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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, 1997
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 0-11094
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RIBI IMMUNOCHEM RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Delaware 81-0394349
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(State of Incorporation) (I.R.S. Employer Identification No.)
553 Old Corvallis Road, Hamilton, MT 59840
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (406) 363-6214
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Indicate by check mark whether the registrant (1) has filed all reports
requiredto 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
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As of July 31, 1997, there were 20,295,923 shares of common stock outstanding.
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RIBI IMMUNOCHEM RESEARCH, INC.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 3
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Item 1. Financial Statements: . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Balance Sheets
June 30, 1997 (Unaudited)
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Statements of Operations
Three months and six months ended
June 30, 1997 and 1996 (Unaudited). . . . . . . . . . . . . . . . . 5
Condensed Statements of Cash Flows
Six months ended June 30, 1997 and
1996 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Financial Statements
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 11
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Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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2
RIBI IMMUNOCHEM RESEARCH, INC.
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
The condensed balance sheet as of June 30, 1997, the condensed statements
of operations for the three month and six month periods ended June 30, 1996 and
1997, and the condensed statements of cash flows for the six months ended June
30, 1996 and 1997, have been prepared by the Company without audit. In the
opinion of management, all adjustments necessary to present fairly the financial
position, results of operations and cash flows as of and for the periods
indicated have been made.
It is suggested that the accompanying condensed financial statements be
read in conjunction with the audited financial statements and the notes thereto
included in the Company's 1996 Annual Report to Stockholders and Annual Report
on Form 10-K for the fiscal year ended December 31, 1996.
The results of operations for the three month and six month periods ended
June 30, 1997, are not necessarily indicative of results expected for the full
year 1997.
3
RIBI IMMUNOCHEM RESEARCH, INC.
CONDENSED BALANCE SHEETS
(In Thousands)
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 618 432
Available-for-sale investment
securities 15,146 14,080
Accounts receivable 290 52
Inventories 1,439 1,268
Other current assets 179 273
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Total current assets 17,672 16,105
Property, plant and equipment, net 11,435 11,601
Other assets, net 603 592
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$ 29,710 28,298
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 203 318
Accrued expenses 746 570
Deferred revenue 1,167 563
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Total current liabilities 2,116 1,451
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Stockholders' equity:
Preferred stock - -
Common stock 20 19
Additional paid-in capital 66,504 62,492
Unrealized investment holding
(losses) (87) (28)
Accumulated deficit (38,843) (35,636)
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Total stockholders' equity 27,594 26,847
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$ 29,710 28,298
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See accompanying notes.
4
RIBI IMMUNOCHEM RESEARCH, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In Thousands Except per Share Data)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Sales $ 671 518 866 818
Contracts and licenses 650 548 1,300 1,033
Investment income 255 264 496 538
Other, net 7 - 8 2
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Total revenues 1,583 1,330 2,670 2,391
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Costs and expenses:
Purchases and production costs 385 289 600 474
Proprietary research
and development 1,814 1,261 3,557 2,769
Selling, general and
administrative 928 678 1,720 1,445
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Total costs and expenses 3,127 2,228 5,877 4,688
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Net loss $ (1,544) (898) (3,207) (2,297)
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Net loss per common share $ (.08) (.05) (.16) (.12)
======= ======= ======= =======
Average number of shares
outstanding 20,002 18,890 19,867 18,890
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See accompanying notes.
5
RIBI IMMUNOCHEM RESEARCH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
Six Months Ended
June 30,
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1997 1996
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Cash flows from operating activities:
Net loss $ (3,207) (2,297)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation and amortization 494 458
Common stock grants 11 3
Compensation relating to stock options 14 15
Discount accretion (45) (305)
Asset sales and abandoned patents - 3
Changes in operating assets and
liabilities 351 271
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Net cash used by operating
activities (2,382) (1,852)
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Cash flows from investing activities:
Capital expenditures (300) (372)
Payments for other assets (53) (39)
Proceeds from maturities of held-to-
maturity investment securities - 3,121
Proceeds from maturities and sales of
available-for-sale investment securities 4,658 425
Purchases of available-for-sale
investment securities (5,739) (143)
Purchases of held-to-maturity
investment securities - (97)
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Net cash provided (used) by
investing activities (1,434) 2,895
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Cash flows from financing activities:
Sale of common stock, net 3,978 -
Proceeds from exercise of options 24 5
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Net cash provided by financing
activities 4,002 5
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Net change in cash and short-term
deposits 186 1,048
Cash and cash equivalents at
beginning of period 432 284
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Cash and cash equivalents at
end of period $ 618 1,332
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See accompanying notes.
6
RIBI IMMUNOCHEM RESEARCH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Inventories
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Inventories are as follows:
June 30, December 31,
1997 1996
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(In Thousands)
Raw materials $ 64 96
Work in process 1,338 1,092
Finished goods 37 80
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$ 1,439 1,268
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2. Commitments and Contingencies
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The Company, the National Institutes of Health ("NIH") and the Bitterroot
Valley Sanitary Landfill ("Landfill") were notified by the Montana Department of
Health and Environmental Sciences (now known as the Department of Environmental
Quality ["DEQ"]) in March 1991 that they had been identified as potentially
responsible parties ("PRPs") and as such are jointly and severally liable for
groundwater contamination located at and near the site of the Landfill in
Ravalli County, Montana. The Company's involvement arises out of waste
materials which it deposited at the Landfill from 1982 to 1985 that the Landfill
had permits to receive. The NIH voluntarily initiated and completed work
pursuant to an interim remediation plan approved by the DEQ to remove and
decontaminate the believed source of contamination and treat the aquifers which
tests have shown contain contaminants. Although decontamination of the soil at
and around the Landfill has been completed, treatment of the groundwater in the
proximity of the disposal site continues utilizing carbon filtering and air
sparging, and it is anticipated such treatment will continue through 1997 and
possibly longer. The DEQ conducted a "Risk Assessment" and issued a "Draft
Final Feasibility Study" in October 1994 that discussed possible final
remediation alternatives. In August 1995, the DEQ announced that it had
approved a second interim action in the vicinity of the Landfill being
voluntarily conducted by the NIH and which involves installing individual
replacement wells and new wells to provide both an alternate water supply for
the affected residents and to develop additional information on the site
hydrogeology. Information collected from these wells through a multi-year
monitoring program will be used by the DEQ to evaluate the effectiveness of the
remediation efforts to date. The current plan calls for the wells to be
installed in three phases: Phase I includes occupied properties with the highest
remaining contamination levels; Phase II includes occupied properties with
lesser degrees of contamination; and Phase III consists largely of vacant
properties. Preliminary studies completed in 1994 estimated the cost of the
wells to be approximately $1,400,000. The first Phase was completed in the
spring of 1996. The DEQ could require the PRPs to implement further remediation
should these wells not provide sufficient quality or quantity of water. The
NIH, which has taken the lead and incurred substantially all of the remediation
costs, has
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represented publicly that it would continue to work with the DEQ toward an
acceptable final remediation plan. In 1993, the NIH stated that as of that
time, it had incurred costs and anticipated future interim remediation costs
which could total $2 million or more. In 1996 the DEQ filed an action against
the Company, the Landfill and the owner of the Landfill seeking reimbursement of
costs in the amount of $199,000 associated with its oversight activities. For
procedural reasons, the DEQ dismissed this action but recently reinitiated the
action against the Company, the Landfill and the owner of the Landfill seeking
recovery of past alleged costs associated with its oversight activities in the
amount of $238,000, as well as a declaratory judgment finding the parties liable
for future oversight costs, plus civil penalties in the event the parties fail
to comply. The Company has filed a response to the action. Because of the
uncertainties, including the uncertainty of the cost of further remediation and
whether the NIH will seek and obtain partial reimbursement from the other PRPs,
it is not possible at this time to determine the potential liability of the
Company as a PRP.
Two landowners in the vicinity of the Landfill filed civil suits seeking
unspecified damages for alleged diminished value of land, possible health
hazards and loss of domestic water source. The suits named the PRPs and the
DEQ, as well as unknown individuals and corporations which may be discovered to
have contributed to the injuries alleged. The Company filed answers to these
suits denying any liability and in a motion for summary judgment, denied the
injuries alleged. On October 11, 1996, the court granted the summary judgment
and dismissed the plaintiffs' claims. Counsel for one of the plaintiffs filed a
motion for reconsideration, which was denied. Counsel appealed the District
Court decision to the State Supreme Court on behalf of both plaintiffs. Supreme
Court rules require the parties to submit to nonbinding mediation prior to the
matter being heard by the Court. Settlement was reached in June as a result of
the mediation. As part of the settlement, the suits will be dismissed with
prejudice, and plaintiffs will be barred from making any future claims arising
out of the alleged contamination. It is not possible at this time to predict
whether additional civil suits will be filed.
Some of the costs incurred in the defense of the civil suits, including the
action by the DEQ seeking reimbursement of costs, have been paid by insurance
and at least some of the future defense costs are expected to be paid by
insurance. None of the potential reimbursement has been accrued. Net costs
charged against earnings during the first six month periods of 1997 and 1996
were $45,000 and $8,000, respectively. As of June 30, 1997, the Company has
accrued a reserve of approximately $190,000, primarily to cover billed and
potential legal, consulting and DEQ reimbursement costs associated with the
Company as a PRP.
3. Future Accounting Changes
-------------------------
During 1997 the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 128 which revises certain procedures for
computing and presenting earnings per share. The Company will be required to
adopt the new Standard in its 1997 annual financial statements. However, the
Standard is not expected to cause a significant change in the earnings per share
it reports.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
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Since its inception in 1981, the Company has been engaged primarily in the
research and development of immunostimulants for use in preventing and treating
human diseases. To date, the Company has received limited revenues from
commercial sales and sales of clinical supplies. The Company has incurred net
losses in each year since its inception and expects to incur additional losses
for at least the next year, and probably longer. At June 30, 1997, the
Company's accumulated deficit was approximately $38,843,000.
The Company's results of operations can vary significantly from quarter to
quarter and depend, among other factors, on costs related to the progress of
clinical trials conducted by the Company and, to a lesser extent, on revenues
and costs associated with manufacturing. To date, research and development
expenses, together with manufacturing costs, have exceeded product and other
revenues in all periods.
The Company is not able to estimate with certainty the amount of cash and
working capital which may be needed for operations. Such requirements typically
vary depending upon the results of basic research and clinical trials, the time
and expense required for governmental approval of products, and competitive and
technical developments, most of which are beyond management's control. There is
no assurance that the Company will be able to obtain the necessary funding in
sufficient amounts or at the appropriate time for its planned activities. In
the event the Company may require additional funding, it might not be able to
proceed as rapidly as it would like, if at all, with the development and
commercialization of its products, which would have a material adverse effect on
its future financial condition and results of operations.
Pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, several forward-looking statements that involve a number of
risks and uncertainties are included within this Management's Discussion and
Analysis of Financial Condition and Results of Operations including (i) levels
of purchases and production costs associated with manufacturing, (ii) filing of
commercial license applications for MELACINE, (iii) expected levels of research
and development spending, and (iv) the Company's cash requirements. In addition
to the risks and uncertainties discussed with the forward-looking statements,
there are a number of other factors that could cause actual results to differ
materially from projected results, including but not limited to the following:
levels of expenditure on and results of the Company's research and the impact of
those results on milestone and transfer payments from partners; research results
of other companies using the Company's products; competition from other
companies; changes in government regulation, including price controls for newly
developed drugs; and risk factors listed from time-to-time in the Company's SEC
reports. Forward-looking statements herein are followed by an asterisk ("*").
Results of Operations
- ---------------------
The Company experienced a larger net loss during both the second quarter
and the first half of 1997 compared to the same periods in 1996. The increased
net loss can be attributed primarily to increased expenses, which were partially
offset by greater sales and revenues from contracts and licenses.
9
Revenues increased 19% in the second quarter of 1997 compared to the second
quarter of 1996 as a result of a 30% increase in sales and a 19% increase in
revenues from contracts and licenses. All of the increase in sales during the
second quarter of 1997 were due to improved sales of custom adjuvants. Custom
adjuvant sales made up 76% of total sales for the quarter. Revenues from
contracts and licenses increased because of a fifth agreement with SmithKline
Beecham signed in early January 1997.
For the first six months of 1997, revenues were up 12% compared to the
first six months of 1996. Revenues from contracts and licenses were up 26% and
sales increased 6%, offset slightly by an 8% reduction in investment income.
The small increase in sales for the first six months of 1997 reflects unusually
low sales in the first quarter of 1997. During the first quarter of 1997, the
Company's manufacturing plant was the subject of validation work related to the
preparation of a commercial license application for MELACINE melanoma
theraccine. As a result, it was not available to produce material for sale.
Sales were up by 244% in the second quarter compared to the first quarter of
1997 as production resumed.
Purchases and production costs increased during the second quarter of 1997
compared to the second quarter of 1996 in approximately the same ratio as sales.
For the first six months of 1997 compared to the first six months of 1996,
purchases and production costs increased at a higher rate than sales. The
increase in costs in relation to sales results primarily from lower plant
throughput during the first quarter of 1997 due to the validation effort
explained above. As plant throughput increases, the cost per unit should
decrease until plant capacity is reached.* It is possible that material, labor
and other costs will be higher than expected or that throughput will not reach
the levels expected.
Research and development expenses increased 44% in the second quarter of
1997 compared to the second quarter of 1996 and increased 28% in the first six
months of 1997 compared to the first six months of 1996. Most of the increase
in the second quarter and first six months of 1997 over the same periods in 1996
resulted from the preparation of a commercial license application for MELACINE.
The Company expects to learn whether the application will be accepted for
detailed review in Canada during the third quarter of 1997 and plans to file
applications in Europe and the United States later in the year.* It is possible
that completion of the various applications will require more time than expected
or that any or all of the regulatory agencies in the countries where the
applications are filed will not accept the filings for detailed review. It is
also possible that one or all of the applications will not be approved once
accepted for review. The Company is also conducting a Phase III human clinical
trial using MELACINE with interferon alfa-2b to treat stage IV (late stage)
melanoma patients. Expenses for this trial, which began in late 1995, were
higher in the first six months of 1997 than in the same period in 1996 as
patient accrual in the trial was higher in 1997. The Company had planned to
conduct in 1997 a Phase II(b) controlled human clinical trial in which cardiac
bypass patients are treated prior to surgery with MPL-C cardioprotectant to
prevent or reduce cardiac ischemia reperfusion injury. As reported in the
Company's first quarter report on Form 10-Q, recent preclinical studies have
indicated that MPL cardioprotectant can provide almost immediate protection from
ischemia reperfusion injury as opposed to previous data, which required
prophylactic administration of the drug nine to twelve hours prior to initiation
of coronary bypass procedures. This new data suggests a much more pragmatic
approach with broader applications if duplicated in further preclinical and in
possible human
10
studies. Given this possible new opportunity, the planned Phase II(b) study of
MPL-C by the Cleveland Clinic has not been initiated. Increased research and
development expenses in the first six months of 1997 were partially offset by
charges in the first six months of 1996 for non-GMP (Good Manufacturing
Practices) material manufactured in process scale-up work in late 1995 and early
1996.
Selling, general and administrative expenses were up 37% in the second
quarter of 1997 and up 19% in the first six months of 1997 compared to those
same periods in 1996. The increases result primarily from higher maintenance
costs, increased investor relations efforts and costs associated with the
defense and settlement of civil suits described in Note 2 of the Notes to
Condensed Financial Statements.
Financial Condition
- -------------------
During the first six months of 1997 the Company used $2,382,000 in
operations which was 29% more than the amount used in the first six months of
1996. The increase in cash usage is attributable primarily to a larger net
loss, offset in part by less accretion of discount on cash investments and
greater amounts of cash provided by changes in operating assets and liabilities,
which result from timing differences between cash and accrual accounting. The
Company expects cash flows used in operations for the year 1997 to exceed the
amount used in 1996 as research expenditures are expected to remain higher than
they were during 1996.* Projected cash requirements are dependent upon the
Company receiving revenues that are anticipated and conducting the projected
research and clinical trials.
In January 1997, effective December 31, 1996, SmithKline Beecham purchased
1,103,448 shares of the Company's common stock for $4,000,000. With this
additional funding, the Company believes its available cash, cash equivalents
and investments together with funds from licensing agreements and product sales
should be sufficient to meet its capital requirements through 1999.* However,
it is possible that revenues from license agreements, product sales and
investments could be lower than anticipated and/or operating cost and expenses
could be higher than anticipated which could result in having sufficient capital
for a period less than through 1999.
See Note 2 of the Notes to Condensed Financial Statements for a discussion
of contingencies related to the Company's identification as a PRP for
groundwater contamination at and near the Bitterroot Valley Sanitary Landfill,
the Company being a named defendant in two civil suits brought by landowners in
the vicinity of the Landfill and the Company being a named defendant in a suit
by the Montana DEQ for reimbursement of administrative fees related to the
Landfill.
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings
(a) See Note 2 of the Notes to Condensed Financial Statements for a
discussion of the Company's involvement as a PRP and a defendant in a
civil suits relating to the Bitterroot Valley Sanitary Landfill.
11
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on April 30, 1997.
(b) Proxies were solicited by the Company pursuant to Regulation 14A of
the Securities Exchange Act of 1934 and all of management's nominees for
director were elected as follows:
TOTAL
FOR WITHHELD VOTED
--- -------- -----
John L. Cantrell 16,587,141 216,372 16,803,513
Philipp Gerhardt 15,817,753 985,760 16,803,513
Paul Goddard 16,582,511 221,002 16,803,513
Mark I. Greene 16,584,511 219,002 16,803,513
Robert E. Ivy 16,410,886 392,627 16,803,513
Thomas N. McGowen, Jr. 15,809,028 994,485 16,803,513
Frederick B. Tossberg 16,567,091 236,422 16,803,513
(c) A proposal to adopt a new directors stock option plan (Ribi
ImmunoChem Research, Inc. 1996 Directors' Stock Option Plan) was
adopted by a vote of 14,025,744 for and 2,550,608 against, with
227,161 abstaining. There were no broker non-votes. The new plan
authorizes the grant of options to purchase up to 210,000 of the
Company's common shares. The grant of options is non-discretionary
and options are only awarded to directors who are not employees of
the Company. The new Plan will expire in the year 2006.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (filed only
electronically)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1997.
12
SIGNATURES
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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.
RIBI IMMUNOCHEM RESEARCH, INC.
-----------------------------
(Registrant)
August 12,1997 By /s/Vern D. Child
------------------------------------------
Vern D. Child, Vice President-Finance
and Treasurer (duly authorized officer
and principal financial and accounting
officer)
13