<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-22373
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VAXCEL, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 58-2027283
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
154 Technology Parkway, Norcross, Georgia 30092
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(770) 453-0195
- --------------------------------------------------------------------------------
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Number of shares of Vaxcel, Inc. Common Stock, $.001 par value, issued and
outstanding as of November 6, 1997: 11,005,333.
<PAGE> 2
VAXCEL, INC.
Form 10-Q
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations (unaudited) for the
Three Month and Nine Month Periods Ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Nine Month Periods Ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 12
SIGNATURES 12
</TABLE>
2
<PAGE> 3
Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
VAXCEL, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,097,289 $ 84,481
Accounts receivable 170,221 49,222
------------ ------------
Total current assets 1,267,510 133,703
Property and equipment, net 90,847 95,176
Other assets:
Acquired developed technology, net 3,514,356 --
Notes receivable 632,786 --
Deferred transaction costs -- 113,439
Deposits 55,674 35,674
------------ ------------
Total other assets 4,202,816 149,113
------------ ------------
Total assets $ 5,561,173 $ 377,992
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,167 $ 32,039
Accrued liabilities 176,974 155,540
Amounts due to affiliates, net 17,022 30,427
------------ ------------
Total current liabilities 229,163 218,006
Commitments
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $.001 par value, 30,000,000 shares authorized;
11,005,333 and 8,250,004 shares issued and outstanding at
September 30, 1997 and December 31, 1996, respectively 11,005 8,250
Additional paid-in capital 12,063,552 4,697,750
Accumulated deficit (6,742,547) (4,546,014)
------------ ------------
Total stockholders' equity 5,332,010 159,986
------------ ------------
Total liabilities and stockholders' equity $ 5,561,173 $ 377,992
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
VAXCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended September 30, Nine Month Period Ended September 30,
-------------------------------------- -------------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Collaborative and grant income $ 158,418 $ 30,635 $ 216,203 $ 30,635
License fees -- -- -- 50,000
Investment income, net 15,681 925 24,148 6,459
----------- ----------- ----------- -----------
174,099 31,560 240,351 87,094
Expenses:
Research and development
Transactions with affiliates 124,365 10,275 217,868 59,148
Other 268,512 150,304 681,541 481,596
Acquired research and development -- -- 951,017 --
Selling, general and administrative
Transactions with affiliates 22,500 17,490 68,921 52,472
Other 293,574 111,057 517,537 264,191
----------- ----------- ----------- -----------
708,951 289,126 2,436,884 857,407
----------- ----------- ----------- -----------
Net loss $ (534,852) $ (257,566) $(2,196,533) $ (770,313)
=========== =========== =========== ===========
Net loss per share (see Exhibit 11) $ (0.05) $ (0.03) $ (0.23) $ (0.10)
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
VAXCEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Period Ended September 30,
-------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,196,533) $ (770,313)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 124,344 38,700
Charge for acquired research and development 951,017 --
Net change in assets and liabilities 203,558 (62,170)
----------- -----------
Total adjustments 1,278,919 (23,470)
----------- -----------
Net cash used by operating activities (917,614) (793,783)
Cash flows from investing activities:
Capital expenditures (3,371) (2,907)
----------- -----------
Net cash used by investing activities (3,371) (2,907)
----------- -----------
Cash flows from financing activities:
Pre-merger equity contributions by CytRx 163,396 --
Proceeds from sale of common stock 8,005 300,000
Net proceeds from issuance of common stock
in connection with acquisition of Zynaxis, Inc. 1,762,392 --
----------- -----------
Net cash provided by financing activities 1,933,793 300,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,012,808 (496,690)
Cash and cash equivalents at beginning of period 84,481 515,522
----------- -----------
Cash and cash equivalents at end of period $ 1,097,289 $ 18,832
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,421 $ --
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
VAXCEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
1. DESCRIPTION OF COMPANY AND BASIS OF PRESENTATION
Vaxcel, Inc. ("Vaxcel" or the "Company") is engaged in the development
and commercialization of proprietary vaccine delivery system technologies to
improve the effectiveness and convenience of existing vaccines and contribute to
the development of new vaccines. The Company's core technology is based upon
novel vaccine formulations containing certain biologically active copolymers
licensed exclusively for this purpose by the Company from CytRx Corporation
("CytRx"). In May 1997 the Company acquired certain additional vaccine delivery
technologies pursuant to its merger with Zynaxis, Inc. (see Note 3).
Vaxcel was formed on January 6, 1993 as a wholly-owned subsidiary of
CytRx and has been economically dependent upon CytRx to provide the funding
necessary to conduct its operations since its inception. In May 1997 Vaxcel
completed a merger with Zynaxis, Inc. ("Zynaxis"), resulting in the issuance of
an aggregate of 12.5% of its outstanding (post-merger) shares of common stock to
the former shareholders of Zynaxis. The acquisition also resulted in a
significant cash contribution to the Company from CytRx (see Note 3).
The accompanying condensed consolidated financial statements at
September 30, 1997 and for the three month and nine month periods ended
September 30, 1997 and 1996 are unaudited, but include all adjustments,
consisting of normal recurring entries, which the Company's management believes
to be necessary for a fair presentation of the periods presented. Interim
results are not necessarily indicative of results for a full year. The financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1996 contained in its registration
statement filed on Form S-4 under the Securities Act of 1933, as amended.
2. NET LOSS PER COMMON SHARE
Net loss per common share is calculated in accordance with Accounting
Principles Board Opinion No. 15, Earnings per Share, and is based on the
weighted average number of common shares and common share equivalents
outstanding during each period. Stock options and warrants outstanding are
excluded from the computation of net loss per share since the effect is
antidilutive.
6
<PAGE> 7
3. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The adoption of Statement
No. 128 will not impact the Company's calculation of net loss per share for the
three month or nine month periods ended September 30, 1997 and 1996.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income, which is required to be adopted
December 31, 1997. The Statement establishes new rules for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The adoption of Statement No. 130 will not impact
the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, Disclosures about Segments of an Enterprise and Related Information,
which is required to be adopted December 31, 1997. The adoption of Statement No.
131 will not impact the Company's financial statements.
4. ACQUISITION OF ZYNAXIS, INC.
In December 1996 Vaxcel, CytRx and Zynaxis signed an agreement whereby
Zynaxis would be merged with a wholly-owned subsidiary of Vaxcel. At that time
Zynaxis was a publicly-held biotechnology company engaged in the development of
certain vaccine technologies. The transaction was approved by the Zynaxis
stockholders at a meeting held on May 21, 1997 and was consummated as of that
date.
Under the terms of the agreement all of the outstanding shares of
Zynaxis were converted into shares of Vaxcel based upon certain exchange ratios
defined in the agreement resulting in the issuance of an aggregate of 12.5% of
the outstanding (post-merger) shares of Vaxcel common stock at the date of
closing.
The merger was treated as a purchase and constitutes a tax-free
reorganization for Zynaxis stockholders. In accordance with the provisions of
APB Nos. 16 and 17, all identifiable assets acquired, including identifiable
intangible assets, were assigned a portion of the purchase price on the basis of
their fair values. A summary of the allocation of the purchase price is as
follows:
<TABLE>
<S> <C>
Net tangible assets, less outstanding liabilities $ (551,017)
Acquired developed technology 3,600,000
Charge for acquired research and development 951,017
----------
Total purchase price $4,000,000
</TABLE>
7
<PAGE> 8
Pursuant to the agreement, CytRx was to provide up to $2 million to
Zynaxis under a secured credit facility during the period prior to the closing
of the merger, at which time the outstanding principal and interest was to be
contributed to the capital of Vaxcel, together with additional cash in the
amount of $4 million less the outstanding principal and interest of the secured
note. At the time of closing the outstanding principal and interest of the
secured note to Zynaxis was approximately $1.7 million, resulting in a net cash
contribution to Vaxcel from CytRx of approximately $2.3 million.
The following table presents unaudited pro forma operating results for
the nine months ended September 30, 1997 and 1996, as if the acquisition of
Zynaxis had occurred on January 1 of each period.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revenues $ 1,068,000 $ 1,095,000
Net loss $(1,567,000) $(3,413,000)
Net loss per share $ (.14) $ (.31)
</TABLE>
8
<PAGE> 9
Item 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Vaxcel is engaged in the development and commercialization of
Optivax(R), the tradename for a family of proprietary nonionic block copolymers
which may augment or modulate the immune response to vaccines when administered
injectably. Vaxcel derives its rights to Optivax from an exclusive, worldwide
license agreement with CytRx. Vaxcel believes Optivax may improve the
effectiveness and/or convenience of existing vaccines and may contribute to the
development of new vaccines. Vaxcel and its institutional/corporate
collaborators have conducted preclinical studies in which Optivax appears to act
both as a delivery system and as a vaccine adjuvant. In addition, a Phase I
human clinical trial initiated by Vaxcel in early 1996 and completed during the
first quarter of 1997 demonstrated both the safety and vaccine adjuvant activity
of Optivax in humans.
Vaxcel's business strategy is to license Optivax on a
vaccine-by-vaccine basis to pharmaceutical and biotechnology companies engaged
in vaccine research and development. Under such arrangements, these companies
would combine Optivax with their vaccines and assume responsibility for product
development, regulatory approval, and marketing at their expense. In return,
Vaxcel would receive licensing fees, milestone payments, and royalties on sales.
At present, Vaxcel has entered into option agreements for the development of
Optivax with Medeva PLC and Connaught Laboratories, Inc. and a license agreement
with Corixa Corporation.
As a result of Vaxcel's business combination with Zynaxis (see Note 4
to Financial Statements), Vaxcel has acquired the PLG microencapsulation and
mucoadhesive vaccine technologies of Zynaxis. These technologies appear to be
complementary to Vaxcel's current technology, as Optivax is primarily focused on
enhancing the effectiveness of injectible vaccines, while the Zynaxis
technologies are primarily targeted toward development of vaccines for oral and
mucosal delivery. Vaxcel believes the Zynaxis oral delivery technologies may
have commercial application for many marketed vaccines currently administered by
injection, as well as certain new vaccines under development. In addition, the
Zynaxis technologies can be administered alone or in combination with other
vaccine carriers, delivery systems, and adjuvants. Similar to Optivax, Vaxcel's
business strategy for the PLG microencapsulation and mucoadhesive vaccine
technologies will be to license these technologies to companies engaged in
vaccine research and development. In September 1995, ALK A/S ("ALK"), a Danish
company, executed a development and licensing agreement which granted ALK
exclusive, worldwide rights to evaluate and develop the Zynaxis technologies for
oral delivery of bioactive substances for the treatment of allergy. ALK is a
world leader in the preparation and standardization of allergen extracts for
allergy immunotherapy.
9
<PAGE> 10
Financial Condition and Liquidity
At September 30, 1997 Vaxcel had cash and cash equivalents of
$1,097,000 and net assets of $5,332,000 compared to $84,000 and $160,000,
respectively, at December 31, 1996. The increase in cash and cash equivalents is
due to CytRx's contribution of approximately $2.3 million in cash to Vaxcel in
connection with the acquisition of Zynaxis in May 1997. Since its inception,
Vaxcel's research and development, general and administrative and other expenses
have exceeded its revenues from licenses, grants and other sources, and the
Company has been economically dependent upon CytRx to provide the funding
necessary to conduct its operations.
Vaxcel's primary requirement for capital will be to continue its
development activities for Optivax and the Zynaxis technologies and for general
corporate purposes. Vaxcel anticipates substantial losses over the next several
years resulting primarily from research and development expenses. Definitive
statements as to the time required and costs involved in reaching certain
development objectives are difficult to project due to the uncertainties of the
medical research field. It is generally recognized that the FDA approval process
for a new vaccine from Phase I to commercialization can take seven or more
years. For certain improved versions of existing vaccines, the amount of time
may be significantly reduced if the company only needs to prove safety and
increased antibody levels compared to the original version of the vaccine. It
should be noted that companies which license Optivax for use with their vaccines
will assume responsibility for product development, regulatory approval and
marketing, thereby allowing Vaxcel to maintain a lower level of expenses.
Revenues from corporate partnering arrangements are vital to the
Company's ability to meet its business objectives. Management expects to enter
into additional arrangements that would supplement Vaxcel's liquidity and
capital resources. It is management's belief that cash on hand will be
sufficient to support Vaxcel's current level of operations through late 1998.
The Company will consider additional sources of funding as appropriate and
available. These statements regarding the Company's plans for future financings
are forward-looking statements that are subject to a number of risks and
uncertainties. The Company's ability to obtain future financings through
corporate partnering arrangements or otherwise is subject to market conditions
and the Company's ability to identify parties that are willing and able to enter
into such arrangements on terms that are satisfactory to the Company. There can
be no assurance that the Company will be able to obtain future financing from
these sources.
At December 31, 1996, the Company had net operating loss carryforwards
for income tax purposes of approximately $4.6 million, which will expire at
various dates through 2011, if not utilized. The Company also has research and
development credits available to reduce income taxes, if any, of approximately
$77,000. Based on an assessment of all available evidence including, but not
limited to, the Company's limited operating history and lack of profitability,
uncertainties of the commercial viability of the Company's technology, the
impact of government regulation and healthcare reform initiatives, and other
risks normally associated with biotechnology companies, the Company has
concluded that it is more likely than not that these net operating loss
carryforwards and credits will not be realized and, as a result, a 100% deferred
10
<PAGE> 11
tax valuation allowance has been recorded against these assets. Such valuation
allowance had no impact on reported net losses.
Results of Operations
The Company recorded net losses of $535,000 and $2,197,000 during the
three month and nine month periods ended September 30, 1997, as compared to
$258,000 and $770,000 during the same periods in 1996.
The higher net loss for the nine months ended September 30, 1997 versus
the same period in 1996 is primarily due to a $951,000 non-cash charge for
acquired research and development incurred during the second quarter of 1997 as
a result of the Company's acquisition of Zynaxis, and also to higher
administrative expenses subsequent to the merger. Higher administrative expenses
were also the primary reason for the higher net loss for the three months ended
September 30, 1997 over the same period in 1996.
Research and development expenditures for the three month period ended
September 30, 1997 were $393,000, as compared to $161,000 during 1996. For the
nine month period research and development expenditures were $899,000 versus
$541,000 in 1996. From 1996 to 1997 there has been no significant change in the
level of research and development activity, nor in the Company's focus of
developing Optivax. Fluctuations in expenditures from year to year are primarily
due to the timing and nature of external studies being performed.
General and administrative expenses for the three month period ended
September 30, 1997 were $316,000, as compared to $129,000 during 1996. For the
nine month period general and administrative expenses were $586,000 versus
$317,000 in 1996. The increase is primarily due to non-transaction expenses
associated with the Company's acquisition of Zynaxis and activities for
administration of the combined companies.
11
<PAGE> 12
Part II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
11 Statement re: computation of net loss per share
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VAXCEL, INC.
(Registrant)
Date: November 6, 1997 By: /s/ Mark W. Reynolds
---------------- -------------------------------------
Mark W. Reynolds
Chief Financial Officer
(Chief Accounting Officer and a
duly authorized officer)
12
<PAGE> 1
EXHIBIT 11
VAXCEL, INC.
COMPUTATION OF NET LOSS PER SHARE
COMPUTATION OF LOSS PER SHARE - PRIMARY
<TABLE>
<CAPTION>
Three Month Period Ended September 30, Nine Month Period Ended September 30,
-------------------------------------- -------------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (534,852) $ (257,566) $ (2,196,533) $ (770,313)
------------ ------------ ------------ ------------
Average number of common shares outstanding 11,002,630 8,159,783 9,580,559 8,058,029
Common shares issuable assuming exercise of
stock options and warrants(1) -- -- -- --
------------ ------------ ------------ ------------
Total 11,002,630 8,159,783 9,580,559 8,058,029
------------ ------------ ------------ ------------
Net loss per share $ (0.05) $ (0.03) $ (0.23) $ (0.10)
============ ============ ============ ============
COMPUTATION OF LOSS PER SHARE - FULLY DILUTED
Net loss $ (534,852) $ (257,566) $ (2,196,533) $ (770,313)
------------ ------------ ------------ ------------
Average number of common shares outstanding 11,002,630 8,159,783 9,580,559 8,058,029
Common shares issuable assuming exercise of
stock options and warrants(1) -- -- -- --
------------ ------------ ------------ ------------
Total 11,002,630 8,159,783 9,580,559 8,058,029
------------ ------------ ------------ ------------
Net loss per share $ (0.05) $ (0.03) $ (0.23) $ (0.10)
============ ============ ============ ============
</TABLE>
(1) Stock options and warrants outstanding are excluded from the computation of
net loss per share since their effect would be antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF VAXCEL, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,097,289
<SECURITIES> 0
<RECEIVABLES> 198,747
<ALLOWANCES> 28,526
<INVENTORY> 0
<CURRENT-ASSETS> 1,267,510
<PP&E> 299,172
<DEPRECIATION> 208,325
<TOTAL-ASSETS> 5,561,173
<CURRENT-LIABILITIES> 229,163
<BONDS> 0
0
0
<COMMON> 11,005
<OTHER-SE> 5,321,005
<TOTAL-LIABILITY-AND-EQUITY> 5,561,173
<SALES> 0
<TOTAL-REVENUES> 240,351
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,436,884
<LOSS-PROVISION> 32,565
<INTEREST-EXPENSE> 1,421
<INCOME-PRETAX> (2,196,533)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,196,533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,196,533)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> 0
</TABLE>
