SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR
---
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended 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 No. 0-19153
________________________
NEXELL THERAPEUTICS INC.
(Exact name of Registrant as specified in its Charter)
________________________
Delaware 06-1192468
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
9 Parker, Irvine, CA 92618
(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 470-9011
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ______
---
The aggregate number of Registrant's shares of Common Stock, $.001 par
value, outstanding on July 18, 2000 was 18,993,781 shares.
_______________________
NEXELL THERAPEUTICS INC.
INDEX
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PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) as of
June 30, 2000 and December 31, 1999................................ 3
Condensed Consolidated Statements of Operations (unaudited)
for the three and six months ended June 30, 2000
and 1999........................................................... 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2000 and 1999.................... 5
Notes to Condensed Consolidated Financial
Statements (unaudited)............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 15
Item 2. Changes in Securities and Use of Proceeds.................................... 15
Item 3. Defaults upon Senior Securities.............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.......................... 15
Item 5. Other Information............................................................ 17
Item 6. Exhibits and Reports on Form 8-K............................................. 17
SIGNATURES.................................................................................. 18
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NEXELL THERAPEUTICS INC. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2000 1999
------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,002,000 $ 28,695,000
Trade receivables net of allowance for doubtful accounts of
$26,000 at June 30, 2000 and December 31, 1999 3,078,000 2,033,000
Receivables from related party 815,000 1,248,000
Inventory - finished goods 3,479,000 4,409,000
Other current assets 3,520,000 2,271,000
------------------- ---------------------
Total current assets 28,894,000 38,656,000
Fixed assets, net 9,849,000 10,932,000
Intangible assets, net 41,106,000 43,191,000
Other assets, including equity investments 5,158,000 1,060,000
------------------- ---------------------
Total assets $ 85,007,000 $ 93,839,000
=================== =====================
LIABILITIES
Current liabilities:
Accounts payable $ 2,737,000 $ 3,194,000
Accounts payable due to related party 5,009,000 4,279,000
Accrued expenses 3,941,000 3,152,000
------------------- ---------------------
Total current liabilities 11,687,000 10,625,000
Commitments and contingencies -- --
SHAREHOLDERS' EQUITY
Convertible preferred stock; $.001 par value, 1,150,000 shares
authorized:
Series A; 74,498 issued and outstanding at June 30, 2000 and 100 100
December 31, 1999 (liquidation value $76,898,000 and $74,685,000)
Series B; 63,000 issued and outstanding at June 30, 2000 and 100 100
December 31, 1999 (liquidation value $63,194,000 and $63,192,000)
Common stock; $.001 par value, 80,000,000 shares authorized,
18,841,035 and 18,178,737 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively. 19,000 18,000
Additional paid-in capital 255,854,800 252,796,800
Unearned compensation (45,000) (198,000)
Accumulated other comprehensive income (loss) 3,813,000 (5,000)
Accumulated deficit (186,322,000) (169,398,000)
------------------- ---------------------
Total shareholders' equity 73,320,000 83,214,000
------------------- ---------------------
Total liabilities and shareholders' equity $ 85,007,000 $ 93,839,000
=================== =====================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
NEXELL THERAPEUTICS INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------- ------------- -------------
Revenue $ 4,630,000 $ 1,563,000 $ 9,414,000 $ 7,077,000
Cost of goods sold 2,669,000 1,580,000 5,212,000 4,738,000
------------ ------------- ------------- -------------
Gross profit (loss) 1,961,000 (17,000) 4,202,000 2,339,000
------------ ------------- ------------- -------------
Operating expenses:
Research and development 3,826,000 4,464,000 7,948,000 8,241,000
General and administrative 3,046,000 2,349,000 5,657,000 4,510,000
Selling, marketing and distribution 2,584,000 1,172,000 4,975,000 2,123,000
Goodwill and intangible assets amortization 1,016,000 922,000 2,033,000 1,747,000
Restructuring costs -- -- -- 504,000
------------ ------------- ------------- -------------
Total operating expenses 10,472,000 8,907,000 20,613,000 17,125,000
------------ ------------- ------------- -------------
Operating loss (8,511,000) (8,924,000) (16,411,000) (14,786,000)
------------ ------------- ------------- -------------
Other (income) expenses:
Royalty, licensing and other related income (1,000) (300,000) (77,000) (301,000)
Royalty expense -- 40,000 100,000 40,000
Interest income (297,000) (215,000) (613,000) (590,000)
Interest expense -- 542,000 -- 1,030,000
Other, net 41,000 -- 164,000 145,000
------------ ------------- ------------- -------------
Total other (income) expenses (257,000) 67,000 (426,000) 324,000
------------ ------------- ------------- -------------
Net loss (8,254,000) (8,991,000) (15,985,000) (15,110,000)
Preferred stock dividends (1,587,000) (1,051,000) (3,162,000) (2,091,000)
------------ ----------- ------------- -------------
Net loss applicable to common stock $ (9,841,000) $ (10,042,000) $ (19,147,000) $ (17,201,000)
============ ============= ============= =============
Basic and diluted loss per share $ (0.53) $ (0.57) $ (1.04) $ (0.98)
------------ ------------- ------------- -------------
Weighted average number of shares of common
stock outstanding-basic and diluted 18,675,000 17,668,000 18,468,000 17,537,000
========== =========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
NEXELL THERAPEUTICS INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
---------------------------------------------------
2000 1999
------------------------ ------------------------
Cash flows from operating activities:
Net loss............................................................ $ (15,985,000) $ (15,110,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 3,685,000 3,191,000
Noncash compensation............................................. 128,000 95,000
Loss from disposal of equipment.................................. 19,000 --
Asset impairment charge.......................................... 90,000 112,000
Changes in operating assets and liabilities:
Increase in trade receivables................................... (1,045,000) --
Decrease in receivable from related party....................... 432,000 731,000
Decrease in inventory........................................... 930,000 1,154,000
Increase in other current assets and other assets............... (1,499,000) (169,000)
Increase (decrease) in accounts payable and accrued expenses.... (612,000) 39,000
Increase in accounts payable to related party................... 730,000 85,000
------------------ ----------------
Net cash used in operating activities............................ (13,127,000) (9,872,000)
------------------ ----------------
Cash flows from investing activities:
Purchases of equipment.............................................. (712,000) (1,023,000)
Proceeds from sales of equipment.................................... 77,000 150,000
------------------ ----------------
Net cash used in investing activities............................ (635,000) (873,000)
Cash flows from financing activities:
Proceeds from issuance of common stock in connection with the
exercise of warrants/options.................................... 3,083,000 921,000
Repurchase/retirement of common stock............................... (627,000)
Increase in long term debt due to related party..................... 1,028,000
Repayment of long term debt......................................... (96,000)
Repayment of capital leases......................................... (42,000)
------------------ ----------------
Net cash provided by financing activities....................... 3,083,000 1,184,000
Effect of exchange rate changes on cash................................ (14,000) 9,000
------------------ ----------------
Net decrease in cash and cash equivalents.............................. (10,693,000) (9,552,000)
Cash and cash equivalents at beginning of period....................... 28,695,000 33,091,000
------------------ ----------------
Cash and cash equivalents at end of period............................. $ 18,002,000 $ 23,539,000
================== ================
Supplemental disclosure of cash flow information:
Cash paid for interest -- --
Cash paid for income taxes $ 75,000 --
Non-cash investing and financing activities:
. In January 1999, the Company issued 470,553 shares of Common Stock valued at
$3,000,000 in exchange for certain intangible assets.
. In May 1999, the Company issued 750,000 shares of Common Stock valued at
$6,282,000 to Baxter Healthcare Corporation in exchange for its minority
interest in Nexell of California, Inc.
. In June 1999, the Company issued 17,500 shares of Common Stock valued at
$153,000 to certain Innovir shareholders in exchange for their outstanding
Innovir preferred stock.
. The Company accrued $945,000 in preferred stock dividends in the six months
ended June 30, 2000.
The accompanying notes are an integral part of the condensed consolidated
financial statements
5
NEXELL THERAPEUTICS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(unaudited)
(1) Financial Statement Presentation
The unaudited condensed consolidated financial statements and notes thereto
of Nexell Therapeutics Inc. ("Nexell") and subsidiaries (collectively, the
"Company") herein have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"), and in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the results of operations for the
interim periods presented. Certain information and footnote disclosures
normally included in financial statements, prepared in accordance with
generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations. However, management believes that
the disclosures are adequate to make the information presented not
misleading. These condensed consolidated unaudited financial statements and
notes thereto have been prepared in conformity with the accounting
principles applied in our 1999 Annual Report on Form 10-K for the year
ended December 31, 1999 and should be read in conjunction with such Report.
The results for the interim periods are not necessarily indicative of the
results for the full fiscal year.
(2) Principles of Consolidation
These condensed consolidated financial statements include the accounts of
Nexell, Nexell of California, Inc. ("NCI") and its subsidiary, VIMRX
Genomics, Inc. ("VGI"), Innovir Laboratories, Inc. ("Innovir") and its
subsidiaries. All significant intercompany balances and transactions have
been eliminated.
(3) Common Stock Reverse Split
At the June 14, 2000 annual meeting of stockholders, the stockholders
approved, and on June 15, 2000 the Company effected, a one for four reverse
stock split of the Company's outstanding common stock ("Common Stock"). All
prior period common share and per share information presented in the
unaudited condensed consolidated financial statements and notes thereto
have been adjusted to give retroactive effect to the reverse stock split.
6
(4) Comprehensive Loss
Comprehensive loss consists of net loss, adjustment to fair value of equity
investments and foreign currency translation adjustments and is presented
in the table below. Accumulated other comprehensive loss is included as a
component of shareholders' equity.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------
Net loss $ 8,254,000 $8,991,000 $15,985,000 $15,110,000
Translation adjustment 16,000 12,000 31,000 33,000
Adjustment to market value
of equity investment (3,849,000) -- (3,849,000) --
------------ ---------- ----------- -----------
Total comprehensive loss $ 4,421,000 $9,003,000 $12,167,000 $15,143,000
============ ========== =========== ===========
The cumulative foreign currency translation adjustment included as a
component of accumulated other comprehensive loss was $36,000 and $5,000 at
June 30, 2000 and December 31, 1999, respectively. The cumulative
adjustments for the difference between cost and market value of equity
securities held as investments included as a component of accumulated other
comprehensive loss was $3,849,000 and zero at June 30, 2000 and December
31, 1999, respectively.
No income tax expense or benefit was allocated to the foreign currency
translation or equity investment adjustments recorded in 2000 and 1999,
respectively, due to the Company's significant net operating loss tax
carryforwards.
(5) Per Share Information
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted net loss per
share is computed using the weighted average number of shares of common
stock outstanding and potentially dilutive common shares outstanding during
the period. Potentially dilutive common shares consist of stock options and
warrants using the treasury stock method but are excluded if their effect
is antidilutive.
Stock options and warrants, excluding Class A performance warrants, to
purchase 4,394,163, and 4,037,331 shares of Common Stock were outstanding
at June 30, 2000 and 1999, respectively. Stock options and warrants
outstanding were not included in the computation of diluted earnings per
share as the Company incurred losses in all periods presented.
7
(6) Restructuring of Sales, Marketing and Distribution Arrangement with Baxter
As more fully described in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, the Company is party to numerous contracts
with Baxter Healthcare Corporation. Certain of these agreements were
terminated and/or restructured in 1999. This allowed the Company to assume
direct control for all sales and distribution of the Company's products.
(7) Investments
The Company owns 457,143 shares of the common stock of Epoch
Pharmaceuticals, Inc., representing approximately 2% ownership at June 30,
2000. Included in comprehensive income in the second quarter of 2000 is
the unrealized gain recorded for this investment to fair market value at
June 30, 2000.
The Company owns 134,000 shares of the common stock of Ribozyme
Pharmaceuticals, Inc., representing approximately 1% ownership at June 30,
2000. These securities are not tradable until August 2000 and, accordingly,
are valued at cost.
The above investments are included in "other assets" on the accompanying
balance sheet and are accounted for under the cost method as neither of the
investments represent more than 20 percent of the voting stock of the
investee and the Company does not exercise significant influence over the
investee's operations or financial policies.
(8) Distribution and Co-Development Agreement
On May 9, 2000, the Company announced it had entered into a strategic
alliance with Takara Shuzo Co., Ltd. ("Takara"), a diversified brewing,
foods, and biomedical company in Japan. Pursuant to such agreements, Takara
will become the exclusive distributor of the Company's cell therapy
products in Japan, Korea, Taiwan and China and the parties will engage in
development collaborations in gene therapy. In exchange for the
distribution rights, Takara agreed to pay the Company a nonrefundable fee
of $2.5 million within 100 days of the agreement's execution. This payment,
when received, will be recognized as revenue over the five year term of the
agreement. Under the co-development agreement, the companies will engage in
co-development efforts to develop a product in the field of ex-vivo genetic
transduction combining the Company's technology and Takara's product.
8
(9) Geographic Information
The Company operates in one industry segment; the development, manufacture,
marketing and distribution of specialized instruments, biologicals,
reagents, sterile plastic sets and related products used in ex vivo cell
research and therapies. Prior to the termination of the Company's
distribution agreement with Baxter on November 30, 1999, all of the
Company's sales were made to a domestic entity of Baxter. Substantially all
of Baxter's end user sales of the Company's products were made
internationally until regulatory approval for United States distribution
was received in July 1999. Assets assigned to geographic segments have not
changed materially since December 31, 1999. Summary comparative operating
results for the United States and the rest of the world follows:
Three Months Ended Six Months Ended
------------------------------- --------------------------------
June 30,2000 June 30, 1999 June 30, 2000 June 30,1999
------------ ------------- ------------- ------------
Revenues by Geographic Area:
United States $2,836,000 $1,563 000 $ 5,893,000 $ 7,077,000
Rest of World 1,794,000 -- 3,521,000 --
---------- ---------- ----------- -----------
$4,630,000 $1,563,000 $ 9,414,000 $ 7,077,000
========== ========== =========== ===========
Operating loss by Geographic Area:
United States $8,413,000 $8,886,000 $16,244,000 $14,704,000
Rest of World 98,000 38,000 167,000 82,000
---------- ---------- ----------- -----------
$8,511,000 $8,924,000 $16,411,000 $14,786,000
========== ========== =========== ===========
(10) Recent Accounting Developments
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements", as amended, which for the Company is effective no
later than the fiscal quarter beginning October 1, 2000. SAB No. 101
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company believes that implementation of SAB No. 101 will have no material
impact on its financial statements.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto included elsewhere in this Quarterly
Report on Form 10-Q and with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
Three Months Ended June 30, 2000 and 1999
Sales were $4,630,000 for the quarter ended June 30, 2000, an increase of
$3,067,000 or 196% from $1,563,000 for the quarter ended June 30, 1999. In the
prior year, revenues reflected product sales by NCI to its former exclusive
worldwide distributor, Baxter Healthcare Corporation ("Baxter"), and were
impacted by the timing of the distributor's orders. In the current year, as a
result of the 1999 restructuring of the distribution agreement with Baxter, the
Company now sells product directly to multiple end users. Accordingly, timing of
orders less significantly impacts revenues since product sales are distributed
to more than 200 customers rather than a single distributor. The transition from
distribution through Baxter to direct end user sales by the Company required the
recruitment and training of domestic and international sales forces and the
creation of a sales infrastructure, activities which management believes are now
complete. Further, following regulatory approval of the Isolex 300i system in
July 1999, end user sales began in the United States. In addition, pursuant to
an asset transfer agreement, the Company agreed to repurchase inventory,
hardware and related assets previously sold to Baxter for distribution. The
closing for the transfer of assets in the United States and Canada occurred on
June 30, 1999 and in the rest of the world on November 30, 1999. As a result of
this transfer, sales were reduced by approximately $1,387,000 in the three
months ended June 30, 1999 as a result of the return of assets previously sold
to Baxter.
Gross profit was $1,961,000 for the quarter ended June 30, 2000, an increase of
$1,978,000 from the $(17,000) for the quarter ended June 30, 1999. This increase
was due to the impact of the changes in the distribution agreement with Baxter
in the prior year, spreading substantially constant overhead costs over a larger
sales base and changes in sales mix.
Total operating expenses were $10,472,000 for the three months ended June 30,
2000, an increase of $1,565,000 or 18% over the quarter ended June 30, 1999.
This increase was the result of an increase in sales, marketing and distribution
expenses of $1,412,000, an increase of $697,000 in general and administrative
expenses and an increase of $94,000 in goodwill and intangible assets
amortization offset by a decrease of $638,000 in research and development
expenses.
Research and development expenses decreased by $638,000 or 14% from $4,464,000
for the three months ended June 30, 1999 to $3,826,000 for the three months
ended June 30, 2000, primarily due to discontinuing all Innovir operations.
General and administrative expenses increased by $697,000 from $2,349,000 in the
second quarter of 1999 to $3,046,000 in the second quarter of 2000. This
resulted principally from increased headcount and related recruitment and
relocation costs as a result of the anticipated growth in revenue following
regulatory approval of the Isolex
10
300i system in July 1999, the need for increased infrastructure as a result of
the revisions to the distribution agreement with Baxter and one-time charges
related to separation agreements with former employees, including certain
officers. Selling, marketing and distribution expenses increased by $1,412,000
or 120% from $1,172,000 in the second quarter of 1999 to $2,584,000 in the
second quarter of 2000 as a result of the restructuring of the distribution
agreement with Baxter. This increase resulted from the Company's assumption of
responsibility for marketing, selling and distribution activities related to its
cell therapy products during late 1999. Baxter had previously performed these
activities. Goodwill and intangible amortization increased by $94,000 or 10% to
$1,016,000 for the quarter ended June 30, 2000 from $922,000 for the quarter
ended June 30, 1999 as a result of acquisitions completed during 1999.
Other income was $257,000 for the quarter ended June 30, 2000, while other
expense of $67,000 was incurred in the quarter ended June 30, 1999, a change of
$324,000. This was primarily the result of a decrease in interest expense from
$542,000 in the three months ended June 30, 1999 to zero for the comparable
period in 2000 and an increase in interest income of $82,000 partially offset by
a decrease of $299,000 in royalty income. The decrease in interest expense and
increase in interest income arose from the repayment of approximately $34
million in convertible debentures from the proceeds of the Company's private
placement financing that was completed in November 1999 and investment of
residual proceeds. The decrease in royalty income resulted from a non-recurring
licensing payment received from Amgen Inc. by Innovir in the second quarter of
1999.
The foregoing resulted in a net loss of $8,254,000 and a net loss applicable to
common stock of $9,841,000 for the quarter ended June 30, 2000. This represented
a decrease in net loss of $737,000 or 8% and a decrease in the net loss
applicable to common stock of $201,000 or 2% from the quarter ended June 30,
1999.
Six Months Ended June 30, 2000 and 1999
Sales were $9,414,000 for the six months ended June 30, 2000, an increase of
$2,337,000 or 33% from $7,077,000 for the six months ended June 30, 1999. This
increase was the result of the changes to the distribution agreement with
Baxter, the completion of the development of an internal sales function,
regulatory approval of the Isolex 300i system and the non-recurring prior year
decrease in sales associated with the repurchase of inventory previously sold to
Baxter which is described in greater detail above.
Gross profit was $4,202,000 for the six months ended June 30, 2000, an increase
of $1,863,000 from the $2,339,000 for the six months ended June 30, 1999. This
increase was due to the impact of the changes in the distribution agreement in
the prior year and spreading substantially constant overhead costs over a larger
sales base and changes in sales mix.
Total operating expenses were $20,613,000 for the six months ended June 30,
2000, an increase of $3,488,000 or 20% over the six months ended June 30, 1999.
This increase was the result of several factors. General and administrative
expenses increased by $1,147,000 or 25% from $4,510,000 in 1999 to $5,657,000 in
2000. This was largely due to increased headcount and
11
related recruitment and relocation costs as a result of the anticipated growth
in revenue following regulatory approval of the Isolex 300i system in July 1999,
the need for increased infrastructure as a result of the revisions to the
distribution agreement with Baxter and one-time charges related to separation
agreements with former employees, including certain officers. Selling and
marketing expenses increased by $2,852,000 or 134% from $2,123,000 in the first
six months of 1999 to $4,975,000 in the first six months of 2000. This was the
result of the restructuring of the distribution agreement with Baxter and the
ramp up in sales and marketing activities associated with regulatory approval of
the Isolex system. The changes in the agreement with Baxter resulted in the
Company's assumption of responsibility for marketing, selling and distribution
activities related to its cell therapy products. Baxter had previously performed
these activities. Goodwill and intangible amortization increased by $286,000 or
16% to $2,033,000 for the six months ended June 30, 2000 from $1,747,000 for the
six months ended June 30, 1999 as a result of acquisitions completed during
1999. The expense increases discussed above were partially offset by a $504,000
decrease in restructuring costs related to the relocation of the Company's
corporate headquarters in the previous year while no such costs were incurred in
the current year, and by a decrease in research and development expenses of
$293,000 or 4% from $8,241,000 in the first six months of 1999 to $7,948,000 in
the first six months of 2000.
Other income was $426,000 for the six months ended June 30, 2000, while other
expense of $324,000 was incurred in the six months ended June 30, 1999, a change
of $750,000. This was primarily the result of a decrease in interest expense
from $1,030,000 in the six months ended June 30, 1999 to zero for the comparable
period in 2000 offset by a decrease of $224,000 in royalty income. The decrease
in interest expense arose from the repayment of approximately $34 million in
convertible debentures from the proceeds of the Company's private placement
financing that was completed in November 1999. The decrease in royalty income
resulted from a non-recurring licensing payment received from Amgen Inc. by
Innovir in the second quarter of 1999.
The foregoing resulted in a net loss of $15,985,000 and a net loss applicable to
common stock of $19,147,000 for the six months ended June 30, 2000. This
represented an increase in net loss of $875,000 or 6% and an increase in the net
loss applicable to common stock of $1,946,000 or 11% from the six months ended
June 30, 1999.
Liquidity and Capital Resources
The Company had $18,002,000 in cash and cash equivalents as of June 30, 2000 as
compared to $28,695,000 as of December 31, 1999, and working capital of
$17,207,000 at June 30, 2000 as compared to $28,031,000 at December 31, 1999.
The $10,693,000 decrease in cash and cash equivalents resulted principally from
cash used in the operations of the Company of $13,127,000, and purchases of
equipment totaling $712,000. These were partially offset by cash proceeds of
$3,083,000 from the exercise of stock options and warrants and $77,000 from the
sale of equipment. The decrease in working capital of $10,824,000 resulted
principally from the decrease in cash and cash equivalents.
12
Cash used in operating activities in the first six months of 2000 of $13,127,000
represented an increase of $3,255,000 or 33% from the cash use of $9,872,000 for
the six months ended June 30, 1999. The increase is due principally to an
increase in the net loss of $875,000, an increase of $494,000 in non cash
depreciation and amortization, an increase in trade receivables of $1,045,000
due to changes in the agreements with Baxter and an increase in European
receivables and an increase in cash used for other current assets and other
assets of $1,499,000 related to value added tax deposits necessary in Europe and
other deposits and miscellaneous receivables. Remaining changes in current
assets and liabilities largely offset.
Cash dividends are payable semi-annually in May and November on the Series B
Preferred Stock at the rate of 3% of the liquidation preference and will be
approximately $1,900,000 per year.
At this time, the Company does not have any specific plans to acquire any
company. The Company, in the ordinary course of business, routinely explores
possible business transactions that may lead to an acquisition. In general, in
order to conserve cash the Company's preference is to use its stock as
consideration for any potential acquisition.
The Company expects to incur substantial expenditures in the foreseeable future
for the research and development and commercialization of its proposed products.
Based on current projections, which are subject to change, the Company's
management believes that the current balance of cash and cash equivalents is
sufficient to fund its operations through at least fiscal 2000. Thereafter, the
Company will require additional funds, which it may seek to raise through public
or private equity or debt financings, collaborative or other arrangements with
corporate sources, or through other sources of financing. There can be no
assurance that such additional funds will be available to the Company on terms
favorable to the Company, or at all.
On May 9, 2000, the Company announced it had entered into a strategic alliance
with Takara Shuzo Co., Ltd. ("Takara"), a diversified brewing, foods, and
biomedical company in Japan. Pursuant to such agreements, Takara will become the
exclusive distributor of the Company's cell therapy products in Japan, Korea,
Taiwan and China and the parties will engage in development collaborations in
gene therapy. In exchange for the distribution rights, Takara agreed to pay the
Company a nonrefundable fee of $2.5 million within 100 days of the agreement's
execution. This payment, when received, will be recognized as revenue over the
five year term of the agreement. Under the co-development agreement, the
companies will engage in co-development efforts to develop a product in the
field of ex-vivo genetic transduction combining the Company's technology and
Takara's product.
Year 2000 Issues
The Company has experienced no material disruption in the operation of its
business as a result of the transition from 1999 to 2000. No future costs are
anticipated with respect to Year 2000 compliance. The Company's product lines
all operate independently of the date or time of day; thus, the transition to
the Year 2000 has not affected their operation. The Company continues to
monitor its IT and non-IT systems, as well as its vendors, suppliers, and
partners to ensure continued Year 2000 compliance. Although the Company will
take all practical measures to prevent future problems related with the Year
2000 issue, such problems and failures may occur which could seriously affect
the Company's operation. Because of the unprecedented nature of such problems,
the extent of the effect on the Company's operations, if any, cannot be
determined.
Disclosure Regarding Forward Looking Statements
This Report on Form 10-Q contains certain statements that are "Forward Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Those statements include, among other things, the discussions of the Company's
business strategy and expectations contained in "Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
13
Although the Company believes that the expectations reflected in Forward Looking
Statements are reasonable, management can give no assurance that such
expectations will prove to have been correct. Generally, these statements
relate to business plans or strategies, projected or anticipated benefits or
other consequences of such plans or strategies, or projections involving
anticipated revenues, expenses, earnings, levels of capital expenditures,
liquidity or indebtedness or other aspects of operating results or financial
position. All phases of the operations of the Company are subject to a number
of uncertainties, risks and other influences (including the timely commencement
and success of the Company's clinical trials and other research endeavors,
delays in receiving FDA or other regulatory approvals, the development of
competing therapies and/or technologies, the terms of any future strategic
alliances, the possible need for additional capital, and the volatility in the
market price for the Company's securities) many of which are outside the control
of the Company and any one of which, or a combination of which, could materially
affect the results of the Company's operations and whether the Forward Looking
Statements made by the Company ultimately prove to be accurate.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, operations of the Company are exposed to risks
associated with fluctuations in interest rates and foreign currency exchange
rates.
Interest Rate Risk
The Company maintains excess cash in a mutual fund, the "BlackRock Low Duration
Bond Portfolio" (the "fund"), which invests in asset backed securities, bonds
and various other commercial obligations. The fund may, from time to time, use
certain derivatives in its investment strategy.
Two of the main risks disclosed by the fund are interest rate risk and credit
risk. Typically, when interest rates rise, there is a corresponding decline in
the market value of bonds such as those held by the fund. Credit risk refers to
the possibility that the issuer of the bond will not be able to make principal
and interest payments. The Company addresses these risks by actively monitoring
the fund's performance and investment holdings. The Company does not enter into
financial instruments for trading or speculative purposes.
The Company's interest income is most sensitive to fluctuations in the general
level of U.S. interest rates. In this regard, changes in the U.S. interest
rates affect the interest earned on the Company's cash as well as the value of
the mutual fund in which excess cash is invested.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment of excess cash in a mutual fund, which
invests in asset backed securities, bonds and various other commercial
obligations. The fund may, from time to time, use certain derivatives in its
investment strategy. The fund's portfolio managers make all investment
decisions and the Company has no control over such investment decisions or the
fund's use of derivatives.
14
Foreign Currency Risk
Changes in foreign exchange rates, and in particular a strengthening of the U.S.
dollar, may negatively affect the Company's consolidated sales and gross margins
as expressed in U.S. dollars. To date, the Company has not entered into any
foreign exchange contracts to hedge its exposure to foreign exchange rate
fluctuations. However, as its international operations grow, the Company may
enter into foreign exchange contracts to manage its foreign exchange risk.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
On March 2, 2000, the Company filed suit in the U.S. District Court in Delaware
(civil case number 00-141) against Miltenyi Biotec GmbH of Germany and its
related U.S. companies, Miltenyi Biotec, Inc. and AmCell Corporation. The suit
charges Miltenyi with patent infringement, breach of contract and deceptive
trade practices. Becton, Dickinson & Company and The Johns Hopkins University,
both of whom have proprietary rights associated with the Company's technology,
have joined with the Company in the suit. The Company is seeking damages and
injunctive relief. The parties are currently engaged in pretrial discovery and a
trial is currently scheduled for May 14, 2001. Miltenyi Biotec GmbH of Germany
is contesting whether jurisdiction is proper in the Delaware Court.
Item 2. Changes in Securities and Use of Proceeds.
On June 15, 2000, the Company effected a one for four reverse stock split of its
Common Stock. See Note (3) to the Condensed Consolidated Financial Statements.
As a result of the reverse stock split, the exercise price of the Company's
publicly traded warrants (Nasdaq:NEXLW) to purchase one share of Common Stock
changed from $1.35 per share to $5.40 per share and the warrants are now
exercisable for one-fourth the number of shares of Common Stock for which they
had been exercisable prior to the reverse stock split. There were also
corresponding adjustments to the Company's privately placed derivative
securities.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The 2000 annual meeting of stockholders of the Company was held on June 14,
2000. The following matters were voted upon at the meeting: (i) the election as
directors of the Company of each of Richard L. Dunning, Eric A. Rose, M.D.,
Victor W. Schmitt, Donald G. Drapkin, C. Richard Piazza, Joseph A. Mollica,
M.D., Richard L. Casey and L. William McIntosh; (ii) to approve an increase in
the number of shares of Common Stock issuable under the Company's 1997 Incentive
and Non-Incentive Stock Option Plan from 3,000,000 shares to 5,250,000 shares
(on a pre-split basis); (iii) to approve the amendment to the Company's Amended
and Restated
15
Certificate of Incorporation to effect a one for four reverse stock split of
Common Stock; (iv) to approve the amendment to the Company's Amended and
Restated Certificate of Incorporation to reduce the authorized shares of Common
Stock from 160,000,000 to 80,000,000; and (v) to ratify the appointment of KPMG
LLP as independent auditors of the Company for the year ended December 31, 2000.
The following vote totals are on a pre-split basis.
- ----------------------------------------------------------------------------------------------------
Matter Voted Votes Cast For Authority Withheld
- ----------------------------------------------------------------------------------------------------
1. Election of Directors
- ----------------------------------------------------------------------------------------------------
Richard L. Dunning 69,850,795 1,017,383
- ----------------------------------------------------------------------------------------------------
Eric A. Rose, M.D. 69,851,795 1,016,383
- ----------------------------------------------------------------------------------------------------
Victor W. Schmitt 69,851,745 1,016,433
- ----------------------------------------------------------------------------------------------------
Donald G. Drapkin 69,851,795 1,016,383
- ----------------------------------------------------------------------------------------------------
C. Richard Piazza 69,851,645 1,016,533
- ----------------------------------------------------------------------------------------------------
Joseph A. Mollica, M.D. 69,851,645 1,016,533
- ----------------------------------------------------------------------------------------------------
Richard L. Casey 69,851,645 1,016,533
- ----------------------------------------------------------------------------------------------------
L. William McIntosh 69,851,795 1,016,383
- ----------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Votes Cast Broker
- ---------------------------------------------------------------------------------------------------------------------------
For Against Abstentions Non-Votes
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
2. Approval of amendment to 65,507,713 4,811,081 549,384 --
1997 Option Plan
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
3. Approval of amendment to 65,958,920 4,700,922 208,336 --
the Company's Certificate of
Incorporation to effect a 1 for 4
reverse stock split
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
4. Approval of amendment to the 66,605,457 3,868,656 394,065 --
Company's Certificate of
Incorporation to reduce the number of
authorized shares
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
5. Ratification of KPMG LLP 69,937,660 660,087 270,431 --
- ---------------------------------------------------------------------------------------------------------------------------
16
Item 5. Other Information.
On May 9, 2000, the Company announced it had entered into a strategic alliance
with Takara Shuzo Co., Ltd. ("Takara"), a diversified brewing, foods and
biomedical company in Japan. Pursuant to such agreements, Takara will become
the exclusive distributor of the Company's cell therapy products in Japan,
Korea, Taiwan and China and the parties will engage in development
collaborations in gene therapy. In exchange for the distribution rights, Takara
agreed to pay the Company a nonrefundable fee of $2.5 million within 100 days of
the agreement's execution. Under the co-development agreement, the companies
will engage in co-development efforts to develop a product in the field of ex-
vivo genetic transduction combining the Company's technology and Takara's
product.
On July 12, 2000 the Company issued a press release announcing the promotion of
William A. Albright, Jr. to President and Chief Operating Officer and that L.
William McIntosh was leaving the management team but would continue to advise
the Company as a consultant and member of its Board of Directors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
3.1 The Company's Amended and Restated Certificate of
Incorporation as amended to date (incorporated by reference
to Exhibit 4.1 to the Company's registration statement on
form S-8 filed with the Commission on July 6, 2000
{Registration Number 333-40860})
3.2 The Company's Amended and Restated Bylaws as amended to
date
10.64 Distribution Agreement with Takara Shuzo Co., Ltd.
10.65 Co-Development Agreement with Takara Shuzo Co., Ltd.
27 Financial Data Schedule
(b) Reports on Form 8-K:
-------------------
The Company filed a Current Report on Form 8-K on June 22, 2000, under
Item 5, announcing a one for four reverse split of it's Common Stock
effective June 15, 2000.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 1, 2000
NEXELL THERAPEUTICS INC.
a Delaware Corporation
(Registrant)
By: /s/ Richard L. Dunning
-----------------------------
Richard L. Dunning
Chairman of the Board and
Chief Executive Officer
By: /s/ William A. Albright, Jr.
-----------------------------
William A. Albright, Jr.
President and Chief Operating Officer
18