UNITED STATES
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 September 27, 2003 |
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. 0-24241
V.I. TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 11-3238476 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
134 Coolidge Avenue, Watertown, Massachusetts | 02472 | |
(Address of principal executive offices) | (Zip code) |
Registrants telephone number, including area code: (617) 926-1551
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 ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the Registrants classes of common stock as of November 1, 2003:
Title of Class |
Shares Outstanding | |
Common Stock, $.01 par value | 40,905,495 |
V. I. TECHNOLOGIES, INC.
PAGE | ||||
PART I. |
FINANCIAL INFORMATION | |||
Item 1. |
Financial Statements: | |||
Consolidated Balance Sheets at September 27, 2003 and December 28, 2002 (Unaudited) | 2 | |||
Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended September 27, 2003 and September 28, 2002 (Unaudited) | 3 | |||
Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 27, 2003 and September 28, 2002 (Unaudited) | 4 | |||
Notes to consolidated financial statements | 5-8 | |||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 9-14 | ||
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 15 | ||
Item 4. |
Controls and Procedures | 15 | ||
PART II. |
OTHER INFORMATION | |||
Item 4. |
Submission of Matters to a Vote of Security Holders | 15-16 | ||
Item 6. |
Exhibits and Reports on Form 8-K | 16 | ||
17 |
1
Consolidated Balance Sheets
(in thousands, except for share and per share data)
(unaudited)
September 27, 2003 |
December 28, 2002 |
|||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 4,920 | $ | 6,659 | ||||
Restricted cash |
590 | 590 | ||||||
Other receivables, net |
1,157 | 6,493 | ||||||
Prepaid expenses and other current assets |
537 | 693 | ||||||
Total current assets |
7,204 | 14,435 | ||||||
Property and equipment, net |
3,325 | 4,961 | ||||||
Intangible assets, net |
2,782 | 2,967 | ||||||
Goodwill |
398 | 398 | ||||||
Other assets, net |
4,407 | | ||||||
Total assets |
$ | 18,116 | $ | 22,761 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Revolving credit facility |
$ | | $ | 2,500 | ||||
Capital lease obligations |
3 | 157 | ||||||
Accounts payable and accrued expenses |
3,104 | 2,660 | ||||||
Current portion of deferred revenue |
153 | 153 | ||||||
Current portion of advances |
1,035 | 3,478 | ||||||
Total current liabilities |
4,295 | 8,948 | ||||||
Advances |
1,655 | | ||||||
Deferred revenue |
839 | 954 | ||||||
Total liabilities |
6,789 | 9,902 | ||||||
Stockholders equity: |
||||||||
Preferred stock, par value $.01 per share; authorized 1,000,000 shares; no shares issued and outstanding |
| | ||||||
Common stock, par value $.01 per share; authorized 75,000,000 shares; issued and outstanding 40,901,834 at September 27, 2003 and 22,771,821 at December 28, 2002 |
409 | 228 | ||||||
Additional paid-in-capital |
159,370 | 141,464 | ||||||
Accumulated deficit |
(148,452 | ) | (128,833 | ) | ||||
Total stockholders equity |
11,327 | 12,859 | ||||||
Total liabilities and stockholders equity |
$ | 18,116 | $ | 22,761 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
2
Consolidated Statements of Operations
(in thousands, except for per share data)
(unaudited)
Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
|||||||||||||||
September 27, 2003 |
September 28, 2002 |
September 27, 2003 |
September 28, 2002 |
|||||||||||||
Revenues: |
||||||||||||||||
Research funding |
$ | 105 | $ | 182 | $ | 314 | $ | 4,020 | ||||||||
Costs and expenses: |
||||||||||||||||
Research and development costs |
5,787 | 5,255 | 16,380 | 16,420 | ||||||||||||
General and administrative expenses |
1,048 | 1,301 | 3,269 | 3,684 | ||||||||||||
Plasma Operations divestiture credit |
| (331 | ) | | (331 | ) | ||||||||||
Total operating costs and expenses |
6,835 | 6,225 | 19,649 | 19,773 | ||||||||||||
Loss from operations |
(6,730 | ) | (6,043 | ) | (19,335 | ) | (15,753 | ) | ||||||||
Interest income (expense), net |
44 | 86 | (284 | ) | 355 | |||||||||||
Net loss |
$ | (6,686 | ) | $ | (5,957 | ) | $ | (19,619 | ) | $ | (15,398 | ) | ||||
Basic and diluted net loss per share |
$ | (0.16 | ) | $ | (0.26 | ) | $ | (0.64 | ) | $ | (0.68 | ) | ||||
Weighted average shares used in calculation of basic and diluted net loss per share |
40,899 | 22,752 | 30,559 | 22,746 |
The accompanying notes are an integral part of the consolidated financial statements.
3
Consolidated Statements of Cash Flows
(in thousands) (unaudited)
Thirty-Nine Weeks Ended |
||||||||
September 27, 2003 |
September 28, 2002 |
|||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (19,619 | ) | $ | (15,398 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
806 | 797 | ||||||
Net discount (accretion) of interest |
212 | (106 | ) | |||||
Plasma Operations divestiture credit |
| (331 | ) | |||||
Reserve for long-lived assets and facility costs |
1,406 | | ||||||
Changes in operating accounts: |
||||||||
Other receivables, net |
10 | 1,247 | ||||||
Prepaid expenses and other current assets |
206 | 96 | ||||||
Accounts payable and accrued expenses |
158 | (439 | ) | |||||
Deferred revenue |
(115 | ) | (115 | ) | ||||
Net cash used in operating activities |
(16,936 | ) | (14,249 | ) | ||||
Cash flows from investing activities: |
||||||||
Additions to property and equipment |
(104 | ) | (1,343 | ) | ||||
Proceeds from Plasma Operations divestiture |
760 | 2,000 | ||||||
Proceeds from maturity of short-term investments |
| 3,332 | ||||||
Net cash provided by investing activities |
656 | 3,989 | ||||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock |
18,446 | 97 | ||||||
Costs associated with equity financing |
(409 | ) | | |||||
Repayment of revolving credit facility |
(5,000 | ) | | |||||
Proceeds from revolving credit facility |
2,500 | 2,500 | ||||||
Repayment on advances |
(842 | ) | | |||||
Principal repayment of capital lease obligations |
(154 | ) | (203 | ) | ||||
Net cash provided by financing activities |
14,541 | 2,394 | ||||||
Net decrease in cash and cash equivalents |
(1,739 | ) | (7,866 | ) | ||||
Cash and cash equivalents, beginning of period |
6,659 | 21,359 | ||||||
Cash and cash equivalents, end of period |
$ | 4,920 | $ | 13,493 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited consolidated financial statements of V.I. Technologies, Inc. (the Company or Vitex) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Certain reclassifications have been made to 2002 financial statements to conform to the current year presentation. Operating results for the thirteen and thirty-nine weeks ended September 27, 2003 are not necessarily indicative of the results that may be expected for the year ending December 27, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 28, 2002 as filed on March 26, 2003.
The Company faces certain risks and uncertainties similar to other biotechnology companies including its ability to obtain additional funding; its future profitability; protection of patents and property rights; uncertainties regarding the development of the Companys technologies; the success of its clinical trials; competition and technological change; governmental regulations including the need for product approvals; and attracting and retaining key officers and employees.
The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of its assets and the satisfaction of its liabilities in the normal course of business. As shown in these consolidated financial statements, the Company has incurred recurring losses from operations and, as of September 27, 2003, has an accumulated deficit of $148.5 million. For the thirty-nine weeks ended September 27, 2003, the Company consumed in its operations, net cash resources of approximately $16.9 million. The Company had cash and cash equivalents of $4.9 million at September 27, 2003 which were reduced to approximately $2.5 million as of November 14, 2003.
Management is involved in several actions to address this situation. It is actively seeking capital to finance the Company. In the third quarter, the Company retained an investment bank to advise it on fundraising alternatives. The Company will shortly implement a plan involving staff and spending reductions to significantly reduce its operating losses. At this date, the Company cannot predict the likelihood of success in its fundraising activities. Management believes that its current resources will only be adequate to support the Companys operations until mid December of 2003. Accordingly, there is substantial doubt about the Companys ability to continue as a going concern.
5
Presentation of Fiscal Years
The Company prepares its consolidated financial statements on the basis of a fifty-two week fiscal year and a thirteen week quarter, ending on the Saturday closest to the end of the calendar year or quarter.
Revenue Recognition
Reimbursement from collaborators under research programs is recorded within research funding revenue when eligible costs are incurred. Prior to the modification of the Pall Corporation (Pall) collaboration in August 2002, research funding revenue was primarily from Pall, a shareholder (see Note 3). Palls reimbursement of costs of the Companys red blood cell program, net of program costs incurred by Pall, was $0.1 million and $3.6 million for the thirteen and thirty-nine week period ended September 28, 2002, respectively. Also included within research funding revenue is amortized revenue related to non-refundable up-front and milestone payments of Amersham Pharmacia Biotech which are amortized over the life of the related agreement. These amounts totaled $0.04 million and $0.14 million for both of the thirteen and thirty-nine week periods ended September 27, 2003 and September 28, 2002, respectively.
Research and Development
All research and development costs are charged to operations as incurred.
Intangible Assets, Net
Intangible assets, comprised of core technology, are amortized over their estimated useful life of fifteen years. At September 27, 2003, core technology was recorded at gross carrying value of $3.7 million less accumulated amortization of $0.9 million. Amortization expense was $0.06 million and $0.2 million for both of the thirteen and thirty-nine weeks ended September 27, 2003 and September 28, 2002, respectively. In each of the next five years, amortization expense is estimated to be approximately $0.25 million per annum.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per share is the same as basic net loss per share because the inclusion of potential common stock equivalents (stock options and warrants) in the computation would be anti-dilutive. The dilutive effect of common stock equivalents, had they been included in the computation, would have been approximately 302,000 and 145,000 for the thirteen and thirty-nine weeks ended September 27, 2003, respectively, and 114,000 and 167,000 for the thirteen and thirty-nine weeks ended September 28, 2002, respectively.
Stock-based Compensation
The Company accounts for its stock-based compensation plans and employee stock purchase plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and complies with the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and SFAS No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure. No stock-based compensation cost is reflected in net loss, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of the grants.
6
The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation.
Thirteen Weeks Ended |
Thirty-nine Weeks Ended |
|||||||||||||||
September 28, 2003 |
September 29, 2002 |
September 28, 2003 |
September 29, 2002 |
|||||||||||||
Net loss |
||||||||||||||||
As reported |
$ | (6,686 | ) | $ | (5,957 | ) | $ | (19,619 | ) | $ | (15,398 | ) | ||||
Add: Stock-based compensation expense |
(708 | ) | (583 | ) | (2,581 | ) | (1,838 | ) | ||||||||
Pro forma |
$ | (7,394 | ) | $ | (6,540 | ) | $ | (22,200 | ) | $ | (17,236 | ) | ||||
Basic and diluted net loss per share: |
||||||||||||||||
As reported |
$ | (0.16 | ) | $ | (0.26 | ) | $ | (0.64 | ) | $ | (0.68 | ) | ||||
Add: Stock-based compensation expense |
(0.02 | ) | (0.03 | ) | (0.09 | ) | (0.08 | ) | ||||||||
Pro forma |
$ | (0.18 | ) | $ | (0.29 | ) | $ | (0.73 | ) | $ | (0.76 | ) |
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option valuation model. Because the Companys stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
2. | Phase III Clinical Trial Status |
The Company is conducting pivotal Phase III clinical trials for its INACTINE red cell system in both a surgical and in a chronic population. The chronic study is divided into two parts: Part A and Part B. Part A of the study, conducted at one site, has been completed. Upon completion of Part A, an interim safety analysis including review by an independent Data Safety Monitoring Committee (DSMC) required by the FDA was performed. On November 17, 2003 the DSMC issued its recommendation that the trial not proceed into Part B, and that the data be reviewed by the Company. This recommendation reflected a concern by the DSMC with antibody responses to INACTINE treated red cells and associated clinical assessments in trial participants. There were no serious adverse events associated with the study treatment. The Company is evaluating the recommendation of the DSMC. New patients will not be enrolled in the chronic trial until this assessment is completed, and both the DSMC and the FDA concur that the trial should move forward. The Company intends to continue to enroll patients in the surgical study.
This recent development has triggered an impairment review to determine whether it is likely that an impairment loss has been incurred on our long-lived assets and goodwill. The Company expects to complete its review during the fourth quarter of this fiscal year. The amount of an impairment loss on long-lived assets and goodwill, if any, cannot be assessed at this time.
3. | Equity Transactions |
On June 5, 2003, the Company concurrently closed a shareholder rights offering in the amount of $14.4 million and a Pall equity milestone investment in the amount of $4.0 million, realizing total gross proceeds from the two transactions of $18.4 million. Vitex issued a total of 14.1 million and 3.9 million shares of common stock for the rights offering and the Pall equity milestone investment, respectively. Total transaction costs of $0.4 million including legal, accounting, printing and related costs were offset within stockholders equity against the proceeds of those financings.
As a result of their participation and the participation of their affiliate, Precision Pharma Services, Inc. (Precision), in the rights offering, Ampersand Ventures, the Companys largest shareholder, owns beneficially or controls approximately 38 percent of the Companys common stock. Certain matters which, under the restated Certificate of Incorporation, require a 66 2/3 percent vote by the shareholders for approval may be delayed or blocked solely by Ampersand Ventures and Precision. These matters include any merger or sale of substantially all of the Companys assets.
4. | Pall Corporation Modified Collaboration |
In August 2002, the Company and Pall modified their collaboration (the modified collaboration) on the INACTINETM Pathogen Reduction System for red cells to permit the addition of new distribution partners. Vitex acquired worldwide distribution rights previously held by Pall and assumed responsibility for funding the program. Pall acquired a royalty interest in each INACTINETM treatment of red cells. Pall also made an equity milestone investment of $4.0 million on June 5, 2003 (see Note 2) and made available a revolving credit facility of $5.0 million which, as provided in the modified collaboration, terminated on June 5, 2003.
7
5. | Plasma Operations Receivables |
In August 2001 the Company divested its plasma operations to Precision for approximately $34.0 million. Precision is a private company owned by its management and Ampersand Ventures, a Vitex shareholder (see Note 2). The Company recorded a credit of $0.3 million in the third quarter of fiscal 2002 for the settlement of certain liabilities below recorded amounts.
The total purchase price included a non-interest bearing $3.0 million holdback now scheduled for payment by Precision on December 31, 2004. This is reflected in the balance sheet at September 27, 2003 at its net present value of $2.8 million. In addition, Precision is required to fund a $3.5 million continuing obligation of the Company. This obligation is being amortized over a three year period ending in February 2006. The outstanding balance at September 27, 2003 was $2.8 million. Both obligations are subordinated to senior debt obligations to Precisions principal bank.
Precision provides contract plasma fractionation services. Its largest customer, who is under contract until the end of 2004, has recently announced that it is offering its plasma business for sale. This has created uncertainty about Precisions business and ability to make payments against the amounts due to the Company. At this time, there is no evidence that the amounts due from Precision are not collectable and accordingly, no reserve has been recorded in the accompanying financial statements. The Company will continue to closely monitor the situation.
In light of this development, the Company and Precision have held preliminary discussions on alternatives to settle the outstanding receivables. The precise nature and likelihood of a settlement of the Precision receivables or possible settlement terms cannot be determined at this time. Precision has made all payments owed to the Company through September 27, 2003.
6. | Red Cell Processing Laboratory |
During 2002 the Company invested $1.1 million in build-out costs for a 16,500 sq. ft. laboratory near Boston, Massachusetts intended for use as a processing site for INACTINE treated red blood cells. At that time, the INACTINE system was in early development, was more labor intensive, and was expected to require a larger area for a given volume of red cells. Also, it was believed that a separate site might be required for the Companys FDA Biologics License Application (BLA). Since then, there has been significant progress in automating the system and reducing space requirements so that it currently can be implemented in community blood centers by the blood center staff. Further, the Company has concluded that the facility will not be required for its BLA. The Company has a smaller processing laboratory at the Watertown facility for clinical trial support and to display the INACTINE process. It has concluded that the second site is not required and is taking steps to sublease the space. The site has not been placed in service and, accordingly, most build-out costs were not amortized. Due to this decision and reflecting its lease obligations, the Company recorded a non-cash charge of $1.4 million within research and development costs in the third quarter of 2003 to write off its capitalized build-out costs and to provide for estimated lease and associated carrying costs until the facility is sublet. The facility lease runs to 2008. Total remaining payments under the lease are approximately $1.0 million. The Company anticipates subleasing the facility under terms similar to its primary lease obligations.
8
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
Based on the demonstrated effectiveness of our science as presented in industry publications and presentations, and on our competitive analysis, we believe that we are a leading developer of innovative biotechnology products designed to improve the safety of the worlds blood supply. We have designed our proprietary INACTINE Pathogen Reduction System for red cells (the INACTINE system) to inactivate a wide range of viruses, bacteria, parasites and lymphocytes from red blood cells while maintaining the therapeutic properties of the red blood cells. The INACTINE system has also demonstrated in non-clinical trials high efficiency in removing prion proteins. Prion proteins in their pathogenic forms are the agents that cause Mad Cow Disease, or in humans, variant Creutzfeldt-Jakob Disease (vCJD), which is 100% fatal, and for which no diagnostic or therapy currently exists. The technology works by binding to the RNA or DNA of the pathogen. Once bound, the compound forms an irreversible bond to the pathogenic nucleic acid, preventing replication and thereby killing the pathogens. Our lead product candidate, INACTINE red blood cell system for pathogen reduction, is in pivotal Phase III clinical trials. (See the discussion of current developments in the clinical trials under Results of Operations below.) We are designing our INACTINE system to work with existing red blood cell collection systems and to be easily integrated into the blood banking infrastructure. Over 40 million red cell units are transfused annually in the U.S., Europe and Japan, representing an over $4 billion market opportunity. We currently do not have any approved products and we have not made any commercial sales of our products under development.
Blood safety and availability remain a significant concern as new pathogens are discovered and the demand for blood products continues to increase. To reduce the risk of contamination of the blood supply with pathogens, blood banks currently screen donors using detailed questionnaires and screen the donated blood for five known pathogens. Although these safety measures have increased the safety of blood products overall, the risk of transmitting pathogens remains. Our goal is to diminish this risk with our INACTINE system.
In order to accelerate product development and commercialization of our INACTINE system, we are actively engaged in discussions with potential distribution partners. We have a continuing relationship with Pall Corporation (Pall) and also have a contract development and manufacturing agreement with Haemonetics Corporation and a collaboration with Amersham Pharmacia Biotech.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with generally accepted accounting principles in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the consolidated financial statements as well as reported revenues and expenses during the reporting periods. Our actual results could differ from these estimates.
9
The significant accounting policies that we believe are most critical to aid in fully understanding and evaluating our reported financial results and the accounting policies most critical to the preparation of our consolidated financial statements include the following:
Research and Development Revenue and Cost Recognition
We recognize revenue in accordance with Staff Accounting Bulletin (SAB) No. 101 (SAB101), Revenue Recognition in Financial Statements. Revenues under partner research collaborations are recognized as we incur research costs eligible for reimbursement under the collaboration agreements. Non-refundable up-front and milestone payments related to license and distribution agreements are deferred and amortized over the period in which the licensee has distribution rights. We continually review these estimates for any events which could result in a change in the deferral period. Amounts received in advance of the incurrence of reimbursable research expenses are deferred and recognized when the related expenses have been incurred.
Research and development costs are charged to operations as incurred.
Long-Lived Assets
Our long-lived assets, which consist of property and equipment and intangible assets, are recorded at cost and amortized over the estimated useful life of the asset. We generally depreciate property and equipment using the straight-line method over their economic life, which ranges from 3 to 15 years. We amortize acquired intangible assets using the straight-line method over their economic lives, which range from 5 to 15 years. Determining the economic lives of our long-lived assets requires us to make significant judgments and estimates, and can materially impact our operating results.
Asset Impairments
We review the valuation of long-lived assets, including property and equipment and intangible assets, under the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We are required to assess the recoverability of long-lived assets on an interim basis whenever events and circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an interim impairment review include the following:
| significant changes in the manner of our use of the acquired assets or the strategy of our overall business; |
| significant decrease in the market value of an asset; |
| significant adverse change in our business or industry; and |
| significant decline in our stock price for a sustained period. |
In accordance with SFAS No. 144, when we determine that the carrying value of applicable long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we evaluate whether the carrying amount of the asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of that asset. If such a circumstance were to exist, we would measure an impairment loss to the extent the carrying amount of the particular long-lived asset or group of assets exceeds its fair value. We would determine the fair value based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Use of different estimates and judgments on any of these factors could yield materially different results in our analysis, and could result in significantly different asset impairment charges.
As discussed in Note 5 to the consolidated financial statements, during 2002 we invested $1.1 million in build-out costs for a 16,500 sq. ft. laboratory near Boston, Massachusetts intended for use as a processing site for INACTINETM treated red blood cells. At that time, the INACTINE system was in early development, was more labor intensive, and was expected to require a larger area for a given volume of red cells. Also, it was believed that a separate site might be required for our FDA Biologics License Application (BLA). Since then, there has been significant progress in automating the system and reducing space requirements so that it currently can be implemented in community blood centers by the blood center staff. Further, we concluded that the facility will not be required for our BLA. We have a smaller processing laboratory at the Watertown facility for clinical trial support and to display the INACTINE process. We have concluded that the second site is not required and are taking steps to sublease the space. The site has
10
not been placed in service and, accordingly, most build-out costs were not amortized. Due to this decision and reflecting our lease obligations, we recorded a non-cash charge of $1.4 million within research and development costs in the third quarter of 2003 to write off our capitalized build-out costs and to provide for estimated lease and associated carrying costs until the facility is sublet.
Effective January 1, 2002, we adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill is required to be tested for impairment annually in lieu of being amortized. We have selected the fourth quarter as the period to perform the annual test. Furthermore, goodwill is required to be tested for impairment on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. An impairment loss shall be recognized to the extent that the carrying amount of goodwill exceeds its implied fair value. Impairment losses shall be recognized in operations. We adopted SFAS No. 142 during the first quarter of 2002 without a material impact on our financial position or results of operations.
We are conducting pivotal Phase III clinical trials for its INACTINE red cell system in both a surgical and in a chronic population. The chronic study is divided into two parts: Part A and Part B. Part A of the study, conducted at one site, has been completed. Upon completion of Part A, an interim safety analysis including review by an independent Data Safety Monitoring Committee (DSMC) required by the FDA was performed. On November 17, 2003 the DSMC issued its recommendation that the trial not proceed into Part B, and that the data be reviewed by the Company. This recommendation reflected a concern by the DSMC with antibody responses to INACTINE treated red cells and associated clinical assessments in trial participants. There were no serious adverse events associated with the study treatment. We are evaluating the recommendation of the DSMC. New patients will not be enrolled in the chronic trial until this assessment is completed, and both the DSMC and the FDA concur that the trial should move forward. We intend to continue to enroll patients in the surgical study.
This recent development has triggered an impairment review to determine whether it is likely that an impairment loss has been incurred on our long-lived assets and goodwill. We expect to complete our review during the fourth quarter of this fiscal year. The amount of an impairment loss on our long-lived assets and goodwill, if any, cannot be assessed at this time.
Contingencies
Contingencies are addressed by assessing the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of losses. A determination of the amount of reserves required, if any, for these contingencies is made after reviewing the relevant facts and circumstances, seeking outside professional advice of lawyers or accountants where appropriate, and then making and recording our best judgment of potential loss under the guidance of Statement of Financial Accounting Standards No. 5, Contingencies. This process is repeated in each reporting period as circumstances evolve and are reevaluated. Any changes in our assumptions or estimates that impact our estimates of loss will be recorded in operations immediately in the period of the change.
As described in Note 4 to the financial statements, we have outstanding receivables from Precision Pharma Services, Inc. (Precision) totaling $5.5 million at September 27, 2003. Precision provides contract plasma fractionation services. Its largest customer, who is under contract until the end of 2004, has recently announced that it is offering its plasma business for sale. This has created uncertainty about Precisions business and ability to make payments against the amounts due to the Company. At this time, there is no evidence that the amounts due from Precision are not collectable and accordingly, no reserve has been recorded in the accompanying financial statements. We will continue to closely monitor the situation.
In light of this development, we and Precision have held preliminary discussions on alternatives to settle the outstanding receivables. The nature and likelihood of a settlement of the Precision receivables or possible settlement terms, cannot be determined at this time. Precision has made all payments owed to us through September 27, 2003.
RESULTS OF OPERATIONS
Comparison of Thirteen and Thirty-nine Weeks Ended September 27, 2003 and September 28, 2002
Net Revenues
Research funding decreased by $0.1 million to $0.1 million for the quarter ended September 27, 2003 versus $0.2 million for the thirteen weeks ended September 28, 2002. Research funding decreased by $3.7 million to $0.3 million for the thirty-nine weeks ended September 27, 2003 versus $4.0 million for the prior year period. The decreases are a result of our August 2002 modification of the Pall collaboration, under terms of which we assumed responsibility from Pall for funding of the INACTINE red cell program. Prior to August 2002, research funding was principally from Pall Corporation.
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Research and Development
Our research and development activities all relate to the development of pathogen inactivation technologies for blood products of which our INACTINE chemistry is currently the core technology and our INACTINE Pathogen Reduction System for red cells (the INACTINE system) is the lead product candidate. The INACTINE system has completed Phase I and Phase II clinical trials in human subjects and Phase III trials in the United States are underway. The pivotal Phase III INACTINE red cell program consists of two studies. The first covers patients with sickle cell disease or thalassemia who are enrolled in a chronic transfusion program and whose standard patient care involves either simple or exchange transfusions (the chronic study). The second study covers cardiac surgery patients requiring acute transfusion support (the surgical study). The chronic study is divided into two parts: Part A and Part B. Part A of the study, conducted at one site, has been completed. Upon completion of Part A, an interim safety analysis including review by an independent Data Safety Monitoring Committee (DSMC) required by the FDA was performed. On November 17, 2003 the DSMC issued its recommendation that the trial not proceed into Part B, and that the data be reviewed by the Company. This recommendation reflected a concern by the DSMC with antibody responses to INACTINE treated red cells and associated clinical assessments in trial participants. There were no serious adverse events associated with the study treatment. We are currently evaluating the recommendation of the DSMC. New patients will not be enrolled in the chronic trial until this assessment is completed, and both the DSMC and the FDA concur that the trial should move forward. We intend to continue to enroll patients in the surgical study.
Our research and development spending on pathogen inactivation technologies principally includes our internal research efforts, scientific and development work under contract to independent vendors, our intellectual property protection efforts and clinical trials conducted by medical institutions.
Research and development spending on pathogen inactivation technologies totaled $5.8 million for the quarter ended September 27, 2003 as compared to $5.3 million for the quarter ended September 28, 2002, an increase of $0.5 million, or 9%. The increase is primarily due to a non-cash charge of $1.4 million recorded in the third quarter of 2003 to cover previously incurred and capitalized build-out and other costs of a processing facility which we have decided not to place in service. We have determined that this facility is not essential to complete the development and successful launch of our INACTINE red cell system. Accordingly, we now are in the process of marketing the space for sublease. Absent this charge, research and development costs were $0.9 million lower in the current quarter in comparison with the prior year quarter reflecting reduced system development costs and the completion of toxicology studies partially offset by increased clinical trial costs.
For the thirty-nine weeks ended September 27, 2003 and September 28, 2002, research and development costs were approximately unchanged at $16.4 million. The current year period includes a $1.4 million facility charge as described in the preceding paragraph. The 2002 amounts include a non-recurring $1.0 million royalty payment for engineering services on the INACTINE delivery system. Excluding these items, our 2003 red cell Phase III clinical and process development costs were higher than the prior year while toxicology and prion program costs declined.
Cumulatively, we have invested $142.4 million in research and development on pathogen inactivation technologies for blood products since our inception in 1995, including the cost of in-process research and development resulting from our 1999 merger with Pentose Pharmaceuticals, Inc.
Our Phase III clinical trial program for the INACTINETM system began in December 2002 and the program is scheduled to continue into the second half of fiscal 2004. After that point, we will plan to prepare a Biologics License Application (BLA) for submission to the FDA which initiates the final step of FDA review, leading to a decision by the FDA on approval to market the system in the U.S. The time involved in the FDAs review of a BLA is not within our control and we cannot reasonably
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estimate this time period or the outcome of this review. Assuming that the FDA approves our BLA, we intend to introduce the INACTINE system into the U.S. market shortly after receiving BLA approval. We anticipate that our research and development spending during the time leading to our filing of a BLA, including the cost of conducting clinical trials, will be in the annual range of approximately $25 million.
In parallel with this process, we will be developing and implementing a strategy to achieve marketing approval of the INACTINE system in the European Community and Japan. We are currently in the course of developing this strategy and have not yet arrived at estimates of the timing and related cost.
The exact nature, timing and estimated costs of the efforts necessary to bring to market the product resulting from our pathogen inactivation research and development projects involve a number of key variables which are either unpredictable or outside our control, including the resolution of the issues related to the chronic study raised by the DSMC, the enrollment rates and results of the Phase III clinical trials, the length of the FDA and foreign regulatory review processes, the timing and conditions of a marketing approval, if any, the success of our fundraising efforts, our ability to establish and maintain relationships with marketing partners and strategic collaborators, and the timing of commencement of commercialization of our product. These factors are also described in the section entitled Risk Factors in our Annual Report on Form 10-K filed on March 26, 2003. Accordingly, we are unable to estimate, with any degree of precision, either the total future costs that will be required to continue and complete the commercialization of the INACTINETM system, or the period in which we can expect material net cash inflows from the system.
General and Administrative Expenses
General and administrative expenses decreased $0.3 million or 19% to $1.0 million in the third quarter of fiscal 2003 from the prior year period and decreased $0.4 million or 11% to $3.3 million in the thirty-nine weeks ended September 27, 2003 versus the comparable 2002 period. The decreases were due to lower staffing and discretionary expenditures.
Interest (Expense) Income, Net
Net interest income of $0.04 million was slightly lower in the current quarter versus the prior year $0.09 million due to lower average cash balances. Year to date net interest expense of $0.3 million in 2003 reflects a $0.28 million charge in the second quarter on remeasurement to net present value of the $3.0 million receivable from Precision on which payment was rescheduled by one year to December 2004. Excluding this, the change from 2002 net interest income of $0.4 million reflects the cost of borrowings under the Pall revolving credit facility which was repaid in June 2003 and lower average cash balances.
FINANCIAL CONDITION
Liquidity and Capital Resources
We have historically financed our operations through sales of common stock, issuance of short-term and long-term debt, capital lease financing arrangements and research and development funding.
At September 27, 2003, we had working capital of $2.9 million, including cash and cash equivalents of $4.9 million, in comparison with working capital of $5.5 million, including cash and cash equivalents of $6.6 million at December 28, 2002. The primary objectives for our investment of cash balances are safety of principal and liquidity.
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During the thirty-nine weeks ended September 27, 2003, our cash position decreased by $1.7 million to $4.9 million from $6.6 million at December 28, 2002 primarily reflecting net cash proceeds of $18.0 million from the rights offering and Pall equity investment milestone, offset by net repayments of $2.5 million under the Pall $5.0 million revolving credit facility, and operating losses, changes in working capital and other items totaling $17.2 million.
We are involved in several actions to address this situation. We are actively seeking capital to finance the Company. In the third quarter, we retained an investment bank to advise us on fundraising alternatives. We will shortly implement a plan involving staff and spending reductions to significantly reduce our operating losses. At this date, we cannot predict the likelihood of success in our fundraising activities. Management believes that our current resources will only be adequate to support the Companys operations until mid December of 2003.
The following table represents our outstanding contractual obligations at September 27, 2003, in thousands:
Less than 1 Year |
Years 1-3 |
Years 4-5 |
More than 5 Years |
Total | |||||||||||
Operating Leases |
$ | 1,104 | $ | 3,567 | $ | 2,322 | $ | 279 | $ | 7,272 | |||||
Repayment of Advances |
1,035 | 1,655 | | | 2,690 | ||||||||||
Capital Leases |
3 | | | | 3 | ||||||||||
Total |
$ | 2,142 | $ | 5,222 | $ | 2,322 | 279 | $ | 9,965 | ||||||
FORWARD-LOOKING STATEMENTS
This document and other documents we may file with the Securities and Exchange Commission contain forward-looking statements. Also, our company management may make forward-looking statements orally to investors, analysts, the media and others. Forward-looking statements express our expectations or predictions of future events or results. They are not guarantees and are subject to many risks and uncertainties. There are a number of factors that could cause actual events or results to be significantly different from those described in the forward-looking statement. Forward-looking statements might include one or more of the following:
| anticipated results of financing activities; |
| anticipated agreements with marketing partners; |
| anticipated clinical trial timelines or results; |
| anticipated research and product development results; |
| projected regulatory timelines; |
| descriptions of plans or objectives of management for future operations, products or services; |
| forecasts of future economic performance; and |
| descriptions or assumptions underlying or relating to any of the above items. |
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as anticipate, estimate, expect, project, intend, opportunity, plan, potential, believe or words of similar meaning. They may also use words such as will, would, should, could or may. Given these uncertainties, you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should review carefully the risks and uncertainties identified in this report and in more detail in our Annual Report on Form 10-K. We may not revise these forward-looking statements to reflect
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events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our earnings and cash flows are subject to fluctuations due to the effects of changes in interest rates on our investments of available cash balances in money market funds. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes.
ITEM 4. | CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us, including our consolidated subsidiary, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.
(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
On July 25, 2003 the Company held its Annual Meeting of Stockholders. The following matters were approved at that meeting:
1. The election of Mr. Jeremy Hayward-Surry as Class II Director to serve until the 2006 Annual Meeting of Stockholders or until a successor is elected and qualified. There were 35,196,282 shares of common stock voted for the election of Mr. Hayward-Surry and 554,510 shares of common stock withheld. In addition, the terms in office of Dr. Samuel K. Ackerman, Mr. John Barr, Dr. Richard Charpie, Mr. Irwin Lerner, Mr. Joseph Limber, Dr. Doros Platika and Mr. David Tendler continued after the meeting.
2. An amendment to the Companys restated certificate of incorporation which increased from 60,000,000 shares to 75,000,000 shares the aggregate number of shares of common stock authorized to be issued by the Company. There were 35,620,787 shares of common stock voted for such amendment, 128,598 shares of common stock voted against such amendment and 1,407 shares of common stock abstained from the vote.
3. An amendment to the Companys 1998 Employee Stock Purchase Plan which increased the maximum number of shares of the Companys common stock reserved for issuance under the 1998 Employee Stock Purchase Plan from 200,000 shares to 400,000 shares. There were 35,558,023 shares
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of common stock voted for such amendment, 181,895 shares of common stock voted against such amendment and 10,874 shares of common stock abstained from the vote.
4. An amendment to the Companys 1998 Equity Incentive Plan which increased the maximum number of shares of the Companys common stock for which awards may be granted under the 1998 Equity Incentive Plan from 4,000,000 shares to 4,750,000 shares. There were 32,163,601 shares of common stock voted for such amendment, 3,583,958 shares of common stock voted against such amendment and 3,233 shares of common stock abstained from the vote.
5. The ratification of the appointment of KPMG LLP as the Companys independent accountants for the current fiscal year. There were 35,681,846 shares of common stock voted for such amendment, 61,746 shares of common stock voted against such amendment and 7,200 shares of common stock abstained from the vote.
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K |
(a) | Exhibits |
31.1 | Certification of Chief Executive Officer. Filed herewith. | |
31.2 | Certification of Chief Financial Officer. Filed herewith. | |
32 | Section 906 certification of periodic financial report by Chief Executive Officer and Chief Financial Officer. Filed herewith. |
(b) | Reports on Form 8-K |
The Company filed a Current Report on Form 8-K on August 7, 2003 announcing its financial results for the quarter ended June 28, 2003.
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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.
V.I. TECHNOLOGIES, INC.
(Registrant) | ||||
Date: November 17, 2003 |
/s/ John R. Barr | |||
John R. Barr President and Chief Executive Officer |
Date: November 17, 2003 |
/s/ Thomas T. Higgins | |||
Thomas T. Higgins Executive Vice President, Operations and Chief Financial Officer |
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EXHIBIT INDEX
31.1 | Certification of Chief Executive Officer | |
31.2 | Certification of Chief Financial Officer | |
32 | Section 906 certification of periodic financial report by Chief Executive Officer and Chief Financial Officer |
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