UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
MARTEK BIOSCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation) |
52-1399362
(IRS Employer Identification No.) |
6480 Dobbin Road, Columbia, Maryland 21045
(Address of principal executive offices)
Registrant's telephone number including area code: (410) 740-0081
None
(Former name, former address and former fiscal year, if changed since last report)
- 1 -
Item 7. Financial Statements and Exhibits
On May 3, 2002, Martek
Biosciences Corporation (“Martek” or the “Company”) filed a
Current Report on Form 8-K announcing the merger of a wholly owned subsidiary of
Martek with and into OmegaTech, Inc. (“OmegaTech”). This Form 8-K/A
includes (i) the historical unaudited consolidated financial
statements of OmegaTech and its subsidiary as of March 31, 2002 and for the
three-month periods ended March 31, 2002 and 2001, (ii) the historical
consolidated audited financial statements of OmegaTech and its subsidiary as of
and for the years ended December 31, 2001 and 2000, and (iii) the Martek and
OmegaTech unaudited pro forma condensed consolidated financial information for
the year ended October 31, 2001 and the six-month period ended April 30, 2002.
(a) Financial Statements of Business Acquired
Unaudited Consolidated Financial Statements of OmegaTech, Inc. and subsidiary as of March 31, 2002 and for
the three-month periods ended March 31, 2002 and 2001, which include the following:
(i) Consolidated Balance Sheets
(ii) Consolidated Statements of Operations
(iii) Consolidated Statements of Cash Flows
(iv) Notes to Consolidated Financial Statements
Audited Consolidated Financial Statements of OmegaTech, Inc. and subsidiary as of and for the years ended
December 31, 2001 and 2000, which include the following:
(i) Independent Auditors' Report
(ii) Consolidated Balance Sheets
(iii) Consolidated Statements of Operations
(iv) Consolidated Statements of Stockholders' Equity
(v) Consolidated Statements of Cash Flows
(vi) Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information
Unaudited Pro Forma Condensed Consolidated Financial Statements of Martek Biosciences Corporation and
OmegaTech, Inc., which include the following:
(i) Introduction to Unaudited Pro Forma Condensed Consolidated Financial Statements
(ii) Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended October
31, 2001
(iii) Unaudited Pro Forma Condensed Consolidated Statement of Operations for the six-month period ended April 30, 2002
(iv) Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(c) Exhibits
23.1 Consent of Ernst & Young LLP (filed herewith)
23.2 Consent of Deloitte & Touche LLP (filed herewith)
99.1 Press Release dated April 25, 2002 (previously filed)
99.2 Agreement and Plan of Merger, dated March 25, 2002, by and among Martek Biosciences Corporation, OmegaTech,
Inc. and OGTAQ Corp. (previously filed)*
99.3 First Amendment to the Agreement and Plan of Merger dated as of March 25, 2002 by and among OmegaTech, Inc.,
Martek Biosciences Corporation, and OGTAQ Corp., dated April 24, 2002 by and among Martek Biosciences
Corporation, OmegaTech, Inc., OGTAQ Corp. and Robert Zuccaro, in his capacity as the Stockholders'
Representative. (previously filed)*
*These Exhibits contain a list briefly identifying the contents of all omitted schedules and Martek will furnish
supplementally a copy of any omitted schedule to the Commission at its request.
- 2 -
OMEGATECH, INC. AND SUBSIDIARY
------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2002 2001
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 373,320 $ 269,336
Accounts receivable, net of allowance for doubtful accounts
of $17,076 806,272 862,786
Inventories 1,391,239 1,579,601
Other current assets 366,885 257,168
------------- --------------
Total current assets 2,937,716 2,968,891
PROPERTY AND EQUIPMENT:
Lab equipment 1,149,837 1,226,479
Computers and software 517,870 524,588
Furniture and fixtures 399,743 429,601
Leasehold improvements 141,731 191,110
Automobiles 47,200 47,200
Construction in progress 334,079 127,500
------------- --------------
2,590,460 2,546,478
Less accumulated depreciation (1,151,897) (1,082,527)
------------- --------------
Property and equipment, net 1,438,563 1,463,951
LICENSES, net of accumulated amortization of $667,498
and $568,707 3,415,934 3,514,725
PATENTS, net of accumulated amortization of $120,638
and $106,784 743,550 719,946
OTHER INTANGIBLE ASSETS, net of accumulated
amortization of $48,382 and $44,570 181,349 173,553
OTHER NON-CURRENT ASSETS 307,114 403,514
------------- --------------
TOTAL $ 9,024,226 $ 9,244,580
============= ==============
See notes to the consolidated financial statements.
- 3 -
------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2002 2001
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,236,840 $ 3,988,770
Accrued liabilities 1,394,102 345,562
Note payable to shareholders 4,398,279 1,950,734
Current maturities of obligations under capital lease 177,802 173,930
-------------- --------------
Total current liabilities 8,207,023 6,458,996
LONG TERM ROYALTY PAYABLE 212,250 175,000
LONG TERM OBLIGATIONS UNDER CAPITAL LEASE 34,785 80,716
-------------- --------------
Total liabilities 8,454,058 6,714,712
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 10,000,000 shares authorized,
and no shares issued and outstanding - -
Common stock, $.001 par value, 50,000,000 shares authorized,
15,706,000 and 15,634,000 shares issued and outstanding 15,706 15,634
Additional paid-in capital 54,505,769 46,000,980
Accumulated deficit (49,354,551) (42,828,905)
Deferred stock compensation (4,585,513) (650,626)
Accumulated other comprehensive (loss) 11,243) (7,215)
-------------- --------------
Total stockholders' equity 570,168 2,529,868
TOTAL $ 9,024,226 $ 9,244,580
============== ==============
- 4 -
OMEGATECH, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
------------------------------------------------------------------------------------------------------------------------
2002 2001
REVENUES:
Product sales $ 1,019,099 $ 1,652,366
Royalties 10,152 -
-------------- --------------
Total revenues 1,029,251 1,652,366
-------------- --------------
COSTS AND EXPENSES:
Cost of sales 722,379 1,488,492
Selling, general and administrative 3,575,502 3,989,953
Research and development 676,939 1,136,000
-------------- --------------
Total costs and expenses 4,974,820 6,614,445
-------------- --------------
LOSS FROM OPERATIONS (3,945,569) (4,962,079)
OTHER INCOME (EXPENSE):
Interest and investment income 1,991 129,431
Interest expense (2,582,068) (3,011)
-------------- --------------
NET LOSS (6,525,646) (4,835,659)
OTHER COMPREHENSIVE LOSS -
Foreign currency translation adjustment (4,028) (35,648)
-------------- --------------
NET COMPREHENSIVE LOSS $ (6,529,674) $ (4,871,307)
============== ===============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.42) $ (0.31)
============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES USED IN PER SHARE CALCULATION 15,704,000 15,634,000
============== ===============
See notes to the consolidated financial statements.
- 5 -
OMEGATECH, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
------------------------------------------------------------------------------------------------------------------------
2002 2001
OPERATING ACTIVITIES:
Net loss $(6,525,646) $(4,835,659)
Adjustments to reconcile net loss to net cash used in operating activities: 119,700 -
Depreciation and amortization 230,654 109,962
Amortization of debt discounts 2,447,545 -
Stock-based compensation expense 300,007 68,750
Other 33,222 8,102
Net change in operating assets and liabilities:
Accounts receivable 56,514 182,290
Inventories 188,362 (144,728)
Other assets (13,317) (105,618)
Accounts payable (1,751,930) 853,664
-------------- --------------
Net cash used in operating activities (3,866,349) (3,617,388)
-------------- --------------
INVESTING ACTIVITIES:
Proceeds from sales and maturities of investments - 1,960,220
Purchase of property and equipment (208,509) (219,237)
Additions to intangible assets (49,066) (200,859)
-------------- --------------
Net cash provided by (used in) investing activities (257,575) 1,540,124
-------------- --------------
FINANCING ACTIVITIES:
Proceeds from note payable to shareholders 4,269,607 -
Proceeds from option exercises 360 -
Principal payments on capital leases (42,059) (14,468)
-------------- --------------
Net cash provided by (used in) financing activities 4,227,908 (14,468)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 103,984 (2,091,732)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 269,336 6,127,802
CASH AND CASH EQUIVALENTS, END OF YEAR $ 373,320 $ 4,036,070
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURE -
Cash paid for interest $ 6,120 $ 3,011
NON-CASH INVESTING AND FINANCIAL ACTIVITIES -
Warrants issued with debt
4,269,607 -
See notes to the consolidated financial statements.
- 6 -
OMEGATECH,
INC. AND SUBSIDIARY
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS THREE
MONTHS ENDED MARCH 31, 2002 AND 2001
-----------------------------------------------------------------------------------------------------------------------
1. BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| |
Basis
of Presentation – The accompanying unaudited condensed
consolidated financial statements of OmegaTech, Inc. and subsidiary
(collectively, “the Company”) have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and in accordance with Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements, and should be read in conjunction
with the Company’s audited consolidated financial statements as of and for
the year ended December 31, 2001. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. |
| |
The
Company has incurred net losses of $6,525,646 and $16,532,572 for the period
ended March 31, 2002 and year ended December 31, 2001, respectively.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company has been actively pursuing
financing sources and in 2001, the Company engaged investment bankers for
private equity fundraising and to evaluate merger and acquisition opportunities
presented to the Company. In January 2002, the Company obtained bridge loan
financing of $4,700,000, see Note 2. The Company has also engaged in
certain non-strategic cost cutting measures. On March 25, 2002, the Company
signed a definitive agreement to merge with Martek Biosciences Corporation and
the merger closed on April 25, 2002, see Note 5. |
| |
Inventories - Inventories consisted of the following: |
March 31, December 31,
2002 2001
Finished goods $ 865,801 $1,178,636
Raw materials 525,438 400,965
------------ ------------
Total $1,391,239 $1,579,601
============ ============
| |
Net
Loss Per Common Share – The loss per share is presented in
accordance with the provisions of SFAS No. 128, “Earnings Per
Share” (EPS). Basic EPS is calculated by dividing the income or loss
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Basic and diluted EPS were the same
for 2002 and 2001 because the Company had losses from operations and therefore,
the effect of all potential common stocks was antidilutive. |
- 7 -
| |
Stock
options, warrants outstanding and their equivalents are included in diluted
earnings per share computations through the “treasury stock method”
unless they are antidilutive. Common share equivalents are excluded from the
computations in loss periods, as their effect would be antidilutive. |
| |
Segment
Information – The Company currently operates in one business
segment, the development and commercialization of algae and algal derivatives in
the biotech, medical and food industries. The Company is managed and operated as
one business. The entire business is comprehensively managed by a single
management team that reports to the Chief Executive Officer. The Company does
not operate separate lines of business or separate business entities with
respect to its products or product candidates. Accordingly, the Company does not
have separately reportable segments as defined by SFAS No. 131,
“Disclosure about Segments of an Enterprise and Related
Information.” |
| |
The
Company’s long-lived assets in geographic areas outside the United States
are not material. Sales from customers located in the following geographic areas
are: |
March 31,
2002 2001
United States $ 727,963 $1,400,182
Europe 162,574 197,584
Other 138,714 54,600
------------ ------------
Total $1,029,251 $1,652,366
============ ============
| |
During
the years ended March 31, 2002 and 2001, the Company received 33% and 9%,
respectively, of its revenues from one customer. No other customers accounted
for over 10% of revenues. |
| |
Recent
Accounting Pronouncements – In July 2001, SFAS No. 141,
“Business Combinations” was issued. SFAS 141 requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. The adoption of SFAS 141
did not have a material impact to the Company’s financial condition or
results of operations. |
| |
In
January 2002, the Emerging Issues Task Force (“EITF”) issues Consensus
No. 01-09, “Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor’s Products).” EITF
01-09 requires that sales incentives and other similar types of consideration
given to a customer or reseller of the vendor’s products be classified as a
reduction of revenue. The adoption of EITF 01-09 in the first quarter of 2002
did not have a material impact on the Company’s financial condition or
results of operations. |
- 7 -
| |
Effective
January 2002, the Company is subject to SFAS No. 142, “Goodwill and
Other Intangible Assets.” Under the provisions of SFAS No. 142,
goodwill is no longer subject to amortization over its estimated useful life.
Instead, goodwill is assessed for impairment on an annual basis (or more
frequently if circumstances indicate a possible impairment) by means of a
fair-value-based test. SFAS No. 142 requires that existing goodwill as of June
30, 2001 continue to be amortized through the end of the current calendar year,
after which no further amortization of goodwill will be permitted. The
implementation of SFAS No. 142 did not have a material impact to the
Company’s financial condition or results of operations. |
| |
The
Company will adopt SFAS No. 143, “Accounting for Asset
Obligations,” no later than January 1, 2003. Under SFAS No. 143,
the fair value of a liability for an asset retirement obligation covered under
the scope of SFAS No. 143 would be recognized in the period in which the
liability is incurred, with an offsetting increase in the carrying amount of the
related long-lived asset. Over time, the liability would be accreted to its
present value, and the capitalized cost would be depreciated over the useful
life of the related asset. Upon settlement of the liability, an entity would
either settle the obligation for its recorded amount or incur a gain or loss
upon settlement. The Company is still studying this newly-issued standard to
determine, among other things, whether it has any asset retirement obligations
which are covered under the scope of SFAS No. 143. The effect to the Company of
adopting this standard, if any, has not yet been determined. |
| |
In
August 2001, SFAS No. 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets” was issued. SFAS No. 144 provides new guidance on
the recognition of impairment losses on long-lived assets to be held and used or
to be disposed of and also broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. SFAS No. 144 is effective for the Company’s fiscal
year beginning in 2002, and did not have a material impact to the Company’s
financial condition or results of operations. |
2. NOTES
PAYABLE TO SHAREHOLDERS
| |
On
September 25, 2001, the Company entered into a secured promissory note and
warrant purchase agreement (the “Facility”) with a partnership of
Company shareholders to obtain approximately $2,000,000 in bridge financing. The
outstanding balance under the Facility bears interest of 12% and matures on
April 30, 2002 and is secured by substantially all the Company’s assets. In
connection with entering into the Facility, the Company issued warrants to
acquire 44,000 shares of the Company’s common stock, par value $.001, with
an exercise price of $0.05. The warrants expire on the date ten years after the
issuance date. The value assigned to the warrants, totaling $86,215, was
recorded as a discount on the notes payable and is being amortized to interest
expense over the term of the note. In the quarter ended March 31, 2002, the
Company charged a total of $36,949 to interest expense related to the value of
these warrants. The fair value of the warrants was determined using a
Black-Scholes model and was calculated using a risk free interest rate of 2.71%,
expected volatility of 75%, no dividends, and a term of five years. |
- 8 -
| |
In
January 2002, the Company entered into a Bridge Loan Financing Agreement with a
partnership comprised of certain shareholders of the Company. Under the terms of
the agreement, the Company may borrow up to $5,000,000 with a 12 percent
interest rate. Additionally, the Company issued 5,000,000 warrants with an
exercise price of $0.01 per share to purchase shares of the Company’s
common stock. The warrants were immediately vested upon issuance and are
exercisable for a term of ten years. The fair value of the warrants, limited to
the total proceeds received in the financing, is being amortized to interest
expense over the term of the loan as funding has been received under this
agreement. In the quarter ended March 31, 2002, the Company charged a total
of $2,410,596 to interest expense related to the value of these warrants. The
agreement also provides that upon occurrence of certain events, including but
not limited to a change in control or bankruptcy, the principal amount due under
the loan will be increased by 100%. The loan is due the earlier of (i) April 30,
2002 or June 1, 2002 if the Company has entered into a written commitment prior
to April 30, 2002 regarding an equity financing in the amount of at least
$15,000,000, or a change in control transaction, (ii) termination of the
commitment, or (iii) closing of an equity financing. At March 31, 2002,
$4,269,607 was outstanding under this agreement. As a result of the sale of the
Company, as discussed in Note 5, the principal amount due increased to
approximately $9.4 million plus accrued interest of approximately $100,000. |
3. STOCK
OPTIONS
| |
In
January 2002, the Company completed an option exchange. Under the terms of the
option exchange, option holders were allowed to tender two existing stock
options in exchange for one stock option with an exercise price of $0.50 per
share, which was at a discount to the then-estimated fair market value of the
Company’s common stock. Options granted under this exchange vest ratably
over a three-year period. 4,210,540 options were tendered in the exchange and
2,105,270 replacement options were issued. Additionally, the Company issued
169,000 newly granted options with an exercise price of $0.50 per share. As a
result of the cancellation and regrant of the options at a discount and granted
new options at a discount, the Company recorded $3,413,839 of deferred
compensation which is being amortized over the vesting term of 3 years.
Compensation expense of $235,272 was recorded in the quarter ended March 31,
2002. Additionally, options that were cancelled and regranted are subject to
variable accounting. As a result, at March 31, 2002, the Company recorded an
additional $775,441 of deferred compensation and $45,614 of additional
compensation expense for the increase in value of the Company’s common
stock. These amounts were recorded based on the Company’s estimate of the
valuation of the Company as a result of the sale as more fully discussed in Note
5. |
4. LICENSE AND
SUPPLY AGREEMENT
| |
On
January 7, 2002, the Company entered into a License and Supply agreement with
Luberski, Inc. (d.b.a. Hidden Villa Ranch (HVR)). Under the agreement, the
Company licensed the Gold Circle Farms brand name along with certain technology
relating to the production of DHA enhanced eggs in exchange for various purchase
commitments of their DHA enhanced feed product. The license term begins January
7, 2002 and ends December 31, 2005. If HVR complies with the agreement, the Gold
Circle Farms name and technology becomes their property beginning on
January 1, 2006. At that time, HVR could potentially buy their feed
ingredient from another vendor. Under the agreement, the Company’s
operations will no longer include the production and distribution of DHA
enriched eggs. In the three-month period ended March 31, 2001, sales, cost
of sales and direct operating costs for egg production and distribution were
approximately $1.2 million, $1.2 million and $1.1 million, respectively. Under
the license agreement, the Company will no longer receive revenues and incur the
related costs from egg sales; however, the license agreement guarantees that
minimum amounts of DHA enriched feed will be purchased from the Company by HVR
through December 31, 2005. These minimum purchases increase during each year of
the contract and the Company expects yearly purchases will exceed the minimum
amount of purchases. In addition to revenues generated from DHA enriched feed
sales, the Company will earn royalties from egg sales generated by HVR. HVR can
terminate the license agreement at any time upon 120 days written notice. If the
agreement is terminated the Company would then have the option to license the
brand to a third party or to continue the production and distribution of DHA
enriched eggs. |
- 9 -
5. SUBSEQUENT
EVENTS
| |
On
March 25, 2002, the Company signed a definitive agreement to merge with Martek
Biosciences Corporation in a tax-free, stock for stock merger. Under the terms
of the agreement, OmegaTech shareholders will receive approximately
$51.5 million worth of Martek common stock as the initial consideration,
reduced for the payment of certain liabilities including the notes payable to
shareholders of approximately $2.0 million, the bridge loan of approximately
$9.5 million, discussed in Note 2, approximately $6.2 million of
transaction expenses and severance payments and approximately $1.0 million for
the Company’s negative working capital at the closing date, subject to
adjustment to actual amounts. Additionally, OmegaTech shareholders may receive
up to an additional $40 million worth of Martek common stock based on the
attainment of certain earn-out criteria. The merger closed April 25, 2002.
The combined company will operate as Martek Biosciences Corporation. |
- 10 -
INDEPENDENT
AUDITORS’ REPORT
To the Board of Directors
and Shareholders of
OmegaTech, Inc.:
We have audited the
accompanying consolidated balance sheets of OmegaTech, Inc. and Subsidiary (the
Company) as of December 31, 2001 and 2000, and the related statements of
operations, stockholders’ equity, and cash flows. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2001 and 2000, and the
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in
Notes 1 and 8 to the financial statements, the Company was merged with
Martek Biosciences Corporation on April 25, 2002.
/s/ Deloitte & Touche LLP
Denver, Colorado
March 26, 2002 (April 25, 2002 as to fourth paragraph of Note 8)
- 11 -
OMEGATECH, INC. AND SUBSIDIARY
------------------------------------------------------------------------------------------------------------------------
ASSETS 2001 2000
CURRENT ASSETS:
Cash and cash equivalents $ 269,336 $ 6,127,802
Investments - 5,749,291
Accounts receivable, net of allowance for doubtful accounts
of $17,076 and $119,852 862,786 1,773,771
Inventories 1,579,601 1,248,407
Other current assets 206,286 311,617
Prepaid expenses 50,882 64,139
------------- -------------
Total current assets 2,968,891 15,275,027
PROPERTY AND EQUIPMENT:
Lab equipment 1,226,479 573,035
Computers and software 524,588 335,708
Furniture and fixtures 429,601 412,664
Leasehold improvements 191,110 195,589
Automobiles 47,200 47,200
Construction in progress 127,500 337,300
------------- -------------
2,546,478 1,901,496
Less accumulated depreciation (1,082,527) (629,140)
------------- -------------
Property and equipment, net 1,463,951 1,272,356
LICENSES, net of accumulated amortization of $568,707
and $176,160 3,514,725 3,511,890
PATENTS, net of accumulated amortization of $106,784
and $70,340 719,946 316,870
OTHER INTANGIBLE ASSETS, net of accumulated
amortization of $44,570 and $32,265 173,553 204,086
OTHER NON-CURRENT ASSETS 403,514 148,818
------------- -------------
TOTAL $ 9,244,580 $20,729,047
============= =============
See notes to the consolidated financial statements.
- 12 -
------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
CURRENT LIABILITIES:
Accounts payable $ 3,988,770 $ 1,680,355
Accrued liabilities 345,562 140,662
Note payable to shareholders 1,950,734 -
Current maturities of obligations under capital lease 173,930 56,402
------------- --------------
Total current liabilities 6,458,996 1,877,419
LONG TERM ROYALTY PAYABLE 175,000 -
LONG TERM OBLIGATIONS UNDER CAPITAL LEASE 80,716 99,238
------------- --------------
Total liabilities 6,714,712 1,976,657
------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares authorized,
and no shares issued and outstanding - -
Common stock, $.001 par value, 50,000,000 shares authorized,
15,634,000 shares issued and outstanding 15,634 15,634
Additional paid-in capital 46,000,980 45,426,963
Accumulated deficit (42,828,905) (26,296,333)
Deferred stock compensation (650,626) (439,491)
Accumulated other comprehensive income (loss) (7,215) 45,617
------------- --------------
Total stockholders' equity 2,529,868 18,752,390
------------- --------------
TOTAL $ 9,244,580 $ 20,729,047
============= ==============
- 13 -
OMEGATECH, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
------------------------------------------------------------------------------------------------------------------------
2001 2000
REVENUES:
Product sales $ 6,873,800 $ 5,778,150
Royalties - 379,637
-------------- ---------------
Total revenues 6,873,800 6,157,787
-------------- ---------------
COSTS AND EXPENSES:
Cost of sales 5,938,374 4,452,124
Selling, general and administrative 11,699,925 10,455,102
Research and development 5,918,929 3,968,738
-------------- ---------------
Total costs and expenses 23,557,228 18,875,964
-------------- ---------------
LOSS FROM OPERATIONS (16,683,428) (12,718,177)
OTHER INCOME (EXPENSE):
Interest and investment income 292,656 1,014,014
Interest expense (144,483) (14,980)
Other income, net 2,683 26,159
-------------- ---------------
NET LOSS $(16,532,572) $(11,692,984)
============== ===============
BASIC AND DILUTED LOSS PER COMMON SHARE (1.05) (0.81)
============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES USED IN PER SHARE CALCULATION 15,634,000 14,365,121
============== ===============
See notes to the consolidated financial statements.
- 14 -
OMEGATECH, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000
------------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Additional Deferred Comprehensive Total
Common Stock Paid-In Accumulated Stock Income Stockholders'
Shares Amount Capital Deficit Compensation (Loss) Equity
BALANCE, DECEMBER 31, 1999 12,459,980 $ 12,460 $ 22,974,717 $(14,603,349) $ - $ - $ 8,383,828
Issuance of common stock for
cash (net of offering costs of $301,769) 3,105,880 3,106 21,428,732 - - - 21,431,838
Stock based compensation 41,460 41 425,551 - - - 425,592
Stock options exercised 26,680 27 91,579 - - - 91,606
Deferred stock compensation - - 506,384 - (506,384) - -
Amortization of deferred stock
compensation - - - - 66,893 - 66,893
Comprehensive loss:
Net loss - - - (11,692,984) - - (11,692,984)
Foreign currency translation adjustment - - - - - 9,969 9,969
Unrealized gain on available for
sale securities - - - - - 35,648 35,648
-------------
Net comprehensive loss - - - - - - (11,647,367)
---------- --------- -------------- ------------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 2000
15,634,000 15,634 45,426,963 (26,296,333) (439,491) 45,617 18,752,390
Stock based compensation - - 487,802 - (487,802) - -
Issuance of common stock warrants with
notes payable - - 86,215 - - - 86,215
Amortization of deferred stock compensation - - - - 276,667 - 276,667
Comprehensive loss:
Net loss - - - (16,532,572) - - (16,532,572)
Foreign currency translation adjustment - - - - - (17,184) (17,184)
Unrealized gain on available for
sale securities - - - - - (35,648) (35,648)
-------------
Net comprehensive loss - - - - - - (16,585,404)
---------- --------- -------------- ------------- ----------- ----------- -------------
BALANCE, DECEMBER 31, 2001 15,634,000 $ 15,634 $ 46,000,980 $(42,828,905) $ (650,626) $ (7,215) $ 2,529,868
See notes to the consolidated financial statements.
- 15 -
OMEGATECH, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
-------------------------------------------------------------------------------------------------------------------------
2001 2000
OPERATING ACTIVITIES:
Net loss $ (16,532,572) $(11,692,984)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 948,344 446,406
Amortization of debt discount 36,949 -
Stock-based compensation expense 276,667 196,024
Net change in operating assets and liabilities:
Accounts receivable 910,985 (1,147,989)
Inventories (331,194) (1,010,017)
Prepaid expenses 13,257 32,284
Other assets (149,365) (295,521)
Accounts payable 2,308,415 601,110
Accrued liabilities 204,900 20,449
Royalty payable 175,000 -
Other (52,832) 9,969
---------------- ---------------
Net cash used in operating activities (12,191,446) (12,840,269)
---------------- ---------------
INVESTING ACTIVITIES:
Proceeds from sales and maturities of investments 5,749,291 15,207,326
Purchase of investments - (20,852,544)
Purchase of property and equipment (688,537) (965,454)
Additions to intangible assets (826,780) (3,931,384)
---------------- ---------------
Net cash provided by (used in) investing activities 4,233,974 (10,542,056)
FINANCING ACTIVITIES:
Proceeds from note payable to shareholder 2,000,000 -
Proceeds from option exercises - 91,606
Principal payments on capital leases 99,006 (52,372)
Proceeds from issuance of common stock - 21,728,299
---------------- ---------------
Net cash provided by financing activities 2,099,006 21,767,533
---------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,858,466) (1,614,792)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,127,802 7,742,594
---------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 269,336 $ 6,127,802
================ ===============
SUPPLEMENTAL CASH FLOW DISCLOSURE -
Cash paid for interest $ 33,453 $ 14,980
NONCASH INVESTING AND FINANCING ACTIVITY:
Issuance of common stock warrants with notes payable $ 86,215 $ -
Assets acquired under capital leases 95,293 -
Stock issued for underwriter fees - 296,461
See notes to the consolidated financial statements.
- 16 -
OMEGATECH, INC. AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS YEARS
ENDED DECEMBER 31, 2001 AND 2000
-----------------------------------------------------------------------------------------------------------------------
1. BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| |
Organization
and Business – OmegaTech, Inc. was incorporated in
1987 for the purpose of researching and developing new technologies for the use
of algae and algal derivatives in the biotech, medical and food industries.
OmegaTech, Inc. and its subsidiary are collectively referred to as the Company.
The Company has developed and patented a method and process of producing
docosahexaenoic acid (DHA), a long-chain Omega-3 highly unsaturated fatty acid,
as nutritional supplements. The Company’s DHA technology allows the food
industry to provide consumers with a broad range of food products to supplement
consumers’ diets with long-chain fatty acids. Current applications for the
Company’s DHA products include the worldwide markets for human dietary
supplements, foods, beverage, and animal and aquaculture nutrition segments. The
Company began selling its products in the United States in 1998 and currently
has export sales to Mexico, South America, Europe and Asia. |
| |
Basis
of Presentation – The Company has incurred net losses of
$16,532,572 and $11,692,984 for the years ended December 31, 2001 and 2000. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company has been actively pursuing
financing sources and in 2001, the Company engaged investment bankers for
private equity fundraising and to evaluate merger and acquisition opportunities
presented to the Company. In January 2002, the Company obtained bridge loan
financing of $4,700,000, see Note 8. The Company has also engaged in
certain non-strategic cost cutting measures. Management believes that the bridge
loan, coupled with the non-strategic cost cutting measures, will fund operations
through April 2002. On March 25, 2002, the Company signed a definitive agreement
to merge with Martek Biosciences Corporation and the merger closed on
April 25, 2002, see Note 8. |
| |
Basis
of Consolidation – The financial statements include the
accounts of the Company and its wholly-owned subsidiary. All material balances
and transactions have been eliminated in consolidation. |
| |
Use
of Estimates – The preparation of the Company’s
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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 these estimates. |
| |
Cash
and Cash Equivalents – The Company considers all highly
liquid investments purchased with an original maturity of three months or
less to be cash equivalents. |
- 17 -
| |
Concentration
of Credit Risk – Financial instruments which subject the
Company to concentrations of credit risk consist principally of trade accounts
receivable. The Company extends credit to licensees, which are located in
Europe, the Americas and Asia. This concentration of credit risk may be affected
by changes in economic or other conditions and may, accordingly, impact the
Company’s overall credit risk. However, management believes that the risk
to the Company is not significant. |
| |
Investments
– The Company classifies its investment securities as held
to maturity, available for sale, or trading according to management’s
intent. Bonds, notes and debentures for which the Company has the positive
intent and ability to hold to maturity are reported at cost, adjusted for
premiums and discounts. Available for sale securities consist of bonds, notes
and debentures not classified as held to maturity securities and are reported at
fair market value as determined by quoted market prices. Unrealized holding
gains and losses are reported in accumulated other comprehensive income (loss)
until realized. Premiums and discounts are recognized in interest income using
the effective interest method over the period to maturity. The amortized cost
and estimated fair value of investment securities at December 31, 2000 are
summarized as follows: |
Corporate Federal Home
Bonds Loan Note
Amortized cost $1,989,646 $3,574,975
Gross unrealized gains - 35,648
-------------- ------------
Estimated fair value $1,989,646 $3,610,623
============== ============
| |
Corporate
bonds are classified as held-to-maturity and matured and were liquidated during
2001 to fund current operations. The Federal Home Loan Note is classified as
available-for-sale. The Company liquidated this investment during 2001. Gross
realized gains and losses on the investment classified as available-for-sale for
the year ended December 31, 2001 and 2000 were not material. Other
investments at December 31, 2000 consist of certificates of deposit for
$149,022 which matured in 2001. |
| |
Inventories - Inventories are stated at the lower of cost, using the first-in, first-out method, or market.
Inventories consisted of the following: |
December 31,
2001 2000
------------ ------------
Finished goods $1,178,636 $1,230,290
Raw materials 400,965 18,117
------------ ------------
Total $1,579,601 $1,248,407
============ ============
| |
Other
Current Assets – Other current assets include non-interest
bearing advances due from employees totaling $9,334 and $143,800 at
December 31, 2001 and 2000, respectively. The amounts are relocation
advances. |
- 18 -
| |
Property
and Equipment – Property and equipment are
recorded at cost. The Company provides for depreciation using the straight-line
method over the estimated useful lives of the assets, ranging from three to five
years. Assets recorded under capital lease and leasehold improvements are
amortized using the straight-line method, over the shorter of their useful lives
or the terms of the related lease. No depreciation is provided on the
construction in progress. |
| |
Intangible
Assets – Intangible assets consist of patents, trademarks,
licenses and rights to technology. The intangible assets are amortized using the
straight-line method over the estimated useful lives of the assets, ranging from
ten to seventeen years. |
| |
Valuation
of Long-Lived Assets – The Company reviews long-lived
assets, including intangible assets, for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability is determined based on future net cash flows from
the use and ultimate disposition of the asset. Impairment loss is calculated as
the difference between the carrying amount of the asset and its fair value. The
Company has not recognized any impairment losses. |
| |
Fair
Value of Financial Instruments – The fair value of the
Company’s financial instruments approximates their carrying values due to
the relatively short periods to maturity. |
| |
Revenue
Recognition – The Company records sales at the
time of shipment when title to the product transfers and the customer bears the
risk of loss. Royalties on third party sales are recognized when product is
shipped by the licensee based on the invoiced amount by the licensee and royalty
rates as specified in the agreement with the licensee. |
| |
Research
and Development – Research and development costs are
expensed when incurred and are comprised of salaries and benefits, allocated
overhead and occupancy costs, materials and supplies, contract services and
other outside costs. |
| |
Advertising
– Advertising costs are expensed as incurred. During the
years ended December 31, 2001 and 2000, the Company expensed $131,453 and
$635,791 respectively, as advertising costs. |
| |
Royalty
Expense – The Company records royalty expense based on the
amount of qualifying sales and the applicable royalty rates in the periods those
sales are made. Future minimum royalties are recorded in the period due unless
it is not expected that the minimum royalties will be recovered by sales in
those periods. |
| |
Stock-Based
Compensation – The Company accounts for its stock-based
awards to employees, officers and directors using the intrinsic value method in
accordance with Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees” and its
related interpretations and has adopted the disclosures-only provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 123
“Accounting for Stock-Based Compensation.” The Company
accounts for stock-based awards to non-employees using a fair value method in
accordance with SFAS No. 123. |
| |
Foreign
Currency Translation – The translation of applicable foreign
currencies into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate during the period. The
cumulative translation adjustment is recorded as a component of other
comprehensive income. |
- 19 -
| |
Income
Taxes – Deferred income tax assets and liabilities
are computed annually for differences between the financial statement basis and
the income tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future. Such deferred income tax liability
computations are based on enacted tax laws and rates applicable to the years in
which the differences are expected to affect taxable income. A valuation
allowance is established when necessary to reduce deferred income tax assets to
the amounts expected to be realized. |
| |
Comprehensive
Income (Loss) – Comprehensive income (loss) is presented in
the statement of stockholders’ equity and includes net loss, the change in
unrealized gains on available for sale securities and the foreign currency
translation adjustment. |
| |
Stock
Split – In 2001, the Company declared a twenty for one stock
split of its common stock. All common stock and additional paid in capital
information have been retroactively restated to reflect this split. |
| |
Net
Loss Per Common Share – The loss per share is presented in
accordance with the provisions of SFAS No. 128, “Earnings Per
Share” (EPS). Basic EPS is calculated by dividing the income or loss
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Basic and diluted EPS were the same
for 2001 and 2000 because the Company had losses from operations and therefore,
the effect of all potential common stocks was anti-dilutive. |
| |
Stock
options, warrants outstanding and their equivalents are included in diluted
earnings per share computations through the “treasury stock method”
unless they are antidilutive. Common share equivalents are excluded from the
computations in loss periods, as their effect would be antidilutive. For the
years ended December 31, 2001 and 2000 approximately 1.65 million and 1.97
million equivalent dilutive securities (common stock options and warrants), have
been excluded from the weighted-average number of common shares outstanding for
the diluted net loss per share computations as they are antidilutive. |
| |
Segment
Information – The Company currently operates in one business
segment, the development and commercialization of algae and algal derivatives in
the biotech, medical and food industries. The Company is managed and operated as
one business. The entire business is comprehensively managed by a single
management team that reports to the Chief Executive Officer. The Company does
not operate separate lines of business or separate business entities with
respect to its products or product candidates. Accordingly, the Company does not
have separately reportable segments as defined by SFAS No. 131,
“Disclosure about Segments of an Enterprise and Related
Information.” |
- 20 -
| |
The
Company’s long-lived assets in geographic areas outside the United States
are not material. Sales from customers located in the following geographic areas
are: |
December 31,
2001 2000
------------- ------------
United States $ 5,718,536 $4,224,385
Europe 885,764 1,466,734
Other 269,500 466,668
------------- ------------
Total $ 6,873,800 $6,157,787
============= ============
| |
During
the years ended December 31, 2001 and 2000, the Company received 17% and
13%, respectively, of its revenues from one customer. No other customers
accounted for over 10% of revenues. |
| |
Recent
Accounting Pronouncements – In July 2001, SFAS No. 141,
“Business Combinations” was issued. SFAS 141 requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. The adoption of SFAS 141
did not have a material impact to the Company’s financial condition or
results of operations. |
| |
“In
January 2002, the Emerging Issues Task Force (“EITF”) issues Consensus
No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products).” EITF 01-09 requires
that sales incentives and other similar types of consideration given to a
customer or reseller of the vendor’s products be classified as a reduction
of revenue. The Company will adopt EITF 01-09 in 2002. The effect of this EITF
Consensus is not expected to have a material impact on the Company’s
financial conditions or results of operations due to the licensing of the Gold
Circle Farms brand in January 2002, see Note 8.” |
| |
Effective
January 2002, the Company is subject to SFAS No. 142, “Goodwill and
Other Intangible Assets.” Under the provisions of SFAS No. 142,
goodwill is no longer subject to amortization over its estimated useful life.
Instead, goodwill is assessed for impairment on an annual basis (or more
frequently if circumstances indicate a possible impairment) by means of a
fair-value-based test. SFAS No. 142 requires that existing goodwill as of June
30, 2001 continue to be amortized through the end of the current calendar year,
after which no further amortization of goodwill will be permitted. The Company
believes the implementation of SFAS No. 142 will not have a material impact to
the Company’s financial condition or results of operations. |
| |
The
Company will adopt SFAS No. 143, “Accounting for Asset
Obligations,” no later than January 1, 2003. Under SFAS No. 143,
the fair value of a liability for an asset retirement obligation covered under
the scope of SFAS No. 143 would be recognized in the period in which the
liability is incurred, with an offsetting increase in the carrying amount of the
related long-lived asset. Over time, the liability would be accreted to its
present value, and the capitalized cost would be depreciated over the useful
life of the related asset. Upon settlement of the liability, an entity would
either settle the obligation for its recorded amount or incur a gain or loss
upon settlement. The Company is still studying this newly-issued standard to
determine, among other things, whether it has any asset retirement obligations
which are covered under the scope of SFAS No. 143. The effect to the Company of
adopting this standard, if any, has not yet been determined. |
- 21 -
| |
In
August 2001, SFAS No. 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets” was issued. SFAS No. 144 provides new guidance on
the recognition of impairment losses on long-lived assets to be held and used or
to be disposed of and also broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. SFAS No. 144 is effective for the Company’s fiscal
year beginning in 2002, but is not expected to have a material impact to the
Company’s financial condition or results of operations. |
| |
Reclassification - Certain amounts in the 2000 financial statements have been reclassified to conform to the
2001 presentation. |
2. NOTES
PAYABLE TO SHAREHOLDERS
| |
On
September 25, 2001, the Company entered into a secured promissory note and
warrant purchase agreement (the “Facility”) with a partnership of
Company shareholders to obtain approximately $2,000,000 in bridge financing. The
outstanding balance under the Facility bears interest of 12% and matures on
April 30, 2002 and is secured by substantially all the Company’s assets. |
| |
In
connection with entering into the Facility, the Company issued warrants to
acquire 44,000 shares of the Company’s common stock, par value $.001, with
an exercise price of $0.05. The warrants expire on the date ten years after the
issuance date. The value assigned to the warrants, totaling $86,215, was
recorded as a discount on the notes payable and is being amortized to interest
expense over the term of the note. The outstanding principal balance of
$1,950,734 at December 31, 2001 is net of the discount and the current
period amortization. The fair value of the warrants was determined using a
Black-Scholes model and was calculated using a risk free interest rate of 2.71%,
expected volatility of 75%, no dividends, and a term of five years. Interest
expense for 2001 was $111,030. |
3. STOCK
OPTION PLANS
| |
The
Company adopted a stock option plan in 1996 (the Plan) for key employees and
officers of the Company and has reserved 6,000,000 shares of its common stock
for issuance under the Plan. The granting of options under the Plan is at the
discretion of the Board of Directors. The stock options have a term of 10 years
with exercise prices equal to fair market value on the date of grant. The
options are generally not exercisable earlier than six months after date of
grant, and shall become fully exercisable three years after grant date. The
Company has granted 4,860,380 stock options under the Plan. The Company has
granted 721,280 stock options in connection with non-plan awards. |
- 22 -
Weighted-
Average
Shares Exercise Price Exercise Price
Options outstanding, January 1, 2000 3,039,800 $0.01 - $4.79 $ 2.61
Options granted 2,238,200 $4.07 - $7.15 $ 6.54
Options exercised (26,680) $3.43 $ 3.43
Options forfeited (38,320) $3.43 - $4.79 $ 4.32
-----------
Options outstanding, December 31, 2000 5,213,000 $0.01 - $7.15 $ 4.24
Options granted 763,660 $1.65 - $7.15 $ 3.82
Options exercised - - $ -
Options forfeited (395,000) $4.79 - $7.15 $ 5.63
-----------
Options outstanding, December 31, 2001 5,581,660 $0.01 - $7.15 $ 4.09
===========
Options exercisable:
December 31, 2001 3,942,400 $0.01 - $7.15 $ 3.56
December 31, 2000 2,876,180 $0.01 - $7.15 $ 2.58
| |
The
weighted average fair value of options granted in 2001 and 2000 with exercise
prices equal to the market price at date of grant was $1.65 and $2.79,
respectively. The weighted average fair value of options granted in 2001 and
2000 with exercise prices less than the market price at date of grant was $2.09
and $3.39, respectively. Compensation recorded in 2001 and 2000 for options with
exercise prices less than the market price is $276,667 and $196,024,
respectively. |
| |
The
following table summarizes information about Plan and non-plan stock options
outstanding and exercisable as of December 31, 2001: |
Weighted Weighted
Average Weighted Average
Range of Options Remaining Average Options Exercise Price
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable
$0.01 240,580 1.0 $ 0.01 240,580 $ 0.01
$0.62 - $0.70 1,041,540 5.4 0.67 1,041,540 0.67
$1.65 459,660 10.0 1.65 - -
$3.43 - $4.31 1,299,520 7.1 3.80 1,299,520 3.80
$4.79 - $6.08 770,400 8.6 4.87 567,080 4.90
$7.15 1,769,960 9.2 7.15 793,680 7.15
----------- -----------
5,581,660 3,942,400
=========== ===========
| |
The
Company granted stock options in 2001 and 2000 to non-employees to purchase
70,000 and 30,960 shares of the Company’s common stock at exercise prices
of $7.16 in 2001 and $4.79 and $7.15 per share in 2000. The Company recognized
stock-based compensation expense of $71,338 and $49,247 related to these
issuances in 2001 and 2000, respectively. The fair value of the options granted
was estimated on the date of grant using the Black-Scholes option pricing model
and the following weighted average assumptions: no dividend yield, expected
volatility of 71% for 2001 and 53% for 2000, risk-free interest rate of 4.39%
for 2001 and 5.96% for 2000, and expected life equal to the vesting period. |
- 23 -
| |
Had
compensation cost for employee, officer and director stock options granted been
determined based upon the fair value of the stock options at the grant date,
consistent with the methodology prescribed under SFAS No. 123, the
Company’s net loss of $16,532,572 and $11,692,984 for the years ended
December 31, 2001 and 2000 would have been increased by $2,592,779 and
$1,451,032 to a proforma net loss of $19,125,351 and $13,144,016, respectively.
Proforma net loss per share for the years ended December 31, 2001 and 2000
is $1.22 and $0.91, respectively. The fair value of the options granted was
estimated on the date of grant using the Black-Scholes option pricing model and
the following weighted average assumptions: no dividend yield, expected
volatility of 71% for 2001 and 53% for 2000, risk-free interest rate of 3.62%
for 2001 and 6.24% for 2000, and expected life of three years. |
4. EMPLOYEE
BENEFIT PLAN
| |
The
Company has a 401(k) plan covering substantially all employees. All employees
are generally eligible to participate in the 401(k) upon attaining 18 years of
age. The employees may elect to contribute a percentage of their compensation up
to $10,500 to the 401(k) plan. The Company matches the employee’s
contributions up to 3% of the employee’s compensation or $5,100, whichever
is less. Employees are immediately fully vested in the Company’s matching
contributions. The Company’s matching contributions totaled $150,901 and
$100,478 during the years ended December 31, 2001 and 2000. In February
2002, the Company discontinued its policy of matching employee contributions. |
5. LICENSES
| |
On
September 15, 1993, the Company entered into an agreement licensing the
rights to certain of the Company’s proprietary DHA technology to a third
party (Licensee). The agreement provided for royalties ranging from 3% to 5.5%
on certain sales of the Licensee subject to annual minimum royalties. The
Company received $362,658 in royalties under the agreement in 2000. The
agreement with the Licensee was cancelled during May 2000, as part of the
settlement discussed below. |
| |
In
May 2000, the Company and the Licensee terminated the agreement and entered into
a settlement. Under the terms of the settlement, the Licensee transferred back
to the Company the technology subject to the license agreement in exchange for
the following: |
| |
o A $2 million payment at the time of the settlement. |
| |
o
Annual royalty payments, commencing with the period ended June 30, 2001, for a
period of ten years. The rate of these royalties is 5% on net sales of human
application and aquaculture products and 2% on animal application products.
Commencing with the year ending June 30, 2003 through the year ending June 30,
2010, these royalty payments will be subject to annual minimums of $500,000. |
| |
o Up to a $3 million
payment at the end of the term of the agreement, July 31, 2010. |
- 24 -
| |
The
$3 million payment due at the end of the agreement is being accrued over the
term of the agreement, using the effective interest method, discounted at 12%,
which is the interest rate specified in the agreement. At December 31, 2001,
$175,000 was accrued as a long-term liability related to this future expected
payment. No amounts have been accrued under the $500,000 annual minimum payments
because management expects those amounts to be fully recovered by qualifying
sales in those years. |
| |
Future minimum royalty payments under this agreement as of December 31 are as follows: |
2002 $ -
2003 500,000
2004 500,000
2005 500,000
2006 500,000
Thereafter 5,000,000
------------
Total $7,000,000
============
| |
The
$2 million initial payment and associated costs of the settlement were
capitalized by the Company and are being amortized over the ten-year period of
the agreement. |
6. COMMITMENTS
AND CONTINGENCIES
| |
Leases
– The Company leases office space and certain equipment under noncancelable
operating lease agreements. Rent expense for the years ended December 31,
2001 and 2000 was $640,197 and $525,774, respectively. Additionally, the Company
leases equipment and furniture under capitalized leases. The capital leases are
collateralized by the leased assets and are due in minimum monthly payments
totaling $15,807, including imputed interest rates ranging from 8.8% to 13.0%.
Interest expense relating to capital leases for the year ended December 31, 2001
and 2000 was $33,453 and $14,980, respectively. |
- 25 -
| |
Future minimum
lease payments under leases as of December 31 are as follows: |
Operating Capitalized
Year Ending Leases Leases
2002 $353,949 $ 189,689
2003 173,107 82,935
2004 34,316 -
2005 13,027 -
---------- -------------
Total minimum lease payments $574,399 272,624
Less interest (17,978)
-------------
Total capital lease obligations 254,646
Less current portion (173,930)
-------------
Long term portion $ 80,716
=============
| |
Assets under capitalized leases totaled $596,696 and $275,595 at December 31, 2001 and 2000, respectively, with
associated accumulated depreciation and amortization of $201,626 and $64,306, respectively. Depreciation and
amortization expense related to property and equipment under capital lease was $137,321 and $27,560 for the
years ended December 31, 2001 and 2000, respectively. |
| |
Royalty Payments - On January 31, 1992, the Company signed an agreement with the University of Denver
(University) for the use of certain facilities and services provided to the Company. The agreement requires
the Company to pay the University royalties equal to six tenths of one percent (0.6%) of certain eligible
revenues, as defined, that are in excess of cumulative eligible revenues of $8,000,000. The term of the
royalty agreement is indefinite and, as of December 31, 2001, the Company's cumulative eligible revenues were
$15,037,666. As of December 31, 2001, the Company has accrued for $14,936 due to the University. |
| |
Purchase Commitments - On October 19, 2001, the Company entered into an agreement with CP Kelco (Kelco) in
which the Company made a $300,000 nonrefundable payment to Kelco that was used to purchase DHA processing
equipment. The Company will be reimbursed for the payment through rebates on each kilogram of product
purchased from Kelco. The agreement also requires the Company to purchase approximately $2.4 million of
inventory per year through December 31, 2004. |
- 26 -
7. INCOME TAXES
| |
Income tax expense deferred from the amounts computed by applying the U. S. Federal rate of 34 percent to loss
before taxes as a result of the following: |
Year Ended December 31,
2001 2000
Computed expected benefit $ 5,621,074 $ 3,975,615
Permanent items 174,573 135,201
State taxes 505,236 357,338
Change in valuation allowance (6,300,883) (4,468,154)
-------------- --------------
Total $ - $ -
============== ==============
| |
Significant
components of the Company's net deferred income taxes are as follows: |
December 31,
2001 2000
Deferred tax assets:
Tax credits $ 341,852 $ 203,497
Net operating loss carryforwards 13,037,323 6,991,774
Other 377,201 260,222
-------------- --------------
Total assets 13,756,376 7,455,493
Valuation allowance (13,756,376) (7,455,493)
-------------- --------------
Net deferred tax asset $ - $ -
============== ==============
| |
The
Company recognized a valuation allowance to the full extent of its deferred tax
assets since the likelihood of realization of the benefit cannot be determined.
At December 31, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $34,934,000, which will expire, if
unused, in the year 2019 through the 2021 |
8. SUBSEQUENT
EVENTS
| |
License
and Supply Agreement – On January 7, 2002, the Company
entered into a License and Supply agreement with Luberski, Inc. (d.b.a. Hidden
Villa Ranch (HVR)). Under the agreement, the Company licensed the Gold Circle
Farms brand name along with certain technology relating to the production of DHA
enhanced eggs in exchange for various purchase commitments of their DHA enhanced
feed product. The license term begins January 7, 2002 and ends December 31,
2005. If HVR complies with the agreement, the Gold Circle Farms name and
technology becomes their property beginning on January 1, 2006. At that
time, HVR could potentially buy their feed ingredient from another vendor. Under
the agreement, the Company’s operations will no longer include the
production and distribution of DHA enriched eggs. In 2001, sales, cost of sales
and direct operating costs for egg production and distribution were
approximately $5.2 million, $4.5 million and $2.3 million, respectively. Under
the license agreement, the Company will no longer receive revenues and incur the
related costs from egg sales; however, the license agreement guarantees that
minimum amounts of DHA enriched feed will be purchased from the Company by HVR
through December 31, 2005. These minimum purchases increase during each year of
the contract and the Company expects yearly purchases will exceed the minimum
amount of purchases. In addition to revenues generated from DHA enriched feed
sales, the Company will earn royalties from egg sales generated by HVR. HVR can
terminate the license agreement at any time upon 120 days written notice. If the
agreement is terminated the Company would then have the option to license the
brand to a third party or to continue the production and distribution of DHA
enriched eggs. |
- 27 -
| |
Option
Exchange – In January 2002, the Company completed an option
exchange. Under the terms of the option exchange, option holders were allowed to
tender two existing stock options in exchange for one stock option with an
exercise price of $0.50 per share, which was a 75 percent discount to the
then-estimated fair market value of the Company’s common stock. Options
granted under this exchange vest ratably over a three-year period. 4,210,540
options were tendered in the exchange and 2,105, 270 replacement options were
issued. |
| |
Bridge
Loan – In January 2002, the Company entered into a Bridge
Loan Financing Agreement with a partnership comprised of certain shareholders of
the Company. Under the terms of the agreement, the Company may borrow up to
$5,000,000 with a 12 percent interest rate. Additionally, the Company issued
5,000,000 warrants with an exercise price of $0.01 per share to purchase shares
of the Company’s common stock. The warrants were immediately vested upon
issuance and are exercisable for a term of ten years. The agreement also
provides that upon occurrence of certain events, including but not limited to a
change in control or bankruptcy, the principal amount due under the loan will be
increased by 100%. The loan is due the earlier of (i) April 30, 2002 or June 1,
2002 if the Company has entered into a written commitment prior to April 30,
2002 regarding an equity financing in the amount of at least $15,000,000, or a
change in control transaction, (ii) termination of the commitment, or (iii)
closing of an equity financing. As a result of the sale of the Company, as
discussed below, the principal amount due increased to approximately $9.4
million plus accrued interest of approximately $100,000. |
| |
Sale
of the Company – On March 25, 2002, the Company signed a
definitive agreement to merge with Martek Biosciences Corporation in a tax-free,
stock for stock merger. Under the terms of the agreement, OmegaTech shareholders
will receive approximately $51.5 million worth of Martek common stock as
the initial consideration, reduced for the payment of certain liabilities
including the notes payable to shareholders of approximately $2.0 million, the
bridge loan of approximately $9.5 million, discussed above, approximately $6.2
million of transaction expenses and severance payments and approximately $1.0
million for the Company’s negative working capital at the closing date,
subject to adjustment to actual amounts. Additionally, OmegaTech shareholders
may receive up to an additional $40 million worth of Martek common stock
based on the attainment of certain earn-out criteria. The merger closed
April 25, 2002. The combined company will operate as Martek Biosciences
Corporation. |
- 28 -
MARTEK BIOSCIENCES CORPORATION
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On April 25, 2002, the Company acquired OmegaTech, Inc., a Delaware corporation ("OmegaTech"), by the statutory
merger (the "Merger") of a wholly owned subsidiary of the Company, OGTAQ Corp., a Delaware corporation ("Merger
Sub"), with and into OmegaTech. The Merger was accomplished pursuant to the Agreement and Plan of Merger dated as of
March 25, 2002 by and among Martek, OmegaTech and the Merger Sub, as amended (the "Merger Agreement"). The Merger
occurred following the approval of the Merger Agreement by the OmegaTech stockholders and the satisfaction of other
closing conditions. Following the completion of the Merger, OmegaTech changed its name to Martek Biosciences Boulder
Corporation.
Prior to the Merger,
OmegaTech was a biotechnology company dedicated to the research, development and
commercialization of “natural bioactive compounds” or
“NBCs”, which are biologically active compounds that provide
clinically proven preventative and therapeutic health benefits.
As a result of the Merger,
Martek became the owner of 100% of the issued and outstanding common stock of
OmegaTech and each outstanding share of OmegaTech common stock was converted
into .04224 shares of Martek common stock. Options to purchase OmegaTech common
stock pursuant to OmegaTech’s 1996 Stock Option Plan and certain non-plan
option agreements were assumed by Martek and such options will remain
outstanding as options to purchase shares of Martek common stock.
In exchange for the
acquisition by Martek of all of the outstanding capital stock of OmegaTech,
Martek issued a total of 863,157 shares of Martek common stock to former
OmegaTech stockholders at the closing and Martek reserved, as of the closing,
154,589 shares of Martek common stock for issuance upon the exercise of options
assumed pursuant to the Merger. In addition, at the closing, Martek issued to
former OmegaTech stockholders and option holders non-transferable rights to
receive, in the aggregate, up to 2,290,533 additional shares of Martek common
stock, subject to certain adjustments, if certain operational and financial
targets (“Milestones”) are achieved between April 25, 2002 and April
30, 2004. In no event will the aggregate number of Martek common stock issued
pursuant to the Merger exceed 4,210,926 shares of Martek common stock. The
shares of Martek common stock issued at the closing of the Merger were issued in
a transaction exempt from registration under the Securities Act of 1933, as
amended, pursuant to Regulation D. Martek has filed a registration statement on
Form S-3 to permit public resales of shares being issued to former OmegaTech
stockholders at the closing.
At the closing and included
in the 4,210,926 shares that may be issued in the Merger, Martek also issued
760,826 shares of Martek common stock (the “Directed Shares”) into
various escrow accounts to satisfy OmegaTech’s pre-closing liabilities to
certain lenders and vendors and issued on May 20, 2002 141,745 shares of Martek common stock
to certain employees to satisfy certain liabilities of OmegaTech (the “Non
Compete Shares”). The Directed Shares and the Non Compete Shares were issued
in a transaction exempt from registration under the Securities Act of
1933, as amended. A number of shares equal to the Directed Shares that are not
required to be used to pay those liabilities and any costs incurred in
connection with such payment, will be distributed to former OmegaTech
stockholders on a pro rata basis.
The aggregate purchase price
of approximately $54,065,000, including acquisition costs, was allocated as follows:
- 29 -
Trademarks $ 8,955,000
Patents 3,256,000
Core technology 1,961,000
Current products 11,434,000
In-process research and development 15,788,000
Goodwill 17,188,000
-------------------
58,582,000
Tangible net liabilities assumed, at fair value (4,517,000)
-------------------
$54,065,000
===================
MARTEK BIOSCIENCES CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2001
(in thousands, except per share data)
Pro Forma
Martek Biosciences Adjustments Pro Forma
Corporation OmegaTech, Inc. (See Note 2) Consolidated
--------------------- -------------------- ----------------- ----------------
Revenues $18,824 $6,874 --- $25,698
Costs and expenses:
Cost of revenues 12,554 5,938 --- 18,492
Research and
development 12,705 5,919 --- 18,624
Acquired in-process
research and 15,788 C ---
development (15,788) C ---
Selling, general and
administrative 7,969 11,700 (383) A 19,286
Other operating expenses 565 --- --- 565
--------------------- -------------------- ----------------- ----------------
Total costs and expenses 33,793 23,557 (383) 56,967
--------------------- -------------------- ----------------- ----------------
Income (loss) from
operations (14,969) (16,683) 383 (31,269)
Other income (expense),
net 1,267 150 56 B 1,473
--------------------- -------------------- ----------------- ----------------
Net income (loss) (13,702) (16,533) 439 (29,796)
===================== ==================== ================= ================
Net loss per share, basic
and diluted ($0.73) ($1.44)
===================== ================
Weighted average shares
outstanding 18,864 20,630 F
===================== ================
- 30 -
MARTEK BIOSCIENCES CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2002
(in thousands, except per share data)
Pro Forma
Martek Biosciences Adjustments Pro Forma
Corporation OmegaTech, Inc. (See Note 2) Consolidated
Revenues $17,393 $2,807 $20,200
Costs and expenses:
Cost of revenues 12,469 2,106 14,575
Research and
development 6,233 1,842 8,075
Acquired in-process
research and 15,788 (15,788) C ---
development
Selling, general and
administrative 4,191 6,285 (1,378) D 9,098
Other operating expenses 96 --- --- 96
--------------------- -------------------- ----------------- -----------------
Total costs and expenses 38,777 10,233 (17,166) 31,844
Income (loss) from
operations (21,384) (7,426) 17,166 (11,644)
Other income (expense),
net 520 (2,629) 2,629 E 520
--------------------- -------------------- ----------------- -----------------
Net income (loss) (20,864) (10,055) 19,795 (11,124)
===================== ==================== ================= =================
Net loss per share, basic
and diluted ($1.01) ($0.50)
===================== =================
Weighted average shares
outstanding 20,708 22,420 F
===================== =================
- 31 -
MARTEK BIOSCIENCES CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The pro forma adjustments
are based on estimates, available information and certain assumptions and may be
revised, as additional information becomes available. The pro forma financial
information does not necessarily represent what the Company’s financial
position or results of operations would actually have been if such transactions
in fact had occurred on those dates or the results of operations for any future
period. These pro forma financial statements for both periods presented exclude the one time
charge of $15.8 million for in-process research and development related to the
Merger. The unaudited pro forma condensed consolidated financial statements should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the
audited and unaudited financial statements and notes incorporated by reference from Martek's 2001 Annual Report
of Form 10-K and Martek's Quarterly Report on Form 10-Q for the quarter ended April 30, 2002 into this Form 8-K/A.
The unaudited pro forma
condensed consolidated statement of operations for the year ended October 31,
2001 gives effect to the acquisition of OmegaTech as if the transaction had
occurred on November 1, 2000. The unaudited pro forma condensed consolidated
statement of operations includes the audited results of the Company for the year
ended October 31, 2001 with the audited results of Omegatech for the year ended
December 31, 2001. The unaudited pro forma condensed consolidated statement of
operations for the six months ended April 30, 2002 gives effect to the
acquisition of OmegaTech as if the transaction had occurred on November 1, 2001.
The unaudited pro forma condensed consolidated statement of operations includes
the results of the Company for the six months ended April 30, 2002 with the
results of Omegatech for the six months ended March 31, 2002. The unaudited pro
forma condensed consolidated balance sheet as of April 30, 2002 is not included
herein because the acquisition of Omegatech occurred on April 25, 2002 and is
therefore included Martek’s consolidated balance sheet included in
Martek’s Quarterly Report on Form 10-Q for the quarter ended April 30,
2002. The related audited historical financial statements of OmegaTech as of and
for the years ended December 31, 2001 and 2000 are included elsewhere herein and
should be read in conjunction with these unaudited pro forma condensed
consolidated financial statements.
2. PRO FORMA ADJUSTMENTS
(A) Consists of the following adjustments:
- $1,052,000 to record the net additional amortization expense as a result of the allocation of purchase price
to identifiable intangible assets
- ($441,000) to eliminate costs associated with OmegaTech’s settlement of a
third party license agreement that was accounted for by the Company as part of
the purchase price consideration
- ($124,000) to give effect to reduced depreciation expense as a result of fair market value adjustments to
OmegaTech machinery and equipment
- ($656,000) to reduce
labor costs for personnel restructuring implemented upon consumation of the
Merger
- ($214,000) to eliminate stock-based compensation for OmegaTech
consultant options and options granted to OmegaTech employees at below fair market
value. These options were converted to Martek options upon consummation
of the Merger
- 31 -
(B)
Consists of $56,000 to eliminate interest expense on an OmegaTech debt which was
paid off upon consummation of the Merger
(C)
To eliminate the portion of the OmegaTech purchase price that was allocated to
in-process research and development and expensed as a one-time charge by Martek
in the quarter ended April 30, 2002
(D) Consists of the following adjustments:
- $518,000 to record the net additional amortization expense as a result of the allocation of purchase price
to identifiable intangible assets
- ($823,000) to eliminate acquisition related fees and expenses
- ($334,000) to eliminate costs associated with OmegaTech’s settlement of a
third party license agreement that was accounted for by the Company as part of
the purchase price consideration
- ($65,000) to give effect to reduced depreciation expense as a result of fair market value adjustments to
OmegaTech machinery and equipment
- ($292,000) to reduce
labor costs for personnel restructuring implemented upon consumation of the
Merger
- ($382,000) to eliminate stock-based compensation for OmegaTech
consultant options and options granted to OmegaTech employees at below fair market value. These options were converted to Martek options upon consummation
of the Merger
(E) Consists of the following adjustments:
- $2,448,000 to eliminate interest expense related to the issuance of warrants in
an OmegaTech bridge financing in January 2002 which was paid off upon
consummation of the Merger
- $181,000 to eliminate interest expense on an OmegaTech debt which was paid off upon consummation of the
Merger
(F) Pro forma weighted average shares include approximately 1,766,000 shares assumed
outstanding for the six-month period ended April 30, 2002 and for the year ended October 31, 2001 in
connection with the pro forma completion of the merger on November 1, 2001 and
November 1, 2000, respectively. Stock options and warrants outstanding have been
excluded from the calculation because their effect is anti-dilutive.
- 32 -
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.
| |
MARTEK BIOSCIENCES CORPORATION
(Registrant) |
- 33 -
