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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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
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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
- -------------------------------------------------------------------------------
(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 October 20, 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 September 30, 1998 (unaudited)
and December 31, 1997 3
Condensed Statements of Operations (unaudited) for the Three Month
and Nine Month Periods Ended September 30, 1998 and 1997 4
Condensed Statements of Cash Flows (unaudited)
for the Nine Month Periods Ended September 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 6 Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
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Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements
VAXCEL, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
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ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 70,048 $ 690,636
Accounts receivable - 141,898
Note receivable 300,000 -
Other current assets - 500
------------ ------------
Total current assets 370,048 833,034
Property and equipment, net 10,858 74,155
Other assets:
Acquired developed technology, net 3,274,356 3,454,356
Goodwill, net 608,942 640,991
Notes receivable, net of reserve - 400,000
Other assets 55,674 55,674
------------ ------------
Total other assets 3,938,972 4,551,021
------------ ------------
Total assets $ 4,319,878 $ 5,458,210
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 82,372 $ 20,166
Accrued liabilities 17,794 72,880
Amounts due to affiliates 111,032 73,714
------------ ------------
Total current liabilities 211,198 166,760
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
September 30, 1998 and December 31, 1997, respectively 10,995 11,001
Additional paid-in capital 12,425,761 12,425,761
Accumulated deficit (8,328,076) (7,145,312)
------------ ------------
Total stockholders' equity 4,108,680 5,291,450
------------ ------------
Total liabilities and stockholders' equity $ 4,319,878 $ 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 Nine Month Period Ended
September 30, September 30,
----------------------------- ----------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenues:
Collaborative and grant income $ 36,294 $ 158,418 $ 153,839 $ 216,203
License fees 75,000 - 75,000 -
Interest income 1,428 15,681 11,786 24,148
------------ ------------ ------------ -----------
112,722 174,099 240,625 240,351
Expenses:
Research and development
Transactions with affiliates - 124,365 21,015 217,868
Other 130,195 268,512 669,924 681,541
Acquired incomplete research and development - - - 951,017
Selling, general and administrative
Transactions with affiliates 27,942 22,500 80,442 68,921
Other 209,858 293,574 652,008 517,537
------------ ------------ ------------ -----------
367,995 708,951 1,423,389 2,436,884
------------ ------------ ------------ -----------
Net loss $ (255,273) $ (534,852) $ (1,182,764) $ (2,196,533)
============ ============ ============ ===========
Basic and diluted loss per common share $ (0.02) $ (0.05) $ (0.11) $ (0.23)
============ ============ ============ ===========
Basic and diluted
weighted average shares outstanding 10,994,656 11,002,630 10,997,663 9,580,559
</TABLE>
See accompanying notes.
4
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VAXCEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Period Ended September 30,
-------------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,182,764) $(2,196,533)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 218,691 124,344
Charge for acquired research and development - 951,017
Net change in assets and liabilities 186,830 203,558
----------- -----------
Total adjustments 405,521 1,278,919
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Net cash used by operating activities (777,243) (917,614)
Cash flows from investing activities:
Capital expenditures and retirements, net 56,655 (3,371)
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Net cash provided (used) by investing activities 56,655 (3,371)
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Cash flows from financing activities:
Pre-merger equity contributions by CytRx - 163,396
Borrowings from CytRx 100,000 -
Proceeds from issuance of common stock - 8,005
Net proceeds from issuance of common stock
in connection with acquisition of Zynaxis, Inc. - 1,762,392
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Net cash provided by financing activities 100,000 1,933,793
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Net increase (decrease) in cash and cash equivalents (620,588) 1,012,808
Cash and cash equivalents at beginning of period 690,636 84,481
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Cash and cash equivalents at end of period $ 70,048 $ 1,097,289
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</TABLE>
See accompanying notes
5
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VAXCEL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 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. These four technologies are complementary
to each other and provide 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.
The accompanying financial statements at September 30, 1998 and for the
three month and nine month periods ended September 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.
2. CURRENT FINANCIAL CONDITION AND POTENTIAL IMPACT ON OPERATIONS
At September 30, 1998, the Company had cash and cash equivalents of
$70,000 and working capital of $159,000. Current cash resources 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 its 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 banking 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.
6
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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 advance its 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
<PAGE> 8
Item 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
At September 30, 1998, the Company had cash and cash equivalents of
$70,000 and net assets of $4,109,000, compared to $691,000 and $5,291,000,
respectively, at December 31, 1997. Working capital totaled $159,000 at
September 30, 1998, compared to $666,000 at December 31, 1997. Current cash
resources may only be sufficient to fund current operations into, but not beyond
the fourth quarter of 1998, based on current projections. 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 banking 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 advance its 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. The Company has taken steps to conserve
its cash resources, including
8
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personnel eliminations and reductions in 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 $255,000 and $1,183,000 for the
three month and nine month periods ended September 30, 1998, as compared to
$535,000 and $2,197,000 for the same periods in 1997. The net loss for the nine
month period ended September 30, 1997 includes a $951,000 charge for acquired
incomplete research and development incurred as a result of the Company's
acquisition of Zynaxis, Inc.
During the three month and nine month periods ended September 30, 1998
Vaxcel recorded collaborative and grant revenues of $36,000 and $154,000, as
compared to $158,000 and $216,000 during 1997. These amounts relate to research
funding pursuant to SBIR grants to Vaxcel from the National Institutes of
Health. 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.
During the three month period ended September 30, 1998 the Company
recorded $75,000 in license fee income related to an agreement with Heska
Corporation for the license of Vaxcel's proprietary microencapsulation
technologies and related intellectual property for use in Heska's development of
oral vaccines for companion animals. Under the terms of this agreement, Vaxcel
will receive milestone fees and royalties on sales. The timing and amount of
such future revenues are subject to a number of risks and uncertainties,
including the ability of Heska to successfully develop commercially viable
products using the Company's technologies.
9
<PAGE> 10
Research and development expenditures for the three month and nine
month periods ended September 30, 1998 were $130,000 and $691,000, as compared
to $393,000 and $899,000 during 1997. 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. 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.
General and administrative expenses for the three month and nine month
periods ended September 30, 1998 were $238,000 and $732,000, as compared to
$316,000 and $586,000 during 1997. The overall increase in the nine month period
from 1997 to 1998 is primarily due to (i) amortization of acquired developed
technology and goodwill associated with the acquisition of Zynaxis, (ii)
investment banking fees and other expenses related to evaluation of the
Company's strategic alternatives and (iii) 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. The decrease in the three month period from 1997 to 1998
is primarily due to the reversal of a $100,000 bad debt reserve, recorded during
the second quarter of 1998, related to a note receivable assumed from Zynaxis;
this note receivable was collected during the third quarter of 1998. Management
believes that inflation had no material impact on the Company's operations
during the three months ended September 30, 1998.
Year 2000 Issue
Introduction
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.
State of Readiness
A majority of the Company's business systems and services are provided
by CytRx Corporation. CytRx has developed and is implementing a comprehensive
plan (the "Year 2000 Plan") to become Year 2000 ready by the middle of the
fourth quarter 1999. The Year 2000 Plan addresses the following systems for both
CytRx and Vaxcel (collectively, the "Systems"):
- - the Company's business-critical information technology and operating
systems ("Critical IT Systems") which are comprised substantially of
commercial off-the-shelf software and other third party software and
hardware relating primarily to financial operations and reporting,
including accounts payable,
- - the Company's non-critical information technology and operating systems
("Non-Critical IT Systems") which also are substantially comprised of
commercial off-the-shelf software and other third party software and
hardware relating to, among others, spreadsheet, word processing, and
supporting and related operating systems;
- - the systems of the Company's major vendors and other material service
providers ("Third Party Systems"); and
- - the Company's non-information technology systems, including embedded
technology ("Non-IT Systems") relating to, among others, security
systems and HVAC.
The Year 2000 Plan consists of four phases: (i) awareness, (ii)
assessment, (iii) remediation, and (iv) creation of contingency plans in the
event of year 2000 failures. The Company has completed the awareness phase of
its Year 2000 Plan for all of its Systems, and is well under way toward
completing the assessment phase. As part of the assessment phase, the Company
has polled substantially all of the third parties who provide material services
to the Company regarding each of such third party's Year 2000 compliance plan
and state of readiness. The Company has received responses regarding Year 2000
compliance from most of such third parties, all of whom have assured the Company
that their hardware and/or software is or will be Year 2000 compliant. The
Company is actively seeking responses from the remainder of such third parties.
Costs
To date, the Company has not incurred significant costs in connection
with the implementation of its Year 2000 Plan. The Company expects that future
costs, which may include, among other things, the engagement of outside
consultants, upgrades or replacements of hardware and software, and
implementation of viable contingency plans, will be borne by CytRx.
Risks and Contingency Plans
The failure to remediate a material Year 2000 problem or develop and
implement a viable contingency plan could result in an interruption in, or a
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect the Company's business, financial
condition and results of operations. Due to the general uncertainty inherent in
the Year 2000 issue and the current phase in which the Company is in of its Year
2000 Plan, the Company is currently unable to determine the most reasonably
likely worst case Year 2000 scenarios or whether the Year 2000 issue will have a
material impact on the Company. As the Company progresses in its Year 2000 Plan,
the level of uncertainty about the impact of the Year 2000 issue on the Company
will be reduced and the Company should be better positioned to assess and
develop viable contingency plans and disclose the nature and extent of material
risks to the Company as a result of any failure to remediate a Year 2000 problem
which would require implementation of a contingency plan.
Part II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
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27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K: None
10
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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: February 2, 1999 By: /s/ Mark W. Reynolds
---------------- --------------------------------
Mark W. Reynolds
Chief Financial Officer
(Chief Accounting Officer and a
duly authorized officer)
11
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF VAXCEL, INC. FOR THE NINE MONTH PERIOD ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 70,048
<SECURITIES> 0
<RECEIVABLES> 300,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 370,048
<PP&E> 145,265
<DEPRECIATION> (134,407)
<TOTAL-ASSETS> 4,319,878
<CURRENT-LIABILITIES> 211,198
<BONDS> 0
0
0
<COMMON> 10,995
<OTHER-SE> 4,097,685
<TOTAL-LIABILITY-AND-EQUITY> 4,319,878
<SALES> 0
<TOTAL-REVENUES> 240,625
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,423,389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,182,764)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,182,764)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,182,764)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
