UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-21130
ENERGY BIOSYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3078857
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4200 Research Forest Drive
The Woodlands, Texas 77381
(address of principal executive offices) (zip code)
281-419-7000
(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 November 1, 1999, there were outstanding 6,569,890 shares of
Common Stock, par value $.01 per share, of the registrant.
ENERGY BIOSYSTEMS CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Page
----
Factors Affecting Forward-Looking Statements 3
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements 4
Balance Sheets as of September 30, 1999 (Unaudited)
and December 31, 1998 5
Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998 (Unaudited) 6
Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited) 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
- ---------
2
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "anticipate", "believe", "expect", "estimate", "project" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
believed, expected, estimated or projected. These risks and uncertainties
include technological uncertainty and risks associated with the
commercialization of the Company's technology, the Company's history of
operating losses and uncertainty of future profitability, manufacturing risks
and uncertainties, uncertainty of market acceptance of the Company's technology,
the Company's reliance on environmental regulation, uncertainties as to the
protection offered by the Company's patents and proprietary technology, the
Company's dependence on collaborations, the Company's need for additional funds,
limited marketing experience and dependence on key personnel, government
regulation, competition and other risks and uncertainties described in the
Company's filings with the Securities and Exchange Commission. For additional
discussion of such risks, uncertainties and assumptions ("Cautionary
Statements"), see "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" included
elsewhere in this report and "Item 1. Business - Risk Factors" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form
10-K). All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made herein are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the 1998 Form 10-K.
The information presented in the accompanying financial statements is
unaudited, but in the opinion of management, reflects all adjustments (which
include only normal recurring adjustments) necessary to present fairly such
information.
4
ENERGY BIOSYSTEMS CORPORATION
BALANCE SHEETS
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,296,774 $ 2,795,429
Short term investments 2,451,140 -
Prepaid expenses and other current assets 433,813 512,487
------------ ------------
Total current assets 7,181,727 3,307,916
Furniture, equipment and leasehold improvements, net 1,135,757 1,675,992
Intangible and other assets, net 1,243,135 1,142,837
------------ ------------
Total assets $ 9,560,619 $ 6,126,745
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 124,167 $ 513,673
Deferred revenue 180,000 180,000
Note payable 14,068 126,613
------------ ------------
Total current liabilities 318,235 820,286
Stockholders' equity:
Series B Convertible Preferred Stock, $0.01 par value
(liquidation value $35,105,000; 760,000 shares
authorized, 519,400 and 696,400 shares,
respectively, issued and outstanding) 27,455,144 33,955,166
Common Stock, $0.01 par value (30,000,000 shares
authorized, 6,569,557 and 2,179,142 shares,
respectively, issued and outstanding) 65,696 21,791
Additional paid-in capital 54,524,670 38,529,097
Accumulated deficit (72,803,126) (67,199,595)
------------ ------------
Total stockholders' equity 9,242,384 5,306,459
------------ ------------
Total liabilities and stockholders' equity $ 9,560,619 $ 6,126,745
============ ============
The accompanying notes are an integral part of these financial statements.
5
ENERGY BIOSYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
REVENUES:
Sponsored research revenues $ 390,241 $ 304,592 $ 1,415,177 $ 561,659
Interest and investment income 89,837 180,649 131,180 339,157
----------- ----------- ----------- -----------
Total revenues 480,078 485,241 1,546,357 900,816
COSTS AND EXPENSES:
Research and development 1,008,510 1,741,727 3,677,615 6,153,959
General and administrative 428,784 464,158 1,441,380 1,516,856
----------- ----------- ----------- -----------
Total costs and expenses 1,437,294 2,205,885 5,118,995 7,670,815
----------- ----------- ----------- -----------
NET LOSS $(957,216) $(1,720,644) $(3,572,638) $(6,769,999)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE -
BASIC AND DILUTED $(0.25) $(1.35) $(1.49) $(5.05)
=========== =========== =========== ===========
SHARES USED IN COMPUTING
NET LOSS PER COMMON SHARE 6,569,557 1,858,034 3,983,820 1,809,774
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
6
ENERGY BIOSYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
-------------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,572,638) $(6,769,999)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 608,435 1,055,708
Changes in assets and liabilities:
Decrease in prepaid expenses and other current assets 78,674 685,887
Increase in intangible and other assets and notes
receivable (127,297) (202,309)
Decrease in accounts payable and accrued
liabilities (389,506) (639,554)
----------- -----------
Net cash used in operating activities (3,402,332) (5,870,267)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (41,202) (164,758)
Net sale (purchase) of investments (2,451,140) 693,279
----------- -----------
Net cash provided by (used in) investing activities (2,492,342) 528,521
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on capital lease obligations - (3,556)
Payments on notes payable, net (112,545) (218,606)
Issuance of stock, net 7,508,564 447,062
----------- -----------
Net cash provided by financing activities 7,396,019 224,900
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,501,345 (5,116,846)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 2,795,429 9,661,310
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,296,774 $ 4,544,464
=========== ===========
The accompanying notes are an integral part of these financial statements.
7
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Energy BioSystems Corporation (the "Company") was incorporated in the
State of Delaware on December 20, 1989. Since inception, the Company has devoted
substantially all of its resources to research and development. To date, all of
the Company's revenues resulted from sponsored research payments from
collaborative agreements and interest and investment income. The Company has
incurred cumulative losses since inception and expects to incur substantial
losses for at least the next several years, due primarily to its research and
development activities and the development of its biocatalyst, fermentation and
bioreactor programs. The Company expects that losses will fluctuate from quarter
to quarter and that such fluctuations may be substantial.
Effective March 30, 1999, EBC implemented a restructuring, including a
substantial employee reduction, in order to reduce expenses and focus its
limited resources on the critical elements leading to commercialization of its
patented biodesulfurization ("BDS") process. EBC retained certain key technical
and management personnel.
EBC's BDS process will require substantial research, development and
testing in order to determine its commercial viability. EBC has proven its BDS
technology only to a limited extent in laboratory, bench-scale and pilot plant
trials, which is not yet sufficient for full commercialization. If EBC
successfully field tests its BDS technology, the commercialization of the BDS
technology will depend on, among other things, EBC's success in achieving
improvement of its biocatalyst and success in developing fermentation processes,
as well as EBC's ability to manufacture or contract for the manufacture of
sufficient biocatalyst for use in commercial BDS units; to apply process
engineering to design bioreactor systems capable of accomplishing the BDS
process on a commercial scale; and to market its BDS systems efficiently. The
accomplishment of some or all of these objectives may be delayed or may never
occur. EBC will require additional capital to continue the development and
commercialization of its BDS technology, and there can be no assurance that such
capital will be available or that EBC will be able to successfully commercialize
its BDS technology.
The accompanying unaudited interim financial statements reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. These financial
statements should be read in conjunction with the Company's 1998 Form 10-K.
NET LOSS PER COMMON SHARE
Net loss per share has been computed by dividing the net loss, which
has been increased for periodic accretion and accrued dividends on the Series B
Convertible Preferred Stock issued in February and March 1997, by the weighted
average number of shares of common stock outstanding during the period.
In December 1998, the Company declared a one-for-seven reverse stock
split which was effective December 18, 1998. All references to earnings per
share, number of shares and share
8
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
amounts prior to December 18, 1998 have been retroactively restated to reflect
the reverse stock split.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. COMMON STOCK OFFERING
The Company completed a private placement of its common stock during
June 1999. The Company offered and sold 2,600,223 and 1,614,597 shares at $1.80
and $2.00 per share, respectively. Those shares sold at $2.00 per share included
one warrant to purchase one share of the Company's common stock for five shares
purchased in the private placement. Those shares sold at $1.80 per share
included no such warrants. Net proceeds from the offering were approximately
$7.5 million. In connection with the closing, warrants to purchase 646,623
shares of the Company's common stock were issued at an exercise price of $2.40.
Such number of warrants includes both those warrants issued to investors, as
described above, and warrants issued to the placement agent, SAMCO Capital
Markets, Inc.("SAMCO"), in partial payment of its fee. The warrants have been
recorded at an estimated fair value of $1,147,358, which was computed using the
Black-Scholes option pricing model and the following assumptions: risk free
interest rate of 6.01 percent; expected dividend yield of zero; expected life of
three years (and with respect to the warrants issued to the placement agent five
years); and an expected volatility at an average weight of 125 percent.
NOTE 3. SERIES B CONVERTIBLE PREFERRED STOCK
Dividends on shares of Series B Preferred Stock are payable in cash or
common stock of the Company, or a combination thereof, at the Company's option.
Dividends on the Series B Preferred Stock are cumulative from February 27, 1997
and payable semi-annually commencing May 1, 1997, at an annual rate equal to (i)
$4.00 per share of Series B Preferred Stock to the extent the dividend is paid
in cash and (ii) $4.50 per share of Series B Preferred Stock to the extent the
dividend is paid in common stock. The Company elected to defer payment of the
May 1, 1999 and November 1, 1999 dividend in accordance with the Series B
Preferred Stock Agreement.
Shares of Series B Preferred Stock are convertible into shares of
common stock at a conversion price of $20.06 per share, subject to certain
adjustments. The Series B Preferred Stock may be redeemed by the Company under
certain circumstances after February 26, 1999 and is required to be redeemed,
subject to certain limitations, on February 26, 2002 at a redemption price of
$50.00 per share, plus accrued and unpaid dividends. It is the Company's intent,
however, to redeem the Series B Preferred Stock for common stock. Accordingly,
the Series B Preferred Stock is included in stockholders' equity. In April and
July 1998, 4,000
9
ENERGY BIOSYSTEMS CORPORATION
NOTES TO FINANCIAL SATEMENTS - (CONTINUED)
shares and 1,700 shares of the Series B Preferred Stock were converted to 3,940
shares and 1,674 shares of common stock, respectively. In May 1999, 177,000
shares of Series B Preferred Stock were converted to 174,379 shares of common
stock.
The carrying amount of the Series B Preferred Stock is increased for
accrued and unpaid dividends plus periodic accretion, using the effective
interest method, such that the carrying amount will equal the redemption amount
on the Series B Preferred Stock on February 26, 2002.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since its inception in December 1989, the Company has devoted
substantially all of its resources to its research and development. To date, all
of the Company's revenues have resulted from interest and investment income and
sponsored research payments from collaborative agreements. The Company has
incurred cumulative net losses since inception and expects to incur substantial
losses for at least the next several years, due primarily to its research and
development activities and the development of its biocatalyst, fermentation and
bioreactor programs. The Company expects that losses will fluctuate from quarter
to quarter and that such fluctuations may be substantial. As of September 30,
1999, the Company's accumulated deficit was $72,803,126.
RESULTS OF OPERATIONS
The Company had total revenues for the three months ended September 30,
1999 and 1998 of $480,078 and $485,241, respectively. The decrease in total
revenues of $5,163 was attributable to a decrease in interest and investment
income offset in part by increases in sponsored research revenues. The Company
had sponsored research revenues of $390,241 during the third quarter of 1999 as
compared to $304,592 during the third quarter of 1998. The increase of $85,649
in sponsored research revenues resulted primarily from the increase in sponsored
research revenues from a Department of Energy ("DOE") grant.
The Company had total revenues for the nine months ended September 30,
1999 and 1998 of $1,546,357 and $900,816, respectively. The increase of $645,541
in total revenues was attributable to increases in sponsored research revenues
offset in part by decreases in interest and investment income. The Company had
sponsored research revenues of $1,415,177 during the first nine months of 1999
as compared to $561,659 during the first nine months of 1998. The increase of
$853,518 in sponsored research revenues resulted primarily from the increase in
sponsored research revenues from a DOE grant.
The Company had interest and investment income of $89,837 in the third
quarter of 1999 as compared to $180,649 in the third quarter of 1998. The
decrease of $90,812 in interest and investment income resulted primarily because
the Company's average balances of cash, cash equivalents and short-term
investments during the third quarter of 1999 were less than those during the
corresponding period of 1998.
The Company had interest and investment income of $131,180 for the
first nine months of 1999 compared to $339,157 for the first nine months of
1998. The decrease of $207,977 in interest and investment income resulted
primarily from a decrease in the available cash from which interest and other
investment income are generated.
The Company had research and development expenses for the three months
ended September 30, 1999 and 1998 of $1,008,510 and $1,741,727, respectively,
and for the nine months ended September 30, 1999 and 1998 of $3,677,615 and
$6,153,959, respectively. The decrease in research and development expenses of
$733,217 and $2,476,344, respectively, for the
11
three and nine months ended September 30, 1999 as compared to the
corresponding prior year periods resulted primarily from a reduction in
research and development personnel and the charge to research and development
expense in the first quarter of 1998 for warrants issued to Petro Star Inc.
("Petro Star") in the amount of $404,500. The Company expects its research
and development expenses to remain below 1998 levels for the remainder of
1999, reflecting a reduction in the workforce at the end of the first quarter
of 1999.
The Company had general and administrative expenses for the three
months ended September 30, 1999 and 1998 of $428,784 and $464,158, respectively,
and for the nine months ended September 30, 1999 and 1998 of $1,441,380 and
$1,516,856, respectively. The decrease of $35,374 and $75,476 for the three and
nine months ended September 30, 1999, respectively, as compared to the
corresponding periods of 1998 resulted from the reduction of the administrative
personnel at the end of the first quarter of 1999 and the sublease of
approximately 5,700 square feet of space at the end of the second quarter of
1999. The Company expects a slight decrease from 1998 levels in its general and
administrative expenses during the remainder of 1999, reflecting a reduction in
administrative personnel at the end of the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed a private placement of its common stock during
June 1999. The Company offered and sold 2,600,223 and 1,614,597 shares at $1.80
and $2.00 per share, respectively. Those shares sold at $2.00 per share included
one warrant to purchase one share of the Company's common stock for five shares
purchased in the private placement. Those shares sold at $1.80 per share
included no such warrants. Net proceeds from the offering were approximately
$7.5 million. In connection with the closing, warrants to purchase 646,623
shares of the Company's common stock were issued at an exercise price of $2.40.
Such number of warrants includes both those warrants issued to investors, as
described above, and warrants issued to the placement agent, SAMCO, in partial
payment of its fee. The warrants have been recorded at an estimated fair value
of $1,147,358, which was computed using the Black-Scholes option pricing model
and the following assumptions: risk free interest rate of 6.01 percent; expected
dividend yield of zero; expected life of three years and with respect to the
warrants issued to the placement agent five years; and an expected volatility at
an average weight of 125 percent.
For the nine months ended September 30, 1999, the Company used
$3,402,332 of net cash in operating activities, incurred $41,202 in capital
expenditures and provided $7,396,019 in net financing activities. At September
30, 1999, the Company had cash, cash equivalents and marketable securities
totaling $6,747,914 and working capital of $6,863,492.
The Company intends to spend approximately $200,000 during the
remainder of 1999 for the purchase of laboratory and analytical instrumentation.
The Company also expects to incur substantial additional research and
development expenses, including expenses associated with biocatalyst,
fermentation and bioreactor development. In addition, the Company is subject to
cost sharing arrangements under various collaboration agreements.
To supplement its research and development budgets, the Company intends
to seek additional collaborative research and development agreements with
corporate partners. In this regard, the Company has entered into collaborative
agreements with the Exploration and Production Technology Division of Texaco,
Inc., Total Raffinage Distribution S.A. ("Total"),
12
The M. W. Kellogg Company and Koch Refining Company, among others, as more
fully described in the 1998 Form 10-K.
The Company's ability to reach agreements with Petro Star, Total or
other parties with respect to commercial applications of its BDS technology, and
its ability to commercialize such technology generally, will depend upon its
ability to achieve additional improvements in the productivity of the
biocatalyst (e.g., specific activity, production and longevity) and process
engineering (e.g., bioreactor design, separations technology and byproduct
disposition), and is subject to numerous risks and uncertainties. Although the
Company has made substantial progress to date in improving the productivity of
the biocatalyst and the process engineering used in its pilot BDS unit, no
assurance can be made that the Company will be able to achieve the improvements
necessary for its BDS technology to become commercially viable or to reach
agreements with respect to the commercial application of its technology within
the time anticipated or at all. See "Factors Affecting Forward-Looking
Statements".
In August 1997, the Company was awarded funding by the DOE for a $2.4
million, three year program dedicated to the development of a BDS application
for gasoline. The DOE provided additional interim funding of $390,241 for the
third year of the grant until permanent funding can be approved. Through
September 30, 1999 the Company had recognized approximately $2.0 million in
sponsored research revenue from the grant, of which $390,241 was receivable at
September 30, 1999.
YEAR 2000 ISSUES
The year 2000 issue is the result of certain computer programs or
computerized equipment that are unable to accurately calculate, store or use
dates subsequent to December 31, 1999. The erroneous date can be interpreted in
a number of different ways; typically the year 2000 is represented as the year
1900. Year 2000 problems may result in system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
transactions.
The Company has completed the process of assessing all financial and
operational systems and equipment to ensure year 2000 compliance, and plans to
complete remediation of these systems by December 31, 1999. Based on reviews to
date, the Company does not anticipate that it will incur any significant costs
relating to the remediation of year 2000 issues. The Company believes that the
potential impact, if any, of its systems not being year 2000 compliant should
not impact the Company's ability to continue its research and development
activities. However, there can be no assurance that the Company, its business
partners, vendors or customers will successfully be able to identify and remedy
all potential year 2000 problems or that a system failure resulting from a
failure to identify any such problems would not have a material adverse effect
on the Company.
13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
11.1 Statement regarding Computation of Per Share Earnings.
27.1 Financial Data Schedule.
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated June
11, 1999 during the three months ended September 30, 1999. Such
report related to the issuance by the Company of 4,189,820
shares of common stock of the Company in a private placement.
14
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.
Energy BioSystems Corporation
By: /s/ Peter P. Policastro
--------------------------------------
Peter P. Policastro
Chief Executive Officer and President
Date: November 12, 1999
By: /s/ Paul G. Brown III
--------------------------------------
Paul G. Brown III
Chief Financial Officer and Vice President, Finance and Administration
Date: November 12, 1999
15