SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 March 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-27718
NEOSE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3549286
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 Witmer Road
Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)
(215) 441-5890
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(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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 9,908,583 shares of common
stock, $.01 par value, were outstanding as of April 30, 1999.
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
INDEX
Page
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) at December 31, 1998 and
March 31, 1999........................................................ 3
Consolidated Statements of Operations (unaudited) for the three
months ended March 31, 1998 and 1999, and for the period from
inception through March 31, 1999...................................... 4
Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 31, 1998 and 1999, and for the period from
inception through March 31, 1999...................................... 5
Notes to Unaudited Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......... 12
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds.......................... 12
Item 6. Exhibits and Reports on Form 8-K................................... 12
SIGNATURES................................................................... 13
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share amounts)
December 31, March 31,
Assets 1998 1999
------------ ---------
Current assets:
Cash and cash equivalents $ 9,484 $ 3,406
Marketable securities 22,539 25,217
Restricted funds 468 2,123
Prepaid expenses and other current assets 235 460
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Total current assets 32,726 31,206
Property and equipment, net 13,539 13,276
Acquired technology (See Note 3) -- 3,300
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Total assets $46,265 $47,782
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 617 $ 611
Accounts payable 45 100
Accrued expenses 1,290 1,531
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Total current liabilities 1,952 2,242
Long-term debt 8,300 8,300
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Total liabilities 10,252 10,542
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Stockholders' equity:
Preferred stock, $.01 par value,
5,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 30,000
shares authorized; 9,589 and
9,908 shares issued and outstanding 96 99
Additional paid-in capital 82,400 87,059
Deferred compensation (211) (564)
Unrealized gains on marketable securities 222 212
Deficit accumulated during the
development-stage (46,494) (49,566)
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Total stockholders' equity 36,013 37,240
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Total liabilities and stockholders' equity $46,265 $47,782
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
3
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Peiod from
Three months ended inception
March 31, (January 17, 1989)
------------------- to
1998 1999 March 31, 1999
------- ------- --------------
Revenue from collaborative agreements $ 11 $ 125 $ 6,470
Operating expenses:
Research and development 2,715 2,471 43,375
General and administrative 715 1,003 17,716
------- ------- --------
Total operating expenses 3,430 3,474 61,091
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Operating loss (3,419) (3,349) (54,621)
Interest income 571 384 7,377
Interest expense (138) (107) (2,322)
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Net loss $(2,986) $(3,072) $(49,566)
======= ======= ========
Basic and diluted net loss per share $ (0.31) $ (0.31)
======= =======
Basic and diluted weighted-average
shares outstanding 9,532 9,860
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The accompanying notes are an integral part of these
consolidated financial statements.
4
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three months ended Period from
March 31, inception
--------------------- (January 17, 1989)
1998 1999 to March 31, 1999
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Cash flows from operating activities:
Net loss $ (2,986) $(3,072) $(49,566)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 379 404 5,609
Common stock issued for non-cash and other charges -- -- 35
Changes in operating assets and liabilities:
Restricted funds (128) (1,655) (2,052)
Prepaid expenses and other (64) (225) (460)
Accounts payable (181) 55 100
Accrued expenses (706) 241 849
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Net cash used in operating activities (3,686) (4,252) (45,485)
-------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment (201) (96) (16,620)
Proceeds from sale-leaseback of equipment -- -- 1,382
Purchases of marketable securities -- (24,593) (75,716)
Proceeds from sales of marketable securities 988 5,930 8,515
Proceeds from maturities of and other
changes in marketable securities -- 15,975 42,196
Purchase of intellectual property -- (3,300) (3,300)
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Net cash provided by (used in)
investing activities 787 (6,084) (43,543)
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Cash flows from financing activities:
Proceeds from issuance of debt -- -- 11,955
Repayment of debt (119) (6) (4,341)
Proceeds from issuance of preferred stock, net -- -- 29,497
Proceeds from issuance of common stock, net 87 4,080 4,785
Proceeds from public offerings, net -- -- 49,466
Proceeds from exercise of stock options and warrants 3 184 1,144
Dividends paid -- -- (72)
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Net cash provided by (used in)
financing activities (29) 4,258 92,434
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Net increase (decrease) in cash and cash equivalents (2,928) (6,078) 3,406
Cash and cash equivalents, beginning of period 17,098 9,484 --
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Cash and cash equivalents, end of period $ 14,170 $ 3,406 $ 3,406
======== ======= ========
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 152 $ 111 $ 2,220
======== ======= ========
Non-cash financing activities:
Issuance of common stock for dividends $ -- $ -- $ 90
======== ======= ========
Issuance of common stock to employees in
lieu of cash compensation $ -- $ -- $ 44
======== ======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
We have used generally accepted accounting principles for interim financial
information to prepare unaudited consolidated financial statements:
o As of March 31, 1999;
o For the three months ended March 31, 1998 and 1999; and
o For the period from inception (January 17, 1989) to March 31, 1999.
These consolidated financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In our opinion, the unaudited information
includes all the normal recurring adjustments that are necessary for a fair
presentation of the financial position, results of operations, and cash flows
for the periods presented. You should not base your estimate of our results of
operations for 1999 solely on our results of operations for the three months
ended March 31, 1999. You should read these consolidated financial statements in
combination with:
o The other Notes in this section;
o "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing in the following section; and
o The Consolidated Financial Statements, including the Notes to the
Consolidated Financial Statements, included in our Annual Report on
Form 10-K for the year ended December 31, 1998.
2. Agreement with Johnson & Johnson
In 1997, we entered into a joint development agreement with McNeil
Specialty Products Company, a subsidiary of Johnson & Johnson, for the joint
development of novel technologies for the efficient large-scale manufacture of a
particular class of complex carbohydrates for a number of human healthcare
applications. In January 1999, the joint development agreement was extended and
expanded, and Johnson & Johnson Development Corporation, another subsidiary of
Johnson & Johnson, made a $4 million investment in our common stock. Under the
joint development agreement, we jointly contemplate building and operating a
manufacturing facility capable of producing at least one commercially promising
complex carbohydrate by early 2000. Either party may terminate the agreement
upon sixty days prior notice.
3. Acquisition of Intellectual Property from Cytel
On March 26, 1999, we acquired the carbohydrate manufacturing patents,
licenses, and other intellectual property of Cytel Corporation's Glytec business
unit. We paid $3.5 million in cash to Cytel and an additional $1.5 million in
cash into escrow, the release of which is conditioned on Cytel's satisfaction of
certain matters relating to the acquired patents and licenses. We may be
required to pay Cytel up to an additional $1.6 million in cash, contingent on
potential payments and
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revenues realized by us from certain future corporate collaborations. We have
capitalized $3.3 million of the amount paid to Cytel as developed technology,
which is classified on our Balance Sheet as Acquired Technology. This amount
will be amortized to our Statement of Operations over the estimated useful life
of the technology. We currently estimate the useful life of the technology to be
approximately seven to ten years. The remaining $200,000 was paid to Cytel from
an escrow account funded by us in 1998. This amount was expensed to our
Statement of Operations in 1998. We have recorded the $1.5 million placed into
escrow as Restricted Funds.
4. Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic
loss per share is computed by dividing net loss by the weighted-average number
of common shares outstanding for the period. Diluted loss per share reflects the
potential dilution from the exercise or conversion of securities into common
stock. For the three months ended March 31, 1998 and 1999, the effects of the
following were antidilutive; accordingly, they were excluded from the
calculation of diluted earnings per share:
o The exercise of outstanding stock options and warrants; and
o The conversion of outstanding shares of convertible preferred stock
into common stock (as if converted into common stock on their dates of
issuance).
5. Comprehensive Loss
Our comprehensive loss for the three months ended March 31, 1998 and 1999
was $2,986,000 and $3,082,000, respectively. Comprehensive loss is comprised of
net loss and other comprehensive income or loss. Currently, our only source of
other comprehensive income or loss is unrealized gains and losses on our
marketable securities that are classified as available-for-sale.
6. Reclassifications
Some prior year amounts have been reclassified to conform to current year
presentation.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The statements in this Form 10-Q and the Exhibits that are not facts are
forward-looking statements. Forward-looking statements involve predictions. Our
actual results, performance, or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements. Potential
risks and uncertainties that could affect our actual results, performance, or
achievements include the "Risk Factors" in Item 1 of our Annual Report on Form
10-K for the year ended December 31, 1998, and general financial, economic,
regulatory, and political conditions affecting the biotechnology industry in
general. Given these uncertainties, you should not base your decision to invest
in our common stock on any forward-looking statements. In addition, we do not
have any obligation or intent to update any of these risk factors or
forward-looking statements to reflect future events or developments.
You should read this section in combination with the Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 1998, included in our Annual Report on Form 10-K and in
our 1998 Annual Report to Stockholders.
Overview
Neose, a development-stage company, is developing synthetic processes to
manufacture oligosaccharides, or complex carbohydrates. We are using these
manufacturing processes to discover, develop, and commercialize complex
carbohydrates for pharmaceutical, nutritional, and consumer uses. Due to their
structural complexity, oligosaccharides are difficult and expensive to produce.
Accordingly their commercial development has been significantly limited. We
believe our proprietary technologies enable the rapid and cost-efficient
enzymatic production of naturally occurring oligosaccharides.
We have not generated any material revenues from operations, except for
interest income and revenues from collaborative agreements, including our
agreements with Abbott Laboratories. Under our agreements, Abbott has the
exclusive right to use our technology to manufacture and commercialize, for
nutritional purposes only, any complex carbohydrate naturally found in breast
milk. We have received approximately $11.2 million in contract payments, license
fees, milestone payments, and equity investments from Abbott. Under our
agreements, we will receive further payments from Abbott only if Abbott
commercializes a product manufactured using our technology.
We have incurred increasingly large losses each year. As of March 31, 1999,
we had an accumulated deficit of approximately $49.6 million. We expect
increased losses over at least the next several years as we expand research and
development efforts, conduct additional clinical trials, expand manufacturing
scale-up activities, and begin sales and marketing activities.
We have not yet commercialized any products or technologies. We do not know
if or when we will generate significant revenues from the commercialization of
our products or technologies. Before we can commercialize any of our products or
technologies, we must overcome many hurdles. Even if we commercialize one or
more of our products or technologies, we may not become profitable.
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Results of Operations
Revenues
Revenues from collaborative agreements for the three months ended March 31,
1999 increased to $125,000 from $11,000 for the corresponding period in 1998.
Revenues for the 1999 period were received under our agreement with
Bristol-Myers Squibb Company.
Operating Expenses
Research and development expenses for the three months ended March 31, 1999
decreased to $2,471,000 from $2,715,000 for the corresponding period in 1998.
The expenses for the 1998 period reflect our significant manufacturing campaign
to produce clinical trial material for NE-1530, our compound for the treatment
of pediatric ear infections, and NE-0080, our compound for the treatment of
gastritis and peptic ulcers caused by H. pylori infections. We did not conduct
such a campaign during the comparable 1999 period.
General and administrative expenses for the three months ended March 31,
1999 increased to $1,003,000 from $715,000 for the corresponding period in 1998.
The increase during the 1999 period was primarily attributable to increased
patent and general legal expenses associated with the acquisition of
intellectual property from Cytel Corporation.
Interest Income and Expense
Interest income for the three months ended March 31, 1999 decreased to
$384,000 from $571,000 for the corresponding period in 1998. The decrease was
due to lower average cash and marketable securities balances during the 1999
period.
Interest expense for the three months ended March 31, 1999 decreased to
$107,000 from $138,000 for the corresponding period in 1998. The decrease was
due to lower average loan balances outstanding during the 1999 period.
Net Loss
Our net loss for the three months ended March 31, 1999 increased to
$3,072,000, or $0.31 per share, from $2,986,000, or $0.31 per share, for the
corresponding period in 1998.
Liquidity and Capital Resources
We have incurred increasingly large losses each year since our inception.
As of March 31, 1999, we had a deficit accumulated during the development stage
of approximately $49.6 million. We have financed our operations through private
and public offerings of our securities and revenues from our collaborative
agreements. We had $28.6 million in cash and marketable securities as of March
31, 1999, compared to $32.0 million in cash and marketable securities as of
December 31, 1998. This decrease was attributable to our use of funds for the
acquisition of intellectual property from Cytel Corporation and for our
continuing operating activities. The decrease was partly offset by Johnson &
Johnson Development Corporation's $4.0 million investment in our common stock in
January 1999.
On March 26, 1999, we acquired the carbohydrate manufacturing patents,
licenses, and other intellectual property of Cytel Corporation's Glytec business
unit. We paid $3.5 million in cash to
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Cytel and an additional $1.5 million in cash into escrow, the release of which
is conditioned on Cytel's satisfaction of certain matters relating to the
acquired patents and licenses. We may be required to pay Cytel up to an
additional $1.6 million in cash, contingent on potential payments and revenues
realized by us from certain future corporate collaborations. We have capitalized
$3.3 million of the $3.5 million paid to Cytel as developed technology, which is
classified on our Balance Sheet as Acquired Technology. This amount will be
amortized to our Statement of Operations over the estimated useful life of the
technology. We currently estimate the useful life of the technology to be
approximately seven to ten years. The remaining $200,000 was paid to Cytel from
an escrow account funded by us in 1998. This amount was expensed to our
Statement of Operations in 1998. We have recorded the $1.5 million placed into
escrow as Restricted Funds.
In 1997, we issued, through the Montgomery County (Pennsylvania) Industrial
Development Authority, $9.4 million of taxable and tax-exempt bonds. The bonds
were issued to finance the purchase of our previously leased building and the
construction of a pilot-scale manufacturing facility within our building. The
bonds are supported by a AA-rated letter of credit, and a reimbursement
agreement between our bank and the letter of credit issuer. The interest rate on
the bonds will vary weekly, depending on market rates for AA-rated taxable and
tax-exempt obligations, respectively. As of March 31, 1999, the effective,
blended interest rate was 7.25% per annum, including letter-of-credit and other
fees. To provide credit support for this arrangement, we have given a first
mortgage on the land, building, improvements, and certain machinery and
equipment to our bank. In addition, we have agreed to maintain at least $20
million of cash and short-term investments. If we fail to comply with this
covenant, we are required to deposit with the lender cash collateral up to, but
not more than, the unpaid balance of the loan, which as of March 31, 1999 was
$8.9 million.
If the technology development program with Johnson & Johnson is successful,
the parties will have to reach agreement upon the structure and financing of a
large-scale manufacturing facility.
During the quarter ended March 31, 1999, we purchased approximately $96,000
of property, equipment, and building improvements.
We expect that our existing cash and short-term investments will be
adequate to fund our operations through late 2000; however, changes in our
collaborative relationships or our business, whether or not initiated by us, may
cause us to deplete our cash and short-term investments sooner than the above
estimate. The timing and amount of our future capital requirements and the
adequacy of available funds will depend on many factors, including:
o If or when any products covered by our existing collaborative
agreements are commercialized;
o The progress of our research and development activities, including our
pharmaceutical discovery and development programs;
o The safety and efficacy of our products in preclinical studies and
clinical trials;
o The costs involved in preparing, filing, prosecuting, maintaining, and
enforcing patent claims and other intellectual property rights;
o Competing technological and market developments;
o Changes in our existing collaborative relationships;
o Our ability to establish additional collaborative agreements;
o The cost of manufacturing scale-up; and
o Developing effective marketing activities and arrangements.
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We may need to sell additional stock, borrow additional money, or enter
into new collaborative agreements both to fund operations until we become
profitable and to make capital investments. The timing and amount of our future
capital requirements will depend on many factors including those discussed
above.
If we raise money by selling additional stock or borrowing additional
money, the terms may not be favorable and may be dilutive to our stockholders. A
debt financing may contain restrictive covenants, and, if we default, may
provide the lender with rights to some or all of our assets.
We may not be able to raise money when we need it. If we are unable to
obtain adequate funds when needed:
o We may delay or eliminate our research and development activities, or
other aspects of our business;
o We may have to license or sell our technologies on unfavorable terms;
or
o We may have to reduce or cease operations.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. In other
words, date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including an inability to
process transactions and information, operate certain laboratory and
manufacturing equipment, order raw materials, or engage in similar normal
business activities.
We do not believe we have a material exposure to the Year 2000 issue for
our information and non-information technology systems. We have reviewed these
existing systems and they either correctly define the Year 2000 or are expected
to be replaced before Year 2000 issues will arise. Each of our major vendors has
informed us that they are taking appropriate steps to remediate their own Year
2000 issues. Our business, financial condition, and results of operations may be
materially and adversely affected if our major vendors fail to remediate their
own Year 2000 issues. We have not yet developed any contingency plans to address
situations that may result if our operations are affected by Year 2000 issues
that are not remediated.
Our historical costs directly related to Year 2000 issue evaluation,
remediation, and validation have been immaterial as our systems have been on a
normal replacement schedule with only immaterial opportunity costs of personnel
to ensure new systems and third parties are Year 2000 compliant. We estimate
that the future expenses and capital expenditures necessary to complete our Year
2000 evaluation, remediation, and validation of all systems will not exceed
$200,000.
We are currently assessing the extent to which we would be vulnerable to
our vendors' failure to remediate any Year 2000 issues on a timely basis. We
plan to develop contingency plans if necessary during 1999. We have not deferred
any systems projects as a result of our efforts to evaluate, remediate, and
validate our systems for the Year 2000 issue.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
We do not hold any investments in market risk sensitive instruments.
Accordingly, we believe that we are not subject to any material risks arising
from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive
instruments.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On January 13, 1999, we issued 286,097 shares of common stock to Johnson &
Johnson Development Corporation for $4 million. The shares were issued pursuant
to an exemption from registration under Section 4(2) of the Securities Act of
1933.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
10.1 Stock Purchase Agreement, dated as of January 13, 1999, by and
between Neose and Johnson & Johnson Development Corporation.
10.2* Asset Purchase Agreement, dated as of March 26, 1999, by and
between Neose and Cytel Corporation.
10.3* Escrow Agreement, dated as of March 26, 1999, by and among
Neose, Cytel Corporation, and Chase Manhattan Trust Company,
National Association.
27 Financial Data Schedule.
(b) Reports on Form 8-K. None.
Explanation of Footnote to List of Exhibits
* We have intentionally omitted portions of the exhibit from this
filing. We have submitted an application for confidential treatment,
which includes the omitted portions, to the Securities and Exchange
Commission. Our application for confidential treatment was filed as
specified in Rule 24b-2 of the Securities Exchange Act of 1934.
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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.
NEOSE TECHNOLOGIES, INC.
Date: May 17, 1999 By: /s/ P. Sherrill Neff
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P. Sherrill Neff
President and Chief Financial Officer
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