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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 June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 000-30231
TANOX, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 76-0196733
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
10301 Stella Link, Suite 110
Houston, Texas 77025-5497
(Address of Principal Executive Offices) (Zip Code)
(713) 578-4000
(Registrant's Telephone Number, Including Area Code)
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 ____
As of August 13, 2002, the registrant had 44,298,441 shares of Common Stock
issued and 43,743,741 shares of Common Stock outstanding.
TANOX, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Page
-----
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001......................... 1
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six........
Months Ended June 30, 2002 and 2001 2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001..... 3
Notes to Condensed Consolidated Financial Statements................................................ 4
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations........ 8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk................................... 13
Part II - Other Information
Item 2 - Changes in Securities and Use of Proceeds.................................................... 15
Item 5 - Submission of Matters to a Vote of Security Holders.......................................... 15
Item 6 - Exhibits and Reports on Form 8-K............................................................. 15
Signature.................................................................................................. 16
i
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
TANOX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Per Share data)
June 30, 2002 December 31, 2001
------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 47,886 $ 142,883
Short-term investments ........................................... 57,226 62,720
Interest receivable .............................................. 3,357 2,722
Prepaid expenses and other ....................................... 599 860
--------- ---------
Total current assets ........................................... 109,068 209,185
LONG-TERM INVESTMENTS - HELD-TO-MATURITY ............................ 139,309 55,499
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $8,026 and
$7,024 in 2002 and 2001, respectively ............................... 12,048 11,598
OTHER ASSETS ........................................................ 170 1,252
--------- ---------
TOTAL ASSETS
$ 260,595 $ 277,534
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ......................... $ 4,906 $ 7,190
Accrued arbitration award ........................................ 3,989 3,903
--------- ---------
Total current liabilities ....................................... 8,895 11,093
NOTE PAYABLE TO RELATED PARTY ....................................... 10,000 10,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none
outstanding ..................................................... -- --
Common stock, $.01 par value; 120,000,000 shares authorized;
44,296,441 and 44,156,601 shares issued; 43,925,241 and
44,076,601 shares outstanding .................................. 443 442
Additional paid-in capital ........................................ 310,008 309,892
Treasury stock, at cost; 371,200 and 80,000 shares ................ (4,470) (1,009)
Deferred compensation ............................................. (3) (83)
Accumulated other comprehensive loss .............................. (353) 84
Accumulated deficit ............................................... (63,925) (52,885)
--------- ---------
Total stockholders' equity ..................................... 241,700 256,441
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 260,595 $ 277,534
========= =========
See accompanying notes to condensed consolidated financial statements.
1
TANOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In Thousands, Except Shares and Per Share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---------- --------- --------- --------
DEVELOPMENT AGREEMENT AND LICENSING FEE REVENUES ......... $ 153 $ 163 $ 156 $ 284
OPERATING EXPENSES:
Research and development .............................. 5,732 6,353 10,415 11,006
General and administrative ............................ 2,000 2,053 4,538 4,376
Restructuring charge .................................. (89) 3,876 (89) 3,876
----------- ----------- ----------- -----------
Total operating expenses ............................ 7,643 12,282 14,864 19,258
LOSS FROM OPERATIONS ..................................... (7,490) (12,119) (14,708) (18,974)
OTHER INCOME (EXPENSE):
Interest income ....................................... 2,033 3,928 4,156 8,121
Interest expense ...................................... (134) (124) (276) (433)
Other, net ............................................ -- -- (212) --
----------- ----------- ----------- -----------
Total other income .................................. 1,899 3,804 3,668 7,688
----------- ----------- ----------- -----------
NET LOSS ................................................. $ (5,591) $ (8,315) $ (11,040) $ (11,286)
=========== =========== =========== ===========
NET LOSS PER BASIC and DILUTED SHARE ..................... $ (0.13) $ (0.19) $ (0.25) $ (0.26)
=========== =========== =========== ===========
SHARES USED IN COMPUTING NET LOSS PER SHARE - BASIC
AND DILUTED............................................ 44,173,000 44,090,000 44,126,000 43,904,000
=========== =========== =========== ===========
COMPREHENSIVE LOSS:
Net loss ............................................. $ (5,591) $ (8,315) $ (11,040) $ (11,286)
Foreign currency translation adjustment .............. 5 (149) 5 (112)
Unrealized loss on available-for-sale security ....... (442) -- (442) --
=========== =========== =========== ===========
TOTAL COMPREHENSIVE LOSS ................................. $ (6,028) $ (8,464) $ (11,477) $ (11,398)
============ =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
2
TANOX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended June 30,
---------------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................... $(11,040) $(11,286)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................................. 2,441 684
Loss on available-for-sale investment ..................................... 220 --
Compensation expense related to stock options ............................. (122) 94
Restructuring charge ...................................................... (89) 3,876
In-processing research and development .................................... -- 1,066
Other, net ............................................................... 68 --
Changes in operating assets and liabilities:
(Increase) Decrease in receivables and other assets ....................... (372) 755
(Decrease) in current liabilities ......................................... (2,110) (32)
-------- --------
Net cash (used in) provided by operating activities ................ (11,004) (4,843)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ....................................... (1,457) (3,619)
Purchases of investments .................................................. (122,779) (38,748)
Maturities and sales of investments ....................................... 43,379 172,033
Other, net ................................................................ -- (169)
-------- --------
Net cash (used in) provided by investing activities ................ (80,857) 129,497
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock ........................................... 320 2,903
Change in employee loans in connection with stock option
exercises ................................................................. -- 166
Purchase of treasury stock ................................................ (3,461) --
-------- --------
Net cash (used) provided by financing activities ................... (3,141) 3,069
IMPACT OF EXCHANGE RATES ON CASH .............................................. 5 (112)
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................. (94,997) 127,611
CASH AND CASH EQUIVALENTS:
Beginning of period ........................................................ 142,883 29,264
-------- --------
End of period .............................................................. $ 47,886 $156,875
======== ========
OTHER NON-CASH INVESTING AND FINANCING
ACTIVITIES INCLUDE THE FOLLOWING:
Temporary loss on available-for-sale security .............................. (442) --
Common stock issued for acquisition ........................................ -- 1,818
See accompanying notes to condensed consolidated financial statements.
3
TANOX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(UNAUDITED)
1. Basis of Consolidation
The accompanying unaudited condensed consolidated interim financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and in accordance with the instructions to
Form 10-Q and Article 10 of Regulation S-X and include the accounts of Tanox,
Inc. and its wholly owned subsidiaries (collectively the Company or Tanox).
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles in the United States for complete
financial statements. In the opinion of management, all normal recurring
adjustments considered necessary for fair presentation have been included. These
condensed consolidated interim financial statements and notes thereto should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. Operating results for the three and six months periods
ended June 30, 2002 are not necessarily indicative of the operating results that
may be expected for the year ending December 31, 2002. Certain prior period
amounts have been reclassified to conform to the current period presentation.
2. Acquisition of Tanox Pharma B.V.
In March 1998, Tanox acquired the common stock of Tanox Pharma B.V. (formerly
PanGenetics B.V.), a biotechnology company located in Amsterdam, The
Netherlands. Tanox recorded the transaction for accounting purposes as a
purchase, and the consolidated financial statements include the operations of
Tanox Pharma subsequent to the acquisition date. Under the terms of the stock
purchase agreement, Tanox purchased Tanox Pharma for an initial cash payment of
$508,000 and 226,409 shares of common stock, valued at $11.25 per share, for a
total initial consideration of $3.1 million. In addition, Tanox agreed to pay
future consideration, in two installments, upon the occurrence of specified
future events. These events include originating at least three additional
research projects within a three year period, retaining the services of two
individuals for 36 months and maintaining a certain level of government grants
and subsidies. Any additional consideration would be paid to all former
shareholders in proportion to their ownership at the acquisition date. In
September 1999, Tanox made the second installment payment of $333,000 in cash
and 242,075 shares of common stock valued at $12.50 per share, for total
additional consideration of $3.4 million.
Tanox management believes that certain events upon which full payment of the
third installment was dependent did not occur and, in accordance with the stock
purchase agreement, the total consideration should be reduced by 20%. The third
installment payment was recorded in the second quarter of 2001 and consisted of
$133,000 in cash and 60,518 shares of common stock valued at $30.85 per share,
totaling $2.0 million, which reflected a 20% reduction in total consideration.
As discussed in Note 7, the former shareholders are disputing the sufficiency of
the amount paid in the third installment. Due to the dispute, the cash portion
of the payment was returned by the former shareholders and is classified in
accrued liabilities at June 30, 2002.
Note 3. Restructuring Charge
In connection with a periodic review and assessment of Tanox's research
programs, management made the decision to streamline its research activities and
to consolidate the Taiwan, Dutch and U.S. research operations into a single site
at the Company's headquarters in Houston. In June 2001, management approved a
formal restructuring plan (the Plan) to close Tanox's research facility in
Amsterdam. Tanox recorded a restructuring charge for the Plan of $3.9 million or
$0.09 per share in June 2001, which includes a restructuring accrual for
4
cash expenses of $2.2 million and non-cash charges of $1.7 million for
impairment of goodwill and write-down of assets.
The Plan's activity, as it relates to cash expenses for six months ended June
30, 2002, was as follows:
Balance at Balance at
December 31, Amount Amount June 30,
2001 Paid Adjusted 2002
---------- ---------- ---------- ----------
Severance and related costs ............................... $ 300,000 $ (11,000) $ (19,000) $ 270,000
Termination of government grants and
subsidies ................................................. 646,000 (394,000) (50,000) 202,000
Termination of leases and research
agreements ................................................ 444,000 (354,000) (20,000) 70,000
Other exit costs .......................................... 294,000 (92,000) -- 202,000
---------- ---------- ---------- ----------
Total .............................................. $1,684,000 $ (851,000) $ (89,000) $ 744,000
========== ========== ========== ==========
Included in the restructuring charge are incremental costs to terminate 17
employees, exit licensing, research and office lease arrangements, and make
payments for idle facilities. As of June 30, 2002, all employees have been
terminated, however, one severance amount for the former managing director of
Tanox Pharma, B.V.was in dispute. During the second quarter, the Company settled
additional restructuring liabilities at an amount less than originally
anticipated resulting in a reduction of the restructuring accrual of $89,000.
The Company has substantially completed the plan at June 30, 2002. As of June
30, 2002, $1.4 million of the restructuring expenses had been paid, and a
restructuring liability of $744,000 is classified in accrued liabilities in the
accompanying balance sheet. The accrual as of June 30, 2002 represents
management's best estimate, based on available information, of identifiable and
quantifiable costs that the Company will incur as a result of the Plan. The
actual expenses may differ from the estimates, and any adjustments will be
reflected in future results.
4. Investments
Investments consist of the following (in thousands):
June 30, 2002 December 31, 2001
-------------- -----------------
Held-to-maturity investments - short-term ..................... $ 56,888 $ 62,720
Available-for-sale investment ................................. 338 --
-------- --------
Total short-term investments ............................ 57,226 62,720
Held-to-maturity investments - long-term ...................... 139,309 55,499
-------- --------
$196,535 $118,219
======== ========
Held-to-maturity investments consist of investment grade corporate bonds and
commercial paper with maturities of less than two years from the balance sheet
date. Tanox's policy is to hold all investments in bonds and commercial paper
until maturity; therefore, these investments are classified as held-to-maturity
and carried at amortized cost.
Tanox's net carrying value of held-to-maturity investments in bonds and
commercial paper at June 30, 2002 and December 31, 2001, was $196.2 million and
$118.2 million, respectively. The fair value of these investments at June 30,
2002 and December 31, 2001, was $196.3 million and $118.9 million, respectively.
At June 30, 2002, unrealized gains on these investments totaled $103,000. As of
June 30, 2002, investments in securities with credit ratings of A1, A2, Aa3 and
above are 9%, 32% and 59%, respectively, of the total held-to-maturity
investment portfolio.
5
On November 2, 2000, Tanox made an equity investment in a privately held
biotechnology company for $1.0 million. At December 31, 2001, this investment
was included in other assets and carried at cost, which management believed
approximated the fair market value. In March 2002, the privately held company
merged with a public company, and the equity investment was converted into an
available-for-sale marketable security. As a result, Tanox's investment was
reclassified to an available-for-sale investment and carried at fair market
value. At March 31, 2002, the fair value of Tanox's investment was $780,000. The
decline in the value of $220,000 since December 31, 2001 was not considered by
management to be temporary, and as a result, Tanox recognized a loss of $220,000
included in Other Income for the quarter ended March 31, 2002.
Subsequent temporary changes in fair market value have been included in
comprehensive loss and classified as a component of stockholders' equity. At
June 30, 2002 the fair value of Tanox's investment was $338,000, a $442,000
decline in the fair market value of the investment. The Company considered the
decline in the fair value as temporary and recorded the $442,000 in Accumulated
other comprehensive loss, a component of stockholders' equity until the loss is
realized.
5. Treasury Stock
In September 2001, the board of directors of Tanox authorized the repurchase, at
management's discretion, of up to $4.0 million of Tanox common stock. In June
2002, the board authorized the purchase of an additional $3.0 million pursuant
to the stock repurchase program. As of June 30, 2002, the Company has purchased
a total of 371,200 shares at an aggregate cost of $4.5 million.
6. Net Loss Per Share
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and
diluted earnings per share (EPS). Basic EPS is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted EPS is computed in the same manner as basic EPS,
except that diluted EPS reflects the potential dilution that would occur if
outstanding options were exercised. Tanox incurred net losses for the three and
six-month periods ended June 31, 2002 and 2001; therefore, options outstanding
for each of the periods were excluded from the computation of diluted EPS
because they would have been antidilutive. Due to the antidilutive effect of the
stock options, basic and diluted EPS are the same for these periods.
7. Commitments and Contingencies
Tanox is currently engaged in litigation and arbitration relating to a fee
dispute with the law firms that represented Tanox in a lawsuit with Genentech,
Inc. relating to, among other things, the intellectual property rights
surrounding the development of anti-IgE technology. An arbitration panel issued
an award in 1999 entitling the attorneys to receive (i) approximately $3.5
million, including interest, (ii) payments ranging from 33-1/3% to 40% of the
future payments that Tanox may receive from Genentech following product approval
and (iii) 10% of the royalties that Tanox may receive on sales of anti-IgE
products. Tanox sought a court order vacating this arbitration award. However, a
judgment was entered confirming the award. Tanox intends to pursue all available
remedies, including appealing the decision. During the appeals process, Tanox is
required to post a bond or place amounts in escrow to secure payment of the
award. Tanox posted a $4.1 million supersedeas bond with the court to continue
the appeals process and to secure payment of the award. If Tanox is ultimately
required to pay all or part of the award to the attorneys, Tanox's future
revenues, results of operations, cash flow and financial condition could be
materially adversely affected. Subsequent to June 30, 2002, the Company executed
an irrevocable letter of credit (LOC) with a bank for the posted bond. This LOC
is collateralized with long term investments valued at $5.6 million.
Tanox is also engaged in a dispute with Novartis Pharma AG and Genentech, Inc.
over Tanox's right to independently develop certain of its anti-IgE monoclonal
antibodies, which are not being developed in
6
connection with the collaborative agreement among Tanox, Genentech and Novartis.
Following a favorable summary judgment from a Federal district court regarding
certain key issues in the dispute, Tanox and Novartis are submitting remaining
issues to an arbitration panel. Tanox and Genentech are also seeking resolution
of remaining issues in arbitration. If Tanox ultimately loses its right to
independently develop the anti-IgE monoclonal antibodies, Tanox would be
required to discontinue development of its TNX-901 product.
In connection with Tanox's acquisition of Tanox Pharma in March 1998, Tanox paid
initial consideration of $508,000 and 226,409 shares of its common stock, and
agreed to pay future consideration, in two installments, subject to the
occurrence of specified events. Tanox believes that certain events did not
occur, and, in accordance with the terms of the stock purchase agreement, the
total consideration payable was reduced by 20%. The former stockholders of Tanox
Pharma have disputed this position, and Tanox sought a declaratory judgment in
state court in Harris County, Texas to resolve the dispute. The former
stockholders have brought counterclaims in the Texas lawsuit, as well as claims
in a parallel litigation in the Netherlands, which assert that the total
consideration should not have been reduced, therefore requesting payment of the
full amount of the third installment, as well as return of 51% of the stock of
Tanox Pharma. The full amount of the third installment under the stock purchase
agreement is $333,336 in cash and 151,294 shares of common stock. In addition,
the former stockholders have asserted that they are entitled to additional
shares because Tanox declared a stock dividend in February 2000. Tanox also
disagrees with this assertion. Tanox does not believe that the outcome of this
litigation will have a material adverse effect on its financial position or
liquidity.
From time to time Tanox is a defendant in other lawsuits incidental to its
business. Management believes that the outcome of these lawsuits will not be
material to Tanox's financial statements.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Tanox identifies and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of asthma, allergy, autoimmune,
inflammation and other related diseases. Tanox's products are genetically
engineered antibodies that target a specific substance, or antigen. In 1987, we
discovered a novel approach for treating allergies and asthma by using
anti-immunoglobulin E, or anti-IgE, antibodies capable of blocking IgE, a
causative agent of the allergy pathway, thus preventing the onset of disease
symptoms. Xolair(TM), our most advanced product in development, is a humanized
monoclonal antibody that blocks IgE. Its therapeutic effect has been validated
through clinical trials in patients suffering from allergic asthma, seasonal
allergic rhinitis (hay fever) and perennial allergic rhinitis. Xolair is being
developed under an agreement among Tanox, Novartis Pharma AG and Genentech, Inc.
In June 2000, our collaboration partners filed a Biologics License Application
(BLA) with the U.S. Food and Drug Administration (FDA) and a submission for
marketing approval with health authorities in the European Union, Switzerland,
Australia, and New Zealand for allergic asthma and hay fever in adults,
adolescents and children. Following receipt of a Complete Response Letter in
July 2001, our collaboration partners have indicated that they are planning to
submit an amendment to the BLA in fourth quarter of 2002 for the allergic asthma
indication in adults and adolescents. In June 2002, the Therapeutic Goods
Administration (TGA) in Australia approved Xolair for treating adults and
adolescents with moderate allergic asthma.
Using our knowledge of the human immune system, we are building a diverse
pipeline of monoclonal antibody product candidates. We are conducting clinical
trials with two additional monoclonal antibodies. TNX-901, a humanized anti-IgE
monoclonal antibody distinct from Xolair, is being developed to reduce the
sensitivity to peanut allergen in patients suffering from severe peanut allergy.
A double blind, placebo controlled Phase 2 clinical trial to evaluate the safety
and efficacy in patients allergic to peanuts was completed in May, 2002. The
trial involved 84 patients in 4 dose groups, (0, 150, 300, and 450mg). The
primary endpoint, based on an increase in symptom threshold to peanuts by oral
food challenge, was met with statistical significance. Further studies are being
planned. TNX-355, an anti-CD4 antibody, is in a dose escalation Phase 1 trial
for treating HIV. We recently completed an open-label, single-dose, dose
escalation Phase 1 trial with intravenous TNX-100, an anti-CD40 antibody, in 18
patients with moderately active Crohn's disease. Based on study results, an
on-going assessment of commercialization opportunities and resource
requirements, this program is currently being evaluated for further clinical
development. We are seeking a development partner for TNX-224, an anti-Factor D
antibody that is potentially useful to treat acute inflammation associated with
activation of the complement system.
We currently have no products available for sale. We are focusing our efforts on
research and product development activities necessary to advance our product
opportunities, including process development and clinical trial activities for
products that are currently in the clinic. We have incurred substantial losses
since inception and incurred an accumulated deficit through June 30, 2002, of
$63.9 million. We expect to continue to incur substantial operating losses for
the foreseeable future, particularly as we expand our research and development
activities, produce clinical material and initiate additional clinical trials,
as well as provide additional administrative support for these and other
activities. We expect that losses will continue until such time, if ever, that
we generate sufficient revenue from Xolair or our other products to cover our
expenses.
Historically, we have earned revenues primarily from milestone payments, license
fees and sponsored research under our collaboration agreements. In the future,
we expect our principal revenues will be milestone payments, royalties and
profit-sharing payments from Novartis and Genentech. We may also receive
royalties from Hoffman-La Roche Ltd. should it participate in selling Xolair in
Europe. Our revenues will depend particularly on the success of our
collaboration partners in developing, manufacturing, obtaining regulatory
approvals for and marketing Xolair. Because a substantial portion of our
revenues for the foreseeable future will depend on achieving development and
commercialization milestones, we anticipate that our results of operations will
vary substantially from year to year and even quarter to quarter.
8
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period. The
actual results could differ from those estimates, and any adjustment will be
reflected in future results.
Cash, Cash Equivalents and Investments
Cash equivalents consist of highly liquid investments with an original maturity
of three months or less when purchased. Investments consist of investment grade
corporate bonds, commercial paper and one investment in equity securities. The
investments in corporate bonds and commercial paper have maturity dates of less
than two years, are classified as held-to-maturity and carried at amortized
cost. In 2002, Tanox's investment in equity securities is classified as
available-for-sale and carried at fair market value, with temporary changes in
market value included in comprehensive loss and classified as a component of
stockholders' equity.
At June 30, 2002, Tanox held investments with a net carrying value of $196.5
million and a fair market value of $196.6 million. At any point in time,
amortized cost may be greater or less than fair market value. If investments are
sold prior to maturity we could incur a realized gain or loss based on the fair
market value of the investments at the date of sale. Additionally, Tanox could
incur future losses on investments if the investment issuer becomes impaired or
the investment is down-graded.
Research & Development
Research and development costs, including incidental patent costs, are expensed
as incurred. Research and development costs include estimates for clinical trial
costs. These estimates are based on patient enrollment and clinical trial
progress. Actual costs may differ from estimates, and any adjustment will be
reflected in future results.
Contingent Liabilities
We are currently involved in certain legal proceedings as discussed in Note 7 in
the Notes to the Condensed Consolidated Financial Statements.
9
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 and 2001
Revenues. Revenues decreased to $153,000 in the three months ended June 30, 2002
from $163,000 in the three months ended June 30, 2001. $163,000 in grant funding
and subsidies received in the prior period for our Dutch research facility were
partially offset by a $150,000 licensing fee received in June 2002.
Research and Development Expenses. Research and development expenses decreased
to $5.7 million in the second quarter of 2002 from $6.4 million in the second
quarter of 2001. The decrease was attributed to non-recurring expenses in the
2001 period that included Tanox Pharma, B.V. operating costs of $470,000 and a
$1.1 million in-process R&D charge related to the third installment payment for
Tanox Pharma, B.V. This decrease was offset by increased R&D costs in the second
quarter of 2002 due to staff additions and increased spending in clinical
manufacturing and clinical development for the TNX-901 and TNX-355 programs.
General and Administrative Expenses. General and administrative expenses of $2.0
million decreased slightly in the second quarter of 2002 compared to $2.1
million in the second quarter of 2001, primarily due to lower legal costs which
were partially offset by increased personnel costs.
Restructuring Charge. In the second quarter of 2001, the Company took a $3.9
million restructuring charge associated with the closure of the research
operations at Tanox Pharma, B.V. (see note 3). As of June 30, 2002, most of the
restructuring expenses had been paid. During the second quarter of 2002, the
Company settled additional restructuring liabilities at an amount less than
originally anticipated, resulting in a reduction of the restructuring accrual by
$89,000. The remaining restructuring liability of $744,000 is classified as
accrued liabilities in the balance sheet.
Other Income (Expense). Other income (expense) was approximately $1.9 million
and $3.8 million for the three-month periods ended June 30, 2002 and 2001,
respectively. The 48% decrease is primarily due to lower interest rates and
lower cash and investment balances during the three months ended June 30, 2002.
Net Loss. The net loss in the second quarter of 2002 decreased by $2.7 million
(33%) or $0.06 per share compared to the second quarter of 2001. Excluding the
restructuring charge of $3.9 million in the second quarter of 2001, net loss in
the second quarter of 2002 increased by $1.2 million (26%) or $0.03 per share.
Six Months Ended June 30, 2002 and 2001
Revenue. Total revenues decreased to $156,000 in the first six months of 2002
from $284,000 in the first six months of 2001. Revenues in the prior period were
primarily grant funding and subsidies received by our Dutch research facility,
Tanox Pharma, B.V. which was closed in June of 2001. The revenue decrease was
partially offset by a $150,000 licensing fee received in June of 2002.
Research and Development Expenses. Research and development expenses decreased
to $10.4 million in the first six months of 2002 from $11.0 million in the first
six months of 2001. The decrease was attributed to non-recurring expenses that
included Tanox Pharma, B.V. operating costs of $1.0 million and a $1.1 million
in-process R&D charge related to the third installment payment for Tanox Pharma,
B.V. This decrease was offset with increased R&D costs in the first six months
of 2002 associated with staffing growth and increased spending in clinical
manufacturing and clinical development for the TNX-901 and TNX-355 programs. In
addition, depreciation expenses increased by $375,000 for the first six months
of 2002 due to capital expenditures made in the second half of 2001 for R&D and
clinical manufacturing facilities.
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General and Administrative Expenses. General and administrative expenses
increased slightly to $4.5 million in the first six months of 2002 from $4.4
million in the first six months of 2001. The increase relates primarily to
higher personnel costs, partially offset by lower legal fees.
Other Income (Expense). Other income (expense) was approximately $3.7 million
and $7.7 million for the six-month periods ended June 30, 2002 and 2001,
respectively. The 52% decrease is primarily due to lower interest rates and
lower cash and investment balances during the six months ended June 30, 2002.
Net Loss. The net loss was $11.0 million in the first six months of 2002
compared to $11.3 million loss for the first six months of 2001. Net loss per
share decreased $0.01 per share to $0.25 per share in 2002 from $0.26 per share
in 2001.
Liquidity and Capital Resources
We have financed our operations since inception primarily through sales of
equity securities, collaboration and grant revenues, interest income and
equipment financing agreements. As of June 30, 2002, we had $244.4 million in
cash, cash equivalents and investments, of which $105.1 million were classified
as current assets.
During the six months ended June 30, 2002, we used proceeds from investment
maturities and sales and proceeds from stock option exercises, together with
cash and cash equivalents on hand at December 31, 2001, to fund operating
activities, capital expenditures, investment purchases and repurchases of our
Common Stock. The combination of the above items resulted in a decrease in cash
and cash equivalents of $95.0 million for the six months ended June 30, 2002.
From 1994 through 1998, Novartis advanced us $10.0 million, pursuant to a loan
agreement, to finance our pilot manufacturing facility. Tanox has pledged all of
the assets of the pilot manufacturing facility as security for the loan. The
loan bears interest at the London Interbank Offered Rate, or LIBOR, plus 2%.
Through December 31, 2001, Novartis has agreed to forgive interest on the loan.
Subject to modifications agreed to in principle concurrent with completion of
the tripartite collaboration among Genentech, Tanox and Novartis in July 1996,
the principal and future interest payments may be partially or totally forgiven
by Novartis based on the future use of the facility. Under the loan agreements,
once the facility is activated for production, Tanox is required to make
principal and interest payments on the loan in amounts equal to 75% of net cash
flow, if any, from the facility. The facility became operational in 2002, and,
accordingly, accrued interest will not be forgiven at the end of this year. If
the net cash flow payments during the ten years following the date the facility
first became operational are not sufficient to repay the principal and accrued
interest on the loan, Novartis has agreed to forgive the remaining principal and
accrued interest.
During the six months ended June 30, 2002, we invested approximately $1.5
million in property and equipment, primarily to support the expansion of our
research and product development activities.
Our current and anticipated development projects will require substantial
additional capital to complete. We anticipate that the amount of cash we need to
fund operations, including research and development, manufacturing and other
costs, and for capital expenditures, will grow substantially in the future as
our projects move from clinical development to commercialization. We also expect
that we will need to expand our clinical development, manufacturing capacity,
facilities, business development and marketing activities to support the future
development of our programs. Our cash burn rate in the second half of 2002 will
increase accordingly. We expect that cash on hand and revenue from operations
will be sufficient to fund our operations for the next three to four years.
However, our future capital needs will depend on many factors, including
successfully commercializing Xolair, receiving payments from our collaboration
partners, progress in our research and
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development activities, commercialization activities, the magnitude and scope of
these activities, the costs and magnitude of product or technology acquisitions,
the cost of preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, changes in or terminations of existing collaboration and
licensing arrangements, establishing additional collaboration and licensing
arrangements, and manufacturing scale-up costs and marketing activities, if we
undertake those activities. Consequently, we may need to raise substantial
additional funds. We do not have committed external sources of funding and we
cannot assure that we will be able to obtain additional funds on acceptable
terms, if at all. If adequate funds are not available, we may be required to:
o delay, reduce the scope of or eliminate one or more of our programs;
o obtain funds through arrangements with collaboration partners or
others that may require us to relinquish rights to technologies,
product candidates or products that we would otherwise seek to develop
or commercialize ourselves; or
o license rights to technologies, product candidates or products on
terms that are less favorable to us than might otherwise be available.
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Item 3: Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks, including foreign currency exchange
fluctuations and changes in interest rates. In the normal course of business, we
have established policies and procedures to manage these risks.
Foreign Currency Exchange Rates. At June 30, 2002, the balance sheet reflects a
cumulative foreign currency translation adjustment of $89,000. We are subject to
foreign currency exchange risk because:
o we invest in our foreign subsidiaries;
o we incur a portion of our revenues and expenses in the local
currencies of the countries where we do business; and
o we finance part of the cost of our subsidiaries' operations through
dollar denominated intercompany loans and equity investments that are
recorded on their books in the respective local currencies.
Since we have closed our research facility in the Netherlands, and our current
Taiwan operations are minimal, we do not expect a material impact of future
exchange rate change on our revenue or expenses.
Interest Rate Risk. Cash, cash equivalents and investments were approximately
$244.4 million at June 30, 2002. These assets were primarily invested in money
market investments, and investment grade commercial paper and corporate bonds
with maturities of less than two years. We have the ability and intent to hold
these investments to maturity. We do not invest in derivative securities.
Although our portfolio is subject to fluctuations in interest rates and market
conditions, no temporary gain or loss on any security will be recognized in
earnings until we sell the asset. In addition, our loan from Novartis is based
on a premium over LIBOR. As such, if general interest rates increase, our
interest costs will increase.
Factors Affecting Forward-Looking Statements. Some of the information in this
Quarterly Report on Form 10-Q contains forward-looking statements. We typically
identify forward-looking statements by using terms such as "may," "will,"
"should," "could," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential", "continue" or similar words, although we express some
forward-looking statements differently. You should be aware that actual events
could differ materially from those suggested in the forward-looking statement
due to a number of factors, including:
o the ability to develop safe and efficacious drugs;
o failure to achieve positive results in clinical trials;
o failure to receive, or delay in receiving, marketing approval for our
products;
o failure to successfully commercialize our products;
o relationships with our collaboration partners;
o the outcome of various legal proceedings;
o difficulty in achieving or managing growth;
o variability of royalty, licenses and other revenues;
o ability to enter into future collaboration agreements;
o competition and technological change; and
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o existing and future regulations affecting our business.
You should also consider carefully the other factors identified in our Annual
Report on Form 10-K for the year ended December 31, 2001, which could cause our
actual results to differ from those set forth in the forward-looking statements.
14
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On April 6, 2000, the Securities and Exchange Commission declared
effective our Registration Statement on Form S-1, Commission File No. 333-96025,
registering the sale of 8,568,000 shares of our common stock (including the
over-allotment option) for net proceeds of $225.8 million. For the six months
ended June 30, 2002, we have used approximately $12.5 million of our initial
public offering proceeds as follows (in millions):
Research and development activities, general corporate purposes
and working capital ......................................... $11.0
Capital expenditures .......................................... 1.5
-----
$12.5
=====
The remaining portion of the net offering proceeds has been invested in cash
equivalents and held-to-maturity investments. Our use of the proceeds from the
offering does not represent a material change in the use of proceeds described
in the prospectus included as part of the Registration Statement.
Item 5. Submission of Matters to a Vote of Security Holders
At our 2002 Annual Meeting of Stockholders held on May 17, 2002, the
stockholders of the Company elected the following persons as Class II directors
for a term of three years by votes indicated:
Name Number of Votes For Number of Votes Withheld
- ------------------ ------------------- ------------------------
Heinz W. Bull 29,004,656 2,728,991
Tse Wen Chang 28,945,954 2,787,693
The other directors whose terms of offices as director continue after the
meeting are Nancy T. Chang, William J. Jenkins and Osama Mikhail.
The stockholders approved an amendment to the 2000 Non-Employee Directors' Stock
Option Plan as follows:
Number of Votes For: 31,317,440
Number of Votes Against: 406,401
Number of Votes Abstained: 9,806
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3(i) Certificate of Designations of Series A Junior Participating Preferred
Stock
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K.
On May 23, 2002, we filed a Form 8-K reporting the dismissal of Arthur Andersen
LLP, our independent auditors.
On June 28, 2002, we filed a Form 8-K reporting the engagement of Ernst & Young
LLP as our independent auditors.
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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.
TANOX, INC.
Date: August 13, 2002 By: Nancy T. Chang
------------------------------------
Nancy T. Chang
President and Chief Executive Officer
By: Gregory P. Guidroz
-------------------------------------
Gregory P. Guidroz
Acting Vice President of Finance
(Principal Accounting and Financial
Officer)
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