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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 March 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-22373
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VAXCEL, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 58-2027283
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
154 Technology Parkway, Norcross, Georgia 30092
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(Address of principal executive offices) (Zip Code)
(770) 453-0195
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(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 NO X
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Number of shares of Vaxcel, Inc. Common Stock, $.001 par value, issued and
outstanding as of May 27, 1997: 11,000,000.
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VAXCEL, INC.
Form 10-Q
Table of Contents
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
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Item 1 Financial Statements:
Condensed Balance Sheets as of March 31, 1997 (unaudited)
and December 31, 1996 3
Condensed Statements of Operations (unaudited) for the
Three Month Periods Ended March 31, 1997 and 1996 4
Condensed Statements of Cash Flows (unaudited) for the
Three Month Periods Ended March 31, 1997 and 1996 5
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 11
SIGNATURES 11
EXHIBIT 11 -- Computation of Net Loss Per Share 12
</TABLE>
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Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
VAXCEL, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
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ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 41,493 $ 84,481
Accounts receivable 54,812 49,222
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Total current assets 96,305 133,703
Property and equipment, net 82,276 95,176
Other assets:
Deferred transaction costs 84,583 113,439
Deposits 35,674 35,674
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Total other assets 120,257 149,113
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Total assets $ 298,838 $ 377,992
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 19,971 $ 32,039
Accrued liabilities 45,026 155,540
Amounts due to affiliates, net 231,948 30,427
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Total current liabilities 296,945 218,006
Commitments
Stockholder's 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;
8,250,004 shares issued and
outstanding at March 31, 1997 and
December 31, 1996, respectively 8,250 8,250
Additional paid-in capital 4,882,630 4,697,750
Accumulated deficit (4,888,987) (4,546,014)
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Total stockholder's equity 1,893 159,986
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Total liabilities and stockholder's equity $ 298,838 $ 377,992
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</TABLE>
See accompanying notes.
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VAXCEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended March 31,
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1997 1996
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<S> <C> <C>
Revenues:
Collaborative and grant income $ 53,697 $ -
Interest income 496 4,366
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54,193 4,366
Expenses:
Research and development 176,839 183,805
General and administrative 138,392 78,988
Transactions with affiliates
Research and development 59,435 16,875
General and administrative 22,500 17,491
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397,166 297,159
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Net loss $(342,973) $ (292,793)
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Net loss per share -- see Exhibit 11 $ (0.04) $ (0.04)
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</TABLE>
See accompanying notes.
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VAXCEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended March 31,
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1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(342,973) $(292,793)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 12,900 17,200
Net change in assets and liabilities (37,378) (75,002)
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Total adjustments (24,478) (57,802)
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Net cash used by operating activities (367,451) (350,595)
Cash flows from financing activities:
Equity contributions by CytRx 184,880 -
Borrowings from CytRx 134,583 -
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Net cash provided by financing activities 324,463 -
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Net decrease in cash and cash equivalents (42,988) (350,595)
Cash and cash equivalents at beginning of period 84,481 515,522
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Cash and cash equivalents at end of period $ 41,493 $ 164,927
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</TABLE>
See accompanying notes.
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VAXCEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 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 financial statements at March 31, 1997 and for
the three month periods ended March 31, 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.
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
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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 net loss per share for the three month periods ended March 31, 1997
and 1996.
3. ACQUISITION OF ZYNAXIS
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 will be treated as a purchase and will constitute a tax-free
reorganization for Zynaxis stockholders.
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
infusion to Vaxcel of approximately $2.3 million.
4. LOAN FROM CYTRX
Effective March 15, 1997, in order to provide necessary funding for
certain expenses and operations of Vaxcel pending its merger with Zynaxis, CytRx
and Vaxcel entered into a Loan Agreement (the "Loan") pursuant to which CytRx
agreed to lend up to $400,000 to Vaxcel with interest accruing from May 1, 1997
at prime plus 2%. As of March 31, 1997, Vaxcel had outstanding borrowings of
approximately $140,000 pursuant to the Loan. The outstanding principal and
interest of approximately $287,000 was repaid by Vaxcel to CytRx concurrent
with the closing of the aquisition of Zynaxis.
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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
3 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. ALK is currently conducting a Phase II human clinical
trial.
8
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Financial Condition and Liquidity
At March 31, 1997 Vaxcel had cash and cash equivalents of $41,493 and net
assets of $1,893 compared to $84,481 and $159,986, respectively, at December 31,
1996. The decrease in Vaxcel's cash, cash equivalents and net assets were due to
Vaxcel's continuing operating losses. To date, Vaxcel's research and
development, general and administrative and other expenses have exceeded its
revenues from licenses, grants and other sources. Since its inception Vaxcel has
been economically dependent upon CytRx to provide the funding necessary to
conduct its operations. In connection with the acquisition of Zynaxis in May
1997, CytRx contributed additional cash to Vaxcel of approximately $2.3 million.
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.
Management believes that cash on hand subsequent to the acquisition of
Zynaxis will be sufficient to support Vaxcel's operations for the next two
years. Management further expects that proceeds from corporate partnering
arrangements may further supplement Vaxcel's liquidity and capital resources.
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
$63,000. 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 tax valuation allowance has been recorded against these assets. Such
valuation allowance had no impact on reported net losses.
9
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Results of Operations
The Company recorded a net loss of $342,973 during the first quarter of
1997, as compared to $292,793 during the same period of 1996.
The lower net loss in the first quarter of 1997 versus 1996 is due
primarily to the fact that Vaxcel had $53,697 in collaborative and grant income
in the first quarter of 1997 versus no such income in the first quarter of 1996.
This collaborative and grant income relates to funding pursuant to a Small
Business Innovative Research (SBIR) grant and pursuant to an agreement with one
of its corporate collaborators. Interest income was negligible during both the
1997 and 1996 periods. No excess cash balances were carried by Vaxcel during
these periods as expenditures were funded by CytRx on an as-needed basis.
Research and development expenditures during 1997 were $236,274, as
compared to $200,480 during 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 were $160,892 during the first quarter
of 1997, as compared to $96,479 during 1996. The increase is primarily due to
non-transaction expenses associated with the Company's acquisition of Zynaxis
and activities in preparation for administration of the combined companies.
10
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Part II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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<CAPTION>
Exhibit
Number Description
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<S> <C>
11 Statement re: computation of net loss per share
27 Financial Data Schedule (for SEC use only)
</TABLE>
(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: May 30, 1997 By: /s/ Mark W. Reynolds
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Mark W. Reynolds
Chief Financial Officer
(Chief Accounting Officer)
11
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VAXCEL, INC.
Exhibit 11
Computation of Net Loss Per Share
COMPUTATION OF LOSS PER SHARE - PRIMARY
<TABLE>
<CAPTION>
Three Month Period Ended March 31,
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1997 1996
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<S> <C> <C>
Net loss $ (342,973) $ (292,793)
========== ==========
Average number of common shares outstanding 8,250,004 8,000,000
Common shares issuable assuming exercise of
stock options and warrants 0 (1) 0 (1)
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Total shares 8,250,004 8,000,000
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Net loss per share $ (0.04) $ (0.04)
========== ==========
COMPUTATION OF LOSS PER SHARE - FULLY DILUTED
Net loss $ (342,973) $ (292,793)
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Average number of common shares outstanding 8,250,004 8,000,000
Common shares issuable assuming exercise of
stock options and warrants 0 (1) 0 (1)
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Total shares 8,250,004 8,000,000
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Net loss per share $ (0.04) $ (0.04)
========== ==========
</TABLE>
(1) Stock options and warrants outstanding are excluded from the computation
of net loss per share since their effect would be antidilutive.
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD 3/31/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 41,493
<SECURITIES> 0
<RECEIVABLES> 54,812
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 96,305
<PP&E> 264,801
<DEPRECIATION> 182,525
<TOTAL-ASSETS> 298,838
<CURRENT-LIABILITIES> 296,945
<BONDS> 0
0
0
<COMMON> 8,250
<OTHER-SE> (6,357)
<TOTAL-LIABILITY-AND-EQUITY> 298,838
<SALES> 0
<TOTAL-REVENUES> 54,193
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 397,166
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (342,973)
<INCOME-TAX> 0
<INCOME-CONTINUING> (342,973)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (342,973)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
