<PAGE> 1
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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, 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 Number 0-20023
ALPHA-BETA TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Massachusetts 04-2997834
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Innovation Drive
Worcester, MA 01605
(Address of principal executive offices)
508-798-6900
(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 registrant's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 7, 1996
----- -------------------------------
Common stock, $.01 par value 16,721,810
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<TABLE>
ALPHA-BETA TECHNOLOGY, INC.
INDEX
-----
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION:
---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1995, and
September 30, 1996.....................................................................3
Condensed Consolidated Statements of Operations for the three and nine month periods
ended September 30, 1995 and 1996, and from the period of inception through
September 30, 1996 ....................................................................4
Condensed Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1995 and 1996, and from the period of inception through
September 30, 1996.....................................................................5
Notes to Condensed Consolidated Financial Statements...................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................8
PART II. OTHER INFORMATION:
-----------------
Item 1. Legal Proceedings..................................................................11
Item 2. Changes in Securities..............................................................11
Item 3. Defaults Upon Senior Securities....................................................11
Item 4. Submission of Matters to a Vote of Security Holders................................11
Item 5. Other Information..................................................................11
Item 6. Exhibits and Reports on Form 8-K...................................................11
SIGNATURES.....................................................................................12
</TABLE>
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<TABLE>
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, September 30,
1995 1996
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,120,843 $ 17,746,647
Marketable securities 18,343,066 29,630,423
Other current assets 542,361 1,037,375
------------ ------------
Total current assets 29,006,270 48,414,445
------------ ------------
Property and equipment, net of accumulated depreciation and amortization 30,863,374 28,982,104
------------ ------------
Other assets:
Restricted cash 381,347 -
Bond issuance costs, net 1,128,998 1,083,537
Other 184,153 142,501
------------ ------------
Total other assets 1,694,498 1,226,038
------------ ------------
$ 61,564,142 $ 78,622,587
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of term notes payable and
capital lease obligations $ 1,250,545 $ 1,106,431
Accounts payable 960,876 1,819,320
Accrued expenses 507,719 469,149
------------ ------------
Total current liabilities 2,719,140 3,394,900
------------ ------------
Term notes payable and capital lease obligations, net of current portion 26,726,336 26,018,273
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value - authorized -- 1,000,000 shares, issued - none - -
Common stock, $.01 par value - authorized -- 30,000,000 shares, issued and
outstanding -- 13,650,274 shares and 16,720,223 shares at December 31,
1995 and September 30, 1996, respectively 136,502 167,202
Additional paid-in capital 108,090,944 147,519,993
Deficit accumulated during the development stage (75,840,456) (98,379,307)
Deferred compensation (268,324) (98,474)
------------ ------------
Total stockholders' equity 32,118,666 49,209,414
------------ ------------
$ 61,564,142 $ 78,622,587
============ ============
See accompanying notes
3
</TABLE>
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<TABLE>
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
March 2, 1988
Three months ended Nine months ended (inception)
September 30, September 30, through
-------------------------- ---------------------------- September 30,
1995 1996 1995 1996 1996
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Interest $ 422,617 $ 711,306 $ 1,417,133 $ 1,929,063 $ 7,415,348
Other 1,768 62,176 32,122 66,687 379,648
----------- ----------- ------------ ------------ ------------
Total revenues 424,385 773,482 1,449,255 1,995,750 7,794,996
----------- ----------- ------------ ------------ ------------
Expenses:
Research and development 4,892,985 6,975,754 14,742,963 18,727,020 76,820,693
General and administrative 1,027,513 986,737 3,350,248 3,283,272 21,264,326
Interest 861,492 826,774 2,576,389 2,475,363 8,101,515
----------- ----------- ------------ ------------ ------------
Total expenses 6,781,990 8,789,265 20,669,600 24,485,655 106,186,534
----------- ----------- ------------ ------------ ------------
Net loss $(6,357,605) $(8,015,783) $(19,220,345) $(22,489,905) $(98,391,538)
=========== =========== ============ ============ ============
Net loss per common share $ (0.52) $ (0.48) $ (1.61) $ (1.41)
=========== ============ ============= ============
Weighted average number of common
shares outstanding 12,333,665 16,716,692 11,901,310 15,910,469
========== =========== ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
<TABLE>
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
March 2, 1988
Nine months ended (inception)
September 30, through
---------------------------- September 30,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVIES:
Net loss $(19,220,345) $(22,489,905) $(98,391,538)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 3,258,743 2,521,050 11,073,097
Amortization of investment premium 188,055 56,126 1,745,681
Amortization of deferred financing and bond issuance costs 173,067 173,066 519,301
Noncash compensation related to stock options,
warrants and common stock 200,149 159,837 2,073,078
Changes in operating assets and liabilities:
Other current assets 240,250 (495,014) (1,037,375)
Accounts payable (395,152) 858,444 1,819,320
Accrued expenses (180,594) (38,570) 469,149
------------ ------------ ------------
Net cash used for operating activities (15,735,827) (19,254,966) (81,729,287)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in marketable securities 1,442,936 (11,392,429) (31,363,880)
Increase in property and equipment (524,844) (639,780) (39,534,812)
Decrease (increase) in restricted cash - 381,347 (32,425,737)
Payments from restricted cash - - 32,425,737
Decrease (increase) in other assets (78,613) 41,652 (219,569)
Increase in bond issuance costs - - (1,303,237)
------------ ------------ ------------
Net cash used for (provided by) investing activities 839,479 (11,609,210) (72,421,498)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible subordinated notes payable to stockholders - - 2,300,000
Proceeds from equipment line of credit 297,030 - 3,261,600
Payments on capital lease obligations (26,061) (9,627) (178,663)
Proceeds from notes payable - - 27,835,947
Payments on notes payable (939,564) (970,155) (3,612,744)
Proceeds from sale of convertible redeemable preferred stock, net
of issuance costs 6,136,012 - 24,560,465
Proceeds from sale of common stock, net of issuance costs 3,593,927 39,469,762 117,730,827
------------ ------------ ------------
Net cash provided by financing activities 9,061,344 38,489,980 171,897,432
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (5,835,004) 7,625,804 17,746,647
Cash and cash equivalents, beginning of period 18,667,550 10,120,843 -
------------ ------------ ------------
Cash and cash equivalents, end of period $ 12,832,546 $ 17,746,647 $ 17,746,647
============ ============ ============
Interest paid (net of capitalized interest) $ 2,403,322 $ 2,475,363 $ 8,107,456
============ ============ ============
</TABLE>
See accompanying notes
5
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<TABLE>
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
<CAPTION>
March 2, 1988
Nine months ended (inception)
September 30, through
--------------------------- September 30,
1995 1996 1995
----------- -------- ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment under capital lease ........................................ $ - $ - $ (178,886)
Furniture and equipment under capital lease .......................... - - 178,886
Conversion of line of credit to term note payable .................... (1,845,295) - (2,144,525)
Issuance of term note payable ........................................ 1,845,295 - 2,144,525
Grant of common stock ................................................ 45,540 44,320 185,820
Compensation related to common stock grant ........................... (45,540) (44,320) (185,820)
Cancellation of stock options ........................................ (257) (54,333) (166,170)
Grant of stock options and restricted stock .......................... - - 1,996,153
Deferred compensation on stock options and restricted stock .......... 257 54,333 (1,829,983)
Grant of warrants .................................................... - - 132,000
Deferred compensation on warrants .................................... - - (132,000)
Conversion of subordinated notes payable to redeemable preferred stock - - (2,300,000)
Issuance of redeemable preferred stock ............................... - - 2,300,000
Conversion of redeemable preferred stock to common stock ............. - - (20,674,454)
Common stock ......................................................... - - 20,674,454
Other assets ......................................................... - - (50,000)
Issuance costs associated with proceeds on sale of redeemable
preferred stock ................................................... - - 50,000
Note payable ......................................................... - - 2,679,165
Grant of warrants .................................................... - - 974,627
Note payable discount ................................................ - - (3,653,792)
Unrealized losses (gains) on marketable securities ................... (6,790) 48,946 (12,231)
Accumulated deficit .................................................. 6,790 (48,946) 12,231
Capitalized interest in property and equipment ....................... - - (312,476)
Amortization of bond issuance costs .................................. - - 83,315
Amortization of note payable discount ................................ - - 229,161
----------- -------- ------------
$ - $ - $ -
=========== ======== ============
</TABLE>
See accompanying notes.
6
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ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim unaudited condensed consolidated financial statements contained
herein have been prepared in accordance with generally accepted accounting
principles for interim financial information. They do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In management's opinion, the unaudited
information includes all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The results of
operations for the interim periods shown in this report are not necessarily
indicative of results expected for the full year. The financial statements
should be read in conjunction with the financial statements and notes for the
year ended December 31, 1995, included in the Company's Annual Report on Form
10-K.
2. NET LOSS PER COMMON SHARE
For the three and nine month periods ended September 30, 1995 and 1996, net
loss per common share was computed using the weighted average number of common
shares outstanding during the period.
3. MARKETABLE SECURITIES
<TABLE>
The amortized cost and estimated fair market values of the Company's
securities at September 30, 1996 are presented below. The Company did not
realize any gains or losses from securities sold in the nine months ended
September 30, 1996 and 1995.
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES HELD TO MATURITY COST GAINS LOSSES VALUE
- ----------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government Agency obligations
(average maturity of 1.1 months) $ 2,966,423 $ - $ 65 $ 2,966,358
Corporate debt securities (average
maturity of 1 month) 7,688,196 - 111 7,688,085
----------- --- ---- -----------
$10,654,619 $ - $176 $10,654,443
=========== === ==== ===========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- ----------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government Agency obligation
(average maturity of 7.5 months) $ 3,460,467 $ 3,941 $ - $ 3,464,408
Corporate debt securities (average
maturity of 4.6 months) 15,503,106 8,291 - 15,511,396
----------- ------- --- -----------
$18,963,573 $12,231 $ - $18,975,804
=========== ======= === ===========
</TABLE>
7
<PAGE> 8
ALPHA-BETA TECHNOLOGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since its inception in March 1988, Alpha-Beta Technology, Inc. has been
engaged in research and development of new classes of carbohydrate products. The
Company has not received significant revenues from the sale of its products and
expects to incur substantial operating losses for the next several years. As of
September 30, 1996, the Company's accumulated deficit was $98,379,307.
RESULTS OF OPERATIONS
Revenues
- --------
Revenues to date have consisted of interest earned from the investment of
cash balances and limited product sales to the research community. For the three
month periods ended September 30, 1996 and 1995, revenues were $773,482 and
$424,385 respectively. This increase of $349,097 was due to additional interest
earned as a result of higher average cash balances in the third quarter of 1996
compared with the third quarter of 1995, and to a lesser extent, research grants
received in the three month period ended September 30, 1996. Revenues in the
nine month periods ended September 30, 1996 and 1995 were $1,995,750 and
$1,449,255, respectively. The increase of $546,495 in the 1996 period resulted
from additional interest earned as a result of higher average cash balances in
the nine months ended September 30, 1996, as compared to the same period in
1995. The higher average cash balances for the three and nine month periods
ended September 30, 1996, are due to net proceeds of $39,295,000 raised from the
sale of 3,000,000 shares of common stock in March 1996.
Operating Expenses
- ------------------
For the three month periods ended September 30, 1996 and 1995, research and
development expenses were $6,975,754 and $4,892,985, respectively. For the nine
month periods ended September 30, these expenses increased 27% to $18,727,020 in
1996 from $14,742,963 in 1995. These increases were primarily due to costs
related to conducting the Phase III clinical trial for Betafectin(R) PGG-
glucan. The Company expects research and development expenses to continue to
increase over 1995 levels for the remainder of 1996 and may increase in future
years, reflecting anticipated activities related to performing clinical trials
of Betafectin in surgery and other indications and the development of additional
products.
For the three month periods ended September 30, 1996 and 1995, general and
administrative expenses were $986,737 and $1,027,513, respectively. This
decrease of $40,776 was primarily due to a decrease in amortization expense
related to certain leasehold improvements. For the nine month periods ended
September 30, these expenses decreased by approximately 2% to $3,283,272 in 1996
from $3,350,248 in 1995. The decrease of $66,976 was due to a decrease in rent
expense and amortization expense related to certain leasehold improvements.
General and administrative expenses are not expected to significantly increase
over 1995 levels in 1996; however, these expenses may increase in future years
reflecting planned efforts to commercialize Betafectin.
For the three month periods ended September 30, 1996 and 1995, interest
expense was $826,774 and $861,492, respectively. For the nine month periods
ended September 30, interest expense decreased to $2,475,363 in 1996 from
$2,576,389 in 1995. This decrease of $101,026
8
<PAGE> 9
was primarily due to lower loan balances in the first nine months of 1996
compared with the same period in 1995.
Net Loss
- --------
The net loss for the nine months ended September 30, 1996 was $22,489,905
($1.41 per share) compared to $19,220,345 ($1.61 per share) for the same period
in 1995. In March 1996, the Company issued and sold 3,000,000 shares of common
stock at $14 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $47,377,070 in cash equivalents and marketable securities
at September 30, 1996, compared to $28,463,909 at December 31, 1995. This
increase was due to the net proceeds of approximately $39,295,000 raised from
the Company's issuance and sale of 3,000,000 shares of common stock in March
1996. During the nine month period ended September 30, 1996, the Company used
approximately $19,255,000 of cash for operating activities and $970,000 to repay
the Company's debt obligations.
The change in the balance of Other Current Assets from December 31, 1995,
to September 30, 1996, is primarily due to the timing of certain interest
receivables. The increase in Accounts Payable from December 31, 1995, to
September 30, 1996, is due to the timing of scheduled payments for the Company's
Phase III clinical trial of Betafectin.
The Company expects to incur substantial additional operating expenses in
1996 and in future years related to research, development, and clinical studies
of Betafectin and other products, as well as the establishment of commercial
manufacturing and sales and marketing capabilities. As of September 30, 1996,
the Company had working capital of approximately $45,020,000. Based on its
current plans, the Company anticipates that its existing capital resources will
enable it to maintain its current and planned operations and capital
expenditures into 1998. The Company's capital requirements will depend upon
numerous factors, including the progress of the Company's research and
development programs, preclinical testing and clinical trials, the timing and
cost of obtaining regulatory approvals, and the costs associated with expanding
manufacturing and establishing marketing capabilities. The Company may raise
additional funds prior to the completion of its Phase III clinical trial for
Betafectin through collaborative alliances, equity or debt financings or other
arrangements. There can be no assurance that additional funds will be available
on favorable terms or that the Company will enter into collaborative or other
arrangements.
In October 1996, the Data Safety Monitoring Board conducted a planned
safety review of adverse experiences in the first 400 patients enrolled in the
Phase III trial of Betafectin. The review was included in the original design of
the trial, which was approved by the FDA. Four independent experts including a
biostatistician, a surgeon, an anesthesiologist, and an infectious disease
expert conducted the review. No representatives of the Company participated as
members of the panel. After its review, the panel unanimously recommended that
the trial continue without limitation. The Company continues to enroll patients
in its Phase III clinical trial of Betafectin for the prevention of
post-surgical infection. As of November 11, 1996, 1,044 patients of
approximately 1,200 have been enrolled in the trial.
In October 1996, the Company announced a Phase II clinical trial for
Betafectin for the prevention of serious infections in patients undergoing bowel
resections for Inflammatory Bowel Disease (IBD). The Phase II clinical trial is
a double-blind, placebo-controlled study and will include approximately 240
patients. The study is designed to assess the safety and effectiveness of
Betafectin compared with placebo in preventing serious infections in patients
with IBD (to include ulcerative colitis and Crohn's Disease) who are undergoing
small bowel or colon resections. The primary endpoint of the study is the
efficacy of Betafectin in reducing the proportion of patients who develop
serious infections following surgery. Secondary endpoints include hospital
length of stay, ICU length of stay and days of non-prophylactic antibiotic use.
A standard antibiotic prophylaxis is being used by all sites, on all patients.
9
<PAGE> 10
CERTAIN FACTORS AFFECTING FUTURE EVENTS AND RESULTS
This Form 10-Q to Stockholders contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual events and results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such difference include but are not limited to the
following: the timing and adequacy of patient accruals for the Company's Phase
III trial for Betafectin; the results of the Company's Phase III trial and for
its other clinical development programs; the impact on the Company's cash burn
rate resulting from any additional research and development programs; obtaining
the requisite regulatory approvals for the Company's products from the U.S. Food
and Drug Administration; the competitive environment and market conditions for
the biotechnology industry; and general economic conditions.
10
<PAGE> 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits. None
B. Reports on Form 8-K. None
11
<PAGE> 12
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.
ALPHA-BETA TECHNOLOGY, INC.
Date: November 13, 1996 By: /s/ AUGUSTINE LAWLOR
- ----------------------- ------------------------
Augustine Lawlor, Vice President,
Finance and Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 17,746,647
<SECURITIES> 29,630,423
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 48,414,445
<PP&E> 40,023,717
<DEPRECIATION> 11,041,614
<TOTAL-ASSETS> 78,622,587
<CURRENT-LIABILITIES> 3,394,900
<BONDS> 0
<COMMON> 167,202
0
0
<OTHER-SE> 49,042,212
<TOTAL-LIABILITY-AND-EQUITY> 78,622,587
<SALES> 6,687
<TOTAL-REVENUES> 1,995,750
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,010,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,475,363
<INCOME-PRETAX> (22,489,905)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,489,905)
<EPS-PRIMARY> (1.41)
<EPS-DILUTED> (1.41)
</TABLE>
