SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended March 31, 1999, 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 0-12081
AQUILA BIOPHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-3307818
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
175 Crossing Boulevard, Framingham, MA 01702
(Address of Principal Executive Offices) (Zip Code)
(508) 628 - 0100
(Registrant's Telephone Number, Including Area Code)
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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 ____.
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _X__ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of May 13, 1999
Common Stock Outstanding 6,996,740
AQUILA BIOPHARMACEUTICALS, INC.
Form 10-Q, March 31, 1999
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements Page Number
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998.......................................3
Consolidated Statement of Operations for three month periods
ended March 31, 1999 and 1998...............................4
Consolidated Statement of Cash Flows for the three month
periods ended March 31, 1999 and 1998.......................5
Notes to Interim Financial Statements.......................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................7
PART II - OTHER INFORMATION.................................... 10
Item 6. Exhibits and Reports on Form 8-K.......................11
SIGNATURES......................................................13
Item 1 - Financial Statements
Aquila Biopharmaceuticals, Inc.
Consolidated Balance Sheet
(unaudited)
(in thousands)
Assets 3/31/99 12/31/98
Current Assets:
Cash and cash equivalents $ 543 $ 5,270
Marketable securities 11,879 9,885
Receivables (less allowance
for doubtful accounts of $47,000) 1,106 1,028
Inventories 422 435
Prepaid expenses & other current assets 224 353
------ ------
Total current assets 14,174 16,971
Investments 320 320
Property, Plant, and Equipment, Net 6,372 6,372
Patents and Purchased Technology, Net 98 116
Other Assets 842 849
------ ------
Total Assets $ 21,806 $ 24,628
====== ======
Liabilities & Shareholders' Equity
Current Liabilities:
Accounts payable $ 327 $ 486
Accrued royalties 137 134
Accrued professional fees 249 299
Other accrued expenses 1,666 1,971
Current maturities of long-term debt 2,180 2,191
----- -----
Total Current Liabilities 4,559 5,081
Deferred Revenue 225 225
Long Term Debt 3,481 3,669
----- -----
Total Liabilities 8,265 8,975
Shareholders' Equity:
Preferred stock, authorized:
5,000,000 shares, none issued 0 0
Common stock, par value: $.01 per
share, authorized: 30,500,000
shares, issued: 6,998,826 at March 31,1999
and 6,992,483 at December 31, 1998 70 70
Treasury Stock (34) (34)
Additional paid in capital 139,833 139,812
Accumulated other comprehensive income 90 79
Accumulated Deficit (126,418) (124,274)
------- -------
Total Shareholders' Equity 13,541 15,653
------- -------
Total Liabilities and Shareholders' Equity $ 21,806 $ 24,628
====== ======
The accompanying notes are an integral part of these unaudited statements.
Aquila Biopharmaceuticals, Inc.
Consolidated Statement of Operations
(unaudited)
(in thousands, except per share amounts)
Three Months Ended
March 31,1999
1999 1998
---- ----
Revenue:
Product sales $ 43 $ 301
Research and development 119 1,040
--- -----
162 1,341
Cost and expenses:
Cost of sales 297 257
Research and development 1,243 1,428
General & administrative 834 1,073
----- -----
Total costs and expenses 2,374 2,758
Other income, net 68 621
----- -----
Net Loss $(2,144) $( 796)
----- -----
Unrealized holding gains on
available-for-sale securities 11 --
----- -----
Total other comprehensive
income 11 --
----- -----
Comprehensive loss $(2,133) $ (796)
===== =====
Basic and diluted loss
per weighted average share:
Net loss $ (0.31) $(0.14)
Weighted average number of
common shares outstanding:
Basic and diluted 6,998 5,505
The accompanying notes are an integral part of these unaudited statements.
Aquila Biopharmaceuticals, Inc.
Consolidated Statement of Cash Flows
(unaudited),(in thousands)
For the three months
ended March 31,
1999 1998
---- ----
Cash Flows From Operating Activities:
Net Loss $ (2,144) $ (796)
Adjustments to reconcile net loss to net cash
provided/(used) by operating activities:
Depreciation and amortization 199 64
Changes in assets and liabilities:
Receivables (78) 398
Inventories 13 (14)
Deferred revenue 0 2,250
Prepaid expenses and other current assets 129 (42)
Accounts payable and other accrued expenses (511) (309)
----- -----
Net cash provided/(used)by
operating activities (2,392) 1,551
Cash Flows From Investing Activities:
Purchases of marketable securities (7,000) --
Proceeds from maturities
of marketable securities 5,017 4,023
Other noncurrent assets and liabilities 7 (748)
Purchases of property, plant, and equipment (181) (269)
----- -----
Net cash provided/(used) by
investing activities (2,157) 3,006
Cash Flows From Financing Activities:
Payment of long-term obligations (199) (17)
Issuance of common stock 21 3,813
----- -----
Net cash provided/(used)
by financing activities (178) 3,796
----- -----
Net increase/(decrease) in cash and cash
Equivalents (4,727) 8,353
Cash and cash equivalents at the beginning
of the year 5,270 7,352
----- -----
Cash and cash equivalents at the end
of the period $ 543 $15,705
===== ======
Supplemental disclosures:
Interest paid $ 173 $ 5
The accompanying notes are an integral part of these unaudited statements.
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying interim financial statements are unaudited and have been
prepared on a basis substantially consistent with the audited financial
statements. Certain information and footnote disclosures normally included in
the Company's annual financial statements have been condensed or omitted
pursuant to the Securities and Exchange Commission's rules and regulations.
The interim financial statements, in the opinion of management, reflect all
adjustments (including normal recurring accruals) necessary for a fair
presentation of the results for the interim periods. Certain items have been
reclassified to conform to the current period's presentation.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1998, which are
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, filed with the Securities and Exchange Commission.
The year-end balance sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
2. Segment information:
The Company has determined that its reportable segments are development and
manufacturing. All research programs are aggregated in the development
segment. Revenues from the sale of the feline leukemia vaccine, the QS-21
material supplied to research partners, and QS-21 license fees are reported in
the manufacturing segment. Financial results of segments are presented on the
same accounting basis as the Company's consolidated results. There are no
inter-segment activities. The Company's business is conducted entirely within
the United States.
Three Months Ended
March 31,1999
1999 1998
---- ----
Development
Revenue $ 68 $ 161
Net loss (1,647) (1,628)
Manufacturing
Revenue 94 1,180
Net income/(loss) (537) 429
Reconciling items
Revenue 0 0
Net income (1) 40 403
Consolidated totals
Revenue 162 1,341
Net loss $(2,144) $ (796)
===== =====
(1) 1999 includes $50, 000 of royalty income, $10,000 gain on
disposal of an asset, and a charge for excess facilities of $20,000. 1998
includes net interest income of $284,000, royalty income of $225,000, $80,000
from settlement of a claim, and a charge for excess space of $200,000.
3. Inventories:
Inventories consist of the following: (000'S)
3/31/99 12/31/98
------- --------
Finished goods $ 229 $ 231
Work-in-process 81 122
Raw materials & supplies 112 82
$ 422 $ 435
4. Earnings Per Share:
The common stock equivalents of the Company consist of stock options and
warrants. The Company was in a net loss position at March 31, 1999 and March
31, 1998; therefore, common stock equivalents were not used to compute diluted
loss per share since the effect would have been anti-dilutive. Options to
purchase 1,077,341 and 826,655 shares of common stock at weighted average
prices of $3.88 and $4.26, respectively, were outstanding at March 31, 1999
and 1998, respectively. Warrants to purchase 68,680 shares of common stock at
an exercise price of $4.12 were outstanding at March 31, 1999.
5. Contingencies:
In March 1995, an Adversary Proceeding was commenced by Institut Pasteur and
Genetic Systems Corporation against the Company's predecessor Cambridge Biotech
Corporation ("CBC") alleging patent infringement. Institut Pasteur appealed the
Bankruptcy Court's ruling and the United District Court's affirmation thereof
to the Federal Circuit Court of Appeals. The technology at issue is part of a
business that has been sold with the only liability arising out of the conduct
of the Company prior to the sale. Accordingly, based on current information,
management believes that any adverse settlement will not have a material effect
on the Company's financial position or results of operations.
The Company has been named a potentially responsible party ("PRP") by the
Environmental Protection Agency ("EPA") at a waste disposal site. The EPA
will generally impose joint and several liability upon each PRP at each site.
The extent of the Company's required financial contribution to the cleanup of
this site is expected to be limited based on the number and financial strength
of the other named PRPs and the volume and types of waste involved which might
be attributable to the Company.
CSL International ACN ("CSL") and Seed Capital, Inc. filed an opposition with
the European Patent Office on the issuance of the Company's StimulonTM patent
in Europe. In a hearing, the Company prevailed against all points raised in
opposition. CSL may appeal the decision of the hearing and though the Company
does not believe CSL's claims have any merit, there can be no assurance that
the Company will prevail in any future actions taken to attack the validity of
its StimulonTM patents.
The Company received a letter from CBC in February 1999 alleging that the
Company must indemnify CBC under a Master Acquisition Agreement among the
Company, CBC, and bioMerieux, Inc. for potential losses from the termination
of CBC's rights under a license agreement. The Company is evaluating this
claim and has not yet determined the effect, if any, the claim might have on
the Company.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three months ended March 31, 1999 compared to three months ended March 31,
1998:
Revenue
Total revenues were $0.2 million for the three months ended March 31, 1999
compared to $1.3 million in the same period in 1998, a decrease of 88%.
First quarter 1999 product sales were $43,000 compared to $301,000 the same
period one year ago. The primary reason for the lower revenues was the
requirement to complete validation of the Company's new manufacturing facility
prior to the shipment of newly manufactured product. Validation is expected
to be complete in the second quarter of 1999. Also, a reseller was acquired
by a competitor in the second quarter of 1998. The Company's marketing
partner has informed the Company that it will respond to this competitive
action; however, until the reseller sales are replaced, product sales are
expected to be lower than historical levels.
First quarter research and development revenues were $0.1 million compared to
$1.0 million for the same period in 1998. The primary reason for the quarter-
to-quarter decrease was a license fee payment in 1998 of $3.0 million with
$0.8 million recognized in the first quarter of 1998. The balance of the
change resulted from lower shipments of QS-21 to research partners and
advancement of the Company's funded research program to the final licensing
stage where costs are not shared with the Company's partner.
Costs and Expenses
For the first quarter of 1999, cost of sales exceeded product sales due to
costs incurred for validation and preparation of the Company's new
manufacturing facilities. First quarter research and development spending
decreased by 13% from one year ago to $1.2 million. The decrease was due to
lower spending for clinical trials partially offset by assumption of the
research programs from VacTex, acquired in April 1998. Spending for clinical
trials is expected to increase for the remainder of the year with the start of
pivotal licensing trials for the Company's bovine mastitis product. General
and administrative expenses were reduced by 22% from one year ago due to lower
staffing levels, legal fees and facility costs.
Other Income, Net
First quarter 1999 other income was $0.1 million compared to $0.6 million for
the same period in 1998. The reasons for the decrease were interest expense of
$0.2 million on the Company's outstanding debt, lower interest income by $0.1
million due to lower average cash balances, and $0.2 million lower royalty
income. Royalty income may continue to decline as new products or technology
replace current products.
Liquidity, Capital Resources and Business Outlook
Total cash, cash equivalents and marketable securities were $12.4 million at
March 31, 1999 compared to $15.2 million at December 31, 1998.
During the first three months of 1999, operating activities used cash of $2.4
million primarily due to the net loss of $2.1 million. Investing activities
used cash of $2.2 million primarily due to the net purchase of marketable
securities. Financing activities used cash of $0.2 million for repayment of
debt principal. As of March 31, 1999, the Company had a balance of $4.3
million under its loan agreement with Transamerica Business Credit Corporation
and owed $1.4 million for the debentures issued in connection with the
acquisition of VacTex, Inc. As of May 7, 1999, $0.1 million of the debentures
had been redeemed.
During the first three months of 1998, the Company sold common stock in a
private placement for proceeds of $3.6 million and received $3.0 million from
a research partner, the last of a series of license fee payments.
Aquila expects that its available cash and marketable securities, and its cash
flows from research contracts, product sales, and borrowings will be
sufficient to finance its planned operations and capital requirements for the
next fifteen months. The management of the Company is taking all reasonable
steps at its disposal to assure continuation of the Company's programs. The
Company's ability to fund its long term operations is dependent on several
factors, including the Company's ability to attract funding through additional
public and private financing or by establishing corporate partnerships and
collaborative agreements. There can be no assurance that such additional
funding can be obtained on acceptable terms.
Aquila's revenues and expenses vary from quarter to quarter and will continue
to vary in the future. Future revenues depend primarily upon the success of
Aquila's efforts to license its proprietary technology and enter into cost
sharing programs, and its ability to market its products currently undergoing
development or clinical trials. Aquila's expenses fluctuate primarily due to
clinical trials, which take from six months to two years, and require varying
degrees of financial support. Revenues or operating results in any period
will not necessarily be indicative of results in subsequent period.
The Year 2000 ("Y2K") issue originates in computer programs that characterize
the year with two digits instead of four. This method of characterization may
result in interpretation of the year 2000 in a manner that would cause
inadequate or inaccurate results. The Company is engaged in basic research
and product development, and in manufacturing a product for animal healthcare
and material for its research partners. The Company believes that with the
relocation to newly constructed facilities in September 1998 and the
conversion to Y2K compliant business systems software in the first quarter of
1998, the Y2K problem will not pose significant internal operational problems
for the Company. The Company has conducted an internal review of equipment and
software employed in its business, manufacturing and research operations and
concluded that there are no Y2K systemic dependencies. Specific items of
equipment and associated software found to be date dependent are expected to be
replaced prior to the year 2000 due to capacity or quality improvements. In
the normal course of its business, the Company conducts audits of key vendors
and vendors used for regulated products to assure their ability to supply
materials. These audits have not revealed any Y2K compliance issues with
respect to the Company's key vendors. The Company's marketing partner is a
French company and there can be no assurance that this company will be Y2K
compliant. The Company has material transfer agreements with a number of other
companies and there can be no assurance that these companies will be Y2K
compliant. The Company has expended less than $100,000 to date for items
directly relating to the Y2K issues, mainly new business software and harware,
and expects to spend less than $50,000 in the future. Y2K issues could
adversely affect both revenues and costs if the Company were unable to supply
material and products to customers and research partners. To ensure no
interruption in supply during the two quarters immediately proceeding and
following the year 2000, the Company may consider carrying higher inventories
of raw material from vendors used for regulated products and higher finished
goods inventories to supply the needs of customers and partners.
Aquila's discussions as to management's plans and objectives for Aquila's
business after the date hereof are forward looking statements that involve a
number of risks and uncertainties. Actual results may differ materially from
those projected by Aquila. The following factors, among others, could effect
the Company's actual results: general economic conditions; risks in product
and technology development; delays and difficulties in the regulatory approval
process; difficulties in obtaining raw materials and supplies for the
Company's products; failure of corporate partners to commercialize
successfully products using the Company's technology; competition from other
companies; the cost of acquiring additional technology; failure to obtain the
funding necessary for the Company's planned activities; and other risks
identified in this Form 10Q and in Aquila's other Securities and Exchange
Commission filings and the exhibits thereto.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports of Form 8-K
Exhibits
27. Financial Data Schedule
Reports on Form 8-K
None filed in the first quarter of 1999.
-----------------------------------------------------------
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 undersigned thereunto duly authorized.
AQUILA BIOPHARMACEUTICALS, INC.
Date: May 14, 1999 /s/ Alison Taunton-Rigby
Alison Taunton-Rigby
President and Chief Executive Officer
/s/ James L. Warren
James L. Warren
Vice President Finance,
Chief Financial Officer and Treasurer
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