<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 June 30, 1999
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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 4, 1999: 10,994,656.
<PAGE> 2
VAXCEL, INC.
Form 10-Q
June 30, 1999
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998 3
Condensed Statements of Operations (unaudited) for the
Three Month and Six Month Periods Ended June 30, 1999 and 1998 4
Condensed Statements of Cash Flows (unaudited)
for the Six Month Periods Ended June 30, 1999 and 1998 5
Notes to Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk 9
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 10
SIGNATURES 10
</TABLE>
2
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Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
VAXCEL, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
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ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 405,744 $ 2,900
Accounts receivable -- 5,808
Note receivable -- 300,000
Other 1,797 5,308
------------ ------------
Total current assets 407,541 314,016
Property and equipment, net -- 6,597
Other assets:
Acquired developed technology and other intangibles, net -- 600,000
Other -- 55,674
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Total other assets -- 655,674
------------ ------------
Total assets $ 407,541 $ 976,287
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 91,313 $ 221,885
Accrued liabilities 207,469 214,483
Amounts due to affiliate -- 181,758
------------ ------------
Total current liabilities 298,782 618,126
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 shares issued and outstanding at
June 30, 1999 and December 31, 1998 respectively) 10,995 10,995
Additional paid-in capital 12,485,767 12,485,767
Accumulated deficit (12,388,003) (12,138,601)
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Total stockholders' equity 108,759 358,161
------------ ------------
Total liabilities and stockholders' equity $ 407,541 $ 976,287
============ ============
</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,
--------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Collaborative and grant income $ -- $ 101,062 $ 20,000 $ 117,545
Investment income 116,385 3,308 117,300 10,358
------------ ------------ ------------ ------------
116,385 104,370 137,300 127,903
Expenses:
Research and development
Transactions with affiliates -- -- -- 21,015
Other 4,985 539,729 4,985 539,729
Selling, general and administrative
Transactions with affiliates 19,500 39,792 41,000 52,500
Other 245,235 196,701 336,540 442,150
Interest expense 475 -- 4,177 --
------------ ------------ ------------ ------------
270,195 525,813 386,702 1,055,394
------------ ------------ ------------ ------------
Net loss $ (153,810) $ (421,443) $ (249,402) $ (927,491)
============ ============ ============ ============
Basic and diluted
loss per common share $ (0.01) $ (0.04) $ (0.02) $ (0.08)
============ ============ ============ ============
Basic and diluted
weighted average shares outstanding 10,994,656 10,997,334 10,994,656 10,999,192
</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,
-------------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (249,402) $ (927,491)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 6,597 131,979
Net change in assets and liabilities 802,447 152,391
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Total adjustments 809,044 284,370
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Net cash provided (used) by operating activities 559,642 (643,121)
Cash flows from investing activities:
Capital expenditures and retirements, net -- 35,187
Cash flows from financing activities:
Borrowings from CytRx -- 100,000
Loan repayment to CytRx (156,798) --
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Net cash provided (used) by financing activities (156,798) 100,000
---------- ----------
Net increase (decrease) in cash and cash equivalents 402,844 (507,934)
Cash and cash equivalents at beginning of period 2,900 690,636
---------- ----------
Cash and cash equivalents at end of period $ 405,744 $ 182,702
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 4,177 $ --
</TABLE>
See accompanying notes.
5
<PAGE> 6
VAXCEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT UNCERTAINTIES
Vaxcel, Inc. ("Vaxcel" or the "Company") was formed on January 6, 1993
as a wholly-owned subsidiary of CytRx Corporation ("CytRx"). 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. Vaxcel has historically
engaged in the development and commercialization of vaccine adjuvants and
delivery systems and a novel vaccine for the treatment of cancer. However, as
discussed below, there is substantial doubt about the Company's ability to
survive as a going concern.
During 1998, the Company's Board of Directors retained an investment
banking firm to introduce Vaxcel and its technology licenses to the trade with
the purpose of concluding strategic transactions for the benefit of the Vaxcel
stockholders. As discussed in Note 2, in January 1999 the Company entered into
an option agreement for the sale of its PLG microencapsulation technology,
which option was exercised by the third party in April 1999. To date, the
Company has not identified any additional potential buyers for its technologies
that appear to have the ability and willingness to complete any of the
contemplated transactions.
As discussed in Note 4, CytRx has terminated its license of Optivax(R)
to Vaxcel, resulting in the assignment to CytRx of Vaxcel's rights and
obligations under its license agreement to Corixa Corporation. Vaxcel continues
to hold rights to develop and commercialize a certain cancer antigen under a
license agreement from University College London, but no longer has any
employees or other ability to develop its technologies further without
assistance from CytRx. CytRx has no obligation to provide any assistance, and
has indicated that it will not provide any assistance. Should the Company
determine that it is no longer in the best interest of its stockholders 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 stockholders will be limited by the amount of working capital on
hand. At June 30, 1999, the Company had cash and cash equivalents of $406,000
and working capital of $109,000.
The accompanying financial statements at June 30, 1999 and for the
three month and six month periods ended June 30, 1999 and 1998 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, 1998
contained in its Annual Report on Form 10-K/A.
6
<PAGE> 7
2. SALE OF TECHNOLOGY TO INNOVAX
In January 1999, the Company entered into an agreement with Innovax
Corporation ("Innovax") giving Innovax the option to purchase the rights to
Vaxcel's PLG microencapsulation technology for an aggregate purchase price of
$600,000. Innovax paid a nonrefundable option fee of $200,000, with an
additional $400,000 due upon the exercise of the option. Innovax also paid a
total of $20,000 for extensions of the option period. On April 1, 1999 Innovax
exercised its option and the rights to such technology were assigned by Vaxcel
to Innovax.
The Company recorded this transaction in the second quarter of 1999 as
a sale of its Acquired Developed Technology and Other Intangibles, valued at
$600,000 and therefore did not record a gain or loss on the transaction. The
$20,000 in option extension fees paid by Innovax is reflected as license fee
income in the accompanying Statement of Operations. The $400,000 due upon
exercise of the option was paid on April 1, 1999.
3. EXERCISE OF CORIXA WARRANT AND SALE OF SHARES
In April 1999, the Company exercised certain vested warrants to
purchase shares of Corixa Corporation common stock pursuant to a cashless
exercise provision contained in the warrant agreement. In May 1999, the Company
sold the shares received upon exercise of the warrant resulting in net proceeds
of $114,000, which has been recorded as investment income in the accompanying
Statement of Operations. No additional warrants are expected to vest and become
exercisable in the foreseeable future.
4. TERMINATION OF OPTIVAX(R) LICENSE BY CYTRX
In July 1999, CytRx terminated its license of Optivax(R) to Vaxcel due
to Vaxcel's cessation of operations within the meaning of the license
agreement. Concurrently with the termination of the Optivax(R) license, all of
Vaxcel's rights and obligations pursuant to its license of the Optivax(R)
technology to Corixa Corporation were assigned to CytRx.
7
<PAGE> 8
Item 2. -- Management's Discussion and Analysis of Financial Condition
And Results of Operations
Liquidity and Capital Resources
At June 30, 1999, the Company had cash and cash equivalents of
$406,000 and net assets of $109,000, as compared to $2,900 and $358,000,
respectively, at December 31, 1998. At June 30, 1999 the Company had working
capital of $109,000.
The Company does not have sufficient cash resources to conduct its
operations and there is substantial doubt about the Company's ability to
survive as a going concern. During 1998, the Company's Board of Directors
retained an investment banking firm to introduce Vaxcel and its technology
licenses to the trade with the purpose of concluding strategic transactions for
the benefit of the Vaxcel stockholders. As discussed in Note 2 to Financial
Statements, in January 1999 the Company entered into an option agreement for
the sale of its PLG microencapsulation technology, which option was exercised
by the third party in April 1999. To date, the Company has not identified any
additional potential buyers for its technologies that appear to have the
ability and willingness to complete any of the contemplated transactions.
The Company does not have any employees and is not conducting any
operations other than holding rights under a certain technology license. Should
the Company determine that it is no longer in the best interest of its
stockholders 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.
In April 1998, December 1998 and January 1999, Vaxcel borrowed a
cumulative total of $181,000 from CytRx pursuant to three convertible note
agreements, $25,000 of which was repaid in February 1999 and the remainder was
repaid in April 1999. Such notes bore interest at 9% per annum and were
convertible, at CytRx's discretion, into shares of Vaxcel common stock.
Results of Operations
The Company recorded net losses of $154,000 and $249,000 for the three
and six month periods ended June 30, 1999, as compared to $421,000 and $927,000
for the same periods in 1998.
Collaborative and grant income was $0 and $20,000 for the three month
and six month periods ended June 30, 1999, as compared to $101,000 and $118,000
for the same periods in 1998. During the first quarter of 1999, Vaxcel recorded
license fees of $20,000 related to payments by Innovax to extend their option
period for evaluating certain of the Company's technologies (see Note 2 to
Financial Statements). The amounts recorded during 1998 relate to certain
research funding arrangements with a third party and Small Business Innovative
Research (SBIR) grants to Vaxcel from the National Institutes of Health, which
ended during 1998.
Research and development expenditures were $5,000 for the three month
and six month periods ended June 30, 1999, as compared to $289,000 and $561,000
for the same periods in 1998. The Company is not currently actively developing
any of its technologies.
8
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General and administrative expenses were $265,000 and $378,000 for the
three month and six month periods ended June 30, 1999, as compared to $236,000
and $495,000 for the same periods in 1998. Routine general and administrative
expenses have declined from 1998 due to an overall reduction in the Company's
operations. The majority of general and administrative expenses incurred during
the first half of 1999 relate to payments made to an investment banking firm
and others associated with the Company's efforts to secure a strategic
transaction. Other general and administrative expenses incurred during the
first half of 1999 primarily relate to patent costs and fees paid to CytRx for
administrative services. Management believes that inflation had no material
impact on the Company's operations during the six months ended June 30, 1999.
Year 2000 Issue
The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000
is approached and reached. These problems generally arise from the fact that
most of the world's computer hardware and software have historically used only
two digits to identify the year in a date, often meaning that the computer will
fail to distinguish dates in the "2000's" from dates in the "1900's." These
problems may also arise from other sources as well, such as the use of special
codes and conventions in software that make use of the date field.
There have been no material changes in the Company's state of
readiness from that disclosed in its Annual Report on Form 10-K/A for the year
ended December 31, 1998. As substantially all of the Company's business systems
and services are provided by CytRx Corporation, the Company is dependent upon
CytRx's efforts to become Year 2000 compliant. Although CytRx has provided no
assurances to the Company of its Year 2000 compliance, CytRx has advised the
Company that it completed the remediation phase of its Year 2000 plan with
respect to its internal computer systems during the second quarter of 1999. As
discussed above, the Company is currently conducting no business operations
and, as such, there are no significant vendor relationships which could
negatively impact the Company's business operations if such vendors experienced
Year 2000 compliance problems. The Company's current estimate of its most
reasonably likely worst case scenario is a temporary disruption in its ability
to process accounting transactions. The Company's contingency plans primarily
consist of a temporary switch to manual accounting systems, which, at the
Company's current level of operations, could be accomplished with minimal cost.
No costs have been incurred related to the Year 2000 Issue for the six months
ended June 30, 1999.
Item 3. -- Quantitative and Qualitative Disclosures About Market Risk
There have been no changes in the Company's assessment of its market
risk from that disclosed in its Form 10-K for the year ended December 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>
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K:
On April 16, 1999, the Registrant filed a Current Report on Form 8-K
reporting the sale of certain technology assets.
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 4, 1999 By:/s/ Mark W. Reynolds
-------------- ----------------------------
Mark W. Reynolds
Chief Financial Officer
(Chief Accounting Officer and a
duly authorized officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 405,744
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 407,541
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 407,541
<CURRENT-LIABILITIES> 298,782
<BONDS> 0
0
0
<COMMON> 10,995
<OTHER-SE> 97,764
<TOTAL-LIABILITY-AND-EQUITY> 407,541
<SALES> 0
<TOTAL-REVENUES> 137,300
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 386,702
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,177
<INCOME-PRETAX> (249,402)
<INCOME-TAX> 0
<INCOME-CONTINUING> (249,402)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (249,402)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
