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, 1999
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 $.10 per share: 16,492,229 shares outstanding as of
September 8, 1999
Page 1 of 14
<PAGE>
PART I - FINANCIAL
INFORMATION
Item 1. Financial Statements
MARTEK BIOSCIENCES CORPORATION
Balance Sheets
($ in thousands)
- --------------------------------------------------------------------------------
July 31, October 31,
1999 1998
- --------------------------------------------------------------------------------
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $3,479 $4,498
Short-term investments and
marketable securities 16,616 13,147
Accounts receivable 1,509 1,336
Inventories (Note 3) 5,995 5,002
Prepaid expenses 250 424
Other current assets 126 96
----------------------------------
Total current assets 27,975 24,503
Property, plant and equipment, net 15,498 16,233
----------------------------------
$43,473 $40,736
==================================
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $888 $596
Accrued liabilities 1,060 1,566
Unearned Revenue 19 ---
Current portion of notes payable 1,551 1,341
----------------------------------
Total current liabilities 3,518 3,503
Long-term portion of notes payable (Note 2) 747 1,951
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; 16,492,229 and
14,879,434 shares issued and
outstanding at July 31, 1999
and October 31, 1998, respectively. 1,649 1,488
Additional paid-in capital 107,472 92,843
Accumulated deficit (69,913) (59,049)
----------------------------------
Total stockholders' equity 39,208 35,282
----------------------------------
Total liabilities and stockholder's equity $43,473 $40,736
==================================
See accompanying notes.
Page 2 of 14
<PAGE>
MARTEK BIOSCIENCES CORPORATION
Statements of Operations
(Unaudited - $ in thousands, except per share data)
Three months Nine months
ended July 31, ended July 31,
- --------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Product Sales:
Nutritional product sales $677 $619 $2,092 $1,927
Stable isotope and other
product sales 485 491 1,749 1,595
------------------ -------------------
Total Product Sales 1,162 1,110 3,841 3,522
License fees and other revenues 6 --- 6 1,165
Royalties 79 67 245 187
Research and development contracts
and grants 71 140 278 326
------------------ -------------------
Total revenues 1,318 1,317 4,370 5,200
Costs and expenses:
Cost of product sales 853 887 2,934 2,825
Research and development 2,601 2,575 7,324 7,475
Selling, general and administrative 1,586 1,551 5,202 5,705
------------------ -------------------
Total costs and expenses 5,040 5,013 15,460 16,005
------------------ -------------------
Loss from operations (3,722) (3,696) (11,090) (10,805)
Other income (expense):
Miscellaneous income 31 25 102 67
Interest income 212 341 569 801
Interest expense (141) (170) (445) (358)
------------------ -------------------
Total other income 102 196 226 510
------------------ -------------------
Net loss ($3,620) ($3,500) ($10,864) ($10,295)
- --------------------------------------------------------------------------------
Net loss per share (Note 5) ($0.23) ($0.24) ($0.71) ($0.73)
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding 15,971,019 14,833,397 15,273,640 14,145,134
- --------------------------------------------------------------------------------
See accompanying notes.
Page 3 of 14
<PAGE>
MARTEK BIOSCIENCES CORPORATION
Statements of Cash Flows
(Unaudited - $ in thousands)
Nine Months ended July 31,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Operating activities:
Net loss ($10,864) ($10,295)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,087 1,001
Other non-cash items 348 ---
Changes in assets and liabilities:
Accounts receivable (173) 435
Inventories (993) (1,231)
Other current assets 144 136
Accounts payable 292 (394)
Accrued liabilities (506) 102
Unearned revenue 19 ---
-------------------------------
Net cash used in operating activities (10,646) (10,246)
Investing activities:
Change in short-term investments
and marketable securities (3,469) 4
Purchase of property, plant and equipment (352) (1,239)
-------------------------------
Net cash used in investing activities (3,821) (1,235)
Financing activities:
Proceeds from issuance of common stock
in private placement 13,770 10,010
Proceeds from the exercise of warrants
and options 672 3,998
Borrowings on notes payable --- ---
Repayment of notes payable (994) (980)
-------------------------------
Net cash provided by financing activities 13,448 13,028
-------------------------------
Net increase (decrease) in cash and
cash equivalents (1,019) 1,547
Cash and cash equivalents at beginning of year 4,498 1,977
-------------------------------
Cash and cash equivalents at end of period $3,479 $3,524
===============================
See accompanying notes.
Page 4 of 14
<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, 1998 14,879,434 $1,488 $92,843 ($59,049) $35,282
- --------------------------------------------------------------------------------
Issuance of common stock
in private placement 1,528,935 153 13,617 --- 13,770
Exercise of stock options
and other 83,860 8 1,012 --- 1,020
Net loss --- --- --- (10,864) (10,864)
- --------------------------------------------------------------------------------
Balance at
July 31, 1999 16,492,229 $1,649 $107,472 ($69,913) $39,208
- --------------------------------------------------------------------------------
See accompanying notes.
Page 5 of 14
<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, 1999 are not
necessarily indicative of the results that may be expected for the year ended
October 31, 1999. 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, 1998.
2. Commitment and Contingencies
The Company had commitments at July 31, 1999 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, 1999, 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.
The Company is required to meet certain covenants in relation to its term loans,
which had an outstanding balance at July 31, 1999 of approximately $2.3 million.
These covenants outline minimum cash, current ratio and net worth requirements.
The Company was in compliance with all of these covenants at July 31, 1999.
3. Inventories
Inventories consist of the following:
July 31, October 31,
1999 1998
----------- -----------
Finished products $1,982,042 $1,406,053
Work in process 3,646,914 3,343,911
Raw materials 366,497 252,026
----------- -----------
$5,995,453 $5,001,990
=========== ===========
Page 6 of 14
<PAGE>
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.
4. Income Taxes
At July 31, 1999, the Company has net operating loss carryforwards of
approximately $84,734,000 for income tax purposes that expire in years 2000
through 2019.
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 five
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. The Company's total net
deferred tax assets, which resulted primarily from net operating losses, were
$34,235,000 and $28,024,000 at July 31, 1999 and 1998, respectively. Because of
the uncertainty with the ultimate realization of these net deferred tax assets,
they were fully reserved for by a valuation allowance at July 31, 1999 and 1998.
5. Capital Accounts
Private Placements of Common Stock
On April 21, 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 issued warrants to purchase up
to 51,250 shares of common stock on April 27, 1999 at $7.51 per share and is
obligated to again issue warrants to purchase up to 51,250 shares of common
stock at the end of year two if the Company does not utilize the additional
funding by such date. The cost associated with the additional warrants has been
calculated using the Black-Scholes option pricing model and is included in
interest expense for the quarter ended July 31, 1999.
On June 1, 1999, 1,528,935 shares of the Company's common stock and warrants to
purchase 458,679 shares of common stock were issued in a private placement
resulting in net proceeds to the Company of approximately $13.8 million. The
stock was issued at a thirty day average trading price of $9.03 per share. The
warrants are exercisable for a period of three years from date of issuance at
$10.84 per share.
Page 7 of 14
<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 among other things, 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
FDA approval of the Company's oils for inclusion in U.S. infant formula; (4)
expectations regarding future efficiencies in manufacturing processes and the
cost of production of the Company's nutritional oils; (5) future research and
development costs; (6) Year 2000 business risks; and (7) expectations regarding
additional capital expenditures needed in relation to fermentation and oil
processing activities. Forward-looking statements include those statements
containing such words 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 set forth in Exhibit 99.1 hereto 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 that play a beneficial role in promoting mental and
cardiovascular health, and in the development of the eyes and central nervous
system in newborns; (2) stable isotope products and technologies to visualize
molecular interactions for drug discovery and development; and (3) new, powerful
fluorescent markers for diagnostics, rapid miniaturized screening and gene and
protein detection. In 1989, Martek began to realize revenues from sales of its
stable isotope 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(R), a DHA dietary supplement. In 1998, Martek first
realized revenues from the sale of its new phycobilisome fluorescent marker
products.
Martek has incurred losses in each year since its inception. At July 31, 1999,
the Company's accumulated deficit was $69,913,000. The Company expects to
continue its development, production optimization and product marketing
activities and as a result, expects losses to continue for at least the next
year, or until significant sales of its nutritional oils and Neuromins(R) DHA
products occur and/or until significant royalties from sales of infant formula
products containing its oils are recognized. In addition, the Company expects to
continue 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. Because the extent and timing of future oils-related
revenues are largely dependent upon the Company's licensees and/or other future
third-party collaborators, the timing or likelihood of future profitability is
largely dependent on factors over which the Company has no control.
Management Outlook and Regulatory Issues
Management believes that while quarterly results may show fluctuations in
product sales, the outlook for future revenue growth remains positive and that
fiscal 1999 sales will surpass prior year levels.
Page 8 of 14
<PAGE>
Specifically, Management believes that for fiscal 1999 as a whole: (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(R) DHA products will expand;
(4) sales of new high value products from the Company's stable isotope group
will increase; and (5) distribution and sales of diagnostic products will grow.
Management believes that recent scientific evidence supports the contention 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 company to promote Martek's
non-infant formula nutritional oil products. Because of this objective, certain
shorter-term marketing arrangements of lesser scope have been avoided, thus
modestly sacrificing short-term product sales. 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, management is unable to accurately
predict when, or if, such events will occur.
Four of the Company's infant formula licensees have obtained the regulatory
approval, where required, to sell infant formula supplemented with Martek's oils
in over 60 countries for term or pre-term infant formula products, including
most recently approval by the French Scientific Committee for Foods for pre-term
and term infant formula. The Company and its licensees are in the process of
responding to certain questions raised by the FDA in connection with evaluating
Martek's oils for inclusion in U.S. infant formula. While Management believes
that FDA approval should ultimately be obtained, it is Management's belief that
this process will take a minimum of six to twelve additional months. There is
also no assurance that the Company and its licensees will be able to adequately
respond to the FDA's questions, that the licensees will continue to press
forward, that clearances will in fact be granted, that the process will not
involve significant delays that may materially and adversely affect the timing
and extent of potential future introductions of the Company's products, or that
once and if approval is obtained, a licensee will actually market a U.S. infant
formula product containing the Company's oils. Nevertheless, management
anticipates that for fiscal year 1999 infant formula products containing
Martek's oils will continue to be introduced in additional countries around the
world and overall product sales, including sales from infant formula related
products, will increase over sales from the prior year.
Results of Operations - Comparison of Quarters and Nine Months Ended July 31,
1999 and 1998
Revenues for the quarter ended July 31, 1999 were $1,318,000, consistent with
revenues of $1,317,000 for the same period in 1998. Revenues for the nine-month
period ended July 31, 1999 were $4,370,000, a decrease of $830,000 or 16%, from
the same period in 1998, due primarily to the recognition of a non-recurring
$1.1MM license fee in January, 1998. Total product sales during the third
quarter and nine months ending July 31, 1999 increased by $52,000 and $319,000
or 5% and 9%, respectively from the same periods in 1998. Sales of Nutritional
Products, including Neuromins(R) capsules, increased 9% for both the three and
the nine months ended July 31, 1999 when compared to the same periods in 1998.
Stable isotope and other product sales decreased 1% for the third quarter and
increased $154,000 or 10% for the first nine months of 1999, when compared to
the same periods in 1998. The decrease in the third quarter of 1999 was
primarily due to price competition in the reagents market which is expected to
continue for at least the remainder of 1999 and could adversely impact total
reagent sales. The Company is actively looking for ways to reduce its reagent
production costs and increase yields of high-end co-products in an effort to
offset the impact of this price competition. Royalty revenues increased by 18%
in the third quarter of 1999 compared to the third quarter of 1998 and over 32%
for the first nine months of 1999 compared to the first nine months of 1998.
Revenues from research and development contracts and grants decreased by 49% in
the third quarter of 1999 when compared to the third quarter of 1998 and
decreased 15% for the nine months ended July 31, 1999 from the same period in
1998, due to the timing of activity under the Company's outstanding grants.
Page 9 of 14
<PAGE>
Cost of product sales decreased to 73% of revenues from product sales for the
third quarter of 1999 from 80% for the third quarter of 1998. For the nine month
period ended July 31, 1999 cost of product sales decreased to 76% of revenues
from product sales, down from 80% for the same period in 1998. Cost of sales
will continue to fluctuate based on the mix of sales, with lower margins
experienced when the mix includes higher volumes of sales to infant formula
manufacturers. There is an approximate six to nine month delay after the initial
sale of oil until 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
as revenue at the time of 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 volumes increase, and
manufacturing efficiencies and optimization occurs, Management believes that the
cost of production of the nutritional oils products will decrease.
Research and development costs in the third quarter of 1999 were consistent with
the third quarter of 1998. For the nine month period ended July 31, 1999,
research and development costs decreased $151,000 or 2% when compared to the
same period in 1998. 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 increased by $35,000, or 2%, during
the third quarter of 1999 and decreased by $503,000 or 9%, in the nine months
ended July 31, 1999 compared to the third quarter and nine months ended July 31,
1998, respectively. The fiscal year-to-date cost decrease was primarily the
result of lower advertising expenses due to the timing of print and other
advertising campaigns. Other income was $94,000 lower during the third quarter
of 1999 than in the third quarter of 1998 and $284,000 lower in the first nine
months of 1999 than in the first nine months of 1998. Decreases in other income
are due primarily to a decrease in the amount of interest earned on investments
as funds received in the Company's various fund raising efforts are being used
to support operations.
As a result of the foregoing, net loss for the third quarter of 1999 was
$3,620,000, or $.23 per share, compared to a net loss of $3,500,000, or $.24 per
share for the third quarter of 1998. Net loss for the nine months ended July 31,
1999, was $10,864,000 or $.71 per share, compared to a net loss of $10,295,000
or $.73 per share for the same period in 1998.
Recent Accounting Pronouncements
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. This Statement is
effective for the annual reporting of companies with fiscal years beginning
after December 15, 1997. Adoption of SFAS No. 130 will not impact the reporting
of the Company.
The FASB also recently 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. This
Statement must be adopted in the annual reporting for companies with fiscal
years beginning after December 15, 1997. Adoption of this standard is not
expected to have a significant impact on the Company's financial position,
results of operations, cash flows, or the presentation of its disclosures.
Page 10 of 14
<PAGE>
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 believes that the
business risk associated with these internal information systems is minimal and
has completed more than 95% of its Year 2000 compliance implementation work on
them. The Company is also evaluating its non-information technology systems,
including the various equipment in operation at the oil production facilities in
Winchester, Kentucky. Management has completed more than 95% of this evaluation
and subsequent implementation, and believes that the business risk associated
with this equipment is minimal. Management believes that its compliance work on
the Company's information and non-information technology systems will be
completed by the end of fiscal year 1999. However, if significant new
non-compliance issues are identified, the process may be delayed and the
Company's operations and financial condition may be materially adversely
affected.
Additionally, Martek's third party relationships are being reviewed to assess
their Year 2000 status and potential impact on the Company. The Company has
completed approximately 95% of this review and, where potential business risk
has been identified, is requesting additional information from certain third
parties to obtain assurance that they are year 2000 compliant. To date, the
Company's third party suppliers have represented that they are Year 2000
compliant or are in the process of becoming compliant by December 31, 1999.
Although Management has identified multiple suppliers for most of the goods and
services purchased from third parties, there can be no guaranty that the failure
of any individual supplier to adequately address the Year 2000 issue for the
products or services that they provide to the Company will not have a material
adverse impact on the Company's operations and financial results. Contingency
plans will be developed if it appears that the Company or its suppliers will not
be Year 2000 compliant, and such non-compliance is expected to have a material
adverse impact on the Company's operations.
The major risks to Martek resulting from the failure of third parties to attain
Year 2000 readiness could include: (1) interruptions or disruptions to the
manufacturing process and facilities; (2) an interruption in the flow of goods
or services from suppliers; or (3) interruptions or disruptions of business and
transaction processing such as customer billing, payroll, accounts payable and
other operating and information processes. If such disruptions would occur, they
could have a material adverse effect on the Company's operations.
Based on currently available information, Management believes that total costs
associated with Year 2000 issues will be less than $200,000, and that it will be
able to manage the Year 2000 transition without any material adverse effect on
the Company's operations, liquidity or capital resources. However, there can be
no assurance that Year 2000 issues will not require a significant commitment of
resources to resolve potential problems.
Liquidity and Capital Resources
Martek has financed its operations primarily from the issuance and sale of
equity securities, debt financing, revenues received under research and
development contracts and grants, product sales and receipt of license fees.
Since its inception, the Company has raised approximately $97 million from
public and private sales of its equity securities, including approximately $10
million from a private placement in 1998 and $13.8 million from a private
placement in June 1999. The 1998 private placement investors 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 1998 initial issuance price of $15.63.
Through July 31, 1999 Martek has incurred an accumulated deficit of $69,913,000.
The Company's balance of cash, cash equivalents, short-term investments and
marketable securities at July 31, 1999 was $20,095,000. The investments and
securities consist of U.S. government securities and are available to meet the
future cash needs of the Company. Cash, cash equivalents, short-term investments
and marketable securities increased $2,450,000 in the first nine months of 1999,
primarily the result of the additional funds raised in the private placement of
common stock which closed in June 1999 (see Note 5).
Page 11 of 14
<PAGE>
Martek may require substantial additional funds in the future to continue its
research and development programs, to conduct preclinical and clinical studies
and to commercialize its nutritional oils, Neuromins(R), 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 at least $250,000 are expected in the
fourth quarter of fiscal 1999. Expenditures beyond fiscal 1999 will depend in
part on production capacity needs, and the extent of development and
implementation of process improvements.
Management believes that 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, Management believes that
additional funds will be needed in the longer term to continue the Company's
research and development, manufacturing and marketing efforts. Management
intends to seek additional funding through commercial and government research
and development contracts and grants, product sales and license fee
arrangements, asset-based borrowing, equity issuances, additional lease
financing and/or 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
Page 12 of 14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
See Item 2, Part II of Form 10-Q for the quarter ended April 30, 1999
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 27.01 Financial Data Schedule
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: Form 8-K filed on June 9, 1999.
Page 13 of 14
<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, 1999 /s/ Peter L. Buzy
------------------- ------------------------------
Peter L. Buzy, Principal Financial
and Chief Accounting Officer
Page 14 of 14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 3,479,085
<SECURITIES> 16,616,280
<RECEIVABLES> 1,518,633
<ALLOWANCES> 10,000
<INVENTORY> 5,995,453
<CURRENT-ASSETS> 27,975,107
<PP&E> 21,526,827
<DEPRECIATION> 6,028,610
<TOTAL-ASSETS> 43,473,324
<CURRENT-LIABILITIES> 3,517,712
<BONDS> 747,057
0
0
<COMMON> 1,649,222
<OTHER-SE> 37,559,333
<TOTAL-LIABILITY-AND-EQUITY> 43,473,324
<SALES> 3,840,695
<TOTAL-REVENUES> 4,370,600
<CGS> 2,933,527
<TOTAL-COSTS> 15,460,286
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 445,418
<INCOME-PRETAX> (10,863,521)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,863,521)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,863,521)
<EPS-BASIC> (.71)
<EPS-DILUTED> (.71)
</TABLE>
EXHIBIT 99.1
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES REFORM ACT OF 1995
We desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Many of the following
important factors discussed below have been discussed in our prior SEC filings.
You should be cautioned that the following important factors have affected, and
in the future could affect, our actual results. There may also be additional
factors not discussed in this report that could also affect future results.
These factors could cause our future financial results to differ materially from
those expressed in any forward-looking statements made by us. Forward-looking
statements may relate to such matters as:
- our ability to generate future revenues;
- the potential commercialization of our products; and
- The optimization of production costs.
Forward-looking statements may include words such as "will," "should," "could,"
"anticipate," "believe," "plan," "estimate," "expect," "intend," and other
similar expressions. This list does not constitute all factors which you should
consider prior to making an investment decision in our securities. You should
also not assume that the information contained herein is complete or accurate in
all respects after the date of this filing. We disclaim any duty to update the
statements contained herein.
History of Operating Losses; Uncertainty of Future Financial Results.
We have experienced net operating losses since our inception. We expect such
losses to continue until significant sales of our nutritional oils occur and/or
until significant royalties from sales of infant formula products containing our
oils are recognized. We expect 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:
- our ability to complete successfully the commercialization and cost
optimization of our products;
- the willingness and ability of infant formula licensees to incorporate
our product into their infant formula products;
- the willingness of potential strategic partners to market our products;
- growth in revenues from our nutritional oils;
- growth in revenues from sales of our products for use in molecular
structure research and structure-based drug design;
- the progress of our research and development programs;
- the progress of our preclinical and clinical product studies;
- the time, costs and ability of obtaining regulatory approvals for those
products subject to such approval;
- our ability to protect our proprietary rights;
- the costs of protecting our patent claims;
- competing technological and market developments;
- manufacturing costs associated with our various products and
potential products; and
- the costs of commercializing and marketing our products.
Early Stage of the Company and its Products. Martek was founded in
1985. Certain of our products require substantial additional research and
development. Some require laboratory and clinical testing and regulatory
approval. In addition, although we anticipate the introduction of new products
over the next several years, some of our potential products, especially in the
area of pharmaceuticals, are not expected to become commercially available for
many years, if at all. There is no assurance that:
- we will successfully complete our product development efforts;
- we will obtain required regulatory approvals on a timely basis or at all;
- we will be capable of manufacturing our products in commercial
quantities at a reasonable cost; or
- any new products, if introduced, will achieve market acceptance.
We expect to receive most of our future revenues from direct sales of products,
royalty income and licensing fees. A portion of our revenues to date has come
from research and development contracts (primarily from the federal government)
and federal government grants. We first realized revenues from our products for
use in molecular structure research and structure-based drug design in 1989. We
recognized revenues from license fees and sales of sample quantities of
nutritional and diagnostic products in 1992. In 1995, we recognized our first
product and royalty revenues from sales of infant formula containing our DHA and
ARA. In 1996, we began to realize revenues from the sale of our Neuromins(R), a
DHA dietary supplement.
Need for Additional Capital. Additional funds will be required to:
- enable us to continue our research and development activities;
- conduct preclinical and clinical studies; and
- manufacture and market our products.
Management is likely to pursue various financing alternatives to obtain these
funds, including:
- asset-based borrowing;
- equity issuances;
- additional lease financing; and/or
- collaborative arrangements with partners.
The level of expenditures required for these activities will depend in part on
the extent to which we develop, manufacture and market our products
independently or with other companies through collaborative arrangements. Our
future capital requirements will also depend, among other things, on one or more
of the following factors:
- growth in our infant formula and nutritional product sales;
- the extent and progress of our 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 our manufacturing facilities;
- the cost of acquiring additional and/or operating existing
manufacturing facilities for our various products and potential
products (depending on which products we decide to manufacture and
continue to manufacture ourselves);
- and the costs of marketing and commercializing our products.
There is no assurance that funding to carry on these activities will be
available at all or on favorable terms to permit successful commercialization of
our products. We have only limited debt financing arrangements. These
arrangements require us to meet certain financial covenants related to our
outstanding term loans. There is no assurance that we will be able to:
- continue such arrangements;
- continue to comply with bank covenants; and/or
- establish additional debt financing arrangements on satisfactory terms,
if at all.
If adequate funds are not available, we may be required to:
- curtail one or more of our research and development programs;
- curtail manufacturing and commercialization programs; and/or
- obtain funds through arrangements with collaborative partners or others.
These arrangements may require us to relinquish certain technology or product
rights including patent and other intellectual property rights.
Dependence on Third Parties; Reliance on Future Collaborations. Future
revenues from our nutritional oils are largely dependent on factors over which
we will have no control. To date, a portion of our revenues has consisted of
license fees and anniversary payments received from infant formula manufacturers
which have licensed our nutritional oils. Under these agreements, we are
entitled to receive royalty payments based on the licensees' sales of products
including our nutritional oils. These licensees will be responsible for
performing all clinical testing on, obtaining regulatory approvals for and
marketing products containing our nutritional oils. These licensees are not
required to use our nutritional oils in any of their products. They are also 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 our licensees have introduced infant formula
products containing our nutritional oils overseas, we cannot predict whether any
licensee will broaden its use of our oils or whether they will be used by any of
our other licensees in their infant formula products.
Our strategy for the development, clinical testing, manufacturing and
commercialization of certain of our products includes entering into various
collaborations with corporate partners, licensors, licensees and others. In
1997, we entered into a supply agreement with a third party manufacturer for its
ARA-containing oil. Although we are able to produce ARA oil in our Kentucky
manufacturing plant, a halt in supply from this third party ARA oil manufacturer
could adversely impact our ability to meet product demand in the short-run. It
could also adversely impact our ability to meet product demand in the long-run
if this source of ARA oil could not be replaced. There is no assurance that we
will negotiate other collaborative arrangements in the future on acceptable
terms, if at all, or that such collaborative arrangements will be beneficial to
our operations. If we cannot establish such arrangements, we may face increased
capital requirements to undertake such activities at our own expense. As a
result, we could encounter significant delays in introducing our products into
certain markets. This could also adversely affect the development, manufacture,
marketing and sale of products in such markets. In particular, our continuing
ability to generate nutritional oil-related revenues depends on our ability to
enter into agreements with additional licensees. Some of our nutritional oil
licensing agreements contain provisions which will not allow us to enter into
future agreements containing payment terms more favorable than those granted to
current licensees. Such provisions may restrict our ability to negotiate with
potential infant formula licensees.
Dependence on Major Customers. Our dependence on sizable product orders
from infant formula licensees and other marketing partners will make the
relationship with each customer critically important to our business. While we
have detailed contracts with each of our major customers, changes to product
pricing, royalty rates and delivery timetables may be required to meet their
demands and expectations. There is no assurance that we will be able to manage
our licensees and other customer relationships successfully. Our major customers
are large and complex and the launch cycles of new products are typically long
and unpredictable. This requires us to make considerable early investments in
account management and other efforts without the assurance of future revenues.
There is no assurance that we will be able to convert these investments into
significant revenue generating relationships.
Significant Technological Change and Competition. We operate in rapidly
evolving fields. Competition from larger, more experienced and better
capitalized companies has been and will continue to be intense. There is no
assurance that developments by others will not render our products or
technologies obsolete or noncompetitive, or that we will keep pace with new
technological developments. Currently, DHA-containing fish oils provide
alternative sources of DHA, and we are aware of another company which produces
DHA from fungal sources. In addition, DHA and ARA have been derived from egg
yolk lipids, and we are 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. We have obtained seven U.S. patents and a number of
patents outside the U.S. covering certain aspects of our nutritional oils to
date. We have additional patent applications pending covering certain aspects of
these DHA- and ARA-containing oils. However, we have not been awarded any
European patents relating to our ARA-containing oil. Accordingly, competitors
may be able to produce, sell and use ARA in Europe until patents are issued or
have been invalidated using similar or identical processes to those used by us.
Generally, however, they are prohibited from manufacturing, using or selling
materials where patents have been issued. Competitors may be able to produce,
sell and use DHA- and/or ARA-containing oils in countries where we have not
applied for patent protection. In addition, competitors may produce certain DHA-
and ARA-containing oils that are not covered by our patents. We are aware of
several other companies offering ARA-containing oils for sale. In addition,
there is no assurance that other sources of DHA and ARA, the two primary
components of our nutritional oils, will not become commercially viable.
Uncertainty Regarding Patents and Proprietary Technology. Our success
depends on our ability to:
- obtain patent protection for our products;
- maintain trade secret protection; and
- operate without infringing the proprietary rights of others.
Our policy is to aggressively protect our proprietary technology through patents
and, in some cases, trade secrets. Additionally, in certain cases we rely on the
licenses of patents and technology of third parties. We have obtained
approximately 25 U.S. patents covering various aspects of our technology. These
patents will expire on various dates between 2007 and 2015. We have filed, and
intend to continue to file, applications for additional patents covering both
products and processes as appropriate. There is no assurance that
- the relevant authorities will grant any patent applications filed by,
assigned to, or licensed to, us;
- we will develop additional products that are patentable; and
- any patents issued to or licensed by us will provide us with any
competitive advantages or adequate protection for inventions.
Moreover, there is no assurance that any patents issued to or licensed by us
will not be challenged, invalidated or circumvented by others.
There is no assurance that issued patents, or patents that may issue,
will provide protection against competitive products or otherwise be
commercially valuable. Furthermore, since patent laws relating to the scope of
claims in the fields of health care and biosciences are still evolving, our
patent rights are subject to this uncertainty. Our patent rights on our products
therefore might conflict with the patent rights of others, whether existing now
or in the future. Alternatively, the products of others could infringe our
patent rights. The defense and prosecution of patent claims is both costly and
time consuming, even if the outcome were favorable to us. An adverse outcome
could:
- subject us to significant liabilities to third parties;
- require disputed rights to be licensed from third parties; and/or
- require us to cease selling our products.
We have obtained seven U.S. patents covering certain aspects of our DHA
and/or ARA oils. We have applied for other patents in the United States covering
certain other aspects of our nutritional oils. We have also filed patent
applications on a selective basis in other industrialized countries, some of
which are pending and some of which have been granted. We are unable to predict,
however, whether these patents will be challenged, invalidated or circumvented
by others. Failure to obtain adequate patent protection for our nutritional oils
would have a material adverse affect on our results of operations. This could
particularly affect:
- future sales of our nutritional oils;
- future royalties on sales of infant formula containing our oils; and
- future license fees related to our oils.
In particular, failure to maintain patent protection could permit our
competitors to produce products which could directly compete with our
nutritional oils using similar or identical processes. It is also possible that
the infant formula manufacturers currently under license by us or potential
future licensees may choose formula ingredients from these competitors if they
choose to include the ingredients in their formulas at all.
Other patents that we have cover:
- our photobioreactor system which is used for culturing microalgae and
certain aspects of our breath test technology;
- our Celtone and Celtone M technology; and
- our combinatorial library technology.
We also rely on trade secrets and proprietary know-how, which we
protect in part by confidentiality agreements with our collaborators, employees
and consultants. There is no assurance that:
- other parties to these agreements will not breach them;
- we will have adequate remedies for any such breach; or
- competitors will not otherwise learn of or independently develop our
trade secrets.
Risks Associated with Infant Formula and Nutritional Products
Industries. To the extent that our nutritional oils are included in infant
formula or in nutritional products for consumer use, we are subject to the risks
generally associated with these industries. These risks include, among others:
- product tampering or production defects which may require a recall or may
reduce the demand for such products;
- the risk that authorities may ban an ingredient used in such products,
including our nutritional oils, limit its use or declare
it unhealthful; and/or
- sales of infant formula may decline or authorities may limit or
discontinue use of our nutritional oils due to perceived health
concerns, adverse publicity or other reasons beyond our control.
Potential Difficulty in Obtaining FDA and other Government Approvals. A
number of government authorities in the United States and other countries
regulate our products and our manufacturing and research activities. This
includes 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.
Their regulatory authority includes the manufacture and labeling of such
products. Generally, authorities regulate prescription pharmaceuticals and
certain types of diagnostic products 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 is no assurance that any changes to federal
and state laws will not have a material adverse effect on the company.
Our infant formula licensees are responsible for obtaining the
requisite regulatory clearances to market their products containing our oils. To
date, none of our infant formula licensees have obtained the necessary approval
to sell an infant formula product containing our oils in the United States.
Sales of our products outside the United States are subject to foreign
regulatory requirements that may vary widely from country to country. Term
infant formula products containing our nutritional oils are currently being
marketed outside the U.S. in seven countries. Pre-term infant formula products
containing our oils are currently being marketed outside the U.S. in over 60
countries. We understand that our licensees have received appropriate regulatory
clearances as needed to market products containing our oils in those countries.
The time required to obtain clearances from additional foreign
countries may vary. It may be longer or shorter than that required by the FDA.
There is no assurance that additional foreign clearances can be obtained or met
on a timely basis, if at all.
We are preparing, with the help of our licensees, to respond to
certain questions raised by the FDA in connection with evaluating our oils for
inclusion in U.S. infant formula. We feel that the process of obtaining FDA
approval will take at least another six to twelve months. There is no assurance
that:
- we will be able to, with the assistance of our licensees, adequately
respond to the FDA's questions;
- our licensees will continue to press forward;
- the FDA will in fact grant clearances;
- the process will not involve significant delays;
- potential delays will not materially and adversely affect the timing
and extent of potential future introductions of our products; or
- once and if approval is obtained, a licensee will actually market a U.S.
infant formula product containing our oils.
There is no assurance that the FDC Act will not impose food additive
regulation on DHA and ARA used in medical foods, infant formulas or enteral
nutritional products. Use of DHA and ARA in medical foods may also require
additional supportive data.
The process of obtaining FDA clearances can be time-consuming and
expensive. There is no assurance that the FDA will grant such clearances. The
FDA review process may involve delays that may materially and adversely affect
the testing, marketing and sale of our products. Moreover, regulatory clearances
for products such as medical devices, new drugs, or new food additives, even if
granted, may include significant limitations on their uses. Additionally, the
FDA could withdraw product clearances for failure to comply with regulatory
standards. There is 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 our products are in research and development phases. We cannot
predict all regulatory requirements or issues that may apply to or arise in
connection with our products. Changes in existing laws, regulations or policies
or the adoption of new laws, regulations or policies could prevent us or our
licensees or collaborators from achieving compliance with regulatory
requirements. Such changes could also affect the timing of achieving such
clearances.
Since the FDA regulatory process may be costly and time consuming, we
will decide on a product-by-product basis whether to handle their requirements
independently or to assign such responsibilities to our licensees or future
collaborative partners. There is no assurance that we will be able to obtain
such regulatory clearances, if required, on a timely basis or at all. If such
clearances are delayed or not achieved at all, it may adversely effect our
business, financial condition and results of operations. If we lose previously
received approvals or clearances, or fail to comply with existing or future
regulatory requirements, it would have a similar adverse effect.
We are currently required to meet FDA Good Manufacturing Practices
("GMP") requirements as applicable to infant formula and dietary supplements.
GMP regulations specify component and product testing standards, control quality
assurance requirements, and records and other documentation controls. Depending
upon the type of FDA application that is submitted, compliance with relevant GMP
requirements can be difficult and time consuming. If we continue to manufacture
our own products we will continue to fall under the GMP requirements of the FDA.
It may even be necessary in the future to meet more stringent drug GMP
requirements. There is no assurance that we can meet relevant FDA manufacturing
requirements, particularly for scale-up operations involving product marketing
applications. Further, we have only limited experience in the area of regulatory
compliance with respect to our products. There is no assurance that we will be
able to continue to manufacture our nutritional oils in accordance with relevant
infant formula and dietary supplement requirements for commercial use. State and
federal agencies, including the FDA and comparable agencies in other countries,
conduct periodic inspections to monitor ongoing compliance with GMP and other
applicable regulatory requirements. A determination that we are in violation of
such GMP and other regulations could lead to the imposition of civil penalties,
including fines, product recalls or product seizures. In situations where
serious violations are noted, criminal sanctions may be imposed.
Each line of products that is or may be marketed by us or our
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;
- prescribes detailed requirements for labeling dietary supplements; and
- establishes GMP requirements for dietary supplements.
We are currently marketing a line of DHA dietary supplements, Neuromins(R) and
Neuromins(R)PL. In addition, we are researching and developing new applications
for our DHA and ARA oils. There is no assurance that we will be able to comply
with the requirements of the DSHEA or any other regulations that the FDA may
promulgate regarding DHA or ARA use as a dietary supplement.
Our 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. This
classification subjects these products to premarket clearances and/or regulatory
approvals. There is no assurances that:
- we or our collaborators will be able to develop the extensive safety and
efficacy data needed to support FDA premarket clearances and/or
regulatory approvals for these products; or
- 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 is
no assurance that required clinical testing of our products will be completed
successfully within any specified time period, if at all. Additionally, there is
no assurance that:
- we will be able to develop the extensive data needed to establish the
safety and efficacy of our products for approval for drug uses.
- authorities will not begin to regulate these drug products as biological
products or as controlled substances, which would affect marketing and
other requirements.
Limited Manufacturing and Sales and Marketing Experience and
Capabilities. We have limited experience operating our manufacturing facility.
In 1995, we acquired a fermentation plant in Winchester, Kentucky to manufacture
our nutritional oils. During 1996, we completed the construction of an oil
extraction and refining facility in this plant. There is no assurance that we
will be able to scale-up or successfully optimize production of our nutritional
oils. There is also no assurance that these production facilities will be
sufficient to meet future demand for our products. If we do not develop adequate
manufacturing capability or contract for manufacturing on acceptable terms, we
may not be able to commercialize some of our current or planned products. Or, if
we are able to adequately manufacture them, commercialization of the products
may be significantly delayed. In addition, we have only limited experience
managing operations at a remote geographic location. Managing a remote
manufacturing plant may place a substantial strain on our managerial resources.
We believe that our Winchester, Kentucky plant will be able to produce
our nutritional DHA oil in sufficient quantity to meet near-term demand.
Nevertheless, because demand for our nutritional DHA oil is based on factors
beyond our control, we are unable to predict whether we have sufficient
manufacturing capacity to meet any such future demand. During 1997, we entered
into a supply agreement with one of the world's largest fermentation companies
to provide ARA oil. In addition, we have conducted DHA production trials with
third-party manufacturers to prepare for future DHA oil demand in excess of our
current plant capacity. Although we believe that we will be able to use third
party manufacturing for our DHA oil if demand requires, there is no assurance
that we will be able to do so successfully. The failure to meet demand for our
nutritional oils could encourage our infant formula licensees and other
nutritional product customers to look for alternative manufacturing sources.
We currently do not have the capability to manufacture therapeutic and
diagnostic products in accordance with GMP requirements. Should we decide to
manufacture and scale-up the production of future diagnostic and pharmaceutical
products, we would incur substantial start-up expenses, we would need to expand
our facilities, and we would have to hire additional personnel.
We market infant formula oils and nutritional supplements primarily
through distributors, and to a lesser extent, directly to consumers. We market
our products for use in molecular structure research and structure-based drug
design, and fluorescent pigments both directly to end users and through
distributors. Other nutritional products and products that we develop in the
diagnostic and pharmaceutical areas will require us to form corporate alliances
with companies capable of marketing such products and/or develop our own sales
and marketing force. There is no assurance that we will be able to establish an
effective sales or marketing force or establish additional third-party sales and
marketing arrangements. Even if we are able to achieve the above, the cost may
be prohibitive.
No Clinical and Limited Regulatory Compliance Capabilities. We have
limited experience and capabilities in the area of product testing. We have no
experience and limited capabilities in the area of regulatory compliance with
respect to our products. We will have to expend significant sums of money to
acquire and expand such capabilities. We may need to 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 us for the successful commercialization of our existing and
potential future nutritional, human diagnostic and pharmaceutical products.
We will depend on our current licensees to obtain any required
regulatory clearances for our nutritional oils which they will use as infant
formula ingredients. Although we believe that our infant formula licensees will
perform required testing and obtain any required regulatory clearances, we
cannot control the timing or the resources that they will devote to these
activities. We may, in the future, decide to seek FDA clearances ourselves for
our nutritional oils or other nutritional products, if such clearances are
required. In the area of human diagnostics, we have 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 our product
candidates and obtain any required regulatory clearances. If we were to
manufacture these diagnostic products for certain uses, it would be subject to
applicable regulatory requirements. For potential pharmaceutical products, we
will likely contract with third parties and seek collaborative arrangements. In
any case, these activities may require the devotion of substantial resources and
a significant portion of our time. There is no assurance that we can effectively
test and obtain regulatory clearances for our products. Delays in testing or
obtaining such regulatory clearances may result in delay in or the inability to
commercialize the affected product. See "--Dependence on Third Parties; Reliance
on Future Collaborations."
Exposure to Product Liability Claims. We face an inherent business risk
of exposure to product liability claims alleging that the use of our 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 is no assurance that our
current level of product and clinical study liability insurance together with
indemnification rights under our infant formula license agreements and other
collaborative arrangements will be adequate to protect us from this exposure. It
is uncertain whether we will be able to obtain increased levels of insurance as
we grow. There is no assurance that this level of insurance would be
economically practical or that we would be able to renew our 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 our business, financial condition and future prospects.
Dependence Upon Key Personnel. We are highly dependent on the principal
members of our management, production, sales and marketing and scientific staff.
The loss of certain key management and scientific employees could have a
material adverse effect on our operations. In addition, we believe that our
future success will depend in large part upon our ability to attract and retain
highly skilled scientific, managerial and marketing personnel. We face
competition for such personnel from other companies, research and academic
institutions, government entities and other organizations. There is no assurance
that we will be successful in hiring or retaining the personnel we require for
continued growth.
Limited Availability of Certain Supplies. The availability of carbon-13
and nitrogen-15 is critical for production of our products for use in drug
design. Although the current supplies of these items are adequate for our
near-term needs, they may not be adequate if the demand for our products for use
in drug design and/or breath test diagnosis were to grow significantly.
Possible Volatility of Stock Price; Limited Liquidity; Absence of
Dividends. The market price of our common stock may experience a high level of
volatility, as frequently occurs with publicly traded emerging growth companies
and biosciences companies. The market price of our stock may be significantly
impacted, among other things, by:
- announcements of technological innovations or new commercial products by
us or our competitors;
- developments or disputes concerning patent or proprietary rights;
- publicity regarding actual or potential medical results relating to
products under development by us or our competitors;
- general regulatory developments affecting our 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; and
- period-to-period fluctuations in financial results.
Since our 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 is no assurance that a more
active trading market will develop in the future. We have never declared or paid
any cash dividends on our common stock and do not intend to do so for the
foreseeable future.
Risks Relative to Anti-Takeover Devices. Our 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. We have adopted a
stockholder rights plan which may have the effect of deterring hostile or
coercive attempts to acquire the company. The plan does this through the
distribution of rights to stockholders enabling those stockholders to acquire
shares of our 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. We have reserved 300,000 shares of Series A Junior Participating
Preferred Stock for issuance in connection with the Stockholder Rights Plan. We
are 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. (To the extent
that the outstanding stock options and warrants described below are exercised,
the percentage ownership of certain of our stockholders will be diluted). As of
September 8, 1999, we had 16,492,229 outstanding shares of common stock,
substantially all of which are available for sale in the public marketplace. As
of September 8, 1999, there were also outstanding stock options to purchase an
aggregate of 2,381,760 shares of common stock at various exercise prices ranging
from $8.00 to $34.25 per share. There have also been warrants issued in
connection with the Common Stock and Warrant Purchase Agreements dated April 27,
1998 and June 1, 1999 totalling 706,599 shares at exercise prices between $7.51
and $18.76 per share. If we elect to sell all the shares of common stock and
warrants which have not been sold pursuant to the April 27, 1998 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. In addition, certain holders of the common stock have
certain demand and piggyback registration rights pursuant to a registration
rights agreement between Martek 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
stock may be sold in the public market may adversely affect prevailing market
prices for the common stock. This could impair our ability to raise capital
through the sale of equity securities. Further, if we 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 our ability to raise additional capital.
Risks Relating to Year 2000 Compliance. We use a number of computer
software programs and operating systems in our internal operations. These
include applications used in financial business systems and various
administrative functions. We believe that the business risk associated with
these internal information systems is minimal. We have completed more than 95%
of our Year 2000 compliance implementation work on them. We are also evaluating
our non-information technology systems, including the various equipment in
operation at our oil production facilities in Winchester, Kentucky. We have
completed more than 95% of this evaluation and subsequent implementation, and
believe that the business risk associated with this equipment is minimal. We
believe that the compliance work on our information and non-information
technology systems will be completed by the third quarter of fiscal year 1999.
However, if significant new non-compliance issues are identified, the process
may be delayed and our operations and financial condition may be materially
adversely affected.
Additionally, our third party relationships are being reviewed to assess their
Year 2000 status and potential impact on our operations. We have completed
approximately 95% of this review and, where potential business risk has been
identified, are requesting additional information from certain third parties to
obtain assurance that they are year 2000 compliant. To date, our third party
suppliers have represented that they are Year 2000 compliant or are in the
process of becoming compliant by December 31, 1999. Although we have identified
multiple suppliers for most of the goods and services purchased from third
parties, there is no assurance that the failure of any individual supplier to
adequately address the Year 2000 issue for the products or services that they
provide us will not have a material adverse impact on our operations and
financial results. Contingency plans will be developed if it appears that the
Company or our suppliers will not be Year 2000 compliant, and such
non-compliance is expected to have a material adverse impact on our operations.
The major risks to Martek resulting from the failure of third parties to attain
Year 2000 readiness could include:
- interruptions or disruptions to the manufacturing process and
facilities;
- an interruption in the flow of goods or services from suppliers; or
- interruptions or disruptions of business and transaction processing
such as customer billing, payroll, accounts payable and
other operating and information processes.
If these disruptions would occur, they could have a material adverse effect
on our operations.
Based on currently available information, we believe that total costs associated
with Year 2000 issues will be less than $200,000, and that we will be able to
manage the Year 2000 transition without any material adverse effect on our
operations, liquidity or capital resources. However, there can be no assurance
that Year 2000 issues will not require a significant commitment of resources to
resolve potential problems.
