<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
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 0-28290
AKSYS, LTD.
(Exact name of registrant as specified in its charter)
Delaware 36-3890205
(State of incorporation) (I. R. S. Employer
Identification No.)
Two Marriott Drive, Lincolnshire, Illinois 60069
(address of principal executive offices) (Zip Code)
Registrant's telephone number 847-229-2020
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 twelve months, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
The number of shares of Common Stock, $.01 Par Value, outstanding as of August
1, 2000 was 17,155,752.
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AKSYS, LTD.
FORM 10-Q
For the Quarterly Period Ended June 30, 2000
TABLE OF CONTENTS
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PART 1 - FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (Unaudited)
and December 31, 1999............................................ 3
Consolidated Statements of Operations for the Three- and
Six-Month Periods Ended June 30, 2000 and 1999 (Unaudited)....... 4
Consolidated Statements of Cash Flows for the Six-Month Periods
Ended June 30, 2000 and 1999 (Unaudited)......................... 5
Notes to Consolidated Financial Statements (Unaudited)........... 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 8-11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 11
PART II - OTHER INFORMATION
Item 2. Changes in Securities ........................................... 12
Item 6. Exhibits and Reports on Form 8-K................................. 12
SIGNATURES................................................................. 13
EXHIBITS................................................................... 14
2
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<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Balance Sheets
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June 30, December 31,
Assets 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
Current assets:
Cash and cash equivalents $ 18,666,224 $ 4,322,635
Short-term investments 1,500,477 10,518,853
Interest receivable 50,967 298,567
Prepaid expenses 155,093 43,115
Other current assets 104,431 49,542
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Total current assets 20,477,192 15,232,712
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Long-term investments 780,000 780,000
Property and equipment, net 2,239,666 2,564,075
Other assets 187,440 234,647
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$ 23,684,298 $ 18,811,434
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Liabilities and Stockholders' Equity
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Current liabilities:
Accounts payable $ 1,482,439 $ 1,028,662
Accrued liabilities 399,664 622,359
Deferred revenue 2,363,629 4,390,687
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Total current liabilities 4,245,732 6,041,708
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Other long-term liabilities 154,262 146,345
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Total liabilities 4,399,994 6,188,053
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Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000
shares authorized, 0 shares issued and outstanding
in 2000 and 1999 - -
Common stock, par value $.01 per share, 50,000,000
shares authorized, 17,098,752 and 15,076,996 shares
issued and outstanding in 2000 and 1999, respectively 170,988 150,770
Additional paid-in capital 84,402,440 70,448,778
Accumulated other comprehensive income 13,030 13,030
Deficit accumulated during development stage (65,302,154) (57,989,197)
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Total stockholders' equity 19,284,304 12,623,381
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$ 23,684,298 $ 18,811,434
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</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Statements of Operations
For the Three- and Six-Month Periods Ended June 30, 2000 and 1999
(Unaudited)
=======================================================================================================================
Cumulative
from
Three-month periods Six-month periods Jan. 18, 1991
ended June 30, ended June 30, (inception)
---------------------------- ---------------------------- through
2000 1999 2000 1999 June 30, 2000
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<S> <C> <C> <C> <C> <C>
Revenues:
Joint development income $ 851,768 $ 7,141,071 $ 2,027,058 $ 7,141,071 $ 12,636,371
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Operating expenses:
Research and development 3,002,166 3,061,992 6,798,078 6,510,859 62,121,508
Business development 664,362 770,137 843,615 1,123,905 5,717,102
General and administrative 1,150,307 911,662 2,180,115 1,868,037 17,624,188
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Total operating expenses 4,816,835 4,743,791 9,821,808 9,502,801 85,462,798
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Operating loss (3,965,067) 2,397,280 (7,794,750) (2,361,730) (72,826,427)
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Other income (expense):
Interest income 291,425 187,881 481,793 432,461 7,483,013
Interest expense - - - - (23,591)
Other income - - - - 67,884
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291,425 187,881 481,793 432,461 7,527,306
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Net income (loss) $(3,673,642) $ 2,585,161 $(7,312,957) $(1,929,269) $(65,299,121)
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Net income (loss) per share,
basic and diluted $ (0.22) $ 0.17 $ (0.46) $ (0.13) $ (9.86)
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Weighted average shares outstanding 16,685,422 15,345,501 15,952,355 14,822,029 6,619,326
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Statements of Cash Flows
For the Six-Month Periods Ended June 30, 2000 and 1999
(Unaudited)
=============================================================================================================================
Cumulative
from
Jan. 18, 1991
(inception)
through
2000 1999 June 30, 2000
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<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(7,312,957) $(1,929,269) $ (65,299,121)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 433,855 542,469 4,012,979
Adjustment of fixed asset carrying value - - 980,912
Compensation expense related to stock options - - 3,240
Issuance of stock in exchange for services rendered - - 378,305
Changes in assets and liabilities:
Interest receivable 247,600 (98,943) (50,967)
Prepaid expenses (111,978) (56,148) (155,363)
Other current assets (54,889) (102,816) (104,431)
Accounts payable 453,777 (670,553) 1,482,439
Deferred revenue (2,027,058) 6,858,929 2,363,629
Accrued liabilities (222,695) (177,929) 556,576
Other 7,917 (24,112) (534,314)
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Net cash provided by (used in) operating activities (8,586,428) 4,341,628 (56,366,116)
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Cash flows from investing activities:
Proceeds from maturities of investments 9,018,376 10,662,202 118,862,245
Purchases of investments - (9,537,386) (121,150,265)
Purchases of property and equipment (62,239) (344,394) (6,745,374)
Organizational costs incurred - - (19,595)
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Net cash provided by (used in) investing activities 8,956,137 780,422 (9,052,989)
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Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs 13,973,880 326,039 71,852,754
Proceeds from issuance of preferred stock - - 12,336,096
Proceeds from issuance of note payable - - 41,792
Repayment of notes payable - - (41,792)
Repayment of lease obligation - - (103,521)
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Net cash provided by financing activities 13,973,880 326,039 84,085,329
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Net increase in cash and cash equivalents 14,343,589 5,448,089 18,666,224
Cash and cash equivalent at beginning of period 4,322,635 8,671,576
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Cash and cash equivalent at end of period $18,666,224 $14,119,665 $ 18,666,224
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
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AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Notes to Consolidated Financial Statements - Unaudited
(1) Basis for Presentation
The consolidated financial statements of Aksys, Ltd. and Subsidiary (the
"Company") presented herein are unaudited, other than the consolidated
balance sheet at December 31, 1999, which is derived from audited financial
statements. The interim financial statements and notes thereto have been
prepared pursuant to the rules of the Securities and Exchange Commission
for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. In the opinion of management, the interim financial statements
reflect all adjustments consisting of normal, recurring adjustments
necessary for a fair statement of the results for interim periods. The
operations for the six-month period ended June 30, 2000 are not necessarily
indicative of results that ultimately may be achieved for the entire year
ending December 31, 2000. These financial statements should be read in
conjunction with the financial statements and notes thereto for the year
ended December 31, 1999, included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 30,
2000.
(2) Revenue Recognition
On June 21, 1999, the Company entered into a co-development and license
agreement (the "Agreement") with Teijin Limited of Osaka, Japan. Under the
terms of the Agreement, Teijin paid $7.0 million to the Company for the
right to manufacture and sell the PHD System in Japan. The Company is also
entitled to future royalty payments from future product sales in Japan. The
$7.0 million has been recognized as revenue. Teijin also paid the Company a
$7.0 million co-development fee relating to the PHD System. Use of the
proceeds from the co-development fee is restricted to development costs
incurred on the PHD System and may not be used for other general corporate
purposes. Amounts paid under the co-development arrangement are recognized
as revenue as development costs on the PHD System are incurred. The Company
recognized revenue related to the co-development of the PHD System of $0.9
million and $2.0 million, respectively, during the quarter and six-month
period ended June 30, 2000.
6
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AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Notes to Consolidated Financial Statements - Unaudited
(3) Comprehensive Income
Other comprehensive income is comprised of the following:
<TABLE>
<CAPTION>
Three-month periods ended June 30, Six-month periods ended June 30,
---------------------------------- --------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(3,673,642) $2,585,161 $(7,312,957) $(1,929,269)
Foreign currency
translation adjustment 0 (227) 0 (1,480)
----------- ---------- ----------- -----------
Comprehensive income $(3,673,642) $2,584,934 $(7,312,957) $(1,930,749)
=========== ========== =========== ===========
</TABLE>
7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since its inception in January 1991, the Company has been engaged in the
development of hemodialysis products and services for patients suffering from
End-Stage Renal Disease. The Company has developed the Aksys Personal
Hemodialysis PHD System (the "PHD System"), which is designed to enable patients
to perform daily hemodialysis at alternate sites, such as the patient's home.
The Company has never generated sales revenue and has incurred losses since its
inception. At June 30, 2000, the Company had a deficit accumulated during the
development stage of $65.3 million. The Company expects to incur additional
losses in the foreseeable future at least until such time, if ever, that it
obtains necessary regulatory clearances or approvals from the FDA to market the
PHD System in the United States or it is able to secure equivalent regulatory
approvals to market the PHD System in countries other than the United States.
Comparison of Results of Operations
For the quarter and six-month period ended June 30, 2000, the Company reported
net losses of $3.7 million ($0.22 per share) and $7.3 million ($0.46 per share),
respectively. For the quarter and six-month period ended June 30, 1999, the
Company reported net income of $2.6 million ($0.17 per share) and a net loss of
$1.9 million ($0.13 per share), respectively. The increase in net loss,
especially compared with net income for the quarter ended June 30, 1999, is
attributable to joint development income related to the co-development and
license agreement entered into with Teijin Limited during the quarter ended
June 30, 1999, as explained below.
Joint development income. On June 21, 1999, the Company entered into a co-
development and license agreement (the "Agreement") with Teijin Limited of
Osaka, Japan. Under the terms of the Agreement, Teijin paid $7.0 million to the
Company for the right to manufacture and sell the PHD System in Japan. The
Company is also entitled to future royalty payments from future product sales in
Japan. The $7.0 million was recognized as revenue during the quarter ended June
30, 1999. Teijin also paid the Company a $7.0 million co-development fee
relating to the PHD System. Use of the proceeds from the co-development fee is
restricted to development costs incurred on the PHD System and may not be used
for other general corporate purposes. Amounts paid under the co-development
arrangement are recognized as revenue as development costs on the PHD System are
incurred. The Company recognized $0.1 million of revenue related to co-
development of the PHD System during the quarter ended June 30, 1999, compared
with $0.9 and $2.0 million, respectively, during the quarter and six-month
period ended June 30, 2000.
8
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Operating expenses. Operating expenses for the quarter and six-month period
ended June 30, 2000 were $4.8 million and $9.8 million, respectively, compared
with $4.7 million and $9.5 million for the comparable periods in 1999. Research
and development expenses remained relatively constant for the quarters ended
June 30, 2000 and 1999, and increased $0.3 million to $6.8 million for the six-
month period ended June 30, 2000, as the Company incurred costs associated with
the clinical evaluation of the PHD System.
Business development expenses decreased $0.1 million to $0.7 million during the
quarter ended June 30, 2000, and decreased $0.3 million to $0.8 million for the
six-month period then ended. The primary reason for the decreases was a
reduction in pre-commercialization activities in Europe and Japan in 2000 as
compared to 1999
General and administrative expenses increased $0.2 million to $1.2 million for
the quarter ended June 30, 2000, and increased $0.3 million to $2.2 million for
the six-month period ended June 30, 2000. The increases are primarily
attributable to the costs of executive hirings during the current quarter.
Interest income. Interest income for the quarter and six-month period ended
June 30, 2000 was $0.3 million and $0.5 million, respectively, compared with
$0.2 million and $0.4 million for the same periods last year. The slight
increase in interest income is due to earnings on the net proceeds of $13.5
million from private placements of the Company's Common Stock during the quarter
ended June 30, 2000.
Liquidity and Capital Resources
The Company has financed its operations to date primarily through public and
private sales of its equity securities. Through June 30, 2000, the Company
received net offering proceeds from public and private sales of equity
securities of approximately $84.1 million. Since its inception in 1991 through
June 30, 2000, the Company made $6.7 million of capital expenditures and used
$56.4 million in cash to support its operations. At June 30, 2000, the Company
had cash, cash equivalents and short-term investments of $20.2 million, working
capital of $16.2 million and long-term investments of $0.8 million.
The Company expects that the majority of cash to be expended on operations will
be used to (i) conduct clinical studies using the PHD System, and (ii) prepare
for pre-commercialization activities of the PHD System. The Company expects to
continue to incur substantial expenses related to manufacturing scale-up and
preparation for commercialization of the PHD System and the protection of patent
and other proprietary rights.
9
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Upon commercialization, the Company generally expects U.S. customers to purchase
PHD Systems and enter into contracts whereby the Company will provide all
products and services related to the PHD Systems for a single monthly price,
which would include all consumables, service and product support. As an
alternative, U.S. customers may enter into lease agreements for the PHD Systems,
under which the single monthly price would also include a lease payment. The
Company's present commercialization plan for markets outside of the United
States is to develop a partnership in those markets to distribute the PHD System
and related consumables and service. Financing production of the PHD System in
quantities necessary for commercialization will require a significant investment
in working capital. This need for working capital will increase to the extent
that demand for the PHD System increases. The Company would, therefore, have to
rely on sources of capital beyond cash generated from operations to finance
production of the PHD System even if the Company was successful in marketing its
products and services. The Company currently intends to finance the working
capital requirements associated with these arrangements through equipment and
receivable financing with a commercial lender. If the Company is unable to
obtain such equipment financing, it would need to seek other forms of financing,
through the sale of equity securities or otherwise, to achieve its business
objectives. The Company has not yet obtained a commitment for such equipment
financing, and there can be no assurance that the Company will be able to obtain
equipment financing or alternative financing on acceptable terms or at all.
The Company's funding needs will depend on many factors, including the timing
and costs associated with obtaining FDA clearance or approval, continued
progress in research and development, the results of clinical studies,
manufacturing scale-up, the cost involved in filing and enforcing patent claims
and the status of competitive products. In the event that the Company's plans
change, its assumptions change or prove inaccurate or it is unable to obtain
production financing on commercially reasonable terms, the Company could be
required to seek additional financing sooner than currently anticipated. In
addition, in the future the Company will require substantial additional
financing to fund full-scale production and marketing of the PHD System and
related services. The Company has no current arrangements with respect to
sources of additional financing. There can be no assurance that FDA clearance or
approval will be obtained in a timely manner or at all or that additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all.
The Company has not generated taxable income to date. At June 30, 2000, the net
operating losses available to offset future taxable income were approximately
$68 million. Because the Company has experienced ownership changes, future
utilization of the carryforwards may be limited in any one fiscal year pursuant
to Internal Revenue Code regulations. The carryforwards expire at various dates
beginning in 2008. As a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to reduce federal
income tax liabilities.
10
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Note on Forward-Looking Information
Certain statements in this Quarterly Report on Form 10-Q and in future filings
made by the Company with the Securities and Exchange Commission and in the
Company's written and oral statements made by or with the approval of an officer
of the Company constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and the Company intends that such forward-looking
statements be subject to the safe harbors created thereby. The words "believes,"
"expects," "estimates," "anticipates," and "will be," and similar words or
expressions, identify forward-looking statements made by or on behalf of the
Company. These forward-looking statements reflect the Company's views as of the
date they are made with respect to future events and financial performance, but
are subject to many uncertainties and factors which may cause the actual results
of the Company to be materially different from any future results expressed or
implied by such forward-looking statements. Examples of such uncertainties and
factors include, but are not limited to, (i) risks related to the failure to
meet development and manufacturing milestones on a timely basis, (ii) the
Company's need to achieve manufacturing scale-up in a timely manner with its
primary manufacturing contractor and its need to provide for the efficient
manufacturing of sufficient quantities of its products, (iii) changes in GMP
requirements, (iv) the Company's need to develop the marketing, distribution,
customer service and technical support and other functions critical to the
success of the Company's business plan, (v) the uncertainty regarding the
effectiveness and ultimate market acceptance of the PHD System, the Company's
primary product in development, (vi) changing market conditions, (vii) the need
to further establish the clinical benefits of daily hemodialysis, (viii) the
capital requirements necessary to fund the development and commercialization of
the Company's products and services and effectively compete with its
competitors, many of whom have substantially greater resources, (ix) the
potential adverse impact of possible changes to Medicare reimbursement policies
and rates (x) the Company's dependence on key personnel and on patents and
proprietary information, and (xi) risks related to the regulatory approval
process. Regulatory approval risks include, without limitation, the timing and
results of our clinical trial, and whether and when we will obtain clearance
from the FDA of a 510(k) per-market notification and similar clearances from
other countries in which we may attempt to distribute the PHD System. Additional
Clinical trials and/or other data may be needed, beyond the current clinical
trial, in order to obtain regulatory clearances. The Company does not undertake
any obligation to update or revise any forward-looking statement made by it or
on its behalf, whether as a result of new information, future events, or
otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's market risk during the six-
month period ended June 30, 2000. For additional information refer to Item 7A in
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
11
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PART II - OTHER INFORMATION
Item 2. Changes in Securities
(1) On April 11, 2000, the Company completed a private placement to four
institutional investors of 1,516,697 shares of its common stock. The gross
proceeds of the offering were approximately $11,754,000. The shares were sold
with the assistance of U.S. Bancorp Piper Jaffray ("Piper Jaffray"). As the
placement agent, Piper Jaffray received a fee of approximately $705,000.
The shares of common stock were sold in a reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933. The private
placement was made without any general solicitation or advertising and each
investor represented to the Company in writing that it was an accredited
investor with in the moaning of Rule 501(a) of Regulation D.
(2) On June 8, 2000, the Company completed a private placement of 320,103 shares
of its common stock. The shares were sold to Kimal plc, the Company's technical
service partner in the United Kingdom and a non-U.S. person (as defined in
Regulation S). The Company received gross proceeds from the offering of
$2,500,000. No commission fees or other selling expenses were incurred.
The shares of common stock were sold in reliance on the exemption from
registration provided by Regulation S, promulgated by the Securities and
Exchange Commission under the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3.1) Restated Certificate of Incorporation /(1)/
(3.2) Amended and Restated Bylaws /(1)/
(27) Financial Data Schedule
-----------------
(1) Incorporated by reference to Aksys, Ltd.'s Registration Statement on
Form S-1 (Registration No. 333-02492.
(b) Reports on Form 8-K
On April 19, 2000, the Company filed a Current Report on Form 8-K, reporting in
Item 5 the sale and issuance of 1,516,697 shares of its common stock in a
private placement to institutional investors.
12
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Signatures
Pursuant to 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.
Aksys, Ltd.
Date: August 14, 2000 By: /s/ William C. Dow
--------------- --------------------------
William C. Dow
President, Chief Executive
Officer and Director
Date: August 14, 2000 By: /s/ Steven A. Bourne
--------------- --------------------------
Steven A. Bourne
Controller
13
