<PAGE>
================================================================================
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: June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-28386
CELL THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Washington 91-1533912
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
201 Elliott Avenue West, Suite 400, 98119
Seattle, Washington (Zip code)
(Address of principal executive offices)
(206) 282-7100
(Registrant's telephone number, including area code)
Indicate by check [x] 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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at July 31, 1998
----- ----------------------------
Common Stock, no par value (including
associated Preferred Stock
Purchase Rights)........................ 15,433,001
===============================================================================
This report on Form 10-Q, including all exhibits, contains __ pages. The
exhibit index is located on page __.
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CELL THERAPEUTICS, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<S> <C> <C>
Consolidated Balance Sheets -- June 30, 1998 and December 31, 1997............................ 3
Consolidated Statements of Operations -- Three months and six months ended
June 30, 1998 and 1997 and the period from September 4, 1991 (date of
incorporation) to June 30, 1998............................................................... 4
Consolidated Statements of Cash Flows -- Three months and six months
ended June 30, 1998 and 1997 and the period from September 4,
1991 (date of incorporation) to June 30, 1998................................................. 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............................................................................. 13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.............................................................. 14
SIGNATURES.................................................................................... 15
EXHIBIT INDEX................................................................................. 16
</TABLE>
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PART I
ITEM 1. Financial Statements
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
Assets (UNAUDITED)
Current assets:
Cash and cash equivalents $ 3,720,658 $ 8,876,990
Securities available-for-sale 52,390,825 61,567,384
Collaboration agreement receivables 3,999,478 3,683,031
Prepaid expenses and other current assets 937,469 101,127
------------- ------------
Total current assets 61,048,430 74,228,532
Property and equipment 15,730,432 13,716,342
Accumulated depreciation (8,604,635) (7,811,242)
------------- ------------
Property and equipment, net 7,125,797 5,905,100
Notes receivable from officers,
less current portion 81,195 71,812
Other assets 82,075 228,052
------------- ------------
Total assets $ 68,337,497 $ 80,433,496
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,011,403 $ 162,469
Accrued expenses 3,734,974 4,712,232
Current portion of long-term obligations 1,138,319 1,660,226
------------- ------------
Total current liabilities 5,884,696 6,534,927
Long-term obligations, less current portion 1,832,629 2,138,265
Stockholders' equity:
Common Stock, no par value:
Authorized shares--100,000,000
Issued and outstanding shares--15,433,001 and
15,378,419 at June 30, 1998 and
December 31, 1997, respectively 169,088,126 168,893,074
Deficit accumulated during development stage (108,467,954) (97,132,770)
------------- ------------
Total stockholders' equity 60,620,172 71,760,304
------------- ------------
Total liabilities and shareholders' equity $ 68,337,497 $ 80,433,496
============= ============
</TABLE>
See accompanying notes.
3
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CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Period From
Three Months Ended Six Months Ended September 4,
June 30 June 30 1991 (Date of
------------------------- ---------------------------- Incorporation)
1998 1997 1998 1997 To June 30, 1998
------------ ------------ ------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Collaboration agreements $ 4,138,391 $ 3,266,060 $ 7,416,326 $ 5,266,980 $ 28,468,552
Operating expenses:
Research and development 7,217,416 6,798,846 15,027,895 12,627,291 103,183,090
General and administrative 2,834,619 2,056,299 5,379,291 4,132,404 40,212,823
----------- ----------- ------------ ------------ ----------------
10,052,035 8,855,145 20,407,186 16,759,695 143,395,913
----------- ----------- ------------ ------------ ----------------
Loss from operations (5,913,644) (5,589,085) (12,990,860) (11,492,715) (114,927,361)
Other income (expense):
Investment income 805,951 808,645 1,777,740 1,182,569 8,646,126
Interest expense (109,277) (96,841) (215,042) (205,903) (2,245,048)
----------- ----------- ------------ ------------ ----------------
Net loss $(5,216,970) $(4,877,281) (11,428,162) $(10,516,049) $(108,526,283)
=========== =========== ============ ============ ================
Net loss per share:
Basic and diluted
net loss per share $ (0.34) $ (0.37) $ (0.74) $ (1.15)
=========== =========== ============ ============
Shares used in computation of
basic and diluted
net loss per share 15,385,950 13,028,377 15,383,801 9,165,590
=========== =========== ============ ============
Pro forma basic and diluted
net loss per share $ (0.34) $ (0.37) $ (0.74) $ (0.92)
=========== =========== ============ ============
Shares used in computation of
pro forma basic and diluted
net loss per share 15,385,950 13,028,377 15,383,801 11,451,710
=========== =========== ============ ============
</TABLE>
See accompanying notes.
4
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CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Period From
Six Months Ended September 4,
June 30 1991 (Date of
--------------------------- Incorporation)
1998 1997 To June 30, 1998
------------- ------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(11,428,162) $(10,516,049) $(108,526,283)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 793,393 841,031 9,003,272
Noncash compensation expense -- 100,186 100,186
Noncash research and development expense -- -- 1,155,750
Noncash interest expense -- -- 25,918
Noncash rent expense 40,770 30,879 609,167
Investment premium (discount) amortization (78,003) (127,158) 266,111
(Gain) loss on sale of securities 20,691 -- 20,691
Changes in assets and liabilities:
Collaboration agreement receivable (316,447) (2,547,487) (3,999,478)
Prepaid expenses and other current assets (836,342) (96,199) (937,469)
Notes receivable from officers (9,383) 14,181 (176,419)
Other assets 145,977 397,360 (98,076)
Accounts payable 848,934 816,317 1,011,403
Accrued expenses (977,258) (61,958) 3,734,974
------------ ------------ -------------
Total adjustments (367,667) (632,848) 10,716,031
------------ ------------ -------------
Net cash used in operating activities (11,795,829) (11,148,897) (97,810,252)
------------ ------------ -------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (43,676,398) (33,383,219) (205,468,184)
Proceeds from sales of securities available-for-sale 12,783,918 1,999,938 29,673,675
Proceeds from maturities of securities available-for-sale 40,178,558 12,337,000 123,123,626
Purchase of property and equipment (2,014,090) (1,182,348) (15,889,824)
Dispositions of property and equipment -- 15,148 167,300
------------ ------------ -------------
Net cash provided by investing activities 7,271,988 (20,213,481) (68,393,407)
FINANCING ACTIVITIES
Sales of common stock to founders -- 80,000
Proceeds from borrowings from shareholder -- 850,000
Sale of common stock via initial public offering, net of offering costs 26,802,250 26,802,250
Sale of common stock via follow-on public offering, net of offering costs -- 34,262,000
Sale of Series A Preferred Stock via private placement, net of offering costs -- 47,366,204
Sale of Series B Preferred Stock via private placement, net of offering costs -- 4,960,000
Sale of common stock via private placements, net of offering costs 3,000,000 52,307,084
Proceeds from the issuance of common stock to Employee Stock Purchase Plan 108,061 -- 108,061
Repurchase of common stock -- (2,522)
Proceeds from common stock options 86,992 34 760,026
Proceeds from common stock warrants exercised -- 305,558
Repayment of long-term obligations (827,544) (597,196) (10,525,784)
Proceeds from the issuance of long-term obligations -- 12,651,440
------------ ------------ -------------
Net cash provided by (used in) financing activities (632,491) 29,205,089 169,924,317
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents (5,156,332) (2,157,289) 3,720,658
Cash and cash equivalents at beginning of period 8,876,990 5,483,515 --
------------ ------------ -------------
Cash and cash equivalents at end of period $ 3,720,658 $ 3,326,226 $ 3,720,658
============ ============ =============
Supplemental schedule of noncash investing and financing activities:
Acquisition of equipment pursuant to capital lease obligations $ -- $ -- $ 362,425
============ ============ =============
Conversion of convertible debt and related accrued interest into common stock $ -- $ -- $ 875,918
============ ============ =============
Conversion of preferred stock into common stock $ -- $ 52,626,204 $ 52,326,204
============ ============ =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 215,042 $ 205,903 $ 2,245,048
============ ============ =============
</TABLE>
See accompanying notes.
5
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CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial information of Cell Therapeutics, Inc. (the
"Company") as of June 30, 1998 and for the three and six months ended June 30,
1998 and 1997 has been prepared in accordance with the instructions to Form 10-
Q. In the opinion of management, such financial information includes all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for such periods. Operating results for the
three and six month periods ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the entire year. These financial
statements and the related notes should be read in conjunction with the
Company's audited annual financial statements for the year ended December 31,
1997 included in the Company's Form 10-K for the year ended December 31, 1997,
and the Company's unaudited financial statements for the quarter ended March 31,
1998 included in the Company's quarterly report on Form 10-Q for the quarter
ended March 31, 1998.
Certain prior year balances have been reclassified to conform to the current
year presentation.
(2) SIGNIFICANT AGREEMENTS
In November 1996, cti entered into a Collaboration and License Agreement (the
"Collaboration Agreement") with Ortho Biotech, Inc. and the R.W. Johnson
Pharmaceutical Research Institute (a division of Ortho Pharmaceutical
Corporation) each of which are wholly-owned subsidiaries of Johnson & Johnson
(collectively, "Johnson & Johnson") for the joint development and
commercialization of lisofylline, ("LSF"), to prevent or reduce the toxic side
effects among cancer patients receiving high dose radiation and/or chemotherapy
followed by bone marrow transplantation ("BMT"). Under the terms of the
Collaboration Agreement, Johnson & Johnson agreed, subject to certain
termination rights, to fund up to $12,000,000 of the Company's budgeted BMT
development costs per year for each of 1997 and 1998. The Company recorded
$4,138,391 and $7,416,326 of collaboration agreement revenues related to the
reimbursement of development expenses by Johnson & Johnson in the three and six
month periods ending June 30, 1998, respectively, and $3,266,060 and $5,266,980
in the three and six month periods ending June 30, 1997, respectively. In
September 1997, Johnson & Johnson exercised an option under the Collaboration
Agreement to expand its participation to include the development of LSF to
include the treatment of patients with acute myelogenous leukemia ("AML")
undergoing high dose chemotherapy. On July 15, 1998, the Company reached an
agreement in principle to revise its agreement with Johnson & Johnson. The
revised agreement reflects a change in the anticipated regulatory filing
timeline for LSF from late 1998 to late 1999. Under the terms of the revised
agreement, Johnson & Johnson will continue to pay the Company its share of
development costs for BMT and AML through December 31, 1998, up to a limit of
$14.1 million. Thereafter, the Company will continue to control development and
be responsible for costs associated with the development of LSF. Johnson &
Johnson may elect to resume responsibility for the development and
commercialization of LSF following the successful outcome of a Phase III trial
subject to certain additional payments upon resumption of its obligations. If
Johnson & Johnson does not resume development activities, then cti will be free
to license LSF to other third parties.
On January 5, 1998, the Company entered into an agreement with City of Hope
National Medical Center to form a joint venture (Cell City, LLC) to discover and
develop a new class of drugs to treat diabetes and its complications. Under the
terms of the agreement, the Company will fund the first two years of the venture
and provide expertise in drug discovery and technology in oxidized lipid
chemistry. City of Hope will contribute its rights to technology for a human
enzyme, human leukocyte 12-Lipoxygenase ("12-LO"), which it has identified and
partially sequenced. The enzyme is believed to be responsible for generating
oxidized lipids that may be associated with certain immune diseases,
cardiovascular disease and diabetes. City of Hope will also provide expertise
and services in cellular analysis, animal models and clinical trials for
applications in diabetes. The Company holds a 70% interest in the joint venture
and City of Hope holds 30%.
On June 30, 1998, the Company entered into an agreement with PG-TXL Company,
L.P., granting the Company an exclusive worldwide license to the rights to
polyglutamic acid paclitaxel ("PG-TXL"), a water-soluble form of the cancer
drug, Taxol(R). Under the terms of the agreement, the Company will fund the
research,
6
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development, manufacture, marketing and sale of anti-cancer drugs developed
using PG-TXL's polymer technology.
(3) NET LOSS PER SHARE
In February 1997 the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," which is required to be adopted after December 31,
1997. Statement No. 128 supersedes Accounting Principles Board Opinion No. 15.
At that time, the Company will be required to change the method currently used
to calculate net loss per share and to restate prior periods. At June 30, 1998
and 1997 and December 31, 1997, there is no material impact on the Company's
calculations of net loss per share.
The pro forma net loss per share is computed based on net loss per share
adjusted for the assumed conversion of all outstanding shares of convertible
preferred stock into common stock at the time of issuance.
Basic and diluted loss per share is calculated using the average number of
common shares outstanding. Pro forma basic and diluted net loss per share is
computed on the basis of the average number of common shares outstanding plus
the effect of convertible preferred shares using the if-converted method as
follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------------ ---------------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
-------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Net Loss (A) $(5,216,970) $(4,877,281) $(11,428,162) $(10,516,049)
Weighted average outstanding:
Common Stock (B) 15,385,950 13,028,377 15,383,801 9,165,590
Convertible preferred stock -- -- -- 2,286,120
Total weighted average ------------ ------------ ------------ -------------
outstanding 15,385,950 13,028,377 15,383,801 11,451,710
Loss per share:
Basic and diluted (A)/(B) $ (0.34) $ (0.37) $ (0.74) $ (1.15)
Pro forma basic and
diluted (A)/(C) $ (0.34) $ (0.37) $ (0.74) $ (0.92)
</TABLE>
(4) NEW ACCOUNTING PRONOUNCEMENT
In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income,"
which is required to be adopted for periods beginning after December 15, 1997.
The only item of comprehensive income for the Company is net unrealized gains on
Securities Available-for-Sale. This amount is $62,703 and $92,978 for the three
and six month periods ending June 30, 1998, respectively, and $3,197 and
$(85,703) for the three and six month periods ending June 30, 1997,
respectively.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES.
WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW AS WELL AS THOSE DISCUSSED IN THE COMPANY'S ANNUAL REPORTS ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 WHICH IS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF
ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
OVERVIEW
Cell Therapeutics, Inc. ("cti" or the "Company") focuses on the discovery,
development and commercialization of small molecule drugs which selectively
regulate the metabolism of oxidized lipids and phospholipids relevant to the
treatment of cancer and inflammatory and immune diseases. Since commencement of
operations in 1992, the Company has been engaged in research and development
activities, including conducting preclinical studies and clinical trials,
recruiting its scientific and management personnel, establishing laboratory
facilities and raising capital. The Company has not received any revenue from
the sale of products to date and does not expect to receive revenues from the
sale of products for at least the next several years.
In the fourth quarter of 1995 the Company began to receive revenue under a
collaboration agreement with BioChem Pharma, Inc. ("BioChem Pharma") and in the
fourth quarter of 1996 the Company began to receive revenue under a
collaboration agreement (the "Collaboration Agreement") with subsidiaries of
Johnson & Johnson ("Johnson & Johnson"). Under the terms of the Collaboration
Agreement, Johnson & Johnson was to pay 60% of the U.S. development costs in
connection with obtaining regulatory approval of lisofylline ("LSF") for use
with bone marrow transplants ("BMT") and, after exercising its option in 1997,
for use with inductive chemotherapy to treat myelogenous leukemia ("AML"). As
of June 30, 1998, the Company had recorded approximately $35.1 million in equity
payments, license and milestone fees, and development cost reimbursements with
Johnson & Johnson. On July 15, 1998, the Company and Johnson & Johnson reached
an agreement in principle to revise the Collaboration Agreement. Under the
terms of the revised agreement, cti will continue to control development and be
responsible for costs associated with development of LSF, and Johnson & Johnson
will continue to pay cti its share of development costs through December 31,
1998, subject to a limit of $14.1 million. Thereafter, Johnson & Johnson may
elect to resume its responsibilities for the development and commercialization
of LSF following the successful outcome of a Phase III trial, subject to certain
additional payments upon resumption of its obligations. If Johnson & Johnson
does not resume development activities, then cti will be free to license LSF to
other third parties. The revised agreement reflects a change in the
anticipated regulatory filing timeline for LSF from late 1998 to late 1999.
As of June 30, 1998, the Company had incurred aggregate net losses of
approximately $108.5 million since its inception. The Company expects to
continue to incur significant additional operating losses over the next several
years as its research, development and clinical trial efforts expand. Operating
losses may fluctuate from quarter to quarter as a result of differences in the
timing of expenses incurred and revenues recognized. To date, the Company's
operations have been funded primarily from the sale of equity securities, which
have raised aggregate net proceeds of approximately $167.7 million, and from the
Collaboration Agreement with Johnson & Johnson.
RESULTS OF OPERATIONS
Three months ended June 30, 1998 compared with three months ended June 30, 1997.
8
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Development cost reimbursements from Johnson & Johnson increased to
approximately $4.1 million for the three months ended June 30, 1998 from
approximately $3.3 million for the three months ended June 30, 1997.
This increase in reimbursement revenue was primarily due to increased
preclinical activities related to the development of LSF which include certain
costs that are 100% reimbursable, through December 31, 1998, from Johnson &
Johnson under the terms of the revised agreement.
Research and development expenses increased to approximately $7.2 million for
the three months ended June 30, 1998 from $6.8 million for the three months
ended June 30, 1997. The increase between the periods was primarily related to
increased product development activities for LSF and to the recruitment of
additional personnel with respect to the on-going development of LSF and CT-
2584, the company's novel small molecule drug under investigation for the
treatment of patients with multidrug (e.g., chemotherapy) resistant cancers. The
Company expects that research and development expenses will increase in future
years as the Company expands its research and development programs and
undertakes additional clinical trials.
General and administrative expenses increased to approximately $2.8 million for
the three months ended June 30, 1998 from approximately $2.1 million for the
three months ended June 30, 1997. The increase between the periods is
attributable primarily to operating expenses associated with supporting the
Company's research, development and clinical activities and transaction costs
with respect to the establishment of Cell City, LLC, the Company's joint venture
with The City of Hope National Medical Center, for developing novel
pharmacological agents for treating diabetes and diabetes-associated vascular
complications and acquiring the rights to polyglutamate paclitaxel ("PG-TXL").
General and administrative expenses are expected to increase to support the
Company's expected increase in research, development and clinical trial efforts.
Investment income principally comprises interest income from investment of the
Company's cash reserves. Interest expense results primarily from the financing
of laboratory and other equipment. Investment income was relatively consistent
at approximately $806,000 for the three months ended June 30, 1998 compared to
approximately $809,000 for the three months ended June 30, 1997. Interest
expense increased slightly to approximately $109,000 for the three months ended
June 30, 1998 from approximately $97,000 for the three months ended June 30,
1997. This increase was due primarily to higher average balances of outstanding
long-term obligations.
Six months ended June 30, 1998 compared with six months ended June 30, 1997.
Development cost reimbursements from Johnson & Johnson increased to
approximately $7.4 million for the six months ended June 30, 1998 from
approximately $5.3 million for the six months ended June 30, 1997. This
increase in reimbursement revenue was due primarily to expanded preclinical and
manufacturing development activities, and the recruitment of additional
personnel with respect to the development of LSF which include certain costs
that are 100% reimbursable, through December 31, 1998, from Johnson & Johnson
under the terms of the revised agreement.
Research and development expenses increased to approximately $15.0 million for
the six months ended June 30, 1998 from approximately $12.6 million for the six
months ended June 30, 1997. This increase was due primarily to expanded
preclinical and manufacturing development activities, including the recruitment
of additional personnel, with respect to LSF and CT-2584. The Company expects
that research and development expenses will increase in future years as the
Company expands its research and development programs and undertakes additional
clinical trials.
General and administrative expenses increased to approximately $5.4 million for
the six months ended June 30, 1998 from approximately $4.1 million for the six
months ended June 30, 1997. This increase was due primarily to operating
expenses associated with supporting the Company's research, development and
clinical activities and transaction costs with respect to the establishment of
Cell City, LLC and acquiring the rights to PG-TXL. General and administrative
expenses are expected to increase to support the Company's expected increase in
research, development and clinical trial efforts.
Investment income principally comprises interest income from investment of the
Company's cash reserves. Interest expense results primarily from the financing
of laboratory and other equipment. Investment income increased to approximately
$1.8 million for the six months ended June 30, 1998 from approximately $1.2
million for the six months ended June 30, 1997. This increase was associated
primarily with interest earnings on higher
9
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average cash balances on hand during the second quarter of 1998 due to the
proceeds from both the Company's initial public offering ("IPO") in March 1997
and the Company's follow-on public offering ("Follow-On Offering") in October
1997. Interest expense increased slightly to approximately $215,000 for the six
months ended June 30, 1998 from approximately $206,000 for the six months ended
June 30, 1997. This increase was due primarily to higher average balances of
outstanding long-term obligations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through the
sale of equity securities and from its collaboration with Johnson & Johnson. As
of June 30, 1998, the Company has raised aggregate net proceeds of approximately
$167.7 million through the sale of equity securities including public offerings
of Common Stock, private placements of Series A and B Convertible Stock and
Common Stock, a bridge loan and the exercise of stock options and warrants. As
of June 30, 1998, the Company had recorded approximately $35.1 million in equity
payments, license fees, milestone payments and development cost reimbursements
from Johnson & Johnson. In addition, the Company financed the purchase of $13.1
million of property and equipment through financing agreements of which
approximately $2.4 million remained outstanding as of June 30, 1998.
On July 15, 1998, the Company and Johnson & Johnson reached an agreement in
principle to revise the Collaboration Agreement. Among other things, the revised
agreement reflects a change in the anticipated regulatory filing timeline for
LSF from late 1998 to late 1999.
At June 30, 1998, the Company had $56.1 million in cash, cash equivalents and
short-term investments. The Company invests in U.S. government obligations and
other highly rated liquid debt instruments. The Company intends to use the
substantial portion of its financial resources to fund its research and
development activities with respect to the Company's LSF and CT-2584 programs,
including preclinical testing, clinical trials and process development
activities, and to fund other research and development activities. The amounts
actually expended for research and development activities and the timing of such
expenditures will depend upon numerous factors, including the progress of the
Company's research and development programs, the results of preclinical and
clinical trials, the timing of regulatory submissions and approvals, if any,
technological advances, determinations as to the commercial potential of the
Company's compounds, and the status and timing of competitive products. The
amount of expenditures will also depend upon the potential resumption by Johnson
& Johnson of its obligations under the Collaboration Agreement, the timing and
availability of alternative methods of financing the Company's research and
development activities and preclinical and clinical trials, and the ability of
the Company to establish collaborative agreements with other companies. A
variety of other factors, some of which are beyond the Company's control, could
also affect the application of the proceeds.
The Company also expects to use a portion of its financial resources to add
research and product development programs. On June 30, 1998, the Company
entered into an agreement with PG-TXL Company, L.P., granting the Company an
exclusive worldwide license to the rights to PG-TXL, a water-soluble form of the
cancer drug, Taxol(R). Under the terms of the agreement, the Company will fund
the research, development, manufacture, marketing and sale of anti-cancer drugs
developed using PG-TXL's polymer technology. The Company's research and
development expenditures will vary as such research and product development
programs are added, expanded or discontinued.
The Company also expects to use portions of its financial resources to improve
facilities, purchase capital equipment and for general corporate purposes. The
Company has not identified precisely the amount it plans to spend on these
specific programs or the timing of such expenditures. Pending such uses, the
Company intends to invest its cash balances in U.S. government obligations and
other highly rated liquid debt instruments. The Company may also from time to
time consider the acquisition of other companies, technologies or products that
complement the business of the Company, although no agreements or understandings
are in effect with respect to any such transactions at this time.
The Company expects that its capital requirements will increase as the Company
expands its research and development programs and undertakes additional clinical
trials. In connection with such expansion, the Company expects to incur
substantial expenditures for hiring additional management, scientific and
administrative personnel, for planned expansion of its facilities, and for the
purchase or lease of additional equipment.
The Company does not expect to generate a positive cash flow from operations for
several years due to substantial additional research and development costs,
including costs related to drug discovery, preclinical
10
<PAGE>
testing, clinical trials, manufacturing costs and operating expenses associated
with supporting such activities. The Company expects that its existing capital
resources and the interest earned thereon, combined with anticipated funding
from Johnson & Johnson under the Collaboration Agreement through December 31,
1998, will enable the Company to maintain its current and planned operations at
least through the end of 1999. The Company will need to raise substantial
additional capital to fund its operations beyond such time. The Company's future
capital requirements will depend on, and could increase as a result of, many
factors, including the potential resumption by Johnson & Johnson's of it's
obligations under the Collaboration Agreement; continued scientific progress in
the Company's research and development programs; the terms of any additional
collaborative arrangements that the Company may enter into; the magnitude of
such programs; the progress of preclinical testing and clinical trials; the time
and costs involved in obtaining regulatory approvals; the costs involved in
preparing, filing, prosecuting, maintaining, enforcing and defending patent
claims; competing technological and market developments; changes in
collaborative relationships; the ability of the Company to establish research,
development and commercialization arrangements pertaining to products other than
those covered by existing collaborative arrangements; the cost of establishing
manufacturing facilities; the cost of commercialization activities and the
demand for the Company's products if and when approved.
The Company intends to raise additional funds though additional equity or debt
financings, research and development financings, collaborative relations, or
otherwise. Because of these long-term capital requirements, the Company may seek
to access the public or private equity markets from time to time, even if it
does not have an immediate need for additional capital at that time. There can
be no assurance that additional financing will be available to the Company, or,
if available, that it will be on acceptable terms. If additional funds are
raised by issuing equity securities, further dilution to shareholders may
result. If adequate funds are not available, the Company may be required to
delay, reduce the scope of, or eliminate one or more of its research,
development and clinical activities. If the Company seeks to obtain funds
through arrangements with collaborative partners or others, such partners may
require the Company to relinquish rights to certain of its technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize itself.
As of June 30, 1998, the Company had available for Federal income tax purposes
net operating loss carryforwards of approximately $105 million and research and
development credit carryforwards of approximately $4 million. These
carryforwards begin to expire in 2007. The Company's ability to utilize its net
operating loss and research and development credit carryforwards is subject to
an annual limitation in future periods pursuant to the "change in ownership"
rules under Section 382 of the Internal Revenue Code of 1986.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, some of which are outside of the Company's control. The following
discussion highlights some of these risks and others are discussed elsewhere
herein and in other documents filed by the Company with the Securities and
Exchange Commission.
The time frame for market success for any of the Company's potential products is
long and uncertain. The Company is at an early stage of development and its
technology is unproven. All of the Company's proposed products are in research
or development and will require significant additional research and development
efforts prior to any commercial use, including extensive preclinical and
clinical testing as well as lengthy regulatory approval. There can be no
assurance that the Company's research, development and clinical trial efforts
will be successful, that its lead drug candidate, LSF, or any of its other
proposed products, will prove to be safe and efficacious in clinical trials or
meet applicable regulatory standards, that unforeseen problems will not develop
with the Company's technologies or applications, or that any commercially
successful products will ultimately be developed by the Company. The Company
faces substantial competition from a variety of sources, both direct and
indirect. There can be no assurance that research and discoveries by others will
not render some or all of the Company's programs or products noncompetitive or
obsolete or that the Company will be able to keep pace with technological
developments or other market factors.
The Company's ability to continue the development and commercialization of LSF
as presently planned will depend on its ability to raise additional funds and
establish additional collaborative relationships. There can be no assurance that
the Company will be able to establish effective sales and distribution
capabilities or will be successful in gaining market acceptance for LSF. The
Company's products under development have never been manufactured on a
commercial scale and there can be no assurance that such products can be
manufactured at a cost or in quantities necessary to make them commercially
viable. The Company initiated commercial scale manufacturing of LSF in 1997 with
a third-party contract manufacturer, however there can be no assurance that the
contract manufacturer will meet the Company's requirements for quality, quantity
or timeliness. The Company currently has no internal manufacturing facilities
and has no experience in sales, marketing or distribution. If the Company
develops any additional products with commercial potential, it may
11
<PAGE>
seek to enter into collaborative arrangements with other parties which have
established manufacturing, sales, marketing and distribution capabilities or may
need to develop such resources on its own.
The foregoing risks reflect the Company's early stage of development and the
nature of the Company's industry and potential products. Other risk factors that
may affect the Company's future results include competition, uncertainties
regarding protection of patents and proprietary rights, government regulation
and uncertainties regarding pharmaceutical pricing and reimbursement.
The Company could be impacted by the Year 2000 Issue which is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. The Company is in the process of assessing its computer systems to
determine the extent of modifications required so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter, and has
also initiated formal communications with all of its significant suppliers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remedy their own Year 2000 Issues. The Company
presently believes that with modifications to its existing software and
conversions to new software, expected to be completed not later than December
31, 1998, the Year 2000 Issue will not pose significant operational problems for
its computer systems. The Company does not expect the cost to modify its
existing software and convert to new software to be material. However, if such
modifications and conversions are not made, or the systems of other companies on
which the Company's systems rely are not timely converted, the Year 2000 Issue
could have a material impact on the Company's business, prospects, financial
condition, liquidity and results of operations.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company completed its initial public offering in March 1997 pursuant to a
Registration Statement on Form S-1 (Commission File No. 333-2085) which was
declared effective by the Securities and Exchange Commission on March 18, 1997.
The Company issued and sold 3 million shares of Common Stock for aggregate
proceeds to the Company of $27.9 million. The managing underwriters for the
offering were: UBS Securities LLC, Montgomery Securities (now known as
"NationsBanc Montgomery Securities, Inc.") and Raymond James & Associates, Inc.
From March 18, 1997, the effective date of the Registration Statement, to June
30, 1998, the ending date of the reporting period, the approximate amount of net
offering proceeds used were $1.1 million for costs and expenses related to the
offering, $5.6 million for the repayment of long-term obligations and purchases
of equipment and furniture and $21.2 million for research, development and
general and administrative activities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 18, 1998, the Company held its 1998 Annual Meeting of Shareholders (the
"Annual Meeting"). Each share of Common Stock was entitled to one vote per
share.
At the Annual Meeting, the following Directors were elected to serve until the
Annual Meeting of Shareholders indicated below and until their respective
successors are elected and qualified:
<TABLE>
<CAPTION>
TERM
DIRECTOR NOMINATED EXPIRES VOTES FOR ABSTENTIONS
- ----------------------------------------------------------
<S> <C> <C> <C>
Phillip M. Nudelman..... 2001 12,460,084 201,599
Jack L. Bowman.......... 2001 12,459,769 201,914
Jeremy L. Curnock Cook.. 2001 12,460,369 201,314
</TABLE>
Other directors whose terms of office continued after the meeting are as
follows: James A. Bianco, M.D., Wilfred E. Jaeger, M.D., Max E. Link, Ph.D.,
Terrence M. Morris, Mary O'Neil Mundinger, D.P.H., Jack W. Singer, M.D.
The Company's shareholders also approved a proposal for the adoption of an
amendment to the Company's 1994 Equity Incentive Plan (the "1994 Plan") to
increase the maximum number of shares issuable under the 1994 Plan by an
additional 1,500,000 shares to a total of 3,836,715 shares. With respect to this
proposal there were 4,874,907 votes cast for the proposal, 3,248,499 votes cast
against the proposal and 197,811 abstentions.
The Company's stockholders also ratified the selection of Ernst & Young LLP as
the independent auditors for the Company for the year ended December 31, 1998.
With respect to this proposal there were 12,608,509 votes cast for the proposal,
42,357 votes cast against the proposal, and 7,817 abstentions.
The foregoing matters are described in detail in the company's proxy statement
dated May 22, 1998 for the 1998 Annual Meeting of Stockholders. No other
matters were voted on at the Annual Meeting.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
14
<PAGE>
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:
CELL THERAPEUTICS, INC.
(Registrant)
Dated: August 14, 1998 By: /s/ JAMES A. BIANCO, M.D.
-----------------------------------
James A. Bianco, M.D.
President and Chief Executive
Officer
Dated: August 14, 1998 By: /s/ LOUIS A. BIANCO
-----------------------------------
Louis A. Bianco
Executive Vice President,
Finance and Administration
(Principal Financial Officer,
Chief Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED JUNE 30, 1998
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,720,658
<SECURITIES> 52,390,825
<RECEIVABLES> 3,999,478
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 937,469
<PP&E> 15,730,432
<DEPRECIATION> (8,604,635)
<TOTAL-ASSETS> 68,337,497
<CURRENT-LIABILITIES> 5,884,696
<BONDS> 0
0
0
<COMMON> 169,088,126
<OTHER-SE> (108,467,954)
<TOTAL-LIABILITY-AND-EQUITY> 68,637,497
<SALES> 4,138,391
<TOTAL-REVENUES> 4,138,391
<CGS> 0
<TOTAL-COSTS> 10,052,035
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,277
<INCOME-PRETAX> (5,216,970)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,216,970)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
