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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
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1999
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-24241
V.I. TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 11-3238476
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 Duryea Road, Melville, New York 11747
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(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (516) 752-7314
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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 ( )
The number of shares outstanding of each of the Registrant's classes of common
stock as of April 23, 1999
Title of Class Shares Outstanding
Common Stock, $.01 par value 12,433,318
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V. I. TECHNOLOGIES, INC.
INDEX
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<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements:
Condensed balance sheets at April 3, 1999
and January 2, 1999 3
Condensed statements of operations for
the quarters ended April 3, 1999
and March 31, 1998 4
Condensed statement of stockholders' equity
for the quarter ended
April 3, 1999 5
Condensed statements of cash flows for the
quarters ended April 3, 1999
and March 31, 1998 6
Notes to condensed financial statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
2
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PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
V. I. TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(In thousands, except for share data)
<TABLE>
<CAPTION>
April 3,
1999 January 2,
(Unaudited) 1999
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 34,945 $ 35,265
Trade receivables 2,013 3,967
Other receivables, net 837 594
Due from related parties, net 519 313
Inventory 2,515 2,512
Prepaid expenses and other current assets 942 987
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Total current assets 41,771 43,638
Property, plant and equipment, net 31,696 30,821
Other assets, net 562 766
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Total assets $ 74,029 $ 75,225
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,687 $ 2,687
Current portion of capital lease obligations 1,272 1,272
Accounts payable and accrued expenses 5,514 6,576
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Total current liabilities 9,473 10,535
Long-term debt, less current portion 7,129 7,731
Capital lease obligations, less current portion 3,024 3,324
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Total liabilities 19,626 21,590
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Stockholders' equity:
Preferred stock, par value $.01 per share; authorized
1,000,000 at April 3, 1999 and January 2, 1999;
no shares issued and outstanding - -
Common stock, par value $.01 per share; authorized
29,000,000 shares; issued and outstanding 12,412,478
at April 3, 1999 and 12,359,148 at January 2, 1999 125 124
Additional paid-in-capital 86,727 86,575
Accumulated deficit (32,449) (33,064)
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Total stockholders' equity 54,403 53,635
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Total liabilities and stockholders' equity $ 74,029 $ 75,225
=========== ===========
The accompanying notes are an integral part of the condensed financial statements.
</TABLE>
3
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V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except for share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
April 3, March 31,
1999 1998
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Revenue $11,142 $ 3,713
Costs and expenses:
Cost of sales 6,060 4,844
Research and development, net 2,011 1,793
Selling, general and administrative 2,493 837
expenses
Charge related to research
collaboration - 2,202
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Total operating costs and expenses 10,564 9,676
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Income (loss) from operations 578 (5,963)
Interest income (expense), net 37 (422)
--------------- ---------------
Net income (loss) $ 615 $(6,385)
=============== ===============
Basic and diluted net income (loss) per share $0.05 $(0.78)
=============== ===============
Weighted average shares used in computation
of:
Basic net income (loss) per share 12,406 8,146
Diluted net income (loss) per share 12,913 8,146
The accompanying notes are an integral part of the condensed financial statements.
</TABLE>
4
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V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Common Stock Paid-In Accumulated Stockholders'
(Shares) (Amount) Capital Deficit Equity
-------------- -------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance at January 2, 1999 12,359,148 $124 $86,575 $(33,064) $53,635
Compensation expense in connection
with acceleration of option vesting - - 4 - 4
Issuance of shares of common stock
upon exercise of stock options 53,330 1 148 - 149
Net income - - - 615 615
-------------- -------------- --------------- ----------------- -----------------
Balance at April 3, 1999 12,412,478 $125 $86,727 $(32,449) $54,403
============== ============== =============== ================= =================
The accompanying notes are an integral part of the condensed financial statements.
</TABLE>
5
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V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
April 3, March 31,
1999 1998
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<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ 615 $(6,385)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 775 955
Compensation expense in connection with acceleration of
option vesting 4 -
Charge related to research collaboration - 2,202
Accretion of interest on customer advance 70 -
Changes in operating accounts:
Trade receivables 1,954 (131)
Other receivables, net (243) (338)
Due to/from related parties (205) (47)
Inventory (3) (814)
Prepaid expenses and other current assets 207 (57)
Deferred revenue - 712
Accounts payable and accrued expenses (1,063) 538
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Net cash provided by (used in) operating activities 2,111 (3,365)
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Cash flows used in investing activities:
Additions to property, plant and equipment (1,608) (140)
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Net cash used in investing activities (1,608) (140)
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Cash flows (used in) provided by financing activities:
Proceeds from sale of common stock, net of
issuance costs - 3,849
Proceeds from issuance of common stock upon exercise
of options 149 -
Principal repayment of long-term debt (672) (672)
Principal repayment of capital lease obligations (300) (206)
--------------- ---------------
Net cash (used in) provided by financing activities (823) 2,971
--------------- ---------------
Net decrease in cash and cash equivalents (320) (534)
Cash and cash equivalents at beginning of year 35,265 5,250
--------------- ---------------
Cash and cash equivalents at end of period $34,945 $ 4,716
=============== ===============
The accompanying notes are an integral part of the condensed financial statements.
</TABLE>
6
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V. I. TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements of V.I.
Technologies, Inc. (the Company or VITEX) have been prepared in accordance
with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all material adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. Operating results
for the quarter ended April 3, 1999 are not necessarily indicative of the
results that may be expected for the year ended January 1, 2000. For
further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended January 2, 1999.
Certain reclassifications were made to prior year amounts to conform to the
1999 presentation.
Stock Split
In February 1998, the Board of Directors authorized and the stockholders
approved a 1-for-2.795 reverse split of the Company's common stock, which
became effective on February 23, 1998. All share and per share amounts
included in the accompanying condensed financial statements and footnotes
have been restated to reflect the reverse stock split.
Fiscal Year
As reported in the Company's Form 8-K filed August 11, 1998, the Company
changed from a calendar year to a 52-53 week fiscal year ending on the
Saturday closest to December 31, beginning with the fiscal year ending
January 2, 1999. Such fiscal period corresponds with the Company's natural
business year.
Inventory
Costs incurred in connection with plasma fractionation processing services
and with the production of PLAS+SD are included in inventories and expensed
upon recognition of related revenues. Such costs include direct labor and
processing overheads. The processed plasma is supplied and owned by the
Company's customers and is not included in inventory. Inventory is stated
at the lower of cost, as determined using the average cost method, or net
realizable value.
Revenue Recognition
Revenue from plasma fractionation processing services and the production of
PLAS+SD is recognized in the period in which the related services have been
rendered and upon satisfaction of certain quality control requirements.
Revenue in the accompanying statements of operations is not subject to
repayment or future performance obligations.
Research and Development
All research and development costs are charged to operations as incurred.
Reimbursement for research and development costs incurred in accordance
with collaborative agreements is recognized as an offset to research and
development costs in the period in which the eligible costs are incurred by
the Company. Such reimbursement totaled $0.9 million and $0.4 million for
the quarters ended April 3, 1999 and March 31, 1998, respectively.
7
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2. Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding plus the effect of outstanding stock options calculated using
the "treasury stock" method. The components of basic and diluted earnings
per share were as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended
April 3, March 31,
1999 1998
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<S> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share-net income (loss) $ 615 $(6,385)
=============== ===============
Denominator:
Denominator for basic earnings
per share-weighted average shares 12,406 8,146
Effect of dilutive securities - stock options 507 -
--------------- ---------------
Denominator for diluted earnings
per share-adjusted weighted average shares 12,913 8,146
Basic and diluted earnings per share $ 0.05 $ (0.78)
=============== ===============
</TABLE>
Diluted earnings per share for the quarter ended March 31, 1998 does not
include the effect of dilutive options because the inclusion of such
securities would be antidilutive.
3. Inventory
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
April 3, January 2,
1999 1999
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<S> <C> <C>
Work in process $1,429 $1,382
Supplies 1,086 1,130
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$2,515 $2,512
============== ===============
</TABLE>
4. Subsequent Event
On April 16, 1999, the Company initiated a voluntary recall of seven lots
(about one week's production) of PLAS+SD dating from June and July 1998,
which were found to contain moderate to high levels of parvovirus B19 DNA.
This recall was a precautionary measure. Further, the Company has taken
steps to incorporate into its product screening, experimental parvovirus
B19 Polymerase Chain Reaction (PCR) testing in order to ensure that this
virus is below specified laboratory levels. These steps are consistent
with the Company's goal and commitment to enhancing the safety of the blood
supply. In recent Phase IV safety studies, the Company observed several
seroconversions to parvovirus B19 in healthy volunteers who received
PLAS+SD from two lots containing high concentrations of the virus. There
was no evidence of clinical disease typical of parvovirus B19 associated
with these seroconversions. Only one of the two lots involved in the
safety studies had been released to the market and it was included in the
recall. The recall of the additional six lots and adoption of new
screening procedures are intended to further reduce the risks of parvovirus
B19 infection. As part of the Company's ongoing efforts to further insure
the safety of PLAS+SD, over the period through mid-May 1999, testing of
production to date will be conducted to assess the need, if any, for an
additional recall. At the present time, the Company cannot determine the
impact, if any, that this matter may have on its business, results of
operations, financial position or cash flows.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Overview
V.I. Technologies, Inc. is a leading developer of a broad portfolio of blood
products and systems using its proprietary viral inactivation technologies. The
Company's technologies are intended to address the risks of viral contamination
in blood products, including plasma, plasma derivatives, red blood cells and
platelets. Viral inactivation processes have the potential to eliminate viruses
that are enveloped by lipid membranes such as hepatitis B virus (HBV), hepatitis
C virus (HCV) and HIV, the virus that causes AIDS, and non-enveloped viruses
such as hepatitis A virus (HAV) and parvovirus B19 and other known and unknown
pathogens.
The Company reported net income of $615,000 for the first quarter ended April 3,
1999 and its accumulated deficit to that date was $32.4 million. Operating
results will vary from period to period and, accordingly, net income for the
quarter ended April 3, 1999 may not necessarily be indicative of results to be
expected in future periods. The significant risk factors that affect the Company
are described in its annual report on Form 10-K for the year ended January 2,
1999.
The Company's revenues are derived from the manufacture and sale of plasma
fractions and transfusion plasma:
. Plasma Fractions. VITEX produces plasma fractions principally for Bayer
Corporation (Bayer) under terms of a processing agreement whose initial term
extends through 2001. Under this agreement, Bayer is obligated to provide
the Company with a specified quantity of plasma annually and the Company is
obligated to return plasma fractions to Bayer within certain specified
periods. The agreement is structured as a take-or-pay arrangement under
which Bayer is obligated to pay VITEX a fixed fee per liter of fractionated
plasma whether or not Bayer fulfills its obligation to supply plasma to the
Company. In the event that VITEX does not provide fractions as required
under the agreement, or upon the occurrence of other events of default,
Bayer has certain rights to take over and operate the fractionation portion
of the Company's production facility.
The Company is currently utilizing all of its existing fractionation plasma
capacity. Due to an industry-wide shortage of fractionation capacity, in
conjunction with preliminary solicitations from Bayer and others, the
Company is planning to expand its fractionation capacity by 15% in the third
quarter of 1999 and is currently evaluating the cost/benefit of further
expansion in subsequent years. Although the Company believes that it can
accomplish the 1999 expansion and achieve attractive margins on the
increased volume, there can be no assurance as to the eventual commercial
success of the project.
. Transfusion Plasma. PLAS+SD, the first of the Company's virally inactivated
products, received marketing clearance from the United States Food and Drug
Administration (FDA) on May 6, 1998. Commercial scale production of
PLAS+SD, a pooled transfusion plasma which utilizes the Company's
solvent/detergent (SD) viral inactivation technology to inactivate lipid-
enveloped viruses, began in June 1998. PLAS+SD was the first, and is the
only FDA approved, virally inactivated blood component available for use in
the United States. The product is sold under an exclusive Amended and
Restated Supply, Manufacturing and Distribution Collaboration Agreement,
dated October 1, 1998 (Distribution Agreement) with the American National
Red Cross (Red Cross) which extends to 2002. Under the Distribution
Agreement, the Red Cross, which is the largest supplier of transfusion
plasma to hospitals in the United States, providing about 45% of the
transfusion plasma used annually, is required to purchase minimum stated
quantities of PLAS+SD to maintain its exclusive rights. Once the Red Cross
places its annual purchase order with VITEX, it is obligated to supply VITEX
with a sufficient quantity of plasma to enable VITEX to fulfill the order.
The Red Cross must pay for the amount of PLAS+SD specified in the purchase
order even if it is unable to supply sufficient quantities of plasma. In the
past, there has been variability in the rate of plasma supply from the Red
Cross. This situation could recur in future periods, which could negatively
impact the timing of revenue recognition, production scheduling and
ultimately, production costs. Under the Distribution Agreement, the Red
Cross is required to pay to the Company a fixed price per unit of PLAS+SD,
plus a royalty which is initially fixed. Beyond a specified volume, the
royalty becomes variable, based on equal sharing of the amount by which the
average selling price by the Red Cross exceeds a stated amount. The Company
and the Red Cross have each committed to spend minimum amounts for marketing
PLAS+SD during the two year period ending September 2000. The Company's
spending commitment is expected to be satisfied, to a large extent, by the
cost of its sales force which was hired in December 1998.
9
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The Company is delivering PLAS+SD under the second purchase order of the Red
Cross Distribution Agreement. The Distribution Agreement requires the Red
Cross to achieve certain end-user sales levels in order to maintain its
exclusive distribution rights. Failure to achieve these sales levels could
result in termination of the Distribution Agreement by either the Red Cross
or the Company. Although end customer sales of PLAS+SD have risen since the
product was introduced, end-user market penetration has increased at a
slower rate than anticipated. The Company recently established its own
national sales force to support the efforts of the Red Cross by increasing
product awareness among users, thereby accelerating market penetration.
While measurement of the success of the sales force is premature since the
sales force has been in the field only since late January, preliminary
results have shown continuing month-over-month growth. However, there can
be no assurance that PLAS+SD will continue to increase or maintain its
current level of market acceptance among blood centers, physicians, patients
and health care payers.
Subsequent to the end of the first quarter of 1999, in connection with
PLAS+SD Phase IV safety studies, the Company observed several
seroconversions to parvovirus B19 in healthy volunteers who received the
product from two production lots which were found to contain high
concentrations of the virus. Although there was no evidence of clinical
disease typical of parvovirus B19 associated with these seroconversions, on
April 16, 1999, the Company initiated a voluntary recall of seven lots
(about one week of production) of PLAS+SD dating from June and July 1998,
which were found to contain moderate to high levels of parvovirus B19 DNA.
Although alternative products, including fresh frozen plasma (FFP) and donor
retested plasma (DR), are not routinely screened for parvovirus B19, in
order to further enhance the safety of its products and to reduce the
likelihood of transmission of the virus, the Company has subsequently
incorporated experimental parvovirus B19 PCR testing into its product
release process.
The Company is working with the Red Cross to coordinate testing of PLAS+SD
produced prior to the implementation of parvovirus B19 screening. Such
testing is expected to continue through mid-May 1999, at which time, the
Company will assess the need, if any, for an additional recall. At the
present time, the Company cannot determine the impact, if any, that this
matter may have on its Distribution Agreement with the Red Cross, results of
operations, financial position or cash flows.
The Company's other virally inactivated blood products are all under development
and include:
. Universal PLAS+SD. Universal PLAS+SD is a product under development by the
Company which is intended to improve upon PLAS+SD. In addition to having
the same characteristics and benefits as PLAS+SD, Universal PLAS+SD would
eliminate the need for matching donor and recipient blood types. Universal
PLAS+SD is prepared using patented technology, exclusively licensed from
the New York Blood Center (NYBC), which binds and removes specific
antibodies present in donor plasma that would otherwise cause an immune
response in the recipient. The Company expects to file an amendment to its
current Investigational New Drug (IND) application for Universal PLAS+SD
during the second quarter of 1999.
. Universal PLAS+SD II. Universal PLAS+SD II adds a second method of viral
inactivation to Universal PLAS+SD. In addition to inactivating enveloped
viruses, the Company is evaluating alternative technologies, including
ultra violet and chemical compounds, intended to inactivate known non-
enveloped viruses, such as parvovirus B-19 and HAV, and may offer added
protection against other non-enveloped viruses that might contaminate the
blood supply in the future. Although the presence of antibodies normally
found in pooled plasma may protect against known non-enveloped viruses, SD
and these second generation technologies used in combination provide a
higher margin of blood product safety than SD technology alone. Universal
PLAS+SD II is at an early stage of development and, consequently, there can
be no assurance that the Company will be able to successfully develop,
secure approval for or commercialize this product.
. VITEX Fibrin Sealant. The Company is developing its VITEX Fibrin Sealant
for use during surgical procedures to augment or replace sutures or staples
for wound closure. Fibrin sealants-also known as fibrin glues-are created
by combining the two principal clotting factors found in blood, fibrinogen
and thrombin, whose natural function is to halt bleeding and seal tissues.
Fibrin sealants are biodegradable, and their use does not generally elicit
an immune response frequently associated with non-biological glues. The
Company expects that its fibrin sealant will be the first double virally
inactivated fibrin sealant available in the United States. This product
has completed Phase II clinical trials for two indications (non-healing
rectal fistula and modified radical mastectomy) and completed enrollment
for one Phase III clinical trial (breast lumpectomy). Enrollment for an
additional Phase III clinical trial (carotid endarterectomy) is expected to
be completed during the second quarter of 1999 and the Company expects to
submit a Product License Application (PLA) for VITEX Fibrin Sealant by the
end of fiscal 1999.
10
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The Company's fibrin sealant development is jointly funded by United States
Surgical Corporation (U.S. Surgical) who has entered into an exclusive
worldwide distribution agreement with VITEX. Under terms of the agreement,
U.S. Surgical must achieve certain minimum product sales to maintain its
exclusive distribution rights. The Company has agreed to supply U.S.
Surgical's forecasted demand for the product. Either the Company or U.S.
Surgical may terminate the agreement upon written notice in certain
circumstances, including a breach of the agreement by the other party.
U.S. Surgical may also terminate the agreement for any reason upon nine
months notice to the Company. During 1998, the Company completed
construction of a multi-use manufacturing suite, within its existing
facility, to permit the production, subject to FDA approval, of commercial
quantities of VITEX Fibrin Sealant. Validation of the new manufacturing
area is currently underway. U.S. Surgical was recently acquired by Tyco
Corporation. The effects, if any, of this acquisition on the development
programs and the eventual success of the product cannot be assessed at this
time.
. VITEX Red Blood Cell Concentrates. The Company is developing virally
inactivated red blood cell concentrates (RBCC) based on the use of light
activated compounds that respond to specific wavelengths of light. These
viral inactivation procedures, which are performed in combination with the
Company's Quenchers, are designed to leave unaffected the structure,
function and circulatory persistence of the treated cells, thus preserving
the biological characteristics of these blood components. The Company has
entered into an agreement with Pall Corporation regarding the development
and distribution of systems for the viral inactivation of RBCC and expects
to file an IDE application in 1999.
The field of transfusion medicine and therapeutic use of blood products is
characterized by rapid technological change. Product development involves a
high degree of risk, and there can be no assurance that the Company's product
development efforts will result in any commercial success.
Results of Operations
Revenue
Revenue increased $7.4 million in the first quarter of 1999 to $11.1 million,
compared to $3.7 million during the first quarter of 1998. The increase was
primarily due to sales of PLAS+SD, which was approved by the FDA in May 1998.
Sales of plasma fractions were also higher for the quarter, as a result of
increased processing volume and higher unit pricing in accordance with the
Company's processing agreement with Bayer.
Cost of Sales
Cost of sales increased $1.2 million in the first quarter of 1999 to $6.1
million, compared to $4.8 million during the first quarter of 1998. The
increase for the quarter was primarily due to processing costs related to the
production of PLAS+SD.
As a percentage of revenue, cost of sales was 54% for the quarter ended April 3,
1999. This was a significant improvement from the comparative 1998 period,
which did not contain revenue from the sale of PLAS+SD. In addition, the
Company continued to strengthen both its plasma fractionation and PLAS+SD
manufacturing processes, resulting in improved margins from the previous
quarter. Cost of sales as a percentage of revenue was 59% during that period.
Research and Development
Research and development costs increased $0.2 million in the first quarter of
1999 to $2 million, compared to $1.8 million during the first quarter of 1998.
The increase in research and development costs was due to the expanded
activities in the Company's red blood cell program, and an increase in
expenditures for the Company's fibrin sealant and PLAS+SD Phase IV clinical
trial studies. Further increases in research and development expenditures are
expected to continue through the remainder of 1999.
11
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.7 million in the first
quarter of 1999 to $2.5 million, compared to $0.8 million during the first
quarter of 1998. The increase was principally due to marketing costs associated
with PLAS+SD, and the hiring of new personnel, including the national sales
force in December 1998. The Company is reducing its general and administrative
expenses in certain areas, although expected increases in sales and marketing
expenditures relating to PLAS+SD will likely mitigate these reductions,
resulting in a similar level of selling general and administrative expenditures
throughout the remainder of the year.
Charge Related to Research Collaboration
During the first quarter of 1998, the Company recorded a one-time charge of $2.2
million in connection with its research collaboration with Pall Corporation.
The charge occurred in connection with an equity investment in the Company made
by Pall under the collaboration agreement and reflects the difference between
the amount paid for the shares issued to Pall and the fair market value of the
common stock at that date.
Net Interest Expense
The Company earned net interest income of $37 thousand during the quarter ended
April 3, 1999, compared to the first quarter of 1998 when the Company incurred
net interest expense of $422 thousand. The change reflects the reduced level of
debt outstanding during the first quarter of 1999, combined with the interest
earned on cash balances, including the proceeds from the Company's initial
public offering. Included in net interest income during the first quarter of
1999, is a non-cash charge of $70 thousand, representing the accretion of the
balance of the Company's non-interest bearing advance from the Red Cross.
Liquidity and Capital Resources
The Company has historically financed its operations primarily through sales of
common stock, issuance of long-term debt and capital lease financing
arrangements. In addition to these financing methods, the Company generates
cash from revenues derived under its Processing Agreement with Bayer Corporation
and the sale of PLAS+SD to the Red Cross. The Company also receives research
and development funding, under a collaboration agreement from U.S. Surgical, for
the direct costs associated with clinical and regulatory activities for the
development of its fibrin sealant and from Pall Corporation, as part of a cost
sharing agreement, in connection with the research collaboration described
previously. At April 3, 1999, the Company had working capital of $32.3 million,
including cash and cash equivalents of $34.9 million, compared to working
capital of $33.1 million, including cash and cash equivalents of $35.3 million
at January 2, 1999.
During the quarter ended April 3, 1999, the Company generated $2.1 million of
cash from operations, compared to $3.4 million of cash used for operating
purposes during the quarter ended March 31, 1998. The increase in cash from
operations was primarily related to the sale of PLAS+SD. Cash used in investing
activities of $1.6 million during the quarter ended April 3, 1999, was primarily
related to the Company's renovation of its production facility, while cash used
in financing activities of $0.8 million, was primarily related to long-term debt
and capital lease repayments.
The Company believes that its existing funds and funds expected to be generated
from operations will be sufficient to meet cash requirements in the foreseeable
future.
Year 2000
Some of the Company's older computer software programs were written using two
digit fields rather than four digit fields to define the applicable year (i.e.,
"98" in the computer code refers to the year "1998"). As a result, time-
sensitive functions of those software programs may misinterpret dates after
January 1, 2000, to refer to the twentieth century rather than the twenty-first
century (i.e., "02" could be interpreted as "1902" rather than "2002" (the Year
2000 Issue)). This could cause system failures or miscalculations resulting in
inaccuracies in computer output or disruptions of operations, including, among
other things, inaccurate processing of financial information and/or temporary
inability to process transactions, manufacture products, or engage in similar
normal business activities.
Based on recent assessments, the Company determined that it will be required to
modify or replace limited portions of hardware and software so that those
systems will properly utilize dates beyond December 31, 1999. If such
12
<PAGE>
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 issue involves the following four
phases: assessment, remediation, testing, and implementation. To date the
Company has fully completed its assessment of all systems that could be
significantly affected by the Year 2000 Issue. The completed assessment
indicated that most of the Company's significant information, financial
reporting and manufacturing systems were at risk. Affected manufacturing systems
include program logic controllers used in various aspects of the manufacturing
process.
The Company has fully remediated all information and financial reporting
systems. The Company plans to complete remediation and testing of its
manufacturing systems by the end of July 1999. By June 1999, the Company is
expected to have contingency plans in place for its critical applications, which
primarily involve manual workarounds.
The Company has no systems which directly interface with either customers or
vendors. The Company has queried, and is in the process of collecting responses
from its important suppliers and contractors that do not share information
systems with the Company (external agents). To date, the Company is not aware of
any external agent Year 2000 issue that would materially impact the Company's
results of operations, liquidity, or capital resources.
The Company will utilize both internal and external resources to reprogram,
replace, test, and implement the operating equipment and related software for
Year 2000 modifications. The total cost of the Year 2000 project is estimated at
$375,000 and is being funded through operating cash flows. Through the quarter
ended April 3, 1999, the Company had incurred approximately $75,000 (all of
which has been expensed), relating to all phases of the Year 2000 project. Of
the total remaining project costs, approximately $250,000 is attributable to the
purchase of new software and operating equipment, which will be capitalized. The
remaining $50,000 relates to continued Year 2000 compliance monitoring and
repair of hardware and software and will be expensed as incurred.
The Company's plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources, and
other factors. There can be no guarantee that these estimates will be achieved
and actual results could differ materially.
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act").
All statements other than statements of historical information provided herein
are forward-looking statements and may contain information about financial
results, economic conditions, trends and known uncertainties. These forward-
looking statements involve risks and uncertainties, such as quarterly
fluctuations in operating results, the timely availability of new products,
market acceptance of the Company's products, and the impacts of competitive
products and pricing. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. In addition to the disclosure contained herein,
readers should carefully review any disclosure of risks and uncertainties
contained in other documents the Company has filed with the Securities and
Exchange Commission pursuant to the Exchange Act, including its annual report on
Form 10-K for the year ended January 2, 1999.
13
<PAGE>
PART II. - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(d) Use of proceeds information is provided herewith in Connection with the
Offering. The Company's Registration Statement on Form S-1 (File No.
333-46933) was declared effective by the Securities and Exchange
Commission on June 9, 1998. The first closing for the Offering was held
on July 15, 1998. The Offering has terminated.
In the Offering, the Company sold in its two closings, an aggregate of
3,325,000 shares (with an aggregate offering price to the public of
$39,900,000) out of the 3,450,000 shares of Common Stock (with an
aggregate offering price of $41,400,000) registered in the Offering.
The managing underwriters of the Offering were Cowen & Company and SBC
Warburg Dillon Read, Inc. After expenses, the Company's net proceeds
from the offering were $35,868,000. The Company has utilized these
proceeds to: (i) fund capital investments, primarily for improvements
and expansion of its manufacturing facility ($5,700,000), (ii) fund
research and development projects ($6,100,000), and (iii) repay debt
($2,800,000). The Company will continue to use the remaining net
proceeds to fund costs associated with the marketing and distribution of
PLAS+SD, clinical trials, research and development and capital
investments, including the expansion of the manufacturing facility and
other general corporate purposes. Unused proceeds of the offering are
invested in money market funds with portfolios of investment grade
corporate and U.S. government securities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
4.1 Restated Certificate of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.8 to the Registrant's
Registration Statement on Form S-1, filed with the Commission on
February 26, 1998 (File No. 333-46933).
4.2 Amended and Restated By-Laws of the Registrant. Incorporated by
reference to Exhibit 3.10 to the Registrant's Registration
Statement on Form S-1, filed with the Commission on February 26,
1998 (File No. 333-46933).
4.3 Form of Certificate for Common Stock. Incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form S-1,
filed with the Commission on February 26, 1998 (File No. 333-
46933).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended April 3,
1999.
14
<PAGE>
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.
V.I. TECHNOLOGIES, INC.
-----------------------
(Registrant)
Date: April 28, 1999 /s/ John R. Barr
- ----- -------------- ----------------
John R. Barr
President, Chief Executive Officer
Date: April 28, 1999 /s/ Thomas T. Higgins
- ----- -------------- ---------------------
Thomas T. Higgins
Executive Vice President, Operations
and Chief Financial Officer
15
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