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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-27718
NEOSE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3549286
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 Witmer Road
Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)
(215) 441-5890
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(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: 13,967,421 shares of
common stock, $.01 par value, were outstanding as of October 31, 2000.
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NEOSE TECHNOLOGIES, INC.
(a development-stage company)
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I.FINANCIAL INFORMATION:
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at December 31, 1999 and September 30, 2000................3
Consolidated Statements of Operations for the three and nine months ended
September 30, 1999 and 2000, and for the period from inception through
September 30, 2000.....................................................................4
Consolidated Statements of Cash Flows for the nine months ended .....
September 30, 1999 and 2000, and for the period from inception through
September 30, 2000.....................................................................5
Notes to Consolidated Financial Statements.............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................8
Item 3. Quantitative and Qualitative Disclosure About Market Risk........................12
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.................................................12
SIGNATURES................................................................................13
</TABLE>
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Assets December 31, 1999 September 30, 2000
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,365 $ 3,815
Marketable securities 22,870 92,286
Accounts receivable -- 1,417
Restricted funds 2,285 611
Prepaid expenses and other current assets 118 215
--------- ---------
Total current assets 35,638 98,344
Property and equipment, net 13,366 13,544
Other assets (see Note 4) 3,235 5,109
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Total assets $ 52,239 $ 116,997
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,000 $ 1,100
Accounts payable 237 228
Accrued expenses 2,112 1,976
Deferred revenue 805 431
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Total current liabilities 4,154 3,735
Long-term debt 7,300 6,200
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Total liabilities 11,454 9,935
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Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 30,000 shares
authorized; 11,434 and 13,964 shares issued and
outstanding 114 140
Additional paid-in capital 101,013 174,364
Deferred compensation (530) (1,266)
Deficit accumulated during the development-stage (59,812) (66,176)
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Total stockholders' equity 40,785 107,062
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Total liabilities and stockholders' equity $ 52,239 $ 116,997
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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NEOSE TECHNOLOGIES, INC.
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from
Three months Nine months inception
ended September 30, ended September 30, (January 17, 1989)
1999 2000 1999 2000 to September 30, 2000
----------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Revenue from collaborative agreements $ 92 $ 583 $ 217 $ 4,299 $ 11,066
-------- -------- -------- ---------- ----------
Operating expenses:
Research and development 2,435 2,987 7,626 9,644 61,197
General and administrative 1,238 1,535 3,433 4,233 25,466
-------- -------- -------- ---------- ----------
Total operating expenses 3,673 4,522 11,059 13,877 86,663
-------- -------- -------- ---------- ----------
Operating loss (3,581) (3,939) (10,842) (9,578) (75,597)
Interest income 678 1,578 1,284 3,565 12,420
Interest expense (106) (117) (315) (351) (2,999)
-------- -------- -------- ---------- ----------
Net loss $ (3,009) $ (2,478) $ (9,873) $ (6,364) (66,176)
======== ======== ======== ========== ==========
Basic and diluted net loss per share $ (0.26) $ (0.18) (0.95) $ (0.48)
======== ======== ======== ==========
Basic and diluted weighted-average
shares outstanding 11,422 13,950 10,425 13,246
======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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NEOSE TECHNOLOGIES, INC.
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended Period from
September 30, inception
------------------------- (January 17, 1989)
1999 2000 to September 30, 2000
---------- --------- ---------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,873) $ (6,364) $ (66,176)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,596 2,698 10,075
Common stock issued for non-cash and other charges -- -- 35
Changes in operating assets and liabilities:
Accounts receivable -- (1,417) (1,417)
Prepaid expenses and other current assets 33 (97) (215)
Accounts payable 170 (9) 228
Accrued expenses 609 (136) 1,294
Deferred revenue -- (374) 431
--------- --------- ----------
Net cash used in operating activities (7,465) (5,699) (55,745)
--------- --------- ----------
Cash flows from investing activities:
Purchases of property and equipment (920) (1,271) (19,002)
Proceeds from sale-leaseback of equipment -- -- 1,382
Purchases of marketable securities (67,954) (135,845) (275,630)
Proceeds from sales of marketable securities 8,882 -- 11,467
Proceeds from maturities of and other changes in marketable
securities 50,733 66,429 171,877
Purchase of acquired technology (3,300) (1,000) (4,550)
Purchase of preferred stock -- (1,250) (1,250)
Restricted cash related to acquired technology (1,500) 1,500 --
--------- --------- ----------
Net cash used in investing activities (14,059) (71,437) (115,706)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from issuance of debt -- -- 11,955
Repayment of debt (617) (1,000) (5,952)
Restricted cash related to debt (61) 174 (540)
Proceeds from issuance of preferred stock, net -- -- 29,497
Proceeds from issuance of common stock, net 17,572 -- 18,277
Proceeds from public offerings, net -- 68,605 118,071
Proceeds from exercise of stock options and warrants 194 2,807 4,030
Dividends paid -- -- (72)
--------- --------- ----------
Net cash provided by financing activities 17,089 70,586 175,266
--------- --------- ----------
Net increase in cash and cash equivalents (4,436) (6,550) 3,815
Cash and cash equivalents, beginning of period 9,484 10,365 --
--------- --------- ----------
Cash and cash equivalents, end of period $ 5,048 $ 3,815 $ 3,815
========= ========= ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 273 $ 365 $ 2,903
--------- --------- ----------
Non-cash 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
consolidated financial statements
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NEOSE TECHNOLOGIES, INC.
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
We have used generally accepted accounting principles for interim
financial information to prepare unaudited consolidated financial statements:
o As of September 30, 2000;
o For the nine months ended September 30, 1999 and 2000; and
o For the period from inception (January 17, 1989) to
September 30, 2000.
Our consolidated financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In our opinion, the unaudited information
includes all the normal recurring adjustments that are necessary for a fair
presentation of the financial position, results of operations, and cash flows
for the periods presented. You should not make any assumptions about possible
results of our operations for 2000 based solely on our results of operations for
the nine months ended September 30, 2000. You should read these consolidated
financial statements in combination with:
o The other Notes in this section;
o "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing in the following section; and
o The Consolidated Financial Statements, including the Notes to the
Consolidated Financial Statements, included in our Annual Report
on Form 10-K for the year ended December 31, 1999.
2. Sale of Common Stock
In March 2000, we offered and sold 2.3 million shares of our common
stock at a public offering price of $32.00 per share. Our net proceeds from the
offering after the payment of underwriting fees and offering expenses were
approximately $68.6 million.
3. Agreement with Bristol-Myers Squibb Company
In 1998, we entered into an agreement with Bristol-Myers Squibb Company
to develop proprietary technologies that enable cGMP processes for the
manufacture of two gangliosides (complex carbohydrate structures attached to
lipids) for use as the active pharmaceutical ingredients in two cancer vaccines
being developed by Bristol-Myers. Both vaccine candidates, GMK and MGV, have
been licensed to Bristol-Myers from Progenics Pharmaceuticals, Inc. During the
nine months ended September 30, 2000, we recorded revenues of $3.3 million from
Bristol-Myers.
In May 2000, Progenics Pharmaceuticals announced that the Eastern
Cooperative Oncology Group would conclude their participation in the Phase III
clinical trial for the GMK melanoma vaccine. Progenics Pharmaceuticals also
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announced that it planned to continue the trial as an extension study until the
scheduled completion of the original trial. We have been advised by
Bristol-Myers that they are reviewing the available data from the clinical
trial. The amount and timing of our future revenues, if any, from this
collaboration will depend on Bristol-Myers' decision to continue, suspend, or
terminate the collaborative agreement.
4. Other Assets
Acquired Technology
In March 1999, we acquired the carbohydrate manufacturing patents,
licenses, and other intellectual property of Cytel Corporation for aggregate
consideration of $4.75 million, of which $1.25 million was paid after March 1999
to Epimmune, Inc., Cytel's successor corporation, as it satisfied certain
milestones relating to the acquired patents and licenses. We charged $200,000 of
the $4.75 million to expenses in our Consolidated Statement of Operations in
1998. Because the acquired intellectual property consists of core technology
with alternative future uses, we have capitalized the remaining $4.55 million as
Acquired Technology, included in other assets on the accompanying Consolidated
Balance Sheet.
The Acquired Technology balance will be amortized to our Consolidated
Statement of Operations over eight years, which we estimate to be the useful
life of the technology. During the nine months ended September 30, 2000, we
recorded amortization expense of $376,000 relating to the acquired technology.
Investment in Convertible Preferred Stock
In June 2000, we made an investment of $1.25 million in convertible
preferred stock of Neuronyx, Inc., and entered into a research and development
collaboration with Neuronyx for the discovery and development of drugs for the
treatment of Parkinson's disease and other neurological diseases. The
collaboration agreement provides for each of Neose and Neuronyx to perform and
fund specific tasks, and to share in any financial benefits of the
collaboration. Our investment, which represents a fully-diluted ownership
interest of approximately 6%, was made on the same terms as other unaffiliated
investors. Accordingly, we have stated the investment at cost. We will continue
to evaluate the realizability of this investment and record, if necessary,
appropriate impairments in value. No such impairments have occurred as of
September 30, 2000.
5. Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic
loss per share is computed by dividing net loss by the weighted-average number
of common shares outstanding for the period. Diluted loss per share reflects the
potential dilution from the exercise or conversion of securities into common
stock. For the nine months ended September 30, 1999 and 2000, the effects of the
exercise of outstanding stock options and warrants were antidilutive;
accordingly, they were excluded from the calculation of diluted earnings per
share.
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6. Comprehensive Loss
Our comprehensive loss for the nine months ended September 30, 1999 and
2000 was approximately $10 million and $6.4 million, respectively. Comprehensive
loss is comprised of net loss and other comprehensive income or loss. Our only
source of other comprehensive income or loss is unrealized gains and losses on
our marketable securities that are classified as available-for-sale for the nine
months ended September 30, 1999.
7. Reclassifications
Certain prior year amounts have been reclassified to conform to our
current year presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION ACT OF 1995:
This report, and statements made by Neose management from time to time, contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. The words "anticipate," "believe," "estimate," and similar
expressions are generally intended to identify forward-looking statements. These
forward-looking statements include, among others:
o expectations for increases in operating expenses;
o expectations for increases in research and development and general
and administrative expenses in order to develop new products and
manufacture commercial quantities of products;
o expectations for the development, manufacturing, and approval of
new products;
o expectations for incurring additional capital expenditures to expand
our manufacturing capabilities;
o expectations for generating revenue or becoming profitable on a
sustained basis;
o ability to enter into additional marketing agreements and the
ability of our existing marketing partners to commercialize products
incorporating our technologies;
o estimate of the sufficiency of our existing cash and cash
equivalents and investments to finance our operating and capital
requirements;
o expected losses; and
o expectations for future capital requirements.
Our actual results could differ materially from those results expressed
in, or implied by, these forward-looking statements. Potential risks and
uncertainties that could affect our actual results include the following:
o our ability to commercialize any of our products or technologies;
o our ability to maintain our existing collaborative arrangements and
enter into new collaborative arrangements;
o our ability to develop commercial-scale manufacturing facilities;
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o our ability to protect our proprietary products, know-how, and
manufacturing processes;
o unanticipated cash requirements to support current operations or
research and development;
o the timing and extent of funding requirements for the joint
venture's activities;
o our ability to attract and retain key personnel; and
o general economic conditions.
These and other risks and uncertainties that could affect our actual
results are discussed in greater detail in this report and in our other filings
with the Securities and Exchange Commission. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, events, levels of activity, performance, or
achievements. We do not assume responsibility for the accuracy and completeness
of the forward-looking statement. We do not intend to update any of the
forward-looking statements after the date of this report.
You should read this section in combination with the Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 1999, included in our Annual Report on Form 10-K and in
our 1999 Annual Report to Stockholders.
Overview
We are a leading developer of proprietary technologies for the
synthesis and manufacture of complex carbohydrates. Our proprietary enzymatic
glycosylation technology platform enables the rapid and cost-effective synthesis
of a wide range of complex carbohydrates in commercial quantities. We use our
broad, enabling technology to produce complex carbohydrates for pharmaceutical,
biotechnology, nutritional, and consumer product applications.
We have incurred operating losses each year. As of September 30, 2000,
we had an accumulated deficit of approximately $66 million. We expect additional
losses for some time as we expand research and development efforts, expand
manufacturing scale-up activities, and begin sales and marketing activities.
Results of Operations
Revenues
Revenues from collaborative agreements for the three and nine months
ended September 30, 2000, were $583,000 and $4,299,000, respectively, compared
to $92,000 and $217,000, respectively, for the corresponding periods in 1999.
The increases were primarily attributable to revenues received under our
agreements with Bristol-Myers and Wyeth Nutritionals International, a division
of American Home Products.
Operating Expenses
Research and development expenses for the three and nine months ended
September 30, 2000, were $2,987,000 and $9,644,000, respectively, compared to
$2,435,000 and $7,626,000, respectively, for the corresponding periods in 1999.
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The increases were primarily attributable to additional services rendered under
our current research and development agreement with Bristol-Myers, and non-cash
compensation expense associated with stock options granted to non-employees.
General and administrative expenses for the three and nine months ended
September 30, 2000, were $1,535,000 and $4,233,000, respectively, compared to
$1,238,000 and $3,433,000, respectively, for the corresponding periods in 1999.
The increases were primarily attributable to the hiring of additional business
development and administrative personnel, and the non-cash compensation expense
associated with stock options granted to non-employees.
Interest Income and Expense
Interest income for the three and nine months ended September 30, 2000,
was $1,578,000 and $3,565,000, respectively, compared to $678,000 and
$1,284,000, respectively, for the corresponding periods in 1999. The increases
were due to higher average cash and marketable securities balances during the
2000 periods.
Interest expense for the three and nine months ended September 30,
2000, was $117,000 and $351,000, respectively, compared to $106,000 and
$315,000, respectively, for the corresponding periods in 1999. The increases
were due to higher average interest rates, and were partly offset by lower
average loan balances outstanding, during the 2000 periods.
Net Loss
We incurred net losses of $2,478,000 and $6,364,000, or $0.18 and $0.48
per share, for the three and nine months ended September 30, 2000, respectively,
compared to $3,009,000 and $9,873,000, or $0.26 and $0.95 per share,
respectively, for the corresponding periods in 1999.
Liquidity and Capital Resources
We have incurred losses each year since our inception. As of September
30, 2000, we had a deficit accumulated during the development stage of
approximately $66 million. We have financed our operations through private and
public offerings of our securities, and revenues from our collaborative
agreements. We had $96.1 million in cash and marketable securities as of
September 30, 2000, compared to $33.2 million in cash and marketable securities
as of December 31, 1999. The increase was primarily attributable to our public
offering of 2.3 million shares of common stock in March 2000.
In May 2000, Progenics Pharmaceuticals announced that the Eastern
Cooperative Oncology Group would conclude their participation in the Phase III
clinical trial for the GMK melanoma vaccine. Progenics Pharmaceuticals also
announced that it planned to continue the trial as an extension study until the
scheduled completion of the original trial. We have been advised by
Bristol-Myers that they are reviewing the available data from the clinical
trial. The amount and timing of our future revenues, if any, from this
collaboration, will depend on Bristol-Myers' decision to continue, suspend, or
terminate the collaborative agreement.
We have a 50% ownership interest in our joint venture with McNeil
Specialty. We account for our investment in the joint venture under the equity
method, under which we recognize our share of the income and losses of the joint
venture. In 1999, we reduced the carrying value of our initial investment in the
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joint venture of $350,000 to zero to reflect our share of the joint venture's
losses. We will record our share of post-1999 losses of the joint venture,
however, only to the extent of our actual or committed investment in the joint
venture.
Until the joint venture is profitable, McNeil Specialty is required to
fund, as a non-recourse, no-interest loan, all of the joint venture's aggregate
capital expenditures in excess of an agreed-upon amount, and all of the joint
venture's operating losses. These loans would be repayable by the joint venture
to McNeil Specialty over seven years, and in the event of any dissolution of the
joint venture would be payable to McNeil Specialty before any distribution of
assets to us.
We may be required to make additional investments in the joint venture
to fund capital expenditures. If the joint venture builds additional production
facilities, and we wish to maintain our 50% ownership interest in the joint
venture, we are required to fund half of such expenditures, up to a maximum
investment of $8.85 million. However, we may elect to fund as little as $1.85
million of the cost of the facilities, so long as our aggregate investments in
the joint venture are at least 15% of the joint venture's aggregate capital
expenditures. In this case, McNeil Specialty will fund the remainder of our half
of the joint venture's capital expenditures, and our ownership percentage will
be proportionately reduced. We have an option, expiring in September 2006, to
return to 50% ownership of the joint venture by reimbursing McNeil Specialty for
this amount.
In 1997, we issued, through the Montgomery County (Pennsylvania)
Industrial Development Authority, $9.4 million of taxable and tax-exempt bonds.
The bonds were issued to finance the purchase of our previously leased building
and the construction of a pilot-scale manufacturing facility within our
building. The bonds are supported by a AA-rated letter of credit, and a
reimbursement agreement between our 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. As of September 30,
2000, the effective, blended interest rate was 8.3% per annum, including
letter-of-credit and other fees. To provide credit support for this arrangement,
we have given a first mortgage on the land, building, improvements, and certain
machinery and equipment to our bank. We have also agreed to a covenant, which
was renegotiated in May 2000, to maintain a minimum required cash and short-term
investments balance of at least two times the current loan balance. Thus, we are
now required to maintain a cash and short-term investments balance of $14.6
million, rather than $20 million as required under the original covenant. If we
fail to comply with this covenant, we are required to deposit with the lender
cash collateral up to, but not more than, the unpaid balance of the loan, which
as of September 30, 2000 was $7.3 million.
During the nine months ended September 30, 2000, we purchased
approximately $1,271,000 of property, equipment, and building improvements.
We expect that our existing cash and short-term investments will be
adequate to fund our operations through at least 2001, although changes in our
collaborative relationships or our business, whether or not initiated by us, may
cause us to deplete our cash and short-term investments sooner than the above
estimate. The timing and amount of our future capital requirements and the
adequacy of available funds will depend on many factors, including if or when
any products manufactured using our technology are commercialized.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
Our holdings of financial instruments are comprised primarily of
government agency securities. All such instruments are classified as securities
held to maturity. We seek reasonable assuredness of the safety of principal and
market liquidity by investing in rated fixed income securities, while at the
same time, seeking to achieve a favorable rate of return. Our market risk
exposure consists principally of exposure to changes in interest rates. Our
holdings are also exposed to the risks of changes in the credit quality of
issuers. We typically invest in the shorter-end of the maturity spectrum. The
approximate principal amount and weighted average interest rate of our
investment portfolio at September 30, 2000 was $92,286,000 and 6.6%,
respectively.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K. None.
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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 14, 2000 By: /s/ P. Sherrill Neff
---------------------------------------
P. Sherrill Neff
President, Chief Operating Officer, and
Chief Financial Officer
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