Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the quarterly period ended June 30, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
---
For the transition period from _______________ to ______________
Commission file number 0-11480
CELLEX BIOSCIENCES, INC.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1412084
--------- ----------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
8500 Evergreen Blvd., Minneapolis, MN 55433
(Address of principal executive offices)
Issuer's telephone number: (612) 786-0302
--------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
---
At August 10, 2000, there were 8,690,644 shares of the registrant's Common
Stock, no par value, issued and outstanding.
Transitional Small Business Disclosure Format
(check one) Yes No X
---
<PAGE>
INDEX
CELLEX BIOSCIENCES, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheet as of June 30, 2000............................................................ 3
Statements of Operations for the Three and Nine Months ended June 30, 2000................... 4
Statement of Cash Flows for the Nine Months ended June 30, 2000.............................. 5
Notes to Financial Statements................................................................ 6
Predecessor Company Financial Statements .................................................... 16
ITEM 2. Management's Discussion and Analysis or Plan
of Operation........................................................................... 21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................................... 26
ITEM 6. Exhibits and Reports on Form 8-K........................................................ 30
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - CELLEX BIOSCIENCES, INC.
<TABLE>
<CAPTION>
Balance Sheet June 30, 2000
ASSETS (Unaudited)
------ -------------
<S> <C>
Current assets:
Cash $ 1,498,000
Accounts receivable, net of $238,000 allowance for doubtful accounts 1,576,000
Costs and estimated earnings in excess of billings on uncompleted contracts 488,000
Inventories 1,813,000
Other 57,000
-------------
Total current assets 5,432,000
Property, plant and equipment, net 1,303,000
Other assets:
Inventories 378,000
Patents and trademarks, net 1,039,000
Other assets 12,000
Reorganization value in excess of amounts allocable to identifiable assets, net 2,678,000
-------------
$ 10,842,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 129,000
Accounts payable 721,000
Customer deposits 401,000
Deferred revenue 199,000
Accrued liabilities:
Reorganization costs 200,000
Compensation and related taxes 215,000
Other 387,000
Billings in excess of costs and estimated earnings on uncompleted contracts 24,000
-------------
Total current liabilities 2,276,000
Long-term debt 518,000
Commitments and contingencies --
Shareholders' equity:
Common stock, no par value, 10,000,000 shares authorized;
8,690,644 shares issued and outstanding 9,203,000
Accumulated deficit (accumulated since July 31, 1999, the effective
date of the Company's Amended Plan of Reorganization) (1,155,000)
-------------
Total shareholders' equity 8,048,000
-------------
$ 10,842,000
-------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE>
CELLEX BIOSCIENCES, INC.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, 2000 June 30, 2000
------------- -------------
<S> <C> <C>
Revenues:
System sales $ 222,000 $ 445,000
Consumable sales 372,000 1,054,000
Contract production services 1,052,000 2,121,000
Other 32,000 123,000
------------- -------------
Total revenues 1,678,000 3,743,000
Operating costs and expenses:
Cost of sales 1,122,000 2,334,000
Research and development 127,000 340,000
Marketing, general and administrative 722,000 1,919,000
------------- -------------
Total operating costs and expenses 1,971,000 4,593,000
------------- -------------
Loss from operations (293,000) (850,000)
Other income (expense):
Interest income -- 1,000
Interest expense (11,000) (140,000)
Currency transaction gain -- 32,000
------------- -------------
(11,000) (107,000)
------------- -------------
Net loss $ (304,000) $ (957,000)
============= =============
Net loss per common share - basic and diluted $ (.04) $ (.25)
============= =============
Weighted average number of common shares
outstanding - basic and diluted 8,101,937 3,852,320
============= =============
</TABLE>
4
<PAGE>
CELLEX BIOSCIENCES, INC.
Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 2000
-------------
<S> <C>
Cash flows from operating activities:
Net loss $ (957,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 49,000
Amortization 206,000
Gain on foreign currency transaction (32,000)
Changes in operating items:
Accounts receivable (106,000)
Costs and estimated earnings in excess of billings on uncompleted contracts (384,000)
Inventories (509,000)
Other assets (4,000)
Accounts payable and accrued liabilities 325,000
Customer deposits 311,000
Billings in excess of costs and estimated earnings on uncompleted contracts (22,000)
-------------
Net cash used in operating activities (1,123,000)
Cash flows from investing activities:
Capital expenditures (126,000)
-------------
Net cash used in investing activities (126,000)
Cash flows from financing activities:
Proceeds from short-term borrowings 255,000
Repayment of short-term borrowings (150,000)
Principal payments on long-term debt (602,000)
Net proceeds from securities offering 3,216,000
-------------
Net cash provided by financing activities 2,719,000
-------------
Net increase in cash and cash equivalents 1,470,000
Cash at beginning of period 28,000
Cash at end of period $ 1,498,000
=============
</TABLE>
5
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(1) Description of the Company
Except as indicated otherwise, the term the "Company" refers to CELLEX
BIOSCIENCES, Inc. The Company provides advanced cell culture technology to
pharmaceutical, diagnostic and biotechnology companies, as well as leading
research institutions, worldwide. The Company develops, manufactures and markets
patented perfusion systems and performs contract production services including
cell line selection, optimization and subcloning, whole cell and secreted
protein production and cell banking. Cell culture is a key process used by these
organizations for the creation of novel proteins and monoclonal antibodies
needed to detect and treat human diseases such as cancer and AIDS.
On July 7, 1999, the United States Bankruptcy Court, District of
Minnesota, Third Division, entered the order confirming the Company's Modified
First Amended Plan of Reorganization dated June 28, 1999 (the "Plan"), which
became effective July 30, 1999. For financial reporting purposes, the effective
date of the Plan is considered to be July 31, 1999 (the "Effective Date"). The
results of operations for the period July 30, 1999 through July 31, 1999 are not
considered material.
Effective as of the close of business on May 25, 2000, the Company
acquired certain assets and technology, and assumed certain liabilities from
Unisyn Technologies, Inc. ("Unisyn"), a wholly owned subsidiary of Medi-Cult
A/S, a Danish biotechnology corporation. Unisyn develops, manufactures and
markets products and contract services that produce antibodies. Unisyn also
provides research and development services related to these products.
(2) Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been derived from unaudited interim financial information prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. The financial
statements of the Company, in the opinion of management, include all normal and
recurring adjustments necessary for a fair presentation of results as of the
dates and for the periods covered by the financial statements.
6
<PAGE>
CELLEX
BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Operating results for the three and nine months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the entire fiscal
year. For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1999.
As of July 31, 1999, the Company adopted fresh start reporting in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7 Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code ("SOP 90-7"). Due to the Company's emergence from
Chapter 11 Reorganization and implementation of fresh-start reporting, the
financial statements for the reorganized company as of July 31, 1999 and for the
periods subsequent to July 31, 1999 (the "Reorganized Company") will not be
comparable to those of the Company for the periods prior to July 31, 1999 (the
"Predecessor Company"). The results of the periods shown for the Predecessor
Company are not considered to be indicative of the results of operations that
are expected for the Reorganized Company.
Fresh-start reporting resulted in material changes to the Company's
balance sheet, including valuation of assets at fair value in accordance with
principles of the purchase method of accounting, valuation of liabilities
pursuant to provisions of the Plan and valuation of equity based on the
reorganization value of the ongoing business. In accordance with fresh-start
reporting, the gain on discharge of debt resulting from the reorganization
proceedings was reflected on the financial statements of the Predecessor Company
for the two-month period ended July 30, 1999. In addition, the accumulated
deficit of the Predecessor Company was eliminated and at July 31, 1999, the
Reorganized Company's financial statements reflected no beginning retained
earnings or deficit. In addition, the Company's capital structure was recast in
conformity with the Plan.
The Company has included in its financial statements the assets and
liabilities recorded in connection with the acquisition of certain assets and
assumption of certain liabilities of Unisyn Technologies, Inc. The results of
operations related to Unisyn since May 25, 2000, the effective date, have been
included in the Company's statement of operations. See Note 4.
7
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures about contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Net Income (Loss) Per Common Share
Basic income (loss) per share of common stock is computed by dividing net
income (loss) by the weighted average number of outstanding common shares.
Diluted net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of outstanding common shares and common
share equivalents relating to warrants, when dilutive. Warrants to purchase
100,000 common shares at a weighted average exercise price of $10 per common
share have been excluded from the computation because the effect is
anti-dilutive.
(3) Going Concern
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred significant
operating losses and cash flow deficits in previous years and has accumulated
losses of $1,155,000 during the eleven-month period since its reorganization.
The Company may need to procure additional financing to fund its operations.
Management believes that its future success is dependent in part on
continuing to increase its sales particularly in contract cell culture
production and services Management believes that the combination of Unisyn
assets and technologies with those of the Company will enhance the Company's
platform of experience and technical and scientific expertise, equipment and
facilities. Management expects the combination to augment the Company's ability
to service the pharmaceutical and biotechnology industry and further the
Company's goal to accelerate the development of breakthrough biological drugs
and treatments from the laboratory to market for biotech companies. The
Company's strategy for growth and achieving profitability includes expanding its
share of the market for its systems and contract cell culture production
services while exploring other applications for the Company's proprietary
technology (when possible, in conjunction with and through funding of strategic
alliances and corporate partners).
During the nine months ended June 30, 2000, the Company was successful in
negotiating the payment of $3,436,000 of liabilities through the issuance of
common stock. Additionally, the Company received net proceeds of approximately
$3,216,000 from the sale of 2,785,200 shares of the Company's common stock
pursuant to a private placement offering. There is no assurance additional
funds, if required, will be raised. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
8
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(4) Acquisition of Unisyn
Effective as of the close of business on May 25, 2000, Cellex Biosciences,
Inc. (the "Company") acquired substantially all of the assets and technology and
assumed certain liabilities from Unisyn Technologies, Inc. ("Unisyn") pursuant
to an asset purchase agreement (the " Asset Purchase Agreement").
In consideration, the Company issued 70,000 shares of common stock to
Unisyn's parent company. Pursuant to settlement agreements, 127,000 additional
shares of the Company's common stock were issued to settle approximately
$1,000,000 in obligations to two creditors of Unisyn. An additional 733,000
shares of the Company's common stock have been issued to settle approximately
$800,000 in additional liabilities. In addition, during the period from February
18, 2000 the Company provided cash advances to Unisyn aggregating approximately
$450,000; these obligations were cancelled pursuant to the Asset Purchase
Agreement.
The assets purchased include accounts receivable, inventory, equipment,
licenses, proprietary software, certain prepaid expenses and other assets, and
intangible assets including patents, trademarks, trade names, service names,
copyrights and other intangibles.
The Company also assumed certain rights and obligations of Unisyn pursuant
to contracts and agreements with customers of Unisyn and pursuant to real
property leases and purchased contracts. The Company also assumed certain
liabilities, including certain accounts payable, deferred revenue and severance
obligations to certain employees totaling approximately $680,000.
On September 10, 1999, the Company had commenced an adversary proceeding
against Unisyn relating to the unilateral termination by Unisyn of an Agreement
and Plan of Merger dated October 10, 1997 between the Company and Unisyn. The
Asset Purchase Agreement provides for the dismissal of all claims in the
litigation.
9
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
The recorded value and purchase price of the assets acquired and
liabilities assumed are as follows:
Accounts receivable, net $1,089,000
Inventories, net 307,000
Property, plant and equipment, net 1,111,000
Other assets 29,000
----------
Allocation of Purchase Price $2,536,000
==========
Value of common stock issued
(930,000 shares at $1.25 per share) $1,163,000
Fair value of liabilities assumed 780,000
Cancellation of cash advances to Unisyn 450,000
Transaction costs 143,000
----------
Total Purchase Price $2,536,000
==========
The operations of Unisyn are included in the statement of operations only
from the date of acquisition, May 25, 2000. Pro forma results of operations
(unaudited) as if the acquisition had occurred as of October 1, 1999 and 1998
are as follows:
Nine months ended June 30,
2000 1999
---- ----
Revenues $ 6,820,000 $ 6,227,000
Net loss before reorganization items $ (2,152,000) $ (4,577,000)
Net loss $ (1,997,000) $ (4,030,000)
Net loss per share $ (0.52) N/A
The loss per common share above for nine months ended June 30, 1999 for
Unisyn has not been computed because the information is not considered
meaningful.
10
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(5) Details to Balance Sheet
Concentration of Credit Risk
The Company grants credit to customers in the normal course of business,
but generally does not require collateral or any other security to support
amounts due. Management performs on-going credit valuations of its customers.
Two customers accounted for approximately 36% of the Company's trade accounts
receivable balance at June 30, 2000.
A significant amount of the Company's revenue has been derived from export
sales. The Company's export sales were 31% and 28% for the three and nine months
ended June 30, 2000, respectively.
Inventories
Inventories consist of the following:
June 30, 2000
-------------
Finished goods......................... $ 288,000
Work-in-process........................ 348,000
Raw materials.......................... 1,555,000
----------
2,191,000
Less non-current portion (378,000)
----------
$1,813,000
The Company has inventory quantities in excess of anticipated sales
requirements for the twelve months subsequent to June 30, 2000. These quantities
consist of finished goods, work-in-process and raw materials relating primarily
to the hollow fiber ACUSYST(R) X-Cell systems. Accordingly, a portion of the
Company's inventory balance is classified as a non-current asset as of that
date.
11
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Long-Term Debt
Long-term debt consists of the following at June 30, 2000:
Uncollateralized promissory note payable to Internal
Revenue Service, with interest of 8% per annum, payable in
monthly installments of $11,095, including interest through
February 1, 2004 and $320 per month thereafter through
February 1, 2005(i)... ..................................... $424,000
Uncollateralized promissory note payable to State of
Minnesota, with interest of 8% per annum, payable in
monthly installments of $2,700, including interest through
February 1, 2005(i)........................................ 125,000
Amounts payable to regulatory agencies(ii)................. 95,000
Other...................................................... 3,000
--------
$647,000
Less current portion of long-term debt..................... 129,000
--------
$518,000
--------
(i) The promissory notes payable to Internal Revenue
Service and State of Minnesota were entered into
pursuant to the Company's reorganization.
(ii) Pursuant to the Plan, the Company is obligated to
repay certain regulatory agencies an aggregate amount
of $94,523 in equal monthly installments for six
years from the date of assessment with interest at
the rate of 8% per annum. As of June 30, 2000, the
Company has not been assessed by these agencies and
promissory notes have not been signed.
12
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
At September 30, 1999, long-term debt, which was assumed pursuant to the
Company's reorganization, totaled approximately $3,900,000 of which $127,000 was
classified as a current liability on the balance sheet. Notes payable in the
amount of approximately $2,303,000 at September 30, 1999 related to the Schuster
Group, a secured creditor of the Predecessor Company which consisted of direct
obligations of the Company to Schuster Group and indirect obligations pursuant
to guarantees made to third parties by the Schuster Group when Mr. Schuster was
an officer, director and principal shareholder of the Predecessor Company. Such
claims were to be paid pursuant to a Credit and Stipulation Agreement between
Biovest and Schuster Group, which was incorporated into the Plan.
During March 2000, the notes payable to the Schuster Group were
extinguished. On February 28, 2000, approximately $555,000 of the direct
obligations plus accrued interest of $17,000 were extinguished upon the cash
payment by the Company of approximately $525,000. The remaining direct
obligations in the principal amount of approximately $874,000 and accrued
interest in the amount of $5,000 were paid by Biovest. Indirect obligations in
the principal amount of $875,000 plus accrued interest of $64,000 were
extinguished upon cash payments in the aggregate amount of approximately
$860,000 by Biovest to the Schuster Group.
At September 30, 1999, pursuant to the Plan, long-term debt included a
note payable to Biovest, L.L.C. ("Biovest") for approximately $861,000, with
interest at 7% per annum, payable in full on or before July 30, 2002, provided
that the Schuster Group obligations were paid in full or released as discussed
above. On March 15, 2000, pursuant to the above payments made by Biovest on
behalf of the Company, the Company's promissory notes issued to Biovest totaled
approximately $2,606,000 in principal and $48,000 in accrued interest. Effective
March 15, 2000, Biovest agreed to purchase and the Company sold 2,123,575 shares
of the Company's Common Stock at $1.25 per share, payable by the cancellation of
the indebtedness to Biovest and the release of obligations of the Company to pay
all outstanding principal and interest thereunder. See Note 6.
At June 30, 2000, the aggregate maturities of long-term debt by fiscal
year are as follows: 2000 - $34,000; 2001 - $223,000; 2002 - $139,000; 2003 -
$151,000; 2004 - $86,000 and subsequent years - $14,000
13
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(6) Common Stock
Private Placement Offering
During the period February 17, 2000 through May 3, 2000, the Company sold
69.63 units of the Company's common stock for approximately $3,481,000 pursuant
to a private placement offering. Each unit had a subscription price of $50,000
and was comprised of 40,000 shares of the Company's common stock at a price of
$1.25 per share. The net proceeds from this offering amounted to $3,216,000,
which is being utilized for the repayment of certain indebtedness and for
working capital purposes. Total issuance costs pertaining to the sale of these
units amounted to approximately $265,000.
Stock Purchase Agreements
Effective March 15, 2000, the Company entered into an agreement with
Biovest, whereby Biovest purchased 2,495,333 shares of the Company's common
stock for an aggregate purchase price of approximately $3,119,000 ($1.25 per
share) and cancelled all of the Company's indebtedness to Biovest as of that
date. Effective March 31, 2000, the Company entered into another agreement with
Biovest, whereby Biovest purchased 13,619 shares of the Company's common stock
for an aggregate purchase price of approximately $17,000 ($1.25 per share) and
cancelled all of the Company's indebtedness to Biovest as of that date.
During March 2000, the Company entered into agreements with the Company's
two executive officers, whereby 240,000 shares of the Company's common stock
were purchased for an aggregate purchase price of $300,000 ($1.25 per share) by
cancellation of all of the Company's indebtedness to these two officers for
salary and bonuses accrued but not yet paid through March 31, 2000.
Acquisition Of Unisyn
Effective May 25, 2000, the Company completed its acquisition of Unisyn
pursuant to an asset purchase agreement. In consideration, the Company issued a
total of 930,000 shares of its common stock. See Note 4.
14
<PAGE>
CELLEX BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(7) Income Taxes
No provision for income taxes has been recorded for the nine months ended
June 30, 2000 due to the net loss incurred during the period. At June 30, 2000,
the Company has net operating loss carryforwards of approximately $40,000,000
(expiring 2002 to 2018) and a capital loss carry forward of approximately
$14,000,000 (expiring in 2003). Due to various changes in ownership of the
Company, virtually all of these carryforwards are subject to significant
restrictions with respect to the ability of the Company to use these amounts to
offset future taxable income. The Company has fully offset deferred tax assets
resulting from differences in accounting between income tax and financial
statement treatment with a valuation allowance. These differences consist almost
entirely of net operating and capital loss carryforwards.
(8) Related Party Transactions
Pursuant to the Company's reorganization effective July 31, 1999, 520,000
shares (approximately 52%) of the Company's new common stock was issued to
Biovest, L.L.C., of which the Company's Chairman of the Board and Chief
Executive Officer is also Chairman and Chief Executive Officer and of which the
Company's President and is also President. Also pursuant to the reorganization,
upon the occurrence of certain events, effective March 15, 2000, 1,434,402
additional shares were issued to Biovest pursuant to the Company's Plan of
Reorganization, comprised of 230,000 shares, which were held in escrow since
July 31, 1999 and 1,204,402 shares issued on March 15, 2000. The 1,434,402
additional shares, pursuant to the Company's Plan of Reorganization, represented
23% of the 6,236,530 shares of the Company's common stock outstanding on March
15, 2000.
In August 1999, Biovest purchased the debt held by the Company's secured
lender in the amount of approximately $676,000. During fiscal 2000, Biovest made
working capital advances to the Company in the amount of $255,000 of which
$150,000 was repaid by the Company. In addition, Biovest paid general and
administrative expenses, expenses of the private placement offering, deferred
acquisition costs and other expenses on behalf of the Company in the aggregate
amount of approximately $377,000. In addition, during fiscal 2000, Biovest paid
approximately $1,745,000 to settle debt and accrued interest on the Company's
behalf. Effective March 15, 2000, Biovest purchased 2,495,333 shares of the
Company's common stock in exchange for cancellation of $3,119,000 in liabilities
payable by the Company to Biovest as of March 15, 2000.
At June 30, 2000, Biovest holds 4,463,354 shares of the Company's Common
Stock or 51.4% of the Company's outstanding common stock and the Company's
chairman and president each own 120,000 shares or 1.4 % of the Company's
outstanding common stock. See Notes 5 and 6.
15
<PAGE>
Predecessor Company
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 1999 June 30, 1999
------------------- -------------------
<S> <C> <C>
Revenues
System sales $ 300,000 $$542,000
Consumable sales 396,000 1,146,000
Contract production services 681,000 2,115,000
Grant revenue -- 55,000
Other 48,000 128,000
------------------- -------------------
Total revenues 1,425,000 3,986,000
Operating costs and expenses
Cost of sales 946,000 2,525,000
Research and development 91,000 281,000
Marketing, general and administrative 339,000 1,129,000
------------------- -------------------
Total operating costs and expenses 1,376,000 3,935,000
------------------- -------------------
Income from operations 49,000 51,000
Other income (expense)
Interest income 1,000 2,000
Interest expense (61,000) (177,000)
------------------- -------------------
Other income (expense), net (60,000) (175,000)
------------------- -------------------
Net loss before reorganization items (11,000) (124,000)
Reorganization items (70,000) (235,000)
------------------- -------------------
Net loss $ (81,000) $ (359,000)
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Predecessor Company
Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 1999
-----------------
<S> <C>
Net loss $ (359,000)
Depreciation 46,000
Amortization 34,000
Changes in current operating items:
Accounts receivable (434,000)
Inventories 88,000
Other (23,000)
Accounts payable and accrued liabilities 1,282,000
Customer deposits (254,000)
--------------
Net cash provided by operating activities 380,000
FINANCING ACTIVITIES
Payments of long-term debt (215,000)
--------------
Net cash used in financing activities (215,000)
--------------
Net increase in cash 165,000
Cash at the beginning of the period (81,000)
--------------
Cash at the end of the period $ 84,000
==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
17
<PAGE>
PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 (unaudited)
(1) Summary of Accounting Policies
Chapter 11 Reorganization
The Company was the subject of an involuntary bankruptcy petition filed on
October 6, 1998 with the United States Bankruptcy Court, District of Minnesota,
Third Division, by three of the Company's unsecured creditors. By request of the
petitioning creditors and by a stipulation, the Company was granted until
December 4, 1998 to file its answer to the involuntary petition. The Company
filed a Consent to order for relief with the Bankruptcy Court on December 8,
1998 and operated as a debtor-in-possession pursuant to Chapter 11 through July
7, 1999 when the Bankruptcy Court entered the order confirming the Company's
Modified First Amended Plan of Reorganization dated June 28, 1999 (the Plan)
which became effective July 30, 1999. For financial reporting purposes, the
effective date of the Plan is considered to be July 31, 1999 (the Effective
Date). The results of operations for the period July 30, 1999 through July 31,
1999 are not considered material.
Basis of Presentation and Reorganization Items
During the ten months ended July 30, 1999, the Predecessor Company
prepared its financial statements in accordance with the American Institute of
Certified Public Accountants' Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The
financial statements for the ten months ended July 30, 1999 distinguish
transactions that were directly associated with the reorganization from the
ongoing operations of the business. Professional fees and similar types of
expenditures relating to the reorganization proceedings were expensed as
incurred and reported as reorganization items. Interest expense was reported
only to the extent that it was paid during the proceeding or that it was
probable that it would be an allowed priority or secured claim.
SOP 90-7 also calls for the adoption of "fresh-start reporting" if the
reorganization value of the emerging entity immediately before the effective
date is less than the total of all post-petition liabilities and pre-petition
allowed claims and if holders of existing voting shares immediately before
confirmation receive less than 50% of the voting shares of the emerging entity,
both conditions of which were satisfied by the Company. Fresh-start reporting
resulted in material changes to the Company's balance sheet, including valuation
of assets at fair value in accordance with principles of the purchase method of
accounting, valuation of liabilities pursuant to provisions of the Plan and
valuation of equity based on the reorganization value of the ongoing business.
In accordance with fresh-start reporting, the gain on discharge of debt of
$9,013,888 resulting from the reorganization proceedings was reflected as an
extraordinary item in the statement of operations of the Predecessor Company for
the two months ended July 30, 1999.
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PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
June 30, 1999 (unaudited)
Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations of the Securities and Exchange Commission relating to interim
reporting, although the Company believes that the disclosures made are adequate
to make the information presented not misleading. The financial statements of
the Company, in the opinion of management, include all normal and recurring
adjustments necessary for a fair presentation of results as of the dates and for
the periods covered by the financial statements.
The results of the period shown for the Predecessor Company are not to be
considered as being indicative of the results of operations that may be expected
for the entire fiscal year or that may be expected for the Reorganized Company.
The results of the Predecessor Company are not comparable to those of the
Reorganized Company.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures about contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
(2) Net Income (Loss) Per Common Share
Pursuant to the Plan, as of the Effective Date, the Predecessor Company's
existing common stock, preferred stock, options and warrants were deemed
canceled and 1,000,000 shares of new common stock were deemed issued to the
Company's new investors and creditors. Loss per Common Share has not been
computed because such information is not considered meaningful.
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PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
June 30, 1999 (unaudited)
(3) Reorganization Items
Reorganization items in the amount of $70,000 for the three months ended
June 30, 1999 and $235,000 for the nine months ended June 30, 1999 consist of
costs related to professional fees and services related to the Company's
reorganization.
(4) Income Taxes
The Predecessor Company did not record a tax benefit for the nine months
ended June 30, 1999 because the Company was unable to carry back the loss and it
was more likely than not that the net deferred tax assets would not be realized
in future years.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company emerged from Chapter 11 Bankruptcy Reorganization on July 31,
1999 with new management, officers and directors.
As of July 31, 1999, the Company adopted fresh start reporting in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 90-7 "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code." SOP 90-7 calls for the adoption of "fresh-start
reporting" if the reorganization value of the emerging entity immediately before
the effective date is less than the total of all post-petition liabilities and
pre-petition allowed claims and if holders of existing voting shares immediately
before confirmation receive less than 50% of the voting shares of the emerging
entity, both conditions of which were satisfied by the Company.
Due to the Company's emergence from Chapter 11 Reorganization and
implementation of fresh-start reporting, the financial statements for the
reorganized company for periods subsequent to July 31, 1999 (the "Reorganized
Company") will not be comparable to those of the Company for the periods prior
to July 31, 1999 (the "Predecessor Company"). The results of the periods shown
for the Predecessor Company are not considered to be indicative of the results
of operations that are expected for the Reorganized Company.
Fresh-start reporting resulted in material changes to the Company's
balance sheet, including valuation of assets at fair value in accordance with
principles of the purchase method of accounting, valuation of liabilities
pursuant to provisions of the Plan and valuation of equity based on the
reorganization value of the ongoing business. In accordance with fresh-start
reporting, the gain on discharge of debt resulting from the reorganization
proceedings was reflected on the financial statements of the Predecessor Company
during July 1999. In addition, the accumulated deficit of the Predecessor
Company was eliminated at July 31, 1999. The Reorganized Company's financial
statements do not reflect beginning retained earnings or deficit. In addition,
the Company's capital structure was recast in conformity with the Plan.
Consequently, results of the Predecessor Company for the three and nine
months ended June 30, 1999, which are unaudited, are not comparable to those of
the Reorganized Company.
The Company has incurred significant operating losses and cash flow
deficits in previous years and has accumulated losses of $1,155,000 during the
eleven-month period since its reorganization. The Company may need to procure
additional financing to fund its operations.
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The Company has included in its financial statements the assets and
liabilities recorded in connection with the acquisition of certain assets and
assumption of certain liabilities of Unisyn Technologies, Inc. The results of
operations related to Unisyn since May 25, 2000, the effective date, have been
included in the Company's statement of operations.
Management believes that its future success is dependent in part on
continuing to increase its sales particularly in contract cell culture
production and services. Management believes that the combination of certain
Unisyn assets and technologies with the Company will enhance the Company's
platform of experience and technical and scientific expertise, equipment and
facilities. Management expects the combination to augment the Company's ability
to service the pharmaceutical and biotechnology industry and further the
Company's goal to accelerate the development of breakthrough biological drugs
and treatments from the laboratory to market for biotech companies. Management
believes that as more biologic products advance through development, clinical
trials and commercialization, the need to produce and manufacture these products
will increase. In addition, management expects the market for contract cell
culture production services to grow as the market's need for expanded production
capability outweighs internal capability and more production is outsourced. The
Company's strategy for growth and achieving profitability includes expanding its
share of the market for its systems and contract cell culture production
services while exploring other applications for the Company's proprietary
technology (when possible, in conjunction with and through funding of strategic
alliances and corporate partners).
During the nine months ended June 30, 2000, the Company was successful in
negotiating the payment of approximately $3,436,000 of liabilities through the
issuance of common stock. Additionally, the Company received net proceeds of
approximately $3,216,000 from the sale of 2,785,200 shares of the Company's
common stock pursuant to a private placement offering. There is no assurance
additional funds, if required, will be raised. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Because of the application of fresh-start reporting, and the acquisition
of Unisyn the financial statements for the periods after reorganization and
acquisition are not comparable to the financial statements for the periods prior
to either or both events.
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Results of Operations
Revenues. Revenues for the three months ended June 30, 2000 of $1,678,000
were up 18% from $1,425,000 for the three months ended June 30, 1999. Contract
cell culture production services increased 54% from $681,000 to $1,052,000 due
primarily to the acquisition of Unisyn. This increase was partially offset by
decreases in other product lines, including a 26% decrease in system sales. For
the nine-month period, total revenues decreased to $3,743,000 this fiscal year
versus $3,986,000 for the nine months ended June 30, 1999. Contract cell culture
production for the three quarters of fiscal 2000 was slightly ahead of the same
period in fiscal 1999. All other sales categories combined were approximately
$200,000 below the comparable period of the previous fiscal year.
Gross Margin. The overall gross margin for the third quarter of fiscal
year 2000 decreased slightly from 34% to 33%. The overall gross margin for the
nine-month period increased slightly from 37% to 38% from last year.
Operating Expenses. Research and development expenses for the third
quarter and nine month period increased approximately $36,000 or 40% and $59,000
or 21%, respectively, over last year reflecting the Company's plans to enhance
the Company's systems software. Marketing, general and administrative ("MG&A")
expenses during the third quarter of fiscal year 2000 and for the nine months
ended June 30, 2000 increased by approximately $383,000 or 113% and $790,000 or
70%, respectively, due to the recognition of increased amortization expense,
expenses incurred relating to the Company's litigation proceedings and increased
corporate expenses which were not incurred during the Company's reorganization
period. Amortization expense, within MG&A expense, during the nine months of
fiscal 2000 was $206,000 approximately half of which relates to patents and
trademarks, which were adjusted to fair value as of the Effective Date of the
Company's reorganization. The remaining half relates to the amortization of the
reorganization value in excess of identifiable assets that was also recorded
pursuant to the Company's reorganization and fresh-start reporting.
Other Expense, Net. Other Expense, Net consists predominantly of interest
expense on the Company's long-term debt that was assumed pursuant to the
Company's reorganization. Such long-term debt was $3,910,000 at September 30,
1999 of which $127,000 was current. Interest expense on this debt was expected
to total in excess of $300,000 each year through at least the year 2006. During
February and March 2000, however, the Company extinguished approximately $3.3
million of debt and accrued interest. Approximately $647,000 in debt remains
with approximately $50,000 of interest expense payable each year through the
year 2005. During the nine months ended June 30, 2000, the Company recognized a
foreign currency transaction gain of approximately $32,000 relating to a portion
of the extinguished debt which was payable in British pounds.
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Reorganization Items. During the three months and nine months ended
June 30, 1999, the Company incurred approximately $70,000 and $235,000 in
reorganization expenses for professional fees and services.
Liquidity and Capital Resources
The Company's cash requirements have been and are expected to continue to
be significant. As of June 30, 2000 the Company had working capital of
$3,156,000 compared to $557,000 at September 30, 1999. The increase is due to
the Company receiving net proceeds of $3,216,000 from the sale of shares of the
Company's common stock pursuant to a private placement offering. The Company's
cash may not be sufficient to fund operating activities and debt service
requirements.
There can be no assurance that additional financing, if required, will be
available to the Company when needed, on commercially reasonable terms, or at
all. Any inability to obtain additional financing when needed would have a
material adverse effect on the Company, including requiring the Company to
curtail, and possibly cease, its operations.
During the period February 17, 2000 through May 3, 2000, the Company sold
69.63 units of the Company's common stock for approximately $3,481,000 pursuant
to a private placement offering. Each unit had a subscription price of $50,000
and was comprised of 40,000 shares of the Company's common stock at a price of
$1.25 per share. The net proceeds from this offering amounted to approximately
$3,216,000 and are being utilized for the repayment of certain indebtedness and
for working capital purposes. Total issuance costs pertaining to the sale of
these units amounted to approximately $265,000.
At September 30, 1999, long-term debt, which was assumed pursuant to the
Company's reorganization, totaled approximately $3,910,000 of which $127,000 was
classified as a current liability on the balance sheet. Approximately $2.3
million of the long-term debt related to notes payable to the Schuster Group and
approximately $861,000 was payable to Biovest pursuant to the Company's
reorganization. The Company was successful in negotiating payment of the
Schuster Group and Biovest obligations in full through the payment of cash and
issuance of common stock of the Company. At various dates during February and
March 2000, the Schuster Group obligations and accrued interest were
extinguished by payments made by the Company and by Biovest on behalf of the
Company, respectively.
On March 15, 2000, pursuant to the above payments made by Biovest on
behalf of the Company, the Company's promissory notes issued to Biovest totaled
$2,606,000 in principal and $48,000 in accrued interest. Effective March 15,
2000, Biovest purchased 2,123,575 shares of the Company's Common Stock at $1.25
per share, payable by the cancellation of the indebtedness to Biovest and the
release of obligations of the Company to pay all outstanding principal and
interest thereunder.
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During fiscal 2000, Biovest made working capital advances to the Company
in the amount of $255,000 of which $150,000 was repaid by the Company. In
addition, Biovest paid general and administrative expenses, expenses of the
private placement offering, deferred acquisition costs and other expenses on
behalf of the Company in the aggregate amount of approximately $377,000.
Effective March 15, 2000, Biovest purchased 2,495,333 shares of the
Company's common stock at $1.25 per share in exchange for the cancellation of
approximately $3,119,000 in liabilities payable by the Company to Biovest.
Effective March 31, 2000, Biovest purchased 13,619 shares of the Company's
common stock at $1.25 per share in exchange for cancellation of $17,000 in
liabilities payable by the Company to Biovest as of that date.
During March 2000, the Company entered into agreements with the Company's
two executive officers, whereby 240,000 shares of the Company's common stock
were purchased for an aggregate purchase price of $300,000 ($1.25 per share) by
cancellation of all of the Company's indebtedness to these two officers for
salary and bonuses accrued but not yet paid through March 31, 2000.
During the nine months ended June 30, 2000, cash resources were utilized
due to the net loss incurred by the Company. Increases in accounts payable,
accrued liabilities and customer deposits had a favorable impact on the
Company's cash resources, while, increases in accounts receivable and changes in
billings on uncompleted contracts had a negative impact.
During the first three quarters of fiscal year 2000, investing activities
utilized $126,000 for capital expenditures. The Company does not currently
expect to make any material capital expenditures in fiscal 2000; however, the
Company is evaluating the expansion of capacity for contract cell culture
production services, which could require an investment of at least $750,000.
Fluctuations in Operating Results
The Company's operating results may vary significantly from quarter to
quarter or year to year, depending on factors such as timing of
biopharmaceutical development and commercialization of products by the Company's
customers, the timing of increased research and development and sales and
marketing expenditures, the timing and size of orders and the introduction of
new products or processes by the Company. Consequently, revenues, profits or
losses may vary significantly from quarter to quarter or year to year, and
revenue or profits in any period will not necessarily be indicative of results
in subsequent periods.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Excorp Medical et al Excorp Medical et al
On May 4, 1997, the Company and Regenerex, Inc. ("Regenerex") filed a
complaint in the Hennepin County District Court, Fourth Judicial District in the
State of Minnesota against defendants Daniel G. Miller; Bruce Amiot; Excorp
Medical, Inc.; James F. Schueppert; Gerald A. Okerman; Stephen E. Smith; Doherty
Rumble & Butler, Professional Association; Ross Strehlow and John G. Kinnard and
Co., Inc.
During the quarter ended June 30, 1998, in exchange for certain
consideration, the Predecessor Company agreed to accept all of the existing
assets of Regenerex, an affiliate of the Predecessor Company with officers and
directors in common with the Predecessor Company, which was developing a
bioartifical liver technology, in complete satisfaction of the amounts owed to
the Predecessor Company by Regenerex. The assets assumed by the Predecessor
Company included Regenerex's claim in this legal proceeding against Excorp and
other parties.
Mr. Miller is a former officer and employee of Regenerex and Mr. Amiot is
a former employee of the Company ("Former Employees'). The complaint alleges
that, unknown to the Company and Regenerex, the Former Employees began a course
of conduct with the goal of convincing the University of Minnesota to terminate
its license agreement with the Company and Regenerex relating to the development
of a bioartificial liver technology ("BAL") and to grant that license instead to
a company in which Miller and Amiot would have an interest. The complaint also
alleges that the other defendants supported and assisted Miller and Amiot to
accomplish their improper and illegal goal of interfering with the current and
prospective contractual relationships of the Company and Regenerex. The
complaint further alleges that Miller and Amiot breached their employment
contracts and wrongfully acquired and used trade secrets of the Company and
Regenerex in setting up a competing company. The complaint contains counts
alleging breach of contract; breach of fiduciary duties; aiding and abetting
breach of fiduciary duties; tortious interference with the contractual
relationship; tortious interference with prospective contractual relationships;
defamation; civil conspiracy and; misappropriation of trade secrets. The
complaint alleges damages to the Company and Regenerex in excess of $50,000.
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Miller and Amiot have each asserted counterclaims against the Company and
Regenerex in response to the complaint. Amiot counterclaimed for $11,000 in back
wages plus a sum representing average daily earnings for 15 days and Miller
counterclaimed for $36,000 in expenses and other amounts allegedly owed, plus a
sum representing his average daily earnings for a period of 15 days. The Company
and Regenerex have denied that Miller and Amiot are entitled to the amounts for
which they have counterclaimed.
By order dated September 30, 1997, the Court severed the breach of
contract and the misappropriation of trade secrets counts involving Miller,
Amiot and Excorp and stayed all proceedings against the remaining defendants
pending resolution of the severed claims. Miller, Amiot and Excorp subsequently
moved for summary judgment on the breach of contract and the misappropriation of
trade secrets claims. The Company and Regenerex opposed the motion and requested
that the matter be set for jury trial. On May 12, 1998, the Court entered two
orders: denying the motion for summary judgment and granting a motion to amend
the Company's and Regenerex's complaint to add a count for tortious interference
against Excorp and to add a claim for punitive damages and attorney's fees under
Minnesota's trade secret statute.
There was no activity in this matter during the pendency of the Company's
reorganization proceedings. However, after the confirmation of the Company's
Plan of Reorganization, the Company and Regenerex filed a motion to
reconsolidate the case in order to complete discovery on all of the non-severed
defendants and conduct one trial involving all of the aforementioned defendants.
The Court granted the motion on October 19, 1999.
On October 29, 1999, an involuntary Chapter 7 bankruptcy case was
commenced against defendant Doherty Rumble & Butler P.A. ("DRB"). Consequently,
the Company and Regenerex dismissed this claim against DRB without prejudice and
shall pursue their claim against this defendant in bankruptcy court.
A scheduling conference was held on November 29, 1999 for the remaining
parties during which the Court set trial to begin the first week of January
2001. The remaining parties are currently involved in discovery.
Unisyn Technologies, Inc.
On September 10, 1999, the Company had commenced an adversary proceeding
against Unisyn relating to the unilateral termination by Unisyn of an Agreement
and Plan of Merger dated October 10, 1997 between the Company and Unisyn. The
Asset Purchase Agreement, effective May 25, 2000 and dismissed all claims in the
litigation.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
On June 8, 2000, the Company filed a report on Form 8-K with respect to
the acquisition of Unisyn Technologies, Inc. on May 25, 2000.
On August 8, 2000, the Company filed a report on Form 8-KA with respect to
the acquisition of Unisyn Technologies, Inc.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
CELLEX BIOSCIENCES, INC.
--------------------------------------
(Registrant)
Date: August 13, 2000 /s/ Dr. Christopher Kyriakides
--------------- --------------------------------------
Dr. Christopher Kyriakides
Chief Executive Officer and Director
Date: August 13, 2000 /s/ Thomas F. Belleau
--------------- --------------------------------------
Thomas F. Belleau
Chief Financial Officer
