<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 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 No. 0-19153
------------------------
NEXELL THERAPEUTICS INC.
(Exact name of Registrant as specified in its Charter)
------------------------
Delaware 06-1192468
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
9 Parker, Irvine, CA 92618
(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 470-9011
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 ______
---
The aggregate number of Registrant's shares of Common Stock, $.001 par
value, outstanding on October 18, 2000 was 19,084,894 shares.
------------------------
<PAGE>
NEXELL THERAPEUTICS INC.
INDEX
-----
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) as of
September 30, 2000 and December 31, 1999........................................ 3
Condensed Consolidated Statements of Operations (unaudited)
for the three and nine months ended September 30, 2000
and 1999........................................................................ 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2000 and 1999........................... 5
Notes to Condensed Consolidated Financial
Statements (unaudited).......................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 15
Item 2. Changes in Securities and Use of Proceeds........................................... 15
Item 3. Defaults upon Senior Securities..................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................. 15
Item 5. Other Information................................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................................................... 15
SIGNATURES......................................................................................... 17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NEXELL THERAPEUTICS INC. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,590,000 $ 28,695,000
Trade receivables net of allowance for doubtful accounts of
$26,000 at September 30, 2000 and December 31, 1999, respectively 3,184,000 2,033,000
Receivables from related party 1,650,000 1,248,000
Inventory - finished goods 3,406,000 4,409,000
Other current assets 3,919,000 2,271,000
---------------- ------------------
Total current assets 31,749,000 38,656,000
Fixed assets, net 9,347,000 10,932,000
Intangible assets, net 40,413,000 43,191,000
Other assets, including equity investments 4,909,000 1,060,000
---------------- ------------------
Total assets $ 86,418,000 $ 93,839,000
================ ==================
LIABILITIES
Current liabilities:
Accounts payable $ 4,151,000 $ 3,194,000
Accounts payable due to related party 5,806,000 4,279,000
Accrued expenses 4,623,000 3,152,000
---------------- ------------------
Total current liabilities 14,580,000 10,625,000
Deferred revenue 2,138,000 --
---------------- ------------------
Total liabilities 16,718,000 10,625,000
Commitments and contingencies -- --
SHAREHOLDERS' EQUITY
Convertible preferred stock; $.001 par value, 1,150,000 shares authorized:
Series A; 74,498 issued and outstanding at September 30, 2000 and
December 31, 1999 (liquidation value $78,013,000 and $74,685,000) 100 100
Series B; 63,000 issued and outstanding at September 30, 2000 and
December 31, 1999 (liquidation value $63,666,000 and $63,192,000) 100 100
Common stock; $.001 par value, 80,000,000 shares authorized,
19,084,894 and 18,178,737 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively. 19,000 18,000
Additional paid-in capital 258,193,800 252,796,800
Unearned compensation -- (198,000)
Accumulated other comprehensive income (loss) 3,774,000 (5,000)
Accumulated deficit (192,287,000) (169,398,000)
---------------- ------------------
Total shareholders' equity 69,700,000 83,214,000
---------------- ------------------
Total liabilities and shareholders' equity $ 86,418,000 $ 93,839,000
================ ==================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
NEXELL THERAPEUTICS INC. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
2000 1999 2000 1999
--------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ 4,498,000 $ 2,243,000 $ 13,912,000 $ 9,320,000
Cost of goods sold 2,731,000 1,920,000 7,943,000 6,657,000
--------------- --------------- ---------------- ----------------
Gross profit 1,767,000 323,000 5,969,000 2,663,000
--------------- --------------- ---------------- ----------------
Operating expenses:
Research and development 3,562,000 5,382,000 11,510,000 13,623,000
General and administrative 4,334,000 3,147,000 10,300,000 7,657,000
Selling, marketing and distribution 2,025,000 3,023,000 6,691,000 5,146,000
Goodwill and intangible assets amortization 1,017,000 1,017,000 3,050,000 2,764,000
Restructuring costs -- -- -- 504,000
--------------- --------------- ---------------- ----------------
Total operating expenses 10,938,000 12,569,000 31,551,000 29,694,000
--------------- --------------- ---------------- ----------------
Operating loss (9,171,000) (12,246,000) (25,582,000) (27,031,000)
--------------- --------------- ---------------- ----------------
Other (income) expenses:
Royalty, licensing and other related income (1,000) (622,000) (77,000) (924,000)
Royalty expense -- 30,000 100,000 70,000
Interest income (350,000) (255,000) (963,000) (844,000)
Interest expense -- 523,000 -- 1,553,000
Gain on sale of equity investments (3,231,000) -- (3,231,000) --
Other, net (97,000) -- 67,000 146,000
--------------- --------------- ---------------- ----------------
Total other (income) expenses (3,679,000) (324,000) (4,104,000) 1,000
--------------- --------------- ---------------- ----------------
Net loss (5,492,000) (11,922,000) (21,478,000) (27,032,000)
Preferred stock dividends (1,587,000) (1,051,000) (4,751,000) (3,142,000)
--------------- --------------- ---------------- ----------------
Net loss applicable to common stock $ (7,079,000) $ (12,973,000) $ (26,229,000) $ (30,174,000)
=============== =============== ================ ================
Basic and diluted loss per share $ (0.37) $ (0.71) $ (1.41) $ (1.70)
--------------- --------------- ---------------- ----------------
Weighted average number of shares of common stock
outstanding-basic and diluted 19,016,000 18,168,000 18,652,000 17,749,000
=============== =============== ================ ================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
NEXELL THERAPEUTICS INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
------------------------------------------------
2000 1999
-------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (21,478,000) $ (27,032,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 5,554,000 5,126,000
Noncash compensation.......................................... 1,549,000 143,000
Loss from disposal of equipment............................... 10,000 --
Gain on sale of equity investments............................ (3,231,000) --
Amortization of deferred revenue.............................. (112,000) --
Asset impairment charge....................................... 100,000 112,000
Changes in operating assets and liabilities:
Increase in trade receivables............................... (1,151,000) (1,826,000)
Decrease (increase) in receivable from related party........ (403,000) 2,157,000
Decrease (increase) in inventory............................ 1,003,000 (2,375,000)
Increase in other current assets and other assets........... (2,241,000) (1,467,000)
Increase in accounts payable and accrued expenses........... 3,259,000 880,000
Increase in accounts payable to related party............... 1,526,000 10,179,000
--------------- ---------------
Net cash used in operating activities......................... (15,615,000) (14,103,000)
--------------- ---------------
Cash flows from investing activities:
Purchases of equipment............................................ (1,089,000) (2,675,000)
Proceeds from sales of equipment.................................. 139,000 150,000
--------------- ---------------
Net cash used in investing activities......................... (950,000) (2,525,000)
Cash flows from financing activities:
Proceeds from issuance of common stock in connection with the
exercise of warrants/options.................................. 4,047,000 921,000
Proceeds from sale of equity investments.......................... 3,818,000 --
Repurchase/retirement of common stock............................. -- (627,000)
Increase in long term debt due to related party................... -- 1,552,000
Repayment of long term debt....................................... -- (96,000)
Repayment of capital leases....................................... -- (56,000)
--------------- ---------------
Net cash provided by financing activities..................... 7,865,000 1,694,000
Effect of exchange rate changes on cash................................ (405,000) 5,000
--------------- ---------------
Net decrease in cash and cash equivalents.............................. (9,105,000) (14,929,000)
Cash and cash equivalents at beginning of period....................... 28,695,000 33,091,000
--------------- ---------------
Cash and cash equivalents at end of period............................. $ 19,590,000 $ 18,162,000
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest -- $ 1,000
Cash paid for income taxes 19,000 --
</TABLE>
Non-cash investing and financing activities:
. In January 1999, the Company issued 470,553 shares of Common Stock valued at
$3,000,000 in exchange for certain intangible assets.
. In May 1999, the Company issued 750,000 shares of Common Stock valued at
$6,282,000 to Baxter Healthcare Corporation in exchange for its minority
interest in Nexell of California, Inc.
. In June 1999, the Company issued 17,500 shares of Common Stock valued at
$153,000 to certain Innovir shareholders in exchange for their outstanding
Innovir preferred stock.
. The Company accrued $3,331,000 in Series A Preferred Stock dividends and
$1,420,000 in Series B Preferred Stock dividends in the nine months ended
September 30, 2000. Payments of $945,000 were made on Series B Preferred
Stock dividends in May 2000.
The accompanying notes are an integral part of the condensed consolidated
financial statements
5
<PAGE>
NEXELL THERAPEUTICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(unaudited)
(1) Financial Statement Presentation
The unaudited condensed consolidated financial statements and notes thereto
of Nexell Therapeutics Inc. ("Nexell") and subsidiaries (collectively, the
"Company") herein have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"), and in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the results of operations for the
interim periods presented. Certain information and footnote disclosures
normally included in financial statements, prepared in accordance with
generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations. However, management believes that
the disclosures are adequate to make the information presented not
misleading. These condensed consolidated unaudited financial statements and
notes thereto have been prepared in conformity with the accounting
principles applied in our 1999 Annual Report on Form 10-K for the year
ended December 31, 1999 and should be read in conjunction with such Report.
The results for the interim periods are not necessarily indicative of the
results for the full fiscal year. Certain prior period amounts have been
reclassified to conform with the current period presentation.
(2) Principles of Consolidation
These condensed consolidated financial statements include the accounts of
Nexell, Nexell of California, Inc. ("NCI") and its subsidiary, VIMRX
Genomics, Inc. ("VGI"), Innovir Laboratories, Inc. ("Innovir") and its
subsidiaries. All significant intercompany balances and transactions have
been eliminated.
(3) Common Stock Reverse Split
At the June 14, 2000 annual meeting of stockholders, the stockholders
approved, and on June 15, 2000 the Company effected, a one for four reverse
stock split of the Company's outstanding common stock ("Common Stock"). All
prior period common share and per share information presented in the
unaudited condensed consolidated financial statements and notes thereto
have been adjusted to give retroactive effect to the reverse stock split.
6
<PAGE>
(4) Comprehensive Loss
Comprehensive loss consists of net loss, adjustment to fair value of equity
investments and foreign currency translation adjustments and is presented
in the table below. Accumulated other comprehensive loss is included as a
component of shareholders' equity.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------------------------------------------
2000 1999 2000 1999
------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Net loss $ 5,492,000 $ 11,922,000 $ 21,478,000 $ 27,032,000
Translation adjustment 383,000 (9,000) 414,000 24,000
Adjustment to market value
of equity investment (344,000) -- (4,193,000) --
------------ ------------ ------------ ------------
Total comprehensive loss $ 5,531,000 $ 11,913,000 $ 17,699,000 $ 27,056,000
============ ============ ============ ============
</TABLE>
The cumulative foreign currency translation adjustment included as a
component of accumulated other comprehensive loss was $419,000 and $5,000
at September 30, 2000 and December 31, 1999, respectively. The cumulative
adjustments for the difference between cost and market value of equity
securities held as investments included as a component of accumulated other
comprehensive loss was $4,193,000 and zero at September 30, 2000 and
December 31, 1999, respectively.
No income tax expense or benefit was allocated to the foreign currency
translation or equity investment adjustments recorded in 2000 and 1999,
respectively, due to the Company's significant net operating loss tax
carryforwards.
(5) Per Share Information
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted net loss per
share is computed using the weighted average number of shares of common
stock outstanding and potentially dilutive common shares outstanding during
the period. Potentially dilutive common shares consist of stock options and
warrants using the treasury stock method but are excluded if their effect
is antidilutive.
Stock options and warrants, excluding Class A performance warrants, to
purchase 4,716,377 and 4,087,161 shares of Common Stock were outstanding at
September 30, 2000 and 1999, respectively. Stock options and warrants
outstanding were not included in the computation of diluted earnings per
share as the Company incurred losses in all periods presented.
7
<PAGE>
(6) Restructuring of Sales, Marketing and Distribution Arrangement with Baxter
As more fully described in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, the Company is party to numerous contracts
with Baxter Healthcare Corporation. Certain of these agreements were
terminated and/or restructured in 1999. This allowed the Company to assume
direct control for all sales and distribution of the Company's products.
(7) Investments
The Company owns 457,143 shares of the common stock of Epoch
Pharmaceuticals, Inc., representing approximately 2% ownership at September
30, 2000. Included in other comprehensive income is the unrealized gain
recorded for this investment to adjust to fair market value at September
30, 2000. The above investments are included in "other assets" on the
accompanying balance sheet and are accounted for as available-for-sale
securities under Statement of Financial Accounting Standards No. 115-
"Accounting for Certain Investments in Debt and Equity Securities".
Accordingly, these investments are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a component of
comprehensive loss, a separate component of shareholders equity.
The Company owned 134,000 shares of the common stock of Ribozyme
Pharmaceuticals, Inc. ("RPI"). These securities became tradable in August
2000 and were sold for a total of $3,818,000 in September 2000. The Company
recognized a gain on the sale of these securities of $3,231,000 in the
third quarter of 2000. In addition, the Company holds warrants to purchase
an additional 350,000 shares of RPI stock.
(8) Distribution and Co-Development Agreement
On May 9, 2000, the Company announced it had entered into a strategic
alliance with Takara Shuzo Co., Ltd. ("Takara"), a diversified brewing,
foods, and biomedical company in Japan. Pursuant to such agreements, Takara
has become the exclusive distributor of the Company's cell therapy products
in Japan, Korea, Taiwan and China and the parties will engage in
development collaborations in gene therapy. In exchange for the
distribution rights, Takara agreed to pay the Company a nonrefundable fee
of $2.5 million within 100 days of the agreement's execution. This payment,
which was received in the third quarter of 2000, is being recognized as
revenue over the five-year term of the agreement. Under the co-development
agreement, the companies will engage in co-development efforts to develop a
product in the field of ex-vivo genetic transduction combining Nexell's
technology and Takara's product.
8
<PAGE>
(9) Geographic Information
The Company operates in one industry segment: the development, manufacture,
marketing and distribution of specialized instruments, biologicals,
reagents, sterile plastic sets and related products used in ex vivo cell
research and therapies. Prior to the termination of the Company's
distribution agreement with Baxter on November 30, 1999, all of the
Company's sales were made to a domestic entity of Baxter. Substantially all
of Baxter's end user sales of the Company's products were made
internationally until regulatory approval for United States distribution
was received in July 1999. Assets assigned to geographic segments have not
changed materially since December 31, 1999. Summary comparative operating
results for the United States and the rest of the world follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- -----------------------------------
September 30, September 30, September 30, September 30,
--------------- -------------- -------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues by Geographic Area:
United States $ 2,809,000 $ 2,243 000 $ 8,666,000 $ 9,320,000
Europe $ 1,557,000 -- $ 4,825,000 --
Rest of World 132,000 -- 421,000 --
----------- ----------- ----------- -----------
$ 4,498,000 $ 2,243,000 $13,912,000 $ 9,320,000
=========== =========== =========== ===========
Operating loss by Geographic Area:
United States $ 6,633,000 $12,232,000 $19,001,000 $26,935,000
Europe $ 2,337,000 -- 5,894,000 --
Rest of World 201,000 14,000 687,000 96,000
----------- ----------- ----------- -----------
$ 9,171,000 $12,246,000 $25,582,000 $27,031,000
=========== =========== =========== ===========
</TABLE>
(10) Recent Accounting Developments
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements", as amended, which for the Company is effective no
later than the fiscal quarter beginning October 1, 2000. SAB No. 101
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company believes that implementation of SAB No. 101 will have no material
impact on its financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25". Under the
provisions of this Interpretation, which the Company has adopted, changes
in vesting schedules, exercise prices and number of shares awarded result
in revaluing options at the date of the change by a charge to compensation
expense.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto included elsewhere in this Quarterly
Report on Form 10-Q and with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
Three Months Ended September 30, 2000 and 1999
Sales were $4,498,000 for the quarter ended September 30, 2000, an increase of
$2,255,000 or 101% from $2,243,000 for the quarter ended September 30, 1999. In
the prior year, revenues principally reflected product sales by NCI to its
former exclusive worldwide distributor, Baxter Healthcare Corporation
("Baxter"), and were impacted by the timing of the distributor's orders. In the
current year, as a result of the 1999 restructuring of the distribution
agreement with Baxter, the Company now sells product directly to multiple end
users. Accordingly, timing of orders less significantly impacts revenues since
product sales are distributed to more than 200 customers rather than a single
distributor. The transition from distribution through Baxter to direct end user
sales by the Company required the recruitment and training of domestic and
international sales forces and the creation of a sales infrastructure,
activities which management believes are now complete. Further, following
regulatory approval of the Isolex 300i system in July 1999, end user sales began
in the United States. In addition, pursuant to an asset transfer agreement, the
Company agreed to repurchase inventory, hardware and related assets previously
sold to Baxter for distribution. The closing for the transfer of assets in the
United States and Canada occurred on June 30, 1999 and in the rest of the world
on November 30, 1999. As a result of this transfer, sales were reduced by
approximately $3,380,000 in the three months ended September 30, 1999 as a
result of the return of assets previously sold to Baxter. The decline in sales
from the prior year exclusive of this adjustment of $1,125,000 was primarily due
to the turnover and subsequent rebuilding of the European sales force in late
1999 and early 2000.
Gross profit was $1,767,000 for the quarter ended September 30, 2000, an
increase of $1,444,000 from the $323,000 for the quarter ended September 30,
1999. This increase was due to the impact of the changes in the distribution
agreement with Baxter in the prior year, spreading substantially constant
overhead costs over a larger sales base and changes in sales mix.
Total operating expenses were $10,938,000 for the three months ended September
30, 2000, a decrease of $1,631,000 or 13% from the quarter ended September 30,
1999. This decrease was the result of decreases in research and development
expenses of $1,820,000 and sales, marketing and distribution expenses of
$998,000. These decreases were partially offset by an increase in general and
administrative expenses of $1,187,000.
Research and development expenses decreased by $1,820,000 or 34% from $5,382,000
for the three months ended September 30, 1999 to $3,562,000 for the three months
ended September 30, 2000, primarily due to discontinuing all Innovir operations
and a decline in new product development costs.
General and administrative expenses increased by $1,187,000 or 38% from
$3,147,000 in the third quarter of 1999 to $4,334,000 in the third quarter of
2000. This resulted principally from a charge of $1,413,000 as a result of
accelerated vesting of options for a departed employee and repricing of
10
<PAGE>
certain stock options in accordance with the provisions of FASB Interpretation
No. 44 (see Note 10 to the condensed consolidated financial statements) and
severance for certain former employees of $300,000. These increases were offset
by reductions related to the closing of Innovir operations and the relocation
and consolidation of the Company's headquarters in Irvine, California.
Additionally the Company incurred costs related to the launch of the Isolex 300i
and assumption of direct sales and distribution responsibilities in Europe in
the prior year which did not recur in 2000.
Selling, marketing and distribution expenses decreased by $998,000 or 33% from
$3,023,000 in the third quarter of 1999 to $2,025,000 in the third quarter of
2000. This decrease resulted from non-recurring expenses related to the
Company's assumption of responsibility for marketing, selling and distribution
activities related to its cell therapy products during the third quarter of
1999. Baxter had previously performed these activities. In addition, in the
prior year there had been a significant ramp up in marketing and selling
expenses related to the launch of the Isolex 300i.
Goodwill and intangible amortization remained constant with the third quarter of
1999.
Other income was $3,679,000 for the quarter ended September 30, 2000, compared
to $324,000 for the quarter ended September 30, 1999, an increase of $3,355,000.
This was primarily the result of a gain of $3,231,000 on the sale of the
Company's investment in the common stock of Ribozyme Pharmaceuticals, Inc.
("RPI") and a decrease in interest expense, due to the November 1999 repayment
of the Company's outstanding debt, from $523,000 in the three months ended
September 30, 1999 to zero for the comparable period in 2000. These were
partially offset by a decrease in royalty, licensing and related income from
$622,000 in the third quarter of 1999 to $1,000 in the comparable period of
2000. The decrease in royalty, licensing and related income in 2000, resulted
from the Company's sale of certain Innovir assets for cash, shares of RPI stock
and RPI warrants.
The foregoing resulted in a net loss of $5,492,000 and a net loss applicable to
common stock of $7,079,000 for the quarter ended September 30, 2000. This
represented a decrease in net loss of $6,430,000 or 54% and a decrease in the
net loss applicable to common stock of $5,894,000 or 45% from the quarter ended
September 30, 1999.
Nine Months Ended September 30, 2000 and 1999
Sales were $13,912,000 for the nine months ended September 30, 2000, an increase
of $4,592,000 or 49% from $9,320,000 for the nine months ended September 30,
1999. This increase was the result of the changes to the distribution agreement
with Baxter, the completion of the development of an internal sales function,
regulatory approval of the Isolex 300i system and the non-recurring prior year
decrease in sales of $4,767,000 associated with the repurchase of inventory
previously sold to Baxter which is described in greater detail above. Exclusive
of this adjustment, sales have declined by $175,000 from the prior year due to
the U.S. launch in July 1999 offset by impacts of the disruption in the European
sales force.
Gross profit was $5,969,000 for the nine months ended September 30, 2000, an
increase of $3,306,000 from the $2,663,000 for the nine months ended September
30, 1999. This increase was due to the impact of the changes in the distribution
agreement in the prior year and spreading substantially constant overhead costs
over a larger sales base and changes in sales mix.
11
<PAGE>
Total operating expenses were $31,551,000 for the nine months ended September
30, 2000, an increase of $1,857,000 or 6% over the nine months ended September
30, 1999. This increase was the result of several factors. General and
administrative expenses increased by $2,643,000 or 35% from $7,657,000 in 1999
to $10,300,000 in 2000. This was largely due to increased headcount and related
recruitment and relocation costs as a result of the anticipated growth in
revenue following regulatory approval of the Isolex 300i system in July 1999,
the need for increased infrastructure as a result of the revisions to the
distribution agreement with Baxter and one-time charges related to separation
agreements with former employees, including certain officers, including
severance and acceleration of stock option vesting.
Selling and marketing expenses increased by $1,545,000 or 30% from $5,146,000 in
the first nine months of 1999 to $6,691,000 in the first nine months of 2000.
This was the result of the restructuring of the distribution agreement with
Baxter and the ramp up in sales and marketing activities associated with
regulatory approval of the Isolex system. The changes in the agreement with
Baxter resulted in the Company's assumption of responsibility for marketing,
selling and distribution activities related to its cell therapy products. Baxter
had previously performed these activities.
Goodwill and intangible amortization increased by $286,000 or 10% to $3,050,000
for the nine months ended September 30, 2000 from $2,764,000 for the nine months
ended September 30, 1999 as a result of the acquisitions of certain assets of
CellPro Incorporated in January 1999 and the acquisition of Baxter's minority
interest in Nexell of California, Inc. (formerly Nexell Therapeutics Inc.) in
May 1999.
The expense increases discussed above were partially offset by a $504,000
decrease in restructuring costs related to the relocation of the Company's
corporate headquarters in the previous year while no such costs were incurred in
the current year, and by a decrease in research and development expenses of
$2,113,000 or 16% from $13,623,000 in the first nine months of 1999 to
$11,510,000 in the first nine months of 2000, which resulted from the cessation
of Innovir operations and reduced new product development costs.
Other income was $4,104,000 for the nine months ended September 30, 2000, while
other expense of $1,000 was incurred in the nine months ended September 30,
1999, a change of $4,105,000. This was primarily the result of a decrease in
interest expense from $1,553,000 in the nine months ended September 30, 1999 to
zero for the comparable period in 2000 and the gain on sale of RPI common stock
of $3,231,000. This was partially offset by a decrease of $847,000 in royalty,
licensing and related income. The decrease in interest expense arose from the
repayment of approximately $34 million in convertible debentures from the
proceeds of the Company's private placement financing that was completed in
November 1999. The decrease in royalty, licensing and related income resulted
from a non-recurring licensing payment received from Amgen Inc. by Innovir in
the second quarter of 1999 and the gain on sale of certain Innovir assets in the
third quarter of 1999.
The foregoing resulted in a net loss of $21,478,000 and a net loss applicable to
common stock of $26,229,000 for the nine months ended September 30, 2000. This
represented a decrease in net loss of $5,554,000 or 21% and a decrease in the
net loss applicable to common stock of $3,945,000 or 13% from the nine months
ended September 30, 1999.
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Liquidity and Capital Resources
The Company had $19,590,000 in cash and cash equivalents as of September 30,
2000 as compared to $28,695,000 as of December 31, 1999, and working capital of
$17,169,000 at September 30, 2000 as compared to $28,031,000 at December 31,
1999. The $9,105,000 decrease in cash and cash equivalents resulted principally
from cash used in the operations of the Company of $15,615,000, and purchases of
equipment totaling $1,089,000. These were partially offset by cash proceeds of
$4,047,000 from the exercise of stock options and warrants and proceeds of
$3,818,000 from the sale of securities held for investment. The decrease in
working capital of $10,862,000 resulted principally from the decrease in cash
and cash equivalents.
Cash used in operating activities in the first nine months of 2000 of
$15,615,000 represented an increase of $1,512,000 or 11% from the cash use of
$14,103,000 for the nine months ended September 30, 1999. The increase is due
principally to the gain on sale of equity investments of $3,231,000, a reduction
in the amount by which accounts payable to related parties increased of
$8,653,000 and an increase of $403,000 in receivables from related parties
compared to the $2,157,000 decrease in the prior year. These increased uses of
operating cash were partially offset by a decrease in the net loss of
$5,554,000, an increase of $1,406,000 in non cash compensation, a decrease in
inventory of $1,003,000 as compared to the prior year's increase in inventory of
$2,375,000 and the growth in the amount of increase in accounts payable and
accrued liabilities of $2,379,000 over the prior year. Remaining changes in
components of cash used in operating activities largely offset.
Cash dividends are payable semi-annually in May and November on the Series B
Preferred Stock at the rate of 3% of the liquidation preference and will be
approximately $1,900,000 per year.
The Company, in the ordinary course of business, routinely explores possible
business transactions that may lead to an acquisition. In general, in order to
conserve cash the Company's preference is to use its stock as consideration for
any potential acquisition or similar corporate transaction.
The Company expects to incur substantial expenditures in the foreseeable future
for the research and development and commercialization of its proposed products.
Based on current projections, which are subject to change, the Company's
management believes that the current balance of cash and cash equivalents is
sufficient to fund its operations through at least fiscal 2000. Thereafter, the
Company will require additional funds, which it may seek to raise through public
or private equity or debt financings, collaborative or other arrangements with
corporate sources, or through other sources of financing. There can be no
assurance that such additional funds will be available to the Company on terms
favorable to the Company, or at all.
On May 9, 2000, the Company announced it had entered into a strategic alliance
with Takara Shuzo Co., Ltd. ("Takara"), a diversified brewing, foods, and
biomedical company in Japan. For further information on this alliance please see
Note 8 to the financial statements.
On July 21, 2000, the Company entered into an Antibody License Agreement with
NeoRx Corporation. Under terms of the agreement NeoRx granted an exclusive,
worldwide license for ex vivo diagnostics to its licensed antibody, NRLu-5.
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Disclosure Regarding Forward Looking Statements
This Report on Form 10-Q contains certain statements that are "Forward Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Those statements include, among other things, the discussions of the Company's
business strategy and expectations contained in "Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Although the Company believes that the expectations reflected in Forward Looking
Statements are reasonable, management can give no assurance that such
expectations will prove to have been correct. Generally, these statements relate
to business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, or projections involving anticipated
revenues, expenses, earnings, levels of capital expenditures, liquidity or
indebtedness or other aspects of operating results or financial position. All
phases of the operations of the Company are subject to a number of
uncertainties, risks and other influences (including the timely commencement and
success of the Company's clinical trials and other research endeavors, delays in
receiving FDA or other regulatory approvals, the development of competing
therapies and/or technologies, the terms of any future strategic alliances, the
possible need for additional capital, and the volatility in the market price for
the Company's securities) many of which are outside the control of the Company
and any one of which, or a combination of which, could materially affect the
results of the Company's operations and whether the Forward Looking Statements
made by the Company ultimately prove to be accurate.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, operations of the Company are exposed to risks
associated with fluctuations in interest rates and foreign currency exchange
rates.
Interest Rate Risk
The Company maintains excess cash in a mutual fund, the "Black Rock Low Duration
Bond Portfolio" (the "fund"), which invests in asset backed securities, bonds
and various other commercial obligations. The fund may, from time to time, use
certain derivatives in its investment strategy. Additionally, the Company
maintains excess cash required for short-term needs in daily money market funds
with financial institutions.
Two of the main risks disclosed by the fund are interest rate risk and credit
risk. Typically, when interest rates rise, there is a corresponding decline in
the market value of bonds such as those held by the fund. Credit risk refers to
the possibility that the issuer of the bond will not be able to make principal
and interest payments. The Company addresses these risks by actively monitoring
the fund's performance and investment holdings. The Company does not enter into
financial instruments for trading or speculative purposes.
The Company's interest income is most sensitive to fluctuations in the general
level of U.S. interest rates. In this regard, changes in the U.S. interest rates
affect the interest earned on the Company's cash as well as the value of the
mutual fund in which excess cash is invested.
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The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment of excess cash in a mutual fund, which
invests in asset backed securities, bonds and various other commercial
obligations. The fund may, from time to time, use certain derivatives in its
investment strategy. The fund's portfolio managers make all investment decisions
and the Company has no control over such investment decisions or the fund's use
of derivatives.
Foreign Currency Risk
Changes in foreign exchange rates, and in particular a strengthening of the U.S.
dollar, may negatively affect the Company's consolidated sales and gross margins
as expressed in U.S. dollars. To date, the Company has not entered into any
foreign exchange contracts to hedge its exposure to foreign exchange rate
fluctuations. However, as its international operations grow, the Company may
enter into foreign exchange contracts to manage its foreign exchange risk.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Part II, Item 1 of the Company's quarterly report on Form
10-Q for the quarterly period ended June 30, 2000 regarding a lawsuit filed by
the Company against Miltenyi Biotec GmbH of Germany and its related U.S.
companies, Miltenyi Biotec, Inc. and AmCell Corporation.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
On October 17, 2000, the Company issued a press release announcing an
organizational restructuring of the Company. The restructure included the
termination of certain employees and the decision not to fill certain open
positions. In addition, duties of various employees were reassigned and
redefined to better utilize the Company's financial and human resources. It is
estimated that the Company will incur a one-time charge of approximately
$500,000 in the fourth quarter related to severance and related benefits for
employees terminated in the fourth quarter pursuant to the organizational
restructure plan.
On October 11, 2000, the Company announced the resignation of L. William
McIntosh from and the appointment of Daniel Levitt, M.D., Ph.D. to the Board of
Directors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
10.66 Letter Agreement between L. William McIntosh and the Company dated
August 10, 2000
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27 Financial Data Schedule
(b) Reports on Form 8-K:
-------------------
On July 19, 2000, the Company filed a Current Report on Form 8-K under
Item 5, the date of report of which was July 12, 2000, regarding
certain management changes.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 31, 2000
NEXELL THERAPEUTICS INC.
a Delaware Corporation
(Registrant)
By: /s/ Richard L. Dunning
-------------------------------
Richard L. Dunning
Chairman of the Board and
Chief Executive Officer
By: /s/ William A. Albright, Jr.
-------------------------------
William A. Albright, Jr.
President, Chief Operating Officer
and Chief Financial Officer
17
