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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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 June 30, 2002.
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: 0-27718
NEOSE TECHNOLOGIES, INC.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3549286
--------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 Witmer Road
Horsham, Pennsylvania 19044
----------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(215) 315-9000
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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: 14,318,279 shares of
common stock, $.01 par value, were outstanding as of July 31, 2002.
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
----------------------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at December 31, 2001 and
June 30, 2002 .......................................................................... 3
Consolidated Statements of Operations for the three and six months ended
June 30, 2001 and 2002, and for the period from inception through
June 30, 2002 .......................................................................... 4
Consolidated Statements of Cash Flows for the six months ended June
30, 2001 and 2002, and for the period from inception through
June 30, 2002 .......................................................................... 5
Notes to 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 ...................... 15
PART II. OTHER INFORMATION:
------------------
Item 4. Submission of Matters to a Vote of Security Holders ............................ 15
Item 6. Exhibits and Reports on Form 8-K ............................................... 16
SIGNATURES ................................................................................. 18
- ----------
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share amounts)
Assets December 31, 2001 June 30, 2002
---------------------- -------------------
Current assets:
Cash and cash equivalents $ 76,245 $ 6,617
Marketable securities - 47,487
Restricted funds 902 1,458
Prepaid expenses and other current assets 1,635 2,403
---------------------- -------------------
Total current assets 78,782 57,965
Property and equipment, net 22,649 33,099
Other assets, net 4,355 4,056
---------------------- -------------------
Total assets $ 105,786 $ 95,120
====================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,100 $ 1,100
Accounts payable 719 2,082
Accrued compensation 855 1,443
Accrued expenses 2,844 1,580
Deferred revenue 1,222 1,014
---------------------- -------------------
Total current liabilities 6,740 7,219
Long-term debt 5,100 5,100
---------------------- -------------------
Total liabilities 11,840 12,319
---------------------- -------------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 30,000,000 shares
authorized; 14,088,823 and 14,296,829 shares
issued; 14,082,823 and 14,290,829 shares
outstanding 141 143
Additional paid-in capital 176,124 178,778
Treasury stock, 6,000 shares at cost (175) (175)
Deferred compensation (503) (219)
Deficit accumulated during the development-stage (81,641) (95,726)
---------------------- -------------------
Total stockholders' equity 93,946 82,801
---------------------- -------------------
Total liabilities and stockholders' equity $ 105,786 $ 95,120
====================== ===================
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)
Period from
Three months Six months inception
ended June 30, ended June 30, (January 17, 1989)
------------------------ -----------------------
2001 2002 2001 2002 to June 30, 2002
------------------------ ----------------------- --------------------
Revenue from collaborative agreements $ 292 $ 1,561 $ 604 $ 2,332 $ 14,965
--------- ------------ ---------- ---------- --------------------
Operating expenses:
Research and development 3,934 4,969 7,101 8,680 87,054
Marketing, general and administrative 2,091 3,170 3,757 5,781 41,596
Severance charges 440 289 440 2,722 3,292
--------- ------------ ---------- ---------- --------------------
Total operating expenses 6,465 8,428 11,298 17,183 131,942
--------- ------------ ---------- ---------- --------------------
Operating loss (6,173) (6,867) (10,694) (14,851) (116,977)
Gain on sale of marketable security - - - - 6,120
Interest income 1,031 419 2,352 848 18,518
Interest expense (68) (42) (167) (82) (3,387)
--------- ------------ ---------- ---------- --------------------
Net loss $ (5,210) $ (6,490) $ (8,509) $ (14,085) $ (95,726)
========= ============ ========== ========== ===================
Basic and diluted net loss per share $ (0.37) $ (0.45) $ (0.61) $ (0.99)
========= ============ ========== ==========
Basic and diluted weighted-average
shares outstanding 14,016 14,281 14,011 14,201
========= ============ ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
NEOSE TECHNOLOGIES, INC.
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six months ended Period from inception
June 30, (January 17, 1989)
-------------------------
2001 2002 to June 30, 2002
--------- --------- ----------------------
Cash flows from operating activities:
Net loss $ (8,509) $ (14,085) $ (95,726)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 1,153 1,382 12,116
Non-cash compensation 547 1,162 4,740
Common stock issued for non-cash and other charges - - 35
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (138) (768) (2,403)
Accounts payable 121 1,363 2,082
Accrued compensation (32) 588 1,443
Accrued expenses (4) (1,264) (902)
Deferred revenue (83) (208) 1,014
--------- --------- ----------------------
Net cash used in operating activities (6,945) (11,830) (77,601)
--------- --------- ----------------------
Cash flows from investing activities:
Purchases of property and equipment (1,732) (11,533) (40,090)
Proceeds from sale-leaseback of equipment - - 1,382
Purchases of marketable securities (72,770) (47,487) (371,814)
Proceeds from sales of marketable securities - - 11,467
Proceeds from maturities of and other changes in marketable securities 55,856 - 312,860
Purchase of acquired technology - - (4,550)
Investment in equity securities - - (1,250)
--------- --------- ----------------------
Net cash used in investing activities (18,646) (59,020) (91,995)
--------- --------- ----------------------
Cash flows from financing activities:
Proceeds from issuance of debt - - 11,955
Repayment of debt (1,100) - (7,052)
Restricted cash related to debt 544 (556) (1,387)
Proceeds from issuance of preferred stock, net - - 29,497
Proceeds from issuance of common stock, net - - 136,840
Proceeds from exercise of stock options and warrants 373 1,778 6,607
Acquisition of treasury stock - - (175)
Dividends paid - - (72)
--------- --------- ----------------------
Net cash provided by (used in) financing activities (183) 1,222 176,213
--------- --------- ----------------------
Net increase (decrease) in cash and cash equivalents (25,774) (69,628) 6,617
Cash and cash equivalents, beginning of period 66,989 76,245 -
--------- --------- ----------------------
Cash and cash equivalents, end of period $ 41,215 $ 6,617 $ 6,617
========= ========= ======================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 185 $ 61 $ 3,364
========= ========= ======================
Non-cash investing activities:
Accrued property & equipment $ - $ - $ 2,438
========= ========= ======================
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.
5
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:
. As of June 30, 2002;
. For the three and six months ended June 30, 2001 and 2002; and
. For the period from inception (January 17, 1989) to June 30, 2002.
Our unaudited consolidated financial statements do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States 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 2002 solely on
our results of operations for the three and six months ended June 30, 2002. You
should read these unaudited consolidated financial statements in combination
with:
. The other Notes in this section;
. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing in the following section; and
. 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, 2001.
2. Severance Charges
In May 2002, we incurred severance charges of approximately $0.3
million in connection with the termination of employees from various
departments. As of June 30, 2002, $0.2 million of this amount had been paid, and
the balance was paid in July 2002.
In March 2002, we entered into a Separation and Consulting Agreement
with Stephen A. Roth, Ph.D., who was the Chief Executive Officer of the Company.
Under this agreement, we agreed to provide medical benefits to Dr. Roth and to
pay him $39,622 per month for twelve months. On or before the first anniversary
of the agreement, Dr. Roth may agree to extend his non-competition and
non-solicitation commitments for two additional years by entering into a
separate non-competition agreement. If he does so, the Company will continue his
medical benefits for six additional months, extend the $39,622 monthly payments
for 24 additional months and, for purposes of stock option vesting and
exercisability, treat Dr. Roth as remaining in service to the Company until the
third anniversary of his resignation as Chief Executive Officer of the Company
(or until the end of his service as a director, if later). We have recognized
$0.3 million in severance charges related to this agreement during the three
months ended March 31, 2002, and the remaining payment of $0.2 million will be
recognized over the one-year term of the agreement.
6
In January 2002, we entered into a Retirement Agreement with Edward J.
McGuire, Ph.D., Vice President, Research and Development. Under this agreement,
he will receive payments through 2006, including $87,500 in 2002, $125,000 in
2003, and $100,000 in each of 2004, 2005, and 2006. We will continue to provide
Dr. McGuire health insurance benefits through December 31, 2003. We also agreed
to extend the period of time during which Dr. McGuire may exercise his stock
options subsequent to his retirement. In connection with this agreement, in
March 2002, we recognized $2.1 million in severance charges, of which $1.6
million was a non-cash expense related to the stock options.
3. 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 six months ended June 30, 2001 and 2002, the effects of the
exercise of outstanding stock options and warrants to purchase 2,519,418 and
3,513,695 shares, respectively, were antidilutive; accordingly, they were
excluded from the calculation of diluted earnings per share.
4. Comprehensive Loss
Our comprehensive loss for the six months ended June 30, 2001 and 2002
was approximately $8.5 million and $14.1 million, respectively. Comprehensive
loss is comprised of net loss and other comprehensive income or loss. For the
periods reported, there are no separate sources of other comprehensive income or
loss.
5. Reclassifications
Certain prior year amounts have been reclassified to conform to our
current year presentation.
6. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized
Statements of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
which are effective for fiscal years beginning after December 15, 2001. SFAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. SFAS 142 no longer requires the amortization of
goodwill; rather, goodwill is subject to a periodic assessment for impairment by
applying a fair-value-based test. In addition, an acquired intangible asset
should be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the intangible asset
can be sold, transferred, licensed, rented, or exchanged, regardless of the
acquirer's intent to do so. Such acquired intangible assets are amortized over
their useful lives. All of our intangible assets were obtained through
contractual rights and have been separately identified and recognized in our
consolidated balance sheets. These intangibles are being amortized over their
estimated useful lives or contractual lives as appropriate. The adoption of SFAS
142 in the first quarter of 2002 did not have a material impact on our
consolidated financial position or results of operations.
Statement of Financial Accounting Standard No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143), which was released in August 2001,
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and their associated asset retirement
costs. SFAS 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of intangible long-lived assets that
result from the acquisition, construction, development, or normal use of the
asset. The enterprise is also required to record a corresponding increase to the
carrying amount of the related long-lived asset (i.e. the associated asset
retirement cost) and to depreciate that cost over the life of the asset. The
liability is changed at the end of each period to reflect the passage of time
(i.e. accretion expense) and changes in the estimated future cash flows
underlying the initial fair value measurement. Because of the extensive use of
estimates, most enterprises will record a gain or loss when they settle the
obligation. We are required to adopt SFAS 143 for our fiscal year beginning
January 1, 2003; we do not expect the adoption of SFAS 143 to have a material
impact on our consolidated financial position or results of operations.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 changes the
accounting for long-lived assets by requiring that all long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell whether
included in reporting continuing operations or in discontinued operations. SFAS
144, which replaces SFAS 121 "Accounting for the Impairment of Long-Lived Assets
and for Assets to Be Disposed Of," is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS 144 did not have a material impact on
our consolidated financial position or results of operations.
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 146, "Accounting for Exit or Disposal
Activities" (SFAS No. 146). SFAS No. 146 addresses significant issues regarding
the recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS No. 146 also
addresses recognition of certain costs related to terminating a contract that is
not a capital lease, costs to consolidate facilities or relocate employees and
termination of benefits provided to employees that are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. Adoption of SFAS 146 is not expected to have a material impact on our
consolidated financial position or results of operations.
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," "estimate," "may," "expect,"
"intend," 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
Condition and Results of Operations about our:
. expectations for increases in operating expenses;
7
. expectations for increases in research and development, and
marketing, general and administrative expenses in order to
develop products, manufacture commercial quantities of
products and commercialize our technology;
. expectations for the development, manufacturing, and approval
of new products, including our own proprietary products;
. expectations for incurring additional capital expenditures to
expand our manufacturing capabilities;
. expectations for generating revenue or becoming profitable on
a sustained basis;
. ability to enter into additional collaboration agreements and
the ability of our existing collaboration partners to
commercialize products incorporating our technologies;
. estimate of the sufficiency of our existing cash and cash
equivalents and investments to finance our operating and
capital requirements;
. expected losses; and
. expectations for future capital requirements.
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:
. our ability to commercialize any products or technologies;
. our ability to enter into and maintain collaborative
arrangements;
. our ability to attract and retain key personnel;
. our ability to develop commercial-scale manufacturing
processes;
. our ability to obtain adequate sources of proteins;
. our ability to expand and protect our intellectual property;
. unanticipated cash requirements to support current operations
or research and development; and
. general economic conditions.
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 other than as required by applicable law.
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, 2001, included in our Annual Report on Form 10-K and in
our 2001 Annual Report to Stockholders.
8
Overview
Neose develops proprietary technologies for using enzymes to
manufacture complex carbohydrates. Neose is using its broad technology base to
develop novel and improved products, primarily focusing on protein therapeutics.
Neose markets its technology for improving protein drugs under the name
GlycoAdvance(TM). We use GlycoAdvance(TM) to modify the human carbohydrate
structures on therapeutic glycoproteins. We are also developing our technology
to create novel glycosylation patterns, and to link other molecules, such as
polyethylene glycol, to glycoproteins. The application of this technology to
proteins potentially results in improved clinical activity and pharmacokinetic
profile, enhanced drug development flexibility, stronger and additional patent
claims, and yield improvements.
We are exploring the use of our technology to enable the development of
carbohydrate-based therapeutics, and the development of novel carbohydrate food
and nutritional ingredients.
Neose was initially incorporated in January 1989, and began operations
in October 1990. We have incurred operating losses each year since inception. As
of June 30, 2002, we had an accumulated deficit of approximately $95.7 million.
We expect additional losses for some time as we expand research and developments
efforts, manufacturing scale-up activities, and marketing activities.
Critical Accounting Policies
Our significant accounting policies are described in Note 2 to the
consolidated financial statements included in Item 8 of our Form 10-K. We
believe our most critical accounting policies relate to recognition of revenue,
income taxes and impairment of long-lived assets.
Revenue Recognition
Revenue from collaborative agreements consists of up-front fees,
research and development funding, and milestone payments. We recognize revenues
from these agreements consistent with Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements", issued by the Securities and
Exchange Commission in December 1999. Non-refundable up-front fees are deferred
and amortized to revenue over the related performance period. Periodic payments
for research and development activities are recognized over the period in which
we perform those activities under the terms of each agreement. Revenue resulting
from the achievement of substantive milestone events stipulated in the
agreements is recognized when the milestone is achieved. We comply with SAB 101,
although its application to non-refundable up-front fees does not accurately
reflect our access to such funds.
Income taxes
We have a history of losses and, as a result, have generated federal
and state tax net operating loss (NOL) carryforwards of approximately $9.6
million and $6.3 million, respectively, as of December 31, 2001. Accounting
principles generally accepted in the United States require us to record a
valuation allowance against the deferred tax asset associated with this NOL
carryforward if it is more likely
9
than not that we will not be able to utilize the NOL carryforward to offset
future taxes. Due to the size of the NOL carryforward in relation to our history
of unprofitable operations, we have not recognized a net deferred tax asset.
Impairment of Long-Lived Assets
As required by Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144), we
assess the recoverability of any long-lived assets for which an indicator of
impairment exists. Specifically, we calculate, and recognize, any impairment
losses by comparing the carrying value of these assets to our estimate of the
undiscounted future operating cash flows. Although our current and historical
operating and cash flows are indicators of impairment, we believe the future
cash flows to be received from our long-lived assets will exceed the assets'
carrying value. Accordingly, we have not recognized any impairment losses
through June 30, 2002.
Liquidity and Capital Resources
We have incurred operating losses each year since our inception. As of
June 30, 2002, we had an accumulated deficit of approximately $95.7 million. We
have financed our operations through private and public offerings of our
securities, and revenues from our collaborative agreements. We had approximately
$54.1 million in cash and marketable securities as of June 30, 2002, compared to
approximately $76.2 million in cash and cash equivalents as of December 31,
2001. The decrease in 2002 was primarily attributable to the use of cash to fund
our operating loss and capital expenditures.
During the six months ended June 30, 2002, we invested approximately
$11.5 million in property, equipment, and building improvements. We anticipate
additional capital expenditures during 2002 of approximately $5.5 million, of
which $2.5 million is to complete construction of additional cGMP manufacturing
capacity in our Horsham, Pennsylvania facility.
We have temporarily suspended plans to complete renovations of a 40,000
square foot facility, for which we entered into a lease agreement in February
2002. During the six months ended June 30, 2002, we invested approximately $3.3
million in renovating the facility. By putting the renovations on hold, we will
not incur in 2002 an additional $7.5 million that was originally intended to
complete the renovations. If we ultimately decide to cancel the project, or
significantly change its scope, the investment of $3.3 million will be charged
to our Statements of Operations. If we resume the project and complete the
planned renovations, we may incur additional costs of approximately $0.5 million
to restart the project. If we complete the project, 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. We
expect to finance the cost of our capital projects by a combination of state
economic development programs, equipment leasing, and cash from our consolidated
balance sheet.
In December 2001, we entered into a research, development and license
agreement with Wyeth Pharmaceuticals, a division of Wyeth, for the use of our
GlycoAdvance technology to develop an improved production system for Wyeth's
biopharmaceutical compound, recombinant PSGL-Ig (P-selectin glycoprotein
ligand). On May 9, 2002, Neose learned of Wyeth's decision to discontinue the
10
development of rPSGL-Ig for the treatment of myocardial infarction. Their
decision was unrelated to the performance of our GlycoAdvance technology. Wyeth
subsequently notified us of the termination of the agreement, effective
September 2002.
For the three and six months ended June 30, 2002, we recognized revenue
of $1.2 million and $1.7 million, respectively, from Wyeth. As a result of
Wyeth's termination, we expect to recognize revenue of approximately $2.1
million during the quarter ending September 30, 2002, and no additional revenue
thereafter from this agreement. Of the $2.1 million, $0.9 million is non-cash,
and represents the remaining amortization of the $1.0 million up-front fee,
which we received from Wyeth and deferred on our consolidated balance sheet in
December 2001, as required under SAB 101.
In 2001, we announced a stock repurchase program authorizing the
repurchase of up to one million shares of common stock in the open market at
times and prices that we consider appropriate. During 2001, we purchased 6,000
shares of common stock in the open market for approximately $0.2 million.
In 1997, we issued, through the Montgomery County (Pennsylvania)
Industrial Development Authority, $9.4 million of taxable and tax-exempt bonds,
of which $6.2 million remained outstanding as of June 30, 2002. 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. During the quarter ended June 30, 2002,
the weighted-average, effective interest rate was 3.3% 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 June 30, 2002, we had restricted funds
relating to the bonds of approximately $1.5 million, which consisted of our
monthly payments to an escrow account plus interest earned 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. As of June 30, 2002, 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.
We believe that our existing cash and marketable securities, expected
revenue from collaborations and license arrangements, and interest income should
be sufficient to meet our operating and capital requirements through at least
2003, although changes in our collaborative relationships or our business,
whether or not initiated by us, and general economic conditions may cause us to
deplete our cash and marketable securities 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.
11
Joint Venture with McNeil Nutritionals
We have a joint venture with McNeil Nutritionals. 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 $0.4 million 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.
The joint venture developed a process for making fructooligosaccharides
and constructed a pilot facility in Athens, Georgia. In 2001, the joint venture
closed the pilot facility and is exploring establishing a manufacturing
arrangement with a third party to produce these bulking agents.
During the three and six months ended June 30, 2002, the joint venture
reimbursed Neose approximately $24,000 and $205,000, respectively, for the cost
of research and development services and supplies provided to the joint venture.
This amount has been reflected as a reduction of research and development
expense in our consolidated statements of operations. As of June 30, 2002, the
joint venture owed Neose approximately $24,000. This amount is included in
prepaid expenses and other current assets in our consolidated balance sheet. We
expect to provide significantly fewer research and development services during
2002 compared to prior years, thereby significantly reducing our expected
reimbursement from 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 June 30, 2002, the joint venture had an accumulated
loss since inception of approximately $10.2 million. Until the joint venture is
profitable, McNeil Nutritionals 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
Nutritionals 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
Nutritionals before any distribution of assets to us. As of June 30, 2002, the
joint venture owed McNeil Nutritionals approximately $8.6 million.
If the joint venture builds additional production facilities, and we
wish to have a 50% ownership interest in the joint venture, we are required to
invest up to $8.9 million to fund half of such expenditures. However, we may
elect to fund as little as $1.9 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 Nutritionals 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 Nutritionals for this amount.
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Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized
Statements of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
which are effective for fiscal years beginning after December 15, 2001. SFAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. SFAS 142 no longer requires the amortization of
goodwill; rather, goodwill is subject to a periodic assessment for impairment by
applying a fair-value-based test. In addition, an acquired intangible asset
should be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the intangible asset
can be sold, transferred, licensed, rented, or exchanged, regardless of the
acquirer's intent to do so. Such acquired intangible assets are amortized over
their useful lives. All of our intangible assets were obtained through
contractual rights and have been separately identified and recognized in our
consolidated balance sheets. These intangibles are being amortized over their
estimated useful lives or contractual lives as appropriate. The adoption of SFAS
142 in the first quarter of 2002 did not have a material impact on our
consolidated financial position or results of operations.
Statement of Financial Accounting Standard No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143), which was released in August 2001,
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and their associated asset retirement
costs. SFAS 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of intangible long-lived assets that
result from the acquisition, construction, development, or normal use of the
asset. The enterprise is also required to record a corresponding increase to the
carrying amount of the related long-lived asset (i.e. the associated asset
retirement cost) and to depreciate that cost over the life of the asset. The
liability is changed at the end of each period to reflect the passage of time
(i.e. accretion expense) and changes in the estimated future cash flows
underlying the initial fair value measurement. Because of the extensive use of
estimates, most enterprises will record a gain or loss when they settle the
obligation. We are required to adopt SFAS 143 for our fiscal year beginning
January 1, 2003; we do not expect the adoption of SFAS 143 to have a material
impact on our consolidated financial position or results of operations.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 changes the
accounting for long-lived assets by requiring that all long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell whether
included in reporting continuing operations or in discontinued operations. SFAS
144, which replaces SFAS 121 "Accounting for the Impairment of Long-Lived Assets
and for Assets to Be Disposed Of," is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS 144 did not have a material impact on
our consolidated financial position or results of operations.
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 146, "Accounting for Exit or Disposal
Activities" (SFAS No. 146). SFAS No. 146 addresses significant issues regarding
the recognition, measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS No. 146 also
addresses recognition of certain costs related to terminating a contract that is
not a capital lease, costs to consolidate facilities or relocate employees and
termination of benefits provided to employees that are involuntarily terminated
under the terms of a one-time benefit arrangement that is not an ongoing
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benefit arrangement or an individual deferred compensation contract. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. Adoption of SFAS 146 is not expected to have a material
impact on our consolidated financial position or results of operations.
Results of Operations
Revenues
Revenues from collaborative agreements for the three and six months
ended June 30, 2002 were $1.6 million and $2.3 million, respectively, compared
to $0.3 million and $0.6 million for the corresponding periods in 2001. The
increases are attributable to our agreement with Wyeth Pharmaceuticals, which we
entered into in December 2001. For the three and six months ended June 30, 2002,
we recognized revenue of $1.2 million and $1.7 million, respectively, from
Wyeth. As a result of Wyeth's termination, we expect to recognize revenue of
approximately $2.1 million during the quarter ending September 30, 2002, and no
additional revenue thereafter from this agreement. Of the $2.1 million, $0.9
million is non-cash, and represents the remaining amortization of the $1.0
million up-front fee, which we received from Wyeth and deferred on our
consolidated balance sheet in December 2001, as required under SAB 101. Our
other revenues during 2002 were primarily from our collaboration with Wyeth
Nutritionals. Our revenues in the first six months of 2001 were primarily
related to our agreement with Bristol-Myers.
Operating Expenses
Research and development expenses for the three and six months ended
June 30, 2002 were $5.0 million and $8.7 million, respectively, compared to $3.9
million and $7.1 million for the corresponding periods in 2001. The increases
during the 2002 periods were primarily attributable to increases in the number
of employees engaged in research and development and associated expenses.
Marketing, general and administrative expenses for the three and six
months ended June 30, 2002 were $3.2 million and $5.8 million, respectively,
compared to $2.1 million and $3.8 million for the corresponding periods in 2001.
The 2002 periods contained higher payroll, legal, and consulting expenses than
the comparable 2001 periods.
During the three and six months ended June 30, 2002, we incurred
severance charges of $0.3 million and $2.7 million, respectively, compared to
$0.4 million for the three and six months ended June 30, 2001. Of the $2.7
million incurred in 2002, $1.6 million is a non-cash charge related to stock
option modifications for an agreement entered into with one of our executive
officers in connection with his retirement.
Interest Income and Expense
Interest income for the three and six months ended June 30, 2002 was
$0.4 million and $0.8 million, respectively, compared to $1.0 million and $2.4
million for the corresponding periods in 2001. The decreases were due to lower
average cash, cash equivalents, and marketable securities balances and lower
interest rates during the 2002 periods.
Interest expense for the three and six months ended June 30, 2002 was
$42,000 and $82,000, respectively, compared to $68,000 and $167,000 for the
corresponding periods in 2001. The decreases were due to lower interest rates
and lower average loan balances during the 2002 periods.
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Net Loss
Our net loss for the three and six months ended June 30, 2002 was $6.5
million and $14.1 million, respectively, compared to $5.2 million and $8.5
million for the corresponding periods in 2001, for the reasons described above.
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. As of
June 30, 2002, we held $47.5 million in FNMA Discount notes with original
maturities ranging from 91 to 338 days. The balance of our investment portfolio
was held in money market securities. The approximate principal amount and
weighted-average interest rate per year of our investment portfolio as of June
30, 2002 was $54.1 million and 2.1%, respectively.
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. During the quarter ended June 30, 2002, the
weighted-average, effective interest rate was approximately 3.3% per year.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
A. Our Annual Meeting of Stockholders was held on June 25, 2002.
B. The motions before stockholders were:
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1. To elect eight Directors.
Votes Votes Votes Broker
Name of Director For Against Withheld Abstentions Nonvotes
---------------- --- ------- -------- ----------- --------
Stephen A. Roth, Ph.D. 12,456,981 -- 459,298 -- --
C. Boyd Clarke 12,139,632 -- 776,647 -- --
William F. Hamilton, Ph.D. 12,456,981 -- 459,298 -- --
Douglas J. MacMaster, Jr. 12,456,981 -- 459,298 -- --
P. Sherrill Neff 12,456,981 -- 459,298 -- --
Mark H. Rachesky, M.D. 12,456,981 -- 459,298 -- --
Lowell E. Sears 12,456,981 -- 459,298 -- --
Elizabeth H. S. Wyatt 12,456,981 -- 459,298 -- --
2. To approve and adopt our Amended and Restated 1995
Stock Option/Stock Issuance Plan to increase the number
of shares authorized for issuance under the plan.
Votes For 4,899,981
Votes Against 2,020,597
Votes Withheld --
Abstentions 22,989
Broker Nonvotes 5,972,712
3. To approve and adopt an amendment to our Employee Stock
Purchase Plan to increase the number of shares
authorized for issuance under the plan.
Votes For 6,363,179
Votes Against 559,957
Votes Withheld --
Abstentions 20,431
Broker Nonvotes 5,972,712
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
99.1 Neose Technologies, Inc. 1995 Amended and Restated Stock
Option/Stock Issuance Plan, amended as of June 25, 2002
(incorporated by reference to Appendix A of our Proxy
Statement filed with the Securities and Exchange Commission on
May 15, 2002).
99.2 Neose Technologies Employee Stock Purchase Plan, amended
as of June 25, 2002, (incorporated by reference to Appendix B
of our Proxy Statement filed with the Securities and Exchange
Commission on May 15, 2002).
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.4 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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(b) Reports on Form 8-K:
On April 4, 2002, we filed a Current Report on Form 8-K
announcing the appointment of C. Boyd Clarke as president,
chief executive officer, and director. The Current Report on
Form 8-K was subsequently amended on April 29, 2002 and April
30, 2002.
On April 30, 2002, we filed a Current Report on Form 8-K
disclosing that we had dismissed our independent accountants
Arthur Andersen LLP, and that KPMG LLP had been retained as
our independent accountants pursuant to authorization of our
board of directors and audit committee. The Current Report on
Form 8-K was subsequently amended on May 15, 2002.
On May 14, 2002, we filed a Current Report on Form 8-K
disclosing that we were informed by Wyeth Pharmaceuticals that
Wyeth does not intend to continue clinical development of
their compound, rPSGL-Ig, for myocardial infarction and
separately, we announced the appointment of Elizabeth H. S.
Wyatt to our board of directors.
On June 13, 2002, we filed a Current Report on Form 8-K
announcing an amendment to our Shareholder Rights Plan.
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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: August 13, 2002 By: /s/ A. Brian Davis
-------------------------------
A. Brian Davis
Principal Financial and
Accounting Officer
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