<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 March 31, 1998.
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 MAY 4, 1998
----- --------------------------
Common stock, $.01 par value 20,443,504
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ALPHA-BETA TECHNOLOGY, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1997,
and March 31, 1998 .....................................................3
Condensed Consolidated Statements of Operations for the three
month periods ended March 31, 1997 and 1998, and from the period
from inception through March 31, 1998 ..................................4
Condensed Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1997 and 1998, and from the period
from inception through March 31, 1998...................................5
Notes to Condensed Consolidated Financial Statements....................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................9
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
2
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ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,288,035 $ 11,901,001
Marketable securities 3,324,936 2,819,985
Other current assets 212,131 717,305
------------- -------------
Total current assets 19,825,102 15,438,291
------------- -------------
Property and equipment, net of accumulated depreciation and amortization 25,469,751 24,931,613
------------- -------------
Other assets:
Bond issuance costs, net 1,007,767 992,613
Other 200,555 189,722
------------- -------------
1,208,322 1,182,335
------------- -------------
$ 46,503,175 $ 41,552,239
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of term notes payable and
capital lease obligations $ 1,180,059 $ 1,146,303
Accounts payable 647,832 1,349,175
Accrued expenses 564,273 496,276
------------- -------------
Total current liabilities 2,392,164 2,991,754
------------- -------------
Term notes payable and capital lease obligations, net of current portion 24,767,335 24,550,070
------------- -------------
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 -- 20,394,727 shares and 20,399,504 shares at December 31,
1997 and March 31, 1998, respectively 203,947 203,995
Additional paid-in capital 159,338,073 159,349,061
Deficit accumulated during the development stage (140,171,324) (145,522,579)
Deferred compensation (27,020) (20,062)
------------- -------------
Total stockholders' equity 19,343,676 14,010,415
------------- -------------
$ 46,503,175 $ 41,552,239
============= =============
</TABLE>
See accompanying notes.
3
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ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
March 2, 1988
Three months ended (inception)
March 31, through
---------------------------------- March 31,
1997 1998 1998
----------- ----------- -------------
<S> <C> <C> <C>
Revenues:
Interest $ 514,316 $ 228,020 $ 9,714,610
Other 340 304,240 835,512
----------- ----------- -------------
Total revenues 514,656 532,260 10,550,122
----------- ----------- -------------
Expenses:
Research and development 7,389,210 4,212,925 112,859,830
General and administrative 1,278,078 890,071 27,854,389
Acquired in-process research & development - - 2,514,004
Interest 807,155 781,008 12,844,924
----------- ----------- -------------
Total expenses 9,474,443 5,884,004 156,073,147
----------- ----------- -------------
Net loss $(8,959,787) $(5,351,744) $(145,523,025)
=========== =========== =============
Basic and diluted net loss per common share $ (0.54) $ (0.26)
=========== ===========
Weighted average number of common
shares outstanding 16,732,386 20,395,993
=========== ===========
</TABLE>
See accompanying notes.
4
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ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
March 2, 1988
Three months ended (inception)
March 31, through
------------------------------ March 31,
1997 1998 1998
----------- ----------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(8,959,787) $(5,351,744) $(145,523,025)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 664,179 553,369 14,991,841
Amortization of investment premium 17,453 16,421 1,904,190
Amortization of deferred financing and bond issuance costs 57,688 57,689 865,435
Noncash compensation related to stock options,
warrants and common stock 153,594 6,958 2,280,376
Charges related with acquired in-process research &
development - - 2,514,004
Changes in assets and liabilities:
Other current assets (103,503) (505,174) (714,585)
Accounts payable 1,004,224 701,343 1,313,008
Accrued expenses (35,294) (67,997) 453,419
----------- ----------- -------------
Net cash used for operating activities (7,201,446) (4,589,135) (121,915,337)
----------- ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in marketable securities 269,261 489,019 (4,723,737)
Net cash used in the purchase of MycoTox - - (593,412)
Increase in property and equipment (67,185) (10,231) (39,692,471)
Increase in restricted cash - - (32,425,737)
Payments from restricted cash - - 32,425,737
Decrease (increase) in other assets 5,832 5,833 (183,457)
Increase in bond issuance costs - - (1,303,237)
----------- ----------- -------------
Net cash provided by (used for) investing activities 207,908 484,621 (46,496,314)
----------- ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible subordinated notes payable to stockholders - - 2,300,000
Proceeds from equipment line of credit - - 3,261,600
Proceeds from equipment lease 202,494 - 349,273
Payments on capital lease obligations - - (180,867)
Proceeds from term notes payable - - 27,835,947
Payments on term notes payable (278,556) (293,556) (5,294,081)
Proceeds from sale of convertible redeemable preferred stock, net
of issuance costs - - 24,560,465
Proceeds from issuance of common stock, net of issuance costs 77,409 11,036 127,480,315
----------- ----------- -------------
Net cash provided by (used for) financing activities 1,347 (282,520) 180,312,652
----------- ----------- -------------
Net increase (decrease) in cash and cash equivalents (6,992,191) (4,387,034) 11,901,001
Cash and cash equivalents, beginning of period 21,885,111 16,288,035 -
----------- ----------- -------------
Cash and cash equivalents, end of period $14,892,920 $11,901,001 $ 11,901,001
=========== =========== =============
Interest paid (net of capitalized interest) $ 749,465 $ 723,318 $ 12,055,658
=========== =========== =============
</TABLE>
See accompanying notes.
5
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ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
March 2, 1988
Three months ended (inception)
March 31, through
--------------------------- March 31,
1997 1998 1998
---------- --------- -------------
<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 .................... - - (2,144,525)
Issuance of term note payable ........................................ - - 2,144,525
Grant of common stock ................................................ 120,474 10,703 387,750
Compensation related to common stock grant ........................... (120,474) (10,703) (387,750)
Cancellation of stock options ........................................ - - (166,170)
Grant of stock options and restricted stock .......................... - - 1,996,153
Deferred compensation on stock options and restricted stock .......... - - (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 .................. 34,604 (489) (446)
Accumulated deficit .................................................. (34,604) 489 446
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. & SUBSIDIARIES
(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, 1997, included in the Company's Annual Report on Form
10-K.
2. NET LOSS PER COMMON SHARE
For the three month periods ended March 31, 1997 and 1998, basic net loss
per common share was computed using the weighted average number of common shares
outstanding during the period in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share. Diluted net loss per
share is the same as basic net loss, as the inclusion of common equivalents
would be antidilutive.
3. MARKETABLE SECURITIES
The amortized cost and estimated fair market values of the Company's
securities at March 31, 1998 are presented below. The Company did not realize
any gains or losses from securities sold in the three months ended March 31,
1997 and 1998.
<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 obligations
(average maturity less than 1 month) $1,003,561 $ - $ 61 $1,003,500
Corporate debt securities (average
maturity of 2 months) 1,815,978 655 148 1,816,485
---------- ---- ---- ----------
$2,819,539 $655 $209 $2,819,985
========== ==== ==== ==========
</TABLE>
4. TERM NOTE PAYABLE
At March 31, 1998, approximately $433,000 was outstanding under a term note
with a bank. This note is payable in monthly installments of $40,352 and bears
interest at the lesser of 8-3/4% or the Prime Rate (8.0% at March 31, 1998) plus
1/2%. In the event that the Company's cash balances and marketable securities
fall below $18 million in the aggregate, the Company will be required to
maintain, as restricted cash, a Repurchase Agreement Investment Account
("Investment Account") with the bank in an amount equal
7
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ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
to the then outstanding balance of the loan. The Company has received a waiver
from the bank releasing the Company from the obligation to maintain this
Investment Account as of March 31, 1998. If the Company's cash balances and
marketable securities subsequently fall below $10 million in the aggregate, the
Company will be required, on demand by the bank, to pledge the Investment
Account to the bank as security for the loan.
5. NEW ACCOUNTING STANDARD
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. The
adoption of this did not have a material effect on the financial statements, as
the only element of comprehensive income related to the Company is unrealized
gains or losses in marketable securities.
8
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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 and
anti-fungal 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 March 31, 1998, the Company's accumulated deficit was
$145,522,579.
RESULTS OF OPERATIONS
REVENUES
Revenues to date have consisted primarily of interest earned from the
investment of cash balances. For the three month periods ended March 31, 1998
and 1997, revenues were $532,260 and $514,656 respectively. A decrease in
interest income of $286,296 was primarily due to less interest earned as a
result of lower average cash balances in the first quarter of 1998 compared with
the first quarter of 1997. This decrease in interest income was offset by an
increase in other revenues of $303,900 consisting of income from research
grants.
OPERATING EXPENSES
For the three month periods ended March 31, 1998 and 1997, research and
development expenses were $4,212,925 and $7,389,210, respectively. The decrease
of $3,176,285 in the first quarter of 1998 was primarily due to costs related to
conducting the first Phase III clinical trial for Betafectin in 1997 and lower
expenses as a result of a corporate downsizing in September 1997. The Company
does not expect research and development expenses to increase over 1997 levels
for the remainder of 1998; however, these expenses may increase in future years,
reflecting activities related to further development and commercialization of
Betafectin PGG-glucan, the development of additional products and the operation
of the Company's commercial manufacturing facility for research and development
purposes.
For the three month periods ended March 31, 1998 and 1997, general and
administrative expenses were $890,071 and $1,278,078, respectively. The
decrease of $388,007 in the first quarter of 1998 was primarily due to lower
expenses as a result of the corporate downsizing in September 1997. General and
administrative expenses are not expected to increase over 1997 levels in 1998;
however, these expenses may increase in future years reflecting planned efforts
to commercialize Betafectin.
For the three month periods ended March 31, 1998 and 1997, interest
expense was $781,008 and $807,155, respectively. This decrease of $26,147 was
primarily due to lower loan balances in the first three months of 1998 compared
with the first three months of 1997.
NET LOSS
The net loss for the three months ended March 31, 1998 was $5,351,744
($0.26 per share) compared to $8,959,787 ($0.54 per share) for the same period
in 1997.
9
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LIQUIDITY AND CAPITAL RESOURCES
The Company had $14,720,986 in cash, cash equivalents and marketable
securities at March 31, 1998, compared with $19,612,971 at December 31, 1997.
This decrease was primarily due to the expenditure of $4,589,135 in cash used
for operating activities during the first quarter of 1998.
The Company expects to incur substantial additional operating expenses in
1998 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 March 31, 1998, the
Company had working capital of approximately $12,446,000. The Company
anticipates that its existing capital resources are sufficient to maintain its
operations and capital expenditures through 1998, after taking into account
certain potential cost saving activities. The Company's actual 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 obtaining regulatory approval
for Betafectin (and, if required, prior to the completion of additional Phase
III clinical trials of 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 at all or that the Company will
enter into collaborative or other arrangements. The Company's ability to raise
additional funds or to enter into collaborative or other arrangements may depend
upon a number of factors including the results of the Company's clinical
development programs, the status of its discussions with the FDA concerning
obtaining regulatory approval of Betafectin and the overall market for
biotechnology stocks.
On January 12, 1998, the Company announced that it had begun a confirmatory
Phase III clinical trial of Betafectin for the prevention of serious infections
in upper gastrointestinal (GI ) surgery patients. This trial, along with the
results of the Company's first Phase III study, will provide the basis for a PLA
filing for Betafectin. The double-blind, placebo-controlled study involves 618
patients at 30 sites throughout the United States. The study is expected to be
completed in approximately 18 months and will include an interim analysis.
In April 1998, after the Company conducted an interim analysis of safety
and efficacy, patient enrollment was resumed in the Phase II clinical trial of
patients undergoing surgery for inflammatory bowel disease (IBD). The
double-blind, placebo-controlled Phase II trial is being conducted at twelve
sites in the United States and will enroll approximately 240 patients undergoing
surgery for Crohn's Disease or ulcerative colitis.
The Company is evaluating Year 2000 issues and their potential impact on
its information systems and computer technologies. All evaluation costs will be
expensed as incurred. Year 2000 issues are not expected to have a significant
impact on the Company's ongoing results of operations.
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 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 differences include, but are not limited to, the
following: the timing of the collection, verification and analysis of the data
for the Company's Phase III trial; results of the Company's Phase III trial and
for its other clinical development programs; obtaining the requisite regulatory
approvals for Alpha-Beta Technology's products from the U.S. Food and Drug
Administration; ability to obtain additional financing; the ability to achieve
potential cost savings; the competitive environment and market conditions for
the biotechnology industry; and general economic conditions.
10
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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: May 15, 1998 By: /s/ Joseph Grimm
------------ ---------------------------------
Joseph Grimm
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 11,901,001
<SECURITIES> 2,819,985
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,438,291
<PP&E> 39,849,121
<DEPRECIATION> 14,917,508
<TOTAL-ASSETS> 41,552,239
<CURRENT-LIABILITIES> 2,991,754
<BONDS> 0
0
0
<COMMON> 203,995
<OTHER-SE> 13,806,420
<TOTAL-LIABILITY-AND-EQUITY> 41,552,239
<SALES> 4,240
<TOTAL-REVENUES> 532,260
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,102,996
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 781,008
<INCOME-PRETAX> (5,351,744)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,351,744)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,351,744)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
