<PAGE>
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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 March 31, 1996
-OR-
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from...to...
Commission File No. 0-24936
ERGO SCIENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3271667
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Charlestown Navy Yard
100 First Avenue, Fourth Floor
Charlestown, Massachusetts 02129
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 241-6800
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.
At May 1, 1996 there were 10,168,080 shares of common stock, par value $.01 per
share, of the registrant outstanding.
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ERGO SCIENCE CORPORATION
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995.....................................3
Consolidated Statements of Operations and Deficit
Accumulated During the Development Stage
for the three months ended March 31, 1996
and March 31, 1995 and for the period from
inception (January 23, 1990) to March 31, 1996............4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and March 31, 1995
and for the period from inception (January 23, 1990)
to March 31, 1996.........................................5
Notes to Consolidated Financial Statements.....................6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................8
PART II. OTHER INFORMATION...................................................10
SIGNATURES....................................................................11
2
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ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 8,177,095 $ 15,896,373
Short-term investments.................................. 8,860,301 6,325,502
Prepaid and other current assets........................ 473,697 440,376
------------ ------------
Total current assets............................. 17,511,093 22,662,251
Equipment and leasehold improvements, net.................. 2,210,396 2,268,234
Other assets............................................... 43,631 19,426
------------ ------------
Total assets..................................... $ 19,765,120 $ 24,949,911
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................... $ 1,235,540 $ 2,313,847
Accrued legal costs..................................... 280,206 695,499
Current portion of capital lease obligations............ 44,178 43,114
------------ ------------
Total current liabilities........................ 1,559,924 3,052,460
Long-term portion of capital lease obligations............. 82,149 93,600
Commitments and contingencies.............................. -- --
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; 6,903 shares of Series D
preferred stock issued and outstanding at
March 31, 1996 and December 31, 1995............. 4,413,170 4,306,520
Common stock, $.01 par value, authorized 50,000,000 at
March 31, 1996 and December 31, 1995;issued and
outstanding 10,168,080 shares at March 31, 1996
and 10,145,580 shares at December 31, 1995....... 101,681 101,456
Additional paid-in capital.............................. 63,438,262 63,420,487
Cumulative dividends on preferred stock...... (2,403,603) (2,296,953)
Deferred compensation................................... (1,650,069) (1,849,150)
Deficit accumulated during the development stage........ (45,776,394) (41,878,509)
------------ ------------
Total stockholders' equity....................... 18,123,047 21,803,851
------------ ------------
Total liabilities and stockholders' equity... $ 19,765,120 $ 24,949,911
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
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ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT ACCUMULATED
DURING THE DEVELOPMENT STAGE
<TABLE>
<CAPTION>
Period From
Inception
Three Months Ended March 31, (January 23, 1990)
---------------------------------- through
1996 1995 March 31, 1996
---- ---- ----------------
<S> <C> <C> <C>
Revenues:
Licensing and supplier fees........................ $ 355,671
Interest........................................... $ 270,402 $ 17,267 827,888
---------------- ---------------- ----------------
270,402 17,267 1,183,559
Operating expenses:
Research and development........................... 3,095,159 1,961,192 22,540,427
Purchase of in-process research and development.... -- -- 7,020,064
General and administrative......................... 1,073,128 1,930,450 17,213,069
---------------- ---------------- ----------------
4,168,287 3,891,642 46,773,560
---------------- ---------------- ----------------
Net loss........................................ (3,897,885) (3,874,375) (45,590,001)
Accretion of dividends on preferred stock............ (106,650) (268,281) (2,117,536)
Dividends on redeemable preferred stock.............. -- -- (7,123,536)
Dividends on preferred stock......................... -- -- (2,018,763)
---------------- ---------------- ----------------
Net loss to common stockholders...................... $ (4,004,535) $ (4,142,656) $ (56,849,836)
================ ================ ================
Net loss per common share............................ $ (.39) $ (1.07)
================ ================
Weighted average common shares outstanding........... 10,146,899 3,887,838
================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
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ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
Inception
Three Months Ended March 31, (January 23, 1990)
---------------------------------- through
1996 1995 March 31, 1996
---- ---- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (3,897,885) $ (3,874,375) $ (45,590,001)
Adjustments to reconcile net loss to cash used
by operating activities:
Depreciation and amortization.................... 436,139 299,245 2,885,508
Noncash purchase of in-process research
and development............................... -- -- 5,520,064
Loss on sale of equipment........................ -- -- 28,331
Noncash stock issuances for renegotiated
supplier agreement............................. 168,750 1,089,356 1,916,681
Changes in operating assets and liabilities:
Prepaid and other current assets............... (33,321) 28,585 (473,697)
Investments and other assets................... (24,205) 3,863 (95,773)
Accounts payable and accrued expenses.......... (1,662,351) 1,602,803 1,316,994
Deferred revenue............................... -- -- 5,559,714
Other noncash charges.......................... -- -- 86,347
---------------- ---------------- ----------------
Net cash used in operating activities................. (5,012,873) (850,523) (28,845,832)
---------------- ---------------- ----------------
Cash flows from investing activities:
Purchase of short-term investments.................. (4,015,550) -- (10,341,052)
Proceeds from sale and maturity of short-term
investments...................................... 1,480,750 -- 1,480,750
Purchase of equipment and leasehold improvements.... (179,218) (143,052) (3,887,085)
Proceeds received on sale of equipment.............. -- -- 31,724
---------------- ---------------- ----------------
Net cash used in investing activities................. (2,714,018) (143,052) (12,715,663)
---------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of convertible debt, net..... -- -- 3,409,552
Distribution paid to S Corp stockholder............. -- -- (186,393)
Principal payments under capital lease obligations.. (10,387) (8,090) (69,435)
Proceeds from issuance of promissory notes.......... -- -- 7,000,000
Repayment of promissory notes....................... -- -- (3,000,000)
Proceeds from issuance of common stock and Series D
redeemable stock................................. -- -- 1,392,686
Proceeds received from capital contributions........ -- -- 102,176
Proceeds from issuance of Series B and C redeemable
convertible preferred stock...................... -- -- 18,041,528
Proceeds from issuance of common stock, net of
issuance costs................................... -- -- 23,030,476
Proceeds from stock options exercised............... 18,000 -- 18,000
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities... 7,613 (8,090) 49,738,590
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents.. (7,719,278) (1,001,665) 8,177,095
Cash and cash equivalents at beginning of period...... 15,896,373 1,880,982 --
---------------- ---------------- ----------------
Cash and cash equivalents at end of period............ $ 8,177,095 $ 879,317 $ 8,177,095
================ ================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
<PAGE>
ERGO SCIENCE CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying financial statements are unaudited and have been
prepared by the Company in accordance with generally accepted accounting
principals.
Certain information and footnote disclosure normally included in the
Company's annual financial statements have been condensed or omitted. The
interim financial statements, in the opinion of management, reflect all
adjustments (including normal recurring accruals) necessary for a fair
statement of the results for the interim periods ended March 31, 1996 and
1995.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These interim financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1995, which are
contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 1995.
2. Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of three months or less at the date
of purchase to be cash equivalents. Changes in cash and cash equivalents may
be affected by shifts in investment portfolio maturities as well as by actual
net cash receipts or disbursements.
At March 31, 1996 and December 31, 1995, cash equivalents were composed
primarily of investments in money market funds, United States government
obligations and high grade commercial paper that mature within 90 days of
purchase.
3. Short-term Investments
The following is a summary of securities with maturities greater than
three months not classified as cash and cash equivalents. All short-term
investments are classified as held-to-maturity .
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Commercial paper.................. $ 1,495,344 $ 2,388,948
US treasury bills................. 2,455,577 --
Federal agency notes.............. 4,909,380 3,936,554
-------------- --------------
Total short-term investments... $ 8,860,301 $ 6,325,502
============== ==============
</TABLE>
6
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Since held-to-maturity securities are short-term in nature, changes in
market interest rates would not have a significant effect on the fair value of
these securities. These securities are carried at amortized cost, which
approximates fair value.
4. Net Loss Per Common Share
Net loss per common share is computed based upon the weighted average
number of common shares outstanding. Common equivalent shares are not
included in the per share calculations where the effect of their inclusion
would be anti-dilutive. In the computation of net loss per common share,
accretion of preferred stock to the mandatory redemption amount is included
as an increase to net loss to common stockholders.
Fully diluted net loss per common share is the same as primary net loss per
common share.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Since inception, the Company has been engaged in the discovery and
development of novel treatments for metabolic and immune system disorders. The
Company has dedicated most of its financial resources to the research and
development of ERGOSET therapy, general and administrative expenses, and the
prosecution of patents and patent applications. To date, the Company has not
received any revenues from the sale of products and does not expect to
generate such revenues for several years, if at all. The Company has been
unprofitable since its inception, and the Company's accumulated deficit was
$45,776,394 as of March 31, 1996. Although the Company intends to enter into
collaborative relationships, it expects to incur substantial and increasing
losses for at least the next several years, due primarily to the expansion of
its research and development programs, including preclinical studies and
clinical trials. The Company expects that losses will fluctuate from quarter
to quarter and that the fluctuations may be substantial.
Results of Operations
Three Months Ended March 31, 1995 and 1996
Total revenues increased from $17,267 for the three months ended March 31,
1995 to $270,402 for the same period in 1996. Revenues were derived primarily
from interest income earned on cash, cash equivalents and short-term
investments. The increase in interest income is attributable to an increase in
the average amounts of cash, cash equivalents and short-term investments
during the first quarter of 1996, compared to the first quarter of 1995. These
amounts increased as a result of proceeds received from the Company's initial
public offering in December 1995.
Research and development expenses increased from $1,961,192 for the three
months ended March 31, 1995, to $3,095,159 for the same period in 1996. The
increase was principally the result of greater expenses related to Phase III
clinical trials for ERGOSET, continued progress on several early stage
research programs including those in metastatic breast cancer and photodynamic
therapy, and the hiring of additional research personnel.
General and administrative expenses decreased from $1,930,450 for the three
months ended March 31, 1995, to $1,073,128 for the same period in 1996. The
decrease was principally due to a net charge of $1,089,356 recorded in the
first quarter of 1995 related to a renegotiated supply agreement. Excluding
this nonrecurring, noncash charge, general and administrative expenses
increased $232,034 in the first quarter of 1996, compared to the first quarter
of 1995. The increase was mainly due to the hiring of additional
administrative personnel.
Net loss increased from $3,874,375 to $3,897,885 while net loss to common
stockholders decreased from $4,142,656 to $4,004,535 for the three months
ended March 31, 1995 and 1996, respectively. Although the change in net loss
to common stockholders was minor, the net loss per common share decreased from
$1.07 for the three months ended March 31, 1995, to $.39 for the same period
in 1996. The decrease was attributable to the change in weighted average
common shares outstanding resulting from the Company's initial public offering
in December 1995. For the three
8
<PAGE>
months ended March 31, 1995, the weighted average common shares outstanding
was 3,887,838, compared to 10,146,899 for the same period in 1996.
Liquidity and Capital Resources
Since its inception, the Company's primary source of cash has been from
financing activities which have consisted of private placements of equity
securities and its initial public offering. The private placements of equity
securities through March 31, 1996, provided the Company with aggregate
proceeds of $32,999,000. On December 19, 1995, the Company raised $23,030,476
from the sale of stock in an initial public offering, net of commissions and
offering costs. Cash and cash equivalents were $15,896,373 and $8,177,095,
while short term investments were $6,325,502 and $8,860,301, at December 31,
1995 and March 31, 1996, respectively. The decrease in cash and cash
equivalents at March 31, 1996, was due primarily to a shift in the Company's
investment portfolio to include more short-term investments and the funding of
the Company's operations.
The Company's primary use of cash to date has been in operating activities
to fund research and development, including preclinical studies and clinical
trials, and general and administrative expenses. As of March 31, 1996, the
Company's net investment in equipment and leasehold improvements was
$2,210,396. The Company expects that additional equipment and facilities will
be needed as it increases its research and development activities.
The Company believes that its available cash, cash equivalents, short-term
investments and expected interest income, will be adequate to fund its current
and anticipated levels of operations through mid-1997. Prior thereto, the
Company will need to raise additional capital through the sale of securities
in the public or private equity markets or by entering into a corporate
partnership. There can be no assurance, however, that events in the Company's
research and development programs or other events affecting the Company's
operations will not result in accelerated or unexpected expenditures. The
Company is pursuing additional research and development of ERGOSET and other
product candidates to treat obesity, breast cancer and other diseases. The
Company will require additional financing to expand and complete that research
and development. To the extent the Company raises additional capital by
issuing equity securities, ownership dilution to existing stockholders will
result and future investors may be granted rights superior to those of
existing stockholders. There can be no assurance, however, that additional
financing will be available from any source or, if available, will be
available on acceptable terms.
The terms of the Company's Series D Preferred Stock prohibit the Company
from paying dividends on the common stock.
This document contains statements which are forward looking statements that
involve risks and uncertainties. Accordingly, no assurances can be given that
the actual events and results will not be materially different than the
results described in the forward looking statements. See "Item 1. Business --
Risks Associated with Business Activities" on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 1995, for a
description of various factors that could materially affect the ability of the
Company to achieve the results described in the forward looking statements.
9
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
---------
11 - Statement re computation of loss per share.
Reports on Form 8-K:
--------------------
None.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ERGO SCIENCE CORPORATION
By: /s/ Alan T. Barber
----------------------------
Vice President, Finance and
Administration and Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
Date: May 14, 1996
--------------------------
11
<PAGE>
Exhibit 11
ERGO SCIENCE CORPORATION
STATEMENT RE COMPUTATION OF LOSS PER SHARE
<TABLE>
<CAPTION>
Historical
Weighted
Average
Type of Security Shares
---------------- ----------
<S> <C>
Company, for the three months ended March 31, 1995:
Common stock outstanding beginning of the year ............. 2,500,025
Issuance of cheap stock(1) ................................. 1,231,413
Weighted average common stock issued during period ......... 156,400
----------
Weighted average common shares outstanding ............. 3,887,838
==========
Company, for the three months ended March 31,1996:
Common stock outstanding beginning of the year ............. 10,145,580
Weighted average common stock issued during period ......... 1,319
----------
Weighted average common shares outstanding ............. 10,146,899
==========
</TABLE>
- - ------------
(1) Pursuant to Securities and Exchange Commission Staff Bulletin No. 83,
stock option issued during the twelve month period prior to the initial
filing date of the Company's Registration Statement at exercise prices
below the assumed initial public offering price of $9.00 have been
included in the calculation of common equivalent shares using the treasury
stock method, as if they were outstanding for all periods presented.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 8,177,095
<SECURITIES> 8,860,301
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,511,093
<PP&E> 3,941,083
<DEPRECIATION> 1,730,687
<TOTAL-ASSETS> 19,765,120
<CURRENT-LIABILITIES> 1,559,924
<BONDS> 0
0
4,413,170
<COMMON> 101,681
<OTHER-SE> 13,808,196
<TOTAL-LIABILITY-AND-EQUITY> 19,765,120
<SALES> 0
<TOTAL-REVENUES> 270,402
<CGS> 0
<TOTAL-COSTS> 4,168,287
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,897,885)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,897,885)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,897,885)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
