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 July 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 0-22354
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 $.10 per share: 14,879,434 shares outstanding
as of September 8, 1998
Page 1 of 13
<PAGE>
PART I - FINANCIAL
INFORMATION
Item 1. Financial Statements.
MARTEK BIOSCIENCES CORPORATION
Balance Sheets
($ in thousands)
- --------------------------------------------------------------------------------
July 31, October 31,
1998 1997
- --------------------------------------------------------------------------------
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $3,524 $1,977
Short-term investments and
marketable securities 18,694 18,698
Accounts receivable 746 1,181
Inventories (Note 3) 4,137 2,906
Other current assets 455 591
----------------------------------
Total current assets 27,556 25,353
Property, plant and equipment, net 16,227 15,989
----------------------------------
$43,783 $41,342
==================================
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 614 $1,008
Accrued liabilities 1,143 1,041
Current portion of notes payable 1,328 1,314
----------------------------------
Total current liabilities 3,085 3,363
Long-term portion of notes payable 2,298 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; 14,873,384
and 13,673,659 shares issued and
outstanding at July 31, 1998
and October 31, 1997, respectively. 1,487 1,367
Additional paid-in capital 92,796 78,908
Accumulated deficit (55,883) (45,588)
----------------------------------
Total stockholders' equity 38,400 34,687
----------------------------------
$43,783 $41,342
==================================
See accompanying notes.
Page 2 of 13
<PAGE>
MARTEK BIOSCIENCES CORPORATION
Statements of Operations
(Unaudited - $ in thousands, except per share data)
Three months Nine months
ended July 31, ended July 31,
- --------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Revenues:
Product Sales:
Nutritional product sales $619 $539 $1,927 $1,192
Other product sales 491 436 1,595 1,229
-------------------- ----------------------
Total Product Sales 1,110 975 3,522 2,421
License fees and related
revenues --- --- 1,143 293
Royalties 67 7 187 16
Research and development
contracts and grants 140 101 326 375
Third party contract
revenue --- --- 22 ---
-------------------- ----------------------
Total revenues 1,317 1,083 5,200 3,105
Costs and expenses:
Cost of product sales 887 773 2,825 1,925
Research and development 2,575 2,716 7,475 8,397
Selling, general and
administrative 1,551 1,730 5,705 5,532
-------------------- ----------------------
Total costs and expenses 5,013 5,219 16,005 15,854
-------------------- ----------------------
Loss from operations (3,696) (4,136) (10,805) (12,749)
Other income (expense):
Miscellaneous income 25 18 67 45
Interest income 341 400 801 1,354
Interest expense (170) (111) (358) (323)
-------------------- ----------------------
Total other income 196 307 510 1,076
-------------------- ----------------------
Net loss ($3,500) ($3,829) ($10,295) ($11,673)
- --------------------------------------------------------------------------------
Net loss per share (Note 5) ($0.24) ($0.28) ($0.73) ($0.86)
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding 14,833,397 13,609,781 14,145,134 13,530,766
- --------------------------------------------------------------------------------
See accompanying notes.
Page 3 of 13
<PAGE>
MARTEK BIOSCIENCES CORPORATION
Statements of Cash Flows
(Unaudited - $ in thousands)
Nine Months ended July 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Operating activities:
Net loss ($10,295) ($11,673)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,001 861
Changes in assets and liabilities:
Accounts receivable 435 (221)
Inventories (1,231) (844)
Other current assets 136 (146)
Accounts payable (394) (25)
Accrued liabilities 102 (279)
-------------------------------
Net cash used in operating activities (10,246) (12,327)
Investing activities:
Change in short-term investments
and marketable securities 4 8,579
Purchase of property, plant and equipment (1,239) (1,411)
-------------------------------
Net cash provided by (used in)
investing activities (1,235) 7,168
Financing activities:
Proceeds from issuance of common stock
in private placement 10,010 ---
Proceeds from the exercise of warrants
and options 3,998 514
Borrowings on notes payable --- 4,000
Repayment of notes payable (980) (4,652)
-------------------------------
Net cash provided by (used in)
financing activities 13,028 (138)
-------------------------------
Net increase (decrease) in cash and
cash equivalents 1,547 (5,297)
Cash and cash equivalents at beginning of year 1,977 8,633
-------------------------------
Cash and cash equivalents at end of period $3,524 $3,336
===============================
See accompanying notes.
Page 4 of 13
<PAGE>
MARTEK BIOSCIENCES CORPORATION
Statement of Stockholders' Equity
(Unaudited - $ in thousands)
Additional
Paid-In Accumulated
Common Stock Capital Deficit Total
--------------------------------------------------------------
Shares Amounts
Balance at
October 31, 1997 13,673,659 $1,367 $78,908 ($45,588) $34,687
- --------------------------------------------------------------------------------
Issuance of common stock
in private placement 655,563 66 9,944 --- 10,010
Exercise of stock options
and warrants 544,162 54 3,944 --- 3,998
Net loss --- --- --- (10,295) (10,295)
- --------------------------------------------------------------------------------
Balance at
July 31, 1998 14,873,384 $1,487 $92,796 ($55,883) $38,400
- --------------------------------------------------------------------------------
See accompanying notes.
Page 5 of 13
<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 and nine months ended July 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 July 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 July
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 January,
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:
July 31, October 31,
1998 1997
---------- ----------
Finished products $2,160,896 $1,661,439
Work in process 1,689,516 909,932
Raw materials 286,909 334,081
---------- ----------
$4,137,321 $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 13
<PAGE>
4. Income Taxes
At July 31, 1998, the Company had net operating loss carryforwards of
approximately $68,942,000 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 in the past,
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 July 31, 1998 and October 31, 1997 are
as follows:
July 31, October 31,
1998 1997
------------ -----------
Deferred tax assets:
Write-off of patent $ 403,000 $ 328,000
Other 44,000 44,000
Net operating loss carryforwards 27,577,000 23,459,000
------------ -----------
Total deferred tax assets $28,024,000 $23,831,000
============ ===========
Valuation allowance for net
deferred tax assets ($28,024,000) ($23,831,000)
============ ============
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.
6. Private Placement of Common Stock
On April 27, 1998, 655,563 shares of the Company's common stock and warrants to
purchase 196,670 shares of common stock were issued in a private placement
resulting in net proceeds to the Company of approximately $10 million. The
warrants are exercisable for a period of three years from date of issuance at a
price of $18.76. The investors have also agreed to a two-year funding commitment
to provide up to an additional $10.25 million in financing in the form of common
stock and warrants, at the discretion of the Company, subject to certain
conditions, which include the stock price being within twenty percent of the
initial issuance price of $15.63. In consideration for the additional $10.25
million two-year funding commitment, the Company is obligated to issue the
investors additional warrants to purchase up to 51,250 shares of common stock at
the end of each of year one and year two if the Company does not utilize the
additional funding by such dates.
Page 7 of 13
<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: (1) expectations regarding
future product introductions, distribution, sales, applications and potential
marketing partnerships; (2) expectations regarding sales and royalties by and
from formula licensees; (3) expectations regarding future efficiencies in
manufacturing processes and the cost of production of the Company's nutritional
oils; (4) future research and development costs and; (5) expectations regarding
additional capital expenditures needed in relation to fermentation and oil
processing activities. Forward-looking statements may relate to such matters as
the Company's ability to generate future revenues and the potential
commercialization of the Company's products including production efficiencies
and include those statements containing words such as "will," "should," "could,"
"anticipate," "believe," "plan," estimate," "expect," "intend," and other
similar expressions. Such statements involve risks and uncertainties and actual
results may differ materially due to a variety of risk factors including without
limitation those factors set forth in Exhibit 99.1 to this report and from time
to time in the Company's filings with the Securities and Exchange Commission.
Martek, founded in 1985, is a leader in the development and commercialization of
high value products derived from microalgae, including nutritional products,
pharmaceutical research and development tools and diagnostics. Martek develops,
manufactures and sells products from microalgae. The Company's products include:
(1) specialty, nutritional oils for infant formula, nutritional supplements and
food ingredients which play a central role in the development of the eyes and
central nervous system; (2) high value reagents to visualize molecular
interactions for drug discovery and development; and (3) new and powerful
fluorescent markers for diagnostics, rapid miniaturized screening and gene and
protein detection. In 1989, Martek began to realize revenues from sales of its
reagent products. 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. In 1998, Martek first
realized revenues from the sale of its new fluorescent pigments.
Martek has incurred losses in each year since its inception. At July 31, 1998,
the Company's accumulated deficit was $55,883,000. 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's losses
could increase for at least the next six months, 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.
Management believes that while quarterly results may show fluctuations in
product sales, the outlook for future revenue growth remains strong and that
sales for fiscal 1998 and 1999 are expected to surpass prior year levels.
Specifically, management believes that for the balance of the fiscal year and
1999: (1) Infant formula containing Martek's oils will be introduced in
additional countries; (2) sales and royalties from the Company's infant formula
licensees will continue to grow; (3) distribution of the Company's Neuromins
capsule products will expand; (4) sales of new high value products from the
Company's stable isotope group will increase and; (5) diagnostic products will
contribute to product sales.
Management believes that humans throughout life will benefit from DHA
supplementation. This could represent a far larger market for DHA than the
market for infants. To realize this market, the Company is pursuing a long-term
marketing partnership with a large nutritional products and/or pharmaceutical
Page 8 of 13
<PAGE>
company to promote Martek's non-infant formula nutritional oil products. Because
of this objective, shorter-term marketing arrangements of lesser scope have been
avoided, thus sacrificing some short-term product sales.
Four of the Company's licensees have introduced term infant formula products
containing Martek's oils in Spain, Israel, Australia and New Zealand and three
of the Company's licensees have introduced preterm infant formula products
containing Martek's DHA and ARA in 35 countries. Management believes that broad
introductions of infant formula containing Martek's nutritional oils and/or a
strategic alliance with a large scale nutritional products and/or pharmaceutical
company will occur in the future. However, significantly higher revenue related
to infant formula sales prior to fiscal 1999 will not be achieved and management
is unable to predict accurately when such events will occur. That
notwithstanding, management anticipates that product sales, including sales from
infant formula related products, will overall increase in both fiscal 1998 and
fiscal 1999.
Results of Operations - Comparison of Quarters and Nine Months Ended July 31,
1998 and 1997
Revenues for the quarter ended July 31, 1998 were $1,317,000, a 22% increase
from revenues of $1,083,000 for the same period in 1997, primarily due to
increased product sales and royalty revenues from licensee sales of infant
formula containing Martek's oils. Revenues for the nine-month period ended July
31, 1998 were $5,200,000, an increase of $2,095,000 or 67%, from the same period
in 1997 also due to increased product sales and royalty revenues, as well as
increased license fees. Total product sales during the third quarter and nine
months ending July 31, 1998, increased by $135,000 and $1,101,000 or 14% and
45%, respectively, from the same periods in 1997. Sales of nutritional products
including Neuromins(TM) capsules, increased nearly 15% for the third quarter and
almost 62% for the first nine months of 1998, when compared to the same periods
in 1997, primarily due to increased sales of Martek's oils to infant formula
manufacturers. Sales of products for drug discovery and diagnostics increased
13% for the third quarter and 30% for the first nine months of 1998, when
compared to the same periods in 1997.
Royalty revenues increased nearly ten-fold in the third quarter of 1998 compared
to the third quarter of 1997 and almost twelve-fold for the first nine months of
1998 compared to the first nine months of 1997, primarily due to the additional
revenue generated from introductions of pre-term and term infant formulas
containing Martek's oils by the Company's licensees in 1998. Revenues from
research and development contracts and grants increased by 39% in the third
quarter of 1998 compared to the third quarter of 1997 and decreased 13% for the
nine months ended July 31, 1998 from the same period in 1997.
Cost of product sales increased slightly to 80% of revenues from product sales
for the third quarter of 1998 compared to 79% for the third quarter of 1997. For
the nine-month period ended July 31, 1998, cost of product sales remained at 80%
of revenues from product sales, consistent with the same period in 1997. Cost of
sales will continue to fluctuate based on the mix of product sales, which in
1998 includes a higher level of low margin sales to infant formula manufacturers
and a lower mix of higer margin Neuromins(TM) capsule sales compared to the same
periods in 1997. Sales to infant formula manufacturers will remain low margin
because infant formula royalties, which are almost equal to the sales price, are
not included in product sales and therefore understate the true sales price by
almost 50%. There is an approximately nine month delay after the initial sale of
oil until these royalties are received and recognized as revenue, creating a
significantly higher cost of goods sold as a percentage of revenues than would
be the case if royalties were incorporated into the product price and recognized
at the same time as the product sale. In addition, oil production costs remain
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, Management believes that the
cost of production of the nutritional oils products will decrease.
Page 9 of 13
<PAGE>
Research and development costs decreased by $141,000 or 5%, in the third quarter
of 1998 as compared to the third quarter of 1997. For the nine-month period
ended July 31, 1998, research and development costs decreased $922,000 or 11%
when compared to the same period in 1997. These decreases resulted from the
conversion of certain development efforts to production efforts. Consistent with
the Company's plans, nutritional oils development costs accounted for over 75%
of all research and development costs as a result of the Company's continued
development efforts to refine 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 decreased by $179,000, or 10%,
during the third quarter of 1998 and increased by $173,000 or 3%, in the nine
months ended July 31, 1998 over the third quarter and nine months ended July 31,
1997, respectively. These costs increased for the nine-month period primarily
due to marketing, advertising and public awareness costs resulting from the
commercialization of the Company's Neuromins(TM) products. Other income was
$111,000 lower during the third quarter of 1998 than in the third quarter of
1997 and $566,000 lower in the first nine months of 1998 than in the first nine
months of 1997. These decreases are due primarily to lower amounts of interest
being earned on investments as funds are being used to support Company
operations.
As a result of the foregoing, net loss for the third quarter of 1998 was
$3,500,000, or $.24 per share, compared to a net loss of $3,829,000, or $.28 per
share for the third quarter of 1997. A net loss of $10,295,000 or $.73 per share
for the nine months ended July 31, 1998, was a decrease from a net loss of
$11,673,000 or $.86 per share for the same period in 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.
Impact of Year 2000
The Company uses a number of computer software programs and operating systems in
its internal operations, including applications used in financial business
systems and various administrative functions. Management has evaluated the
business risk associated with the Company's information systems as minimal and
has completed more than 50% of its "Year 2000" compliance implementation. The
costs incurred to date have not had a material impact on the Company's
operations and management does not anticipate that future costs will be
material. However, there can be no assurance that "Year 2000" issues will not
require a significant commitment of resources to resolve potential problems.
Page 10 of 13
<PAGE>
Liquidity and Capital Resources
Cash, cash equivalents, short-term investments and marketable securities
increased by $1,543,000 in the first nine months of 1998, primarily due to the
funds raised in the private placement of common stock in April 1998 and the
exercise of outstanding warrants related to the Company's 1995 private
financing, both offset by $11,481,000 of funds used in operating and investment
activity during the nine months ended July 31, 1998. Funds used in operating
activities for the first nine months of 1998 included $1,231,000 related to the
expansion of the Company's inventory in anticipation of further commercial
introductions of the Company's products. Capital expenditures of $432,000 and
$1,239,000 were made in the third quarter and the nine month period ending July
31, 1998, respectively, a significant portion of which represents upgrades to
the Company's fermentation and oil processing facilities in Winchester,
Kentucky. As a result, the Company had a cash balance of $3,524,000 and a
balance of $18,694,000 in short-term investments and marketable securities at
July 31, 1998. Management expects additional capital expenditures of up to
$500,000 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: growth in the Company's infant formula and nutritional
product sales; the extent and progress of its research and development programs;
the progress of preclinical and clinical studies; the time and costs of
obtaining regulatory clearances for those products subject to such clearances;
the costs involved in filing, protecting and enforcing patent claims; competing
technological and market developments; the cost of capital expenditures at the
Company's manufacturing facilities; the cost of acquiring additional and/or
operating existing manufacturing facilities for its various products and
potential products (depending on which products the Company decides to
manufacture and continues to manufacture itself); and the costs of marketing and
commercializing the Company's products. 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 up to $500,000 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 18 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. Should the Company need to raise addtional funds, there can be no
assurance that such funds will be available to the Company on acceptable terms,
if at all.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
Page 11 of 13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
In order to present a proposal at Martek's 1999 annual meeting of stockholders,
a Martek stockholder must provide written notice of the proposal to the Company
no later than December 16, 1998. The Company intends to use discretionary voting
authority with respect to any matter that is brought before the 1999 annual
meeting of stockholders of which the Company has not received written notice by
December 16, 1998. Notice must be sent to: Martek Biosciences Corporation,
Attention Chief Financial Officer, 6480 Dobbin Road, Columbia, Maryland 21045.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 99.1: Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995.
(b) Reports on Form 8-K: None
Page 12 of 13
<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: September 14, 1998 /s/ Peter L. Buzy
------------------- ------------------------------
Peter L. Buzy, Chief Financial
Officer(Principal Financial
and Chief Accounting Officer)
Page 13 of 13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 3,524,028
<SECURITIES> 18,694,361
<RECEIVABLES> 755,259
<ALLOWANCES> 10,000
<INVENTORY> 4,137,321
<CURRENT-ASSETS> 27,555,451
<PP&E> 20,801,038
<DEPRECIATION> 4,573,953
<TOTAL-ASSETS> 43,782,537
<CURRENT-LIABILITIES> 3,084,845
<BONDS> 2,297,473
0
0
<COMMON> 1,487,338
<OTHER-SE> 36,912,881
<TOTAL-LIABILITY-AND-EQUITY> 43,782,537
<SALES> 3,521,944
<TOTAL-REVENUES> 5,200,207
<CGS> 2,825,211
<TOTAL-COSTS> 16,004,605
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 358,331
<INCOME-PRETAX> (10,294,521)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,294,521)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,294,521)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
</TABLE>
EXHIBIT 99.1
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES REFORM ACT OF 1995
Martek Biosciences Corporation ("Martek" or the "Company") desires to
take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act"). Many of the following important
factors discussed below have been discussed in Martek's prior SEC filings.
Martek wishes to caution readers that the following important factors,
among others, in some cases have affected, and in the future could affect,
Martek's actual results, and could cause Martek's actual results for the
financial periods ending after the date hereof to differ materially from those
expressed in any forward-looking statements made by or on behalf of Martek.
Forward-looking statements may relate to such matters as the Company's ability
to generate future revenues and the potential commercialization of the Company's
products including the optimization of production costs and include those
statements containing words such as "will," "should," "could," "anticipate,"
"believe," "plan," "estimate," "expect," "intend," and other similar
expressions. The filing of this list should not be construed as constituting all
factors which investors should consider prior to making an investment decision
in Martek's securities, nor should investors assume that the information
contained herein is complete or accurate in all respects after the date of this
filing. The Company disclaims any duty to update the statements contained
herein.
History of Operating Losses; Uncertainty of Future Financial Results.
The Company has experienced net operating losses since its inception. The
Company expects such losses to continue until significant sales of its
nutritional oils occur and/or until significant royalties from sales of infant
formula products containing the Company's oils are recognized. The Company
expects to have quarter-to-quarter and year-to-year fluctuations in revenues,
expenses and losses, some of which could be significant. Future financial
results will be affected by, among other things, the following factors: the
Company's ability to complete successfully the commercialization and cost
optimization of its products; the willingness and ability of infant formula
licensees to incorporate the product into their infant formula products; the
willingness of potential strategic partners to market the Company's products;
growth in revenues from the Company's nutritional oils; growth in revenues from
sales of products for use in molecular structure research and structure-based
drug design; the progress of the Company's research and development programs and
its preclinical and clinical product studies; the time, costs and ability of
obtaining regulatory approvals for those products subject to such approval; the
Company's ability to protect its proprietary rights; the costs of protecting the
Company's patent claims; competing technological and market developments;
manufacturing costs associated with its various products and potential products;
and the costs of commercializing and marketing the Company's products.
Early Stage of the Company and its Products. The Company was founded in
1985. Although the Company expects to receive most of its future revenues from
direct sales of products, royalty income and licensing fees, a portion of its
revenues to date has come from research and development contracts (primarily
from the federal government) and federal government grants. The Company first
realized revenues from its products for use in molecular structure research and
structure-based drug design in 1989 and from license fees and sales of sample
quantities of certain of its nutritional and diagnostic products in 1992.
Certain of the Company's products will require substantial additional research
and development. Some will require laboratory and clinical testing and
regulatory approval. There can be no assurance that the Company's product
development efforts will be successfully completed, that required regulatory
approvals will be obtained on a timely basis or at all, that the Company's
products will be capable of being manufactured in commercial quantities at
reasonable cost or that any new products, if introduced, will achieve market
acceptance. In addition, although the Company anticipates the introduction of
new products over the next several years, some of the Company's potential
products, especially in the area of pharmaceuticals, are not expected to become
commercially available for many years, if at all.
Need for Additional Capital. Substantial expenditures will be required
to enable the Company to continue its research and development activities, to
conduct preclinical and clinical studies and to manufacture and market its
products. The level of expenditures required for these activities will depend in
part on the extent to which the Company develops, manufactures and markets its
products independently or with other companies through collaborative
arrangements. The Company's future capital requirements will also depend, among
other things, on one or more of the following factors: the extent and progress
of its research and development programs; the progress of preclinical and
clinical studies; the time and costs of obtaining regulatory clearances for
those products subject to such clearances; the costs involved in filing,
protecting and enforcing patent claims; competing technological and market
developments; the cost of capital expenditures at the Company's manufacturing
facilities; the cost of acquiring additional and/or operating existing
manufacturing facilities for its various products and potential products
(depending on which products the Company decides to manufacture and continues to
manufacture itself); and the costs of marketing and commercializing the
Company's products. There can be no assurance that funding to carry on these
activities will be available at all or on favorable terms to permit successful
commercialization of the Company's products. The Company has only established
limited debt financing arrangements, which require the Company to meet certain
financial covenants related to its outstanding term loans. There can be no
assurance that it will be able to continue such arrangements, to continue to
comply with bank covenants or to establish additional debt financing
arrangements on satisfactory terms, if at all. If adequate funds are not
available, the Company may be required to curtail one or more of its research
and development, manufacturing and commercialization programs or obtain funds
through arrangements with collaborative partners or others that may require the
Company to relinquish certain technology or product rights including patent and
other intellectual property rights.
Dependence on Third Parties; Reliance on Future Collaborations. To
date, a portion of the Company's revenues has consisted of license fees and
anniversary payments received from infant formula manufacturers which have
licensed the Company's nutritional oils. Under these agreements, the Company is
entitled to receive royalty payments based on the licensees' sales of products
including the Company's nutritional oils. Such licensees will be responsible for
performing all clinical testing on, obtaining regulatory approvals for and
marketing products containing the Company's nutritional oils. These licensees
are not required to use the Company's nutritional oils in any of their products
and are not restricted under the licensing agreements from obtaining
docosahexaenoic acid ("DHA") or arachidonic acid ("ARA") from other sources for
use in their infant formula products. Although some of the licensees have
introduced infant formula products containing the Company's nutritional oils
overseas, the Company cannot predict whether any licensee will broaden its use
of the Company's oils or whether they will be used by any of the Company's other
licensees in their infant formula products. Accordingly, future revenues from
the Company's nutritional oils are largely dependent on factors over which the
Company will have no control.
The Company's strategy for the development, clinical testing,
manufacturing and commercialization of certain of its products includes entering
into various collaborations with corporate partners, licensors, licensees and
others. In 1997, the Company entered into a supply agreement with a third party
manufacturer for its ARA-containing oil. Although the Company is able to produce
its ARA oil in its Kentucky manufacturing plant, a halt in supply from its third
party ARA oil manufacturer could adversely impact the Company's ability to meet
product demand in the short-run and, in the long-run, if this source of ARA oil
could not be replaced. There can be no assurance that the Company will be able
to negotiate other collaborative arrangements in the future on acceptable terms,
if at all, or that such collaborative arrangements will be beneficial to the
Company. To the extent that the Company is not able to establish such
arrangements, it would face increased capital requirements to undertake such
activities at its own expense and might encounter significant delays in
introducing its products into certain markets or find that the development,
manufacture, marketing and sale of its products in such markets is adversely
affected. In particular, the continuing ability of the Company to generate
nutritional oil-related revenues is dependent on the Company's ability to enter
into agreements with additional licensees. Certain of the Company's nutritional
oil licensing agreements contain provisions which restrict the Company from
entering into agreements with future licenses for infant formula applications
containing payment terms more favorable, or with lower royalty rates, than those
granted to current licensees. Such provisions may restrict the Company's ability
to negotiate with potential infant formula licensees.
Dependence on Major Customers. The Company's dependence on sizable
product orders from its infant formula licensees and other marketing partners
will make the relationship with each customer critically important to the
Company's business. While each customer relationship is typically structured
around a detailed, heavily negotiated contract, as the relationship evolves over
time, adjustments to such items as product pricing, royalty rates and delivery
timetables may be required in response to customer demands and expectations.
There can be no assurance that the Company will be able to manage its licensees
and other customer relationships successfully. Additionally, the size and
complexity of the Company's licensees and other marketing partners, and the
typically long and unpredictable product launch cycles require the Company to
make considerable early investments in account management and other efforts
without the assurance of future revenues. There can be no assurance that the
Company will be able to convert these investments into significant revenue
generating relationships.
Technological Change and Competition. The Company operates in rapidly
evolving fields. Competition from larger, more experienced and better
capitalized companies has been and will continue to be intense. There can be no
assurance that developments by others will not render the Company's products or
technologies obsolete or noncompetitive or that the Company will be able to keep
pace with any new technological developments. Currently, DHA-containing fish
oils provide alternative sources of DHA, and the Company is aware of another
company which produces DHA from fungal sources. In addition, DHA and ARA have
been derived from egg yolk lipids, and the Company is currently aware of several
European infant formula manufacturers that are adding DHA derived from egg yolk
lipids and/or fish oil to their infant formula. Further, although the Company
has obtained seven U.S. patents and a number of patents outside the U.S.
covering certain aspects of its nutritional oils to date, and has additional
patent applications pending covering certain aspects of these DHA- and
ARA-containing oils, the Company has not been awarded any European patents
relating to its ARA-containing oil. Accordingly, competitors may be able to
produce, sell and use ARA in Europe during the period when patents have not been
issued or have been invalidated using similar or identical processes to those
used by the Company, although they generally are prohibited from manufacturing,
using or selling such materials where patents have been issued. Competitors may
also be able to produce, sell and use DHA-and/or ARA-containing oils in
countries where the Company has not applied for patent protection. In addition,
competitors may produce certain DHA- and ARA-containing oils that are not
covered by the Company's patents. The Company is aware of several other
companies offering ARA-containing oils for sale. In addition, there can be no
assurance that other sources of DHA and ARA, the two primary components of the
Company's nutritional oil, will not become commercially viable.
Uncertainty Regarding Patents and Proprietary Technology. The Company's
success is dependent in part on its ability to obtain patent protection for its
products, maintain trade secret protection and operate without infringing the
proprietary rights of others. The Company's policy is to protect aggressively
its proprietary technology through patents, where appropriate, and through trade
secrets in other cases. Additionally, the Company, in certain cases, relies on
the licenses of patents and technology of third parties. The Company has
obtained approximately 25 U.S. patents, covering various aspects of its
technology, which will expire on various dates between 2007 and 2015. The
Company has filed, and intends to file, applications for additional patents
covering both products and processes as appropriate. There can be no assurance
that any patent applications filed by, assigned to, or licensed to, the Company
will be granted, that the Company will develop additional products that are
patentable or that any patents issued to or licensed by the Company will provide
the Company with any competitive advantages or adequate protection for
inventions. Moreover, no assurance can be given that any patents issued to or
licensed by the Company will not be challenged, invalidated or circumvented by
others.
There can be no assurance that issued patents, or patents that may
issue, will provide protection against competitive products or otherwise be
commercially valuable. Furthermore, patent law relating to the scope of claims
in the fields of health care and biosciences is still evolving, and the
Company's patent rights are subject to this uncertainty. The Company's patent
rights on its products therefore might conflict with the patent rights of
others, whether existing now or in the future. Alternatively, the products of
others could infringe the patent rights of the Company. The defense and
prosecution of patent claims is both costly and time consuming, even if the
outcome were favorable to the Company. An adverse outcome could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from third parties or require the Company to cease selling its
products.
The Company has been issued seven U.S. patents covering certain aspects
of its DHA and/or ARA oils. the Company has applied for other patents in the
United States covering certain other aspects of its nutritional oils and has
also filed patent applications on a selective basis in other industrialized
countries, some of which are pending and some of which have been granted. The
Company is unable to predict, however, whether these patents will be challenged,
invalidated or circumvented by others. Failure by the Company to obtain adequate
patent protection for its nutritional oils would have a material adverse effect
on the Company's results of operations, particularly future sales of its
nutritional oils, future royalties on sales of infant formula containing these
oils or license fees related thereto. In particular, failure to maintain patent
protection would permit competitors of the company to produce products which
would be directly competitive with its nutritional oils using similar or
identical processes, and it is possible that the infant formula manufacturers
currently under license by the Company or which may be under license in the
future may choose formula ingredients from these competitors if they choose to
include the ingredients in their formulas at all.
The Company's other patents cover its photobioreactor system for
culturing microalgae and certain aspects of Martek's breath test technology; its
Celtone and Celtone M technology; and its combinatorial library technology.
The Company also relies on trade secrets and proprietary know-how,
which it seeks to protect in part by confidentiality agreements with its
collaborators, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any such breach or that the Company's trade secrets will not otherwise
become known or be independently developed by competitors.
Risks Associated with Infant Formula and Nutritional Products
Industries. To the extent the Company's nutritional oils are included in infant
formula, and/or the Company's oils are included in nutritional products for
consumer use, the Company is subject to the risks generally associated with
these industries. These risks include, among others, that (i) product tampering
or production defects may occur which may require a recall or may reduce the
demand for such products; (ii) an ingredient used in such products, including
the Company's nutritional oils, may be banned or its use limited or declared
unhealthful; and (iii) sales of infant formula may decline or use of the
Company's nutritional oils may be limited or discontinued due to perceived
health concerns, adverse publicity or other reasons beyond the control of the
Company.
Potential Difficulty in Obtaining FDA and other Government Approvals.
The Company's products and its manufacturing and research activities are subject
to varying degrees of regulation by a number of government authorities in the
United States and other countries, including the FDA pursuant to the Federal
Food, Drug and Cosmetic Act (the "FDC Act"). The FDA regulates, to varying
degrees and sometimes in very different ways, infant formulas, dietary
supplements, medical foods, enteral and parenteral nutritional products and
diagnostic and pharmaceutical products, including their manufacture and
labeling. Generally, prescription pharmaceuticals and certain types of
diagnostic products are regulated more rigorously than foods, such as dietary
supplements. Infant formulas are special types of food that are regulated more
rigorously than most other types of foods. Federal and state laws, regulations
and policies are always subject to change and depend heavily on administrative
policies and interpretations. There can be no assurance that any changes with
respect to federal and state laws, regulations and policies, and, particularly,
with respect to the FDA or other such regulatory bodies, with possible
retroactive effect, will not have a material adverse effect on the Company.
Martek's infant formula licensees are responsible for obtaining the
requisite regulatory clearances to market their products containing Martek's
oils. To date, none of the company's infant formula licensees have obtained the
requisite marketing clearances for any of the Company's products that require
such clearances in the United States. Sales of the Company's products outside
the United States are subject to foreign regulatory requirements that may vary
widely from country to country. Term infant formula products containing the
Company's nutritional oils are currently being marketed outside the U.S. in four
countries, and pre-term infant formula products containing the Company's oils
are currently being marketed outside the U.S. in 35 countries. Martek
understands that its licensees have received appropriate regulatory clearances
to the extent they are required to market such products in those countries.
The time required to obtain clearances from additional foreign
countries and for term infant formulas containing Martek's oils in foreign
countries may be longer or shorter than that required by the FDA or other such
agencies, and clearance or other product requirements may differ. There can be
no assurance that such foreign clearances or other requirements can be obtained
or met on a timely basis, if at all.
There can be no assurance that DHA and ARA used in medical foods,
infant formulas or enteral nutritional products will not be subject to food
additive regulation under the FDC Act. Additional data also may be needed to
support the use of DHA and ARA in medical foods.
The process of obtaining FDA clearances can be time-consuming and
expensive, and there is no assurance that such clearances will be granted or
that the FDA review process will not involve delays that materially and
adversely affect the testing, marketing and sale of the Company's products.
Moreover, regulatory clearances for products such as medical devices, new drugs,
or new food additives, even if granted, may include significant limitations on
the uses for which such products may be marketed. Additionally, product
clearances could be withdrawn for failure to comply with regulatory standards.
There can be no assurance that any clearances that are required, once obtained,
will not be withdrawn or that compliance with other regulatory requirements can
be maintained.
Many of the Company's products are in research and development phases.
The Company cannot predict all regulatory requirements or issues that may apply
to or arise in connection with the Company's products. Changes in existing laws,
regulations or policies and the adoption of new laws, regulations or policies
could prevent the Company or its licensees or collaborators from, or could
affect the timing of, achieving compliance with regulatory requirements,
including obtaining current and future regulatory clearances, where necessary.
Due to the cost and time commitment associated with the FDA regulatory
process, as well as the Company's lack of experience in obtaining FDA regulatory
clearances, the Company will decide on a product-by-product basis whether to
handle relevant clearance and other requirements independently or to assign such
responsibilities to its licensees or future collaborative partners. There can be
no assurance that the Company, its licensees or collaborators will be able to
obtain such regulatory clearances, if required, on a timely basis or at all.
Delays in receipt of, or failure to receive, such clearances, the loss of
previously received approvals or clearances, or failure to comply with existing
or future regulatory requirements would have a material adverse effect on the
Company's business, financial condition and results of operations.
In connection with the Company's decision to manufacture certain of its
products which it markets directly, or licenses to or collaborates with others
to market, it will be required to adhere to applicable current Good
Manufacturing Practices ("GMP") as required by the FDA. GMP regulations specify
component and product testing standards, control quality assurance requirements,
and records and other documentation controls. In general, drug GMP requirements
are more stringent than food GMP requirements although significant quality
control procedures exist for infant formulas. Depending upon the type of FDA
application that is submitted, compliance with relevant GMP requirements can be
onerous and time consuming, and there can be no assurance that the Company can
meet relevant FDA manufacturing requirements, particularly for scale-up
operations involving product marketing applications. Because the Company is
manufacturing its DHA and ARA oils, it is subject to GMP and various other
requirements applicable to infant formulas and dietary supplements as well as
periodic inspections by the FDA. Further, the Company has had only limited
experience in the area of regulatory compliance with respect to its products.
There can be no assurance that the company will be able to continue to
manufacture its nutritional oils in accordance with relevant infant formula and
dietary supplement requirements for commercial use. Ongoing compliance with GMP
and other applicable regulatory requirements are monitored through periodic
inspections by state and federal agencies, including the FDA and comparable
agencies in other countries. A determination that the Company is in violation of
such GMP and other regulations could lead to the imposition of civil penalties,
including fines, product recalls or product seizures, and, in the most egregious
cases, criminal sanctions.
Each line of products that is or may be marketed by the Company or its
licensees or collaborators can present unique regulatory problems and risks,
depending on the product type, uses and method of manufacture.
The Federal Dietary Supplement Health and Education Act of 1994
("DSHEA") regulates the use and marketing of dietary supplements. The DSHEA sets
forth standards for adulteration of dietary supplements or ingredients thereof,
prescribes detailed requirements for labeling dietary supplements and
establishes GMP requirements for dietary supplements. Martek is currently
marketing a line of DHA dietary supplements, Neuromins(TM) and Neuromins(TM)PL.
In addition, it is researching and developing new applications for its DHA and
ARA oils. There can be no assurance that the Company will be able to comply with
the requirements of the DSHEA or any regulations that the FDA may promulgate
thereunder with regards to ARA as a dietary supplement or that the Company will
be able to continue to meet such requirements with regard to DHA as a dietary
supplement.
The Company's fluorescent pigments and other products derived from
microalgae are subject to potential regulation by the FDA as either medical
devices or as a combination medical device/drug product to the extent that they
are used in the diagnosis, mitigation, treatment, cure or prevention of
diseases. Such classification would subject the products to premarket clearances
and/or regulatory approvals. There can be no assurances that the Company or its
licensees or collaborators would be able to develop the extensive safety and
efficacy data needed to support such FDA premarket clearances and/or regulatory
approvals or that the FDA ultimately would authorize the marketing of such
products on a timely basis, if at all.
For pharmaceutical uses of products derived from microalgae, there can
be no assurance that required clinical testing will be completed successfully
within any specified time period, if at all, with respect to the Company's
products. Additionally, there is no assurance that the Company or its licensees
or collaborators will be able to develop the extensive data needed to establish
the safety and efficacy of these products for approval for drug uses, or that
such drug products will not be subject to regulation as biological products or
as controlled substances, which would affect marketing and other requirements.
Limited Manufacturing and Sales and Marketing Experience and
Capabilities. In 1995, the Company acquired a fermentation plant in Winchester,
Kentucky for the manufacture of its nutritional oils. During 1996, the Company
completed the construction of an oil extraction and refining facility at its
Winchester plant. The Company has limited experience operating its manufacturing
facility. There can be no assurance that the Company will be able to scale-up or
successfully optimize production of its nutritional oils or its other
nutritional, diagnostic or pharmaceutical products or comply with applicable
regulatory, including GMP, requirements or that these production facilities will
be sufficient to meet future demand for the Company's products. If the Company
is not able to develop adequate manufacturing capability or contract for
manufacturing on acceptable terms, the Company may not be able to commercialize
certain of its current or planned products or such commercialization may be
significantly delayed. In addition, the Company has only limited experience
managing operations at a remote geographic location. Managing a remote
manufacturing plant may place a substantial strain on the managerial resources
of the Company.
The Company believes that its Winchester, Kentucky plant will be able
to produce the Company's nutritional oils in sufficient quantity to meet
near-term demand. Nevertheless, because demand for the Company's nutritional
oils under the Company's infant formula licensing agreements and other marketing
relationships is based on factors beyond the Company's control, the Company is
unable to predict whether it has sufficient manufacturing capacity to meet any
such future demand. During 1997, the Company entered into a supply agreement
with one of the world's largest fermentation companies to provide ARA oil. In
addition, the company has conducted DHA production trials with third-party
manufacturers to prepare for future DHA oil demand in excess of the Company's
current plant capacity. Although the Company believes that it will be able to
use third party manufacturing for its DHA oil if demand requires, there is no
assurance that the Company will be able to do so successfully. The failure to
meet demand for the Company's nutritional oils could encourage the Company's
infant formula licensees and other nutritional product customers to look for
alternative manufacturing sources.
The Company currently does not have the capability to manufacture
therapeutic and diagnostic products in accordance with GMP requirements. Should
the Company decide to manufacture and scale-up the production of future
diagnostic and pharmaceutical products, substantial start-up expenses would be
incurred, expansion of facilities would be required and additional personnel
would have to be hired.
The Company currently markets its nutritional supplements, formula and
nutritional products for use in molecular structure research and structure-based
drug design and fluorescent pigments both directly to end users and through
distributors. The Company markets its infant formula oils and its nutritional
supplements primarily through distributors, and to a lesser extent, directly to
consumers. Other nutritional products and products the Company develops in the
diagnostic and pharmaceutical areas will require the Company to form corporate
alliances with companies capable of marketing such products and/or develop its
own sales and marketing force. There can be no assurance that the Company will
be able to maintain existing or establish an effective sales or marketing force
at an acceptable cost, or at all, or to establish additional third-party sales
and marketing arrangements.
No Clinical and Limited Regulatory Compliance Capabilities. The Company
has limited experience and capabilities in the area of product testing and no
experience and limited capabilities in the area of regulatory compliance with
respect to its products and will have to expend significant sums of money to
acquire and expand such capabilities, reach collaborative arrangements with
third parties to provide these capabilities or contract with third parties to
provide these capabilities. These capabilities will be important to the Company
for the successful commercialization of its existing and potential nutritional,
human diagnostic and pharmaceutical products.
The Company intends to depend on its current licensees to obtain any
required regulatory clearances for its nutritional oils to be used by such
licensees as infant formula ingredients. See "--Dependence on Third Parties;
Reliance on Future Collaborations." Although the Company believes that its
infant formula licensees will perform required testing and obtain any required
regulatory clearances, the Company cannot control the timing or the resources
such licensees will devote to these activities. The Company may, in the future,
decide to seek FDA clearances itself for its nutritional oils or other
nutritional products, if such clearances are required. In the area of human
diagnostics, the Company has not yet decided whether to develop in-house
capability, contract with third parties, seek collaborative arrangements with
partners or use a combination of the three to test its product candidates and
obtain any required regulatory clearances. If the Company were to manufacture
these diagnostic products for certain uses, it would be subject to applicable
regulatory requirements. For its potential pharmaceutical products, the Company
will likely contract with third parties and seek collaborative arrangements for
these activities. In any case, these activities may require the devotion of
substantial resources by the Company and a significant portion of management's
time. There can be no assurance that the Company can effectively test and obtain
regulatory clearances for its products and delays in testing or obtaining such
regulatory clearances may result in delay in or the inability to commercialize
the affected product.
Product Liability. The Company faces an inherent business risk of
exposure to product liability claims alleging that the use of its technology or
products resulted in adverse effects. Such risk exists in the conduct of
clinical studies and even with respect to those products, if any, that receive
regulatory clearances for commercial sale. There can be no assurance that the
Company's current level of product and clinical study liability insurance
together with indemnification rights under its infant formula license agreements
and other collaborative arrangements will be adequate to protect the Company. It
is uncertain whether the Company will be able to obtain increased levels of
insurance as the Company grows, that any level of insurance would be
economically practical or that it would be able to renew its current or future
policies. A product liability claim or recall in excess of insured amounts or
amounts recoverable under applicable contractual arrangements could adversely
affect the business, financial condition or future prospects of the Company.
Dependence Upon Key Personnel. The Company is highly dependent on the
principal members of its management, production, sales and marketing and
scientific staff. The loss of certain key management and scientific employees
could have a material adverse effect on the Company. In addition, the Company
believes that its future success will depend in large part upon its ability to
attract and retain highly skilled scientific, managerial and marketing
personnel. The Company faces competition for such personnel from other
companies, research and academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful in
hiring or retaining the personnel it requires for continued growth.
Limited Availability of Certain Supplies. The availability of carbon-13
and nitrogen-15 is critical for production of the Company's products for use in
drug design. Although the current supplies of these items are adequate for the
Company's near-term needs, they may not be adequate if the demand for the
Company's products for use in drug design and/or breath test diagnosis were to
sustain significant growth.
Possible Volatility of Stock Price; Limited Liquidity; Absence of
Dividends. The market price of the Common Stock may experience a high level of
volatility, as frequently occurs with publicly traded emerging growth companies
and biosciences companies. Announcements of technological innovations or new
commercial products by the Company or its competitors, developments or disputes
concerning patent or proprietary rights, publicity regarding actual or potential
medical results relating to products under development by the Company or its
competitors, general regulatory developments affecting the Company's products in
both the United States and foreign countries, market conditions for emerging
growth companies and biosciences companies and economic and other internal and
external factors, as well as period-to-period fluctuations in financial results,
may have a significant impact on the Company's business or the future market
price of the Common Stock. Since the Company's initial public offering of Common
Stock on November 23, 1993, the average daily trading volume in the Common Stock
as reported on the Nasdaq National Market has been relatively low. There can be
no assurance that a more active trading market will develop in the future. The
Company has never declared or paid any cash dividends on its Common Stock and
does not intend to do so for the foreseeable future.
Anti-Takeover Provisions; Preferred Stock. The Company's Board of
Directors is divided into three classes with each class of directors being
elected to three-year terms on a rotating basis. As such, only one-third of the
members of the Board of Directors stand for election every year. The Company has
adopted a stockholder rights plan which may have the effect of deterring hostile
or coercive attempts to acquire the Company through the distribution of rights
to stockholders enabling those stockholders to acquire shares of the Company's
Common Stock, or that of an acquiror, at a substantial discount to the public
market price should any person or group acquire more than 20% of the Common
Stock without approval of the Board of Directors under certain circumstances.
The Company has reserved 300,000 shares of Series A Junior Participating
Preferred Stock for issuance in connection with the Stockholder Rights Plan. The
Company is authorized to issue an additional 4,700,000 shares of Preferred Stock
in one or more series, having terms fixed by the Board of Directors without a
stockholder vote. While the Board of Directors has no current intentions or
plans to issue any Preferred Stock, issuance of these shares could also be used
as an anti-takeover device.
Shares Eligible for Future Sale; Registration Rights. As of
September 8, 1998, the Company had 14,879,434 outstanding shares of Common
Stock, substantially all of which are available for sale in the public
marketplace. As of September 8, 1998, there were also outstanding stock options
to purchase an aggregate of 1,909,020 shares of Common Stock at various exercise
prices ranging from $2.00 to $34.25 per share and warrants issued in connection
with the Common Stock Warrant and Purchase Agreement dated April 27, 1998
(the "Purchase Agreement") to purchase 196,670 shares of Common Stock at an
exercise price of $18.76 per share. If the Company elects to sell all the shares
of Common Stock and Warrants which have not been sold pursuant to the Purchase
Agreement but which, under certain circumstances, the Selling Stockholders are
irrevocably obligated to purchase, there would be up to an additional
outstanding 819,454 shares of Common Stock and 245,836 warrants, with exercise
prices ranging from $15.01 to $18.76 per share. Shares of Common Stock which
may be issued under outstanding options and warrants will be available for sale
in the public markets. To the extent that these outstanding stock options and
warrants are exercised, the percentage ownership of certain of the Company's
stockholders will be diluted. In addition, certain holders of the Common Stock
have certain demand and piggyback registration rights pursuant to a
Registration Rights Agreement between the Company and these holders. No
prediction can be made as to the effect, if any, that sales of shares of Common
Stock or the availability of such shares for sale will have on the market prices
of the Common Stock prevailing from time to time. The possibility that
substantial amounts of Common Stoc k may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital through the sale of its equity
securities. Further, if the Company were required to include shares, through
exercise of the outstanding piggyback registration rights, in a Company-
initiated registration, the sale of such shares could have a material adverse
effect on the Company's ability to raise additional capital.
Year 2000 Compliance. The Company uses a number of computer software
programs and operating systems in its internal operations, including
applications used in financial busines systems and various administrative
functions. Management has evaluated the business risk associated with the
Company's information systems as minimal and has completed more than 50% of its
"Year 2000" compliance implementation. The costs incurred to date have not had a
material impact on the Company's operations and management does not anticipate
that future costs will be material. However, there can be no assurance that
"Year 2000" issues will not require a significant commitment of resources to
resolve potential problems.
