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, 1997.
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.
(Exact name of registrant as specified in its charter)
Delaware 13-3549286
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
102 Witmer Road, Horsham, Pennsylvania 19044
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 441-5890
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 9,517,504 shares of common
stock, $.01 par value, were outstanding as of October 31, 1997.
<PAGE>
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets at December 31, 1996 and September 30, 1997 (unaudited).................................. 3
Statements of Operations (unaudited) for the three and nine months ended
September 30, 1996 and 1997, and from the period of inception through
September 30, 1997 ..................................................................................... 4
Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1996 and 1997, and from the period of inception through
September 30, 1997...................................................................................... 5
Notes to Unaudited Financial Statements................................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................... 11
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.................................................................................. 16
Item 2. Changes in Securities and Use of Proceeds.......................................................... 16
Item 3. Defaults Upon Senior Securities.................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................................................ 17
Item 5. Other Information.................................................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................................................... 17
SIGNATURES ...................................................................................................... 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
----------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ 32,845,025 $ 26,990,232
Marketable securities .......................................................... -- 18,802,820
Restricted funds ............................................................... 73,828 688,940
Prepaid expenses and other ..................................................... 210,122 308,369
------------ ------------
Total current assets ......................................................... 33,128,975 46,790,361
PROPERTY AND EQUIPMENT, net ...................................................... 3,973,619 13,917,485
OTHER ASSETS ..................................................................... 15,049 3,400
------------ ------------
$ 37,117,643 $ 60,711,246
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .............................................. $ 678,122 $ 1,046,531
Accounts payable ............................................................... 217,283 206,048
Accrued compensation ........................................................... 264,440 253,000
Other accrued expenses ......................................................... 161,130 382,353
Deferred revenue ............................................................... 41,667 --
------------ ------------
Total current liabilities .................................................... 1,362,642 1,887,932
OTHER LIABILITIES ................................................................ 78,806 --
LONG-TERM DEBT ................................................................... 556,405 9,035,969
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued .................................................................. -- --
Common stock, $.01 par value; 30,000,000 shares authorized;
8,214,624 and 9,513,878 shares issued and outstanding ........................ 82,146 95,139
Additional paid-in capital ..................................................... 60,830,513 81,640,449
Deferred compensation .......................................................... (269,925) (373,975)
Deficit accumulated during the development stage ............................... (25,522,944) (31,574,268)
------------ ------------
Total stockholders' equity ................................................... $ 35,119,790 $ 49,787,345
------------ ------------
$ 37,117,643 $ 60,711,246
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Period from
Three Months Ended Nine Months Ended Inception
September 30, September 30, (January 17, 1989)
------------------------------- ------------------------------- to
1996 1997 1996 1997 September 30, 1997
------------ ------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
REVENUES FROM
COLLABORATIVE AGREEMENTS .......... $ 312,500 $ 83,667 $ 1,006,100 $ 708,667 $ 5,938,380
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development .......... 1,510,191 1,874,433 4,899,734 5,623,237 28,601,796
General and administrative ........ 596,836 1,079,184 1,788,343 2,768,247 11,961,932
------------ ------------ ------------ ------------ ------------
Total operating expenses ...... 2,107,027 2,953,617 6,688,077 8,391,484 40,563,728
------------ ------------ ------------ ------------ ------------
Operating Loss ................ (1,794,527) (2,869,950) (5,681,977) (7,682,817) (34,625,348)
------------ ------------ ------------ ------------ ------------
INTEREST INCOME ..................... 483,262 848,259 1,278,245 2,019,739 4,565,669
INTEREST EXPENSE .................... (58,318) (159,171) (196,148) (388,246) (1,514,589)
------------ ------------ ------------ ------------ ------------
NET LOSS ............................ $ (1,369,583) $ (2,180,862) $ (4,599,880) $ (6,051,324) $(31,574,268)
============ ============ ============ ============ ============
PRO FORMA NET LOSS PER
SHARE ........................... $ (0.17) $ (0.23) $ (0.60) $ (0.65)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING ............. 8,193,000 9,506,000 7,728,000 9,366,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Period from Inception
------------------------------ (January 17, 1989)
1996 1997 to September 30, 1997
------------ ------------ ---------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $ (4,599,880) $ (6,051,324) $(31,574,268)
Adjustments to reconcile net loss to cash
used in operating activities--
Depreciation and amortization ............................. 416,986 629,708 2,568,506
Common stock issued for non-cash
charges ................................................... -- -- 34,961
Changes in operating assets and liabilities-
Restricted funds ........................................ 110,718 (615,112) (688,940)
Prepaid expenses and other .............................. (134,198) (98,247) (308,369)
Other assets ............................................ -- 11,649 (3,400)
Accounts payable ........................................ 10,079 (11,235) 206,048
Accrued compensation .................................... 16,682 (11,440) 297,473
Other accrued expenses .................................. (167,023) 221,223 382,353
Deferred revenue ........................................ 312,500 (41,667) --
Other liabilities ....................................... 4,373 (78,806) --
------------ ------------ ------------
Net cash used in operating activities ................. (3,962,282) (6,045,251) (29,085,636)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities (purchases) of
marketable securities, net ................................ -- (18,802,820) (18,802,820)
Purchases of property and equipment ......................... (667,150) (10,488,102) (15,448,190)
Proceeds from sale-leaseback of equipment ................... -- -- 1,382,027
------------ ------------ ------------
Net cash used in investing activities ..................... (667,150) (29,290,922) (32,868,983)
------------ ------------ ------------
</TABLE>
(Continued)
5
<PAGE>
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Period from Inception
------------------------------ (January 17, 1989)
1996 1997 to September 30, 1997
------------ ------------ ---------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of notes ........................ $ -- $ -- $ 1,225,000
Repayment of notes payable ................................. -- -- (565,250)
Proceeds from issuance of short-term debt .................. -- -- 290,000
Repayment of short-term debt ............................... -- -- (290,000)
Proceeds from issuance of long-term debt ................... -- 9,400,000 10,510,869
Repayment of long-term debt ................................ (562,678) (552,027) (2,314,846)
Proceeds from issuance of preferred stock, net ............. -- -- 29,497,297
Proceeds from issuance of common stock, net ................ 59,830 188,791 569,456
Proceeds from public offering, net ......................... 29,536,164 20,339,013 49,466,174
Proceeds from exercise of warrants ......................... -- -- 333,920
Proceeds from exercise of stock options .................... 142,494 105,603 330,633
Dividends paid ............................................. (18,000) -- (72,000)
Issuance costs resulting from conversion
of notes to common stock ............................... -- -- (36,402)
------------ ------------ ------------
Net cash provided by financing activities ............ 29,157,810 29,481,380 88,944,851
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .............................................. 24,528,378 (5,854,793) 26,990,232
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ..................................................... 11,189,001 32,845,025 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD ..................................................... $ 35,717,379 $ 26,990,232 $ 26,990,232
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for interest .................................... $ 203,125 $ 355,221 $ 1,404,932
============ ============ ============
Non-cash financing activities --
Issuance of common stock for dividends .................... $ -- $ -- $ 90,000
============ ============ ============
Issuance of common stock to employees
in lieu of cash compensation ......................... $ -- $ -- $ 44,473
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements
6
<PAGE>
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited financial statements at September 30, 1997, for the three and
nine months ended September 30, 1996 and 1997, and for the period from inception
(January 17, 1989) to September 30, 1997, 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, 1996, included in Neose Technologies,
Inc. ("Neose" or the "Company") Form 10-K and the Company's 1996 Annual Report.
2. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and marketable financial
instruments with original maturities of 90 days or less. The Company held the
following cash and cash equivalents on the dates indicated below.
December 31, 1996 September 30, 1997
----------------- ------------------
Cash and money market accounts $ 1,254,681 $ 2,993,976
Repurchase agreements 31,590,344 --
U.S. Government Agency security -- 23,996,256
-------------- --------------
$ 32,845,025 $ 26,990,232
============== ==============
3. Marketable Securities
In accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities," the Company
determines the appropriate classification of debt and equity securities at the
time of purchase and re-evaluates such designation at each balance sheet date.
At September 30, 1997, all marketable securities have been classified as
"Available-for-Sale" securities. Available-for-Sale securities are carried at
fair value, based on quoted market prices, with unrealized gains and losses
reported as a separate component of stockholders' equity. At September 30, 1997,
there were no material unrealized gains or losses.
7
<PAGE>
Marketable securities consist of U.S. Treasury Notes with original
maturities greater than 90 days. The Company has established guidelines relative
to concentration, maturities, and credit ratings that maintain safety and
liquidity.
4. Acquisition of Facility and Issuance of Long-term Debt
On March 20, 1997, the Company purchased its previously leased facility for
a total of approximately $3.8 million.
In connection with the purchase of its facility and its planned GMP
manufacturing expansion, on March 20, 1997, the Company issued, through the
Montgomery County (Pennsylvania) Industrial Development Authority, the aggregate
amount of $9.4 million of taxable and tax-exempt bonds (the "MCIDA Bond
Issuance"). The bonds are supported by a AA-rated letter of credit, and a
reimbursement agreement between the Company's 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. To provide
credit support for this arrangement, the Company has given a first mortgage on
the land, building, improvements, and certain machinery and equipment to its
bank. In addition, the Company has agreed to certain covenants for the
maintenance of minimum cash and short-term investment balances, and for minimum
working capital requirements.
5. Sale of Common Stock
On January 29, 1997, the Company offered and sold 1,250,000 shares of
Common Stock at a public offering price of $17.50 per share (the "Follow-on
Offering"). The net proceeds to the Company from the Follow-on Offering after
the payment of placement fees and offering expenses were approximately
$20,339,000.
The Company's initial public offering of Common Stock (the "Offering")
closed on February 22, 1996. The Company offered and sold 2,250,000 shares of
Common Stock at a public offering price of $12.50 per share. The net proceeds to
the Company from the Offering were approximately $25,204,000. Pursuant to the
underwriters' over-allotment option, an additional 337,500 shares of Common
Stock were offered and sold by the Company on March 4, 1996, resulting in
additional net proceeds to the Company of approximately $3,923,000.
6. Shareholder Rights Plan
In September 1997, the Company adopted a Shareholder Rights Plan ("the
Rights Plan") to insure that any acquisition of the Company would be on terms
that are fair to and in the best interest of all shareholders. Under the Rights
Plan, holders of common stock are entitled to receive one right for each share
of common stock held. Separate rights certificates would be issued and become
exercisable in the event that any acquiring party accumulates 15% or more of the
Company's common stock, or announces an offer to acquire 15% or more of the
outstanding Company common stock.
8
<PAGE>
Each right will entitle a holder, except a 15% or more holder, to buy one
one-hundredth share of Series A Junior Participating Preferred Stock (the
"Preferred Stock") at an exercise price of $150 per unit. Each one one-hundredth
share of such Preferred Stock is essentially equivalent to one share of the
Company's common stock. However, if an acquiring party accumulates 15% or more
of the Company common stock or certain other events occur, each right entitles
the holder (other than a 15% holder) to purchase, depending on the
circumstances, for $150 either $300 worth of the Company's common stock or $300
worth of the 15% acquiror's common stock.
The rights expire in September 2007 and may be redeemed by the Company at a
price of $.01 per right at any time up to ten days after they become
exercisable.
7. Net Loss Per Share
For the nine months ended September 30, 1996, pro forma net loss per share
was computed using the weighted-average number of common shares outstanding
during the period, and includes all Convertible Preferred Stock which converted
into shares of common stock immediately prior to the closing of the Offering as
if they were converted into common stock on their original dates of issuance.
For the three months ended September 30, 1996 and for the three and nine months
ended September 30, 1997, net loss per share was computed using the
weighted-average number of common shares outstanding during the period. Common
stock equivalents were excluded for all periods presented because they are
antidilutive.
8. Collaboration with Bracco
During September 1997, the Company and Bracco Research USA, Inc. ("Bracco")
mutually agreed to terminate their existing research collaboration. Pursuant to
the terms of the collaborative research agreement, Bracco made a one-time,
termination payment of $42,000. The Company recorded the entire payment as
Revenues from Collaborative Agreements in September 1997. Neither the Company
nor Bracco has any additional financial obligations to the other party. The
Company is actively seeking to initiate another research collaboration in the
area of diagnostic imaging agents.
9. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," which supersedes APB Opinion No. 15, "Earnings per Share," was
issued in February 1997. SFAS 128 requires dual presentation of basic and
diluted earnings per share ("EPS") for complex capital structures on the face of
the income statement. Basic EPS is computed by dividing income by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from the exercise or conversion of securities
into common stock, such as stock options. SFAS 128 is required to be adopted for
year-end 1997; earlier application is not permitted. The Company does not
9
<PAGE>
expect the basic or diluted EPS measured under SFAS 128 to be materially
different than its primary or fully-diluted EPS measured under APB No. 15.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), was issued in February 1997.
In addition, Statement of Financial Accounting Standards Nos. 130 and 131,
"Reporting Comprehensive Income" ("SFAS 130"), and "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS" 131"), respectively, were
issued in June 1997. The Company does not expect SFAS 129, SFAS 130, or SFAS 131
to result in any substantive changes in its disclosure.
10
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion of the financial condition and results of
operations of the Company contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. These
forward-looking statements include statements regarding the Company's future
plans, events, or performance. Such statements are based on management's current
expectations and are subject to a number of uncertainties and risks that could
cause actual results to differ materially from those described in the
forward-looking statements. Factors that may cause such a difference include,
but are not limited to, the early stage of development of the Company's
products, technological uncertainties, dependence on collaborative partners, the
need for regulatory approval and effects of government regulation, and
dependence on patents and trade secrets, as well as those described under
"Business--Factors Affecting the Company's Business, Operating Results and
Financial Condition" in Part I of the Company's 1996 Annual Report on Form 10-K.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations for the three and nine months ended September 30, 1997, and as of
September 30, 1997, should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 1996, included in the Company's Form 10-K and the
Company's 1996 Annual Report.
Overview
Neose, a development-stage company, commenced operations in 1990, and has
devoted substantially all of its resources to the development of its enzymatic
carbohydrate synthesis technology and to the discovery and development of
complex carbohydrates for a variety of applications, including nutritional
additives and pharmaceuticals. The Company anticipates that its primary sources
of revenue for the next several years will be payments under its strategic
alliance with Abbott Laboratories ("Abbott") and other collaborative
arrangements, license fees, payments from future strategic alliances and
collaborative arrangements, if any, and interest income. Payments under
strategic alliances and collaborative arrangements will be subject to
significant fluctuation in both timing and amount. Therefore, the Company's
results of operations for any period may not be comparable to the results of
operations for any other period.
In December 1992, the Company entered into its strategic alliance with
Abbott for the development of breast milk oligosaccharides as nutritional
additives. The Company has received approximately $11.2 million in contract
payments, license fees, milestone payments, and equity investments in connection
with its strategic alliance with Abbott.
The Company has not generated any revenues from operations, except for
interest income and revenues from strategic alliances. The Company has incurred
losses since its inception and, as of September 30, 1997, had a deficit
accumulated during the development
11
<PAGE>
stage of approximately $31.6 million. The Company anticipates incurring
additional losses over at least the next several years. Such losses may
fluctuate significantly from quarter to quarter and are expected to increase as
the Company expands its research and development programs, including preclinical
studies and clinical studies for its pharmaceutical product candidates under
development, and as the Company expands its manufacturing capabilities.
Results of Operations
Revenues
Revenues from collaborative agreements for the three and nine months ended
September 30, 1997, were $83,667 and $708,667, respectively, compared to
$312,500 and $1,006,100, respectively, for the corresponding periods in 1996.
The decreases for the comparable three and nine month periods were due to
non-recurring revenues received during the 1996 periods.
Operating Expenses
Research and development expenses for the three and nine months ended
September 30, 1997, were $1,874,433 and $5,623,237, respectively, compared to
$1,510,191 and $4,899,734, respectively, for the corresponding periods in 1996.
The increase was primarily attributable to increased preclinical trial
expenditures for NE-1530, financing expenses associated with the MCIDA Bond
Issuance, and increased funding of external research.
General and administrative expenses for the three and nine months ended
September 30, 1997, were $1,079,184 and $2,768,247, respectively, compared to
$596,836 and $1,788,343, respectively, for the corresponding periods in 1996.
The increase was primarily attributable to increased patent and business
development expenses and expenses associated with being a public company.
Interest Income and Expense
Interest income for the three and nine months ended September 30, 1997, was
$848,259 and $2,019,739, respectively, compared to $483,262 and $1,278,245,
respectively, for the corresponding periods in 1996. The increase was primarily
attributable to higher average cash and investment balances during the 1997
period resulting from the closing of the Company's Follow-on Offering in January
1997.
Interest expense for the three and nine months ended September 30, 1997,
was $159,171 and $388,246, respectively, compared to $58,318 and $196,148,
respectively, for the corresponding periods in 1996. The increase was due to
higher average loan balances during the period resulting from the MCIDA Bond
Issuance in March 1997.
12
<PAGE>
Net Loss
The Company incurred net losses of $2,180,862 and $6,051,324, or $0.23 and
$0.65 per share, for the three and nine months ended September 30, 1997,
respectively, compared to net losses of $1,369,583 and $4,599,880, or $0.17 and
$0.60 per share, for the corresponding periods in 1996.
Liquidity and Capital Resources
From inception through September 30, 1997, the Company has incurred a
cumulative net loss of approximately $31.6 million, and has financed its
operations through private and public offerings of its securities and revenues
from its strategic alliances. The Company had approximately $45.8 million in
cash and marketable securities at September 30, 1997, compared to $32.8 million
at December 31, 1996. This increase is primarily attributable to the receipt of
net proceeds from the Follow-on Offering in January 1997. In January 1997, the
Company sold 1,250,000 shares of Common Stock to the public at a price per share
of $17.50. The Company received proceeds of approximately $20.3 million after
deducting placement fees and offering expenses.
The Company and Abbott have entered into collaborative agreements to
develop breast milk oligosaccharides as additives to infant formula and other
nutritional products. Under this strategic alliance, the Company has received
approximately $11.2 million in contract payments, license fees, milestone
payments, and equity investments. In addition, Abbott is required to make an
additional payment of $5 million to Neose within 60 days of the first commercial
sale, if any, of infant formula containing the Company's nutritional additive.
Abbott may (i) at any time prior to the first commercial sale, if any, of infant
formula containing the Company's nutritional additive, elect to make its license
agreement non-exclusive, in which event the license fees payable by Abbott after
commercialization would be reduced by 50%, and Abbott's obligations to make
contract and milestone payments, including the $5 million milestone payment,
would be terminated, or (ii) elect to terminate the license agreement and return
the licensed technology to Neose upon 60 days' notice, in which event it would
have no further funding obligation to the Company, including no obligation to
make the $5 million milestone payment. In addition, under the terms of the
Abbott agreement, if Abbott fails to make appropriate regulatory filings with
the FDA for the addition of Neose's oligosaccharide to infant formula prior to
December 1, 1997, Neose, at its option, may elect to convert the license of
Neose technology to a non-exclusive license to Abbott, in which event the
license fees payable by Abbott after commercialization would be reduced by 50%,
and Abbott's obligations to make contract and milestone payments, including the
$5 million milestone payment, would be terminated.
On March 20, 1997, the Company purchased its previously leased facility for
a total of approximately $3.8 million. In addition, beginning in the fourth
quarter of 1996, the Company commenced a construction project in its facility to
expand GMP manufacturing capabilities for NE-0080, and to establish GMP
manufacturing capabilities for NE-1530 and NE-0501 ("Planned GMP Manufacturing
Expansion"). In each case, the Company believes
13
<PAGE>
that the planned GMP capacity will be adequate to complete clinical trials for
the respective compounds. In addition, the Company believes that the Planned GMP
Manufacturing Expansion will give it capacity to manufacture under GMP
conditions certain amounts of these and other carbohydrates for third parties.
In connection with the Planned GMP Manufacturing Expansion, the Company expects
to expend approximately $8.2 million, of which $7.4 million and $1.2 million had
been expended as of September 30, 1997 and December 31, 1996, respectively.
In connection with the purchase of its facility and the Planned GMP
Manufacturing Expansion, on March 20, 1997, the Company issued, through the
Montgomery County (Pennsylvania) Industrial Development Authority, the aggregate
amount of $9.4 million of taxable and tax-exempt bonds. The bonds are supported
by a AA-rated letter of credit, and a reimbursement agreement between the
Company's 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. At September 30, 1997, the effective, blended
interest rate was 7% per annum, including letter-of-credit and other fees. To
provide credit support for this arrangement, the Company has given a first
mortgage on the land, building, improvements, and certain machinery and
equipment to its bank. In addition, the Company has agreed to certain covenants
for the maintenance of minimum cash and short-term investment balances, and for
minimum working capital requirements.
During the nine months ended September 30, 1997, the Company purchased
approximately $10.5 million of property and equipment, of which $3.8 million was
expended to purchase its facility, and $6.2 million was expended in connection
with the Company's Planned GMP Manufacturing Expansion.
The Company also has obligations to certain of its employees under
employment agreements.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to continue its research and development programs. The Company
expects that its existing capital resources will be adequate to fund its capital
requirements through 1999. No assurance can be given that there will be no
change that would consume available resources significantly before such time.
The Company's future capital requirements and the adequacy of available funds
will depend on many factors, including progress in its research and development
activities, including its pharmaceutical discovery and development programs, the
magnitude and scope of these activities, progress with preclinical studies and
clinical trials, the costs involved in preparing, filing, prosecuting,
maintaining, and enforcing patent claims and other intellectual property rights,
competing technological and market developments, changes in existing
collaborative research relationships and strategic alliances, the ability of the
Company to establish additional collaborative arrangements for product
development, the cost of manufacturing scale-up, and developing effective
marketing activities and arrangements.
14
<PAGE>
To the extent that funds generated from the Company's operations, together
with its existing capital resources, and the interest earned thereon, are
insufficient to meet current or planned operating requirements, it is likely
that the Company will seek to obtain additional funds through equity or debt
financings, collaborative or other arrangements with corporate partners and
others, and from other sources. The terms and prices of any such financings may
be significantly more favorable than those obtained by present stockholders of
the Company, which could have the effect of diluting or adversely affecting the
holdings or the rights of existing stockholders of the Company. The Company does
not currently have any committed sources of additional financing. There can be
no assurance that additional financing will be available when needed, if at all,
or on terms acceptable to the Company.
If adequate additional funds are not available, for these purposes or
otherwise, the Company's business, financial condition, and results of
operations will be materially and adversely affected. In such circumstances, the
Company may be required to delay, scale back, or eliminate certain of its
research and product development activities or certain other aspects of its
business or attempt to obtain funds through collaborative arrangements that may
require the Company to relinquish some or all of its rights to certain of its
intellectual property, product candidates, or products.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities and Use of Proceeds.
The Company's first Registration Statement on Form S-1
(Commission File No. 33-80693) was declared effective on February 15,
1996 (the "Registration Statement"). Of the 2,587,500 shares of common
stock registered at an aggregate offering price of $32,343,750 (the
"Gross Proceeds"), 2,250,000 shares of common stock were sold by the
Company on February 22, 1996 at an aggregate offering price of
$28,125,000 and 337,500 shares of common stock were sold by the
Company on March 4, 1996 at an aggregate offering price of $4,218,750.
The Offering did not terminate prior to the sale of all securities
registered. The managing underwriters for the Offering were Smith
Barney Inc. and Vector Securities, Inc.
After deducting expenses of approximately $3,216,750 ("Total
Expenses") from the Gross Proceeds, the Company received net proceeds
of approximately $29,127,000 ("Net Proceeds"). Total Expenses
consisted of approximately $2,308,000 of underwriting discounts and
commissions and approximately $908,750 of other expenses. There were
no payments for finders' fees or for expenses incurred by
underwriters. None of the payments of Total Expenses were direct or
indirect payments to directors, officers, persons owning ten percent
or more of any class of equity securities of the Company, or to
affiliates of the Company.
As of September 30, 1997, the Company had used Net Proceeds as
follows: $11,200,000 for research and development activities;
$4,900,000 for general corporate purposes; $2,400,000 for the purchase
and installation of machinery and equipment; $2,000,000 for the
repayment of indebtedness; and $600,000 for the construction of plant,
building, and facilities. The remaining $8,027,000 has been
temporarily invested in a U.S. Treasury Note. None of the Net Proceeds
have been used for the purchase of real estate, the acquisition of
other business(es), or for working capital purposes. Also, none of the
Net Proceeds were direct or indirect payments to directors, officers,
persons owning ten percent or more of any class of equity securities
of the Company, or to affiliates of the Company.
At the time of the Registration Statement, the Company expected
to use $10 million of the Net Proceeds for research and development
activities, $3 million for capital expenditures, and $16.1 million for
working capital and general corporate purposes. As of September 30,
1997, the Company has expended approximately $1.2 million more than
anticipated for its research and development activities. This amount
has been more than offset by $9.2 million of lower than anticipated
16
<PAGE>
disbursements for working capital and general corporate purposes
(including disbursements for the repayment of indebtedness), of which
approximately $8 million has been temporarily invested.
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) List of Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
A Current Report on Form 8-K dated September 17, 1997 reporting
information under "Item 5" relating to the adoption of the Company's
Shareholder Rights Plan (see Note 6 of the Notes to Unaudited
Financial Statements included in Part I of this Form 10-Q and
incorporated herein) was filed with the Securities and Exchange
Commission on October 1, 1997.
17
<PAGE>
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 13, 1997 By: /s/ P. Sherrill Neff
-------------------------------------
P. Sherrill Neff
President and Chief Financial Officer
18
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