SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-27718
NEOSE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3549286
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 Witmer Road
Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)
(215) 441-5890
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(Registrant's telephone number, including area code)
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.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 14,052,214 shares of
common stock, $.01 par value, were outstanding as of October 31, 2001.
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
INDEX
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Page
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PART I. FINANCIAL INFORMATION:
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Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) at December 31, 2000 and September 30, 2001......................3
Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2000
and 2001, and for the period from inception through September 30, 2001...................................4
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2000 and 2001,
and for the period from inception through September 30, 2001.............................................5
Notes to Unaudited Consolidated Financial Statements.....................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................7
Item 3. Quantitative and Qualitative Disclosure About Market Risk...............................................11
PART II. OTHER INFORMATION:
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Item 6. Exhibits and Reports on Form 8-K........................................................................12
SIGNATURES ......................................................................................................13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share amounts)
December 31, 2000 September 30, 2001
----------------- ------------------
Assets
Current assets:
Cash and cash equivalents $ 66,989 $ 31,621
Marketable securities 27,773 51,818
Restricted funds 893 626
Prepaid expenses and other current assets 583 587
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Total current assets 96,238 84,652
Property and equipment, net 13,577 17,193
Other assets 4,953 4,505
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Total assets $ 114,768 $ 106,350
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,100 $ 1,100
Accounts payable 83 34
Accrued compensation 601 634
Accrued expenses 1,527 817
Deferred revenue 389 264
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Total current liabilities 3,700 2,849
Long-term debt 6,200 5,100
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Total liabilities 9,900 7,949
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Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued - -
Common stock, $.01 par value, 30,000 shares
authorized; 13,992 and 14,052 shares issued and
outstanding 140 141
Additional paid-in capital 173,757 174,787
Unrealized gains on investments - 5,667
Deferred compensation (717) (549)
Deficit accumulated during the development-stage (68,312) (81,645)
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Total stockholders' equity 104,868 98,401
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Total liabilities and stockholders' equity $ 114,768 $ 106,350
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three months Nine months Period from
ended September 30, ended September 30, inception
-------------------------- ------------------------- (January 17, 1989)
2000 2001 2000 2001 to September 30, 2001
----------- ------------ ----------- ----------- ---------------------
Revenue from collaborative agreements $ 583 $ 330 $ 4,299 $ 934 $ 12,301
Operating expenses:
Research and development 2,987 4,010 9,644 11,111 74,758
Marketing, general and administrative 1,535 1,883 4,233 6,080 32,961
--------- --------- --------- --------- ---------
Total operating expenses 4,522 5,893 13,877 17,191 107,719
--------- --------- --------- --------- ---------
Operating loss (3,939) (5,563) (9,578) (16,257) (95,418)
Interest income 1,578 793 3,565 3,145 17,111
Interest expense (117) (54) (351) (221) (3,338)
--------- --------- --------- --------- ---------
Net loss $ (2,478) $ (4,824) $ (6,364) $ (13,333) $ (81,645)
========= ========= ========= ========= =========
Basic and diluted net loss per share $ (0.18) $ (0.34) $ (0.48) $ (0.95)
========= ========= ========= =========
Basic and diluted weighted-average
shares outstanding 13,950 14,041 13,246 14,021
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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NEOSE TECHNOLOGIES, INC.
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine months ended Period from
September 30, inception
----------------------------- (January 17, 1989)
2000 2001 to September 30, 2001
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Cash flows from operating activities:
Net loss $ (6,364) $ (13,333) $ (81,645)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,470 1,769 10,081
Non-cash compensation 1,228 493 2,692
Common stock issued for non-cash and other charges - - 35
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (1,417) (4) (587)
Accounts payable (97) (49) 34
Accrued compensation (9) 33 634
Accrued expenses (136) (710) 135
Deferred revenue (374) (125) 264
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Net cash used in operating activities (5,699) (11,926) (68,357)
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Cash flows from investing activities:
Purchases of property and equipment (1,271) (4,937) (24,398)
Proceeds from sale-leaseback of equipment - - 1,382
Purchases of marketable securities (135,845) (103,465) (324,327)
Proceeds from sales of marketable securities - - 11,467
Proceeds from maturities of and other changes in marketable
securities 66,429 85,397 267,019
Purchase of acquired technology (1,000) - (4,550)
Investment in equity securities (1,250) (310) (1,560)
Restricted cash related to acquired technology 1,500 - -
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Net cash used in investing activities (71,437) (23,315) (74,967)
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Cash flows from financing activities:
Proceeds from issuance of debt - - 11,955
Repayment of debt (1,000) (1,100) (7,052)
Restricted cash related to debt 174 267 (555)
Proceeds from issuance of preferred stock, net - - 29,497
Proceeds from issuance of common stock, net - - 18,277
Proceeds from public offerings, net 68,605 - 118,071
Proceeds from exercise of stock options and warrants 2,807 706 4,824
Dividends paid - - (72)
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Net cash provided by (used in) financing activities 70,586 (127) 174,945
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Net increase (decrease) in cash and cash equivalents (6,550) (35,368) 31,621
Cash and cash equivalents, beginning of period 10,365 66,989 -
-------- -------- ---------
Cash and cash equivalents, end of period $ 3,815 $ 31,621 $ 31,621
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 365 $ 243 $ 3,262
========= ========= =========
Non-cash financing activities:
Issuance of common stock for dividends $ - $ - $ 90
========= ========= =========
Issuance of common stock to employees in lieu of
cash compensation $ - $ - $ 44
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements
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NEOSE TECHNOLOGIES, INC.
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
We have used generally accepted accounting principles for interim
financial information to prepare unaudited consolidated financial statements:
o As of September 30, 2001;
o For the three and nine months ended September 30, 2000 and 2001; and
o For the period from inception (January 17, 1989) to September 30,
2001.
Our consolidated financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In our opinion, the unaudited information
includes all the normal recurring adjustments that are necessary for a fair
presentation of the financial position, results of operations, and cash flows
for the periods presented. You should not base your estimate of our results of
operations for 2001 solely on our results of operations for the nine months
ended September 30, 2001. You should read these consolidated financial
statements in combination with:
o The other Notes in this section;
o "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing in the following section; and
o The Consolidated Financial Statements, including the Notes to the
Consolidated Financial Statements, included in our Annual Report on
Form 10-K for the year ended December 31, 2000.
2. Acquisition of Novazyme Pharmaceutical by Genzyme Corporation
On September 27, 2001, Genzyme Corporation announced it had completed
the acquisition of Novazyme Pharmaceuticals. We received shares of Genzyme
General, a division of Genzyme Corporation, in exchange for our ownership
interest in Novazyme. The value of the Genzyme shares was approximately $6
million as of September 30, 2001, and was reflected in Marketable Securities on
our Balance Sheet. During October 2001 we sold these shares for net proceeds of
approximately $6.4 million, of which $6.1 million will be reflected as a Gain on
Investment on our Statement of Operations for the fourth quarter. In addition,
Genzyme acquired Novazyme's obligation to pay us $1.5 million plus interest in
November 2002.
3. Agreement with Bristol-Myers Squibb Amended and Assigned to Progenics
In May 2001, Bristol-Myers Squibb amended and assigned our research and
development agreement to Progenics Pharmaceuticals, Inc. Under the amended
agreement, Progenics has the right to negotiate with Neose for the supply of two
gangliosides for use as the active pharmaceutical ingredients in Progenics' two
cancer vaccine candidates. Under the terms of the original agreement, Neose was
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developing proprietary technologies to enable cGMP manufacturing of these
gangliosides. On May 15, 2001, Progenics announced the initiation of their
second Phase III clinical trial with the most advanced of these vaccine
candidates. This second trial is being conducted in Europe, and includes
ganglioside manufactured by Neose.
4. Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic
loss per share is computed by dividing net loss by the weighted-average number
of common shares outstanding for the period. Diluted loss per share reflects the
potential dilution from the exercise or conversion of securities into common
stock. For the nine months ended September 30, 2000 and 2001, the effects of the
exercise of outstanding stock options and warrants were antidilutive;
accordingly, they were excluded from the calculation of diluted earnings per
share.
5. Comprehensive Loss
Our comprehensive loss for the nine months ended September 30, 2000 and
2001 was approximately $6.4 million and $7.7 million, respectively.
Comprehensive loss is comprised of net loss and other comprehensive income or
loss. Our only source of other comprehensive income or loss is unrealized gain
on equity securities held for the nine months ended September 30, 2001.
6. Reclassifications
Certain prior year amounts have been reclassified to conform to our current year
presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION ACT OF 1995:
This report and the documents incorporated by reference herein contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. When used in this report and the documents incorporated herein by
reference, the words "anticipate," "believe," "may," "expect," "estimate," and
similar expressions are generally intended to identify forward-looking
statements. These forward-looking statements include, among others, the
statements in Management's Discussion and Analysis of Financial Conditions and
Results of Operations about our:
o estimate of the sufficiency of our existing cash and cash
equivalents and investments to finance our operating and capital
requirements; and
o expectations for future capital requirements.
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Our actual results could differ materially from those results expressed
in, or implied by, these forward-looking statements. Potential risks and
uncertainties that could affect our actual results include the following:
o our ability to commercialize any of our products or technologies;
o our ability to maintain our existing collaborative arrangements and
enter into new collaborative arrangements;
o unanticipated cash requirements to support current operations or
research and development;
o the timing and extent of funding requirements for the activities of
our joint venture with McNeil Specialty; and
o general economic conditions.
These and other risks and uncertainties that could affect our actual results are
discussed in greater detail in this report and in our other filings with the
Securities and Exchange Commission. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, events, levels of activity, performance, or achievements. We do
not assume responsibility for the accuracy and completeness of the
forward-looking statements.
We do not undertake any duty to update after the date of this report
any of the forward-looking statements in this report to conform them to actual
results.
You should read this section in combination with the Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 2000, included in our Annual Report on Form 10-K and in
our 2000 Annual Report to Stockholders.
Overview
Neose develops proprietary technologies for the synthesis and
manufacture of complex carbohydrates, which are chains of simple sugar molecules
that can be joined together in many different combinations. Our enzymatic
glycosylation technology platform makes feasible the synthesis of a wide range
of complex carbohydrates for pharmaceutical, biotechnology, nutritional, and
consumer product applications. Our GlycoAdvance(TM) program uses our
technologies to enable the completion and correction of glycosylation in
recombinant glycoprotein discovery, development, and manufacture. Our
GlycoTherapeutics(TM) program uses our technologies to develop and produce novel
carbohydrate-based therapeutics, and our GlycoActives(TM) program uses our
technologies to develop and produce novel carbohydrate-based food ingredients.
We have incurred operating losses each year. As of September 30, 2001, we had an
accumulated deficit of approximately $81.6 million. We expect additional losses
for some time as we expand research and development efforts, manufacturing
scale-up activities, and marketing activities.
Results of Operations
Revenues
Revenues from collaborative agreements for the three and nine months
ended September 30, 2001 were $330,000 and $934,000, respectively, compared to
$583,000 and $4,299,000, respectively, for the corresponding period in 2000.
Payments under our Bristol-Myers agreement, which has subsequently been assigned
to Progenics Pharmaceuticals, accounted for approximately $3.3 million of our
collaborative revenues in the nine months ended September 30, 2000. We do not
expect any future payments under this agreement unless we negotiate new terms
with Progenics.
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Operating Expenses
Research and development expenses for the three and nine months ended
September 30, 2001, were $4,010,000 and $11,111,000, respectively, compared to
$2,987,000 and $9,644,000, respectively, for the corresponding periods in 2000.
The increases were primarily attributable to increased personnel and related
costs.
General and administrative expenses for the three and nine months ended
September 30, 2001, were $1,883,000 and $6,080,000, respectively, compared to
$1,535,000 and $4,233,000, respectively, for the corresponding periods in 2000.
The increases were primarily attributable to the hiring of additional business
development and administrative personnel, marketing and promotional expenses as
we have accelerated our commitment to the commercialization of GlycoAdvance, and
increased legal and patent expenses as we continue to expand our intellectual
property position.
Interest Income and Expense
Interest income for the three and nine months ended September 30, 2001
was $793,000 and $3,145,000, respectively, compared to $1,578,000 and
$3,565,000, respectively, for the corresponding periods in 2000. The changes
were primarily due to lower interest rates during the 2001 periods.
Interest expense for the three and nine months ended September 30, 2001
was $54,000 and $221,000, respectively, compared to $117,000 and $351,000,
respectively, for the corresponding periods in 2000. The changes were due to
lower average interest rates and lower average loan balances outstanding during
the 2001 periods.
Net Loss
We incurred net losses of $4,824,000 and $13,333,000, or $0.34 and
$0.95 per share, for the three and nine months ended September 30, 2001,
respectively, compared to $2,478,000 and $6,364,000, or $0.18 and $0.48 per
share, respectively, for the corresponding periods in 2000.
Liquidity and Capital Resources
We have incurred operating losses each year since our inception. As of
September 30, 2001, we had an accumulated deficit of approximately $81.6
million. We have financed our operations through private and public offerings of
our securities, and revenues from our collaborative agreements. We had $83.4
million in cash and marketable securities as of September 30, 2001, compared to
$94.8 million in cash and marketable securities as of December 31, 2000.
As of September 30, 2001, our marketable securities included Genzyme
stock valued at approximately $6 million which we received in exchange for our
ownership interest in Novazyme Pharmaceuticals. During October 2001, we sold
these shares for net proceeds of approximately $6.4 million.
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During the nine months ended September 30, 2001, we invested
approximately $4.9 million in property, equipment, and building improvements. We
anticipate capital expenditures during 2001 and 2002 of approximately $16
million, of which $3.3 million was recorded as of September 30, 2001, to provide
additional cGMP manufacturing capacity in our Horsham, Pennsylvania facility to
support the initial requirements of our anticipated GlycoAdvance customers. Even
if we make these capital expenditures, we may not be able to enter into
collaborations with potential GlycoAdvance customers. In addition, we anticipate
in the next 12 months we will obtain, either through lease or purchase, another
facility, which we will renovate at a cost of approximately $8 million. We plan
to relocate our non-cGMP research laboratories and corporate office space from
our current facility in Horsham, Pennsylvania into the new facility, leaving our
current facility available for future expansion of our cGMP manufacturing
capacity. The cost of these capital projects will be financed by a combination
of state economic development programs, private debt financing, and cash from
our balance sheet.
We may be required to make additional investments in our joint venture
with McNeil Specialty to fund capital expenditures. If the joint venture builds
additional production facilities, and we wish to maintain our 50% ownership
interest in the joint venture, we are required to invest up to $8.85 million to
fund half of such expenditures. However, we may elect to fund as little as $1.85
million of the cost of the facilities, so long as our aggregate investments in
the joint venture are at least 15% of the joint venture's aggregate capital
expenditures. In this case, McNeil Specialty will fund the remainder of our half
of the joint venture's capital expenditures, and our ownership percentage will
be proportionately reduced. We have an option, expiring in September 2006, to
return to 50% ownership of the joint venture by reimbursing McNeil Specialty for
this amount.
In 1997, we issued, through the Montgomery County (Pennsylvania)
Industrial Development Authority, $9.4 million of taxable and tax-exempt bonds,
the current balance of which is $6.2 million. The bonds were issued to finance
the purchase of our previously leased building and the construction of a
pilot-scale manufacturing facility within our building. The bonds are supported
by an AA-rated letter of credit, and a reimbursement agreement between our bank
and the letter of credit issuer. The interest rate on the bonds will vary
weekly, depending on market rates for AA-rated taxable and tax-exempt
obligations, respectively. As of September 30, 2001, the weighted-average,
effective interest rate was 4.6% per year, including letter-of-credit and other
fees. The terms of the bond issuance provide for monthly, interest-only payments
and a single repayment of principal at the end of the twenty-year life of the
bonds. However, under our agreement with our bank, we are making monthly
payments to an escrow account to provide for an annual prepayment of principal.
As of September 30, 2001, we had restricted funds relating to the bonds of
$626,000, which consisted of our monthly payments to an escrow account plus
interest revenue on the balance of the escrow account.
To provide credit support for this arrangement, we have given a first
mortgage on the land, building, improvements, and certain machinery and
equipment to our bank. We have also agreed to a covenant to maintain a minimum
required cash and short-term investments balance of at least two times the
current loan balance. At September 30, 2001, we were required to maintain a cash
and short-term investments balance of $12.4 million. If we fail to comply with
this covenant, we are required to deposit with the lender cash collateral up to,
but not more than, the loan's unpaid balance, which was $6.2 million as of
September 30, 2001.
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We expect that our existing cash and short-term investments will be
adequate to fund our operations through at least 2002, although changes in our
collaborative relationships or our business, whether or not initiated by us, may
cause us to deplete our cash and short-term investments sooner than the above
estimate. The timing and amount of our future capital requirements and the
adequacy of available funds will depend on many factors, including if or when
any products manufactured using our technology are commercialized.
Joint Venture with McNeil Specialty
Our joint venture with McNeil Specialty is owned equally by Neose and
McNeil Specialty. Each of Neose and McNeil Specialty contributed various
intellectual property to the joint venture. In addition, McNeil Specialty
contributed to the joint venture the pilot commercial manufacturing facility,
for which 50% of the cost will be reimbursed by the joint venture. We account
for our investment in the joint venture under the equity method, under which we
recognize our share of the income and losses of the joint venture. In 1999, we
reduced the carrying value of our initial investment in the joint venture of
approximately $350,000 to zero to reflect our share of the joint venture's
losses. We recorded this amount as research and development expense in our
Consolidated Statements of Operations. We will record our share of post-1999
losses of the joint venture, however, only to the extent of our actual or
committed investment in the joint venture.
If the joint venture becomes profitable, we will recognize our share of
the joint venture's profits only after the amount of our capital contributions
to the joint venture is equivalent to our share of the joint venture's
accumulated losses. As of September 30, 2001, the joint venture had an
accumulated loss since inception of approximately $6 million, of which our 50%
share is approximately $3 million. Until the joint venture is profitable, McNeil
Specialty is required to fund, as a non-recourse, no-interest loan, all of the
joint venture's aggregate capital expenditures in excess of an agreed-upon
amount, and all of the joint venture's operating losses. The loan balance would
be repayable by the joint venture to McNeil Specialty over a seven-year period
commencing on the earlier of September 30, 2006 or the date on which Neose
attains a 50% ownership interest in the joint venture after having had a lesser
ownership interest. In the event of any dissolution of the joint venture, the
loan balance would be payable to McNeil Specialty before any distribution of
assets to us. As of September 30, 2001, the joint venture owed McNeil Specialty
approximately $8 million.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Our holdings of financial instruments are comprised primarily of
government agency securities. All such instruments are classified as securities
held to maturity. We seek reasonable assuredness of the safety of principal and
market liquidity by investing in rated fixed income securities, while at the
same time seeking to achieve a favorable rate of return. Our market risk
exposure consists principally of exposure to changes in interest rates. Our
holdings are also exposed to the risks of changes in the credit quality of
issuers. We typically invest in the shorter-end of the maturity spectrum. The
approximate principal amount and weighted-average interest rate of our
investment portfolio at September 30, 2001 was $79.3 million and 3.5%,
respectively.
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At September 30, 2001, we also held stock worth approximately $6
million of Genzyme General, a division of Genzyme Corporation. During October
2001, we sold these shares for net proceeds of approximately $6.4 million.
We have exposure to changing interest rates on our taxable and
tax-exempt bonds, and we are currently not engaged in hedging activities.
Interest on approximately $6.2 million of outstanding indebtedness is at an
interest rate that varies weekly, depending on the market rates for AA-rated
taxable and tax-exempt obligations. As of September 30, 2001, the
weighted-average, effective interest rate was approximately 4.6% per year.
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K.
None.
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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.
NEOSE TECHNOLOGIES, INC.
Date: November 14, 2001 By: /s/ A. Brian Davis
----------------------------------
A. Brian Davis
Principal Financial and Accounting
Officer
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