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 September 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 November 5, 2004: 31,348,269
This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “may,” “will,” “expect,” “plan,” “anticipate,” “believe,” “forecast,” “project,” or “continue” and variations of these words or comparable words identify forward-looking statements. 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 September 30, 2004
Table of Contents
PART I – FINANCIAL INFORMATION
Large Scale Biology Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
| September 30, 2004 |
December 31, 2003 |
|||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 3,886,000 | $ | 7,737,000 | ||||
| Accounts receivable, net |
325,000 | 265,000 | ||||||
| Prepaid expenses and other current assets |
928,000 | 706,000 | ||||||
| Total current assets |
5,139,000 | 8,708,000 | ||||||
| Property, plant, and equipment, net |
8,140,000 | 8,628,000 | ||||||
| Intangible assets, net |
2,688,000 | 3,074,000 | ||||||
| Other assets |
663,000 | 570,000 | ||||||
| $ | 16,630,000 | $ | 20,980,000 | |||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 939,000 | $ | 592,000 | ||||
| Accrued expenses |
537,000 | 953,000 | ||||||
| Current portion of long-term debt |
54,000 | 52,000 | ||||||
| Deferred revenue and customer advances |
101,000 | 147,000 | ||||||
| Total current liabilities |
1,631,000 | 1,744,000 | ||||||
| Long-term debt |
168,000 | 209,000 | ||||||
| Accrued stock compensation |
854,000 | 708,000 | ||||||
| Total liabilities |
2,653,000 | 2,661,000 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock; issued and outstanding: |
||||||||
| September 30, 2004 — 31,297,743 shares; |
||||||||
| December 31, 2003 — 25,901,273 shares |
200,761,000 | 192,541,000 | ||||||
| Stockholders’ notes receivable |
(20,000 | ) | (24,000 | ) | ||||
| Accumulated deficit |
(186,764,000 | ) | (174,198,000 | ) | ||||
| Total stockholders’ equity |
13,977,000 | 18,319,000 | ||||||
| $ | 16,630,000 | $ | 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 September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Revenues |
$ | 523,000 | $ | 1,192,000 | $ | 1,204,000 | $ | 2,949,000 | ||||||||
| Costs and expenses: |
||||||||||||||||
| Development agreements |
647,000 | 1,265,000 | 1,669,000 | 3,445,000 | ||||||||||||
| Research and development |
2,304,000 | 2,755,000 | 6,823,000 | 8,761,000 | ||||||||||||
| General and administrative |
1,761,000 | 1,511,000 | 5,325,000 | 7,292,000 | ||||||||||||
| Impairment of property |
— | — | — | 1,698,000 | ||||||||||||
| Amortization of purchased intangibles |
— | — | — | 52,000 | ||||||||||||
| Total costs and expenses |
4,712,000 | 5,531,000 | 13,817,000 | 21,248,000 | ||||||||||||
| Loss from operations |
(4,189,000 | ) | (4,339,000 | ) | (12,613,000 | ) | (18,299,000 | ) | ||||||||
| Interest income, net |
18,000 | 33,000 | 47,000 | 151,000 | ||||||||||||
| Net loss |
$ | (4,171,000 | ) | $ | (4,306,000 | ) | $ | (12,566,000 | ) | $ | (18,148,000 | ) | ||||
| Net loss per share - basic and diluted |
$ | (0.13 | ) | $ | (0.17 | ) | $ | (0.42 | ) | $ | (0.71 | ) | ||||
| Weighted average shares outstanding - basic and diluted |
31,243,854 | 25,789,815 | 29,921,779 | 25,538,719 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
Large Scale Biology Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (12,566,000 | ) | $ | (18,148,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation of property, plant and equipment |
1,107,000 | 2,101,000 | ||||||
| Amortization of intangible assets |
398,000 | 944,000 | ||||||
| Stock compensation expense |
749,000 | 1,050,000 | ||||||
| Impairment of property |
— | 1,698,000 | ||||||
| Write-off of capitalized patent costs |
— | 239,000 | ||||||
| Loss on sale of equipment |
18,000 | 156,000 | ||||||
| Provision for doubtful accounts receivable |
— | 154,000 | ||||||
| Interest received in excess of interest accrued |
— | 159,000 | ||||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable |
(35,000 | ) | (273,000 | ) | ||||
| Prepaid expenses and other current assets |
(222,000 | ) | 306,000 | |||||
| Other assets |
(237,000 | ) | 65,000 | |||||
| Accounts payable |
(37,000 | ) | (311,000 | ) | ||||
| Accrued expenses |
(416,000 | ) | 254,000 | |||||
| Deferred revenue and customer advances |
(46,000 | ) | (121,000 | ) | ||||
| Net cash used in operating activities |
(11,287,000 | ) | (11,727,000 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchases of marketable securities |
— | (8,984,000 | ) | |||||
| Proceeds from matured marketable securities |
— | 19,097,000 | ||||||
| Capital expenditures |
(434,000 | ) | (50,000 | ) | ||||
| Proceeds from sale of assets |
156,000 | — | ||||||
| Increase in patents and intellectual property licenses |
(12,000 | ) | — | |||||
| Net cash provided by (used in) investing activities |
(290,000 | ) | 10,063,000 | |||||
| Cash flows from financing activities: |
||||||||
| Proceeds from issuance of common stock |
7,617,000 | 27,000 | ||||||
| Proceeds from stockholder loan payments |
4,000 | 20,000 | ||||||
| Change in restricted cash |
144,000 | 143,000 | ||||||
| Principal payments on long-term debt |
(39,000 | ) | (37,000 | ) | ||||
| Net cash provided by financing activities |
7,726,000 | 153,000 | ||||||
| Net decrease in cash and cash equivalents |
(3,851,000 | ) | (1,511,000 | ) | ||||
| Cash and cash equivalents at beginning of period |
7,737,000 | 8,238,000 | ||||||
| Cash and cash equivalents at end of period |
$ | 3,886,000 | $ | 6,727,000 | ||||
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 a product-focused biotechnology company using proprietary technologies to develop and manufacture recombinant biologics. Our biomanufacturing opportunities include vaccines, complex proteins and follow-on off-patent therapeutics. We are focusing our efforts on the following products:
| • | Recombinant Aprotinin, a protease inhibitor used in medical, research and manufacturing applications |
| • | Vaccines for human and animal healthcare, including antiviral and anticancer applications |
| • | Certain follow-on off-patent biologics and proprietary products, including Interferon alpha 2a and 2b, Granulocyte colony stimulating factor, Alpha-galactosidase A for treatment of Fabry disease and Lysosomal acid lipase for the reduction of plaque in arteries |
The technology employed in our product development and biomanufacturing operations includes our proprietary Geneware transient gene expression system and GRAMMR system to shuffle and improve gene sequences. Our manufacturing processes can be used to produce follow-on therapeutic products. We believe that our combination of proprietary technologies and existing manufacturing infrastructure enables us to rapidly and economically develop partner-specified products and to participate in market opportunities in major disease categories.
Our subsidiary company, Predictive Diagnostics, Inc. (“PDI”) is a new diagnostics company established for the commercial development of a new and proprietary approach to early diagnosis of life-threatening diseases. PDI’s products are supported by our technology developed in the course of our past genomics and medical product development programs. PDI’s initial product focus is in the field of oncology. The Company’s BAMF™ Technology (Biomarker Amplification Filter) is a core component of PDI’s capability and potentially provides low-cost and rapid analysis of multiple biomarkers derived from profiling thousands of individual proteins, peptides and other metabolites found in clinical blood samples. Current typical diagnostic tests rely on measuring the over- or under-abundance of a single protein or biomarker. Our BAMF Technology finds multiple proteins or biomarkers in blood samples and creates a disease “fingerprint”, potentially leading to an accurate and early detection of disease.
The Company’s proprietary systems are supported by patents and patent applications. The Company’s corporate offices, research and development and Predictive Diagnostics, Inc. are headquartered in Vacaville, California. The Company’s biomanufacturing operation is located in Owensboro, Kentucky.
The Company incurred net losses of $12,566,000 and $25,293,000, and negative operating cash flows of $11,287,000 and $15,207,000 in the nine months ended September 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 and a private placement of our common stock during the first quarter of 2004. The Company’s history of negative cash flows and its cash and cash equivalent balance of $3,886,000 at September 30, 2004, raise substantial doubt about the Company’s ability to continue as a going concern, absent any new sources of significant cash flows. In an effort to mitigate this near-term concern, the Company is seeking to obtain loan financing as part of a broader investment initiative involving the Company’s biomanufacturing operations in Owensboro, Kentucky. However, obtaining this financing is subject to factors beyond our control and we cannot assure you that we will successfully obtain it. In addition, we are in the process of financing our subsidiary, PDI and negotiating to secure funds for the Company through a sale of PDI stock held by the Company or a sale of assets by the Company to PDI. In addition, we are seeking to obtain a loan for the Company in connection with the PDI financing. A successful PDI-related financing may not only improve our balance sheet, but also reduce ongoing expenses as PDI becomes a separate operation. We cannot assure you that these transactions involving PDI will be consummated or that they will result in short or long-term cash flow to the Company. The Company is also 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.
4
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 ended December 31, 2004.
Segment Reporting — The Company operates in one reportable segment.
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, resulting in $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 nine months ended September 30, 2004, former employees were paid $470,000 under the 2003 workforce reduction programs, resulting in $71,000 in accrued expenses at September 30, 2004. This amount is expected to be paid during the remainder of 2004.
Intangible Assets — The following table presents the carrying values and accumulated amortization of intangible assets as of September 30, 2004:
| Capitalized patent costs |
$ | 2,195,000 | ||
| Intellectual property licenses |
3,264,000 | |||
| 5,459,000 | ||||
| Accumulated amortization |
(2,771,000 | ) | ||
| $ | 2,688,000 | |||
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