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 September 30, 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 November 12, 1999
Common Stock Outstanding 7,886,364
AQUILA BIOPHARMACEUTICALS, INC.
Form 10-Q, September 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements Page Number
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998.......................................3
Consolidated Statements of Operations for three and nine
month periods ended September 30, 1999 and 1998.............4
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 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
Item 1. Legal Proceedings .....................................11
Item 6. Exhibits and Reports on Form 8-K.......................12
SIGNATURES......................................................14
Item 1 - Financial Statements
Aquila Biopharmaceuticals, Inc.
Consolidated Balance Sheet
(unaudited)
(in thousands)
Assets 9/30/99 12/31/98
Current Assets:
Cash and cash equivalents $ 1,096 $ 5,270
Marketable securities 7,950 9,885
Receivables (less allowance
for doubtful accounts) 381 1,028
Inventories 393 435
Prepaid expenses & other current assets 187 353
Total current assets 10,007 16,971
Investments 320 320
Property, Plant, and Equipment, Net 6,347 6,372
Patents and Purchased Technology, Net 62 116
Other Assets 826 849
Total Assets $ 17,562 $ 24,628
Liabilities & Shareholders' Equity
Current Liabilities:
Accounts payable $ 538 $ 486
Accrued professional fees 305 299
Other accrued expenses 755 2,105
Current maturities of long-term debt 1,544 2,191
Total Current Liabilities 3,142 5,081
Deferred Revenue 225 225
Long Term Debt 2,882 3,669
Total Liabilities 6,249 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: 7,888,446 at September 30,
1999 and 6,992,483 at December 31, 1998 79 70
Treasury Stock (34) (34)
Additional paid in capital 141,802 139,812
Accumulated other comprehensive income (52) 79
Accumulated Deficit (130,482) (124,274)
Total Shareholders' Equity 11,313 15,653
Total Liabilities and Shareholders' Equity $ 17,562 $ 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenue:
Product sales $ 105 $ 207 $ 378 $ 763
Research and development 789 953 1,078 3,188
894 1,160 1,456 3,951
Cost and expenses:
Cost of sales 120 207 712 671
Research and development 1,677 1,666 4,862 5,418
Purchased incomplete technology -- -- -- 9,927
General & administrative 741 833 2,330 2,901
Total costs and expenses 2,538 2,706 7,904 18,916
Other income, net 155 275 240 1,330
Net Loss $(1,489) $ (1,271) $(6,208) $(13,635)
Unrealized holding gains/(losses)
on available-for-sale securities 12 -- 20 --
Reclassification adjustment (151) -- (151)
Total other comprehensive
income/(loss) (139) -- (131) --
Comprehensive loss $(1,628) $ (1,271) $ (6,339) $(13,635)
Basic and diluted loss
per weighted average share:
Net loss $ (0.19) $ (0.18) $(0.86) $ (2.12)
Weighted average number of
common shares outstanding:
Basic and diluted 7,690 6,992 7,229 6,443
The accompanying notes are an integral part of these unaudited
statements.
Aquila Biopharmaceuticals, Inc.
Consolidated Statement of Cash Flows
(unaudited),(in thousands)
For the nine months
ended September 30,
1999 1998
Cash Flows From Operating Activities:
Net Loss $ (6,208) $(13,635)
Adjustments to reconcile net loss to net cash
provided/(used) by operating activities:
Depreciation and amortization 624 188
Provision for doubtful accounts -- 40
Stock and debt issued for incomplete technology -- 9,638
Realized gains on sale of marketable securities (151) --
Changes in assets and liabilities:
Receivables 647 553
Inventories 42 78
Deferred revenue -- 750
Prepaid expenses and other current assets 166 16
Accounts payable and other accrued expenses (1,261) 67
Net cash used by operating activities (6,141) (2,305)
Cash Flows From Investing Activities:
Purchases of marketable securities (8,000) (18,732)
Proceeds from maturities
of marketable securities 9,955 16,030
Other noncurrent assets and liabilities 5 (781)
Purchases of property, plant, and equipment (527) (2,508)
Net cash provided/(used) by
investing activities 1,433 (5,991)
Cash Flows From Financing Activities:
Payment of long-term obligations (976) (252)
Proceeds from long-term debt -- 2,584
Issuance of common stock 1,510 3,845
Net cash provided
by financing activities 534 6,177
Net decrease in cash and cash
Equivalents (4,174) (2,119)
Cash and cash equivalents at the beginning
of the year 5,270 7,352
Cash and cash equivalents at the end
of the period $1,096 $ 5,233
Supplemental disclosures:
Interest paid $ 487 $ 13
Issuance of warrants in conjunction with debt $ -- 90
Issuance of treasury stock in settlement of
accrued liability $ -- 13
Issuance of common stock for redemption of
debt and accrued interest $ 489 $ --
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, compensation
for the cost of supplying QS-21 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.
Nine Months Ended
September 30,
1999 1998
Development
Revenue $ 343 $ 419
Net loss (5,807) (6,225)
Manufacturing
Revenue 1,113 3,532
Net income/(loss) (554) 1,684
Reconciling items
Net income/(loss)(1) 153 (9,094)
Consolidated totals
Revenue 1,456 3,951
Net loss $(6,208) $(13,635)
(1) 1999 includes $62,000 of royalty income, a gain of $14,000 on disposal
of an asset, a $35,000 insurance premium refund , net interest expense of
$41,000, income tax expense of $10,000, income from the sale of available-
for-sale securities of $151,000, rental income of $10,000 and a charge for
excess facilities of $44,000. 1998 includes $750,000 of net interest income,
$437,000 of royalty income, proceeds of $85,000 from settlement of a claim,
a $475,000 charge for excess space, and a charge for incomplete technology
of $9,927,000.
3. Inventories:
Inventories consist of the following: (000'S)
9/30/99 12/31/98
------- --------
Finished goods $ 229 $ 231
Work-in-process 66 122
Raw materials & supplies 98 82
$ 393 $ 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 September 30, 1999 and
September 30, 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 1,300,780 and 1,099,030 shares of common stock at
weighted-average prices of $3.47 and $3.89, respectively, were outstanding at
September 30, 1999 and 1998, respectively. Warrants to purchase 68,680 shares
of common stock at an exercise price of $4.12 were outstanding at September
30, 1999. Most of the options and all of these warrants have exercise prices
that exceeded the average market price during the third quarter of 1999.
5. Contingencies:
In March 1995, an Adversary Proceeding was commenced by Institut Pasteur and
Genetic Systems Corporation against CBC alleging patent infringement.
Institut Pasteur appealed the Bankruptcy Court's ruling and the United
States District Court's affirmation thereof to the Federal Circuit Court of
Appeals. On July 7, 1999, the United States Court of Appeals for the
Federal Circuit affirmed, in all respects, the decision of the Massachusetts
District Court. The time allowed for an appeal of this affirmation has
elapsed.
The Company has been named a potentially responsible party ("PRP") by the
Environmental Protection Agency ("EPA") at a waste disposal site. The EPA
has completed its review of all the information submitted by the parties and
informed the Company that it plans to take no further action against the
Company regarding this matter.
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 September 30, 1999 compared to three months ended
September 30, 1998:
Revenue
Total revenues were $ 894,000 for the three months ended September 30, 1999
compared to $1,160,000 in the same period in 1998.
Third quarter 1999 research and development revenues were $789,000 compared to
$953,000 for the same period in 1998 while product sales, which tend to
fluctuate, were $105,000 compared to $207,000 the same period one year ago.
The primary reason for the quarter-to-quarter decrease in research and
development revenues was lower license fees. New license fees of $500,000
from a new partner partially offset the absence of $750,000 of license fees
from a partner that made its final annual payment in 1998. Funded research
was higher than the same period in 1998 due to the award from the National
Institutes of Health of a SBIR Phase II grant and more than offset slightly
lower transfer payments for the Company's adjuvant.
Costs and Expenses
Third quarter research and development spending was $1,677,000, virtually flat
compared to the same period in 1998 with spending on the pivotal licensing
trials for the Company's bovine mastitis product that commenced in July, 1999
offsetting spending on the Company's other programs. General and
administrative expenses were reduced by 11% from one year ago due to lower
staffing levels and facility costs. Cost of sales was higher than product
sales in part due to low production levels in response to fluctuating demand
and in part due to continuing validation of the Company's new facility.
Other Income, Net
Other income net for the third quarter of 1999 was $155,000 compared to
$275,000 for the same period in 1998. The reasons for the decrease were
$138,000 lower interest income from lower average cash balances, and interest
expense of $148,000 on debt incurred to fit-out the Company's new facility
more than offset by $151,000 of gain from the sale of investments.
Nine months ended September 30, 1999 compared to nine months ended September
30, 1998:
Revenue
Total revenues were $1,456,000 for the nine months ended September 30, 1999
compared to $3,951,000 in the same period in 1998.
Product sales for the first nine months of 1999 were $378,000 compared to
$763,000 the same period one year ago. The reason for the lower revenues was
low shipments in the first quarter of 1999 during which the Company's new
facility was prepared for operation and a reduction of inventories by the
Company's marketing partner.
Research and development revenues for nine months of 1999 were $1,078,000
compared to $3,188,000 for the same period in 1998. The primary reason for the
decrease was license fee payments in 1998 of $2,542,000 recorded as revenue in
nine months of 1998 compared to $638,000 in nine months of 1999. The balance
of the change resulted from slightly lower shipments of QS-21 to research
partners and advancement of the Company's funded research program to the final
licensing stage where only certain costs are shared with the Company's
partner.
Costs and Expenses
For nine months of 1999, cost of sales exceeded product sales primarily due to
costs incurred in the first quarter for validation and preparation of the
Company's new manufacturing facilities. For nine months, research and
development spending decreased by 10% from one year ago to $4,862,000. The
decrease was due to lower spending for clinical trials. General and
administrative expenses were reduced by 20% from one year ago due to lower
staffing levels, legal fees and facility costs.
Other Income, Net
Other income for nine months of 1999 was $240,000 compared to $1,330,000 for
the same period in 1998. The reasons for the decrease were $356,000 lower
interest income from lower average cash balances, a $374,000 decline in
royalty income and interest expense of $485,000 on debt.
Liquidity, Capital Resources and Business Outlook
Total cash, cash equivalents and marketable securities were $9,046,000 at
September 30, 1999 compared to $15,155,000 at December 31, 1998.
During nine months of 1999, operating activities used cash of $6,141,000
primarily due to the net loss of $6,208,000 and the pay-down of year-end
liabilities in connection with the fit-out of the Company's new facility
offset by decreases in other current assets. Investing activities provided
cash of $1,433,000 primarily due to the net sales of marketable securities.
Financing activities provided cash of $534,000 from the issuance of $1,510,000
of common stock offset by $976,000 payment of debt. As of September 30, 1999,
the Company had a balance of $3,899,000 under its loan agreement with
Transamerica Business Credit Corporation and owed $526,000 for the 7%
debentures issued in connection with the acquisition of VacTex, Inc. In July
1999, the Company redeemed $722,000 of its outstanding debentures including
accrued interest for 216,974 shares of common stock and $233,000 in cash. Also
in July 1999, the Company sold 666,667 newly issued shares for proceeds of
$1,510,000 in a directed limited placement.
During nine months of 1998, the Company sold common stock in a private
placement for proceeds of $3,600,000 and received $3,000,000 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 into the
third quarter of 2000. 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 apparent Y2K systemic dependencies. Specific
items of equipment and associated software found to be date dependent are
expected 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. Total amounts expended to date in direct
connection to the Y2K issue were for new business software and hardware and
were less than $100,000. Future costs are expected to be nil. 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 insure no
interruption in supply during the two quarters immediately proceeding and
following the year 2000, the Company is carrying sufficient inventories of raw
material from vendors used for regulated products and sufficient finished
goods inventories to supply the needs of customers and partners in the event
of a short term interruption of supply.
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 1: Legal Proceedings
CSL International ACN ("CSL") and Seed Capital, Inc. filed an opposition with
the European Patent Office on the issuance of the Company's Stimulonr patent
in Europe. In a hearing, the Company prevailed against all points raised in
opposition. The period during which CSL could appeal this decision has expired
without appeal.
Item 6. Exhibits and Reports of Form 8-K
Exhibits
27. Financial Data Schedule
Reports on Form 8-K
1. None filed in the second quarter of 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the duly caused this report to be signed on its behalf by
undersigned thereunto duly authorized.
AQUILA BIOPHARMACEUTICALS, INC.
Date: November 11, 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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