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: 0-27718
NEOSE TECHNOLOGIES, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3549286
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 Witmer Road
Horsham, Pennsylvania 19044
--------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(215) 441-5890
--------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 9,542,363 shares of common
stock, $.01 par value, were outstanding as of April 30, 1998.
<PAGE>
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
INDEX
Page
----
PART I.FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets (unaudited) at December 31, 1997 and March 31, 1998..........3
Statements of Operations (unaudited) for the three months ended
March 31, 1997 and 1998, and from the period of inception through
March 31, 1998..............................................................4
Statements of Cash Flows (unaudited) for the three months ended
March 31, 1997 and 1998, and from the period of inception through
March 31, 1998..............................................................5
Notes to Unaudited Financial Statements.....................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................7
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings....................................................12
Item 2. Changes in Securities and Use of Proceeds............................12
Item 3. Defaults Upon Senior Securities......................................12
Item 4. Submission of Matters to a Vote of Security Holders..................12
Item 5. Other Information....................................................12
Item 6. Exhibits and Reports on Form 8-K.....................................12
SIGNATURES....................................................................13
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
BALANCE SHEETS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1988
----------------- --------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,098 $ 14,170
Marketable securities 26,205 25,217
Restricted funds 450 581
Prepaid expenses and other current assets 514 578
-------- --------
Total current assets 44,267 40,546
Property and equipment, net 14,616 14,503
Other assets 3 --
-------- --------
Total assets $ 58,886 $ 55,049
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,040 $ 926
Accounts payable 347 166
Accrued expenses 1,628 922
-------- --------
Total current liabilities 3,015 2,014
Long-term debt 8,917 8,911
-------- --------
Total liabilities 11,932 10,925
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 30,000 shares
authorized; 9,525 and 9,536 shares issued and
outstanding 95 95
Additional paid-in capital 81,807 82,057
Deferred compensation (361) (455)
Deficit accumulated during the development-stage (34,587) (37,573)
-------- --------
Total stockholders' equity 46,954 44,124
-------- --------
Total liabilities and stockholders' equity $ 58,886 $ 55,049
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended March 31, Period from inception
--------------------------------------- (January 17, 1989)
1997 1998 to March 31, 1998
------------------ ---------------- -----------------------
<S> <C> <C> <C>
Revenue from collaborative agreements $ 313 $ 11 $ 5,966
Operating expenses:
Research and development 1,769 2,715 33,707
General and administrative 913 715 13,793
------- ------- --------
Total operating expenses 2,682 3,430 47,500
------- ------- --------
Operating loss (2,369) (3,419) (41,534)
Interest income 584 571 5,780
Interest expense (43) (138) (1,819)
------- ------- --------
Net loss $(1,828) $(2,986) $(37,573)
======= ======= ========
Basic and diluted net loss per share $ (0.20) $ (0.31)
======= =======
Basic and diluted weighted-average
shares outstanding 9,092 9,532
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended Period from
March 31, Inception
------------------------- (January 17, 1989)
1997 1998 to March 31, 1998
---------- ---------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,828) $ (2,986) $ (37,573)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 191 379 3,435
Common stock issued for noncash and other charges -- -- 35
Changes in operating assets and liabilities:
Restricted funds (2,947) (131) (510)
Prepaid expenses and other current assets (272) (64) (578)
Other assets 12 3 --
Accounts payable 225 (181) 166
Accrued expenses (178) (706) 240
Deferred revenue 187 -- --
Other liabilities (79) -- --
---------- ---------- ----------
Net cash used in operating activities (4,689) (3,686) (34,785)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (6,383) (201) (15,964)
Proceeds from sale-leaseback of equipment -- -- 1,382
Purchases of marketable securities -- -- (26,808)
Proceeds from sales of marketable securities -- 988 1,591
---------- ---------- ----------
Net cash provided by (used in) investing
activities (6,383) 787 (39,799)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of debt 9,329 -- 11,955
Repayment of debt (220) (119) (3,414)
Proceeds from issuance of preferred stock, net -- -- 29,497
Proceeds from issuance of common stock, net 87 87 621
Proceeds from public offerings, net 20,339 -- 49,466
Proceeds from exercise of stock options and warrants, net 70 3 701
Dividends paid -- -- (72)
---------- ---------- ----------
Net cash provided by (used in) financing
activities 29,605 (29) 88,754
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 18,533 (2,928) 14,170
Cash and cash equivalents, beginning of period 32,845 17,098 --
---------- ---------- ----------
Cash and cash equivalents, end of period $ 51,378 $ 14,170 $ 14,170
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 46 $ 152 $ 1,713
========== ========== ==========
Noncash financing activities:
Issuance of common stock for dividends $ -- $ -- $ 90
========== ========== ==========
Issuance of common stock to employees in lieu of
cash compensation $ -- $ -- $ 44
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1.Basis of Presentation
The unaudited financial statements (i) as of March 31, 1998; (ii) for the
three months ended March 31, 1997 and 1998; and (iii) for the period from
inception (January 17, 1989) to March 31, 1998, contained herein have been
prepared by Neose Technologies, Inc. ("Neose" or the "Company") 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 included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
2. Net Loss Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share," which supersedes APB Opinion No. 15 ("APB
No. 15"), "Earnings per Share," and which is effective for all periods ending
after December 15, 1997. SFAS 128 requires dual presentation of basic and
diluted earnings per share ("EPS") for complex capital structures on the face of
the Statements of Operations. Basic EPS is computed by dividing net 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. For the three months ended March 31, 1997 and
1998, the effect of the exercise of outstanding stock options and warrants was
excluded from the calculation of diluted EPS because its effect was
antidilutive.
3. Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The statements set forth below that are not historical facts or statements
of current condition are forward-looking statements. Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "forecasts," "estimates," "plans,"
"continues," "may," "will," "should," "anticipates," or "intends," or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. These forward-looking statements, such as
statements regarding present or anticipated scientific progress, development of
potential pharmaceutical products, future revenues, capital expenditures,
research and development expenditures, future financings and collaborations,
management, manufacturing development and capabilities, and other statements
regarding matters that are not historical facts, involve predictions. The
Company's actual results, performance, or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Potential risks and uncertainties that could affect the Company's actual
results, performance, or achievements include, but are not limited to, the "Risk
Factors" set forth in Item 1 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (the "Form 10-K"), and general financial, economic,
regulatory, and political conditions affecting the biotechnology industry in
general. Given these uncertainties, current or prospective investors are
cautioned not to place undue reliance on any such forward-looking statements.
Furthermore, the Company disclaims any obligation or intent to update any such
factors or forward-looking statements to reflect future events or developments.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations for the three months ended March 31, 1998, and as of March 31,
1998, 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, 1997, included in the Company's Form 10-K and the Company's 1997
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.
In December 1992, the Company entered into collaborative agreements with
Abbott Laboratories ("Abbott"), under which Abbott has licensed technology from
Neose for the development by Abbott of breast milk oligosaccharides as additives
to infant formula and other nutritional products. The Company has received
approximately $11.2 million in contract payments, license fees, milestone
payments, and equity investments in connection with its agreements with Abbott.
The Company has not generated any material revenues from operations, except for
interest income and revenues from collaborative agreements, including its
agreements with Abbott.
7
<PAGE>
The Company has incurred losses since its inception and, as of March 31,
1998, had a deficit accumulated during the development stage of approximately
$37.6 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, and as the Company expands its manufacturing capabilities.
The Company anticipates that the only material sources of revenue for the next
several years will be payments under its collaborative agreements, license fees,
payments from future collaborative agreements, if any, and interest income.
Payments under collaborative agreements 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.
Results of Operations
Revenues
Revenues from collaborative agreements for the three months ended March 31,
1998 decreased to $11,000 from $313,000 for the corresponding period in 1997 due
to decreased non-recurring revenues received during the 1998 period.
Operating Expenses
Research and development expenses for the three months ended March 31, 1998
increased to $2,715,000 from $1,769,000 for the corresponding period in 1997.
The increase was primarily attributable to increased (i) funding of outside
research, (ii) clinical trial expenditures for NE-0080, (iii) depreciation
expense related to significant property and improvements expenditures made in
during 1997, and (iv) expenditures related to the Company's joint development
agreement with McNeil Specialty Products Company, a subsidiary of Johnson &
Johnson ("J&J").
General and administrative expenses for the three months ended March 31,
1998 decreased to $715,000 from $913,000 for the corresponding period in 1997.
The decrease was primarily attributable to decreased patent and business
development expenses during the 1998 period.
Interest income for the three months ended March 31, 1998 decreased to
$571,000 from $584,000 for the corresponding period in 1997 due to lower average
cash and marketable securities' balances during the 1998 period. Interest
expense for the three months ended March 31, 1998 increased to $138,000 from
$43,000 for the corresponding period in 1997 due to higher average loan balances
outstanding during the 1998 period.
Net Loss
The Company's net loss for the three months ended March 31, 1998 increased
to $2,986,000, or $0.31 per share, from $1,828,000, or $0.20 per share, for the
corresponding period in 1997.
8
<PAGE>
Liquidity and Capital Resources
From inception through March 31, 1998, the Company incurred a cumulative
net loss of approximately $37.6 million, and financed its operations through
(i) private and public offerings of its securities, (ii) revenues from its
collaborative agreements, and (iii) the issuance of long-term debt. The Company
had $39.4 million in cash and marketable securities as of March 31, 1998,
compared to $43.3 million as of December 31, 1997.
The Company and Abbott have entered into collaborative agreements under
which Abbott has licensed technology from Neose to develop breast milk
oligosaccharides as additives to infant formula and other nutritional products.
Abbott has exclusive manufacturing rights and development and regulatory
responsibilities for these nutritional additives.
The Company's agreements with Abbott provide, in part, for the receipt by
the Company of a milestone payment and license fees, if commercialization
occurs. Under this arrangement, Neose has received to date approximately $11.2
million in contract payments, milestone payments, and equity investments from
Abbott. Also, Neose is to receive $5 million within 60 days of the first
commercial sale, if any, of infant formula containing nutritional additives
manufactured using the Company's technology. Abbott has agreed to pay Neose
ongoing fees based on the dry weight of infant formula sold containing
nutritional additives manufactured using the Company's technology. The Company
is required to credit $3.75 million of the license fees against the ongoing fees
in equal amounts over four years. In addition, Abbott has agreed to renegotiate
the fees due Neose on the sale of products covered by the technology licensed to
Abbott by Neose in any case where, aside from and in addition to such
technology, Neose has made a contribution in the methods, processes, or
compounds used in the manufacture of the product that both parties agree will
result in a substantial commercial advantage. There can be no assurance that
Abbott will use the Company's technology to commercialize any oligosaccharide.
Thus, there can be no assurance that the Company will ever receive any further
revenues from Abbott.
Abbott has the option at any time prior to the first commercial sale, if
any, of infant formula containing an oligosaccharide manufactured using the
technology licensed from the Company, to elect to make the underlying license
agreement with the Company non-exclusive, in which event the license fees
payable to the Company after commercialization would be reduced by 50%, and
Abbott's obligations to make milestone payments would be terminated. Abbott also
has the right to terminate the underlying license agreement upon 60 days'
notice, in which event it would have no further funding obligations to the
Company. In addition, because Abbott has failed to make a certain regulatory
filing by a specified date, Neose, at its option, may now similarly elect to
convert the license of the Company's technology to a non-exclusive license to
Abbott on the same financial terms. Neose has not exercised that right, and
Neose and Abbott are currently engaged in discussions concerning possible
modifications of their agreements. Neose has been advised that Abbott is
continuing to use the Company's technology to pursue the development and
commercialization of infant formula containing an oligosaccharide. There can
be no assurance that Neose would be able to interest another party in a non-
9
<PAGE>
exclusive license for these purposes in the event that either party elects
to convert to a non-exclusive license.
Further revenues, if any, from the Company's agreements with Abbott will
depend on Abbott's own competitive, marketing, and strategic considerations,
including the relative advantages of alternative products being developed or
marketed by competitors. Furthermore, Abbott is responsible for developing any
oligosaccharides manufactured using the Company's technology, completing
manufacturing scale-up activities, and assuring that the compounds, when used as
nutritional additives, comply with applicable regulatory requirements, which
requirements have not yet been satisfied by Abbott. The amount and timing of
resources Abbott commits to these activities are entirely within Abbott's
control. There can be no assurance that Abbott will use the Company's technology
to pursue the development and commercialization of any products. No assurance
can be given that the agreements will result in the successful commercialization
of any oligosaccharides manufactured using the Company's technology, or that any
future milestone payments or fees will be received by the Company. The
suspension or termination of the Company's agreement with Abbott, the conversion
by Abbott to a non-exclusive license of the Company's technology, or a delay by
Abbott in the development or commercialization of any nutritional additives
manufactured using the Company's technology may have a material adverse effect
on the Company's business, financial condition, and results of operations.
In November 1997, the Company entered into a joint development agreement
with J&J for the joint development of novel technology for the large-scale
production of a class of carbohydrates for a number of consumer health and other
applications. Under the terms of the agreement, the costs of such joint
development will be borne equally by Neose and J&J, and the technology developed
will be owned jointly. Either party may terminate the agreement on 30 days'
notice. If the technology development is successful, agreements will need to be
reached between Neose and J&J concerning the future structure and financing of a
large-scale manufacturing facility, product development, marketing, and sales.
In connection with the purchase of its facility and the expansion of its
GMP manufacturing capabilities, in March 1997, the Company issued, through the
Montgomery County (Pennsylvania) Industrial Development Authority, $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. As of March 31,
1998, 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, and is
required to post cash collateral if it does not meet certain of such covenants.
10
<PAGE>
During the three months ended March 31, 1998, the Company purchased
approximately $201,000 of property, equipment, and building improvements.
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 relationships, the ability of the Company to establish additional
collaborative arrangements, the cost of manufacturing scale-up, and the
development of effective marketing activities and arrangements.
To the extent that funds generated from the Company's operations, together
with its existing capital resources, 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 collaborators 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. There can be no assurance that additional financing
will be available when needed 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.
11
<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
(Securities and Exchange Commission File No. 33-80693) was declared
effective on February 15, 1996 (the "IPO"). The Company received net
proceeds of approximately $29.1 million ("Net Proceeds").
As of March 31, 1998, the Company had used Net Proceeds as
follows: $16.3 million for research and development activities; $6.7
million for general corporate purposes; $2.9 million for the purchase
and installation of machinery and equipment; $2.2 million for the
repayment of debt; and $1.0 million for the construction of plant,
building, and facilities.
At the time of the IPO, the Company expected to use $10.0 million
of the Net Proceeds for research and development activities, $3.0
million for capital expenditures, and $16.1 million for working
capital and general corporate purposes. As of March 31, 1998, the
Company had expended approximately $6.3 million more than anticipated
for its research and development activities, and $0.9 million more
than anticipated for capital expenditures. These amounts were offset
by $7.2 million of lower than anticipated disbursements for working
capital and general corporate purposes (including disbursements for
the repayment of debt).
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. None.
12
<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: May 13, 1998 By: /s/ P. Sherrill Neff
---------------------
P. Sherrill Neff
President and Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,170
<SECURITIES> 25,217
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,546
<PP&E> 17,257
<DEPRECIATION> 2,754
<TOTAL-ASSETS> 55,049
<CURRENT-LIABILITIES> 2,014
<BONDS> 8,911
0
0
<COMMON> 95
<OTHER-SE> 44,029
<TOTAL-LIABILITY-AND-EQUITY> 55,049
<SALES> 0
<TOTAL-REVENUES> 11
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138
<INCOME-PRETAX> (2,986)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,986)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,986)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
