<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 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 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 November
7, 2000 was 18,206,882.
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AKSYS, LTD.
FORM 10-Q
For the Quarterly Period Ended September 30, 2000
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2000 (Unaudited)
and December 31, 1999............................................................................ 3
Consolidated Statements of Operations for the Three- and Nine-Month
Periods Ended September 30, 2000 and 1999 (Unaudited)............................................ 4
Consolidated Statements of Cash Flows for the Nine-Month Periods
Ended September 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
</TABLE>
2
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PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Balance Sheets
================================================================================
September 30, December 31,
Assets 2000 1999
--------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 23,298,522 $ 4,322,635
Short-term investments - 10,518,853
Interest receivable 4,316 298,567
Prepaid expenses 121,826 43,115
Other current assets 97,634 49,542
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Total current assets 23,522,298 15,232,712
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Long-term investments 780,000 780,000
Property and equipment, net 2,069,075 2,564,075
Other assets 164,262 234,647
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$ 26,535,635 $ 18,811,434
================================================================================
Liabilities and Stockholders' Equity
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Current liabilities:
Accounts payable $ 1,312,220 $ 1,028,662
Accrued liabilities 557,551 622,359
Deferred revenue 1,928,528 4,390,687
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Total current liabilities 3,798,299 6,041,708
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Other long-term liabilities 157,287 146,345
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Total liabilities 3,955,586 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 $.01 per share,
50,000,000 shares authorized, 18,116,509
and 15,076,996 shares issued and outstanding
in 2000 and 1999, respectively 181,165 150,770
Additional paid-in capital 91,623,552 70,448,778
Accumulated other comprehensive income 13,030 13,030
Deficit accumulated during development stage (69,237,698) (57,989,197)
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Total stockholders' equity 22,580,049 12,623,381
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$ 26,535,635 $ 18,811,434
================================================================================
See accompanying notes to consolidated financial statements.
3
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AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Statements of Operations
For the Three- and Nine-Month Periods Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
(Unaudited)
==================================================================================================================
Three-month periods Nine-month periods Cumulative
ended September 30, ended September 30, from Jan. 18, 1991
------------------- --------------------- (inception) through
2000 1999 2000 1999 Sept. 30, 2000
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Joint development income $ 435,101 $ 1,335,536 $ 2,462,159 $ 8,476,607 $ 13,071,472
------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 3,014,258 4,778,713 9,561,490 11,289,572 64,884,920
Business development 629,860 288,531 1,724,321 1,412,436 6,597,808
General and administrative 1,073,134 1,143,882 3,253,249 3,011,919 18,697,322
------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,717,252 6,211,126 14,539,060 15,713,927 90,180,050
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Operating loss (4,282,151) (4,875,590) (12,076,901) (7,237,320) (77,108,578)
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Other income (expense):
Interest income 346,606 312,655 828,400 745,116 7,829,620
Interest expense -- -- -- -- (23,591)
Other income -- -- -- -- 67,884
------------------------------------------------------------------------------------------------------------------
346,606 312,655 828,400 745,116 7,873,913
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Net loss $(3,935,545) $(4,562,935) $(11,248,501) $(6,492,204) $(69,234,665)
==================================================================================================================
Net loss per share, basic
and diluted $ (0.23) $ (0.31) $ (0.69) $ (0.44) $ (10.03)
==================================================================================================================
Weighted average shares
outstanding 17,141,745 14,886,412 16,351,713 14,843,754 6,904,945
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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AKSYS, LTD. AND SUBSIDIARY
(a development stage enterprise)
Consolidated Statements of Cash Flows
For the Nine-Month Periods Ended September 30, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
========================================================================================================
Cumulative
from
Jan. 18, 1991
(inception)
through
2000 1999 Sept. 30, 2000
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(11,248,501) $ (6,492,204) $(69,234,665)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 647,003 820,371 4,226,127
Adjustment of fixed asset carrying value -- 950,000 980,912
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 294,251 (292,808) (4,316)
Prepaid expenses (78,711) (28,828) (122,096)
Other current assets (48,092) (88,456) (97,634)
Accounts payable 283,558 (1,215,706) 1,312,220
Deferred revenue (2,462,159) 5,523,393 1,928,528
Accrued liabilities (64,808) (107,834) 714,463
Other 10,942 (41,882) (531,289)
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Net cash used in operating activities (12,666,517) (973,954) (60,446,205)
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of investments 10,518,853 10,719,671 120,362,722
Purchases of investments -- (12,650,693) (121,150,265)
Purchases of property and equipment (81,618) (447,523) (6,764,753)
Organizational costs incurred -- -- (19,595)
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Net cash provided by (used in) investing activities 10,437,235 (2,378,545) (7,571,891)
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock,
net of issuance costs 21,205,169 438,739 79,084,043
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 21,205,169 438,739 91,316,618
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Net increase (decrease) in cash and cash equivalents 18,975,887 (2,913,760) 23,298,522
Cash and cash equivalents at beginning of period 4,322,635 8,671,576 --
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 23,298,522 $ 5,757,816 $ 23,298,522
==========================================================================================================
</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 nine-month period ended September 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 $0.4
million and $2.5 million, respectively, during the three- and nine-month
periods ended September 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 Nine-month periods
ended Sept. 30, ended Sept. 30,
-------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Net loss $(3,935,545) $(4,562,935) $(11,248,501) $(6,492,204)
Foreign currency
translation adjustment 0 486 0 (994)
----------- ----------- ------------ -----------
Comprehensive income $(3,935,545) $(4,562,449) $(11,248,501) $(6,493,198)
=========== =========== ============ ===========
</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 September 30, 2000, the Company had a deficit accumulated during
the development stage of $69.2 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 three- and nine-month periods ended September 30, 2000, the Company
reported net losses of $3.9 million ($0.23 per share) and $11.2 million ($0.69
per share), respectively. For the three- and nine-month periods ended September
30, 1999, the Company reported net losses of $4.6 million ($0.31 per share) and
$6.5 million ($0.44 per share), respectively. The increase in net losses for the
three- and nine-month periods is primarily attributable to reduced revenue
related to the co-development and license agreement during the periods ended
September 30, 2000, 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 revenue related to co-development of the PHD
System during the three- and nine-month periods ended September 30, 2000 of $0.4
million and $2.5 million, respectively. During the same periods in 1999, the
Company recognized revenue of $1.3 million and $8.5 million, respectively.
8
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Operating expenses. Operating expenses for the three- and nine-month periods
ended September 30, 2000 were $4.7 million and $14.5 million, respectively,
compared with $6.2 million and $15.7 million, respectively, for the comparable
periods in 1999. Research and development expenses decreased $1.8 million, to
$3.0 million, during the three-month period ended September 30, 2000, and
decreased $1.7 million, to $9.6 million, for the nine-month period ended
September 30, 2000. The decreases are attributable to costs incurred in the
period ended September 30, 1999 related to the completion of PHD Systems used in
the Company's clinical evaluation.
Business development expenses increased $0.3 million, to $0.6 million, during
the three-month period ended September 30, 2000, and increased $0.3 million, to
$1.7 million, for the nine-month period then ended. The increases are
attributable to pre-commercialization expenses as the Company concludes the
clinical evaluation of the PHD System.
General and administrative expenses remained relatively constant, at $1.1
million, for the three-month periods ended September 30, 2000 and 1999, and
increased $0.2 million to $3.3 million for the nine-month period ended September
30, 2000. The increase is primarily attributable to the costs of executive
hiring during 2000.
Interest income. Interest income for the three- and nine-month periods ended
September 30, 2000 was $0.3 million and $0.8 million, respectively, compared
with $0.3 million and $0.7 million for the same periods last year. The slight
increase in interest income is due to earnings on the net proceeds of $20.5
million from private placements of the Company's Common Stock during 2000.
Liquidity and Capital Resources
The Company has financed its operations to date primarily through public and
private sales of its equity securities. Through September 30, 2000, the Company
received net offering proceeds from public and private sales of equity
securities of approximately $91.4 million. Since its inception in 1991 through
September 30, 2000, the Company made $6.8 million of capital expenditures and
used $60.4 million in cash to support its operations. At September 30, 2000, the
Company had cash and cash equivalents of $23.3 million, working capital of $19.7
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 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.
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
9
<PAGE>
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 September 30, 2000, the
net operating losses available to offset future taxable income were
approximately $72 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) pre-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.
Current and Pending Accounting Changes
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS Nos. 137
and 138, is effective for fiscal 2001. SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of a derivative and whether it
qualifies for hedge accounting. The Company intends to adopt SFAS No. 133, as
amended, in the first quarter of 2001. The Company does not believe that the
adoption of SFAS No. 133 will have a material effect on its financial
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's market risk during the
nine-month period ended September 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 August 16, 2000, the Company completed a private placement to three
institutional investors of 959,678 shares of its common stock. The gross
proceeds of the offering were approximately $7,438,000. 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
$446,000.
The shares of common stock were sold in 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 within the meaning of Rule 501(a) of Regulation D.
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 August 21, 2000, the Company filed a Current Report on Form 8-K, reporting in
Item 5 the sale and issuance of 959,678 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: November 13, 2000 By: /s/ William C. Dow
----------------- --------------------------------------
William C. Dow
President, Chief Executive
Officer and Director
Date: November 13, 2000 By: /s/ Steven A. Bourne
----------------- --------------------------------------
Steven A. Bourne
Controller
13
