<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-21088
VICAL INCORPORATED
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 93-0948554
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9373 Towne Centre Dr., Suite 100, San Diego, California 92121
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(619) 453-9900
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 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 .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at September 30, 1996
----- ---------------------------------
<S> <C>
Common Stock, $.01 par value 15,386,003
</TABLE>
<PAGE> 2
VICAL INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
COVER PAGE.....................................................................................1
TABLE OF CONTENTS..............................................................................2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of September 30, 1996, and December 31, 1995........................3
Statements of Operations for the three months ended September 30, 1996 and
1995, and for the nine months ended September 30, 1996 and 1995.......................4
Statements of Cash Flows for the nine months ended September 30, 1996 and
1995..................................................................................5
Notes to 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............................................................*
ITEM 2. Changes in Securities........................................................*
ITEM 3. Defaults upon Senior Securities..............................................*
ITEM 4. Submission of Matters to a Vote of Security Holders..........................*
ITEM 5. Other Information............................................................*
ITEM 6. Exhibits and Reports on Form 8-K.............................................11
SIGNATURE......................................................................................12
EXHIBIT LIST...................................................................................13
</TABLE>
* No information provided due to inapplicability of item.
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VICAL INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
ASSETS (Unaudited)
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,178,007 $ 7,174,128
Marketable securities - available-for-sale 44,495,955 45,353,638
Receivables and other 1,087,083 528,089
------------ ------------
Total current assets 49,761,045 53,055,855
------------ ------------
Property and Equipment:
Equipment 4,244,132 3,218,315
Leasehold improvements 1,228,695 517,846
------------ ------------
5,472,827 3,736,161
Less-Accumulated depreciation and amortization (3,424,811) (3,044,110)
------------ ------------
2,048,016 692,051
------------ ------------
Patent Costs 1,045,274 835,410
Deposits and Other Assets 692,262 534,188
============ ============
$ 53,546,597 $ 55,117,504
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 619,378 $ 528,297
Current portion of capital lease obligations 399,345 307,485
Deferred revenue 1,486,232 679,167
------------ ------------
Total current liabilities 2,504,955 1,514,949
------------ ------------
Long-Term Obligations:
Notes payable 641,320 --
Long-term obligations under capital leases 794,364 338,514
------------ ------------
Total long-term obligations 1,435,684 338,514
------------ ------------
Stockholders' Equity:
Common stock, $.01 par value--40,000,000 shares authorized--
15,386,003 and 15,364,265 shares issued and outstanding
at September 30, 1996, and December 31, 1995, respectively 153,860 153,643
Additional paid-in capital 72,860,658 72,728,484
Deferred compensation (14,232) (158,427)
Unrealized gain (loss) on marketable securities (85,194) 104,176
Accumulated deficit (23,309,134) (19,563,835)
------------ ------------
Total stockholders' equity 49,605,958 53,264,041
------------ ------------
Total Liabilities and Stockholders' Equity $ 53,546,597 $ 55,117,504
============ ============
</TABLE>
See accompanying notes.
<PAGE> 4
VICAL INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenue $ 254,673 $ 246,567 $ 764,101 $ 699,546
License/royalty revenue 285,853 914,440 3,852,440 4,925,831
------------ ------------ ------------ ------------
540,526 1,161,007 4,616,541 5,625,377
Expenses:
Research and development 2,628,286 2,016,483 8,142,125 6,923,013
General and administrative 750,171 509,024 2,219,192 2,222,019
------------ ------------ ------------ ------------
3,378,457 2,525,507 10,361,317 9,145,032
------------ ------------ ------------ ------------
Loss from operations (2,837,931) (1,364,500) (5,744,776) (3,519,655)
Interest income 683,654 325,341 2,062,706 956,659
Interest expense 36,199 17,904 63,229 57,283
------------ ------------ ------------ ------------
Net loss $ (2,190,476) $ (1,057,063) $ (3,745,299) $ (2,620,279)
============ ============ ============ ============
Net loss per share (Note 2) $ (.14) $ (.08) $ (.24) $ (.20)
============ ============ ============ ============
Shares used in computing net loss per share (Note 2) 15,385,428 12,955,170 15,379,940 12,882,533
============ ============ ============ ============
</TABLE>
See accompanying notes.
<PAGE> 5
VICAL INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,745,299) $ (2,620,279)
Adjustments to reconcile net loss to net cash provided from
(used in) operating activities:
Depreciation and amortization 423,271 401,171
Compensation expense related to stock purchases 143,280 186,175
Write-off of abandoned patent application costs 3,247 219,242
Other -- 1,873
Change in operating assets and liabilities:
Receivables and other (558,994) (1,137,311)
Accounts payable and accrued expenses 91,081 (37,904)
Deferred revenue 807,065 (412,500)
------------ ------------
Net cash provided from (used in) operating activities (2,836,349) (3,399,533)
------------ ------------
INVESTING ACTIVITIES:
Marketable securities 668,313 8,428,479
Capital expenditures (923,799) (37,153)
Deposits and other assets (158,074) 374,486
Patent expenditures (220,116) (236,917)
------------ ------------
Net cash provided from (used in) investment activities (633,676) 8,528,895
------------ ------------
FINANCING ACTIVITIES:
Principal payments under capital lease obligations (300,723) (289,811)
Proceeds from note payable 641,320 --
Issuance of common stock, net 133,307 28,592,564
------------ ------------
Net cash provided from (used in) financing activities 473,904 28,302,753
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,996,121) 33,432,115
Cash and cash equivalents at beginning of period 7,174,128 2,264,130
------------ ------------
Cash and cash equivalents at end of period $ 4,178,007 $ 35,696,245
============ ============
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Equipment acquired under capital leases $ 848,433 $ 123,486
============ ============
</TABLE>
See accompanying notes.
<PAGE> 6
VICAL INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(unaudited)
1. Organization and Basis of Presentation
Organization
Vical was incorporated in April 1987 and has devoted substantially all
of its resources since that time to its research and development
programs. The Company is currently focusing its resources on the
development of its direct gene transfer and related technologies.
Basis of Presentation
The information contained herein has been prepared in accordance with
instructions for Form 10- Q. The information at September 30, 1996, and
for the three month and nine month periods ended September 30, 1996 and
1995, is unaudited. In the opinion of management, the information
reflects all adjustments necessary to make the results of operations
for the interim periods a fair statement of such operations. All such
adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results for a full year. 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
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. For
a presentation including all disclosures required by generally accepted
accounting principles, these financial statements should be read in
conjunction with the audited financial statements for the year ended
December 31, 1995, included in the Vical Incorporated Form 10-K filed
with the Securities and Exchange Commission.
In January 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
The Company has elected to adopt the alternative disclosure provisions
of SFAS 123 and therefore will not be recording stock based
compensation using fair value accounting as defined under SFAS 123.
Patent Costs
The Company capitalizes certain costs related to patent applications.
Accumulated costs are amortized over the estimated economic lives of
the patents using the straight-line method, commencing at the time the
patents are issued. Costs related to patent applications are written
off to expense at the time such costs are deemed to have no continuing
value. The Company continually evaluates its patent costs, and expenses
accumulated costs if, and when, the basis of the patent exceeds the
amount expected to be realized by future applicable product revenue.
<PAGE> 7
2. Net Loss Per Share
Net loss per share for the three and nine month periods ended September
30, 1996 and 1995 is computed using the weighted average number of
common shares outstanding during the period. Common share equivalents
represent shares issuable upon assumed exercise of stock options, using
the treasury stock method, which would have a dilutive effect in
periods where there are earnings. Common share equivalents are not
considered in the calculation of net loss per share, as their effect
would be anti-dilutive.
3. Notes Payable
In June 1996, the Company obtained a loan and security agreement with a
bank for the borrowing of up to $2,500,000. Borrowings currently bear
interest at the bank's prime rate (8.25% at September 30, 1996) plus
.5%, or the Company may alternatively choose to have its borrowings
bear interest at the LIBOR rate plus 3.25%. Borrowings under the line
of credit are secured by substantially all assets of the Company, and
the Company is required to comply with certain financial covenants. In
April 1997, any outstanding borrowings convert to a term loan with
amortization over a three year period. The term loan will bear interest
at the same rate options. At September 30, 1996, borrowings under the
line of credit totaled $641,000.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
OVERVIEW
Vical was incorporated in April 1987 and has devoted substantially all of its
resources since that time to its research and development programs. The Company
is focusing its resources on the development of its direct gene transfer and
related technologies. To date, the Company has not received revenues from the
sale of products. The Company expects to incur substantial operating losses for
at least the next several years, due primarily to expansion of its research and
development programs and the cost of preclinical studies and clinical trials. As
of September 30, 1996, the Company's accumulated deficit was approximately $23.3
million.
In September 1995, the Company commenced Phase II clinical trials of
Allovectin-7, a gene-based product candidate intended for direct injection into
tumor lesions of cancer patients, at ten teaching oncology centers in five tumor
types: melanoma, colorectal carcinoma, renal cell carcinoma, breast carcinoma
and non-Hodgkin's lymphoma. If appropriate rates and durations of clinical
response are observed in these Phase II clinical trials, the data could
potentially lead to the design and initiation of pivotal Phase II/III clinical
trials to support product license approval submissions for certain indications.
Allovectin-7 is being evaluated in combination with low-dose IL-2 in a Phase
I/II clinical trial in renal cell carcinoma patients. Also, several investigator
initiated trials are ongoing using Allovectin-7 supplied by the Company.
In April 1995, the Company initiated Phase I/II clinical testing of its second
gene therapy product candidate, Leuvectin, at two clinical centers. Leuvectin is
a gene-based product candidate intended for direct injection into tumor lesions
of cancer patients. Twenty-four patients with advanced solid malignancies or
lymphoma were enrolled in a Phase I/II clinical trial which evaluated the safety
and biological activity of the experimental gene therapy. This trial concluded
in the second quarter of 1996, and results were presented in May 1996. Since no
toxicity or other adverse events were observed, a follow-on trial was designed
to evaluate safety and biological activity at higher dose levels. This follow-on
trial began in October 1996.
There can be no assurance that the Company's product candidates will prove to be
safe and effective in clinical trials or that any commercially successful
products will ultimately be developed by the Company.
This Form 10-Q contains in addition to historical information, forward-looking
statements. Such statements are subject to certain risks and uncertainties,
including whether the Company's product candidates will be shown to be safe or
efficacious in clinical trials, whether the Company's corporate collaborations
are successful, and whether the Company's product candidates will ultimately be
successfully developed or receive necessary regulatory approvals, which could
cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof. The Company
undertakes no obligation to update these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Vical expects to incur substantial operating losses over the next several years
due to anticipated significant increases in research and development expenses.
The increases are expected to result from expanding preclinical and clinical
trials for the Company's proposed products, increased patent and regulatory
costs and associated increases in personnel. Losses may fluctuate from quarter
to quarter as a result of differences in the timing of expenses incurred and the
revenues received from collaborative agreements. Such fluctuations may be
significant.
<PAGE> 9
For the quarter ended September 30, 1996, the Company had revenues of $541,000
including ongoing amortization of license, contract, and royalty revenue. The
Company had revenues of $1,161,000 for the quarter ended September 30, 1995,
including $750,000 of license revenue from Pasteur Merieux Serums & Vaccins
("Pasteur Merieux"). Other license, contract, and royalty revenues totaled
$411,000. Revenues in the first nine months of 1996 totaled $4,617,000 and
consisted of $1,000,000 from Merck & Co., Inc. ("Merck"), $2,568,000 from
Pasteur Merieux, and other license, royalty, and contract revenue totaling
$1,049,000. For the first nine months of 1995 revenues totaled $5,625,000, and
consisted of contract revenue in the amount of $700,000, license revenue in the
amount of $4,687,000 and royalty revenue of $238,000. Included in license
revenue was $3,312,000 from Merck due to an exercise of options to license Vical
technology. Future payments from Merck, if any, will be milestone and royalty
payments, due upon Merck's development and commercialization of products under
the agreement. There can be no assurance that such development and
commercialization will occur.
The Company's total operating expenses for the quarter ended September 30, 1996,
were $3,378,000 compared to $2,526,000 for the third quarter of 1995. Operating
expenses for the nine months ended September 30, 1996, were $10,361,000 as
compared to $9,145,000 for the same period in 1995.
Research and development expenses were $2,628,000 for the three months ended
September 30, 1996, as compared to $2,016,000 for the same period in 1995. For
the nine months ended September 30, 1996, research and development expenses
increased to $8,142,000 from $6,923,000 for the same period in 1995. These
increases in research and development expenses resulted primarily from option
fees paid in the second quarter of 1996 and ongoing clinical trials and related
internal staffing increases. Additionally, costs of staffing and funding of
research being conducted at universities working in collaboration with Vical
contributed to the increase in research and development expenses.
General and administrative expenses increased to $750,000 for the three months
ended September 30, 1996, from $509,000 for the same period in 1995 primarily
due to increased support for research and development efforts. Costs decreased
to $2,219,000 for the nine months ended September 30, 1996, from $2,222,000 in
1995.
Interest income increased to approximately $684,000 for the third quarter of
1996 from approximately $325,000 for the quarter ended September 30, 1995, and
to $2,063,000 for the nine months ended September 30, 1996 from $957,000 for the
nine months ended September 30, 1995. These changes were primarily the result of
higher cash and investment balances and average rates of return.
Net loss per share for the three months ended September 30, 1996, was $.14 per
share as compared to a net loss per share of $.08 for the third quarter of 1995.
Net loss for the nine months ended September 30, 1996, was $.24 per share as
compared to a net loss per share of $.20 for the same period in 1995.
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Vical has financed its operations primarily through private
placements of preferred stock, three public offerings of common stock, and
revenues from collaborative agreements. As of September 30, 1996, the Company
had working capital of approximately $47.3 million compared to $51.5 million at
December 31, 1995. Cash and marketable securities totaled approximately $48.7
million at September 30, 1996, compared to $52.5 million at December 31, 1995.
In June 1996, the Company obtained a loan and security agreement with a bank for
the borrowing of up to $2,500,000. Borrowings currently bear interest at the
bank's prime rate (8.25% at September 30, 1996) plus .5%, and the Company may
alternatively choose to have its borrowings bear interest at the LIBOR rate plus
3.25%. Borrowings under the line of credit are secured by substantially all
assets of the Company. In April 1997, any outstanding borrowings convert to a
term loan amortized over three years. The term loan bears interest at the same
rate options. In addition, the Company is required to comply with certain
restrictive covenants. At September 30, 1996, borrowings under the line of
credit totaled $641,000.
In October 1996, the Company received $1,000,000 from Genzyme Corporation
("Genzyme") for the exercise of an option granting Genzyme exclusive worldwide
rights to use Company technology for the treatment of cystic fibrosis.
The Company expects to incur substantial additional research and development
expense including continued increases in personnel costs and costs related to
preclinical testing and clinical trials. The Company's future capital
requirements will depend on many factors, including continued scientific
progress in its research and development programs, the scope and results of
preclinical testing and clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments, the
cost of manufacturing and scale-up, and commercialization activities and
arrangements. The Company intends to seek additional funding through research
and development relationships with suitable potential corporate collaborators or
through public or private financing. There can be no assurance that additional
funding will be available on favorable terms, if at all.
If additional funding is not available, Vical anticipates that its available
cash and existing sources of funding will be adequate to satisfy its operating
needs through 1998.
<PAGE> 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
Exhibit 27 Financial Data Schedule
2. Reports on Form 8-K
None
<PAGE> 12
VICAL INCORPORATED
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
Vical Incorporated
Date: November 13, 1996 By: s/Martha J. Demski
------------------
Martha J. Demski
Vice President and
Chief Financial Officer
(on behalf of the registrant and
as the registrant's Principal
Financial and Accounting
Officer)
<PAGE> 13
EXHIBIT LIST
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,178
<SECURITIES> 44,496
<RECEIVABLES> 1,087
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,761
<PP&E> 5,473
<DEPRECIATION> 3,425
<TOTAL-ASSETS> 53,547
<CURRENT-LIABILITIES> 2,505
<BONDS> 1,436
0
0
<COMMON> 154
<OTHER-SE> 49,452
<TOTAL-LIABILITY-AND-EQUITY> 53,547
<SALES> 0
<TOTAL-REVENUES> 6,679
<CGS> 0
<TOTAL-COSTS> 8,142
<OTHER-EXPENSES> 2,219
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> (3,745)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,745)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
