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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 June 30, 1998
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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________________
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 August 10, 1998: 10,994,656.
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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 Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997 3
Condensed Statements of Operations (unaudited) for the
Three Month and Six Month Periods Ended June 30, 1998 and 1997 4
Condensed Statements of Cash Flows (unaudited)
for the Six Month Periods Ended June 30, 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 4 Results of Votes of Security Holders 11
Item 6 Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
2
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Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
VAXCEL, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 182,702 $ 690,636
Accounts receivable 28,769 141,898
Note receivable 300,000 -
Other current - 500
------------ ------------
Total current assets 511,471 833,034
Property and equipment, net 48,355 74,155
Other assets:
Acquired developed technology, net 3,334,356 3,454,356
Goodwill, net 619,625 640,991
Notes receivable, net of reserve - 400,000
Other assets 59,748 55,674
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Total other assets 4,013,729 4,551,021
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Total assets $ 4,573,555 $ 5,458,210
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,168 $ 20,166
Accrued liabilities 53,510 72,880
Amounts due to affiliates 120,924 73,714
------------ ------------
Total current liabilities 209,602 166,760
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;
10,994,656 and 11,001,070 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively 10,995 11,001
Additional paid-in capital 12,425,761 12,425,761
Accumulated deficit (8,072,803) (7,145,312)
------------ ------------
Total stockholders' equity 4,363,953 5,291,450
------------ ------------
Total liabilities and stockholders' equity $ 4,573,555 $ 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 June 30, Six Month Period Ended June 30,
------------------------------------ -----------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Collaborative and grant income $ 101,062 $ 4,088 $ 117,545 $ 57,785
Interest income, net 3,308 7,971 10,358 8,467
-------------- -------------- -------------- -------------
104,370 12,059 127,903 66,252
Expenses:
Research and development
Transactions with affiliates - 34,068 21,015 93,503
Other 289,320 236,190 539,729 413,029
Acquired incomplete research and
development - 951,017 - 951,017
Selling, general and administrative
Transactions with affiliates 39,792 23,921 52,500 46,421
Other 196,701 85,571 442,150 223,963
-------------- -------------- -------------- -------------
525,813 1,330,767 1,055,394 1,727,933
-------------- -------------- -------------- -------------
Net loss $ (421,443) $ (1,318,708) $ (927,491) $ (1,661,681)
============== ============== ============== =============
Basic and diluted
loss per common share $ (0.04) $ (0.14) $ (0.08) $ (0.19)
============== ============== ============== =============
Basic and diluted
weighted average shares outstanding 10,997,334 9,458,793 10,999,192 8,857,738
</TABLE>
See accompanying notes.
4
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VAXCEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Month Period Ended June 30,
---------------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (927,491) $ (1,661,681)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 131,979 51,444
Charge for acquired research and development - 951,017
Net change in assets and liabilities 152,391 144,242
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Total adjustments 284,370 1,146,703
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Net cash used by operating activities (643,121) (514,978)
Cash flows from investing activities:
Increase in short-term investments - (894,246)
Capital expenditures and retirements, net 35,187 (3,371)
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Net cash provided by (used in) financing
activities 35,187 (897,617)
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Cash flows from financing activities:
Pre-merger equity contributions by CytRx - 163,396
Borrowings from CytRx 100,000 -
Net proceeds from issuance of common stock
in connection with acquisition of Zynaxis, Inc. - 1,789,016
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Net cash provided by financing activities 100,000 1,952,412
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Net increase (decrease) in cash and cash equivalents (507,934) 539,817
Cash and cash equivalents at beginning of period 690,636 84,481
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Cash and cash equivalents at end of period $ 182,702 $ 624,298
============== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ - $ 1,421
============== =============
</TABLE>
See accompanying notes.
5
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VAXCEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 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 June 30, 1998 and for the
three month and six month periods ended June 30, 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.
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2. CURRENT FINANCIAL CONDITION AND POTENTIAL IMPACT ON OPERATIONS
At June 30, 1998, the Company had cash and cash equivalents of $183,000
and working capital of $302,000. Current cash resources, augmented by expected
collaborative and other revenues, may only be sufficient to fund operations
into, but not beyond, the fourth 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 June 30, 1998, the Company had cash and cash equivalents of $183,000
and net assets of $4,364,000, compared to $691,000 and $5,291,000,
respectively, at December 31, 1997. Working capital totaled $302,000 at June
30, 1998, compared to $666,000 at December 31, 1997. Current cash resources,
augmented by expected collaborative and other revenues may only be sufficient
to fund current operations into, but not beyond the fourth 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. 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. Vaxcel anticipates substantial losses over the next several years
resulting primarily from research and development expenses. It should be noted
however, 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 minimize its 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. During the second quarter
of 1998, in order to conserve cash resources,
8
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the Company has taken steps to reduce its research and development expenditures
which are not supported by government funding.
In April 1998, Vaxcel borrowed $100,000 from CytRx pursuant to a
convertible note agreement (see Note 3 to Financial Statements). During 1997
and 1998, the Company has received federal government funding for certain
research and development activities via several Small Business Innovative
Research (SBIR) grants, which has offset a significant portion of the Company's
research and development expenditures.
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 $421,000 and $927,000 for the three
month and six month periods ended June 30, 1998, as compared to $1,319,000 and
$1,662,000 for the same periods in 1997. The higher net loss in the 1997
periods 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 (See Note 1 to Financial Statements).
Excluding this one-time charge, the net losses for the three month and six
month periods of 1997 were $368,000 and $711,000, respectively.
During the three month and six month periods ended June 30, 1998 Vaxcel
recorded collaborative and grant revenues of $101,000 and $118,000, as compared
to $4,000 and $58,000 during 1997. These amounts relate to research funding
pursuant to Vaxcel's agreement with Medeva PLC and SBIR grants to Vaxcel from
the National Institutes of Health. The overall increase from 1997 to 1998 is due
to the fact that Vaxcel obtained two new SBIR grants during the third quarter of
1997, which provide for total funding of $200,000 over a 12 month period. Vaxcel
recognizes revenue related to these grants as the related costs are incurred,
which can be highly variable depending upon the scope of work which may be
subcontracted to third parties. The costs associated with these arrangements
approximate the revenues recorded and are reflected in research and development
expense.
Research and development expenditures for the three month and six month
periods ended June 30, 1998 were $289,000 and $561,000, as compared to $270,000
and $507,000 during 1997. There has been no change in the Company's focus on
developing its proprietary
9
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technologies from 1997 to 1998. The acquisition of incomplete 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. During the second quarter
of 1998, in order to conserve cash resources, the Company has taken steps to
reduce its research and development expenditures which are not supported by
government funding.
General and administrative expenses for the three month and six month
periods ended June 30, 1998 were $236,000 and $495,000, as compared to $109,000
and $270,000 during 1997. The increase from 1997 to 1998 is primarily due to
(i) amortization of acquired developed technology and goodwill associated with
the acquisition of Zynaxis, (ii) a $100,000 addition to the Company's bad debt
reserve related to a note receivable assumed from Zynaxis, (iii) investment
banking fees and other expenses related to evaluation of the Company's
strategic alternatives and (iv) overall higher expenses subsequent to the
Company's acquisition of Zynaxis, including patent prosecution costs for the
Zynaxis technologies and legal and accounting costs associated with being a
publicly-held entity. Management believes that inflation had no material impact
on the Company's operations during the three months ended June 30, 1998.
10
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Part II -- OTHER INFORMATION
Item 4. Results of Votes of Security Holders
At the Company's Annual Meeting of Stockholders held on June 10, 1998,
the following members were elected to the Board of Directors:
<TABLE>
<CAPTION>
Votes For Votes Withheld
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<S> <C> <C>
Jack L. Bowman 10,111,790 119,744
Lyle A. Hohnke 10,111,790 119,744
Jack J. Luchese 10,111,790 119,744
Herbert H. McDade, Jr. 10,111,128 120,406
Paul J. Wilson 10,111,790 119,744
</TABLE>
The following proposals were submitted to the Company's Stockholders for
approval:
<TABLE>
<CAPTION>
Votes Abstained/
Votes For Votes Against Not Voted
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<S> <C> <C> <C>
Amendment of the Company's 1993 Stock Option
Plan to increase the number of authorized
shares of the Company's Common Stock available
for issuance thereunder from 1,000,000 to 1,500,000 10,103,679 121,664 0
Ratification of appointment of
Ernst & Young LLP as independent
auditors for the fiscal year
ending December 31, 1998. 10,231,525 9 0
</TABLE>
The nominees for election as directors were all elected. The proposals to amend
the Company's 1993 Stock Option Plan and to ratify the selection of the
Company's auditors received more than the number of votes required for their
approval, and were adopted.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<C> <S> <C>
(a) Exhibits
Exhibit
Number Description
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27.1 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K
None
11
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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: August 14, 1998 By: /s/ Mark W. Reynolds
----------------------
Mark W. Reynolds
Chief Financial Officer
(Chief Accounting Officer and a
duly authorized officer)
12
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 182,702
<SECURITIES> 0
<RECEIVABLES> 328,769
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 511,471
<PP&E> 263,985
<DEPRECIATION> 215,630
<TOTAL-ASSETS> 4,573,555
<CURRENT-LIABILITIES> 209,602
<BONDS> 0
0
0
<COMMON> 10,995
<OTHER-SE> 4,352,958
<TOTAL-LIABILITY-AND-EQUITY> 4,573,555
<SALES> 0
<TOTAL-REVENUES> 127,903
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,053,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,121
<INCOME-PRETAX> (927,491)
<INCOME-TAX> 0
<INCOME-CONTINUING> (927,491)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (927,491)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
