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, 2000
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 $.10 per share: 17,800,059 shares outstanding
as of September 6, 2000
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MARTEK BIOSCIENCES CORPORATION
Balance Sheets
($ in thousands)
--------------------------------------------------------------------------------
July 31, October 31,
2000 1999
--------------------------------------------------------------------------------
(Unaudited)
Assets:
Current assets
Cash and cash equivalents $4,631 $1,180
Short-term investments and marketable securities 19,451 15,178
Accounts receivable 1,437 1,116
Inventories (Note 3) 4,383 5,216
Other current assets 1,981 1,013
--------------------------
Total current assets 31,883 23,703
Property, plant and equipment, net 15,716 15,469
--------------------------
Total assets $47,599 $39,172
==========================
Liabilities and stockholders' equity:
Current liabilities
Accounts payable $1,430 $693
Accrued liabilities 1,559 1,329
Current portion of notes payable 747 1,479
Current portion of unearned revenue (Note 6) 2,143 - - -
--------------------------
Total current liabilities 5,879 3,501
Long-term portion of notes payable (Note 2) - - - 472
Long-term portion of unearned revenue (Note 6) 2,451 - - -
Commitments (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; 17,793,759
and 16,492,229 shares issued and
outstanding at July 31, 2000 and
October 31, 1999, respectively 1,779 1,649
Additional paid-in capital 123,059 107,447
Accumulated deficit (85,569) (73,897)
--------------------------
Total stockholders' equity 39,269 35,199
--------------------------
Total liabilities and stockholders' equity $47,599 $39,172
==========================
See accompanying notes.
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Martek Biosciences Corporation
Statements of Operations
(Unaudited - $ in thousands, except for per share data)
Three months Nine months
ended July 31, ended July 31,
--------------------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------------
Revenues:
Product sales:
Nutritional product sales $1,858 $677 $3,921 $2,092
Stable isotope and other
product sales 338 484 1,495 1,748
-------------------- -------------------
Total product sales 2,196 1,161 5,416 3,841
License fees and related revenues 34 6 45 6
Royalties 110 79 308 245
Research and development revenue 109 71 838 278
-------------------- -------------------
Total revenues 2,449 1,317 6,607 4,371
Costs and expenses:
Cost of product sales 2,005 853 4,507 2,934
Research and development 2,789 2,602 9,201 7,325
Selling, general and administrative 1,804 1,586 5,357 5,202
-------------------- -------------------
Total costs and expenses 6,598 5,040 19,065 15,460
-------------------- -------------------
Loss from operations (4,149) (3,723) (12,458) (11,090)
Other income, net 360 103 786 226
-------------------- -------------------
Net loss ($3,789) ($3,620) ($11,672) ($10,864)
--------------------------------------------------------------------------------
Net loss per share, basic and diluted ($0.21) ($0.23) ($0.68) ($0.71)
--------------------------------------------------------------------------------
Weighted average common
shares outstanding 17,641,407 15,971,019 17,165,319 15,273,640
--------------------------------------------------------------------------------
See accompanying notes.
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MARTEK BIOSCIENCES CORPORATION
Statements of Cash Flows
(Unaudited - $ in thousands)
Nine Months ended July 31,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
Operating activities:
Net loss ($11,672) ($10,864)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,144 1,087
Other non-cash items - - - 348
Changes in assets and liabilities:
Accounts receivable (321) (173)
Inventories 833 (993)
Other current assets (968) 144
Accounts payable 737 292
Accrued liabilities 230 (506)
Unearned revenue 4,594 19
-------------------------------
Net cash used in operating activities (5,423) (10,646)
Investing activities:
Purchase of short-term investments
and marketable securities (22,023) (18,593)
Proceeds from sale of short-term
investments and marketable securities 17,750 15,124
Purchase of property, plant and equipment (1,391) (352)
-------------------------------
Net cash used in investing activities (5,664) (3,821)
Financing activities:
Proceeds from the issuance of common stock
in private placement 10,249 13,770
Proceeds from the exercise of warrants
and options 5,493 672
Repayment of notes payable (1,204) (994)
-------------------------------
Net cash provided by financing activities 14,538 13,448
-------------------------------
Net increase (decrease) in cash
and cash equivalents 3,451 (1,019)
Cash and cash equivalents at beginning of year 1,180 4,498
-------------------------------
Cash and cash equivalents at end of period $4,631 $3,479
--------------------------------------------------------------------------------
See accompanying notes.
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MARTEK BIOSCIENCES CORPORATION
Statements of Stockholders' Equity
(Unaudited - $ in thousands)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
--------------------------------------------------------------------------------
Balance at
October 31, 1999 16,492,229 $1,649 $107,447 ($73,897) $35,199
--------------------------------------------------------------------------------
Issuance of common stock in
private placement 845,652 85 10,164 - - - 10,249
Exercise of warrants, stock
options and other 455,878 45 5,448 - - - 5,493
Net loss - - - - - - - - - (11,672) (11,672)
--------------------------------------------------------------------------------
Balance at
July 31, 2000 17,793,759 $1,779 $123,059 ($85,569) $39,269
--------------------------------------------------------------------------------
See accompanying notes.
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Notes to Financial Statements (Unaudited)
1. Basis of Presentation and Accounting Policies
Basis of Presentation. The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter ended July 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
October 31, 2000. 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, 1999.
Revenue Recognition. Revenues on cost reimbursement and fixed price contracts
are generally recognized on the percentage of completion method of accounting as
costs are incurred. Revenue is recognized on product sales when goods are
shipped. Revenue from licensing agreements is recognized in general over the
term of the agreement, or in certain circumstances, when milestones are met.
Revenue recognized in the accompanying Statements of Operations is not subject
to repayment. Revenue received that is related to future performance under such
contracts is deferred and recognized as revenue when earned.
Foreign Currency Transactions. Foreign currency transactions are translated into
U.S. dollars at prevailing rates. Gains or losses resulting from foreign
currency transactions are included in current period income or loss as incurred.
Currently, all material transactions of the Company are denominated in U.S.
dollars, and the Company has not entered into any material transactions that are
denominated in foreign currencies.
Inventories. Inventories are stated at the lower of cost or market including
appropriate elements of material, labor and indirect costs and are valued using
the average cost method. Inventories include products and materials held for
sale as well as products and materials that can alternatively be used in the
Company's research and development activities. Inventories identified for
development activities are expensed in the period in which such inventories are
designated for such use.
Impairment of Long Lived Assets and Long Lived Assets to be Disposed Of. The
Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. For
purposes of estimating undiscounted cash flows, the Company does not group cash
flows on different levels as only one significant line of business is
identified. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of assets
exceed the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell. In the past,
the Company has not incurred any impairment expense.
Segment Information. The Company currently operates in one business segment,
that being the development and commercialization of novel products from
microalgae. The Company is managed and operated as one business. The entire
business is comprehensively managed by a single management team that reports to
the Chief Executive Officer. The Company does not operate separate lines of
business or separate business entities with respect to its products or product
candidates. Accordingly, the Company does not accumulate discrete financial
information with respect to separate product areas and does not have separately
reportable segments as defined by SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information."
Short-term Investments and Marketable Securities. The Company has classified all
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debt securities as available-for-sale. Available-for-sale securities are carried
at specific identification cost and consist of U.S. government obligations with
average maturities of less than six months. Realized gains and losses and
declines in value judged to be other than temporary are included in other
income, with material unrealized gains and losses reported as a separate
component of stockholders' equity.
Reclassification. Certain amounts in the prior period's financial statements
have been reclassified to conform to the current period presentation.
2. Notes Payable and Commitments
The Company had commitments at July 31, 2000 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, 2000, would not have a material effect on the financial statements.
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.
Martek currently contracts with a third party supplier to produce its
arachidonic acid oil. At July 31, 2000, the Company had outstanding inventory
purchase commitments to this supplier totalling approximately $3 million.
The Company is required to meet certain covenants in relation to its outstanding
term loan, which had an outstanding balance of $747,000 at July 31, 2000. These
covenants outline minimum cash, current ratio and net worth requirements. The
Company was in compliance with all of these covenants at July 31, 2000.
3. Inventories
Inventories consist of the following:
July 31, October 31,
2000 1999
----------------- ---------------
Finished Products $3,206,758 $2,206,051
Work in Process 779,250 2,683,477
Raw Materials 397,353 326,737
----------------- ---------------
$4,383,361 $5,216,265
================= ===============
4. Income Taxes
At July 31, 2000, the Company has net operating loss carryforwards of
approximately $99,945,000 for income tax purposes that expire in years 2000
through 2020.
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
$39,978,000 and $34,235,000 at July 31, 2000 and 1999, respectively. Because it
is more likely than not that some portion or all of these deferred tax assets
will not be realized, they were fully reserved for by a valuation allowance at
July 31, 2000 and 1999.
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5. Private Placement of Common Stock
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.
On February 8, 2000, the Company exercised its option to close a $10.25 million
private financing in which 845,652 shares of the Company's common stock and
warrants to purchase 253,695 shares of common stock were issued to a group of
accredited investors pursuant to a 1998 private placement funding commitment.
The stock was issued at a thirty day average trading price of $12.12 per share.
The warrants are exercisable for a period of three years from date of issuance
at $14.55 per share.
6. Unearned Revenue
On March 31, 2000, Martek entered into a non-exclusive license agreement
relating to the use of the Company's proprietary long-chain polyunsaturated
fatty acids in infant formulas. The total consideration received by the Company
was $4.5 million, which consisted of $3.5 million prepaid and $1 million due
upon the first year anniversary of the agreement. These amounts, which represent
license fees and royalty prepayments, have been recorded as unearned revenue as
of July 31, 2000. The license fees are non-refundable and will be recognized as
revenue on a modified straight-line basis over the twenty-five year term of the
agreement. The royalty prepayment, as well as potential ongoing royalties, will
be recognized as revenue as products are introduced by the licensee in
accordance with the terms of the agreement. The license agreement may be
terminated by the licensee upon proper notification subsequent to the first
anniversary of the date upon which the licensee has made all payments to the
Company in accordance with the agreement.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements concerning Martek's business and
operations, including among other things, statements concerning: (1)
expectations regarding future revenue growth, product introductions,
distribution, sales, applications and potential marketing partnerships, (2)
expectations regarding sales and royalties by and from formula licensees, (3)
expectations regarding Martek's GRAS Notification with the FDA and potential
approval of the Company's licensees to market DHA and ARA oils in U.S. infant
formula, (4) expectations regarding future efficiencies in manufacturing
processes and the cost of production of Martek's nutritional oils, (5)
expectations regarding future research and development costs, and (6)
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 from
time to time in Martek'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. Martek's products include: (1)
specialty, nutritional oils for infant formula, nutritional supplements and food
ingredients that may 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 realized its first 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.
Martek has incurred losses in each year since its inception. At July 31, 2000,
Martek's accumulated deficit was $85,569,000. Martek 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/or Neuromins(R) DHA products
occur. In addition, Martek 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 Martek'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 2000 sales will surpass prior year levels. Specifically, management
believes that for fiscal 2000 as a whole, term infant formula containing
Martek's oils will be introduced in additional countries and sales and royalties
related to Martek's nutritional oils will continue to grow.
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Management believes that recent scientific evidence further 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, Martek is pursuing long-term marketing partnerships with
large nutritional products and/or pharmaceutical companies to promote Martek's
non-infant formula nutritional oil products. Because of this objective, certain
shorter-term marketing arrangements of lesser scope have not been entered into,
thus modestly sacrificing short-term product sales. On March 31, 2000, Martek
entered into a non-exclusive license agreement with Abbott Laboratories relating
to use of the Company's proprietary long-chain polyunsaturated fatty acids in
infant formulas. The total consideration received by the Company was $4.5
million, which consisted of $3.5 million prepaid and $1 million due upon the
first year anniversary of the agreement. These amounts, which represent license
fees and royalty prepayments, have been recorded as unearned revenue as of July
31, 2000. The license fees are non-refundable and will be recognized as revenue
on a modified straight-line basis over the twenty-five year term of the
agreement. The royalty prepayment, as well as potential ongoing royalties, will
be recognized as revenue as products are introduced by the licensee in
accordance with the terms of the agreement. The license agreement may be
terminated by the licensee upon proper notification subsequent to the first
anniversary of the date upon which the licensee has made all payments to the
Company in accordance with the agreement. Martek now has license agreements with
manufacturers making approximately 85% of U.S. and 60% of worldwide infant
formula. 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 such events
will occur.
Four of Martek's infant formula licensees have obtained the regulatory approval,
where required, to sell infant formula supplemented with the Company's oils in
over 60 countries for term or pre-term infant formula products. Martek and its
licensees are in the process of responding to certain questions raised by the
FDA in connection with evaluating the Company's oils for inclusion in U.S.
infant formula. Additionally, during February 2000, Martek filed a Generally
Recognized As Safe ("GRAS") Notification with the FDA for the use of its DHA and
ARA in infant formula. Management believes that the data establish that its
sources of ARA and DHA are GRAS when used in infant formula. Management also
believes that the FDA review of the GRAS notification will have a favorable
outcome. In the event that the FDA review results in a favorable outcome, each
licensee will still need to obtain a separate FDA authorization before marketing
an infant formula with the Company's sources of DHA and ARA in the U.S.
Management believes that this regulatory process will take a minimum of three to
six additional months. There can be no assurance that the FDA will have a
favorable review of the GRAS notification, that a licensee will pursue the
regulatory authorization to market an infant formula containing Martek's DHA and
ARA in the U.S., that the FDA will authorize the marketing of such an infant
formula, or that the regulatory process will not involve significantly longer
delays that may materially and adversely affect the timing and introduction of
infant formula's containing Martek's products. Nevertheless, management
anticipates that during the next twelve months, new infant formula products
containing Martek's oils will continue to be introduced in various countries
around the world and overall product sales, including sales from infant formula
related products, will increase over the prior year.
Results of Operations - Comparison of Quarters and Nine Months Ended July 31,
2000 and 1999
Revenues for the quarter ended July 31, 2000 were $2,449,000, an 86% increase
from revenues of $1,318,000 for the same period in 1999. Revenues for the
nine-month period ended July 31, 2000 were $6,607,000, an increase of $2,237,000
or 51%, from the same period in 1999, primarily due to increased nutritional
product sales. Total product sales during the quarter ended July 31, 2000
increased by $1,034,000 or 89% from the same period in 1999, and increased by
$1,575,000 or 41% for the nine-month period ended July 31, 2000 from the same
period in 1999. Sales of nutritional products increased by $1,181,000 or 174%
for the quarter ended July 31, 2000 over the quarter ended July 31, 1999 and
increased $1,829,000 or 87% for the nine-month period ended July 31, 2000 when
compared to the same period in 1999. The majority of the increase in nutritional
product sales is due to sales of oil to an infant formula licensee under an
existing royalty agreement. A smaller portion of the increase, 19%, resulted
from product sales to a licensee under an all-inclusive flat pricing
arrangement. This contrasted to the Company's traditional sales to licensees
where an initial transfer price is charged and a trailing royalty is received
six to nine months later. The Company is in the process of offering all of its
infant formula licensees an all-inclusive flat price for bulk oil, which would
incorporate a slightly discounted royalty up-front into the sales price of the
Company's oils. If the traditional transfer price had been billed for all bulk
oil sales during the quarter ended July 31, 2000, total nutritional product
sales would have been $228,000 lower, and would have increased only 141%
compared to the quarter ended July 31, 1999.
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Sales of products for drug discovery and diagnostics decreased 30% for the
quarter ended July 31, 2000 and decreased by 15% for the nine months ended July
31, 2000, when compared to the same periods in 1999. These decreases are
primarily due to a focus on higher margin isotope sales and a de-emphasis on the
sale of low margin reagent products. Royalty revenues increased by 39% for the
quarter ended July 31, 2000 compared to the same quarter in 1999 and 26% for the
nine months ended July 31, 2000 compared to the first nine months of fiscal year
1999. Management anticipates that royalty revenues may decline in the future if
Martek increases sales of bulk oil to infant formula licensees under
all-inclusive pricing arrangements. Revenues from research and development work
increased by $38,000 in the quarter ended July 31, 2000 when compared to the
same quarter in 1999 and increased $560,000 for the nine months ended July 31,
2000 from the same period in 1999, mainly due to a third-party development
project completed during the second and third quarters of 2000 at Martek's
Winchester plant.
Cost of product sales increased to 91% of revenues from product sales for the
quarter ended July 31, 2000, up from 73% for the same period in 1999. For the
nine-month period ended July 31, 2000 cost of product sales increased to 83% of
revenues from product sales, up from 76% for the nine-month period ended July
31, 1999. The majority of the increase for the quarter and the nine-month period
ended July 31, 2000 relates to a significant increase in the sales of bulk oil
to infant formula licensees under a royalty-bearing arrangement. Cost of sales
will continue to fluctuate on a quarter-to-quarter basis based on the mix of
sales, with lower margins experienced when the mix includes higher volumes of
sales to infant formula manufacturers under Martek's existing royalty-bearing
arrangements. Martek is in the process of offering all of its infant formula
licensees an all-inclusive flat price for bulk oil, which would incorporate a
slightly discounted royalty up-front into the sales price of the Company's oils.
The overall economics of an all-inclusive price closely match those of Martek's
existing royalty bearing arrangements, however, the all-inclusive flat price
positively impacts the Company's margins at the time of initial sale. For those
licensees who continue to purchase oil under a royalty arrangement rather than
pay an all-inclusive initial price, a transfer price is paid to Martek for the
oil at the time of purchase and a trailing royalty is earned at the time of the
final product sale by the licensee. Under this arrangement, there is an
approximate six to nine month delay after the initial sale of oil by Martek
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. For the quarter ended July 31, 2000, approximately
two-thirds of Martek's oil sales to licensees were made under existing royalty
agreements. Had all sales to licensees been made using all inclusive pricing,
cost of product sales for the quarter would have been approximately 75% of
revenues from product sales.
The high cost of sales incurred in 2000 reflects the cost of inventory when
certain production efficiencies had not yet been realized due to the low volume
of production and because the production process had not been optimized.
Management believes that in the future, as sales volumes increase and
manufacturing efficiencies are realized, the cost of production of nutritional
oils products will decrease, resulting in a positive impact on gross profit
margins.
Research and development costs increased by $188,000, or 7%, in the quarter
ended July 31, 2000 as compared to the same period in 1999. For the nine-month
period ended July 31, 2000, research and development costs increased $1,877,000
or 26% when compared to the same period in 1999. The majority of the increase
for the quarter ended July 31, 2000 relates to the continued refinement of
Martek's fermentation and oil extraction processes and other R&D efforts related
to production of the Company's oils at the Winchester plant. Research and
development costs for the nine-month period ending July 31, 2000 were impacted
by expenses incurred relating to a third-party development project at the
Company's Winchester Plant. Management believes that as sales volumes increase
and production optimization occurs, development costs related to Martek's
Winchester plant will decrease, reducing the Company's overall R&D expenditures.
Page 11 of 15
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Selling, general and administrative expenses increased by $218,000, or 14%,
during the quarter ended July 31, 2000 and increased by $155,000 or 3%, in the
nine months ended July 31, 2000 over the third quarter and nine months ended
July 31, 1999, respectively. This increase in the quarter ended July 31, 2000 is
mainly due to the timing of various corporate administration expenditures.
As a result of the foregoing, net loss for the quarter ended July 31, 2000 was
$3,789,000, or $.21 per share, compared to a net loss of $3,620,000, or $.23
per share for the same period in 1999. Net loss for the nine months ended July
31, 2000, was $11,672,000 or $.68 per share, compared to a net loss of
$10,864,000 or $.71 per share for the same period in 1999.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to recognize all
derivative financial instruments as either assets or liabilities on the balance
sheet and measure those instruments at fair value. This Statement is effective
for fiscal years beginning after June 15, 2000. 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.
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, Martek has raised approximately $125 million from public
and private sales of its equity securities, as well as option and warrant
exercises, including approximately $13.8 million from a private placement of
stock in May, 1999 and $10.25 million in February, 2000 related to a 1998
funding commitment.
Through July 31, 2000, Martek has incurred an accumulated deficit of
$85,569,000. Martek's balance of cash and cash equivalents at July 31, 2000 was
$4,631,000. In addition, at July 31, 2000, Martek had $19,451,000 in short-term
investments and marketable securities. These investments and securities, which
consist of U.S. Government securities with average maturities of less than six
months, are available to meet the future cash needs of the Company. Cash, cash
equivalents, short-term investments and marketable securities increased
$7,724,000 during the first nine months of 2000, primarily due to the funds
received from the private placement of Martek's common stock and warrants in
February, 2000.
Martek will require substantial additional funds to continue its research and
development programs, to conduct pre-clinical and clinical studies, to
maintain compliance with its loan covenants, and to commercialize its
nutritional oils, Neuromins(R) DHA, and its other products under development.
The ultimate levels of funding required will depend, in part, on whether Martek
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 pre-clinical
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 Martek'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 Martek decides to manufacture and continues to
manufacture itself); and the costs of marketing and commercializing Martek's
products. The continued development and optimization of Martek's production
facility has had, and will continue to have, a material effect upon the
Company's liquidity and capital resources. Additional plant modifications
costing at least $500,000 are expected in fiscal 2000. Plant expenditures beyond
2000 will depend in part on production capacity needs, and the extent of
development and implementation of process improvements.
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Management believes that its existing capital resources 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 Martek'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 Martek and on
favorable terms. There can be no assurance that such funds will be available to
Martek on acceptable terms, if at all.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Martek is not a party to any material legal proceedings.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
Not Applicable
Item 4. Submission of Matters to a vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
i. Exhibit 27.01 Financial Data Schedule.
ii. 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 14 of 15
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARTEK BIOSCIENCES CORPORATION
(Registrant)
Date: September 14, 2000 /s/ Peter L. Buzy
------------------- --------------------------------------
Peter L. Buzy,
Chief Financial and Accounting Officer
Page 15 of 15
