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, 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 000-22354
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 $.10 per share: 13,828,334 shares outstanding
as of March 10, 1998
Page 1 of 12
<PAGE>
PART I - FINANCIAL
INFORMATION
Item 1. Financial Statements
MARTEK BIOSCIENCES CORPORATION
Balance Sheets
($ in thousands)
- --------------------------------------------------------------------------------
January 31, October 31,
1998 1997
- --------------------------------------------------------------------------------
(Unaudited)
Assets:
Current assets
Cash and cash equivalents $2,925 $1,977
Short-term investments and
marketable securities 13,189 18,698
Accounts receivable 2,169 1,181
Inventories (Note 3) 3,773 2,906
Prepaid expenses 572 318
Other current assets 218 273
----------------------------------
Total current assets 22,846 25,353
Property, plant and equipment, net 16,039 15,989
----------------------------------
$38,885 $41,342
==================================
Liabilities and stockholders' equity:
Current liabilities
Accounts payable $1,081 $1,008
Accrued liabilities 1,509 1,041
Current portion of notes payable 1,318 1,314
----------------------------------
Total current liabilities 3,908 3,363
Long-term portion of notes payable (Note 2) 2,968 3,292
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; 13,815,759
and 13,673,659 shares issued and
outstanding at January 31, 1998
and October 31, 1997, respectively 1,381 1,367
Additional paid-in capital 79,177 78,908
Accumulated deficit (48,549) (45,588)
----------------------------------
Total stockholders' equity 32,009 34,687
----------------------------------
$38,885 $41,342
==================================
See accompanying notes.
Page 2 of 12
<PAGE>
MARTEK BIOSCIENCES CORPORATION
Statements of Operations
(Unaudited - $ in thousands, except per share data)
Three months ended January 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Revenues:
Product sales:
Nutritional product sales $545 $143
Other product sales 461 379
----------------------------------
Total Product Sales 1,006 522
License fees and related revenues 1,143 293
Royalties 58 4
Research and development
contracts and grants 58 138
Third party contract revenue 22 --
----------------------------------
Total revenues 2,287 957
Costs and expenses:
Cost of product sales 834 370
Research and development 2,641 2,883
Selling, general and administrative 1,961 1,578
----------------------------------
Total costs and expenses 5,436 4,831
----------------------------------
Loss from operations (3,149) (3,874)
Other income (expense):
Miscellaneous income 21 8
Interest income 264 517
Interest expense (97) (103)
----------------------------------
Total other income 188 422
----------------------------------
Net loss $(2,961) $(3,452)
- --------------------------------------------------------------------------------
Net loss per share (Note 5) $(0.22) $(0.26)
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding 13,726,917 13,426,612
- --------------------------------------------------------------------------------
See accompanying notes.
Page 3 of 12
<PAGE>
MARTEK BIOSCIENCES CORPORATION
Statements of Cash Flows
(Unaudited - $ in thousands)
Three Months ended January 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Operating activities:
Net loss $(2,961) $(3,452)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 333 242
Changes in assets and liabilities:
Accounts receivable (988) (651)
Inventories (867) 64
Prepaid expenses (254) (342)
Other current assets 55 (68)
Accounts payable 73 227
Accrued liabilities 468 (268)
----------------------------------
Net cash used in operating activities (4,141) (4,248)
Investing activities:
Change in short-term investments
and marketable securities 5,509 (261)
Purchase of property, plant and equipment (383) (516)
----------------------------------
Net cash provided by (used in)
investing activities 5,126 (777)
Financing activities:
Repayment of notes payable (320) (93)
Proceeds from the exercise of options 283 293
----------------------------------
Net cash (used in) provided by
financing activities (37) 200
----------------------------------
Net increase (decrease) in cash and
cash equivalents 948 (4,825)
Cash and cash equivalents at beginning
of year 1,977 8,633
----------------------------------
Cash and cash equivalents at end of period $2,925 $3,808
- --------------------------------------------------------------------------------
See accompanying notes.
Page 4 of 12
<PAGE>
MARTEK BIOSCIENCES CORPORATION
Statement of Stockholders' Equity
(Unaudited - $ in thousands)
Additional
Common Stock Paid-In Accumulated
Shares Amounts Capital Deficit Total
------------------------------------------------------
Balance at
October 31, 1997 13,673,659 $1,367 $78,908 $(45,588) $34,687
- --------------------------------------------------------------------------------
Exercise of stock options 142,100 14 269 --- 283
Net loss --- --- --- (2,961) (2,961)
- --------------------------------------------------------------------------------
Balance at
January 31, 1998 13,815,759 $1,381 $79,177 $(48,549) $32,009
- --------------------------------------------------------------------------------
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, 1998 are not
necessarily indicative of the results that may be expected for the year ended
October 31, 1998. 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, 1997.
2. Commitment and Contingencies
The Company had commitments at January 31, 1998 to fund up to $1.5 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, 1998, would not have a material effect on the financial
statements.
The Company has licensed certain technologies and recognized license fee
revenue under various agreements. License fees are not recorded as revenue until
the earnings process is complete and amounts are not subject to refund. In the
quarter ended January 31, 1998, a license fee of $1,125,000 associated with a
pre-1998 licensing arrangement was recognized.
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 pay royalties upon the sale of certain
products resulting from such collaborations.
3. Inventories
Inventories consist of the following:
January 31, October 31,
1998 1997
------------ ------------
Finished products $2,537,956 $1,661,439
Work in process 934,605 909,932
Raw materials 300,457 334,081
------------ ------------
$3,773,018 $2,905,452
============ ============
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.
Page 6 of 12
<PAGE>
4. Income Taxes
At January 31, 1998, the Company has net operating loss carryforwards of
approximately $61,608,000 for income tax purposes that expire in years 2000
through 2012.
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, 1998 and 1997 are as
follows:
January 31, January 31,
1998 1997
---------- ----------
Deferred tax assets:
Write-off of patents 328,000 251,000
Other deferred tax assets 44,000 ---
Net operating loss carryforwards 24,643,000 18,228,000
---------- ----------
Total deferred tax assets $25,015,000 $18,479,000
========== ==========
Valuation allowance for net
deferred tax assets $(25,015,000) $(18,479,000)
Net deferred tax assets $ --- $ ---
========== ==========
5. Net loss per share
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. The Company's per
share amounts for all periods presented conform to SFAS No. 128 requirements.
Page 7 of 12
<PAGE>
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 concerning: (i) future
revenues and product introductions, (ii) future production efficiencies for its
nutritional oils products (iii) future research and development costs and (iv)
capital needs. 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 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 design. 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 Martek began to realize revenues from
the sale of Neuromins(TM), a DHA dietary supplement. Martek has incurred losses
in each year since its inception. At January 31, 1998, the Company's accumulated
deficit was $48,549,000. The Company expects to continue to expand its research
and development effort, optimize oil 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 1998, or until significant
sales of its nutritional oils and Neuromins(TM) DHA products occur and/or
significant royalties from sales of infant formula products containing its oils
are recognized. 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.
Four of the Company's licensees have introduced term infant formula
products containing Martek's oils in Spain, Israel, and Australia and three of
the Company's licensees have introduced preterm infant formula products
containing Martek's DHA and ARA in thirty countries. Management is not able to
predict, however, when, or if, any of these licensees will expand or introduce
new offerings of products containing Martek's oils. Management does not believe
that broad introductions of term infant formulas containing these oils will
occur before the middle of 1998, at the earliest. Revenues from preterm uses of
Martek's oils will not, alone, significantly reduce Martek's losses. Because the
extent and timing of future oils-related revenues are largely dependent upon the
Company's licensees, the timing or likelihood of future profitability is largely
dependent on factors over which the Company has no control.
Results of Operations - Comparison of Quarters Ended January 31, 1998 and 1997
Revenues for the quarter ended January 31 were $2,287,000, a 139% increase
from revenues of $957,000 for the same period in 1997, primarily due to
increased license fees and nutritional product sales. The increase in license
fees of $850,000 is due to the recognition of a $1,125,000 fee associated with a
pre-1998 licensing arrangement. Total product sales during the first quarter of
1998 increased by $484,000, or 93%, over the first quarter of 1997. Sales of
nutritional products, including Neuromins(TM) capsules, increased by $402,000,
or 281%, in the first quarter of 1998 when compared to the same period in 1997.
First quarter sales of other commercial products increased by $82,000, or 22%
from the same period in 1997. During the first quarter of 1998 royalty revenue
increased by $54,000, or over thirteen-fold when compared to the first quarter
of 1997. Revenues from research and development contracts and grants decreased
58% in the first quarter of 1998 over the first quarter of 1997.
Page 8 of 12
<PAGE>
Cost of product sales increased to 83% for the first quarter of 1998, up
from 71% for the first quarter of 1997 because of both the significant
contribution and the delayed timing of royalty income, and continued production
optimization. This increase resulted primarily from the cost of Martek's
nutritional oils sold to infant formula manufacturers which represented a higher
percentage of the product mix in the first quarter of 1998 compared to the first
quarter of 1997. Infant formula royalties may comprise up to half of revenues
from oil sold for such purposes, however, there is an approximately nine month
delay after the initial sale of oil until these royalties are received and
recognized as revenue. Accordingly, royalty revenues are not included in product
sales, thereby creating a significantly higher cost of goods sold as a
percentage of revenues than would have been the case if royalties were
incorporated into the product price and recognized at the same time as the
product sales. As sales volume increases, and manufacturing efficiencies and
optimization occurs, management believes that the cost of production of its
nutritional oils will decrease. The Company believes that a significant
continued optimization effort will be required for at least the next year. 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 its facilities will be sufficient to meet
the demand for the oils.
Research and development costs decreased by $242,000, or 8%, in the first
quarter of 1998 when compared to the same period in 1997. Consistent with the
Company's plans, nutritional oils development costs comprised over 75% of all
R&D costs as a result of the Company's continued development efforts to optimize
its production process. Research and development costs may increase in the
future as the Company evaluates new technologies and continues efforts to
optimize the efficiency of its large-scale fermentation and oil extraction
processes.
Selling, general and administrative expenses increased by $383,000, or 24%,
over the first quarter of 1997 primarily due to increased marketing and
promotion of the Company's product lines including an expanded advertising
program. Other income was $234,000 lower during the first quarter of 1998 than
in the first quarter of 1997 primarily 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.
As a result of the foregoing, net loss for the first quarter of 1998 was
$2,961,000, or $.22 per share, compared to a net loss of $3,452,000, or $.26 per
share for first quarter of 1997.
Recent Accounting Pronouncements
In 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS No. 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. The Company's per share
amounts for all periods presented conform to SFAS No. 128 requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires companies to report by major components and in total,
the change in its net assets during the period from non-owner sources. The FASB
also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for a company's operating segments and related disclosures about its products,
services, geographic areas and major customers. Both Statements are effective
for fiscal years beginning after December 15, 1997. Adoption of these standards
will not impact the Company's financial position, results of operations or cash
flows, and any effect, while not yet determined by the Company, will be limited
to the presentation of its disclosures.
Page 9 of 12
<PAGE>
Impact of Year 2000
Management is studying the implications of the Year 2000 on its information
systems. However, based on the business risk associated with the Company's
information systems, Management does not anticipate that the year 2000 will have
a significant impact on its information systems or result in a significant
commitment of resources to resolve potential problems associated with this
event.
Liquidity and Capital Resources
Cash, cash equivalents, short-term investments and marketable securities
decreased by $4,561,000 in the first quarter of 1998 resulting in a cash balance
of $2,925,000 and a balance of $13,189,000 in short-term investments and
marketable securities at January 31, 1998. Capital expenditures of $382,000 were
made in the first quarter of 1998, a significant portion of which represents
upgrades to the Company's fermentation and oil processing facilities in
Winchester, Kentucky. Management expects additional capital expenditures of at
least $1,600,000 in 1998 as a result of escalating fermentation and oil
processing activities at the facility.
Martek may require substantial additional funds to continue its research
and development programs, to conduct preclinical and clinical studies and 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 continued development
and optimization of the Company's production facility has had, and will continue
to have, a material effect upon Martek's liquidity and capital resources.
Additional plant modifications costing at least $1,600,000 are expected in 1998.
Expenditures beyond 1998 will depend in part on production capacity needs, the
extent of development and implementation of process improvements and the success
of previously implemented improvements.
Management believes its existing capital resources, consisting primarily of
cash, short-term investments and marketable securities will provide adequate
capital for at least the next 12 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. Management is also likely to pursue other methods of financing its
activities in 1998, 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. There can be no
assurance that such funds will be available to the Company on acceptable terms,
if at all.
Page 10 of 12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any material 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
<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.
MARTEK BIOSCIENCES CORPORATION
(Registrant)
Date: March 17, 1998 /s/ Peter L. Buzy
-------------- -----------------------------------------------------
Peter L. Buzy, Chief Financial and Accounting Officer
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1998
<CASH> 2,924,498
<SECURITIES> 13,189,136
<RECEIVABLES> 2,169,520
<ALLOWANCES> 0
<INVENTORY> 3,773,018
<CURRENT-ASSETS> 22,846,298
<PP&E> 19,944,414
<DEPRECIATION> 3,905,669
<TOTAL-ASSETS> 38,885,043
<CURRENT-LIABILITIES> 3,907,843
<BONDS> 2,967,744
0
0
<COMMON> 1,381,576
<OTHER-SE> 30,627,850
<TOTAL-LIABILITY-AND-EQUITY> 38,885,043
<SALES> 1,005,947
<TOTAL-REVENUES> 2,287,034
<CGS> 834,134
<TOTAL-COSTS> 5,436,194
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,583
<INCOME-PRETAX> (2,961,459)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,961,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,961,459)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
