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: 0-27718
NEOSE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3549286
--------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 Witmer Road
Horsham, Pennsylvania 19044
- ---------------------------------------- -----------
(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: 11,428,932 shares of common
stock, $.01 par value, were outstanding as of October 31, 1999.
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) at December 31, 1998 and
September 30, 1999.......................................................................................3
Consolidated Statements of Operations (unaudited) for the three and nine
months ended September 30, 1998 and 1999, and for the period from
inception through September 30, 1999.....................................................................4
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1998 and 1999, and for the period from inception through
September 30, 1999.......................................................................................5
Notes to Unaudited Consolidated Financial Statements.....................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................................9
Item 3. Quantitative and Qualitative Disclosure About Market Risk...............................................15
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds...............................................................15
Item 6. Exhibits and Reports on Form 8-K........................................................................15
SIGNATURES.......................................................................................................16
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)
ASSETS December 31, 1998 September 30, 1999
----------------- ------------------
Current assets:
Cash and cash equivalents $ 9,484 $ 5,048
Marketable securities 22,539 30,748
Restricted funds 468 2,029
Prepaid expenses and other current assets 235 157
----------- -----------
Total current assets 32,726 37,982
Property and equipment, net 13,539 13,467
Acquired technology (See Note 3) -- 3,094
----------- -----------
Total assets $ 46,265 $ 54,543
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 617 $ 1,000
Accounts payable 45 215
Accrued expenses 1,290 1,899
----------- -----------
Total current liabilities 1,952 3,114
Long-term debt 8,300 7,300
----------- -----------
Total liabilities 10,252 10,414
----------- -----------
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 11,411 shares issued and
outstanding, respectively 96 114
Additional paid-in capital 82,400 100,792
Deferred compensation (211) (502)
Unrealized gains on marketable securities 222 92
Deficit accumulated during the development-stage (46,494) (56,367)
----------- -----------
Total stockholders' equity 36,013 44,129
----------- -----------
Total liabilities and stockholders' equity $ 46,265 $ 54,543
=========== ===========
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)
Period from
Three months Nine months inception
ended September 30, ended September 30, (January 17, 1989)
-------------------------- ------------------------- to September 30,
1998 1999 1998 1999 1999
-------- ---------- -------- ----------- ----------------
Revenue from collaborative agreements $ - $ 92 $ 265 $ 217 $ 6,562
-------- ---------- -------- ---------- -----------
Operating expenses:
Research and development 2,505 2,435 7,357 7,626 48,530
General and administrative 923 1,238 2,662 3,433 20,146
-------- ---------- -------- ---------- -----------
Total operating expenses 3,428 3,673 10,019 11,059 68,676
-------- ---------- -------- ---------- -----------
Operating loss (3,428) (3,581) (9,754) (10,842) (62,114)
Interest income 486 678 1,579 1,284 8,277
Interest expense (139) (106) (417) (315) (2,530)
-------- ---------- -------- ---------- -----------
Net loss $ (3,081) $ (3,009) $ (8,592) $ (9,873) $ (56,367)
======== ========== ======== ========== ===========
Basic and diluted net loss per share $ (0.32) $ (0.26) $ (0.90) $ (0.95)
======== ========== ======== ==========
Basic and diluted weighted-average
shares outstanding 9,568 11,422 9,548 10,425
======== ========== ======== ==========
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)
Period from
Nine months ended inception
September 30, (January 17, 1989)
-------------------------------- to September 30,
1998 1999 1999
--------- ---------- ------------------
Cash flows from operating activities:
Net loss $ (8,592) $ (9,873) $ (56,367)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,203 1,596 6,801
Common stock issued for non-cash and other charges -- -- 35
Changes in operating assets and liabilities:
Restricted funds (14) (1,561) (1,958)
Prepaid expenses and other 198 33 (202)
Accounts payable (73) 170 215
Accrued expenses (428) 609 1,217
--------- --------- ----------
Net cash used in operating activities (7,706) (9,026) (50,259)
--------- --------- ----------
Cash flows from investing activities:
Purchases of property and equipment (647) (920) (17,444)
Proceeds from sale-leaseback of equipment -- -- 1,382
Purchases of marketable securities (8,611) (67,954) (119,077)
Proceeds from sales of marketable securities 19,167 8,882 11,466
Proceeds from maturities of and other changes in marketable
securities -- 50,733 76,954
Purchase of acquired technology -- (3,300) (3,300)
--------- --------- ----------
Net cash provided by (used in) investing activities 9,909 (12,559) (50,019)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from issuance of debt -- -- 11,955
Repayment of debt (921) (617) (4,952)
Proceeds from issuance of preferred stock, net -- -- 29,497
Proceeds from issuance of common stock, net 171 17,572 18,277
Proceeds from public offerings, net -- -- 49,466
Proceeds from exercise of stock options and warrants 119 194 1,155
Dividends paid -- -- (72)
--------- --------- ----------
Net cash provided by (used in) financing activities (631) 17,149 105,326
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents 1,572 (4,436) 5,048
Cash and cash equivalents, beginning of period 17,098 9,484 --
--------- --------- ----------
Cash and cash equivalents, end of period $ 18,670 $ 5,048 $ 5,048
========= ========= ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 428 $ 273 $ 2,427
========= ========= ==========
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 September 30, 1999;
o For the three and nine months ended September 30, 1998 and 1999; and
o For the period from inception (January 17, 1989) to September 30, 1999.
Our 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 and nine
months ended September 30, 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. SALE OF COMMON STOCK
On June 29, 1999, we completed a $14.25 million private placement of common
stock. We sold 1.5 million shares of common stock to a selected group of
institutional and individual investors at a price of $9.50 per share, the
closing bid price of the stock on June 17, 1999. After payment of finder's fees
and expenses, our net proceeds from the private placement were approximately
$13.4 million.
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 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 Consolidated Balance Sheet as
Acquired Technology. The remaining $200,000 was paid to Cytel from an escrow
account funded by us in 1998. This amount was expensed to our Consolidated
Statement of Operations in
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1998. We have recorded the $1.5 million placed into escrow as Restricted Funds
on our Consolidated Balance Sheet. The Acquired Technology balance will be
amortized to our Consolidated Statement of Operations over eight years, which we
estimate to be the useful life of the technology. During the nine months ended
September 30, 1999, we recorded amortization expense of $206,000 relating to the
acquired technology.
4. AGREEMENT WITH JOHNSON & JOHNSON
On October 13, 1999, we formed a joint venture with McNeil Specialty
Products Company, a subsidiary of Johnson & Johnson, to develop cost-effective
production of certain complex carbohydrates. The joint venture replaces and
expands the previous research and development agreement between Neose and McNeil
Specialty.
Under the new agreement, if McNeil Specialty and we jointly decide to build
additional production facilities, we are required to contribute 15% of the cost
of capital expenditures, up to a maximum of $1.85 million. McNeil Specialty is
required to fund the remainder of the capital expenditures plus any operating
losses of the joint venture. If we fail to contribute 50% of the cost of capital
expenditures of the joint venture, our percentage ownership of the joint venture
will be less than 50%. If this occurs, we have the option until September 30,
2006 of returning to 50% ownership of the joint venture by reimbursing McNeil
Specialty for 50% of the cost of capital expenditures of the joint venture, less
amounts we have previously contributed. Alternatively, at our option, we may
maintain our 50% ownership in the joint venture by contributing 50% of the cost
of capital expenditures of the joint venture.
5. AGREEMENT WITH WYETH NUTRITIONALS INTERNATIONAL
On November 8, 1999, we announced that we entered into a collaboration and
license agreement with American Home Products Corporation to develop and
commercialize a bioactive milk-based carbohydrate for use in infant and
pediatric nutritional formulas marketed by Wyeth Nutritionals International, a
business unit of American Home Products.
Under the agreement, the two companies will conduct a joint research and
development program, with Wyeth's activities focused on use of the ingredient in
its pediatric products, and with Neose's activities focused on the development
of commercial scale manufacturing capabilities for the novel bioactive
carbohydrate ingredient. The agreement provides for development fees payable to
Neose prior to commercialization, and anticipates that we will manufacture and
sell the novel ingredients to Wyeth, and will receive royalties upon
commercialization.
In conjunction with entering into the agreement with American Home
Products, we changed our license agreement with Abbott Laboratories from an
exclusive to a non-exclusive agreement, in accordance with the provisions of the
agreement with Abbott. As a result, Abbott no longer has an obligation to pay us
$5 million upon commercializing a product manufactured using our technology. In
addition, royalties payable by Abbott upon commercialization have been reduced
by 50%.
6. MARKETABLE SECURITIES
Marketable securities consist of investments that have a maturity of more
than three months on the date of purchase. To maintain the safety and liquidity
of our marketable securities, we have established guidelines for the
concentration, maturities, and credit ratings of our investments.
7
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," we determine
the appropriate classification of our debt securities at the time of purchase
and re-evaluate such designation as of each balance sheet date. Marketable
securities that we have the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and recorded at amortized cost. Our
other marketable securities are classified as available-for-sale securities and
are carried at fair value, based on quoted market prices, with unrealized gains
and losses reported as a separate component of stockholders' equity. All
realized gains and losses on our available-for-sale securities, computed using
specific identification, and any declines in value determined to be permanent
are recognized in the Consolidated Statements of Operations.
As of September 30, 1999, marketable securities consisted of securities and
obligations of either the U.S. Treasury or U.S. government agencies. The
following summary contains additional information about our marketable
securities as of September 30, 1999 (in thousands):
Available-for-sale securities
Cost 10,129
Gross unrealized gains 92
Gross unrealized losses --
------
Fair value of available-for-sale securities 10,221
Less amounts classified as cash equivalents (4,222)
------
Total available-for-sale securities 5,999
Held-to-maturity securities (at amortized cost) 24,749
------
Total marketable securities 30,748
======
7. 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 and nine months ended September 30, 1998 and 1999, the
effects of the exercise of outstanding stock options and warrants were
antidilutive; accordingly, they were excluded from the calculation of diluted
earnings per share.
8. COMPREHENSIVE LOSS
Our comprehensive loss for the nine months ended September 30, 1998 and
1999 was $8,592,000 and $10,003,000, respectively. Comprehensive loss is
comprised of net loss and other comprehensive income or loss. 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.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION ACT OF 1995:
This report and the documents incorporated by reference herein contain
"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. When used in this report and the documents incorporated herein by
reference, the words "anticipate," "believe," "estimate," and similar
expressions are generally intended to identify forward-looking statements. These
forward-looking statements include, among others, the statements in Management's
Discussion and Analysis about our:
o expectations for increases in operating expenses;
o expectations for increases in research and development and general and
administrative expenses in order to develop new products, manufacture
commercial quantities of products, and fund additional clinical trials;
o expectations for the development, manufacturing, and approval of new
products;
o expectations for incurring additional capital expenditures to expand our
manufacturing capabilities;
o expectations for generating revenue or becoming profitable on a sustained
basis;
o ability to enter into additional marketing agreements and the ability of our
existing marketing partners to commercialize products incorporating our
technologies;
o estimate of the sufficiency of our existing cash and cash equivalents and
investments to finance our operating and capital requirements through
Mid-2001;
o expected losses in 1999 and subsequent years;
o expectations for future capital requirements;
o our identification and resolution of Year 2000 issues; and
o estimate of the impact to us of the failure of critical suppliers and
customers to achieve Year 2000 compliance.
Our actual results could differ materially from those results expressed in, or
implied by, these forward-looking statements. Potential risks and uncertainties
that could affect our actual results include the following:
o our ability to commercialize any of our products or technologies;
9
o our ability to maintain our existing collaborative arrangements and enter
into new collaborative arrangements;
o our ability to develop commercial-scale manufacturing facilities;
o our ability to protect our proprietary products, know-how, and manufacturing
processes;
o unanticipated cash requirements to support current operations or research and
development;
o our ability to attract and retain key personnel;
o general economic conditions and specifically, conditions in the health care
industry; and
o unanticipated costs of Year 2000 compliance.
These and other risks and uncertainties that could affect our actual results are
discussed in greater detail in this report and in our other filings with the
Securities and Exchange Commission.
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 a
non-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.
10
We have incurred increasingly large losses each year. As of September 30,
1999, we had an accumulated deficit of approximately $56.4 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.
RESULTS OF OPERATIONS
Revenues
Revenues from collaborative agreements for the three and nine months ended
September 30, 1999, were $92,000 and $217,000, respectively, compared to $0 and
$265,000, respectively, for the corresponding periods in 1998. The differences
were primarily attributable to fluctuating non-recurring revenues received under
our agreement with Bristol-Myers Squibb Company.
Operating Expenses
Research and development expenses for the three and nine months ended
September 30, 1999, were $2,435,000 and $7,626,000, respectively, compared to
$2,505,000 and $7,357,000, respectively, for the corresponding periods in 1998.
The increase for the nine-month period was primarily attributable to increased
expenses associated with funding of outside research and the acquisition of
intellectual property from Cytel Corporation. Specifically, we incurred expenses
to retain certain former Cytel employees, and we began amortizing the purchase
price of the intellectual property during the second quarter of 1999.
General and administrative expenses for the three and nine months ended
September 30, 1999, were $1,238,000 and $3,433,000, respectively, compared to
$923,000 and $2,662,000, respectively, for the corresponding periods in 1998.
The increases were 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 and nine months ended September 30, 1999, was
$678,000 and $1,284,000, respectively, compared to $486,000 and $1,579,000,
respectively, for the corresponding periods in 1998. The differences were due to
fluctuating average cash and marketable securities balances during the 1999
periods.
Interest expense for the three and nine months ended September 30, 1999,
was $106,000 and $315,000, respectively, compared to $139,000 and $417,000,
respectively, for the corresponding periods in 1998. The decreases were due to
lower average loan balances outstanding during the 1999 periods.
11
Net Loss
We incurred net losses of $3,009,000 and $9,873,000, or $0.26 and $0.95 per
share, for the three and nine months ended September 30, 1999, respectively,
compared to $3,081,000 and $8,592,000, or $0.32 and $0.90 per share,
respectively, for the corresponding periods in 1998. The decrease in our net
loss per share for the quarter ended September 30, 1999 from the comparable 1998
period is due largely to the issuance of 1.5 million shares in a private
placement completed in June 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred increasingly large losses each year since our inception.
As of September 30, 1999, we had a deficit accumulated during the development
stage of approximately $56.4 million. We have financed our operations through
private and public offerings of our securities and revenues from our
collaborative agreements. We had $35.8 million in cash and marketable securities
as of September 30, 1999, compared to $32.0 million in cash and marketable
securities as of December 31, 1998. This increase was primarily attributable to
our completion of two private placements of common stock totalling $18.25
million. The increase was partly offset by the use of funds for the acquisition
of intellectual property from Cytel Corporation and for our continuing operating
activities.
On November 8, 1999, we announced that we entered into a collaboration and
license agreement with American Home Products Corporation to develop and
commercialize a bioactive milk-based carbohydrate for use in infant and
pediatric nutritional formulas marketed by Wyeth Nutritionals International, a
business unit of American Home Products. The agreement provides for development
fees payable to Neose prior to commercialization, and anticipates that we will
manufacture and sell the novel ingredients to Wyeth, and will receive royalties
upon commercialization.
In conjunction with entering into the agreement with American Home
Products, we changed our license agreement with Abbott Laboratories from an
exclusive to a non-exclusive agreement, in accordance with the provisions of the
agreement with Abbott. As a result, Abbott no longer has an obligation to pay us
$5 million upon commercializing a product manufactured using our technology. In
addition, royalties payable by Abbott upon commercialization have been reduced
by 50%.
On October 13, 1999, we formed a joint venture with McNeil Specialty
Products Company, a subsidiary of Johnson & Johnson, to develop cost-effective
production of certain complex carbohydrates. The joint venture replaces and
expands the previous research and development agreement between Neose and McNeil
Specialty.
Under the new agreement, if we and McNeil Specialty jointly decide to build
additional production facilities, we are required to contribute 15% of the cost
of capital expenditures, up to a maximum of $1.85 million. McNeil Specialty is
required to fund the remainder of the capital expenditures plus any operating
losses of the joint venture. If we fail to contribute 50% of the cost of capital
expenditures of the joint venture, our percentage ownership of the joint venture
will be less than 50%. If this occurs, we have the option until September 30,
2006 of returning to 50% ownership of the joint venture by reimbursing McNeil
Specialty for 50% of the cost of capital expenditures of the joint venture, less
amounts we have previously contributed. Alternatively, at our option, we may
12
maintain our 50% ownership in the joint venture by contributing 50% of the cost
of capital expenditures of the joint venture.
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 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 Consolidated Balance Sheet as
Acquired Technology. The remaining $200,000 was paid to Cytel from an escrow
account funded by us in 1998. This amount was expensed to our Consolidated
Statement of Operations in 1998. We have recorded the $1.5 million placed into
escrow as Restricted Funds on our Consolidated Balance Sheet. The Acquired
Technology balance will be amortized to our Consolidated Statement of Operations
over eight years, which we estimate to be the useful life of the technology.
During the nine months ended September 30, 1999, we recorded amortization
expense of $206,000 relating to the Acquired Technology.
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 September 30, 1999, the effective,
blended interest rate was 6.7% 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 September 30, 1999
was $8.3 million.
During the nine months ended September 30, 1999, we purchased approximately
$920,000 of property, equipment, and building improvements.
We expect that our existing cash and short-term investments will be
adequate to fund our operations through mid-2001; 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;
13
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.
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
$300,000.
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
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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.
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 June 29, 1999, we completed a private placement of 1,500,000 shares of
common stock to selected institutional and individual accredited investors for
gross proceeds of $14.25 million. After payment of finder's fees and expenses,
our net proceeds from the private placement were approximately $13.4 million.
The shares were issued pursuant to an exemption from registration in accordance
with Regulation D under the Securities Act of 1933.
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:
27 Financial Data Schedule.
(b) Reports on Form 8-K. None.
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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: November 15, 1999 By: /s/ P. Sherrill Neff
-------------------------------------
P. Sherrill Neff
President and Chief Financial Officer
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