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,
2000, 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)
------------------------------------------------------
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 10, 2000
Common Stock Outstanding 8,626,482
AQUILA BIOPHARMACEUTICALS, INC.
Form 10-Q, September 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements Page Number
Consolidated Balance Sheets as of September
30, 2000 and December 31,1999 ......................3
Consolidated Statements of Operations and
Comprehensive
Income for three and nine month periods ended
September 30, 2000 and 1999 .....................4
Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 2000
and
1999 ...........................................5
Notes to Interim Financial Statements ...........6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ........................ 11
Item 6. Exhibits and Reports on Form 8-K...........11
SIGNATURES..........................................14
Item 1 - Financial Statements
Aquila Biopharmaceuticals, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands)
Assets 9/30/00 12/31/99
Current Assets:
Cash and cash equivalents $ 1,972 $ 524
Marketable securities 4,486 6,493
Receivables 930 637
Inventories 666 498
Prepaid expenses & other
current assets 175 280
Total current assets 8,229 8,432
Investments 244 244
Property, Plant, and Equipment,
Net 5,656 6,191
Patents and Purchased Technology,
Net 19 47
Other Assets 844 828
Total Assets $ 14,992 $ 15,742
Liabilities & Shareholders' Equity
Current Liabilities:
Accounts payable $ 366 $ 554
Accrued professional fees 103 165
Other accrued expenses 1,393 884
Current maturities of long-
term debt 1,360 1,577
Total Current Liabilities 3,222 3,180
Deferred Revenue 150 150
Long Term Debt 1,728 2,607
Total Liabilities 5,100 5,937
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: 8,607,748 at
September 30, 2000 and 7,888,446
at December 31, 1999 86 79
Treasury Stock (34) (34)
Additional paid in capital 145,716 141,802
Accumulated other comprehensive
income 27 426
Accumulated Deficit (135,903) (132,468)
Total Shareholders' Equity 9,892 9,805
Total Liabilities and Shareholders' Equity
$ 14,992 $ 15,742
The accompanying notes are an integral part of these
unaudited statements
Aquila Biopharmaceuticals, Inc.
Consolidated Statements of Operations and
Comprehensive Income
(unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Revenue:
Product
sales $ 626 $105 $1,207 $ 378
Research
and
development 221 789 2,316 1,078
847 894 3,523 1,456
Cost and
expenses:
Cost of
sales 663 120 1,040 712
Research
and
development 1,050 1,677 4,526 4,862
General &
admini-
strative 631 741 2,045 2,330
Total costs
and expenses 2,344 2,538 7,611 7,904
Other income,
net 51 155 653 240
Net Loss $(1,446) $(1,489) $(3,435) $ (6,208)
Unrealized holding
gains on available
-for-sale
securities 28 12 76 20
Less: re-
classification
for gain included
in net income -- (151) (475) (151)
Total other comprehensive
income/(loss)
28 (139) (399) (131)
Comprehensive loss
$(1,418) $(1,628) $(3,834) $ (6,339)
Basic and diluted loss
per weighted average share:
Net loss
$(0.17) $ (0.19) $(0.41) $ (0.86)
Weighted average number of
common shares outstanding:
Basic and diluted
8,533 7,690 8,341 7,229
The accompanying notes are an integral part of these
unaudited statements.
Aquila Biopharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(unaudited),(in thousands)
For the nine months
ended September 30,
2000 1999
Cash Flows From Operating Activities:
Net Loss
$ (3,435) $ (6,208)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Depreciation and amortization
587 624
Issuance of non-employee options
50 --
Realized gains on sale of marketable securities
-- (151)
Changes in assets and liabilities:
Receivables
(293) 647
Inventories
(168) 42
Prepaid expenses and other current assets
105 166
Accounts payable and other accrued expenses
259 (1,261)
Net cash used by operating activities
(2,895) (6,141)
Cash Flows From Investing Activities:
Purchases of marketable securities
(3,996) (8,000)
Proceeds from maturities
of marketable securities
5,571 9,955
Other noncurrent assets and liabilities
17 5
Purchases of property, plant, and equipment
(24) (527)
Net cash provided by investing activities
1,568 1,433
Cash Flows From Financing Activities:
Payment of long-term obligations
(1,096) (976)
Issuance of common stock
3,871 1,510
Net cash provided by financing activities
2,775 534
Net increase/(decrease) in cash and cash
Equivalents
1,448 (4,174)
Cash and cash equivalents at the beginning
of the year
524 5,270
Cash and cash equivalents at the end
of the period
$1,972 $ 1,096
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 statement of the results for the
interim periods.
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, 1999, which are contained
in the Companys Annual Report on Form 10-K for the
year ended December 31, 1999, 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 Companys consolidated results. There are no
inter-segment activities. The Companys business is
conducted entirely within the United States.
Nine Months
Ended
September 30,
2000 1999
Development
Revenue $ 131 $ 343
Net Loss (5,390) (5,807)
Manufacturing
Revenue 3,392 1,113
Net income/(loss) 1,356 (554)
Reconciling items
Net income(1) 599 153
Consolidated totals
Revenue 3,523 1,456
Net loss $(3,435) (6,208)
(1) 2000 includes a gain of $475,000 on the
sale of an investment, $126,000 of royalty income,
$85,000 of rental income and $32,000 refund of
insurance premium offset by net interest expense of
$64,000 and an unabsorbed overhead charge of $54,000.
1999 includes $62,000 of royalty income, a gain of
$14,000 on disposal of an asset, $35,000 refund of
insurance premium, $41,000 of net interest expense,
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.
3. Inventories:
Inventories consist of the following:
(000'S)
9/30/00 12/31/99
------- --------
Finished goods $ 397 $ 157
Work-in-process 131 236
Raw materials & suppliea 138 105
$ 666 $ 498
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, 2000 and September 30,
1999; therefore, common stock equivalents were not
used to compute diluted loss per share since the
effect would have been anti-dilutive. Options to
purchase 910,520 and 1,300,780 shares of common stock
at weighted-average prices of $3.45 and $3.47,
respectively, were outstanding at September 30, 2000
and 1999, respectively. Warrants to purchase 68,680
shares of common stock at an exercise price of $4.12
were outstanding at September 30, 2000.
5. Contingencies:
The Company received a letter from Cambridge Biotech
corporation (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 CBCs rights
under a license agreement. The Company has not received any
further communication from CBC and upon review does
not feel that adverse settlement of this matter would
have a material effect on its financial position or
results of operations.
6. Accounting Pronouncement:
In December 1999, the United States Securities and
Exchange Commission (SEC) issued Staff Accounting
Bulletin 101, Revenue Recognition in Financial
Statements (SAB 101). SAB 101 provides the staffs
views in applying generally accepted accounting
principles to selected revenue recognition issues, as
well as examples of how the staff applies revenue
recognition guidance to specific circumstances. In
June 2000, the SEC issued Staff Accounting Bulletin
101B delaying the implementation of SAB 101 for six
months. Accordingly, in the fourth quarter of 2000
Aquila will change its accounting for initial license
fees. Through the first nine months of 2000 revenue
was recognized when the agreement was reached and no
contingent factors were present. Under the new
guidance of SAB 101, revenue will be deferred and
recognized ratably over the appropriate life or as
effort is incurred. In the fourth quarter of 2000, a
cumulative adjustment will be recorded retroactive to
January 1, 2000 to create deferred revenue that will be
recognized over future years.
The Company has adopted FASB Interpretation No. 44
(FIN 44), Accounting for Certain Transactions
Involving Stock Compensation: an interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of
certain aspects of APB Opinion No. 25 (APB 25),
including the following: the definition of an employee
for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a non-
compensatory plan; the accounting consequences of
various modifications to the terms of previously fixed
stock options or awards; and the accounting for an
exchange of stock compensation awards in a business
combination.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three months ended September 30, 2000 compared to
three months ended September 30, 1999:
Revenue
Total revenues were $847,000 for the three months
ended September 30, 2000 compared to $894,000 in the
same period in 1999.
Third quarter 2000 product sales were $626,000
compared to $105,000 the same period one year ago.
Research and development revenues were $221,000
compared to $789,000 for the same period in 1999. The
primary reason for the quarter-to-quarter decrease in
research and development revenues was the non-
refundable license fees of $638,000 recognized in Q3
1999 from corporate partners pursuant to a license
agreement that allows the partners to use the
Companys QS-21 adjuvant in their product development
programs and a $111,000 decrease in funded research
pursuant to an NIH grant as the funds from the first
years grant were depleted. This decrease in research
and development revenues was partially offset by
$181,000 of increased QS-21 shipments in Q3 2000.
Costs and Expenses
For the third quarter of 2000, cost of sales was 106%
of product sales compared to 114% for the same period
one year ago. The primary reason cost of sales was
higher than product sales in 2000 was decreased
production levels which did not fully absorb the
period spending levels. Third quarter research and
development spending was $1,050,000 compared to
$1,677,000 in Q3 1999. The decrease was due to lower
spending on clinical trials, decreased spending on
outside services and lower QS-21 spending levels due
to decreased production levels. Spending for clinical
trials is expected to increase for the remainder of
the year as the Company has initiated further clinical
trials for the Quilimmune P product designed to
prevent pneumococcal infections in the elderly. In
the third quarter of 2000, spending on the
tuberculosis program acquired from VacTex was $96,000
compared to $253,000 in the third quarter of 1999.
The Companys future spending on this program may
fluctuate based on the progress of the research and
the availability of funding and resources. General
and administrative expenses were $631,000 compared to
$741,000 the same period one year ago due to lower
staffing levels and lower legal fees.
Other Income, Net
Other income net for the third quarter of 2000 was
$51,000 compared to $155,000 for the same period in
1999. The primary reason for the decrease was $151,000
received from the sale of available-for-sale
securities in Q3 1999 partially offset by a $19,000
increase in rental income received pursuant to a
sublease agreement entered into in Q3 1999 and $19,000
decrease in net interest expense.
Nine months ended September 30, 2000 compared to nine
months ended September 30, 1999:
Revenue
Total revenues were $3,523,000 for the nine months
ended September 30, 2000 compared to $1,456,000 in the
same period in 1999.
Product sales for the first nine months of 2000 were
$1,207,000 compared to $378,000 the same period one
year ago. The reasons for the higher revenues were
increased product shipments in Q3 2000 as compared
with the first six months of 2000 and the resumption
of regular product shipments in the first quarter of
2000 compared with the low shipments in the first
quarter of 1999 during which the Companys new
facility was prepared for operation.
The first nine months of research and development
revenues were $2,316,000 compared to $1,078,000 for
the same period in 1999. The primary reason for the
increase was non-refundable license fees of $1,300,000
recognized from a corporate partner in 2000 as
compared with $638,000 for the same period in 1999.
The remaining balance of the change resulted from
$788,000 of increased shipments of QS-21 to research
partners partially offset by the $232,000 decline in
funded research received from a corporate partner.
Costs and Expenses
For the first nine months of 2000, cost of sales was
86% of product sales compared to the first nine months
of 1999 when cost of sales exceeded product sales.
The primary reasons for the decrease were the
reduction in validation costs associated with
preparing the Companys new manufacturing facilities
in 1999 and increased production levels leading to
lower unabsorbed expenses. Research and development
spending was $4,526,000 for the first nine months of
2000 compared with $4,862,000 for the same period one
year ago. The decrease was due to slightly lower
clinical trial spending in 2000 and lower unabsorbed
spending on QS-21 due to increased production.
Spending for the first nine months of 2000 on the
tuberculosis program acquired from VacTex was $613,000
compared to $680,000 in the first nine months of 1999.
The Companys future spending on this program may
fluctuate based on the progress of the research and
the availability of funding and resources. General
and administrative expenses were reduced by 12% from
one year ago due to lower staffing levels and lower
legal fees.
Other Income, Net
Other income for the first nine months of 2000 was
$653,000 compared to $240,000 for the same period in
1999. The primary reasons for the increase were a gain
of $475,000 on the sale of an investment compared to a
gain of $151,000 on the sale of an investment in 1999,
$63,000 increase in royalty income in 2000 and an
increase of $76,000 of rental income received pursuant
to a sublease agreement entered into in the third
quarter of 1999.
Liquidity, Capital Resources and Business Outlook
Total cash, cash equivalents and marketable securities
were $6,458,000 at September 30, 2000 compared to
$7,017,000 at December 31, 1999.
During the first nine months of 2000, operating
activities used cash of $2,895,000 primarily due to
the net loss of $3,435,000. Investing activities
provided cash of $1,568,000 primarily due to the net
sales of marketable securities. Financing activities
provided cash of $2,775,000 due to $3,871,000 of
proceeds received from the sale of shares of common
stock offset by $1,096,000 payment of obligations. As
of September 30, 2000, the Company had a balance of
$2,883,000 million under its loan agreement with
Transamerica Business Credit Corporation and owed
$205,000 for the 7% debentures issued in connection
with the acquisition of VacTex, Inc.
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 twelve months. The
management of the Company is taking all reasonable
steps at its disposal to assure continuation of the
Companys 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.
Aquilas revenues and expenses vary from quarter to
quarter and will continue to vary in the future.
Future revenues depend primarily upon the success of
Aquilas 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. Aquilas 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.
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.
Accounting Pronouncement
In December 1999, the United States Securities and
Exchange Commission (SEC) issued Staff Accounting
Bulletin 101, Revenue Recognition in Financial
Statements (SAB 101). SAB 101 provides the staffs
views in applying generally accepted accounting
principles to selected revenue recognition issues, as
well as examples of how the staff applies revenue
recognition guidance to specific circumstances. In
June 2000, the SEC issued Staff Accounting Bulletin
101B delaying the implementation of SAB 101 for six
months. Accordingly, in the fourth quarter of 2000
Aquila will change its accounting for initial license
fees. Through the first nine months of 2000 revenue
was recognized when the agreement was reached and no
contingent factors were present. Under the new
guidance of SAB 101, revenue will be deferred and
recognized ratably over the appropriate life or as
effort is incurred. In the fourth quarter of 2000,
a cumulative adjustment will be recorded retroactive
to January 1, 2000 to create deferred revenue that
will be recognized over future years.
The Company has adopted FASB Interpretation No. 44
(FIN 44), Accounting for Certain Transactions
Involving Stock Compensation: an interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of
certain aspects of APB Opinion No. 25 (APB 25),
including the following: the definition of an employee
for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a non-
compensatory plan; the accounting consequences of
various modifications to the terms of previously fixed
stock options or awards; and the accounting for an
exchange of stock compensation awards in a business
combination.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
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 CBCs rights under a
license agreement. The Company has not received any
further communication from CBC and upon review does
not feel that adverse settlement of this matter would
have a material effect on its financial position or
results of operations.
Item 6. Exhibits and Reports of Form 8-K
Exhibits
27. Financial Data Schedule
Reports on Form 8-K
1. Form 8-K filed July 14, 2000.
2. Form 8-K filed August 22, 2000.
Item 6(a) Financial Data Schedule
Aquila Biopharmaceuticals, Inc.
For the Nine Months Ended September
30, 2000
(In thousands)
September 30, 2000
Cash and cash items 1,972
Marketable securities 4,486
Notes and accounts receivable 930
Allowance for doubtful accounts 0
Inventory 666
Total current assets 8,229
Property, plant and equipment 8,974
Accumulated depreciation 3,318
Total assets 14,992
Total current liabilities 3,222
Bond, mortgages and similar debt 3,089
Preferred stock, mandatory redemption 0
Preferred stock, no mandatory redemption 0
Common stock 86
Other stockholders equity 9,806
Total liabilities and stockholders
equity 14,992
Net sales of tangible products 1,207
Total revenues 3,523
Costs of tangible goods sold 1,040
Total costs and expenses applicable to
sales and Revenues 5,566
Other costs and expenses 2,045
Provision for doubtful accounts and notes 0
Interest and amortization of debt
discount 350
Income/(loss) before taxes and other
items (3,435)
Income tax expense 0
Income/(loss) from continuing operations (3,435)
Discontinued operations 0
Extraordinary items 0
Cumulative effect-changes in accounting
principles 0
Net income/(loss) (3,435)
Earnings per share basic (0.41)
Earnings per share diluted (0.41)
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 13, 2000
_____________________________
Alison Taunton-Rigby
President and Chief Executive
Officer
_____________________________
Melissa J. Packard
Controller,Principal
Accounting Officer and
Treasurer
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 13, 2000
/s/ Alison Taunton-Rigby
Alison Taunton-Rigby
President and Chief
Executive Officer
/s/ Melissa J. Packard
Melissa J. Packard
Controller,
Principal Accounting
Officer and Treasurer
