<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 March 31, 1998
--------------
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.
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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 X NO
----- -----
Number of shares of Vaxcel, Inc. Common Stock, $.001 par value, issued and
outstanding as of May 12, 1998: 10,994,656.
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VAXCEL, INC.
Form 10-Q
Table of Contents
<TABLE>
<CAPTION>
Page
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997 3
Condensed Statements of Operations (unaudited) for the
Three Month Periods Ended March 31, 1998 and 1997 4
Condensed Statements of Cash Flows (unaudited) for the
Three Month Periods Ended March 31, 1998 and 1997 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 10
SIGNATURES 10
</TABLE>
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Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
VAXCEL, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
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ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 289,928 $ 690,636
Accounts receivable 40,982 141,898
Other current -- 500
------------ ------------
Total current assets 330,910 833,034
Property and equipment, net 61,254 74,155
Other assets:
Acquired developed technology, net 3,394,356 3,454,356
Goodwill, net 630,992 640,991
Notes receivable 400,000 400,000
Other assets 59,748 55,674
------------ ------------
Total other assets 4,485,096 4,551,021
------------ ------------
Total assets $ 4,877,260 $ 5,458,210
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,612 $ 20,166
Accrued liabilities 71,910 72,880
Amounts due to affiliates 17,336 73,714
------------ ------------
Total current liabilities 91,858 166,760
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;
11,001,070 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively 11,001 11,001
Additional paid-in capital 12,425,761 12,425,761
Accumulated deficit (7,651,360) (7,145,312)
------------ ------------
Total stockholders' equity 4,785,402 5,291,450
------------ ------------
Total liabilities and stockholders' equity $ 4,877,260 $ 5,458,210
============ ============
</TABLE>
See accompanying notes.
3
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VAXCEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended March 31,
----------------------------------
1998 1997
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<S> <C> <C>
Revenues:
Collaborative and grant income $ 16,483 $ 53,697
Interest income 7,050 496
------------ ------------
23,533 54,193
Expenses:
Research and development
Transactions with affiliates 21,015 59,435
Other 250,409 176,839
Selling, general and administrative
Transactions with affiliates 12,708 22,500
Other 245,449 138,392
------------ ------------
529,581 397,166
------------ ------------
Net loss $ (506,048) $ (342,973)
============ ============
Basic and diluted loss per common share $ (0.05) $ (0.04)
============ ============
Basic and diluted weighted average shares outstanding 11,005,333 8,250,004
</TABLE>
See accompanying notes.
4
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VAXCEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended March 31,
----------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(506,048) $(342,973)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 82,900 12,900
Net change in assets and liabilities 22,440 (37,378)
--------- ---------
Total adjustments 105,340 (24,478)
--------- ---------
Net cash used by operating activities (400,708) (367,451)
Cash flows from financing activities:
Equity contributions by CytRx -- 184,880
Borrowings from CytRx -- 139,583
--------- ---------
Net cash provided by financing activities -- 324,463
--------- ---------
Net decrease in cash and cash equivalents (400,708) (42,988)
Cash and cash equivalents at beginning of period 690,636 84,481
--------- ---------
Cash and cash equivalents at end of period $ 289,928 $ 41,493
========= =========
</TABLE>
See accompanying notes.
5
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VAXCEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. DESCRIPTION OF COMPANY AND BASIS OF PRESENTATION
Vaxcel, Inc. ("Vaxcel" or "the Company"), is engaged in the development
and commercialization of vaccine adjuvants and delivery systems and a novel
vaccine for the treatment of cancer.
Vaxcel has four proprietary adjuvant and delivery system technologies
which can be used to increase the effectiveness and/or convenience of both
currently marketed and new vaccines. Vaxcel derives its rights to these four
technologies from the following: (a) the rights to OPTIVAX(R) ("Optivax") are
derived from an exclusive, worldwide license agreement with CytRx Corporation
("CytRx"); (b) the rights to PLG microspheres for oral vaccine delivery are
derived as a result of a May 1997 merger of Zynaxis, Inc. ("Zynaxis"), a
publicly-held biotechnology company, with a wholly-owned subsidiary of Vaxcel
formed for the purpose of the transaction (such transaction hereinafter referred
to as the "Merger"); (c) the rights to mucoadhesives for oral vaccine delivery
are also derived as a result of the Merger; and (d) the rights to entrapment
techniques for vaccine delivery using certain water soluble polymers are derived
from a Research Agreement and Option Agreement with Vanderbilt University
("Vanderbilt"). These four technologies are complementary to each other, thereby
providing Vaxcel with a broad portfolio of technologies for the development of
vaccines to be delivered by the injectable, oral, and mucosal routes of
administration. Vaxcel's business strategy is to sublicense these adjuvant and
delivery system technologies on a vaccine-by-vaccine basis to companies engaged
in vaccine development. In March 1998, Vaxcel also acquired worldwide,
exclusive rights to genetically engineered and mutated B-Human Chorionic
Gonadotropin (BHCG) proteins for use in the treatment and/or prevention of
cancer from University College London.
The accompanying financial statements at March 31, 1998 and for the
three month periods ended March 31, 1998 and 1997 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, 1997 contained in
its Annual Report on Form 10-K.
2. CURRENT FINANCIAL CONDITION AND POTENTIAL IMPACT ON OPERATIONS
At March 31, 1998, the Company had cash and cash equivalents of
$290,000 and working capital of $239,000. Current cash resources, augmented by
expected collaborative and
6
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other revenues, will only be sufficient to fund operations into, but not beyond,
the third quarter of 1998 based on current projections. The Company has incurred
losses from operations since inception, and the ability of the Company to
operate as a going concern with the current portfolio of technologies under
development for the remainder of 1998 and into 1999 will be determined by the
results of ongoing technology licensing efforts and/or the actual proceeds of
any fund-raising activities. In order to fund its operations and technologies,
the Company will consider all available options, including the possible sale of
the Company to or merger with another organization. In May 1998, the Company's
Board of Directors retained the investment Firm of Interstate/Johnson Lane
Corporation to introduce Vaxcel and its technology licenses to the trade with
the purpose of concluding a strategic transaction for the benefit of the Vaxcel
shareholders.
If the Company is unable to raise significant additional funds, it will
be required to severely reduce or terminate operations. A severe reduction in
operations would limit the ability of the Company to perform under its current
collaborative agreements and would limit the advance of the Company's
technologies under development. Ultimately, the Company may need to obtain funds
through arrangements that require it to relinquish rights to certain or all of
its technologies. The Company may additionally be required to curtail or further
divest research programs or totally cease operations and liquidate remaining
assets, if any. Should the Company determine that it is no longer in the best
interest of its shareholders to continue operations, the ability of the Company
to fund an orderly disposition of assets, pay off its then outstanding
liabilities and return any remaining cash to its shareholders will be limited by
the amount of working capital on hand.
3. NOTE PAYABLE TO CYTRX
On March 30, 1998, Vaxcel and CytRx signed a convertible note agreement
(the "Note") whereby CytRx agreed to make loans to Vaxcel from time to time but
not to exceed, at any one time, principal outstanding of $100,000. On April 3,
1998, Vaxcel borrowed $100,000 under the Note. The Note bears interest at 9% per
annum and is due and payable on December 31, 1998. The Note is convertible into
shares of Vaxcel common stock at the lower of (a) $.3125 per share, or (b) the
average closing bid price of Vaxcel's common stock for the 5 days preceding
conversion.
7
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Item 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At March 31, 1998, the Company had cash and cash equivalents of
$290,000 and net assets of $4,785,000, compared to $691,000 and $5,291,000,
respectively, at December 31, 1997. Working capital totaled $239,000 at March
31, 1998, compared to $666,000 at December 31, 1997. Current cash resources,
augmented by expected collaborative and other revenues will only be sufficient
to fund current operations into, but not beyond the third quarter of 1998. The
ability of the Company to operate as a going concern with the current portfolio
of technologies under development for the remainder of 1998 and into 1999 will
be determined by the results of ongoing technology licensing efforts and/or the
actual proceeds of any fund-raising activities. In order to fund its operations
and technologies, the Company will consider all available options, including the
possible sale of the Company to or merger with another organization. In May
1998, the Company's Board of Directors retained the investment firm of
Interstate/Johnson Lane Corporation to introduce Vaxcel and its technology
licenses to the trade with the purpose of concluding a strategic transaction for
the benefit of the Vaxcel shareholders.
Vaxcel's primary requirement for capital will be to continue its
development activities for its proprietary adjuvant and delivery system
technologies and to continue its technology licensing efforts. 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 objectives for the Company's
technologies 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
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 in-license the Company's technologies for use with their
vaccines will assume responsibility for product development, regulatory approval
and marketing, thereby allowing Vaxcel to maintain a relatively moderate cash
burn rate.
If the Company is unable to raise significant additional funds, it will
be required to severely reduce or terminate operations. A severe reduction in
operations would limit the ability of the Company to perform under its current
collaborative agreements and would limit the advance of the Company's
technologies under development. Ultimately, the Company may need to obtain funds
through arrangements that require it to relinquish rights to certain or all of
its technologies. The Company may additionally be required to curtail or further
divest research programs or totally cease operations and liquidate remaining
assets, if any. Should the Company determine that it is no longer in the best
interest of its shareholders to continue operations, the ability of the Company
to fund an orderly disposition of assets, pay off its then outstanding
liabilities and return any remaining cash to its shareholders will be limited by
the amount of working capital on hand.
8
<PAGE> 9
In April 1998, Vaxcel borrowed $100,000 from CytRx pursuant to a
convertible note agreement (see Note 3). During 1997, the Company received
federal government funding for certain research and development activities via
several Small Business Innovative Research (SBIR) grants. The Company intends to
continue to seek government assistance for its product development efforts.
At December 31, 1997, the Company had net operating loss carryforwards
for income tax purposes of approximately $9.4 million, which will expire in 2008
through 2012, if not utilized. The Company also has research and development
credits available to reduce income taxes, if any, of approximately $77,000 which
will expire in 2008 through 2011, if not utilized. 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.
Results of Operations
The Company recorded net losses of $506,000 for the three months ended
March 31, 1998 as compared to $343,000 for 1997.
During the first quarter of 1998 and 1997, Vaxcel recorded
collaborative and grant revenues of $16,000 and $54,000, respectively. These
amounts relate to research funding pursuant to Vaxcel's agreement with Medeva
and pursuant SBIR grants to Vaxcel from the National Institutes of Health. The
costs associated with these arrangements approximate the revenues recorded and
are reflected in research and development expense.
Research and development expenditures for the first quarter of 1998
were $271,000, as compared to $236,000 for 1997. There has been no change in the
Company's focus on developing its proprietary technologies from 1997 to 1998.
The acquisition of in-process research and development from Zynaxis has not
significantly impacted the Company's ongoing research and development
expenditures, however the Company anticipates significant future expenditures
will be required to continue development of these technologies into commercially
viable products. Such expenditures will be limited by the Company's available
capital resources. Fluctuations in expenditures from year to year are due to the
timing and nature of external studies being performed.
General and administrative expenses for the first quarter of 1998 were
$258,000, as compared to $162,000 during 1997. The increase from 1997 to 1998 is
primarily due amortization of developed technology acquired in May 1997.
Management believes that inflation had no material impact on the Company's
operations during the three months ended March 31, 1998.
9
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Part II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C>
10.1 Convertible Note, dated March 30, 1998, between Vaxcel, Inc. and
CytRx Corporation
27.1 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 14, 1998 By: /s/ Mark W. Reynolds
------------ ---------------------
Mark W. Reynolds
Chief Financial Officer
(Chief Accounting Officer and a
duly authorized officer)
10
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EXHIBIT 10.1
CONVERTIBLE NOTE
March 30, 1998 Norcross, Georgia
For value received, Vaxcel, Inc., a Delaware corporation (the
"Borrower"), hereby promises to pay to CytRx Corporation, a Delaware corporation
( the "Lender"), the principal amount as shall have been advanced under this
Convertible Note ("the Note") and shall then be outstanding, together with
interest accrued upon such outstanding balances calculated in accordance with
this Note.
1. The Lender agrees to make loans (the"Loan") to the Borrower from
time to time in aggregate principal amounts not to exceed at any one time
outstanding $100,000 (the "Commitment"). Borrower and Lender agree that the
purpose of the Loan is to provide such funds as necessary for (a) the initial
retainer fee pursuant to the agreement dated February 27, 1998 between Lender,
Borrower and Interstate/Johnson Lane and (b) the upfront license fee required
for the proposed license agreement between Borrower and University College
London for certain a cancer antigen.
2. Interest shall accrue on the outstanding principal balance
hereunder, at a per annum rate of nine percent (9%) and shall be added to the
outstanding principal balance at the end of each month if not sooner paid.
Interest shall be calculated on the basis of a 365-day year for the actual
number of days elapsed.
3. The Borrower may prepay any Loan in whole at any time or in part
from time to time, without premium or penalty. All payments of principal,
interest, fees or other amounts payable hereunder shall be remitted to the
Lender at the address specified by the Lender from time to time by check or as
the Lender shall otherwise direct. Upon payment in full of the principal and
interest on this Note, the Lender will surrender to the Borrower this Note duly
marked canceled.
4. The aggregate outstanding principal balance of the Loan and accrued
interest outstanding thereon shall be due and payable on December 31, 1998, or
such other time as may be agreed to in writing by Lender and Borrower.
5. Lender has the right, at its option, to convert all or any portion
of the outstanding principal and accrued but unpaid interest payable under this
Note into that number of fully paid and non-assessable shares of common stock of
the Borrower ("Common Stock") obtained by dividing the outstanding principal
amount of this Note or portion thereof to be converted by the lower of (a)
$.3125 or (b) the average closing bid price of Borrower's common stock for the 5
days preceeding Lender's conversion notice, or if Borrower's common stock has
not traded during at least 3 of the 5 preceeding days, then the average price
shall be determined by reference to the last 3 days on which Borrower's common
stock
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did trade (the "Conversion Price"), upon surrender of this Note to the Borrower
accompanied by written notice of conversion duly executed and (if so required by
the Borrower) by instruments of transfer, in form satisfactory to the Borrower,
duly executed by the Lender or its duly authorized attorney.
6. No failure or delay on the part of the Lender in exercising any
right, power or remedy under this Note shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right, power or remedy preclude
any other or further exercise thereof or the exercise of any other right, power
or remedy under this Note. The rights and remedies provided under this Note are
cumulative and not exclusive of any remedies provided on by law.
7. No amendment, modification, termination or waiver of this Note or
any provision hereof nor any consent to any departure by the Borrower herefrom
shall be effective unless the same is in writing and signed by the Lender and
then any such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given. No notice to or demand on the
Borrower shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
8. THIS NOTE AND ALL RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF GEORGIA.
9. This Note shall bind and inure to the benefit of the Borrower and
the Lender and their respective successors and assigns, except the Borrower
shall not have the right to assign or otherwise transfer any of its rights or
any interest of it under this Note without the prior written consent of the
Lender.
10. Any provision of this Note which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without affecting the validity or
enforceability of the remainder of this Note or the enforceability of such
provision in any other jurisdiction.
11. All notices, requests, demands, directions, declarations and other
communications provided for in this Note shall, except as otherwise expressly
provided, be mailed by registered or certified mail, return receipt requested,
or telegraphed, telecopied, or delivered in hand to the applicable party at its
address specified from time to time. The foregoing shall be effective when
deposited in the mails, postage prepaid, addressed as aforesaid and shall
whenever sent by telegram or telecopied or delivered in hand be effective when
received. Any party may change its address by a communication in accordance
herewith.
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IN WITNESS WHEREOF, the Borrower and the Lender have caused this Note
to be duly executed as of the day and year first above written.
VAXCEL, INC.
By /s/ Paul J. Wilson
-------------------------------------
Paul J. Wilson
President & Chief Executive Officer
Accepted and agreed to by:
CYTRX CORPORATION
By /s/ Jack J. Luchese
--------------------------------
Jack J. Luchese
President & Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF VAXCEL, INC. FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 289,928
<SECURITIES> 0
<RECEIVABLES> 40,982
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 330,910
<PP&E> 299,171
<DEPRECIATION> 237,917
<TOTAL-ASSETS> 4,877,260
<CURRENT-LIABILITIES> 91,856
<BONDS> 0
0
0
<COMMON> 11,001
<OTHER-SE> 4,774,401
<TOTAL-LIABILITY-AND-EQUITY> 4,877,260
<SALES> 0
<TOTAL-REVENUES> 23,533
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 529,581
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (506,048)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (506,048)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
