                              | )          | (393,344 | ) |
| Pro forma net loss                                                                        |       | $                                     | (5,599,811 | ) | $ | (5,480,408 | ) |
| Net loss per share:                                                                       |       |                                  |       |   |   |
| Basic and diluted - as reported                                                           |       | $                                     | (0.17      | ) | $ | (0.16 | ) |
| Basic and diluted - pro forma                                                             |       | $                                     | (0.18      | ) | $ | (0.18 | ) |

 

                The following assumptions were used in estimating thestock-based compensation expense, as determined under the fair value basedmethod, for activity during the three months ended March 31, 2004 and 2005. Noshares of common stock were sold to employees under the Employee Stock PurchasePlan during the three months ended March 31, 2004 and 2005.

 
| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **2004**                          | ** ** | **2005** | ** ** |
| Stock Option Plans:             |       |                              |       |   |   |
| Expected dividend yield         |       | 0                                 | %          | 0 | % |
| Expected stock price volatility |       | 65                                | %          | 85 | % |
| Risk free interest rate         |       | 3.0  — 3.9                   | %          | 3.7 — 4.0 | % |
| Expected life (years)           |       | 5.0                               |       | 4.0 |   |

 

**6.****               ****Net Loss Per Share**

 

                Basic and diluted net loss per share have beencomputed by dividing the net loss for each period by the weighted averagenumber of common shares outstanding during each respective period. Shares ofcommon stock issuable upon the exercise of outstanding stock options andwarrants were excluded from the calculation of diluted net loss per share asthe effect of including such shares was anti-dilutive.

 

**7.****               ****Restructuring Costs**

 

                InJanuary 2005, we executed agreements to sublease approximatelythree-quarters of the 12,708 square feet of excess space in our corporateoffices located in Westminster, Colorado. The term of each sublease agreementis through the term of our office lease, or October 31, 2008. The actualrental payments to us under the sublease agreements approximate $230,000. Asthe Company’s obligations under our primary lease are in excess of the sum ofthe actual and expected sublease rental payments for this excess space, werecorded a loss of approximately $380,000 in the three months ended March 31,2005.

 

 

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8.                 **Commitmentsand Contingencies**

 

                The Company and one of our officers have been namedas defendants in a purported securities class action lawsuit filed inMay 2004 in the United States District Court for the District of Colorado.An amended complaint was filed in August 2004. The lawsuit is brought onbehalf of a purported class of purchasers of our securities during the periodfrom April 23, 2003 to April 29, 2004, and is seeking unspecifieddamages relating to the issuance of allegedly false and misleading statementsregarding EFAPROXYN during this period and subsequent declines in our stockprice. As is typical in this type of litigation, several other purportedsecurities class action lawsuits containing substantially similar allegationswere filed against the defendants, but the plaintiffs in all of those caseshave subsequently dismissed their actions. Additional lawsuits containingsubstantially similar allegations may be filed in the future. These lawsuitshave been tendered to our insurance carriers.

 

                Webelieve the claims set forth in the pending lawsuit are without merit, and weintend to vigorously defend against them. On October 12, 2004, we filed amotion to dismiss the case with prejudice. That motion remains pending. As withany litigation proceeding, we cannot predict with certainty the eventualoutcome of pending litigation. If we are not successful in our defense againstsuch claims, we could be forced to make significant payments to the plaintiffs,and such payments could have a material adverse effect on our business,financial condition, results of operations and cash flows to the extent suchpayments are not covered by our insurance carriers. Even if our defense againstsuch claims is successful, the litigation could result in substantial costs anddivert management’s attention and resources, which could adversely affect ourbusiness.

 

                We enter into indemnification provisions under ouragreements with other companies in our ordinary course of business, typicallywith business partners, contractors, clinical sites and suppliers. Under theseprovisions we generally indemnify and hold harmless the indemnified party forlosses suffered or incurred by the indemnified party as a result of ouractivities. These indemnification provisions generally survive termination ofthe underlying agreement. The maximum potential amount of future payments wecould be required to make under these indemnification provisions is unlimited.We have not incurred material costs to defend lawsuits or settle claims relatedto these indemnification agreements. As a result, the estimated fair value ofthese agreements is minimal. Accordingly, we have no liabilities recorded forthese agreements as of March 31, 2005.

 

**9.****               ****Recently Issued Accounting Pronouncement**

 

                InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”), which revises SFAS123 and supersedes APB 25. SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values. The pro forma disclosurespreviously permitted under SFAS 123 no longer will be an alternative tofinancial statement recognition. We are required to adopt SFAS 123R in thefirst quarter of fiscal 2006, beginning January 1, 2006. UnderSFAS 123R, we must determine the appropriate fair value model to be usedfor valuing share-based payments, the amortization method for compensation costand the transition method to be used at date of adoption. The transitionmethods include prospective and retroactive adoption options. Under theretroactive option, prior periods may be restated either as of the beginning ofthe year of adoption or for all periods presented. The prospective methodrequires that compensation expense be recorded for all unvested stock optionsand restricted stock at the beginning of the first quarter of adoption ofSFAS 123R, while the retroactive methods would record compensation expensefor all unvested stock options and restricted stock beginning with the firstperiod restated. We are evaluating the requirements of SFAS 123R andexpect that the adoption of SFAS 123R will have a material impact on ourresults of operations and loss per share. We have not yet determined the methodof adoption or the effect of adopting SFAS 123R, and have not determinedwhether the adoption will result in amounts that are similar to the current proforma disclosures under SFAS 123.

 

 

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** **

**ITEM 2.****                                                    ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

                *Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations, as well as information contained elsewhere in thisreport, contains statements that constitute “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements include, butare not limited to, statements concerning our plans to continue development ofour current product candidates; conduct clinical trials with respect to ourproduct candidates; seek regulatory approvals; address certain markets;initiate marketing activities related to commercialization of our products;raise additional capital; hire sales and marketing personnel; developrelationships with pharmaceutical companies; obtain and protect rights totechnology; establish new collaborative and licensing agreements; and evaluateadditional product candidates for in-license and subsequent clinical andcommercial development. In some cases, these statements may be identified byterminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”“believes,” “estimates,” “predicts,” “potential” or “continue,” or the negativeof such terms and other comparable terminology. Although we believe that theexpectations reflected in the forward-looking statements contained herein arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements. These statements involve known and unknown risks anduncertainties that may cause our or our industry’s results, levels of activity,performance or achievements to be materially different from those expressed orimplied by the forward-looking statements. Factors that could cause orcontribute to such differences include, but are not limited to, those mentionedin the discussion below and those described in the “Risk Factors”discussion of our Annual Report on Form 10-K for the year endedDecember 31, 2004 filed with the Securities and Exchange Commission. As aresult, you should not place undue reliance on these forward-lookingstatements. All forward-looking statements included in this report are based oninformation available to us as of the date hereof and we undertake noobligation to revise any forward-looking statements in order to reflect anysubsequent events or circumstances. Forward-looking statements not specificallydescribed above also may be found in these and other sections of this report.*

**Overview**

 

                AllosTherapeutics, Inc. is a biopharmaceutical company that is focused on developingand commercializing innovative small molecule drugs for improving cancertreatments. Small molecule drugs, in general, are non-protein products producedby chemical synthesis rather than biological methods. We strive to developdrugs that improve the treatment of cancer and enhance the power of currenttherapies. Our goal is to build a profitable company by generating income fromproducts we develop and commercialize, either alone or together with one ormore potential strategic partners. Our focus is on product opportunities thatleverage our internal clinical development and regulatory expertise and addressimportant medical markets. We endeavor to grow our existing portfolio ofproduct candidates through ongoing product acquisition and in-licensingefforts.

 

                Wehave never generated any revenue from product sales and have experiencedsignificant net losses since our inception in 1992. We have incurred theselosses principally from costs incurred in our research and development programsand from our general and administrative expenses. We expect to continueincurring net losses for the foreseeable future. The presence and size of thesepotential net losses will depend, in large part, on if and when we obtainregulatory approval in the United States or Europe to market our lead productcandidate, EFAPROXYN (efaproxiral), as an adjunct to radiation therapy for thetreatment of brain metastases originating from breast cancer. Our ability togenerate revenue and achieve profitability is dependent on our ability, aloneor with partners, to successfully complete the development of our productcandidates, conduct clinical trials, obtain the necessary regulatory approvals,and manufacture and market our product candidates.

 

                Wehave three product candidates that are currently under development, EFAPROXYN(efaproxiral), formerly known as RSR13, PDX (pralatrexate) and RH1.

 

•*           ***EFAPROXYN** is the firstsynthetic small molecule designed to sensitize hypoxic, or oxygen-deprived,areas of tumors during radiation therapy by facilitating the release of oxygenfrom hemoglobin, the oxygen-carrying protein contained within red blood cells,and increasing the level of oxygen in tumors. The presence of oxygen in tumorsis an essential element for the effectiveness of radiation therapy. Byincreasing tumor oxygenation, we believe EFAPROXYN has the potential to enhancethe efficacy of standard radiation therapy.

 

 

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InDecember 2003, we submitted a New Drug Application, or NDA, to the UnitedStates Food and Drug Administration, or FDA, for approval to market EFAPROXYNin the United States as an adjunct to whole brain radiation therapy, or WBRT,for the treatment of patients with brain metastases originating from breastcancer. The NDA was based on the findings from our randomized, open labelPhase 3 clinical trial of EFAPROXYN in patients with brain metastases,which we called REACH. The results from the REACH trial were announced inApril 2003. In May 2004, the FDA’s Oncologic Drug Advisory Committeereviewed the NDA and voted not to recommend approval of EFAPROXYN for thisindication based on the data from the REACH trial. However, in June 2004,the FDA issued an “approvable letter” in which it indicated that before the NDAmay be approved, it would be necessary for us to successfully complete ourongoing Phase 3 clinical trial of EFAPROXYN in patients with brainmetastases originating from breast cancer and submit the results as a NDAamendment for the FDA’s review. In the letter, the FDA stated, “if the studyshows effectiveness in this population (increased survival) using the prespecified analysis, and the study is otherwise satisfactory, we believe itwould, together with the subset result in the [REACH trial], support approval.”

 

The ongoing Phase 3trial referenced in the FDA’s approvable letter was initiated inFebruary 2004. This pivotal Phase 3 trial, which is called ENRICH (**EN**hancing whole brain **R**adiation therapy **I**n patients with breast **C**ancer and **H**ypoxic brain metastases), will seek to enroll approximately360 patients at up to 125 cancer centers across North America, Europe and SouthAmerica. The primary endpoint of the trial will measure the difference insurvival between patients receiving whole brain radiation therapy, or WBRT,plus supplemental oxygen, with or without EFAPROXYN. We currently anticipatethat enrollment in the trial will be completed during the second half of 2006.

 

In June 2004, we filed a Marketing AuthorizationApplication, or MAA, with the European Medicines Agency, or EMEA, for approvalto market EFAPROXYN in Europe as an adjunct to WBRT for the treatment ofpatients with brain metastases originating from breast cancer. The MAA wasfiled under the EMEA’s centralized procedure, which is used when marketingauthorization is applied for in all EMEA member states simultaneously. InOctober 2004, we received the EMEA’s Day 120 List of Questions relating tothe MAA, to which we responded in April 2005.

 

InAugust 2004, the FDA awarded orphan drug status to EFAPROXYN for use as anadjunct to WBRT for the treatment of patients with brain metastases originatingfrom breast cancer. The FDA may award orphan drug designation to drugs thattarget conditions affecting 200,000 or fewer U.S. patients per year and providea significant therapeutic advantage over existing treatments. The orphan drugdesignation provides for U.S. marketing exclusivity for seven years followingmarketing approval by the FDA.

 

Inaddition to the Phase 3 ENRICH trial, other current clinical trialsinvolving EFAPROXYN include (i) a Phase 1 clinical trial in patientswith locally advanced non-small cell lung cancer, or NSCLC, receivingconcurrent chemoradiotherapy (chemotherapy and radiation therapy administeredat the same time) in combination with EFAPROXYN, (ii) a Phase 1b/2clinical trial of EFAPROXYN in patients with locally advanced cancer of thecervix receiving concurrent chemoradiotherapy, and (iii) a Phase 1b/2study of EFAPROXYN administered with BCNU (carmustine) chemotherapy for the treatmentof patients with recurrent malignant glioma, a type of primary brain cancer.

 

•*                 ***PDX** is a small molecule chemotherapeutic agent thatinhibits dihydrofolate reductase, or DHFR, a folic acid (folate)-dependentenzyme involved in the building of nucleic acid, or DNA, and other processes.Preclinical data suggests that PDX has an enhanced potency and toxicity profilerelative to methotrexate and other related DHFR inhibitors. Drugs that inhibitDHFR, such as methotrexate, were among the first antifolate chemotherapeuticagents discovered. Methotrexate remains one of the most widely appliedantifolate chemotherapeutics and has been used to treat leukemia, breast,bladder, gastric, esophageal, head, and neck cancers. We believe PDX has thepotential to be delivered as a single agent or in combination therapy regimens.

 

Current clinical trialsinvolving PDX include (i) a Phase 1/2 single-agent study in patientswith non-Hodgkin’s lymphoma, (ii) a Phase 1 combination study withdocetaxel in patients with advanced cancer, including NSCLC, and (iii) aPhase 1 single-agent study to determine the maximum tolerated dose of PDXin patients with NSCLC.

 

•*                 ***RH1** is a small molecule chemotherapeutic agent that isbioactivated by the enzyme DT-diaphorase, or DTD, which is over-expressed inmany tumors relative to normal tissue, including lung, colon, breast and livertumors. Because RH1 is bioactivated in the presence of DTD, it has thepotential to provide targeted drug delivery to these tumor types while limitingthe toxicity to normal tissue. RH1 has undergone in vivo efficacy testing bythe Developmental Therapeutics Program of the National Cancer Institute and hasdemonstrated significant activity in both NSCLC and ovarian xenograft models.

 

 

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RH1 is currently beingevaluated in patients with advanced solid tumors refractory to otherchemotherapy regimens in an open label, Phase 1 dose escalation study totest the safety, tolerability and pharmacokinetics of escalating doses of RH1.

 

**Series AExchangeable Preferred Stock Financing**

 

                OnMarch 2, 2005, we entered into a Securities Purchase Agreement withWarburg Pincus Private Equity VIII, L.P. (“Warburg”) and certain otherinvestors pursuant to which we issued and sold an aggregate of 2,352,443 sharesof Series A Exchangeable Preferred Stock (the “Exchangeable Preferred”) ata price per share of $22.10, for aggregate gross proceeds of approximately$52.0 million (“the Preferred Stock Financing”). We incurred offering expensesof approximately $3.1 million in connection with the sale of theExchangeable Preferred, resulting in net proceeds to the Company ofapproximately $48.9 million. The shares were sold under our shelfRegistration Statement on Form S-3 (File No. 333-113353) declaredeffective by the Securities and Exchange Commission on April 21, 2004. Theclosing of the sale of 2,262,443 shares of Exchangeable Preferred to Warburgoccurred on March 4, 2005. The closing of the sale of an additional 90,000shares of Exchangeable Preferred to certain other investors occurred onMarch 8, 2005. A summary of the material terms of the Preferred StockFinancing and the Exchangeable Preferred is contained in the “RecentDevelopment” section of Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations in our Annual Report on Form 10-Kfor the year ended December 31, 2004.

 

The issuance of shares ofcommon stock upon exchange of shares of the Exchangeable Preferred (the “ShareExchange”) requires the approval of the Company’s stockholders, which will beconsidered at the Company’s 2005 Annual Meeting of Stockholders to be held onWednesday, May 18, 2005 (the “Annual Meeting”). Additional informationconcerning the proposed Share Exchange and the other matters scheduled for avote at the Annual Meeting is contained in the Company’s Definitive ProxyStatement for the Annual Meeting, as filed with the Securities and ExchangeCommission on April 14, 2005.

 

**Results ofOperations**

 

*                Research and Development.* Researchand development expenses include the costs of basic research, nonclinicalstudies, clinical trials, regulatory affairs, biostatistical data analysis,patents, trademarks and licensing fees for new products.

 
| ** **               | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------|------------|---------------------------------------|------------|
| ** **               | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **               |       | **(in  millions)**                    |       |
| Research and development |       | $                                     | 2.0        |   | $ | 2.3 |   |
|                          |            |                                       |            |  |  |  |  |

 

                The$360,000 increase in research and development costs in the three months endedMarch 31, 2005 as compared to the same period in 2004 was due primarily toa $573,000 increase in clinical trial costs, primarily relating to ENRICH,partially offset by a decrease of $215,000 in personnel costs due to lowerheadcount.

 

                Forthe remainder of 2005, we expect our quarterly research and developmentexpenses to increase moderately due primarily to costs associated withincreasing enrollment in our Phase 3 ENRICH trial and our Phase 1 trial ofEFAPROXYN in NSCLC. The amount and timing of the increased costs related to ourclinical trials is difficult to predict due to the uncertainty inherent in thetiming of clinical trial initiations, the rate of patient enrollment and thedetailed design of future trials.

 

*                Clinical Manufacturing.* Clinicalmanufacturing expenses include third party manufacturing costs for EFAPROXYNfor use in clinical trials, costs associated with pre-commercial scale-up ofmanufacturing to support anticipated commercial requirements, and developmentactivities for clinical trial material for PDX.

 
| ** **             | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------|------------|---------------------------------------|------------|
| ** **             | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in millions)**                     | ** ** |
| Clinical manufacturing |       | $                                     | 0.8        |   | $ | 0.4 |   |
|                        |            |                                       |            |  |  |  |  |

 

 

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                The $423,000 decrease in clinical manufacturing costsin the three months ended March 31, 2005 as compared to the same period in2004 was due primarily to: (i) a $277,000 decrease in third-party manufacturingcosts for EFAPROXYN bulk drug substance and formulated drug product as wecurrently have a sufficient supply of EFAPROXYN bulk drug substance andformulated drug product to support our EFAPROXYN clinical trial requirementsfor 2005, (ii) a $98,000 decrease in personnel costs due to lower headcount,and (iii) a $90,000 decrease in consulting costs.

 

                Forthe remainder of fiscal 2005, we expect our quarterly clinical manufacturingexpenses to remain stable relative to the amount recorded for the three monthsended March 31, 2005.

 

*                Marketing, General andAdministrative.* Marketing, general and administrative expensesinclude costs for pre-marketing activities, executive administration, corporateoffices and related infrastructure, and corporate development.

 
| ** **                            | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(in millions)**                     | ** ** |
| Marketing, general and administrative |       | $                                     | 2.5        |   | $ | 2.2 |   |
|                                       |            |                                       |            |  |  |  |  |

 

                The$320,000 decrease in marketing, general and administrative expenses in thethree months ended March 31, 2005 as compared to the same period in 2004was due primarily to: (i) a $114,000 decrease in public relations costs, (ii)an $80,000 decrease in insurance and facilities costs, and (iii) a $71,000decrease in stock-based compensation expense.

 

                Forthe remainder of fiscal 2005, we expect our quarterly marketing, general andadministrative expenses to remain stable relative to the amount recorded forthe three months ended March 31, 2005.

 

*                Restructuring Costs.*InJanuary 2005, we executed agreements to sublease approximatelythree-quarters of the 12,708 square feet of excess space in our corporateoffices located in Westminster, Colorado. The term of each sublease agreementis through the term of our office lease, or October 31, 2008. The actualrental payments to us under the sublease agreements approximate $230,000. Asthe Company’s obligations under our primary lease are in excess of the sum ofthe actual and expected sublease rental payments for this excess space, werecorded a loss of approximately $380,000 in restructuring costs during thethree months ended March 31, 2005. There were no such restructuring costs forthe three months ended March 31, 2004.

 

*                Interest and Other Income, Net*. Interestincome, net of interest expense, for the three months ended March 31, 2004and 2005, was $138,000 and $209,000, respectively. This $71,000 increaseprimarily resulted from higher yields on United States government securities,high-grade commercial paper and corporate notes, and money market funds held bythe Company.

 

**Liquidityand Capital Resources**

 

                Sinceinception, we have financed our operations primarily through private placementsof common and preferred stock, a public equity financing, and interest income,which have resulted in net proceeds to us of $213.9 million throughMarch 31, 2005. We have used $127.2 million of cash for operatingactivities through March 31, 2005. Cash, cash equivalents, and short-terminvestments in marketable securities were $55.1 million at March 31, 2005.Working capital was $54.0 million at March 31, 2005. Net cash used inoperating activities for the three months ended March 31, 2004 and 2005was $4.1 million and $5.4 million, respectively. Cash used inoperating activities was primarily to fund net losses.

 

                Net cashprovided by investing activities for the three months ended March 31, 2004was $3.1 million and consisted primarily of proceeds from maturities ofinvestments in marketable securities, net of purchases of investments inmarketable securities. Net cash used in investing activities for the threemonths ended March 31, 2005 was $35.6 million and consisted primarilyof purchases of investments in marketable securities, net of proceeds frommaturities of investments in marketable securities.

 

Net cash provided byfinancing activities during the three months ended March 31, 2004 was$87,000 and resulted primarily from the exercise of common stock options. Netcash provided by financing activities during the three months endedMarch 31, 2005 of $48.9 million resulted from the sale of shares of ourSeries A Exchangeable Preferred Stock pursuant to the Securities PurchaseAgreement dated March 2, 2005 with Warburg and certain other investors.

 

 

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                Basedupon the current status of our product development and commercialization plans,we believe that our existing cash, cash equivalents, and investments inmarketable securities will be adequate to satisfy our capital needs through atleast the first quarter of 2007. We anticipate continuing our currentdevelopment programs and/or beginning other long-term development projects onnew products or technologies. These projects may require many years andsubstantial expenditures to complete and may ultimately be unsuccessful.Therefore, we may need to obtain additional funds from outside sources tocontinue research and development activities, fund operating expenses, pursueregulatory approvals and build sales and marketing capabilities, as necessary.However, our actual capital requirements will depend on many factors,including:

 

•                  the status of our productdevelopment programs;

•                  the time and cost involvedin conducting clinical trials and obtaining regulatory approvals;

•                  the time and cost involvedin filing, prosecuting and enforcing patent claims;

•                  competing technological andmarket developments; and

•                  our ability to market anddistribute our future products and establish new collaborative and licensingarrangements.

 

                Wemay raise additional capital in the future through arrangements with corporatepartners, equity or debt financings, or from other sources. Such arrangements,if successfully consummated, may be dilutive to our existing stockholders.However, there is no assurance that we will be successful in consummating anysuch arrangements. In addition, in the event that additional funds are obtainedthrough arrangements with collaborative partners or other sources, sucharrangements may require us to relinquish rights to some of our technologies,product candidates or products under development that we would otherwise seekto develop or commercialize ourselves. If we are unable to generate meaningfulamounts of revenue from future product sales, if any, or cannot otherwise raisesufficient additional funds to support our operations, we may be required todelay, reduce the scope of or eliminate one or more of our development programsand our business and future prospects for revenue and profitability may beharmed.

 

**CriticalAccounting Policies**

 

                Ourdiscussion and analysis of our financial condition and results of operationsare based upon our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States of America.The preparation of these financial statements requires us to make estimates andassumptions that affect the reported amounts of assets, liabilities, andexpenses. We base our estimates on historical experience, available informationand assumptions that we believe to be reasonable under the circumstances. Weapply estimation methodologies consistently from period to period. The actualresults may differ from these estimates under different assumptions orconditions. The critical accounting policies are discussed in Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations included in our Annual Report on Form 10-K for the year endedDecember 31, 2004. In addition, as of March 31, 2005, we consider ouraccounting policy related to cash, cash equivalents, and investments inmarketable securities to be a critical accounting policy. All highly liquidinvestments with an original maturity of three months or less are considered tobe cash equivalents. The carrying values of our cash equivalents andinvestments in marketable securities approximate their market values based onquoted market prices. We account for investments in marketable securities inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities*. Investments in marketable securities are classified asheld to maturity and are carried at cost plus accrued interest. Substantiallyall of our marketable securities are held in corporate notes with remainingmaturities ranging from one to twenty-three months.

 

                Thesecritical accounting policies are subject to judgments and uncertainties, whichaffect the application of these policies. We have not made any changes in anyof these critical accounting polices during the three months endedMarch 31, 2005.

 

 

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**RiskFactors**

 

                In addition to the other information contained inthis report, we caution stockholders and potential investors that the followingimportant risk factors, among others, in some cases have affected, and in thefuture could affect, our actual results of operations and could cause ouractual results to differ materially from those expressed in any forward-lookingstatements made by or on behalf of us. The following risk factors should beread in conjunction with the information contained in the “Risk Factors”section of our Annual Report on Form 10-K for the year ended December 31, 2004for a broader discussion of the risks and uncertainties inherent in ourbusiness. The following information is not intended to limit in any way thecharacterization of other statements or information under other captions ascautionary statements for such purpose. These factors include:

 

•                  Failure to complete clinicaltrials on schedule, in compliance with applicable regulations and at anacceptable cost; failure to demonstrate the safety and efficacy of our productcandidates in their target indications.

•                  Delay, difficulty, orfailure to obtain regulatory approval or clearance to market our productcandidates, including delays or difficulties in development because ofinsufficient proof of safety or efficacy.

•                  Delay, difficulty, orfailure to obtain adequate financing on acceptable terms to fund futureoperations, including research, development and commercialization of productcandidates.

•                  Failure to obtainstockholder approval for the exchange of shares of our Series A ExchangeablePreferred Stock for shares of our common stock, which would require us toexpend substantial cash resources to redeem the Series A Exchangeable PreferredStock (including any accumulated and unpaid dividends thereon) in the future.

•                  An adverse outcome in thepending securities class action litigation that has been filed against us.

•                  The ability to obtain, maintainand enforce intellectual property rights; the cost of acquiring in-processtechnology and other intellectual property rights, either by license,collaboration or purchase of another entity; the cost of enforcing or defendingour intellectual property rights.

•                  Failure of third-partycollaborators to effectively conduct research and development activities,including drug discovery and clinical testing; conflicts of interest orpriorities or disputes that may arise between us and such third-party collaborators.

•                  Dependence upon thirdparties to manufacture our product candidates; failure of third parties tomanufacture our product candidates in compliance with regulatory requirementsand at an acceptable cost; failure of third parties to supply sufficientquantities of our product candidates for preclinical, clinical or commercialpurposes; failure to establish alternative sources of supply of our productcandidates.

•                  The ability to create sales,marketing and distribution capabilities for our product candidates, or enterinto agreements with third parties to perform these functions.

•                  The ability to obtainacceptable prices or adequate levels of reimbursement for our products fromthird-party payors, including government and health administration authoritiesand private health insurers.

•                  Competitive or marketfactors that may limit the use or broad acceptance of our product candidates.

•                  The ability to attract andretain highly qualified management and scientific personnel.

•                  Changes in accounting rules andregulations, such as accounting for stock-based compensation, that could have asignificant adverse impact on our results of operations, causing our stockprice to decline and negatively impacting our efforts to obtain adequatefinancing.

 

 

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** **

**ITEM 3.****                                                    ****QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

                Theprimary objective of our investment activities is to preserve principal whileat the same time maximizing the income we receive from our investments withoutsignificantly increasing risk. Some of the securities that we invest in mayhave market risk and all are classified as held-to-maturity. We do not ownderivative financial instruments in our investment portfolio. This means that achange in prevailing interest rates may cause the fair value of the principalamount of the investment to fluctuate. For example, if we hold a security thatwas issued with a fixed interest rate at the then-prevailing rate and theprevailing interest rate later rises, the fair value of the principal amount ofour investment will probably decline. To minimize this risk in the future, wemaintain a non-trading investment portfolio of investment grade, liquid debtsecurities that limits the amount of credit exposure to any one issue, issuer,or type of instrument. The weighted average duration of all of our investmentsis less than one year. Due to the short-term nature of these investments, webelieve we have no material exposure to interest rate risk arising from our investments.Therefore, no quantitative tabular disclosure is provided.

 

 

**ITEM 4.****                                                    ****CONTROLSAND PROCEDURES**

 

                Asof the end of the period covered by this report, an evaluation was carried outunder the supervision and with the participation of our management, includingour principal executive and financial officer (the “Evaluating Officer”), ofthe effectiveness of our disclosure controls and procedures, as defined in Rule13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”).Based on that evaluation, our management, including the Evaluating Officer,concluded that our disclosure controls and procedures were effective to ensurethat information required to be disclosed by us in reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission’s rulesand forms, and that such information is accumulated and communicated to ourmanagement, including the Evaluating Officer, as appropriate, to allow timelydecisions regarding required disclosure.

 

**                NoChanges in Internal Control over Financial Reporting**

 

                There were no changes in our internal controls overfinancial reporting during the quarter ended March 31, 2005 that havematerially affected, or are reasonably likely to materially affect our internalcontrols over financial reporting.

 

 

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**PART II.  OTHER INFORMATION**

 

 

**ITEM 1.****                                                    ****LEGALPROCEEDINGS**

 

TheCompany and one of our officers have been named as defendants in a purportedsecurities class action lawsuit filed in May 2004 in the United StatesDistrict Court for the District of Colorado. An amended complaint was filed inAugust 2004. The lawsuit is brought on behalf of a purported class ofpurchasers of our securities during the period from April 23, 2003 toApril 29, 2004, and is seeking unspecified damages relating to theissuance of allegedly false and misleading statements regarding EFAPROXYNduring this period and subsequent declines in our stock price. As is typical inthis type of litigation, several other purported securities class actionlawsuits containing substantially similar allegations were filed against thedefendants, but the plaintiffs in all of those cases have subsequentlydismissed their actions. Additional lawsuits containing substantially similarallegations may be filed in the future. These lawsuits have been tendered toour insurance carriers.

 

                Webelieve the claims set forth in the pending lawsuit are without merit, and weintend to vigorously defend against them. On October 12, 2004, we filed amotion to dismiss the case with prejudice. That motion remains pending. As withany litigation proceeding, we cannot predict with certainty the eventualoutcome of pending litigation. If we are not successful in our defense againstsuch claims, we could be forced to make significant payments to the plaintiffs,and such payments could have a material adverse effect on our business,financial condition, results of operations and cash flows to the extent suchpayments are not covered by our insurance carriers. Even if our defense againstsuch claims is successful, the litigation could result in substantial costs anddivert management’s attention and resources, which could adversely affect ourbusiness.

 
| **ITEM 2.** | ** ** | **UNREGISTERED  SALES OF EQUITY**                                      | ** ** | **None** |
|-------------|------------|------------------------------------------------------------------------|------------|----------|
|        |       | **SECURITIES  AND USE OF PROCEEDS**                                    |       |     |
| **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**                                                           |       |     |
|        |       | 31.01    Rule  13a-14(a) / 15d-14(a) Certification |       |     |
|        |       | 32.01    Section 1350  Certification          |       |     |

 

 

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** **

**SIGNATURES**

 

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| Date: May 6, 2005 | **ALLOS  THERAPEUTICS, INC.**           |
|------------------------|-----------------------------------------|
|                   | /s/  Michael E. Hart                    |   |
|                   | Michael E. Hart                         |
|                   | President, Chief Executive  Officer and |
|                   | Chief Financial Officer                 |
|                   | (Principal Executive  Officer and       |
|                   | Principal Financial  Officer)           |

 

 

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