UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2004
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 000-31275
LARGE SCALE BIOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 77-0154648 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification number) |
3333 Vaca Valley Parkway, Vacaville, CA 95688
(Address of principal executive offices and zip code)
(707) 446-5501
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of registrant’s common stock, $0.001 par value, as of August 5, 2004: 31,251,289
Some of the statements contained in this report constitute forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “plan,” “anticipate,” “believe,” “forecast,” “project,” or “continue” and variations of these words or comparable words. In addition, any statements, which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations contain many such forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. The risk factors contained in this report, under the heading Factors That May Affect Our Business, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ from the expectations described or implied in our forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
Large Scale Biology Corporation, LSBC, our logo, GENEWARE®, BAMF™, GRAMMR™ and other product and trade names are trademarks of or registered trademarks of Large Scale Biology Corporation in the United States and/or other countries. Other product and trade names mentioned herein may be trademarks and/or registered trademarks of their respective companies. References in this report to “the Company,” “our,” “we” and “us” refer collectively to Large Scale Biology Corporation, a Delaware corporation, and its predecessors and subsidiaries.
Large Scale Biology Corporation
Form 10-Q
For the Quarter Ended June 30, 2004
Table of Contents
PART I – FINANCIAL INFORMATION
Large Scale Biology Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
| June 30, 2004 |
December 31, 2003 |
|||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 7,656,000 | $ | 7,737,000 | ||||
| Accounts receivable, net |
240,000 | 265,000 | ||||||
| Prepaid expenses and other current assets |
731,000 | 706,000 | ||||||
| Total current assets |
8,627,000 | 8,708,000 | ||||||
| Property, plant, and equipment, net |
8,132,000 | 8,628,000 | ||||||
| Intangible assets, net |
2,821,000 | 3,074,000 | ||||||
| Other assets |
671,000 | 570,000 | ||||||
| $ | 20,251,000 | $ | 20,980,000 | |||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 584,000 | $ | 592,000 | ||||
| Accrued expenses |
596,000 | 953,000 | ||||||
| Current portion of long-term debt |
53,000 | 52,000 | ||||||
| Deferred revenue and customer advances |
150,000 | 147,000 | ||||||
| Total current liabilities |
1,383,000 | 1,744,000 | ||||||
| Long-term debt |
182,000 | 209,000 | ||||||
| Accrued stock compensation |
812,000 | 708,000 | ||||||
| Total liabilities |
2,377,000 | 2,661,000 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock; issued and outstanding: June 30, 2004 — 31,226,100 shares; December 31, 2003 — 25,901,273 shares |
200,487,000 | 192,541,000 | ||||||
| Stockholders’ notes receivable |
(20,000 | ) | (24,000 | ) | ||||
| Accumulated deficit |
(182,593,000 | ) | (174,198,000 | ) | ||||
| Total stockholders’ equity |
17,874,000 | 18,319,000 | ||||||
| $ | 20,251,000 | $ | 20,980,000 | |||||
See accompanying notes to condensed consolidated financial statements.
1
Large Scale Biology Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenues |
$ | 362,000 | $ | 903,000 | $ | 681,000 | $ | 1,757,000 | ||||||||
| Costs and expenses: |
|
|||||||||||||||
| Development agreements |
535,000 | 1,245,000 | 1,022,000 | 2,180,000 | ||||||||||||
| Research and development |
2,280,000 | 2,773,000 | 4,519,000 | 6,006,000 | ||||||||||||
| General and administrative |
1,638,000 | 3,140,000 | 3,564,000 | 5,781,000 | ||||||||||||
| Impairment of property |
— | — | — | 1,698,000 | ||||||||||||
| Amortization of purchased intangibles |
— | — | — | 52,000 | ||||||||||||
| Total costs and expenses |
4,453,000 | 7,158,000 | 9,105,000 | 15,717,000 | ||||||||||||
| Loss from operations |
(4,091,000 | ) | (6,255,000 | ) | (8,424,000 | ) | (13,960,000 | ) | ||||||||
| Interest income, net |
20,000 | 48,000 | 29,000 | 118,000 | ||||||||||||
| Net loss |
$ | (4,071,000 | ) | $ | (6,207,000 | ) | $ | (8,395,000 | ) | $ | (13,842,000 | ) | ||||
| Net loss per share - basic and diluted |
$ | (0.13 | ) | $ | (0.24 | ) | $ | (0.29 | ) | $ | (0.54 | ) | ||||
| Weighted average shares outstanding - basic and diluted |
31,186,663 | 25,567,201 | 29,253,478 | 25,411,090 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
Large Scale Biology Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended June 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (8,395,000 | ) | $ | (13,842,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation of property, plant and equipment |
686,000 | 1,443,000 | ||||||
| Amortization of intangible assets |
265,000 | 503,000 | ||||||
| Stock compensation expense |
446,000 | 765,000 | ||||||
| Impairment of property |
— | 1,698,000 | ||||||
| Write-off of capitalized patent costs |
— | 239,000 | ||||||
| Loss on sale of equipment |
— | 156,000 | ||||||
| Provision for doubtful accounts receivable |
— | 154,000 | ||||||
| Interest received in excess of interest accrued |
— | 141,000 | ||||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable |
160,000 | (305,000 | ) | |||||
| Prepaid expenses and other current assets |
(25,000 | ) | 540,000 | |||||
| Other assets |
(245,000 | ) | 50,000 | |||||
| Accounts payable |
(8,000 | ) | (153,000 | ) | ||||
| Accrued expenses |
(357,000 | ) | 513,000 | |||||
| Deferred revenue and customer advances |
3,000 | — | ||||||
| Net cash used in operating activities |
(7,470,000 | ) | (8,098,000 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchases of marketable securities |
— | (8,984,000 | ) | |||||
| Proceeds from matured marketable securities |
— | 12,687,000 | ||||||
| Capital expenditures |
(325,000 | ) | (5,000 | ) | ||||
| Increase in patents and intellectual property licenses |
(12,000 | ) | — | |||||
| Net cash provided by (used in) investing activities |
(337,000 | ) | 3,698,000 | |||||
| Cash flows from financing activities: |
||||||||
| Proceeds from issuance of common stock |
7,604,000 | 9,000 | ||||||
| Proceeds from stockholder loan payments |
4,000 | 18,000 | ||||||
| Change in restricted cash |
144,000 | 143,000 | ||||||
| Principal payments on long-term debt |
(26,000 | ) | (25,000 | ) | ||||
| Net cash provided by financing activities |
7,726,000 | 145,000 | ||||||
| Net decrease in cash and cash equivalents |
(81,000 | ) | (4,255,000 | ) | ||||
| Cash and cash equivalents at beginning of period |
7,737,000 | 8,238,000 | ||||||
| Cash and cash equivalents at end of period |
$ | 7,656,000 | $ | 3,983,000 | ||||
See accompanying notes to condensed consolidated financial statements.
3
Large Scale Biology Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. The Company and Summary of Significant Accounting Policies
Large Scale Biology Corporation and its subsidiaries (collectively, the “Company”, “we” or “our”) is an integrated biotechnology company focusing on product development and biomanufacturing of vaccines, complex proteins and follow-on off-patent therapeutics. We are focusing our efforts on the following products:
| • | Aprotinin, a protease inhibitor used in medical, research and manufacturing applications and other follow-on off-patent biologics, including interferon alpha 2a and 2b, and granulocyte colony stimulating factor |
| • | Alpha-galactosidase A for the treatment of Fabry disease, a lysosomal storage disorder |
| • | Vaccines for human and animal healthcare, including antiviral and anticancer applications |
| • | Lysosomal acid lipase for the reduction of plaque in arteries |
| • | Diagnostic test based upon proprietary technology for detection of cancer and other diseases |
| • | GRAMMR to shuffle and improve gene sequences |
The Company’s proprietary systems are supported by patents and patent applications. The Company’s corporate offices and research and development are headquartered in Vacaville, California. The Company’s biomanufacturing operation is located in Owensboro, Kentucky.
The Company incurred net losses of $8,395,000 and $25,293,000, and negative operating cash flows of $7,470,000 and $15,207,000 in the six months ended June 30, 2004 and the year ended December 31, 2003, respectively. These negative cash flows were financed primarily by proceeds from the Company’s IPO in 2000. The Company’s history of negative cash flows and its cash and cash equivalent balance of $7,656,000 at June 30, 2004, raise substantial doubt about the Company’s ability to continue as a going concern, absent any new sources of significant cash flows. Towards mitigating this near-term concern, the Company is in the process of securing non-dilutive loan financing as part of a broader investment initiative involving the Company’s biomanufacturing operations in Owensboro, Kentucky. In addition, the Company is pursuing opportunities for significant revenue growth and concurrent sources of working capital with other companies for the joint development and commercialization of recombinant Aprotinin and Interferon alpha 2a and 2b products. We are currently in discussions with pharmaceutical companies capable of marketing these products. The commercialization of both products for therapeutic applications will require approval by the FDA and product scale-up at our biomanufacturing facility under FDA regulations. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of recorded liabilities that might be necessary should the Company be unable to continue as a going concern.
Basis of Presentation — The unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial information. Accordingly, these financial statements and notes thereto do not include certain disclosures normally associated with financial statements prepared in accordance with accounting principles generally accepted in the United States of America. This interim financial information should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K.
The unaudited condensed consolidated financial statements include the accounts of Large Scale Biology Corporation and its subsidiaries. All intercompany balances and transactions have been eliminated. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) and disclosures considered necessary for a fair presentation of the results of the interim periods presented. This interim financial information is not necessarily indicative of the results of any future interim periods or for the Company’s full year ending December 31, 2004.
Segment Reporting — The Company operates in one reportable segment.
4
Workforce Reductions — In connection with our 2003 restructuring plans and staff reductions, we accrued $1,401,000 for severance payments and other related termination benefits provided to employees. Of this amount, $860,000 was paid during 2003 leaving $541,000 in accrued expenses at December 31, 2003. We accrue for these benefits in the period when benefits are communicated to the terminated employees. Typically, terminated employees are not required to provide continued service to receive termination benefits. In general, we use a formula based on the number of years of service to calculate the termination benefits to be provided to affected employees. During the six months ended June 30, 2004, former employees were paid $443,000 under the 2003 workforce reduction programs leaving $98,000 in accrued expenses at June 30, 2004. Of this amount, we expect $82,000 to be paid during the remainder of 2004 and $16,000 to be paid during 2005.
Stock-Based Compensation — The Company adopted Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” effective as of January 1, 2003 for its stock-based employee compensation plans using the prospective recognition method under Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS 123.” This method applies the recognition provisions of SFAS 123 to all employee stock awards granted, modified, or settled after January 1, 2003 and accordingly, the Company recognized compensation expense for those issuances under our stock-based employee compensation plans. For stock awards granted prior to January 1, 2003, compensation expense has not been recognized under SFAS 123, unless those stock awards were modified after January 1, 2003.
Prior to January 1, 2003, the Company accounted for stock options granted to employees and directors and other stock-based employee compensation plans using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and related interpretations. As such, the Company recognized compensation expense for stock options only if the quoted market value of the Company’s common stock exceeded the exercise price of the option on the grant date. Any compensation expense realized using this intrinsic value method is being amortized over the vesting period of the option.
The following table presents the effect on net loss and net loss per share if we had applied the fair value recognition provisions of SFAS 123 to all stock-based awards to employees:
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Net loss as reported |
$ | (4,071,000 | ) | $ | (6,207,000 | ) | $ | (8,395,000 | ) | $ | (13,842,000 | ) | ||||
| Stock-based employee compensation expense included in reported net loss for awards issued during 2004 and 2003 |
215,000 | 463,000 | ||||||||||||||