e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006.
OR
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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)
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Delaware
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13-3549286 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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102 Witmer Road
Horsham, Pennsylvania
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19044 |
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(Address of principal executive offices)
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(Zip Code) |
(215) 315-9000
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 32,812,288 shares of common stock, $.01 par value, were outstanding
as of May 1, 2006.
NEOSE TECHNOLOGIES, INC.
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Neose Technologies, Inc.
Balance Sheets
(unaudited)
(in thousands, except per share amounts)
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March 31, |
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December 31, |
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2006 |
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2005 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
30,171 |
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$ |
37,738 |
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Accounts receivable |
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336 |
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1,076 |
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Prepaid expenses and other current assets |
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1,397 |
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892 |
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Total current assets |
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31,904 |
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39,706 |
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Property and equipment, net |
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24,415 |
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24,708 |
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Intangible and other assets, net |
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795 |
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949 |
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Total assets |
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$ |
57,114 |
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$ |
65,363 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Note payable |
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$ |
481 |
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$ |
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Current portion of long-term debt and capital lease obligations |
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3,692 |
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4,031 |
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Accounts payable |
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1,044 |
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722 |
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Accrued compensation |
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1,490 |
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1,618 |
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Accrued expenses |
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2,607 |
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2,697 |
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Deferred revenue |
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739 |
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1,527 |
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Total current liabilities |
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10,053 |
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10,595 |
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Long-term debt and capital lease obligations, net of current portion |
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9,655 |
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10,423 |
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Deferred revenue, net of current portion |
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3,647 |
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3,765 |
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Other liabilities |
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475 |
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463 |
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Total liabilities |
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23,830 |
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25,246 |
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Commitments and contingencies (See Note 14) |
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Stockholders equity: |
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Common stock, par value $.01 per share, 50,000 shares
authorized; 32,785 and 32,782 shares issued and outstanding |
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328 |
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328 |
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Additional paid-in capital |
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279,961 |
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279,015 |
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Deferred compensation |
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(6 |
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Accumulated deficit |
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(247,005 |
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(239,220 |
) |
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Total stockholders equity |
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33,284 |
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40,117 |
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Total liabilities and stockholders equity |
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$ |
57,114 |
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$ |
65,363 |
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The accompanying notes are an integral part of these financial statements.
3
Neose Technologies, Inc.
Statements of Operations
(unaudited)
(in thousands, except per share amounts)
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Three months ended March 31, |
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2006 |
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2005 |
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Revenue from collaborative agreements |
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$ |
2,396 |
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$ |
1,348 |
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Operating expenses: |
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Research and development |
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7,311 |
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9,625 |
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General and administrative |
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2,928 |
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2,978 |
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Total operating expenses |
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10,239 |
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12,603 |
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Operating loss |
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(7,843 |
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(11,255 |
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Other income |
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22 |
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Interest income |
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366 |
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304 |
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Interest expense |
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(308 |
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(338 |
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Net loss |
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$ |
(7,785 |
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$ |
(11,267 |
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Basic and diluted net loss per share |
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$ |
(0.24 |
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$ |
(0.40 |
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Weighted-average shares outstanding
used in computing basic and diluted
net loss per share |
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32,783 |
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27,947 |
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The accompanying notes are an integral part of these financial statements.
4
Neose Technologies, Inc.
Statements of Cash Flows
(unaudited)
(in thousands)
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Three months ended |
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March 31, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(7,785 |
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$ |
(11,267 |
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Adjustments to reconcile net loss to net cash used in
operating activities: |
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Depreciation and amortization expense |
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506 |
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1,636 |
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Non-cash compensation expense |
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823 |
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50 |
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Gain on disposition of property and equipment |
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(2 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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740 |
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1,447 |
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Prepaid expenses and other current assets |
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(511 |
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(688 |
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Accounts payable |
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420 |
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286 |
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Accrued compensation |
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1 |
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(669 |
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Accrued expenses |
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(80 |
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(10 |
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Deferred revenue |
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(906 |
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(747 |
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Other liabilities |
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12 |
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(15 |
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Net cash used in operating activities |
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(6,782 |
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(9,977 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(170 |
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(452 |
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Proceeds from sale of equipment and assets held for sale |
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7 |
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20 |
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Net cash used in investing activities |
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(163 |
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(432 |
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Cash flows from financing activities: |
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Proceeds from issuance of debt |
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539 |
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701 |
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Repayments of debt |
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(1,161 |
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(1,157 |
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Proceeds from issuance of common stock, net |
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30,092 |
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Net cash provided by (used in) financing activities |
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(622 |
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29,636 |
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Net increase (decrease) in cash and cash equivalents |
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(7,567 |
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19,227 |
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Cash and cash equivalents, beginning of period |
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37,738 |
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45,048 |
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Cash and cash equivalents, end of period |
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$ |
30,171 |
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$ |
64,275 |
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The accompanying notes are an integral part of these financial statements.
5
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
1. Organization and Business Activities
Neose Technologies, Inc. is a biopharmaceutical company using its enzymatic technologies to
develop proprietary drugs, focusing primarily on therapeutic proteins. We believe that our core
enzymatic technologies, GlycoAdvance® and GlycoPEGylation, improve the drug properties of
therapeutic proteins by building out, and attaching polyethylene glycol (PEG) to, carbohydrate
structures on the proteins. We are using our technologies to develop proprietary versions of
protein drugs with proven safety and efficacy and to improve the therapeutic profiles of proteins
being developed by our partners. We expect these modified proteins to offer significant advantages,
including less frequent dosing and possibly improved efficacy, over the original versions of the
drugs now on the market, as well as to meet or exceed the pharmacokinetic profile of
next-generation versions of the drugs now on the market. We believe this strategy of targeting
drugs with proven safety and efficacy allows us to lower the risk profile of our proprietary
development portfolio as compared to de novo protein drug development.
We have incurred losses each year since inception. As of March 31, 2006, we had an accumulated
deficit of $247,005. We expect to spend significant amounts to expand our research and development
on our proprietary drug candidates and technologies, maintain and expand our intellectual property
position, and expand our business development and commercialization efforts. Given our planned
level of operating expenses, we expect to continue incurring losses for some time. We believe that
our existing cash and cash equivalents, expected revenue from collaborations and license
arrangements, and interest income should be sufficient to meet our operating and capital
requirements at least through 2006, although changes in our collaborative relationships or our
business, whether or not initiated by us, may cause us to deplete our cash and cash equivalents
sooner than the above estimate. We will require significant amounts of additional capital in the
future to fund our operations, and we do not have any assurance that funding will be available when
we need it on terms that we find favorable, if at all. If we are unable to raise additional capital
when required, we may need to delay, scale back, or eliminate some or all of our research and
development programs.
We have not yet developed any products or commercialized any products or technologies, and we
may never be able to do so. Even if we are successful in developing products that are approved for
marketing, we will not be successful unless our products, and products incorporating our
technologies, gain market acceptance. Our operations are subject to risks and uncertainties other
than mentioned above including, among others: the uncertainty of product development, as well as
our limited product development and manufacturing experience; our dependence upon collaborative
partners to develop and commercialize products incorporating our technologies and the success of
collaborative relationships; the uncertainty of intellectual property rights; technological
uncertainty and the risk of technological obsolescence; the risk of development and
commercialization of competitive products by others that are more effective, less costly, or
otherwise gain greater market acceptance; and the uncertainty of achieving regulatory approvals for
our products, or products incorporating our technologies.
6
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
2. Interim Financial Information
The accompanying unaudited financial statements have been prepared in accordance with U.S.
generally accepted accounting principles for presentation of interim financial statements.
Accordingly, the unaudited financial statements do not include all the information and footnotes
necessary for a comprehensive presentation of the financial position, results of operations, and
cash flows for the periods presented. In our opinion, however, the unaudited financial statements
include 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 2006 solely on our results of operations for
the three months ended March 31, 2006. You should read these unaudited financial statements in
combination with the other Notes in this section; the section entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations appearing in Item 2 of this Form 10-Q;
and the Financial Statements, including the Notes to the Financial Statements, included in our
Annual Report on Form 10-K for the year ended December 31, 2005.
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires us to make estimates and assumptions. Those estimates and assumptions affect
the reported amounts of assets and liabilities as of the date of the financial statements, the
disclosure of contingent assets and liabilities as of the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Stock-based Compensation
We adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R), effective January 1, 2006. SFAS No. 123R requires all
share-based payments to employees to be recognized in the financial statements based on their fair
values at the date of grant. Prior to January 1, 2006, we followed Accounting Principles Board
(APB) Opinion 25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations in accounting for our stock compensation. We elected to use the modified
prospective transition method for adopting SFAS No. 123R. Under this method, the provisions of SFAS
No. 123R apply to all awards granted or modified after the date of adoption and to that portion of
awards not fully vested as of the date of adoption. Accordingly, prior periods have not been
restated.
The fair value of stock options is determined using the Black-Scholes valuation model, which
is the same model we previously utilized for valuing stock options for footnote disclosures
required under SFAS No. 123, Accounting for Stock Based Compensation (SFAS No. 123), as
7
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
amended by
SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure (SFAS No. 148).
The fair value of share-based awards is recognized as expense over the requisite service
period, net of estimated forfeitures. We rely primarily on historical experience to estimate
expected forfeitures for stock options. We have not assumed any expected forfeitures for
restricted stock units (RSUs) because those awards have been granted to a small number of
individuals. For all unvested share-based awards outstanding as of December 31, 2005, the
previously measured but unrecognized compensation expense, based on the fair value at the original
grant date, will be recognized on an accelerated basis in the Statements of Operations over the
remaining vesting period, consistent with our recognition policy under SFAS No. 123. For
share-based awards granted subsequent to December 31, 2005, we have elected to recognize
compensation expense in the Statements of Operations on a straight-line basis from the date of
grant. Our deferred stock compensation balance of $6 as of December 31, 2005 was
reclassified into additional paid-in capital upon the adoption of SFAS No. 123R.
Based on the awards outstanding at December 31, 2005, actual awards granted during the first
quarter of 2006, and an estimate of awards to be granted during the balance of 2006, we estimate
that the adoption of SFAS No. 123R will result in approximately $2,000 to $2,500 of increased
compensation expense during the year ended December 31, 2006, as compared to the year ended
December 31, 2005. The preceding estimate assumes an equal number of shares issuable pursuant to
share-based awards granted during 2006 as compared to 2005, and assumes the aggregate fair value
for share-based awards granted during April through December of 2006 equals the aggregate fair
value for share-based awards granted during comparable period in 2005.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of
common shares outstanding for the period. Diluted net loss per share is computed by dividing net
loss by the sum of weighted-average number of common shares outstanding for the period and the
number of additional shares that would have been outstanding if dilutive potential common shares
had been issued. Potential common shares are excluded from the calculation of diluted net loss per
share if the effect on net loss per share is antidilutive. Our diluted net loss per share is equal
to basic net loss per share for all reporting periods presented because giving effect in the
computation of diluted net loss per share to the exercise of outstanding stock options or
settlement of RSUs would have been antidilutive.
Comprehensive Loss
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income
(loss). Other comprehensive income (loss) includes changes to equity that are not included in net
income (loss), except for changes resulting from investments by, and distributions
8
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
to,
stockholders. Our comprehensive loss for the three months ended March 31, 2006 and 2005 was
comprised only of our net loss, and was $7,785 and $11,267, respectively.
Fair Value of Financial Instruments
The fair value of financial instruments is the amount for which instruments could be exchanged
in a current transaction between willing parties. As of March 31, 2006, the carrying values of cash
and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts
payable, accrued expenses, and accrued compensation equaled or approximated their respective fair
values because of the short duration of these instruments. The fair value of our debt and capital
lease obligations was estimated by discounting the future cash flows of each instrument at rates
recently offered to us for similar debt instruments offered by our lenders. As of March 31, 2006,
the fair and carrying values of our debt and capital lease obligations were $13,865 and $13,828,
respectively.
Recent Accounting Pronouncement
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, Accounting
Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS
No. 154), which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting
for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary
changes in accounting principle, and also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific transition
provisions. SFAS No. 154 became effective for accounting changes and corrections of errors made by
us after January 1, 2006. SFAS No. 154 does not change the transition provisions of any existing
accounting pronouncements, including those that are in a transition phase as of the effective date
of SFAS No. 154. The adoption of SFAS No. 154 did not have any impact on our financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform to current year presentation.
9
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
4. Supplemental Disclosure of Cash Flow Information
The following table contains additional cash flow information for the periods reported:
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Three months ended March 31, |
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2006 |
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2005 |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
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$ |
309 |
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$ |
328 |
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Non-cash investing activity: |
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Increase (decrease) in property and equipment
included in accounts payable and accrued
expenses |
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$ |
(108 |
) |
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$ |
7 |
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Non-cash financing activity: |
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Conversion of liability-classified award to
equity classified award upon grant of
restricted stock units (see Note 11) |
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$ |
129 |
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$ |
382 |
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5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
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March 31, |
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December 31, |
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2006 |
|
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2005 |
|
Prepaid insurance |
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$ |
612 |
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$ |
96 |
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Prepaid maintenance agreements |
|
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291 |
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276 |
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Prepaid clinical and preclinical studies |
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66 |
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141 |
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Other prepaid expenses |
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259 |
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205 |
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Other current assets |
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169 |
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174 |
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$ |
1,397 |
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$ |
892 |
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10
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
6. Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Building, facility improvements, and land |
|
$ |
19,486 |
|
|
$ |
19,486 |
|
Laboratory, manufacturing, and office equipment |
|
|
9,659 |
|
|
|
9,606 |
|
|
|
|
|
|
|
|
|
|
|
29,145 |
|
|
|
29,092 |
|
Less accumulated depreciation and amortization |
|
|
(4,730 |
) |
|
|
(4,384 |
) |
|
|
|
|
|
|
|
|
|
$ |
24,415 |
|
|
$ |
24,708 |
|
|
|
|
|
|
|
|
We have granted a first mortgage to our bank (see Note 8) on the land and building where our
present headquarters are located (the Witmer Road facility), as well as a security interest of
first priority on certain improvements, certain equipment, and other tangible personal property.
We have commenced efforts to dispose of the Witmer Road facility, the carrying value of which
is included in building, facility improvements, and land in the above table. We will reclassify the
carrying value of the Witmer Road facility to assets held for sale upon meeting all of the criteria
required for classifying such assets as assets held for sale.
Laboratory, manufacturing, and office equipment as of each of March 31, 2006 and December 31,
2005 included $530 of assets acquired under capital leases. Accumulated depreciation and
amortization as of March 31, 2006 and December 31, 2005 included $325 and $293, respectively,
related to assets acquired under capital leases. Depreciation expense, which includes amortization
of assets acquired under capital leases, was $352 and $1,373 for the three months ended March 31,
2006 and 2005, respectively.
7. Intangible and Other Assets
Intangible and other assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Acquired intellectual property,
net of accumulated amortization
of $3,985 and $3,836 as of March
31, 2006 and December 31, 2005,
respectively |
|
$ |
565 |
|
|
$ |
714 |
|
|
Deferred financing costs, net of
accumulated amortization of $41
and $36 as of March 31, 2006 and
December 31, 2005, respectively |
|
|
140 |
|
|
|
145 |
|
|
Receivable from related party |
|
|
29 |
|
|
|
29 |
|
|
Deposits |
|
|
61 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
$ |
795 |
|
|
$ |
949 |
|
|
|
|
|
|
|
|
11
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
8. Debt and Capital Lease Obligations
Debt and capital lease obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Term loan from bank |
|
$ |
6,889 |
|
|
$ |
7,111 |
|
Industrial development authority bond |
|
|
1,000 |
|
|
|
1,000 |
|
Term loan from landlord (unsecured), annual
interest at 13.00%, due June 2008 |
|
|
907 |
|
|
|
997 |
|
Notes payable to equipment lender, secured by
equipment and facility improvements, interest
rates from 8.09% to 9.44%, due 2006 to 2009 |
|
|
4,347 |
|
|
|
5,075 |
|
Note payable, secured by insurance policies,
annual interest at 5.40%, due November 2006 |
|
|
481 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
13,624 |
|
|
|
14,183 |
|
Capital lease obligations |
|
|
204 |
|
|
|
271 |
|
|
|
|
|
|
|
|
Total debt and capital lease obligations |
|
|
13,828 |
|
|
|
14,454 |
|
Less note payable, secured by insurance policies |
|
|
(481 |
) |
|
|
|
|
Less current portion of long-term debt |
|
|
(3,692 |
) |
|
|
(4,031 |
) |
|
|
|
|
|
|
|
Total long-term debt and capital lease
obligations, net of current portion |
|
$ |
9,655 |
|
|
$ |
10,423 |
|
|
|
|
|
|
|
|
Term Loan from Bank and Industrial Development Authority Bond
During 2004, we and a bank entered into agreements under which the bank acquired and reissued
the $1,000 outstanding of our tax-exempt Industrial Development Authority bond. In addition, we
borrowed $8,000 from the bank. As of March 31, 2006, we owed the bank $7,889.
Under our agreements with the bank, if the bank determines a material adverse change has
occurred in our business, financial condition, results of operations, or business prospects, the
bank in its sole discretion may declare at any time an event of default, of which one potential
outcome could be the accelerated repayment of the outstanding term loan and bond balances, which
totaled $7,889 as of March 31, 2006. To provide security for these borrowings, we granted a first
mortgage to our bank on the land and building where our present headquarters are located (the
Witmer Road facility), as well as a security interest of first priority on certain improvements,
certain equipment, and other tangible personal property. We have commenced efforts to dispose of
the Witmer Road facility. If we dispose of the Witmer Road facility, we will be required to repay
the outstanding balance to the bank, whether or not the proceeds from the disposition of the
facility exceed the outstanding loan balance.
12
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
In March 2006, we entered into amendments of our agreements with the bank. These amendments,
effective March 1, 2006, lowered the minimum liquidity requirements, increased the interest rate
applicable to the outstanding balance, and added a prepayment premium to be paid in the event we
repay the loan earlier than as set forth in the agreements. Pursuant to the amendments, if we fail
at any time to maintain a minimum required cash and short-term investments balance of at least
$12,000, the bank has the option to require us to make a payment to reduce the combined outstanding
balance of the term loan and bond to $6,000. If we fail at any time to maintain a minimum required
cash and short-term investments balance of at least $10,000, the bank has the option to require us
to make a payment to reduce the combined outstanding balance of the term loan and bond to $5,000.
Finally, if we fail at any time to maintain a minimum required cash and short-term investments
balance of at least $5,000, we will be considered to be in default of our agreements and the bank
may take certain actions in relation to that default, including, but not limited to, requiring us
to repay the combined outstanding balance of the term loan and bond.
The agreements with our bank also contain covenants that, among other things, require us to
obtain consent from the bank prior to paying dividends, making certain investments, changing the
nature of our business, assuming or guaranteeing the indebtedness of another entity or individual,
selling or otherwise disposing of a substantial portion of our assets, or merging or consolidating
with another entity. Under our agreements with the bank, we agreed to limit our total outstanding
debt to $22,000. As of March 31, 2006, our total outstanding debt was $13,828.
The interest rate on the bond and bank debt varies quarterly, depending on 90-day LIBOR rates.
At March 31, 2006, the 90-day LIBOR was 5.0%. We have the option each quarter to incur
interest on the outstanding principal at the LIBOR-based variable interest rate or a fixed
rate offered by our bank.
Prior to March 1, 2006, interest accrued on the $8,000 term loan at an interest rate equal to
the 90-day LIBOR plus 3.0%. In connection with the amendments described above, commencing on March
1, 2006 interest on the term loan began to accrue at an interest rate equal to the 90-day LIBOR
plus 5.0%. During the three months ended March 31, 2006, the weighted-average annual interest rate
for the term loan was 8.3%. We made quarterly, interest-only payments prior to March 31, 2005.
Commencing on March 31, 2005, we began to make quarterly principal payments of $222 plus interest.
We are required to make these quarterly payments through December 31, 2013.
The Industrial Development Authority bond accrues interest at a rate equal to the 90-day LIBOR
plus a percentage (the Applicable Margin) that is dependent upon the LIBOR amount at the beginning
of each quarter. Prior to March 1, 2006, the Applicable Margin was defined as 1.5% when the LIBOR
was less than 4.0%, 1.25% when the LIBOR was between 4.0% and 6.0%, inclusive, and 1.0% when the
LIBOR exceeded 6.0%. In connection with the amendments described above, commencing on March 1, 2006
the Applicable Margin is defined as 3.5% when the LIBOR is less than 4.0%, 3.25% when the LIBOR is
between 4.0% and 6.0%, inclusive, and
13
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
3.0% when the LIBOR exceeds 6.0%. During the three months ended March 31, 2006, the
weighted-average annual interest rate for the bond was 6.5%. For the bond, we are making
quarterly, interest-only payments through March 31, 2014, and will make a single repayment of
principal on March 31, 2014.
2006 Activity
In March 2006, we borrowed $539 to finance insurance policy premiums due on certain insurance
policies. The insurance policy premiums, net of amortization, are included in prepaid expenses and
other current assets on our balance sheet at March 31, 2006 (see Note 5). We are required to pay
$61 of principal and interest during each of the nine months beginning on March 15, 2006 and ending
on November 15, 2006. The interest is calculated based on an annual percentage rate of 5.4%. To
secure payment of the amounts financed, we granted the lender a security interest in all of our
right, title and interest to the insurance policies. Upon a default by us, the lender can demand,
and will have the right to receive from us, immediate payment of the total unpaid balance of the
loan. In the event of default and the demand for immediate payment by the lender, interest will
accrue on any unpaid amounts at the highest rate allowed by applicable law.
9. Accrued Expenses
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Professional fees |
|
$ |
1,053 |
|
|
$ |
1,346 |
|
Contract research and development services |
|
|
1,039 |
|
|
|
650 |
|
Clinical and preclinical studies |
|
|
196 |
|
|
|
183 |
|
Employee relocation |
|
|
38 |
|
|
|
108 |
|
Restructuring charges (see Note 13) |
|
|
2 |
|
|
|
87 |
|
Other expenses |
|
|
279 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
$ |
2,607 |
|
|
$ |
2,697 |
|
|
|
|
|
|
|
|
10. Stockholders Equity
In February 2005, we sold 8,050 shares of our common stock at a public offering price of $4.00
per share, generating net proceeds of $30,006.
14
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
11. Equity Compensation Plans
Equity Incentive Plans
We have two equity incentive plans, under which a total of 7,374 shares of common stock have
been authorized. In addition, we granted nonqualified stock options in 2002 outside of these plans
to purchase 488 shares.
The 2004 Equity Incentive Plan incorporates a predecessor plan. The following types of awards
are available under the plan: incentive stock options, non-qualified stock options, stock
appreciation rights, restricted shares and RSUs. All employees, non-employee directors, and
consultants are eligible to receive awards under the plan.
The plan allows us to grant restricted shares and RSUs with complete discretion as to: when
grants are made; the consideration, if any, to be paid for restricted shares; and when the
restrictions applicable to each restricted share and RSU will lapse. The plan also allows us to
grant stock options and stock appreciation rights to eligible individuals, with complete discretion
as to: when grants are made; the number of shares subject to vesting and the vesting schedule; the
designation as either an incentive or a non-qualified stock option; the maximum term to remain
outstanding, which term, for an incentive stock option, may not exceed ten years (and for an
incentive stock option granted to a person who owns more than 10% of our voting power may not
exceed five years); and the exercise price, which for a non-qualified stock option may not be less
than 85% of the fair market value of the stock on the date of grant and for an incentive stock
option must be at least 100% of the fair market value on the date of grant (unless the recipient
owns more than 10% of our voting power, in which case the exercise price must be at least 110% of
the fair market value on the date of grant).
We normally issue new shares to satisfy stock option exercises and the settlement of shares
pursuant to RSUs. A summary of stock option activity as of March 31, 2006, and for the three months
then ended, is presented in the following table:
15
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
average |
|
|
Aggregate |
|
|
remaining |
|
|
|
|
|
|
|
exercise |
|
|
intrinsic |
|
|
contractual |
|
|
|
Shares |
|
|
price |
|
|
value |
|
|
life (years) |
|
Outstanding at
January 1, 2006 |
|
|
4,995 |
|
|
$ |
14.01 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
896 |
|
|
|
2.56 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(72 |
) |
|
|
4.64 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(180 |
) |
|
|
11.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
March 31, 2006 |
|
|
5,639 |
|
|
$ |
12.40 |
|
|
$ |
349 |
|
|
|
6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at March 31,
2006 and expected
to vest |
|
|
5,195 |
|
|
$ |
13.09 |
|
|
$ |
275 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
March 31, 2006 |
|
|
3,464 |
|
|
$ |
16.70 |
|
|
$ |
52 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Disclosures
We adopted SFAS No. 123R effective January 1, 2006. Prior to January 1, 2006, we applied the
intrinsic value method of accounting for all stock-based employee compensation in accordance with
APB No. 25 and related interpretations. We elected to use the modified prospective transition
method for adopting SFAS No. 123R. Under this method, the provisions of SFAS No. 123R apply to all
awards granted or modified after the date of adoption and to awards not fully vested as of the date
of adoption. Accordingly, prior periods have not been restated. For the three months ended March
31, 2006, we recorded $844 of compensation cost for share-based payment arrangements in our
Statements of Operations, of which $742 related to stock options and $102 related to restricted
stock units. The weighted-average fair value of stock options granted during the three months ended
March 31, 2006 was $1.86. There were no stock options exercised during the three months ended March
31, 2006.
The fair value of stock options is determined using the Black-Scholes valuation model, which
is the same model we previously utilized for valuing stock options for footnote disclosures
required under SFAS No. 123 as amended by SFAS No. 148. During the three months ended March 31,
2006, the fair value of each stock option award was determined as of the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
Expected volatility |
|
|
75 |
% |
Expected term (years) |
|
|
6.3 7.6 |
|
Risk-free interest rate |
|
|
4.5 |
% |
Expected dividend yield |
|
|
0 |
% |
16
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
Expected volatility is based solely on historical volatility of our common stock over the
period commensurate with the expected term of the stock options. We rely solely on historical
volatility because our traded options do not have sufficient trading activity to allow us to
incorporate the mean historical implied volatility from traded options into our estimate of future
volatility. The expected term calculation for stock options granted to directors and officers is
based on the observed and expected time to post-vesting exercise and forfeitures of stock options
by those individuals. The expected term calculation for stock options granted to all other
individuals is based on the simplified method described in Staff Accounting Bulletin No. 107,
Share-Based Payment. The risk-free interest rate is based on the U.S. Treasury yield in effect at
the time of grant for an instrument with a maturity that is commensurate with the expected term of
the stock options. The dividend yield of zero is based on the fact that we have never paid cash
dividends on our common stock, and we have no present intention to pay cash dividends.
The fair value of share-based awards is recognized as expense over the requisite service
period, net of estimated forfeitures. Based on our historical experience of option pre-vesting
cancellations, we have assumed an annualized forfeiture rate of 13% for our stock options. We have
not assumed any expected forfeitures for RSUs because those awards have been granted to a small
number of individuals. Under the provisions of SFAS No. 123R, we will record additional expense if
the actual forfeiture rate is lower than we estimated, and will record a recovery of prior expense
if the actual forfeiture is higher than we estimated. We rely primarily on historical experience to
estimate expected forfeitures.
For all unvested awards outstanding as of December 31, 2005, the previously measured but
unrecognized compensation expense, based on the fair value at the original grant date, is being
recognized on an accelerated basis in the Statements of Operations over the remaining vesting
period, consistent with our recognition policy under SFAS No. 123. For share-based awards granted
subsequent to December 31, 2005, we have elected to recognize compensation expense in the
Statements of Operations on a straight-line basis from the date of grant. Our deferred stock
compensation balance of $6 as of December 31, 2005 was reclassified into additional paid-in capital
upon the adoption of SFAS No. 123R.
As of March 31, 2006, there was $3,055 of total unrecognized compensation cost, which includes
the impact of expected forfeitures, related to unvested share-based compensation arrangements. That
cost is expected to be recognized over a weighted-average period of 1.7 years.
SFAS No. 123R requires us to present pro forma information for the comparative period prior to
the adoption as if we had accounted for all our stock-based employee compensation under the fair
value method of SFAS No. 123. The following table illustrates the effect on our net loss and basic
and diluted net loss per share if we had recorded compensation expense for the estimated fair value
of our stock-based employee compensation, consistent with SFAS No. 123:
17
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
Three months |
|
|
|
ended March 31, |
|
|
|
2005 |
|
Net loss as reported |
|
$ |
(11,267 |
) |
|
Add: Stock-based employee compensation expense
included in reported net loss |
|
|
301 |
|
|
Deduct: Total stock-based employee
compensation expense determined under fair
value-based method for all awards |
|
|
(1,141 |
) |
|
|
|
|
|
Net loss pro forma |
|
$ |
(12,107 |
) |
|
|
|
|
|
Basic and diluted net loss per share as reported |
|
$ |
(0.40 |
) |
|
|
|
|
|
Basic and diluted net loss per share pro forma |
|
$ |
(0.43 |
) |
|
|
|
|
During the three months ended March 31, 2005, the weighted-average fair values of the stock
options granted under the stock option plans was $3.13 using the following assumptions:
|
|
|
|
|
Expected volatility |
|
|
75 |
% |
Expected term (years) |
|
|
6.2 8.5 |
|
Risk-free interest rate |
|
|
4.0% - 4.2 |
% |
Expected dividend yield |
|
|
0 |
% |
Restricted Stock Units
In March 2005, the Compensation Committee of our Board of Directors (Compensation Committee)
modified our bonus program for 2004 for officers, adjusted salaries for officers to reduce cash
payments, granted RSUs to officers, and decided to pay any 2005 bonuses for officers by the award
of RSUs instead of cash. During the three months ended March 31, 2006, we recorded $102 of expense
for these awards, of which $81 related to equity-classified awards. During the three months ended
March 31, 2005, we recorded $292 of expense for these awards, of which $50 related to
equity-classified awards. A summary of the status of RSUs as of March 31, 2006, and changes during
the three months then ended, is presented in the following table:
18
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
average |
|
|
Aggregate |
|
|
remaining |
|
|
|
|
|
|
|
purchase |
|
|
intrinsic |
|
|
contractual |
|
|
|
Shares |
|
|
price |
|
|
value |
|
|
life (years) |
|
Outstanding at
January 1, 2006 |
|
|
290 |
|
|
$ |
¾ |
|
|
|
|
|
|
|
|
|
Awarded |
|
|
84 |
|
|
|
¾ |
|
|
|
|
|
|
|
|
|
Settled |
|
|
(3 |
) |
|
|
¾ |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
¾ |
|
|
|
¾ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
March 31, 2006 |
|
|
371 |
|
|
$ |
¾ |
|
|
$ |
1,006 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at March 31,
2006 and expected
to vest |
|
|
371 |
|
|
$ |
¾ |
|
|
$ |
1,006 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of shares and aggregate intrinsic value of the vested portion of RSUs outstanding
at March 31, 2006 were 294 and $796, respectively. In accordance
with the terms of the RSUs, vested awards will be settled in shares
upon the earlier to occur of 18 months after the grant date or
six months after the Grantees separation from service, subject to certain conditions.
Modification of 2005 Bonus Awards for Officers
Payment of 2005 bonuses for officers was made in January 2006 by the award of RSUs instead of
cash in amounts determined by our Compensation Committee. The RSUs vest in four equal, quarterly
installments following the date of grant. The grant date fair value of the awards was $192, which
we are charging to operating expense in our Statements of Operations on a straight-line basis over
the 25-month period from January 2005 to the last vesting date of the RSUs (January 2007). As a
result, the accrued award value as of December 31, 2005 of $108 was included in accrued
compensation on our Balance Sheets. The liability classification of these RSUs continued until the
grant date, at which time the liability of $129 was reclassified to additional paid-in capital
because the awards became equity-classified. During the three months ended March 31, 2006, we
recorded $32 of expense related to these awards, of which $11 was recorded while the awards were
equity-classified awards. During the three months ended March 31, 2005, we recorded $199 of expense
related to these awards, all which was recorded while the awards were liability-classified awards.
Adjustment of Officer Base Salaries
In March 2005, the Compensation Committee reduced the base salary levels of all of the
Companys officers for the period from March 1, 2005 through February 28, 2006. The salary for each
officer was 10% lower than his or her base salary on February 28, 2005. In connection with these
reductions and the foregoing of merit increases, each officer was granted a one-time award of RSUs.
The grant date fair value of the awards of $363 was to be charged to operating expenses
19
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
on a straight-line basis over the 12-month period from March 2005 through February 2006.
Officers voluntarily terminating employment during 2005 from the Company, however, forfeited
unvested RSUs with a fair value of $24. Of the remaining $339 of fair value, $302 was charged to
operating expenses during 2005, which expense included $31 of previously unrecognized fair value
relating to RSUs held by officers that separated from the Company in October 2005. During the three
months ended March 31, 2006 and 2005, we recorded $37 and $29 of expense, respectively, related to
these equity-classified awards.
Modification of 2004 Bonus Awards for Officers
In March 2005, the Compensation Committee decided that the 2004 bonus award to our Chief
Executive Officer would be paid solely in RSUs instead of cash, and that 2004 bonus awards to other
officers would be payable 50% in cash and 50% in RSUs. Except for RSUs with an immediate vesting
provision that were granted to two officers who retired, the RSUs provided for vesting on the first
anniversary of the grant, subject to the occurrence of certain events. The amount of the RSU
portion of the 2004 bonus for the retired officers was $67, which we charged to general and
administrative expenses on our Statement of Operations in 2004 because the RSUs were immediately
vested. The amount of the RSU portion of the 2004 bonus for other officers was $588, which we
charged to operating expenses in our Statements of Operations on a straight-line basis over the
26-month period from January 2004 to the vesting date of the RSUs (March 2006). As a result, at
December 31, 2004, our accrued compensation included $339 related to these RSUs. The liability
classification of these RSUs continued until the grant date, at which time the liability of $382
was reclassified to additional paid-in capital because the awards became equity-classified. During
the three months ended March 31, 2006, we recorded $33 of expense related to these
equity-classified awards. During the three months ended March 31, 2005, we recorded $64 of expense
related to these awards, of which $21 was recorded while the awards were equity-classified awards.
12. Collaborative Agreements and Significant Customer Concentration
Our revenues from collaborative agreements have historically been derived from a few major
collaborators. Our collaborative agreements have had some or all of the following elements: upfront
fees, research and development funding, milestone revenues, and royalties on product sales. During
the three months ended March 31, 2006 and 2005, one customer accounted for 33% and 47%,
respectively, of total revenues. Another customer accounted for 67% and 53% of our total revenues
during the three months ended March 31, 2006 and 2005, respectively.
Novo Nordisk A/S Agreements
Our agreements with Novo Nordisk A/S provide for us to invoice Novo Nordisk before the
beginning of each calendar quarter for the budgeted amount of our anticipated research and
development activities during the quarter. Following the end of each quarter, we provide a
statement to Novo Nordisk of the actual costs of our research and development activities for the
20
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
quarter, and we arrange with Novo Nordisk to have any difference either paid by one party to
the other or reflected as an adjustment on the next scheduled invoice. As of December 31, 2005, our
accounts receivable and current portion of deferred revenue each included $735 of budgeted costs
relating to research and development activities we expected to complete during the first quarter of
2006. Because the expected activities to be completed during the second quarter of 2006 had not
been finalized as of March 31, 2006, our accounts receivable and current portion of deferred
revenue as of March 31, 2006 did not include the budgeted costs for those activities.
13. Restructuring
In August 2005, we implemented a restructuring of operations to enable an enhanced focus on
next-generation proteins, to allow for the anticipated transfer of production of proteins and
reagents to our collaborative partners and contract manufacturers, and to reduce cash burn. Our net
loss for the year ended December 31, 2005 included $14,206 of charges related to this
restructuring, including $13,187 of non-cash property and equipment impairment charges, $867 of
payments for employee severance costs, and $152 of payments for facility closure costs. Our
research and development expenses for the three months ended March 31, 2006 include a credit of $17
to reflect our change in estimate of employee severance costs associated with the restructuring.
The following table reflects the employee severance charges recorded and reversed, payments
made, and liability remaining as of March 31, 2006. We expect to pay our remaining obligations by
the third quarter of 2006. Our estimates of employee severance and facility closure costs have been
made based upon our best estimate of the amounts and timing of certain future events included in
the restructuring plan. It is possible that the actual outcome of certain events may differ from
the estimates. Changes will be made to the restructuring accrual at the point that the differences
become determinable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Facility |
|
|
|
|
|
|
severance |
|
|
closure |
|
|
|
|
|
|
costs |
|
|
costs |
|
|
Total |
|
Initial provision |
|
$ |
867 |
|
|
$ |
152 |
|
|
$ |
1,069 |
|
|
Cash payments |
|
|
(841 |
) |
|
|
(91 |
) |
|
|
(932 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
26 |
|
|
|
61 |
|
|
|
87 |
|
|
Change in estimate |
|
|
(17 |
) |
|
|
¾ |
|
|
|
(17 |
) |
|
Cash payments |
|
|
(7 |
) |
|
|
(61 |
) |
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2006 |
|
$ |
2 |
|
|
$ |
¾ |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
21
NEOSE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
14. Commitments and Contingencies
In connection with the restructuring announced in August 2005 (see Note 13), we committed to
pay future cash retention bonuses to certain employees, contingent on their not voluntarily
terminating their employment prior to the payment date, who were not given notice of termination in
August 2005. In connection with this commitment, we paid retention bonuses of $388 in 2005, and we
expect to pay an additional $313 of retention bonuses in the first half of 2006, of which $274 was
included in accrued compensation on our Balance Sheets as of March 31, 2006. We also committed to
these employees that, if they were involuntarily terminated in the future, the termination benefit
offered would be no less favorable than offered to employees terminated in the August 2005
restructuring. As a result, accrued compensation on our Balance Sheet as of March 31, 2006 includes
$327 related to these potential payments.
22
Item 2. Managements 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 includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to,
statements about our plans, objectives, representations and contentions that are not historical
facts and that typically may be identified by use of terms such as anticipate, believe,
estimate, plan, may, expect, intend, could, potential, and similar expressions,
although some forward-looking statements are expressed differently. These forward-looking
statements include, among others, the statements about our:
|
|
|
estimate that our existing cash and cash equivalents, expected revenue from
collaborations and license agreements, and interest income should be sufficient to meet
our operating and capital requirements at least through 2006; |
|
|
|
|
expected losses; |
|
|
|
|
expectations for future capital requirements; |
|
|
|
|
expectations for operating expenses; |
|
|
|
|
expectations for expenses for research and development, and general and
administrative activities, in order to develop products, procure commercial quantities
of reagents and products, and commercialize our technology; |
|
|
|
|
expectations regarding the scope and expiration of patents; |
|
|
|
|
expectations regarding the timing of preclinical activities, regulatory meetings and
submissions, as well as the progression of clinical trials, for NE-180 and preclinical
activities and the initiation of clinical trials for GlycoPEG-GCSF; |
|
|
|
|
expectations for the development of long-acting versions of EPO and G-CSF, and
subsequent proprietary drug candidates; |
|
|
|
|
expectations as to the costs and benefits of our plans to dispose of our Witmer Road
facility; |
|
|
|
|
expectations regarding net cash utilization; |
|
|
|
|
expectations for generating revenue; and |
|
|
|
|
expectations regarding the timing and character of new or expanded collaborations
and for the performance of our existing collaboration partners in connection with the
development and commercialization of products incorporating our technologies. |
You should be aware that the forward-looking statements included in this report represent
managements current judgment and expectations, but our actual results, events and
performance could differ materially from those in the forward-looking statements. Potential
risks and uncertainties that could affect our actual results include the following:
|
|
|
our ability to obtain the funds necessary for our operations; |
|
|
|
|
our ability to meet forecasted timelines due to internal or external causes; |
23
|
|
|
our ability to satisfy the FDAs request for additional information and to obtain
clearance from the FDA to commence clinical trials for NE-180 in the U.S.; |
|
|
|
|
our preclinical and clinical results for our products may not be favorable; |
|
|
|
|
our ability to develop commercial-scale manufacturing processes for our products and
reagents, either independently or in collaboration with others; |
|
|
|
|
our ability to enter into and maintain collaborative arrangements; |
|
|
|
|
our ability to obtain adequate sources of proteins and reagents either manufactured
internally or sourced externally; |
|
|
|
|
our ability to develop and commercialize products without infringing the patent or
intellectual property rights of others; |
|
|
|
|
our ability to expand and protect our intellectual property and to operate without
infringing the rights of others; |
|
|
|
|
our ability and our collaborators ability to develop and commercialize therapeutic
proteins and our ability to commercialize our technologies; |
|
|
|
|
our ability to attract and retain key personnel; |
|
|
|
|
our ability to compete successfully in an intensely competitive field; |
|
|
|
|
our ability to renovate our facilities as required for our operations; and |
|
|
|
|
general economic conditions. |
These and other risks and uncertainties that could affect our actual results are discussed in
this report and in our other filings with the Securities and Exchange Commission (SEC),
particularly in Item 1A of Part I of our Annual Report on Form 10-K in the section entitled Risk
Factors.
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 any of the forward-looking statements after the date of this report to conform them to
actual results, except as required by the federal securities laws.
You should read this section in combination with the section entitled Managements Discussion
and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2005,
included in our Annual Report on Form 10-K for the year ended December 31, 2005 and in our 2005
Annual Report to Stockholders.
Overview
We are a biopharmaceutical company using our enzymatic technologies to develop proprietary
drugs, focusing primarily on therapeutic proteins. We believe that our core enzymatic technologies,
GlycoAdvance® and GlycoPEGylation, improve the drug properties of therapeutic proteins by building
out, and attaching polyethylene glycol (PEG) to, carbohydrate structures on the proteins. We are
using our technologies to develop proprietary versions of protein drugs with proven safety and
efficacy and to improve the therapeutic profiles of proteins being developed by our partners. We
expect these modified proteins to offer significant advantages, including less frequent dosing and
possibly improved efficacy, over the original
24
versions of the drugs now on the market, as well as
to meet or exceed the pharmacokinetic profile of next-generation versions of the drugs now on the
market. We believe this strategy of targeting drugs with proven safety and efficacy allows us to
lower the risk profile of our proprietary development portfolio as compared to de novo protein drug
development.
Our proprietary drug development portfolio currently consists of two therapeutic protein
candidates. GlycoPEG-EPO (NE-180) is a long-acting version of erythropoietin (EPO) produced in
insect cells. EPO is prescribed to stimulate production of red blood cells, and is approved for
sale in major markets around the world for treatment of chemotherapy-induced anemia and anemia
associated with chronic renal failure. In February 2006, we initiated a Phase I clinical trial for
NE-180 in a Western European country. We plan to commence a Phase II clinical trial in the fourth
quarter of 2006. In the U.S., our Investigational New Drug application (IND) for NE-180 is
currently on clinical hold with the U.S. Food and Drug Administration (FDA). The early clinical
development of NE-180 may continue to be carried out entirely in Europe. Our second proprietary
protein, GlycoPEG-GCSF, is a long-acting version of granulocyte colony stimulating factor (G-CSF)
that we are co-developing with BioGeneriX AG, a company of the ratiopharm Group. G-CSF is
prescribed to stimulate production of neutrophils (a type of white blood cell) and is approved for
sale in major markets around the world for treatment of neutropenia associated with
myelosuppressive chemotherapy. BioGeneriX expects to initiate a Phase I clinical trial during
mid-2006 in a Western European country. In 2004, the EPO and G-CSF drug categories had aggregate
worldwide sales of approximately $10.6 billion and $3.3 billion, respectively.
In connection with a restructuring of operations that we implemented in August 2005, we have
commenced efforts to dispose of our Witmer Road facility, which we own subject to mortgages
supporting our term loan and industrial development authority bond. If we dispose of the Witmer
Road facility, we will be required to repay the outstanding balance of the term loan and Industrial
Development Authority bond, whether or not the proceeds from the disposition of the facility exceed
the outstanding term loan and bond balances, which totaled $7.9 million as of March 31, 2006. Under
the term loan and bond agreements, which were amended in March 2006, if we fail at any time to
maintain a minimum required cash and short-term investments balance of at least $12.0 million, the
bank has the option to require us to make a payment to reduce the combined outstanding balance of
the term loan and bond to $6.0 million. If we fail at any time to
maintain a minimum required cash and short-term investments balance of at least $10.0 million,
the bank has the option to require us to make a payment to reduce the combined outstanding balance
of the term loan and bond to $5.0 million. Finally, if we fail at any time to maintain a minimum
required cash and short-term investments balance of at least $5.0 million, we will be considered to
be in default of our agreements and the bank may take certain actions in relation to that default,
including, but not limited to, requiring us to repay the combined outstanding balance of the term
loan and bond. See Financing Activities Debt Financing Activities Term Loan from Bank and
Industrial Development Authority Bond in the Liquidity and Capital Resources section of this Form
10-Q for a description of the material features of this borrowing.
We have incurred operating losses each year since our inception. As of March 31, 2006, we had
an accumulated deficit of $247.0 million. We expect additional losses in 2006 and over the next
several years as we continue product research and development efforts and expand our intellectual
property portfolio. We have financed our operations through private and public
25
offerings of equity securities, proceeds from debt financings, and revenues from our
collaborative agreements.
We believe that our existing cash and cash equivalents, expected revenue from collaborations
and license arrangements, and interest income should be sufficient to meet our operating and
capital requirements at least through 2006, although changes in our collaborative relationships or
our business, whether or not initiated by us, may cause us to deplete our cash and cash equivalents
sooner than the above estimate.
Liquidity and Capital Resources
Overview
We had $30.2 million in cash and cash equivalents as of March 31, 2006, compared to $37.7
million in cash and cash equivalents as of December 31, 2005. The decrease was due to continued
funding of our operating activities, capital expenditures, and debt repayments. We anticipate
average quarterly spending during 2006 of approximately $8.0 million to $8.5 million to fund our
operating activities, capital expenditures, and debt repayments, without giving effect to the
impact of entering into any new collaborative agreements or disposing of our current headquarters
and manufacturing facility.
We believe that our existing cash and cash equivalents, expected revenue from collaborations
and license arrangements, and interest income should be sufficient to meet our operating and
capital requirements at least through 2006. We expect an additional several years to elapse before
we generate sufficient cash flow from operations to fund our operating and investing requirements.
Accordingly, we will need to raise substantial additional funds to avoid violating the debt
covenant described above and to fund our operations until we are generating sufficient cash flow
from operations. We plan to raise additional capital through private and public offerings of equity
securities, proceeds from debt financings, and revenues from existing and future collaborative
agreements. If we are unable to raise additional capital when required, we may need to delay, scale
back, or eliminate some of our research and development programs.
Because our revenues for the remainder of 2006 could be substantially affected by entering
into new collaborations and on the financial terms of any new collaborations, we cannot estimate
our 2006 revenues. Other than revenues from our collaborations with Novo Nordisk and BioGeneriX,
and any future collaborations with others, we do not expect to generate significant revenues until
such time as products using our technologies are commercialized, which is not expected during the
next several years.
Operating Activities
Net cash used in operating activities was $6.8 million and $10.0 million for the three months
ended March 31, 2006 and 2005, respectively. Our net loss for the three months ended March 31, 2006
and 2005 was $7.8 million and $11.3 million, respectively. This reduction in overall operating
losses resulted in lower cash requirements to fund our research and development activities.
26
Investing Activities
During the three months ended March 31, 2006 and 2005, we invested $0.2 million and $0.5
million, respectively, in property and equipment. We anticipate additional capital expenditures
during the remainder of 2006 of approximately $1.0 million, excluding the cost of any leasehold
improvements we need in order to accomplish a consolidation of our research, development and
administrative operations upon the disposition of our Witmer Road facility. We may finance some or
all of these capital expenditures through capital leases or the issuance of new debt or equity, to
the extent that we are allowed to do so under our existing bank covenants. The terms of new debt
could require us to maintain a minimum cash and investments balance, or to transfer cash into an
escrow account to collateralize some portion of the debt, or both.
Financing Activities
Equity Financing Activities
In February 2005, we offered and sold 8.1 million shares of our common stock at a public
offering price of $4.00 per share, generating net proceeds of $30.0 million.
Debt Financing Activities
Our total debt decreased to $13.8 million at March 31, 2006, compared to $14.5 million at
December 31, 2005. This decrease primarily resulted from debt principal repayments of $1.2 million,
partially offset by $0.5 million in proceeds from the issuance of debt.
Note Payable Secured by Insurance Policies
In March 2006, we borrowed $0.5 million to finance the insurance policy premiums due on
certain insurance policies. As of March 31, 2006, the outstanding principal balance under this
agreement was $0.5 million. We are required to pay $61,000 of principal and interest during each of
the nine months beginning on March 15, 2006 and ending on November 15, 2006. The interest is
calculated based on an annual percentage rate of 5.4%. To secure payment of the amounts financed,
we granted the lender a security interest in all of our right, title and interest to the insurance
policies. Upon a default by us, the lender can demand, and will have the right to receive,
immediate payment of the total unpaid balance of the loan. In the event of default and the demand
for immediate payment by the lender, interest will accrue on any unpaid amounts at the highest rate
allowed by applicable law.
Term Loan from Bank and Industrial Development Authority Bond
During 2004, we and a bank entered into agreements under which the bank acquired and reissued
the $1.0 million outstanding of our tax-exempt Industrial Development Authority bond. In addition,
we borrowed $8.0 million from the bank. As of March 31, 2006, we owed the bank $7.9 million.
Under our agreements with the bank, if the bank determines a material adverse change has
occurred in our business, financial condition, results of operations, or business prospects, the
bank in its sole discretion may declare at any time an event of default, of which one potential
27
outcome could be the accelerated repayment of the combined outstanding balance of the term loan and
bond, which totaled $7.9 million as of March 31, 2006. To provide security for these borrowings, we
granted a first mortgage to our bank on the land and building where our present headquarters are
located, as well as a security interest of first priority on certain improvements, certain
equipment, and other tangible personal property (collectively, the Witmer Road facility). We have
commenced efforts to dispose of the Witmer Road facility. If we dispose of the Witmer Road
facility, we will be required to repay the outstanding balance to the bank, whether or not the
proceeds from the disposition of the facility exceed the outstanding loan balance.
In March 2006, we entered into amendments of our agreements with the bank. These amendments,
effective March 1, 2006, lowered the minimum liquidity requirements, increased the interest rate
applicable to the outstanding balance, and added a prepayment premium to be paid in the event we
repay the loan earlier than as set forth in the agreements. Pursuant to the amendments, if we fail
at any time to maintain a minimum required cash and short-term investments balance of at least
$12.0 million, the bank has the option to require us to make a payment to reduce the combined
outstanding balance of the term loan and bond to $6.0 million. If we fail at any time to maintain a
minimum required cash and short-term investments balance of at least $10.0 million, the bank has
the option to require us to make a payment to reduce the combined outstanding balance of the term
loan and bond to $5.0 million. Finally, if we fail at any time to maintain a minimum required cash
and short-term investments balance of at least $5.0 million we will be considered to be in default
of our agreements and the bank may take certain actions in relation to that default, including, but
not limited to, requiring us to repay the combined outstanding balance of the term loan and bond.
The agreements with our bank also contain covenants that, among other things, require us to
obtain consent from the bank prior to paying dividends, making certain investments, changing the
nature of our business, assuming or guaranteeing the indebtedness of another entity or individual,
selling or otherwise disposing of a substantial portion of our assets, and merging or consolidating
with another entity. Under our agreements with the bank, we agreed to limit our total outstanding
debt to $22.0 million. As of March 31, 2006, our total outstanding debt was $13.8 million.
The interest rates on both the term loan and bond vary quarterly, depending on 90-day LIBOR
rates. At March 31, 2006, the 90-day LIBOR was 5.0%. We have the option each quarter to incur
interest on the outstanding principal at the LIBOR-based variable interest rate or a fixed rate
offered by our bank.
Prior to March 1, 2006, interest accrued on the $8.0 million term loan at an interest rate
equal to the 90-day LIBOR plus 3.0%. In connection with the amendments described above, commencing
on March 1, 2006 interest on the term loan began to accrue at an interest rate equal to the 90-day
LIBOR plus 5.0%. During the three months ended March 31, 2006, the weighted-average annual interest
rate for the term loan was 8.3%. We made quarterly, interest-only payments prior to March 31,
2005. Commencing on March 31, 2005, we began to make quarterly principal payments of $0.2 million
plus interest. We are required to make these quarterly payments through December 31, 2013.
The Industrial Development Authority bond accrues interest at a rate equal to the 90-day LIBOR
plus a percentage (the Applicable Margin) that is dependent upon the LIBOR amount at
28
the beginning
of each quarter. Prior to March 1, 2006, the Applicable Margin was defined as 1.5% when the LIBOR
was less than 4.0%, 1.25% when the LIBOR was between 4.0% and 6.0%, inclusive, and 1.0% when the
LIBOR exceeded 6.0%. In connection with the amendments described above, commencing on March 1, 2006
the Applicable Margin is defined as 3.5% when the LIBOR is less than 4.0%, 3.25% when the LIBOR is
between 4.0% and 6.0%, inclusive, and 3.0% when the LIBOR exceeds 6.0%. During the three months
ended March 31, 2006, the weighted-average annual interest rate for the bond was 6.5%. For the
bond, we are making quarterly, interest-only payments through March 31, 2014, and will make a
single repayment of principal on March 31, 2014.
Term Loan from Landlord
In May 2004, we borrowed $1.5 million from the landlord of our leased facilities in Horsham,
Pennsylvania. As of March 31, 2006, the outstanding principal balance under this agreement was $0.9
million. The terms of the financing require us to pay monthly principal and interest payments over
48 months at an interest rate of 13%. During the twelve months ending March 31, 2007, we will be
required to make principal and interest payments totaling $0.5 million under this agreement.
Equipment Loans
As of March 31, 2006, we owe $4.3 million to an equipment lender that financed the purchase of
certain equipment and facility improvements, which collateralize the amounts borrowed. The terms of
the financings require us to make monthly principal and interest payments through August 2009 at
interest rates ranging from 8.09% to 9.44%. During the twelve months ending March 31, 2007, we will
make principal and interest payments totaling $2.6 million under these agreements. If we dispose of
our Witmer Road facility, we will be required to repay some of the outstanding balance to the
equipment lender.
Capital Lease Obligations
The terms of our capital leases require us to make monthly payments through February 2009. As
of March 31, 2006, the present value of aggregate minimum lease payments under these agreements was
$0.2 million. Under these agreements, we will be required to make lease payments totaling $0.1
million during the twelve months ending March 31, 2007.
Operating Leases
We lease laboratory, office, warehouse facilities, and equipment under operating lease
agreements. In April 2001, we entered into a lease agreement for approximately 10,000 square feet
of laboratory and office space in San Diego, California. As part of the restructuring announced in
August 2005, we centralized research activities in Horsham, Pennsylvania by ending operations in
our leased facility in San Diego, California. The initial term of the San Diego lease ended on
March 31, 2006, at which time we terminated the lease.
We lease approximately 5,000 square feet of office and warehouse space in Horsham,
Pennsylvania under a lease agreement that expires April 2007. In February 2002, we entered into a
lease agreement for approximately 40,000 square feet of laboratory and office space in another
29
nearby building in Horsham, Pennsylvania. The initial term of this lease ends in July 2022, at
which time we have an option to extend the lease for an additional five years, followed by another
option to extend the lease for an additional four and one-half years. Both of these leases contain
escalation clauses, under which the base rent increases annually by 2%.
Summary of Contractual Obligations
A summary of our obligations to make future payments under contracts existing as of December
31, 2005 is included in Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2005. The
Liquidity and Capital Resources section of this Form 10-Q describes obligations from any material
contracts entered into during the three months ended March 31, 2006.
Off-Balance Sheet Arrangements
We are not involved in any off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect that is material to investors on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources.
Critical Accounting Policies and Estimates
A discussion of our critical accounting policies and estimates is included in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations, of our
Annual Report on Form 10-K for the year ended December 31, 2005. Except as described below, there
have not been any changes or additions to our critical accounting policies during the three months
ended March 31, 2006.
Stock-based Compensation
We adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R), effective January 1, 2006. SFAS No. 123R requires all
share-based payments to employees to be recognized in the financial statements based on their fair
values at the date of grant. Prior to January 1, 2006, we followed Accounting Principles Board
(APB) Opinion 25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations in accounting for our stock compensation. We elected to use the modified
prospective transition method for adopting SFAS No. 123R. Under this method, the provisions of SFAS
No. 123R apply to all awards granted or modified after the date of adoption and to awards not fully
vested as of the date of adoption. Accordingly, prior periods have not been restated.
The fair value of stock options is determined using the Black-Scholes option-pricing model,
which is the same model we previously utilized for valuing stock options for footnote disclosures
required under SFAS No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation, Transition and Disclosure. The fair value result obtained
from the Black-Scholes option-pricing model is
30
significantly impacted by our estimate of the future
volatility of our stock price and the expected term of each stock option.
We base our estimate of expected volatility solely on the historical volatility of our common
stock over the period commensurate with the expected term of the stock options. We rely on
historical volatility only because our traded options do not have sufficient trading activity to
allow us to incorporate the mean historical implied volatility from traded options into our
estimate of future volatility. The expected term calculation for stock options granted to directors
and officers is based on the observed and expected time to post-vesting exercise and forfeitures of
stock options by those individuals. The expected term calculation for stock options granted to all
other individuals is based on the simplified method described in Staff Accounting Bulletin No.
107, Share-Based Payment. The risk-free interest rate is based on the U.S. Treasury yield in effect
at the time of grant for an instrument with a maturity that is commensurate with the expected term
of the stock options. The dividend yield of zero is based on the fact that we have never paid cash
dividends on our common stock, and we have no present intention to pay cash dividends.
The fair value of share-based awards is recognized as expense over the service period, net of
estimated forfeitures. We rely primarily on historical experience to estimate expected forfeitures
for stock options. Under the provisions of SFAS No. 123R, we will record additional expense if the
actual forfeiture rate is lower than we estimated, and will record a recovery of prior expense if
the actual forfeiture is higher than we estimated.
For all unvested awards outstanding as of December 31, 2005, the previously measured but
unrecognized compensation expense, based on the fair value at the original grant date, will be
recognized on an accelerated basis in the Statements of Operations over the remaining vesting
period, consistent with our recognition policy under SFAS No. 123. For share-based awards granted
subsequent to December 31, 2005, we have elected to recognize compensation expense in the
Statements of Operations on a straight-line basis from the date of grant.
Results of Operations
We recorded a net loss of $7.8 million and $11.3 million for the three months ended March 31,
2006 and 2005, respectively. The following sections explain the changes between the reporting
periods in each component of net loss.
We recorded $0.8 million of compensation cost, which is included in research and development
and general and administrative expenses in our Statements of Operations, during the three months
ended March 31, 2006 primarily due to the adoption of SFAS No. 123R in January 2006.
Based on the awards outstanding at January 1, 2006, actual awards granted during the first
quarter of 2006, and an estimate of awards to be granted during the balance of 2006, we estimate
that the adoption of SFAS No. 123R will result in approximately $2.0 million to $2.5 million of
increased stock-based compensation expense during the year ended December 31, 2006, as compared to
the year ended December 31, 2005. The preceding estimate assumes an equal number of shares issuable
pursuant to stock options granted during 2006 as compared to 2005, and assumes the aggregate fair
value for share-based awards granted during April through
31
December of 2006 equals the aggregate
fair value for all share-based awards granted during 2005.
As of March 31, 2006, there was $3.1 million of total unrecognized compensation cost, which
includes the impact of expected forfeitures, related to unvested share-based compensation
arrangements. That cost is expected to be recognized over a weighted-average period of 1.7 years.
Revenue from Collaborative Agreements
Revenue from collaborative agreements for the three months ended March 31, 2006 and 2005 was
$2.4 million and $1.3 million, respectively. The increase in revenues was due to increased revenues
under our collaborations with Novo Nordisk. Our revenue from collaborative agreements has
historically been derived from a few major collaborators. Our collaborative agreements have had
some or all of the following elements: upfront fees, research and development funding, milestone
revenues, and royalties on product sales.
During the three months ended March 31, 2006 and 2005, one customer accounted for 67% and 53%,
respectively, of total revenues. During the three months ended March 31, 2006 and 2005, a second
customer accounted for 33% and 47%, respectively, of total revenues.
Because our remaining 2006 revenues could be substantially affected by entering into new
collaborations and by the financial terms of any new collaborations, we cannot estimate our
remaining 2006 revenues. Material cash inflows from proprietary drug development projects are
highly uncertain, and we cannot reasonably estimate the period in which we will begin to receive
material net cash inflows from our major research and development projects. Cash inflows from
products in development are dependent on several factors, including entering into collaborative
agreements, the achievement of certain milestones, and regulatory approvals. We may not receive
milestone payments from any existing or future collaborations if a product in development fails to
meet technical or performance targets or fails to obtain the required regulatory approvals.
Further, our revenues from collaborations will be affected by the levels of effort committed and
made by our collaborative partners. Even if we achieve technical success in developing drug
candidates, our collaborative partners may discontinue development, may not devote the resources
necessary to complete development and commence marketing of these products, or they may not
successfully market potential products.
Research and Development Expense
Our current research and development projects are divided between two categories: (i)
GlycoAdvance and GlycoPEGylation and (ii) Other Glycotechnology Programs, which includes projects
investigating other applications of our intellectual property. The following chart sets forth our
projects in each of these categories and the stage to which each has been developed:
32
|
|
|
|
|
|
|
Development Stage |
|
Status |
GlycoAdvance and GlycoPEGylation |
|
|
|
|
|
|
|
|
|
NE-180
|
|
Phase I
|
|
Active |
GlycoPEG-GCSF
|
|
Preclinical
|
|
Active |
Other protein projects
|
|
Preclinical/Research
|
|
Active |
|
|
|
|
|
Other Glycotechnology Programs |
|
|
|
|
|
Non-protein therapeutic applications
|
|
Research
|
|
Active |
The process of bringing drugs from the preclinical research and development stage through
Phase I, Phase II, and Phase III clinical trials to FDA approval is time consuming and expensive.
Because our announced product candidates are currently in the early clinical and preclinical stages
and there are a variety of potential intermediate clinical and non-clinical outcomes that are
inherent in drug development, we cannot reasonably estimate either the timing or costs we will
incur to complete these research and development projects. In addition, the timing and costs to
complete our research and development projects will be affected by the timing and structure of any
collaboration agreements we may enter into with a third party, neither of which we can currently
estimate.
For each of our research and development projects, we incur both direct and indirect expenses.
Direct expenses include salaries and other costs of personnel, raw materials, and supplies for each
project. We may also incur third-party costs related to these projects, such as contract research,
contract manufacturing, consulting, and clinical and preclinical development costs. Indirect
expenses include depreciation expense and the costs of operating and maintaining our facilities,
property, and equipment, to the extent used for our research and development projects, as well as
the costs of general management of our research and development projects.
Our research and development expenses for the three months ended March 31, 2006 and 2005 were
$7.3 million and $9.6 million, respectively. Research and development expenses for the 2006 period
included $0.3 million of stock-based compensation expense primarily due to the adoption of SFAS No.
123R. The decrease in research and development expenses during the 2006 period as compared to the
2005 period was primarily due to lower payroll and operational costs resulting from our August 2005
restructuring. The reduction in expenses related to the restructuring was partially offset by
clinical study costs associated with the initiation in February 2006 of the Phase I study of NE-180
in a Western European country. The following table illustrates research and development expenses
incurred during the three months ended March 31, 2006 and 2005 for our significant groups of
research and development projects (in thousands):
33
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
GlycoAdvance and GlycoPEGylation |
|
$ |
4,246 |
|
|
$ |
5,149 |
|
|
Other Glycotechnology Programs |
|
|
152 |
|
|
|
132 |
|
|
Indirect Expenses |
|
|
2,913 |
|
|
|
4,344 |
|
|
|
|
|
|
|
|
|
|
$ |
7,311 |
|
|
$ |
9,625 |
|
|
|
|
|
|
|
|
GlycoAdvance and GlycoPEGylation
Our GlycoAdvance and GlycoPEGylation expenses result primarily from development activities,
including process development, preclinical development and clinical development, associated with
our proprietary drug development programs. These expenses decreased during the first quarter of
2006 due to lower payroll and operational costs resulting from our August 2005 restructuring.
Other Glycotechnology Programs
Research and development expenses related to our Other Glycotechnology Programs increased
slightly during the first quarter of 2006 compared to the first quarter of 2005 due to increased
supplies and consulting expenses for early stage research.
Indirect Expenses
Our indirect research and development expenses decreased during the first quarter of 2006
period, compared to the first quarter of 2005, primarily due to a decreased depreciation,
facilities, and payroll costs as a result of our August 2005 restructuring.
General and Administrative Expense
General and administrative expenses for the three months ended March 31, 2006 decreased to
$2.9 million from $3.0 million for the comparable 2005 period. General and administrative expenses
for the 2006 period included $0.5 million of stock-based compensation expense primarily due to the
adoption of SFAS No. 123R. The decrease for the 2006 period was primarily due to lower consulting
expenses and legal fees associated with intellectual property.
Other Income and Expense
Other income for the three months ended March 31, 2005 was $22,000, and related to payments
received during the first quarter of 2005 in excess of the carrying value of accounts receivable
due to currency fluctuations. We had no other income during the three months ended March 31, 2006.
Interest income for the three months ended March 31, 2006 and 2005 was $366,000 and $304,000,
respectively. The increase during the 2006 period compared to the 2005 period was
34
primarily due to
higher interest rates during the 2006 period. Our interest income during the remainder of 2006 is
difficult to project, and will depend largely on prevailing interest rates and whether we receive
cash from entering into any new collaborative agreements or by completing any additional equity or
debt financings during the year.
Interest expense for the three months ended March 31, 2006 and 2005 was $308,000 and $338,000,
respectively. Lower average debt balances in the 2006 period compared to the 2005 period were
partially offset by higher interest rates during the 2006 period on our variable rate debt. Our
interest expense during the remainder of 2006 is difficult to project and will depend largely on
prevailing interest rates and whether we enter into any new debt agreements. See Financing
Activities Debt Financing Activities in the Liquidity and Capital Resources section of this Form
10-Q for a description of the material features of our debt financings.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
We carried out an evaluation, under the supervision and with the participation of our
management, including our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures, as such phrase
is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of March 31, 2006. Based on
that evaluation, our management concluded that these controls and procedures are effective to
ensure that information required to be disclosed by us in reports that we file or submit under the
Exchange Act, as amended is recorded, processed, summarized and reported as specified in SEC rules
and forms. There were no changes during our last fiscal quarter in these controls or procedures
identified in connection with the evaluation, or in other factors that have materially affected, or
are reasonable likely to materially affect, these controls or procedures.
Changes in internal controls over financial reporting
There were no changes in our internal control over financial reporting that occurred during
our last fiscal quarter that has materially affected, or is reasonably likely to materially affect
our internal control over financial reporting.
35
PART II. OTHER INFORMATION
Item 6. Exhibits
|
|
|
10.1*
|
|
Amendment No. 2 to the Credit Agreement by and between Neose
Technologies, Inc. and Brown Brothers Harriman & Co. dated March 1, 2006. |
|
|
|
10.2
|
|
Premium Finance Agreement, Disclosure Statement and Security Agreement
by and between Neose Technologies, Inc. and AICCO, Inc. dated March 9, 2006. |
|
|
|
10.3
|
|
Omnibus Amendment No. 1 to Loan Documents by and between Neose
Technologies, Inc. and Brown Brothers Harriman & Co. dated March 10, 2006. |
|
|
|
31.1
|
|
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Filed as an Exhibit to out Current Report on Form 8-K filed with the SEC on March 3, 2006. |
36
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: May 4, 2006 |
By: |
/s/ A. Brian Davis
|
|
|
|
A. Brian Davis |
|
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer and
Duly Authorized Signatory) |
|
|
37
Exhibit Index
|
|
|
Exhibit |
|
Description |
10.1*
|
|
Amendment No. 2 to the Credit Agreement by and between Neose
Technologies, Inc. and Brown Brothers Harriman & Co. dated March 1, 2006. |
|
|
|
10.2
|
|
Premium Finance Agreement, Disclosure Statement and Security Agreement
by and between Neose Technologies, Inc. and AICCO, Inc. dated March 9, 2006. |
|
|
|
10.3
|
|
Omnibus Amendment No. 1 to Loan Documents by and between Neose
Technologies, Inc. and Brown Brothers Harriman & Co. dated March 10, 2006. |
|
|
|
31.1
|
|
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Filed as an Exhibit to out Current Report on Form 8-K filed with the SEC on March 3, 2006. |