<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 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 0-22354
MARTEK BIOSCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-1399362
(State of Incorporation) (IRS Employer Identification No.)
6480 Dobbin Road, Columbia, Maryland 21045
(Address of principal executive offices)
Registrant's telephone number including area code: (410)740-0081
None
(Former name, former address and former fiscal year, if changed since last
report)
-----------------------------------------------------------------------
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. X Yes No
Common stock, par value $.10 per share: 13,532,590 shares outstanding
as of March 10, 1997
Page 1 of 12
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MARTEK BIOSCIENCES CORPORATION
Balance Sheets
($ in thousands)
- -------------------------------------------------------------------------------
January 31, October 31,
1997 1996
- --------------------------------------------------------------------------------
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $3,808 $8,633
Short-term investments and
marketable securities 31,020 30,759
Accounts receivable 973 322
Inventories (Note 4) 1,777 1,841
Prepaid expenses 476 134
Other current assets 193 125
------------------------
Total current assets 38,247 41,814
Property, plant and equipment, net 15,583 15,309
------------------------
$53,830 $57,123
========================
Liabilities and stockholder's equity:
Current liabilities:
Accounts payable $869 $642
Accrued liabilities 1,227 1,495
Current portion of notes payable 4,380 4,371
------------------------
Total current liabilities 6,476 6,508
Long-term portion of notes payable 1,097 1,199
Commitments and contingencies (Note 2)
Stockholders' equity:
Preferred stock, $.01 par value, 4,700,000
shares authorized; none issued or outstanding. --- ---
Series A junior participating preferred stock,
$.01 par value, 300,000 shares authorized;
none issued or outstanding. --- ---
Common stock, $.10 par value; 30,000,000 shares
authorized at January 31, 1997 and at October
31, 1996; 13,531,590 and 13,392,250 shares
issued at January 31, 1997 and October 31,
1996, respectively. 1,353 1,339
Additional paid-in capital 78,547 78,268
Accumulated deficit (33,643) (30,191)
------------------------
Total stockholders' equity 46,257 49,416
------------------------
$53,830 $57,123
========================
See accompanying notes.
Page 2 of 12
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MARTEK BIOSCIENCES CORPORATION
Statements of Operations
(Unaudited -$ in thousands, except per share data)
Three months ended January 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Revenues:
Product Sales:
Nutritional product sales $143 $8
Other product sales 379 170
----------------------------
Total Product Sales 522 178
License fees and related revenues 293 2,141
Royalties 4 2
Research and development contracts and grants 138 199
----------------------------
Total revenues 957 2,520
Costs and expenses:
Cost of product sales 370 93
Research and development 2,883 2,105
Selling, general and administrative 1,578 1,000
----------------------------
Total costs and expenses 4,831 3,198
----------------------------
Loss from operations (3,874) (678)
Other income (expense):
Miscellaneous income 8 15
Interest income 517 694
Interest expense (103) (75)
----------------------------
Total other income 422 634
----------------------------
Net loss ($3,452) ($44)
- --------------------------------------------------------------------------------
Net loss per share (Note 5) ($0.26) ($0.00)
- --------------------------------------------------------------------------------
Weighted average common shares outstanding 13,426,612 13,077,386
- --------------------------------------------------------------------------------
See accompanying notes.
Page 3 of 12
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MARTEK BIOSCIENCES CORPORATION
Statements of Cash Flows
(Unaudited - $ in thousands)
Three Months ended January 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Operating activities:
Net loss ($3,452) ($44)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 242 198
Changes in assets and liabilities:
Accounts receivable (651) 44
Inventories 64 (338)
Prepaid expenses (342) (85)
Other current assets (68) 138
Accounts payable 227 423
Accrued liabilities (268) 106
Unearned revenue 0 (2,075)
--------------------------
Net cash used in operating activities (4,248) (1,633)
Investing activities:
Change in short-term investments and
marketable securities (261) (12,844)
Purchase of property, plant and equipment (516) (1,437)
--------------------------
Net cash used in investing activities (777) (14,281)
Financing activities:
Proceeds from the exercise of warrants
and options, and other 293 427
Principal payments on notes payable (93) (24)
--------------------------
Net cash provided by financing activities 200 403
--------------------------
Net increase in cash and cash equivalents (4,825) (15,511)
Cash and cash equivalents at beginning of year 8,633 41,039
--------------------------
Cash and cash equivalents at end of period $3,808 $25,528
- --------------------------------------------------------------------------------
See accompanying notes.
Page 4 of 12
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MARTEK BIOSCIENCES CORPORATION
Statement of Stockholder's Equity
(Unaudited - $ in thousands,except share data)
Additional
Paid-In Accumulated
Capital Deficit Total
-----------------------------------------------------
Shares Amounts
Balance at
October 31, 1996 13,392,250 $1,339 $78,268 ($30,191) $49,416
- --------------------------------------------------------------------------------
Exercise of stock options 139,340 14 279 --- 293
Net loss --- --- --- (3,452) (3,452)
- --------------------------------------------------------------------------------
Balance at
January 31, 1997 13,531,590 $1,353 $78,547 ($33,643) $46,257
- --------------------------------------------------------------------------------
See accompanying notes.
Page 5 of 12
<PAGE>
Notes to Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the quarter ended January 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended October 31,
1997. For further information, refer to the financial statements and footnotes
thereto included in Martek Biosciences Corporation's annual report on Form 10-K
for the year ended October 31, 1996.
2. Commitment and Contingencies
The Company had commitments at January 31, 1997 to fund up to $1.7 million of
Phase III Small Business Innovation Research ("SBIR") technology
commercialization expenses, provided the technology under existing Phase II SBIR
grants yields commercial opportunities favorable to the Company.
Costs under U.S. Government contracts are subject to audit by the appropriate
U.S. Government agency. Management believes that cost disallowances, if any,
arising from such audits of costs charged to government contracts through
January 31, 1997, would not have a material effect on the financial statements.
The Company has licensed certain technologies and recognized license fee revenue
under various agreements. Potentially refundable license fees are recorded as
unearned revenue and are not recognized as revenue until the earnings process is
complete and amounts are not subject to refund. Under the terms of one of the
Company's license agreements, $2,075,000 previously recorded as unearned was
recognized during the first quarter of 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company has entered into various collaborative research and license
agreements. Under the agreements, the Company is required to fund research or to
collaborate on the development of potential products. Certain of these
agreements also commit the Company to make payments upon the occurrence of
certain milestones, and royalties upon the sale of certain products resulting
from such collaborations.
On June 20, 1996, the Company entered into an equipment line of credit in the
amount of $2,000,000 to finance a portion of the construction of the oil
processing facility in Winchester, KY. Draws on the line of credit as of June
20, 1996 converted to a four year term loan bearing interest at a rate of 9.02%.
As of January 31, 1997, $460,000 of the line was available for future borrowings
and $1,337,000 was outstanding. This loan is collateralized solely by the
equipment purchased with the proceeds.
3. Income Taxes
At January 31, 1997, the Company had net operating loss carryforwards of
approximately $45,570,000 for income tax purposes that expire in years 2000
through 2011.
Page 6 of 12
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Section 382 of the Internal Revenue Code limits the utilization of net operating
losses when ownership changes, as defined by that section, are greater than 50
percent. The Company has had significant ownership changes over the past several
years, including an initial public offering of its common stock in December 1993
and a follow-on public offering of its common stock in October 1995, which may
have caused these limitations to apply.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of January 31, 1997 are as follows:
Deferred tax assets:
Write-off of patent .................................. 251,000
Net operating loss carryforwards ..................... 18,228,000
------------
Total deferred tax assets ......................... $ 18,479,000
============
Valuation allowance for net
deferred tax assets ............................ ($18,479,000)
============
Net deferred tax assets .............................. $ --
============
4. Inventories
Inventories consist of the following:
January 31, October 31,
1997 1996
---------- ----------
Finished products .................................... $ 846,368 $ 875,645
Work in process ...................................... 649,876 545,168
Raw materials ........................................ 280,374 420,315
---------- ----------
$1,776,618 $1,841,128
========== ==========
Inventories include products and materials held for sale as well as
products and materials that could alternatively be used in the Company's
research and development activities.
5. Net loss per share
Net loss per share is computed using the weighted average number of shares of
common stock outstanding during the period. Common equivalent shares from stock
options and warrants are excluded as their effect is antidilutive.
Page 7 of 12
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements concerning the Company's business
and operations, including statements about future production efficiencies for
its nutritional oil products. Such statements involve risks and uncertainties
that could cause actual results to differ due to a variety of risk factors set
forth herein and from time to time in the Company's filings with the Securities
and Exchange Commission, including but not limited to its recently filed report
on Form 10-K and its S-3 declared effective on September 26, 1995.
Since its inception in 1985, Martek has been engaged primarily in the research
and development, manufacturing and sales of products derived from microalgae. In
1989, the Company began the commercial production and sale of its products for
drug discovery. In 1992, Martek began to realize revenues from license fees
related to its nutritional oils containing docosahexaenoic acid ("DHA") and
arachidonic acid ("ARA") and sales of sample quantities of these oils. In 1995,
Martek recognized its first product and royalty revenues from sales of infant
formula containing these oils and in 1996 began to recognize revenues from the
sale of Neuromins(TM), a DHA dietary supplement. Martek has incurred losses in
each year since its inception. At January 31, 1997, the Company's accumulated
deficit was $33,643,000. The Company expects to continue to expand its research
and development effort, optimize oils production and increase its product
marketing activities. As a result, Martek expects its losses to continue and
possibly increase for at least the first half of 1997, or until significant
royalties from sales of infant formula products containing its oils, and/or
sales revenues from Neuromins(TM) are received. In addition, the Company expects
to experience quarter-to-quarter and year-to-year fluctuations in revenues,
expenses and losses, some of which may be significant. The timing and extent of
such fluctuations will depend, in part, on the timing and receipt of
oils-related revenues, if any.
Although three of the Company's licensees have introduced preterm infant formula
products containing Martek's DHA and ARA oils in five European countries, the
Company is not able to predict when, or if, any of these licensees will expand
or introduce new offerings of products containing Martek's oils. The Company
does not believe that broad product introductions of term infant formulas
containing these oils will occur before late 1997, at the earliest, and cannot
predict the timing or extent of further introductions or expansions of preterm
infant formula products containing Martek's oils. Revenues from preterm uses of
Martek's oils will not, alone, significantly reduce Martek's losses. Future
oils-related revenues, and the timing or likelihood of future profitability, are
largely dependent on factors over which the Company has no control.
Results of Operations - Comparison of Quarters Ended January 31, 1997 and 1996
Revenues for the quarter ended January 31, 1997, were $957,000, a 62% decrease
from revenues of $2,520,000 for the same period in 1996. This decrease was
primarily due to the recognition of $2,075,000 in license fees during the first
quarter of 1996 that were previously recorded as unearned pending the lapse of
certain conditions contained in the related license agreement. Total product
sales increased by $344,000 or 193% in the first quarter of 1997 as compared to
the same period in 1996. This increase is due primarily to increased sales of
nutritional products, including Neuromins(TM) capsules, as well as increased
sales of products for drug discovery. Revenues from research and development
contracts and grants decreased by 31% in the first quarter of 1997 when compared
with the first quarter of 1996.
Page 8 of 12
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Cost of product sales increased to 71% of revenues from product sales for the
first quarter of 1997 from 52% for the first quarter of 1996. This increase
resulted primarily from the cost of sales of Martek's nutritional oils. The cost
to produce these oils was high due to the current low volume of production and
because the production process requires further optimization. As sales volume
increases, and manufacturing efficiencies and optimization occurs, the cost of
production of the nutritional oils products has the potential to decrease. The
Company believes that a significant continued optimization effort will be
required for at least the next two years. There can be no assurance that the
Company will be able to successfully optimize production of its nutritional oils
in order to manufacture commercial quantities at a reasonable cost, or continue
to comply with applicable regulatory requirements , including GMP, or that these
facilities will be sufficient to meet the demand for the oils. The balance of
the increase in cost of sales resulted from price reductions in the Company's
stable isotope-based drug design products brought about by competition for these
products. The Company is working to decrease its production costs and has
developed new, proprietary products in an effort to improve profit margins. The
Company's ability to successfully market these new products and the ultimate
impact of these efforts on cost of sales, however, cannot be predicted.
Research and development costs increased by $778,000, or 37%, in the first
quarter of 1997 as compared to the same period in 1996. Consistent with the
Company's plans, nutritional oils development costs accounted for a significant
portion of all research and development costs as a result of intensified efforts
to meet production and product introduction objectives. To support the product
introductions of preterm infant formula products containing Martek's oils in the
UK, the Netherlands, Belgium, Finland and Spain, the Company intensified its
commercial scale up and optimization efforts for its oil products beginning
during the latter half of 1994. These efforts have continued through the first
quarter of 1997. Production development and other oils-related development costs
comprised over 75% of research and development expenses for the first three
months of 1997. Research and development costs may increase in the future as the
Company expands its research and development efforts, including optimization of
oil production and development of in-house oil processing capabilities.
Selling, general and administrative expenses increased by $578,000, or 58%,
during the first quarter of 1997. These costs increased primarily due to:
expenses associated with a public awareness campaign for Martek's nutritional
oils; marketing of the Company's Neuromins(TM) products; and increased insurance
and other corporate overhead costs. Other income was $212,000 lower during the
first quarter of 1997 than in the first quarter of 1996 mainly due to a decrease
in the amount of interest earned on the investment of funds received in the
Company's 1995 public offering as funds are being used to support Company
operations.
Net loss for the first quarter of 1997 was $3,452,000, or $.26 per share,
compared to a net loss of $44,000, or $.00 for the same period in 1996. This
increase in net loss resulted primarily from the recognition during the first
quarter of 1996 of $2,075,000 in license fees discussed above. In addition, the
first quarter 1997 loss was affected by increased research and development,
production, marketing and public relations campaign expenses primarily relating
to efforts to commercialize the Company's oil products
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 allows companies to
either account for stock-based compensation under the new provisions of SFAS No.
123 or under the provisions of APB No. 25, "Accounting for Stock Issued to
Employees". If companies elect to account for stock-based compensation under the
provisions of APB No. 25, pro forma disclosure is required for fiscal years
beginning after December 31,1995 in the footnotes to the financial statement as
if the measurement provisions of SFAS 123 had been adopted. The Company intends
to continue accounting for its stock-based compensations in accordance with the
provisions of APB No. 25. As such, the adoption of SFAS No. 123 will not impact
the financial position of the Company.
Page 9 of 12
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Liquidity and Capital Resources
Cash, cash equivalents, short-term investments and marketable securities
decreased by $4,564,000 in the first three months of 1997 resulting in a cash
balance of $3,808,000 and a balance of $31,020,000 in short-term investments and
marketable securities at January 31, 1997. Capital acquisitions of $516,000 were
made in the first quarter of 1997, a significant portion of which represents
upgrades to the Company's fermentation facility in Winchester, Kentucky and
modifications to the newly constructed oil processing plant at the site. The
Company expects additional capital expenditures of approximately $1,500,000
during the balance of 1997 as a result of escalating fermentation activity and
installation of oil processing capabilities at the facility.
Martek may require substantial additional funds to continue its research and
development programs, to conduct preclinical and clinical studies to
commercialize its nutritional oils, Neuromins(TM), and its other products under
development. The ultimate levels of these expenditures will depend, in part, on
whether the Company seeks independently, or with other parties through
collaborative agreements, to develop, manufacture and market its products. The
capital requirements of Martek will depend, among other things, on one or more
of the following factors: the speed at which Martek's infant formula licensees
incorporate Martek's oils into their term infant formula products; the progress
of preclinical and clinical studies; the time and costs of obtaining regulatory
clearance for those products subject to regulatory clearance; the costs involved
in filing, protecting and enforcing patents and other intellectual property
rights; competing technological and market developments; the costs of
manufacturing facilities for those products the Company chooses to manufacture
itself; the costs of commercializing its products; and the extent of future
facilities expansion and collaborative partnerships. The Company's 1995 purchase
of a fermentation facility has had, and will continue to have, a material effect
upon Martek's liquidity and capital resources. In addition to the $1.0 million
in cash used to close the transaction, the investment in subsequent improvements
and the addition of oil processing capabilities, additional capital expenditures
will be needed to modify the plant to meet Martek's future production
requirements as the demand for the Company's nutritional oils grows to fill
plant capacity. Plant modifications, costing at least $1,500,000, are expected
to occur throughout the remainder of 1997. Expenditures beyond 1997 will depend
in part on production capacity needs, the extent of development and
implementation of process improvements and the success of previously implemented
improvements. The Company will also be required to repay or refinance the
promissory notes due in March and September of 1997 in the aggregate principal
amount of $4,000,000 and its interest accrued thereon, associated with the
facility purchase. The notes are secured by the fermentation plant but are
without recourse otherwise. The Company plans to seek refinancing for these
notes later in 1997, but there can be no assurance that the Company will be able
to refinance these notes.
The Company believes its existing capital resources, consisting primarily of
cash, short-term investments and marketable securities will provide adequate
capital for at least the next 15 months. However, due to the Company's
expectations of growth and the rapidly changing nature of the markets in which
it competes, no prediction can be made with certainty of the Company's need for
additional capital or its liquidity position over the long term. The Company
intends to seek additional funding through commercial and government research
and development contracts and grants, product sales and license fee
arrangements. The Company may pursue other methods of financing its activities,
including asset-based borrowing, equity issuances, additional lease financing
and collaborative arrangements with partners, if such methods are available to
the Company and on favorable terms. Should the Company need to raise additional
funds, there can be no assurance that such funds will be available to the
Company on acceptable terms, if at all.
Page 10 of 12
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Item 1. Legal Proceedings.
As previously reported in the Company's annual reports on Form 10-K for its
fiscal years ended October 31, 1995 and 1996, and in the Company's reports on
Form 10-Q since the first quarter of fiscal 1996, on November 29, 1995 Martek
received a letter from the United States Environmental Protection Agency ("EPA")
notifying Martek of potential liability under the Comprehensive Environmental
Response, Compensation and Liability Act in connection with the cleanup of the
RAMP Industries Site in Denver, Colorado. EPA has stated that to date it has
incurred $2.1 million in costs in connection with the cleanup of the site, but
that at this time it is unable to estimate total cleanup costs. EPA has
informally indicated that based on its initial review, it believes that Martek
is responsible for less than .02% of the waste at the RAMP Site. Martek's own
review indicates that its contribution to the site, if any, may be a lower
percentage. EPA has stated that it intends to enter into a "de minimis"
settlement with smaller contributors based on a waste-in list it is currently
compiling. Martek believes that the impact of any settlement will be immaterial
to its financial condition and results of operations.
The Company is not a party to any other legal proceedings.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matter to a vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
Page 11 of 12
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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.
MARTEK BIOSCIENCES CORPORATION
(Registrant)
Date: March 14, 1997 /s/ Steve Dubin
-------------------- ------------------------
Steve Dubin, Chief Financial
and Accounting Officer
Page 12 of 12
<PAGE>
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<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 3,807,863
<SECURITIES> 31,020,102
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