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Securities and Exchange Commission
Washington DC 20549
Form 10-KSB
Annual Report under Section 13 of the
Securities Exchange Act of 1934
For the Year Ended June 30, 1998 Commission File No. 1-14004
Xenometrix, Inc.
2425 N. 55th Street
Boulder, Colorado 80301
Incorporated in Delaware IRS ID # 04-3166089
Telephone: (303) 447-1773
Securities registered under Section 12(g) of the Act:
Common Stock; $0.001 par value
Warrants to purchase Common Stock
Xenometrix, Inc. (Xenometrix or the Company) has filed all reports under Section
13 of the Securities Exchange Act of 1934 during the preceding 12 months, and
has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-B will be
contained in the definitive proxy statement incorporated by reference in Part
III of this Form 10-KSB.
Xenometrix' revenue for the year ended June 30, 1998 was $1,886,000.
The aggregate market value of Xenometrix' voting stock held as of September 11,
1998 by nonaffiliates was $342,000.
2,948,135 shares of Common Stock were outstanding on September 11, 1998.
Transitional small business disclosure format. Yes No X
---- ---
Incorporated by reference in Part III of this Report is the information
contained in the Xenometrix Proxy Statement for the annual meeting of
stockholders proposed to be held November 18, 1998, which will be filed with the
Securities and Exchange Commission within 120 days after June 30, 1998.
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, this Report contains
forward-looking statements that involve risks and uncertainties. Xenometrix'
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Business," "Risk Factors," and "Management's Discussion and
Analysis of Financial Condition and Result of Operations" in this Report and the
documents incorporated herein by reference. For definitions of certain terms
used in this Report, see "Glossary".
GENERAL
Xenometrix, Inc. (the "Company" or "Xenometrix") is a biotechnology company
with a proprietary gene profiling system that measures the expression of genes
when they are exposed to selected compounds. The Company develops, manufactures
and sells a line of assays which test the genetic response of human, bacterial
and yeast cells when exposed to various compounds, along with proprietary
software for reporting and analyzing the test results. Xenometrix also offers a
contract laboratory service which allows the customer to send its compounds to
Xenometrix for testing and evaluation.
Recently the Company has put considerable effort into the licensing of its
intellectual property. In November 1997, the Company was granted a European
patent claiming methods and kits for generating gene profiles resulting from
exposure of eukaryotic cells, (including human, animal and yeast cells) to
compounds. On September 22, 1998, the Company was issued a U.S. patent covering
similar subject matter. In January 1998, the Company was granted a European
patent claiming methods and kits for generating gene profiles resulting from the
exposure of prokaryotic cells (including bacterial cells) to compounds.
Xenometrix shares ownership of the patents with Harvard University, and has an
exclusive world-wide license to Harvard's portion of the intellectual property.
From February through September 1998, the Company has entered into one option
agreement and three non-exclusive license agreements related to these and other
patents. During the fiscal year ended June 30, 1998 approximately two-thirds of
the Company's total annual revenue was generated by the option and license
agreements related to the patents. As of September 25, 1998, the Company was
delinquent on its reporting and payment obligations to Harvard. See Management's
Discussion and Analysis--Risk Factors--Risk of Default on License Agreement.
In order to conserve resources, the Company restructured its operations in
February 1998, resulting in the elimination of twenty positions, or
approximately two-thirds of the Company's workforce. As of September 22, 1998,
the Company had nine employees. Of these, five are engaged in research,
scientific and technical activities, and the remainder in business development,
licensing, finance and general administration.
At September 22, 1998, the Company had cash of approximately $100,000. The
Company estimates that this cash together with projected collections on accounts
receivable from customers will be sufficient to meet its operating needs through
approximately October 25, 1998. In the event that the Company cannot raise
additional capital or generate additional revenue from other sources by that
date, it will evaluate other options including, but not limited to further
curtailing or suspending its operations.
In order to fund its operations, the Company has borrowed $1,500,000 under
a short-term bridge financing line of credit. The due date on the Senior
promissory notes (the "Notes") issued under the line of credit has been extended
several times, most recently until October 25, 1998. At that time, the
$1,500,000 principal balance on the Notes, plus approximately $177,500 of
accrued and unpaid interest will be due and payable. The Company
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Xenometrix(TM), Gene Profile AssayTM, Ames II(TM), and Yeast Del(TM) are
trademarks of Xenometrix, Inc. Windows(R) is a registered trademark of Microsoft
Corporation.
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does not expect to have sufficient cash resources to satisfy this obligation on
October 25, 1998. Accordingly, it plans to attempt to negotiate a further
extension of the due date on the Notes. There can be no assurance that this
extension of the due date will be granted by the Note holders. In the event such
extension cannot be obtained, the interest rate on the Note will increase to
18%, the Company's assets are subject to foreclosure and the Note holders will
have the right to appoint a majority of the Board of Directors of the Company.
The first of the Company's two current core technologies, the Gene Profile
Assays, (formerly known as Stress Gene Assays) represents a low-cost method for
identifying the specific molecular mechanisms underlying the cellular response
to exposure to a particular compound. In February 1998, the Company ceased the
shipment of Gene Profile Assays containing human cells to its customers. These
products are currently offered only through the Company's Client Research
Laboratory. The Company's second core technology, the Genotoxicity Assays,
assesses the carcinogenic potential of a compound by measuring damage to DNA.
Together these two assay systems provide information about what is occurring at
the molecular level when a living cell is exposed to a compound, including, but
not limited to, activation of receptors and signaling pathways, changes in cell
metabolism, damage to cellular components, cell death, tumorigenesis,
teratogenesis, irritation and other reactions. Xenometrix has developed a
proprietary software system for reporting and analyzing the results of its
assays. This software has been evaluated to assure compliance with "Year 2000"
issues.
The Company has developed a small bioinformatics database consisting of the
gene induction profiles of approved pharmaceutical products and other classes of
compounds. The Company believes that a larger, expanded bioinformatics database
would enhance the utility of all of its existing products, and might provide an
additional revenue source. Proprietary software developed by Xenometrix as well
as the search engines used in the database have been evaluated to assure
compliance with "Year 2000" issues.
Numerous public sources estimate that approximately $19 billion is spent
annually on all phases of pharmaceutical research and development, with over $9
billion being spent on drug discovery and pre-clinical development efforts.
Xenometrix believes that its products and services can add value to drug
discovery and pre-clinical research efforts by providing important efficacy and
safety data with regard to a compound's potential therapeutic effects and
toxicity in a unique and cost effective manner.
MARKETS AND INDUSTRY BACKGROUND
The Company began operations in 1992 to serve the toxicology and drug
safety markets with a line of assays designed to analyze the genetic response of
cells when exposed to various compounds. While Xenometrix continues to provide
products and services to the toxicology market, the Company believes that much
larger and nearer-term opportunities lie in using its proprietary technology to
assist pharmaceutical companies in selecting and optimizing potential
therapeutic agents. The Company adopted this strategy in early 1997 in
recognition of the potential for using cell-based gene expression assays to
assist pharmaceutical companies with the identification and optimization of lead
compounds and also in response to several of the Company's customers who have
incorporated Xenometrix's products and services into their drug discovery
programs.
The Drug Discovery Process. The discovery and development of drugs has
traditionally been a lengthy, expensive, inefficient and often unsuccessful
process, typically taking 12 to 15 years from the inception of a research
program until the market introduction of a drug. Costs are estimated to be
approximately $350 million to $500 million for development from concept through
FDA marketing clearance, with only a small fraction of those compounds that
enter pre-clinical testing actually receiving FDA marketing approval.
Of the estimated $19 billion that will be spent on pharmaceutical research
and development in 1998, approximately half of this amount will fund drug
discovery and pre-clinical development efforts. Lower profit margins, shorter
product lives, the proliferation of generic drugs, managed care and cost
containment initiatives, together with scientific and technological advances,
have created powerful incentives for drug developers to discover drugs more
quickly and cost effectively. Xenometrix believes that its products, services
and intellectual property can add
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value to drug discovery and pre-clinical research efforts by providing important
efficacy and safety data with regard to a chemical compound's potential
therapeutic effects and toxicity in a unique and cost effective manner.
Drug discovery involves three key elements: (i) the target, such as a gene,
enzyme, receptor or other protein, which is associated with a disease and on
which the drug will act, (ii) potential drug compounds, and (iii) the assays or
tests used to screen compounds to determine their effect upon the target. Drug
discovery methods generally involve the synthesis and testing of large numbers
of compounds in assays which contain targets designed to mimic aspects of a
disease process. Assays are used to identify those chemicals that physically
interact with the target, which are referred to as "hits." Hits are subjected to
additional rounds of screening for specificity, potency and other desirable
characteristics to identify lead compounds. Typically, lead compounds become the
basis for additional synthesis programs creating hundreds or thousands of
analogs which are then further screened, a process typically referred to as
"lead optimization." The lead optimization process generates drug development
candidates that will be moved into FDA-mandated pre-clinical safety testing.
Drug development candidates are lead compounds that in laboratory studies have
demonstrated the most promising combination of desirable characteristics such as
pharmacological activity, potency, selectivity, lack of toxicity and economic
feasibility.
The following diagram illustrates the steps in the drug discovery process.
The Company believes that its assays may be used throughout the lead
optimization and safety screening portions of the process, assisting drug
developers to both (i) develop "hits" into lead compounds and (ii) optimize lead
compounds into drug development candidates.
DRUG DISCOVERY PROCESS
[CHART]
Targets. Targets are specific biological molecules, such as genes,
receptors or other proteins, which are believed to play a role in the onset or
progression of a disease or medical condition. Most drugs work by binding to a
target and affecting the target's biological function or activity. Thus, most
drugs are discovered by identifying compounds that affect an established
target's biological function. Recent developments in molecular biology and
genomics have led to a dramatic increase in the number of potential therapeutic
targets available for drug discovery.
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Potential Drug Compounds. Traditionally, chemists synthesized new compounds
one at a time or isolated them from natural sources. Over the years, chemists in
pharmaceutical firms built up collections of hundreds or thousands of compounds,
or "libraries". In recent years, however, combinatorial chemistry techniques
have been developed which have greatly increased the number and diversity of
potential drug compounds. Some firms have used these techniques to quickly
create libraries of hundreds of thousands of molecules which are available to be
tested against both established and novel targets in order to determine which
compounds may become lead compounds or drug development candidates.
Screening. After a target has been selected by a drug researcher, the next
step in traditional drug discovery is to identify one or more chemical compounds
that have an effect on the target. These compounds are typically identified by
the sequential synthesis and testing of large numbers of compounds against the
target through the use of screens, such as a receptor binding assay. If primary
screening, such as the use of a receptor binding assay, indicates that a
compound binds with the target, the compound is then considered a hit. While
receptor binding assay screens will indicate whether a particular compound has
physically interacted with the target, such assays provide no additional
information about the biological impact that the binding event had on the
target. After re-testing confirms initial hits, secondary screening identifies
which hits have the properties of a lead compound meriting further development
efforts. Secondary screening evaluates numerous characteristics, including
efficacy (the degree to which a compound produces the desired therapeutic
effect), potency (the amount of the compound required to exert its effect) and
specificity (the degree to which the compound does not affect unintended
targets).
Historically, screening was a manual process in which it was generally
possible to test only limited numbers of compounds per day. Even though numerous
distinct chemical structures exist, it has not been unusual for traditional
screening to be terminated after several years with no lead compounds identified
after examining only a small portion of available compounds. Today,
pharmaceutical and biotechnology companies with advanced drug discovery programs
use semi-automated or robotic high throughput screening systems that can process
thousands of compounds per day, resulting in a greater number of hits.
Lead Optimization. After initial and secondary screening of hits has
identified a lead compound, drug researchers will next "optimize" the lead
compound by the sequential synthesis and testing of variations, or analogs, of a
lead compound to identify promising drug development candidates. After the
numerous chemical analogs of a lead compound have been synthesized, scientists
then rely upon various types of laboratory tests, including additional receptor
binding assays, cell based assays and in vivo testing, to determine whether a
lead compound exhibits the characteristics of a drug development candidate.
The Growing Drug Development Backlog. Drug discovery researchers have
recently begun to apply a number of modern technologies to the early stages of
the drug discovery and development process. Genomics has lead to the
identification of additional targets; automated high throughput screening has
allowed scientists to test significantly larger numbers of chemical compounds
and to generate numerous hits; and combinatorial chemistry has allowed
scientists to develop more compounds for initial screening as well as to much
more quickly synthesize the large number of chemical analogs used for lead
optimization.
The methods used for secondary screening of hits and optimization of lead
compounds have not kept pace with the new technologies being employed in other
stages of the drug discovery process. Traditional methods, such as in vivo
testing, have historically been too slow and expensive to be incorporated into
higher volume development methods. As a result, there is a growing backlog of
hits and lead compounds awaiting further evaluation. The Company believes that
drug researchers are looking for alternatives to traditional testing techniques
in order to more quickly and cost effectively evaluate which compounds should be
advanced further through the drug development process.
Receptor binding assays consist of a target which is isolated from its
natural cellular environment. If enough of the target can be isolated, such
assays can be relatively simple to develop and perform. The artificial
environment of such assays, however, has limited their usefulness in furthering
the development process after initial hits have been identified. For example, in
a cellular environment a receptor may be woven throughout the external surface
of a cell while in a receptor binding assay the receptor is completely removed
from the cell. This differen-
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tiation can mean that a compound that has one effect in a receptor binding assay
can result in a significantly different interaction with the target in its
natural cellular environment. Also, many receptors and cellular compounds cannot
be isolated for use in receptor binding assays.
Cellular assays bridge the gap between receptor binding assays and
traditional in vivo pre-clinical methods of testing because they employ whole
cells in an attempt to more closely mirror the environment within which a
chemical compound must interact. These cellular assays allow scientists to
determine whether a particular compound binds with the receptor in the cell. By
more closely replicating the physiological environment and the complex
interactions that take place within a cell, such cell-based assays provide a
number of advantages, including in many cases greater predictive value of
therapeutic effect and potential toxicity.
Currently, simple cell based assays are subject to a number of limitations
which prevent them from solving the development backlog of drug discovery
companies. Cell based assays have typically been difficult and time consuming to
develop and perform due to the challenge of detecting the function of a target
in a cell. The complexity of cellular assays has prevented their adaptation to
high throughput screening applications which would be necessary for them to be
used to test the thousands of compounds being generated by new drug discovery
techniques. Some cell based assays use cells which are less complex than human
cells in an attempt to create a more usable assay. However, these simple cell
based assays are limited because they fail to mirror the complexity of a human
cellular environment.
Xenometrix's Role in Drug Discovery and Lead Optimization. Xenometrix's
assays and technology platform permit the measurement of the activity of
batteries of genes, or targets, in both human and bacterial cells in an
environment which more closely approximates the physiology of a living organism.
The Company believes that the use of multiple genes in an assay covering a broad
range of cellular responses provides information that is more useful than the
information relating to a single cellular response yielded by simple cell-based
assay. This information can be used as a cost-effective means of prioritizing
which of the positive hits from initial screening has the highest probability of
subsequent success, based on their safety and efficacy profiles. In addition,
the Company believes that its assays can be readily modified to facilitate
automated high throughput screening. The Company has historically applied this
technology to the toxicology and safety market. The genes monitored in the
Company's current product line include both safety and efficacy markers.
Xenometrix has been involved in the characterization, licensing and
commercialization of genes and gene constructs in cells for over five years. The
study of gene expression as an indicator of cellular response to a compound is
relatively new and the Company believes that it has significant know-how
relative to other companies entering this emerging area. Individual testing of
compounds and the analysis of the gene expression they cause in a cellular
environment is difficult because it involves purchases from multiple suppliers,
integration of varying assay designs into a single system and complex quality
control issues. The Company believes its technology platform significantly
reduces these problems.
TECHNOLOGY, PRODUCTS AND SERVICES
The first of the Company's two cell based assay systems, Gene Profile
Assays, represents a cost-effective method of identifying the specific molecular
mechanisms underlying the cellular response to exposure to a particular
compound. The Company's other cell based assay system, Genotoxicity Assays,
assesses the carcinogenic potential of a chemical entity by measuring damage to
DNA.
Gene Profile Assays. The Company's Gene Profile Assays measure the
activation of various bacterial and mammalian genes in response to exposure to a
test compound. The genes monitored respond to tested compounds, with potential
results indicating, among other things, information about the metabolic pathway
of the biological response within a cell, whether the compound is an agonist or
an antagonist, the potential toxicity of the compound, and the potential for the
liver to metabolize the drug before it reaches its therapeutic target. In
February 1998, the Company stopped the shipment of Gene Profile Assay kits
containing human cells to its customers. These products are currently offered
only through the Company's Client Research Laboratory. Gene Profile Assay
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kits containing bacterial cells, as well as all genotoxicity assay kits,
continue to be offered for shipment to customer locations in the United States
and overseas, as well as being offered through the Client Research Laboratory.
The Company's Gene Profile Assays are not yet adapted for automated high
throughput screening. As part of the Company's collaborative agreement with OSI
Pharmaceuticals, Inc. ("OSIP"), the Company has access to certain technology and
know-how which will assist efforts to automate its Gene Profile Assays.
Genotoxicity Assays. The Company's Genotoxicity Assays, consist of the Ames
II family of assays, which assess the mutagenic and carcinogenic potential of a
compound by measuring specific types of damage to DNA, and the Yeast Del assay
which may identify non-mutagenic carcinogens. These assays are largely used in
safety assessment, and are offered by Xenometrix for shipment to customers as
well as through the Client Research Laboratory. Xenometrix is the only company
offering the Ames II family of assays. The Company believes the Ames II assay
offers both scientific and commercial advantages over the widely-accepted
original Ames assay. These advantages include automation which allows
significantly more compounds to be tested, and new bacterial strains which
provide more specific information about the mutations created by the compound.
Software. Xenometrix has developed software to facilitate performing its
assays and analyzing and interpreting the results. The software used with gene
profile assays records the results for a compound by reporting data regarding
the compound's gene induction profile from each assay and presents a graphical
illustration producing a unique fingerprint of each compound's molecular
response in the assays. The gene profile for a given assay can then be compared
to profiles of well known compounds (derived from in vitro and in vivo test
data) to assess a compound's relative activity and its impact on gene activity.
The software used with the Ames II assays provides a statistical analysis of the
test results.
Client Research Laboratory. The Company has established a fully equipped
laboratory at its Boulder, Colorado facility, to serve the needs of clients
wishing to obtain assay data without investing in training or capital equipment.
Xenometrix's scientists receive compounds, perform requested assays in the
required time periods, and deliver the test results in the form of a detailed
report to the client. This service introduces new customers to the Company's
assay systems, helping them to understand and adopt the technology.
Bioinformatics Database. The Company has developed a small bioinformatics
database consisting the gene induction profiles of approved pharmaceutical
products and other classes of compounds. Comparing the gene induction profile of
a new compound being tested to those in the database may facilitate improved
evaluation and decision-making for pharmaceutical products in the development
stage. Resource constraints have prohibited the Company from performing the work
necessary to expand the size of the bioinformatics database. The Company
believes that a larger, expanded bioinformatics database would enhance the
utility of all of its existing products, and might provide an additional revenue
source.
Potential Expansion of Current Products and Services. In order to expand
its product offering and increase the usefulness of the Company's current
products to drug discovery and development customers, Xenometrix believes the
following changes to its product line are desirable:
o Automation. The Company believes that its Gene Profile Assays can
be modified to allow high throughput screening, facilitating
efficient testing of a larger number of compounds. The
technologies accessed by the Company as part of the OSIP
collaborative agreement can be used to facilitate the automation
of the Company's Gene Profile Assays.
o Addition of gene endpoints. The Company believes that the use of
existing and new industry and academic contacts, as well as
in-licensing of patented gene sequences, to add genes to its
assays would be of particular interest to drug discovery and
development customers.
o Additional cell lines. Xenometrix believes that the addition of
new cell lines to its assays would increase their usefulness to
drug discovery and development customers by allowing customers to
use the types of cells which are likely to be the target of drug
development efforts.
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o Messenger RNA Isolation. In January 1998 the Company announced
that it planned to offer exposure-related messenger RNA ("mRNA")
isolation services to pharmaceutical and biopharmaceutical
companies engaged in drug discovery and development. The
Company's researchers have performed preliminary feasibility
studies on methods and procedures to expose cells to large
numbers of compounds and for the subsequent isolation of high
quality mRNA in large volumes.
Due to severe resource limitations, the Company has been unable to invest
the funds necessary to expand its product line or to incorporate some of the
enhancements outlined above which the Company believes would increase the
utility of its products and services to its customers.
BUSINESS DEVELOPMENT & LICENSING
Xenometrix's business development department is primarily responsible for
the licensing of the Company's intellectual property. In November 1997, the
Company was granted a European patent claiming methods and kits for generating
gene profiles resulting from exposure of eukaryotic cells, (including human,
animal and yeast cells) to compounds. On September 22, 1998, the Company was
issued a U.S. patent covering similar subject matter. In January 1998, the
Company was granted a European patent claiming methods and kits for generating
gene profiles resulting from the exposure of prokaryotic cells (including
bacterial cells) to compounds. Xenometrix shares ownership of the patents with
Harvard University, and has an exclusive world-wide license to Harvard's portion
of the intellectual property.
From February through September 1998, the Company has entered into one
option agreement and three non-exclusive license agreements related to these and
other patents. The option agreement granted to one company a limited period
during which they could negotiate with Xenometrix for an exclusive license in a
particular field of use. The Company and the optionee were unable to agree upon
terms for the exclusive license, and the option expired with no further
obligation on the part of the Company. The three license agreements entered into
by the Company are broad, non-exclusive licenses to the patents and other
technology owned by the Company. These agreements generally provide for up-front
payments for licensing fees, royalty payments on future product sales which
utilize the technology covered by the patents and minimum annual royalties
payable to Xenometrix. From February through September 1998, the Company
received $1,375,000 in option payments and up-front licensing payments related
to these agreements, with an additional $150,000 due during the period from
January 1999 through January 2000. As of September 25, 1998, the Company has
paid $38,500 to the holders of the Notes, pursuant to the terms of the most
recent extension of the due date (see Note 5 to the financial statements
included in this Report).
In addition to the licensing of its patents, Xenometrix is seeking to use
its intellectual property to facilitate entry into broad strategic relationships
with pharmaceutical and biotechnology companies. The Company believes that these
relationships may allow the Company to gain access to additional technologies
that would enhance the Company's assays to better serve the drug development
market, or may enable the Company to enter into collaborative arrangements with
other companies to screen large numbers of compounds using the Company's assays.
The Company believes that by developing strategic relationships it will be able
to more quickly broaden its current line of products and services and more
effectively penetrate the drug discovery and development market.
On June 27, 1997, the Company entered into an agreement with OSIP, a
leading high throughput screening and drug discovery company with development
programs targeting major human diseases independently and in co-ventures with
major pharmaceutical companies. The agreement includes the cross-licensing of
certain intellectual property rights. Pursuant to the agreement, the Company
granted OSIP a world-wide, non-exclusive license to use the Company's Gene
Profile technology in conjunction with cell-based reporter-promoter constructs.
In return, OSIP granted the Company a world-wide, non-exclusive license to
OSIP's proprietary technology for measuring gene activation using reporter
constructs and access to technology used in high throughput screening
applications.
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SALES AND MARKETING
The Company's primary target market for the sale of its products and
services consists of large multi-national research-based pharmaceutical
companies as well as smaller biopharmaceutical and biotechnology companies. The
Company's business development department is primarily responsible for
maintaining and expanding business opportunities with existing customers and for
developing collaborative relationships with new customers. The Company sells its
products directly to pharmaceutical and biotechnology customers in the United
States. International distribution is handled through distributors in
Switzerland, France, Germany, Belgium, Japan and Korea.
In December 1997, Xenometrix entered into an exclusive distribution
agreement with Pace Analytical Services ("Pace"), to market and distribute the
Company's products and services in the Americas, to customers in the chemical,
environmental testing and other industries outside of life sciences. The
agreement requires Pace to meet certain minimum sales levels, which are
currently not being met. In the event that these sales levels are not met in the
future, the Company has the right to terminate this agreement in December 1998,
with no further obligation to Pace.
MANUFACTURING
Xenometrix manufactures and assembles its products at its facilities in
Boulder, Colorado. The assays consist of the Company's proprietary components
and components purchased from outside vendors. The Company's assays contain the
components required to perform a specific test in a reproducible and uniform
manner. Specific components typically include genetically engineered cells and
organisms, proprietary software, specialized chemical reagents, reference
manuals, other supplies and appropriate packaging. Xenometrix manufactures
assays in a production process subject to quality control procedures.
The Xenometrix manufacturing process involves growing cells in controlled
environment incubators, maintaining the cells under appropriate conditions and
preparing the cells for shipment. Bacteria- and yeast-based assays include
freeze-dried cells or frozen cells. Mammalian cell-based assays include live
human cells immersed in a growth medium. In February 1998, the Company stopped
the shipment of Gene Profile Assay kits containing human cells to its customers.
These products are currently offered only through the Company's Client Research
Laboratory. Gene Profile Assay kits containing bacterial cells and the Company's
genotoxicity assay kits, continue to be offered for shipment to customer
locations in the United States and overseas, as well as being offered through
the Client Research Laboratory
Apart from the genetically engineered cells and organisms developed and
manufactured by Xenometrix and the Company's proprietary software, all of the
components of the Company's assays are available from outside manufacturers.
Certain of these components are currently provided to Xenometrix from a single
source.
Xenometrix maintains inventories of certain components and raw materials at
what it believes to be prudent levels. Xenometrix believes that, if necessary,
it would be able to obtain alternative sources of supply of these components.
Any supply interruption, however, in a sole-sourced component or raw material
could have a material adverse effect on the Company's business when inventory is
depleted and until a new source of supply is qualified. See "Management's
Discussion and Analysis--Risk Factors--Manufacturing; Dependence on Outside
Suppliers."
RESEARCH AND DEVELOPMENT
R&D scientists provide support to the manufacturing, quality control and
client research laboratory functions. Additional R&D efforts are focused on the
following areas:
Collaborations with Customers. R&D personnel provide the technical support
for collaborations with major customers to assist them in their efforts to
validate Xenometrix's technology, resolve technical issues and incorporate the
Company's products into their pharmaceutical and chemical screening programs.
Continued Product Improvements. The Company's scientists continue to work
on projects to improve the performance of the Company's products. One such
project involves the development of a new cell lines utilizing luciferase
reporter constructs that are more amenable to automated high through-put
screening systems.
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Messenger RNA Isolation. In January 1998 the Company announced that it
planned to offer exposure-related messenger RNA ("mRNA") isolation services to
pharmaceutical and biopharmaceutical companies engaged in drug discovery and
development. The Company's researchers have performed preliminary feasibility
studies on methods and procedures to expose cells to large numbers of compounds,
and for the subsequent isolation of high quality mRNA in large volumes. Resource
constraints have precluded the Company from executing its plans to develop the
infrastructure needed to support this new venture and may continue in the
future.
COMPETITION
Competition in the drug discovery and development sector of the
biotechnology industry is intense. The Company believes that its assays may be
used throughout the secondary screening and lead optimization portions of the
drug discovery process. The Company, therefore, faces competition from firms
which are pursuing the same or similar technologies as those which constitute
the Company's technology platform, as well as from all other technologies or
processes that are or can be used by drug developers to develop "hits" into lead
compounds or to optimize lead compounds into drug development candidates. The
Company faces competition both from other firms which, like Xenometrix, are
developing drug discovery tools and services and from drug researchers using
their own proprietary drug discovery methods in house. As a result, the Company
faces competition from large pharmaceutical companies, biotechnology companies,
academic and research institutions and government agencies.
The Company's technology platform principally consists of using genetically
engineered cell based assays to measure gene expression. The Company also is
working to develop high throughput screening capabilities for its assays. A
number of pharmaceutical and biotechnology companies are active in the areas of
gene expression assays and high throughput screening. Such competitors include
Aurora Biosciences Corporation, Digital Gene Technology, Inc., Gene Logic, Inc.,
Cerep, S.A., Perkin-Elmer Corporation, Phase-1 Molecular Toxicology, Inc. and
OSIP. There may also be several private companies which are pursuing drug
discovery using gene transcription methods, which could be considered
competitors of the Company. In addition, the Company faces competition from
traditional methods used by drug researchers to identify and optimize lead
compounds, such as receptor binding assays, other in vitro assays and animal
testing.
There can be no assurance that pharmaceutical and biotechnology companies
which compete with the Company in specific areas will not merge or enter into
joint ventures or other alliances with one or more other such companies and
become more substantial competitors offering a broader platform of drug
discovery products and services. In addition, genomics, combinatorial chemistry
and primary screening firms, recognizing the growing bottleneck of compounds
awaiting evaluation and optimization, may also expand their businesses to
include secondary screening, optimization and assay development, either alone or
pursuant to alliances with others.
It is very common in the drug discovery industry for biotechnology firms to
have one or more significant corporate partners or collaborative arrangements.
An important part of the Company's strategy is to enter into such arrangements
with major pharmaceutical companies and other drug discovery firms. The Company,
therefore, competes for opportunities to enter into promising collaborative
arrangements with other biotechnology firms and also competes for the limited
funds which major pharmaceutical firms can commit to outsourced lead
identification and optimization activities.
The Company also competes with firms developing new or alternative methods
of drug discovery, such as rational drug design and DNA probe technology, which
may eliminate or significantly alter the market for identifying and optimizing
lead drug compounds. The Company's technological approaches may be rendered
obsolete or uneconomical by advances in existing technological approaches or the
development of different approaches by one or more of the Company's current or
future competitors.
Historically, pharmaceutical and biotechnology companies have maintained
close control over their research activities, including the synthesis, screening
and optimization of chemical compounds. Many of these companies, which represent
the greatest potential market for the Company's products and services, have
developed or are developing, at substantial cost, internal programs and
methodologies to approach drug discovery efforts. The Com-
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pany competes with the processes internally developed by pharmaceutical and
biotechnology companies, who must be convinced that Xenometrix's drug discovery
products and services justify outsourcing a portion of these activities to the
Company.
As a result of drug discovery industry characteristics, many companies that
could be customers or collaborators of Xenometrix may also be actual or
potential competitors, either alone or in combination with other firms. Many of
Xenometrix's actual or potential competitors have been addressing the drug
discovery market for a longer period of time than the Company, have already
established corporate partnering relationships and have significantly greater
financial and other resources than those available to the Company. There can be
no assurance that the Company will be able to develop products which are
competitive with those offered by existing or future competitors. See
"Management's Discussion and Analysis--Risk Factors--Competition".
PATENTS AND PROPRIETARY RIGHTS
The Company believes that patents and other proprietary rights are
important to the development of its business. During the past year , the
Company's efforts to license its intellectual property have generated the
majority of the Company's revenues. The Company also relies upon trade secrets,
know-how, continuing technological innovations and licensing opportunities to
develop and maintain its competitive position.
The Company's core technology relates to eukaryotic and bacterial gene
profiling assays and genotoxicity assays. This technology is comprised of
multiple patents and patent applications, some of which are owned directly by
Xenometrix and others exclusively licensed from Harvard University, the
University of California at Berkeley and other entities. The exclusive license
agreements cover five U.S. and five foreign patents that have been issued and
certain additional patent applications. In general, these license agreements (i)
provide for the payment of royalties on net sales of products covered by the
licensed technology, (ii) provide for the payment of royalties on sublicense
revenues received by Xenometrix (iii) provide for certain minimum royalties, and
(iv) terminate upon the expiration of the last to expire patent included in the
license. If the Company fails to meet its obligations under any such agreement,
including payment of royalties or minimum royalties, such agreements may be
terminated by the licensors. The Company is currently approximately thirty days
in arrears on the royalty payments and reports due under one of its license
agreements.
The Company has obtained an exclusive worldwide license to one issued U.S.
patent, two issued foreign patents and several patent applications that relate
to methods and kits for generating gene profiles by exposing eukaryotic cells
(including human, animal and yeast cells) to compounds and then determining
levels of expression of multiple genes in the cells.
The Company has obtained an exclusive worldwide license to two issued U.S.
patents, two issued foreign patents and several patent applications that relate
to methods and kits for generating gene profiles using bacterial promoters fused
to reporter genes.
The Company has also obtained a worldwide exclusive license to one issued
U.S. patent, one issued foreign patent and several patent applications for a
microbiological system for the detection and identification of mutagens. This
technology is a modification and improvement over the widely accepted Ames
assay.
In addition, the Company has an exclusive worldwide license under one
issued patent and an additional patent application covering a process for
detecting potential carcinogens by monitoring deletions in the yeast genome.
The Company's success will depend in part upon its ability to obtain patent
protection for its products, services and technologies, to continue to license
such intellectual property to others, and to operate without infringing the
proprietary rights of third parties. Patent law as it relates to inventions in
the biotechnology field is still evolving, and involves complex legal and
factual questions for which important legal principles are largely unresolved.
Accordingly, no predictions can be made regarding the breadth or enforceability
of claims issued or allowed in the patents that have been issued to the Company
or its licensors or in patents that may be issued to the Company or its
licensors in the future. Accordingly, no assurance can be given that the claims
in such patents, either as initially
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<PAGE> 12
allowed by the U.S. Patent and Trademark Office or any of its foreign
counterparts or as may be subsequently interpreted by courts inside or outside
the United States, will be sufficiently broad to protect the Company's
proprietary rights, will be commercially valuable, will provide competitive
advantages to the Company and its present or future collaborative partners or
licensees, or will not be challenged, narrowed, invalidated or circumvented.
Further, there can be no assurance that patents will be granted with respect to
any of the Company's or licensor's pending patent applications or with respect
to any patent applications filed by the Company in the future. Moreover, upon
allowance, patents in certain countries are published for opposition before
final grant. If the grant of any of the Company's or its licensor's patents is
opposed, there is no assurance that the Company will be successful in defending
against such opposition. The Company's European eukaryotic gene profiling patent
is currently under opposition in the European Patent Office. Resolution of the
opposition may not be reached for one to three years. In any event, such
opposition could result in substantial cost to the Company, whether or not the
result of such proceedings was favorable to the Company. There can be no
assurance that any of the Company's issued or licensed patents would ultimately
be held valid or that any efforts to defend any of its patents, trade secrets,
know-how or other intellectual property rights would be successful.
The drug discovery industry, including screening technology companies, has
become intensely competitive. This industry has a history of patent litigation
and will likely continue to have patent litigation concerning drug discovery
technologies. A number of pharmaceutical and biotechnology companies and
research and academic institutions have developed technologies, filed patent
applications or received patents on various technologies that may be related to
the Company's technology. Some of the technologies, applications or patents of
these entities may conflict with the Company's technologies, the patents and
patent applications licensed by the Company, or the Company's patent
applications. Moreover, because patent applications in the United States are
maintained in secrecy until patents issue, because patent applications in
certain other countries generally are not published until more than eighteen
months after they are filed and because publication of discoveries in scientific
or patent literature often lag behind the date of actual discoveries, the
Company cannot be certain that it or any of its licensors was the first creator
of inventions covered by pending patent applications or that it or any such
licensor was the first to file patent applications for such inventions. If an
issue regarding priority of inventions were to arise with respect to any of the
patents or patent applications of the Company or its licensors, the Company
might have to participate in one or more interference proceedings declared by
the U.S. Patent and Trademark Office or similar agencies in other countries to
determine priority of invention, which could result in substantial cost to the
Company, whether or not the result of such proceedings was favorable to the
Company.
In some cases, litigation or other proceedings may be necessary to defend
against or assert claims of infringement, to enforce patents issued to the
Company or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned by the Company, or to determine the scope and
validity of the proprietary rights of third parties. Such litigation could
result in substantial costs to and diversion of resources by the Company. An
adverse outcome in any such litigation or proceeding could subject the Company
to significant liabilities, require the Company to obtain alternative
non-infringing technology, require the Company to cease using the subject
technology or require the Company to license the subject technology from the
third party, all of which could have a material adverse effect upon the
Company's business, financial condition and results of operations. If any
licenses are required, there can be no assurance that the Company will be able
to obtain any such license on commercially reasonable terms, if at all, and if
these licenses are not obtained, the Company might be prevented from using
certain of its technologies. To the extent consistent with its business
objectives, the Company intends to resolve any such conflicts that develop
through negotiation or by entering into licensing arrangements regarding the
disputed technology. The Company's failure to obtain a license to any technology
that it may require to continue its efforts to develop drug discovery products
and services may have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is aware that patents have issued or may issue on certain
targets and gene endpoints and related technology or their use in screening
assays that could prevent the Company and its collaborators from developing
screening assays using such targets or endpoints, or relate to certain other
aspects of technology utilized or expected to be utilized by the Company.
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In addition to patent protection, Xenometrix also relies upon copyright,
trademark and trade secret protection for its confidential and proprietary
information. In an effort to maintain the confidentiality and ownership of trade
secrets and proprietary information, the Company requires employees and
consultants to execute confidentiality and invention assignment agreements upon
commencement of a relationship with the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's trade secrets or other confidential information or that adequate
remedies would exist in the event of such unauthorized use or disclosure. The
loss or exposure of trade secrets possessed by the Company could adversely
affect its business. Like many high technology companies, Xenometrix may from
time to time hire scientific personnel formerly employed by other companies
involved in one or more areas similar to the activities conducted by the
Company. Although the Company requires its employees to maintain the
confidentiality of all confidential information of previous employers, there can
be no assurance that the Company or these individuals will not be subjected to
allegations of trade secret misappropriation or other similar claims as a result
of their prior affiliations.
GOVERNMENT REGULATION
The Company's products and services have applications in the
pharmaceutical, biotechnology, chemical, cosmetic and environmental industries.
Those industries are subject to regulation pursuant to federal, state, local and
foreign legislation, including the Food, Drug and Cosmetic Act; the
Environmental Protection Act; the Occupational Safety and Health Act; and state,
local and foreign counterparts to such acts. Certain of these regulations
require the use of testing procedures in federally-mandated trial studies to
evaluate the efficacy and safety of products. The Company's products are
currently used to supplement established protocols for safety and efficacy
testing in the pharmaceutical, chemical, cosmetic and environmental industries.
The Company's products and services do not require FDA, EPA or other
regulatory approval before they can be used by Xenometrix customers. However,
Xenometrix is, or may become subject to, various other federal, state and local
laws, regulations and recommendations relating to safe working conditions, good
laboratory and manufacturing practices and the disposal of hazardous or
potentially hazardous substances.
EMPLOYEES
As of September 11, 1998, Xenometrix had 9 employees, all in the United
States. Of these, 5 are engaged in research, scientific and technical
activities, and the remainder are engaged in business development, licensing,
finance and general administration. The Company's success depends, in large
part, upon the continued services of its key scientific, technical and senior
management staff, and its continuing ability to attract and retain highly
qualified technical and managerial personnel. None of the Company's employees is
represented by a labor union and Xenometrix has not experienced any work
stoppages. Xenometrix considers its relations with its employees to be good.
IMPACT OF YEAR 2000 ISSUES
The Year 2000 issue is related to computer software utilizing two digits
rather than four to define the appropriate year. As a result, any of the
Company's computer programs or any of the Company's suppliers or vendors that
have date sensitive software may incur system failures or generate incorrect
data if "00" is recognized as 1900 rather than 2000.
The Company has evaluated the proprietary software used to facilitate
performing, analyzing and interpreting the results of its assays, and the
proprietary software used in conjunction with its bioinformatics data base, and
found them to appropriately address the date issues associated with the year
2000. The Company believes that all dates in its proprietary software are stored
with either a minimum of four digits for the year or as a text string, thereby
preventing inappropriate sequencing of date sensitive information. While the
Company believes that its proprietary software will not produce any material
problems, erroneous calculations or degradation of performance as a result of
Year 2000 issues, users are advised that the Company's software must be run on
Year 2000 compliant platforms.
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The Company plans to verify whether its major suppliers, service providers
and financial institutions are year 2000 compliant, however there can be no
assurance that the systems and networks of its key suppliers and customers will
not be affected by Year 2000 issues, which could have an adverse effect on the
Company's business, operating results and financial condition. The Company
believes, based upon the evaluations performed upon its proprietary software and
the claims of Year 2000 compliance made by the providers of non-proprietary
software used by the Company, that the impact of Year 2000 will not be material.
However, to the extent the Company or third parties upon which it relies do not
timely achieve Year 2000 readiness, the Company's results of operations may be
adversely affected.
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GLOSSARY OF TERMS
Agonist - A chemical which interacts with a receptor and initiates a
cellular reaction.
Analog - A structural derivative of a parent compound which often varies
from it by a single element.
Antagonist - A chemical that negates the effect of an agonist.
Assay - An analysis of (or analytical process designed to examine) the
composition, characteristics or strengths of a substance.
Bioinformatics - The science of storing, managing and analyzing biologically
related data with the aim of understanding causes of disease, the mechanisms of
action of chemical entities, and the development of therapeutic drugs, or
pharmacologically active substances.
Carcinogenic - Capable of causing or contributing to the incidence of
cancerous tumors (in humans or test organisms).
Cell Line - A population of animal cells derived from a single precursor,
having the characteristic of continuous growth under appropriate conditions.
Such lines are often called "immortal" because of this continuous growth
capacity, and may be infected with a virus, or contain foreign genes which
confer this capacity.
Cellular - Pertaining to the cell, the plant or animal structure containing
genetic material. The basic unit of all organisms.
Chromosome - Structure of double-stranded DNA; chromosomes are made up of
genes and carry genetic information in cells.
Client Research Laboratory - Xenometrix's service laboratory, which performs
assays and contract research for the Company's clients.
Combinatorial Chemistry - Typically, the application of robotics and
systematic changes in chemical structures to produce quickly and inexpensively
large numbers, often tens of thousands, of distinct compounds that can be tested
for biological activity.
DNA - Deoxyribonucleic acid; the chemical building block of genes and
chromosomes; a double helix sequence of nucleotide base pairs which encode
genetic information.
Endpoint - A specific measurement determined to reflect a quantitative or
qualitative change. Examples of endpoints in pharmacology include degree of
tumor growth suppression, degree of inflammation, and level of gene expression.
Eukaryotic - Cells in which DNA is organized into chromosomes contained
within a distinct cellular compartment, and in which division occurs through
replication and distribution of these chromosomes. Such cells include human,
mammalian, animal, plant and yeast cells.
Gene - The fundamental physical unit of heredity. A linear series of
deoxyribonucleotides encoding a specific protein, protein part, or function.
Chromosomes are made up of genes.
Genome - The complete set of chromosomes and extra-chromosomal DNA coding
for cellular proteins which is contained within every cell of a given species.
Genomics - Science pertaining to the genome.
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Genotoxicity Assays - Assay systems designed to detect and quantify damage
caused to the genetic material (DNA) of a test organism.
Gene Profile Assays - Assay systems developed by Xenometrix to assess the
effects of compounds on cells by measuring the induction of specific genes in
these cells, by the compounds.
High Throughput Screening - A process whereby large numbers of unique
chemical entities are assessed for biological activity in a short period of
time. Activity screens include, but are not limited to, specific receptor
binding and enzyme activity. Chemicals of interest are commonly available in
only very small quantities, and may exist as part of a library arising from
combinatorial chemistry methodology.
Hit - The term applied to a compound that has shown biological activity when
tested against a specific screening endpoint (commonly receptor-binding).
In vitro - Outside of the living body, in an artificial environment,
literally, "in glass."
In vivo - In the living body of a plant or animal.
Induction - A measurable increase in the activity of a specific gene in
response to a change in the cellular environment or exposure to a compound.
Lead Compound - A specific chemical entity which has demonstrated a desired
biological activity in a drug development program.
Lead Optimization - The process of qualifying and modifying a lead compound
or "hit" as a viable drug candidate to be further developed.
Ligand - A molecule or compound capable of binding to a receptor.
Molecular - Pertaining to molecules. In this context it pertains to events
which occur at the level of biochemical reactions affecting microscopic and
submicroscopic processes.
MRNA - Messenger ribonucleic acid; a complimentary strand of RNA,
transcribed from a DNA template, which is ultimately translated into a protein
by the cell.
Mutagenicity - The degree to which an agent is capable of causing a genetic
mutation, which is a change in the linear sequence of the nucleotide bases
constituting DNA.
Prokaryotic - Unicellular organisms which do not contain distinct cellular
compartments. These cells contain DNA which is usually organized onto a single
circular chromosome. Cell division is usually by fission or budding. Such cells
include bacteria and blue-green algae.
Protein - Molecules composed of amino acids, responsible (as enzymes) for
many of the cell's biological reactions, and signaling events.
Receptor - A molecule on or within a cell membrane to which a substance,
such as an agonist or ligand binds.
RNA - Ribonucleic acid. Contains information required for protein synthesis,
and is chemically related to DNA.
Toxicity - Disturbances in the biochemical or biophysical homeostasis of a
cell, which may have long-term or short-term harmful effects.
Toxicology - The study of toxic substances, their structures and properties,
and their effects on the various biochemical and genetic processes in living
plants and organisms.
Transcription - The synthesis of mRNA from a DNA template.
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ITEM 2
PROPERTY
The Company's executive offices, research laboratories, manufacturing
operations and ancillary operations are located in Boulder, Colorado in a 22,700
square foot facility. The facility is leased is for a six-year period ending
July 31, 2002, with two optional renewal periods of three years each.
PART II
ITEM 5
MARKET FOR COMMON STOCK
Xenometrix's Units were sold in the Company's initial public offering
("IPO") on October 23, 1995 for $6.75 per Unit. The Units began trading on the
NASDAQ SmallCap Market and the Boston Stock Exchange immediately. There was no
market for the Common Stock until the Units were split into the Common Stock and
the Warrants on April 15, 1996. The Common Stock traded on NASDAQ SmallCap
Market under the symbol XENO and on the Boston Stock Exchange under the symbol
XEN until January 1998 when it was delisted for failure to meet the financial
requirements for continued listing. The Common Stock currently trades on the OTC
Bulletin Board under the symbol XENO.
Reported bid prices for the Common Stock on the NASDAQ SmallCap Market
prior to the delisting and prices of actual trades on the OTC Bulletin Board
subsequent to the delisting are summarized below. The NASDAQ bid prices reflect
interdealer quotations, without retail markup, markdown or commission, and do
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Quarter Ended: High Low
-------------- ---- ---
<S> <C> <C>
June 30, 1996 $ 9.70 $ 8.00
September 30, 1996 10.50 9.38
December 31, 1996 10.50 8.75
March 31, 1997 9.00 7.50
June 30, 1997 8.63 3.25
September 30, 1997 3.75 2.50
December 31, 1997 2.88 1.00
March 31, 1998 1.81 0.16
June 30, 1998 1.02 0.25
</TABLE>
As of September 11, 1998 there were 136 holders of record of the Common
Stock.
Xenometrix expects that it will retain any available earnings generated by
its operations for the payment of debt obligations and the development and
growth of its business and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Any future determination as to dividend
policy will be made at the discretion of the Board of Directors of Xenometrix
and will depend on a number of factors, including the future earnings, capital
requirements, financial condition and business prospects of Xenometrix and other
factors.
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ITEM 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's audited Financial
Statements and Notes thereto appearing elsewhere in this Report. Except for the
historical information contained herein, this Report contains forward-looking
statements that involve risks and uncertainties. Xenometrix' actual results
could differ materially from those discussed in this Report. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in "Business" and "Risk Factors" in this Report and the documents
incorporated herein by reference.
OVERVIEW
Initially, the Company's efforts were focused upon commercializing its
technology in the field of molecular toxicology. Accordingly, the Company's
resources were directed primarily at the product safety and toxicology markets.
Customers include companies in the pharmaceutical, biotechnology, chemical,
consumer products and environmental industries who have a need to test and
assess the potential toxic effects of chemical compounds used in their products.
Xenometrix also sells its products and services to governmental agencies.
In 1997, the Company concluded that its proprietary gene profiles may
provide valuable information that can be used to help pharmaceutical researchers
optimize drug leads. The Company believes its technology can help pharmaceutical
companies evaluate and optimize the growing number of drug leads emerging from
genetic sequencing, combinatorial chemistry and high throughput screening. While
the Company has continued to serve the drug safety and toxicology market, it has
been focusing a significant portion of its effort and resources developing and
marketing its products and services to pharmaceutical companies for testing,
evaluation and optimization of their lead compounds. The Company believes that
its focus on this market will enable it to expand its business through
collaborative arrangements with potential customers and business partners. In
this regard, in April 1997, the Company centralized its sales and support
operations in Boulder, eliminated field sales positions and created an expanded
business development function, with responsibility for developing collaborative
arrangements with customers and others and, more recently, licensing the
Company's intellectual property.
Recently the Company has put considerable effort into the licensing of its
intellectual property. In November 1997, the Company was granted a European
patent claiming methods and kits for generating gene profiles resulting from
exposure of eukaryotic cells, (including human, animal and yeast cells) to
compounds. On September 22, 1998, the Company was issued a U.S. patent covering
similar subject matter. In January 1998, the Company was granted a European
patent claiming methods and kits for generating gene profiles resulting from the
exposure of prokaryotic cells (including bacterial cells) to compounds.
Xenometrix shares ownership of the patents with Harvard University, and has an
exclusive world-wide license to Harvard's portion of the intellectual property.
From February through September 1998, the Company has entered into one option
agreement and three non-exclusive license agreements related to these and other
patents. During the fiscal year ended June 30, 1998, Xenometrix recognized
$1,275,000 of revenue from option and license agreements related to the patents,
representing approximately two-thirds of the Company's total annual revenue. As
of September 25, 1998, the Company was delinquent on its reporting and payment
obligations to Harvard. See Management's Discussion and Analysis--Risk
Factors--Risk of Default on License Agreement.
In order to conserve resources, the Company restructured its operations in
February 1998, resulting in the elimination of twenty positions, or
approximately two-thirds of the Company's workforce. As of September 22, 1998,
the Company had nine employees. Of these, five are engaged in research,
scientific and technical activities, and the remainder in business development,
licensing, finance and general administration.
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The timing and amount of revenues from the licensing of intellectual
property and the sales of products and services to the drug discovery and
development market, as well as to the toxicology and product safety markets,
cannot be predicted with certainty. Similarly, the Company's ability to enter
into meaningful collaborative agreements with customers or other collaborators
and licensees cannot be predicted with a high degree of accuracy. Accordingly,
results of operations for any period may be unrelated to results of operations
for any other period and are likely to fluctuate sharply. In addition,
historical results should not be viewed as indicative of future operating
results.
At June 30, 1998, Xenometrix had an accumulated deficit of $16,698,000 and
has incurred losses subsequent to June 30, 1998. It also has significant future
cash requirements related to the repayment of the Notes, more fully described in
Note 5 of the financial statements included in this Report, and to the further
development of its research, product development and manufacturing operations.
At September 22, 1998, the Company had cash of approximately $100,000. The
Company estimates that this cash together with projected collections on accounts
receivable from customers will be sufficient to meet its operating needs through
approximately October 25, 1998. In the event that the Company cannot raise
additional capital or generate additional revenue from other sources by that
date, it will evaluate other options including, but not limited to further
curtailing or suspending its operations.
In order to fund its operations, the Company has borrowed $1,500,000 under
a short-term bridge financing line of credit. The due date on the "Notes" issued
under the line of credit has been extended several times, most recently until
October 25, 1998. At that time, the $1,500,000 principal balance on the Notes,
plus approximately $177,500 of accrued and unpaid interest will be due and
payable. The Company does not expect to have sufficient cash resources to
satisfy this obligation on October 25, 1998. Accordingly, it plans to attempt to
negotiate a further extension of the due date on the Notes. There can be no
assurance that this extension of the due date will be granted by the Note
holders. In the event such extension cannot be obtained, the interest rate on
the Note will increase to 18%, the Company's assets are subject to foreclosure
and the Note holders will have the right to appoint a majority of the Board of
Directors of the Company.
RESULTS OF OPERATIONS
Comparison of the Fiscal Years Ended June 30, 1998 and June 30, 1997
Revenue. For the fiscal year ended June 30, 1998, revenue increased 147% to
$1,886,000 from $764,000 reported in the prior year. The increase was
attributable to revenue from up-front licensing fees and option payments
relating to the Company's recently issued gene expression profiling patents in
the United States and Europe. Sales of products and service revenue from the
Company's client research laboratory declined 20% to $611,000, from $764,000
reported in the prior year, primarily due to a decline in the demand for
laboratory service work.
Gross Profit. For the fiscal year ended June 30, 1998, gross profit
increased to $1,259,000 from $79,000 reported in the prior year. The increase in
gross profit was due to the large portion of total revenue from licensing fees
and option payments. The cost of licensing revenue was $104,000, representing
royalties due to Harvard University under the Company's existing licensing
agreement. Gross profit margins on revenue from sales of products and services
were up approximately 1% in the current fiscal year, primarily due to reductions
in manufacturing personnel and other cost reduction initiatives implemented
during the year.
Research and Development Expenses (R&D). R&D expenses for the fiscal year
ended June 30, 1998 increased 8% to $1,150,000 from $1,067,000 reported in the
prior year. This increase was primarily attributable to higher personnel costs
in the R&D department, as well as increased research and product development
work performed by personnel in other departments. In the prior year, R&D
personnel performed contract research work for a customer on a fee for service
basis, and the costs associated with this work were allocated to cost of sales.
Selling, General and Administrative Expenses (SG&A). For the fiscal year
ended June 30, 1998, SG&A expenses were $1,833,000, down 40% from $3,058,000 in
the prior year. This decrease was primarily attributable to
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<PAGE> 20
the elimination of the field sales and marketing functions in the fourth quarter
of the prior fiscal year, lower finance, accounting and administrative costs
resulting from personnel reductions in the current fiscal year and lower Board
of Directors costs associated with reducing the size of the Board and replacing
cash compensation to Board members with increased stock option grants.
Interest Income (Expense), Net. During the fiscal year ended June 30, 1998,
the Company incurred net interest expense of $641,000 compared to net interest
income of $112,000 in the prior fiscal year. The net interest expense incurred
in the current fiscal year includes interest accrued on the $1,500,000 Notes at
the stated interest rate, the amortization of the values attributable to the
initial issuance and subsequent repricing of the warrants issued in conjunction
with the Notes and the amortization of deferred financing costs associated with
bridge financing line of credit. In the prior fiscal year, the Company's net
interest income resulted primarily from the investment of excess cash balances,
partially offset by interest expense incurred on the first borrowings under the
bridge financing line of credit.
Net Loss. For the fiscal year ended June 30, 1998, the net loss decreased
to $2,365,000 or $0.80 per share from the net loss of $2,842,000 or $0.97 per
share, reported for prior year. During the prior fiscal year, the Company
recognized a one-time gain of $1,028,000 from the early termination of an
operating lease.
Comparison of the Fiscal Years Ended June 30, 1997 and June 30, 1996
Revenue. For the fiscal year ended June 30, 1997, revenue increased 14% to
$764,000 from $671,000 reported in the prior year. The increase was attributable
to increased sales of assay kits and increased service revenue from the
Company's client research laboratory. Revenue from product development
activities and other sources declined slightly. Revenue from the client research
laboratory accounted for slightly more than half of total revenue.
Gross Profit. For the fiscal year ended June 30, 1997, gross profit
declined to $79,000 from $122,000 reported in the prior year. The decrease in
gross profit was primarily attributable to higher manufacturing costs, including
higher occupancy costs associated with the Company's new and larger facility. In
July 1996, Xenometrix entered into an agreement whereby it received certain
consideration for relinquishing its former operating lease. (See Note 2 to
Financial Statements included in this Report). Included as part of this
consideration are six quarterly installments of $60,000 each, which began in
September 1996 and continued through December 1997. This transaction resulted in
a gain of $1,028,000 which was recognized during the quarter ended September 30,
1996. The cash flow from these payments was intended to cover the higher costs
associated with the Company's new facility.
Research and Development Expenses (R&D). R&D expenses for the fiscal year
ended June 30, 1997 decreased 5% to $1,067,000 from $1,123,000 reported in the
prior year. This decrease was primarily attributable to temporary personnel
vacancies in the research and development department.
Selling, General and Administrative Expenses (SG&A). For the fiscal year
ended June 30, 1997, SG&A expenses were $3,058,000, up 23% from $2,489,000 in
the prior year. This increase was primarily attributable to costs associated
with recruiting and hiring a new President and Chief Executive Officer,
increased legal and accounting costs related to an aborted financing effort,
expenses of establishing an in-house legal function, costs associated with the
Company's relocation to its new facility and costs related to the elimination of
the Company's field sales force.
Net Loss. For the fiscal year ended June 30, 1997, the net loss decreased
to $2,842,000 or $0.97 per share from the net loss of $3,467,000 or $1.60 per
share, reported for prior year. During the current year, the Company recognized
a one-time gain of $1,028,000 from the early termination of an operating lease.
During the prior period, the Company incurred an extraordinary charge of
$115,000 or $0.05 per share for the early extinguishment of debt.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company's cash and cash equivalents were $341,000
compared to $603,000 at June 30, 1997. During the current year $1,117,000 was
used to fund the Company`s operations, $17,000 was invested in capital
expenditures and leasehold improvements, $129,000 was invested in patents,
$1,000,000 was provided by the issuance of the Notes and $1,000 was provided
from the issuance of the Company's common stock upon the exercise of stock
options.
At June 30, 1998, Xenometrix had an accumulated deficit of $16,698,000 and
has incurred losses subsequent to June 30, 1998. It also has significant future
cash requirements related to the repayment of the Notes, more fully described in
Note 5 to the financial statements included in this Report. Xenometrix's future
capital requirements may be substantial and will depend on many factors,
including the pace of growth, if any, in sales and services, progress of
Xenometrix's research and development programs, the cost of obtaining access to
new technology, the cost involved in filing, prosecuting and enforcing patent
claims, payments received under prospective collaborative agreements, agreements
for and changes in collaborative research relationships, the cost associated
with commercialization of its products, the cost and availability of third party
financing for capital expenditures, and legal and administrative expense.
At September 22, 1998, the Company had cash of approximately $100,000. The
Company estimates that this cash together with projected collections on accounts
receivable from customers will be sufficient to meet its operating needs through
approximately October 25, 1998. In the event that the Company cannot raise
additional capital or generate additional revenue from other sources by that
date, it will evaluate other options including, but not limited to further
curtailing or suspending its operations.
In order to fund its operations, the Company has borrowed $1,500,000 under
a short-term bridge financing line of credit. The due date on the Notes issued
under the line of credit has been extended several times, most recently until
October 25, 1998. In consideration for the extension, Xenometrix agreed to
reduce the exercise price of the 499,995 warrants (the "Warrants") issued in
conjunction with the Notes to $0.37 per share and further agreed to pay to the
Note holders a total of 38.5% of all gross licensing revenues received during
the extension period. These payments will be applied first to the accrued
interest payable on the Notes and then applied to reduce the principal balance
due on the Notes. In conjunction with the extension, the Note holders agreed to
reduce the interest rate on the Notes to 12% from 18% and further agreed that in
the event that the Company is acquired by a third party at a price per share
that is greater than the exercise price of the Warrants, to surrender the
Warrants at the closing of such acquisition in exchange for either cash or
freely tradable common stock of the acquiring company in an aggregate amount
equal to the difference between the acquisition price per share and the exercise
price per share of the warrants, multiplied by the total number of Warrants held
by the Note holders.
On October 25, 1998, the $1,500,000 principal balance on the Notes, plus
approximately $177,500 of accrued and unpaid interest will be due and payable.
The Company does not expect to have sufficient cash resources to satisfy this
obligation on October 25, 1998. Accordingly, it plans to attempt to negotiate a
further extension of the due date on the Notes. There can be no assurance that
this extension of the due date will be granted by the Note holders. In the event
such extension cannot be obtained, the interest rate on the Notes will increase
to 18%, the Company's assets are subject to foreclosure and the Note holders
will have the right to appoint a majority of the Board of Directors of the
Company.
IMPACT OF YEAR 2000 ISSUES
The Year 2000 issue is related to computer software utilizing two digits
rather than four to define the appropriate year. As a result, any of the
Company's computer programs or any of the Company's suppliers or vendors that
have date sensitive software may incur system failures or generate incorrect
data if "00" is recognized as 1900 rather than 2000.
The Company has evaluated the proprietary software used to facilitate
performing, analyzing and interpreting the results of its assays, and the
proprietary software used in conjunction with its bioinformatics data base, and
found them to appropriately address the date issues associated with the year
2000. The Company believes that all dates in its proprietary software are stored
with either a minimum of four digits for the year or as a text string,
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thereby preventing inappropriate sequencing of date sensitive information. While
the Company believes that its proprietary software will not produce any material
problems, erroneous calculations or degradation of performance as a result of
Year 2000 issues, users are advised that the Company's software must be run on
Year 2000 compliant platforms.
The Company plans to verify whether its major suppliers, service providers
and financial institutions are year 2000 compliant, however there can be no
assurance that the systems and networks of its key suppliers and customers will
not be affected by Year 2000 issues, which could have an adverse effect on the
Company's business, operating results and financial condition. The Company
believes, based upon the evaluations performed upon its proprietary software and
the claims of Year 2000 compliance made by the providers of non-proprietary
software used by the Company, that the impact of Year 2000 will not be material.
However, to the extent the Company or third parties upon which it relies do not
timely achieve Year 2000 readiness, the Company's results of operations may be
adversely affected.
RISK FACTORS
The following risk factors should be read in conjunction with information
appearing elsewhere in this Report.
Risk of Default on Senior Promissory Notes In order to fund its
operations, the Company has borrowed $1,500,000 under a short-term bridge
financing line of credit. The due date on the Notes issued under the line of
credit has been extended several times, most recently until October 25, 1998.
At that time, the $1,500,000 principal balance on the Notes, plus approximately
$177,500 of accrued and unpaid interest will be due and payable. The Company
does not expect to have sufficient cash resources to satisfy this obligation on
October 25, 1998. Accordingly, it plans to attempt to negotiate a further
extension of the due date on the Notes. There can be no assurance that this
extension of the due date will be granted by the Note holders. In the event
such extension cannot be obtained, the interest rate on the Notes increases to
18%, the Company's assets are subject to foreclosure and the Note holders will
have the right to appoint a majority of the Board of Directors of the Company.
Risk of Default on License Agreement The Company's principal patents
relate to gene expression profiling. Xenometrix shares ownership of these
patents with Harvard University, and has an exclusive world-wide license (the
"Agreement") to Harvard's portion of the intellectual property. During the
fiscal year ended June 30, 1998, approximately two-thirds of the Company's
total annual revenue was generated by option and license agreements related to
the Agreement. The Agreement obligates the Company to make semi-annual payments
to Harvard which include royalties on the sales of products and services by the
Company, and include a portion of the fees received by the Company from the
sub-licensing of these patents to third parties. At June 30, 1998, the Company
determined that it owed Harvard approximately $108,000 under the Agreement,
which was due and payable on August 29, 1998. As of September 25, 1998, this
amount had not been paid, due to the Company's lack of available funds. Failure
to make payments when due constitutes an event of default under the Agreement.
Continued failure to make such payment within ninety days after receipt by the
Company of a written notice of such event of default from Harvard, is grounds
for termination of the Agreement.
The Company is evaluating alternatives for raising the additional funds
needed to make the required payment to Harvard, but there can be no assurance
that such funds will be raised. In the event that this payment is not made
within the timeframe outlined above, the Company could lose its license to
Harvard's ownership interest in the patents which would have a material adverse
effect on the Company's business, financial condition and results of operations.
Limited Operating History; History of Operating Losses; Uncertainty of
Future Profitability; Going Concern Qualification The Company has a limited
operating history and is in the early stage of commercializing its products. As
of June 30, 1998, Xenometrix had incurred cumulative net losses of approximately
$16,698,000 and the Company expects to incur additional losses as it attempts to
continue to implement its business plan. Losses to date have resulted
principally from research, product development, and administrative and selling
expense. The Company has yet to generate sufficient revenue to achieve
profitability in its operations, and there can be no assurance that the Company
will be able to do so in the future. The Company's ability to achieve and
maintain profit-
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bility depends in part on its ability to successfully license its intellectual
property and to successfully market, sell and support its products and services.
There can be no assurance that the Company's licensing efforts will continue to
generate revenue for the Company. There can also be no assurance when, or if,
any of the Company's current or future products will be commercially successful
or that the Company will be able to operate profitably in the future. The Report
on the Company's financial statements for the year ending June 30, 1998 contains
an explanatory paragraph relating to the Company's ability to continue as a
going concern. See Note 1 to the Company's Financial Statements included in this
Report.
Future Capital Needs; Inability to Access Capital Markets; Delisting of the
Company's Securities The Company estimates that its cash resources at September
25, 1998 will be sufficient to fund anticipated operating expenses and working
capital requirements through at least October 25, 1998. The Company is
evaluating its strategic alternatives and has indicated a willingness to
entertain an offer for the purchase of the Company. There can be no assurance
that a sale of the business or other strategic transaction that would raise
additional capital for the Company will be consummated. The Company's future
capital requirements will depend on many factors, including its ability to
generate revenues through the licensing of its intellectual property, its
ability to market its products successfully, the cost of manufacturing
activities, the size of its research and development programs, the length of
time required to collect accounts receivable, competing technological and market
developments, costs associated with and the timing relating to the
implementation of the Company's business strategy. Changes in the Company's
business or business plan could affect the Company's capital requirements. The
Company's ability to satisfy future capital needs will depend on conditions in
the securities markets generally and in the market for the securities of small
capitalization biotechnology companies in particular. The Company's securities
were delisted from the NASDAQ SmallCap Market in January 1998, and the Company's
securities now trade on the NASDAQ OTC Bulletin Board. When the delisting
occurred, the average daily trading volume in the Company's common stock and
warrants declined sharply, resulting in a lack of liquidity in the market for
the Company`s securities. There can be no assurance that the Company will be
able to qualify in the future to have its shares relisted on the NASDAQ SmallCap
Market, or any other recognized exchange. There can also be no assurance that
the Company will be able to raise any additional funds required to conduct its
operations, that any such funds will be available on terms acceptable to the
Company or that existing stockholders will not suffer substantial dilution as a
result of subsequent financings.
Uncertainties Regarding Patents and Proprietary Rights The Company
believes that patents and other proprietary rights are important to the
development of its business. During the past year , the Company's efforts to
license its intellectual property have generated the majority of the Company's
revenues. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position.
The Company's core technology relates to eukaryotic and bacterial gene
profiling assays and genotoxicity assays. This technology is comprised of
multiple patents and patent applications, some of which are owned directly by
Xenometrix and others exclusively licensed from Harvard University, the
University of California at Berkeley and other entities. The exclusive license
agreements cover five U.S. and five foreign patents that have been issued and
certain additional patent applications. In general, these license agreements (i)
provide for the payment of royalties on net sales of products covered by the
licensed technology, (ii) provide for the payment of royalties on sublicense
revenues received by Xenometrix (iii) provide for certain minimum royalties, and
(iv) terminate upon the expiration of the last to expire patent included in the
license. If the Company fails to meet its obligations under any such agreement,
including payment of royalties or minimum royalties, such agreements may be
terminated by the licensors. The Company is currently approximately thirty days
in arrears on the royalty payments and reports due under one of its license
agreements.
The Company has obtained an exclusive worldwide license to one issued U.S.
patent, two issued foreign patents and several patent applications that relate
to methods and kits for generating gene profiles by exposing eukaryotic cells
(including human, animal and yeast cells) to compounds and then determining
levels of expression of multiple genes in the cells.
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The Company has obtained an exclusive worldwide license to two issued U.S.
patents, two issued foreign patents and several patent applications that relate
to methods and kits for generating gene profiles using bacterial promoters fused
to reporter genes.
The Company has also obtained a worldwide exclusive license to one issued
U.S. patent, one issued foreign patent and several patent applications for a
microbiological system for the detection and identification of mutagens. This
technology is a modification and improvement over the widely accepted Ames
assay.
In addition, the Company has an exclusive worldwide license under one
issued patent and an additional patent application covering a process for
detecting potential carcinogens by monitoring deletions in the yeast genome.
The Company's success will depend in part upon its ability to obtain patent
protection for its products, services and technologies, to continue to license
such intellectual property to others, and to operate without infringing the
proprietary rights of third parties. Patent law as it relates to inventions in
the biotechnology field is still evolving, and involves complex legal and
factual questions for which important legal principles are largely unresolved.
Accordingly, no predictions can be made regarding the breadth or enforceability
of claims issued or allowed in the patents that have been issued to the Company
or its licensors or in patents that may be issued to the Company or its
licensors in the future. Accordingly, no assurance can be given that the claims
in such patents, either as initially allowed by the U.S. Patent and Trademark
Office or any of its foreign counterparts or as may be subsequently interpreted
by courts inside or outside the United States, will be sufficiently broad to
protect the Company's proprietary rights, will be commercially valuable, will
provide competitive advantages to the Company and its present or future
collaborative partners or licensees, or will not be challenged, narrowed,
invalidated or circumvented. Further, there can be no assurance that patents
will be granted with respect to any of the Company's or licensor's pending
patent applications or with respect to any patent applications filed by the
Company in the future. Moreover, upon allowance, patents in certain countries
are published for opposition before final grant. If the grant of any of the
Company's or its licensor's patents is opposed, there is no assurance that the
Company will be successful in defending against such opposition. The Company's
European eukaryotic gene profiling patent is currently under opposition in the
European Patent Office. Resolution of the opposition may not be reached for one
to three years. In any event, such opposition could result in substantial cost
to the Company, whether or not the result of such proceedings was favorable to
the Company. There can be no assurance that any of the Company's issued or
licensed patents would ultimately be held valid or that any efforts to defend
any of its patents, trade secrets, know-how or other intellectual property
rights would be successful.
The drug discovery industry, including screening technology companies, has
become intensely competitive. This industry has a history of patent litigation
and will likely continue to have patent litigation concerning drug discovery
technologies. A number of pharmaceutical and biotechnology companies and
research and academic institutions have developed technologies, filed patent
applications or received patents on various technologies that may be related to
the Company's technology. Some of the technologies, applications or patents of
these entities may conflict with the Company's technologies, the patents and
patent applications licensed by the Company, or the Company's patent
applications. Moreover, because patent applications in the United States are
maintained in secrecy until patents issue, because patent applications in
certain other countries generally are not published until more than eighteen
months after they are filed and because publication of discoveries in scientific
or patent literature often lag behind the date of actual discoveries, the
Company cannot be certain that it or any of its licensors was the first creator
of inventions covered by pending patent applications or that it or any such
licensor was the first to file patent applications for such inventions. If an
issue regarding priority of inventions were to arise with respect to any of the
patents or patent applications of the Company or its licensors, the Company
might have to participate in one or more interference proceedings declared by
the U.S. Patent and Trademark Office or similar agencies in other countries to
determine priority of invention, which could result in substantial cost to the
Company, whether or not the result of such proceedings was favorable to the
Company.
In some cases, litigation or other proceedings may be necessary to defend
against or assert claims of infringement, to enforce patents issued to the
Company or its licensors, to protect trade secrets, know-how or other
intellectual property rights owned by the Company, or to determine the scope and
validity of the proprietary rights of third parties. Such litigation could
result in substantial costs to and diversion of resources by the Company. An
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adverse outcome in any such litigation or proceeding could subject the Company
to significant liabilities, require the Company to obtain alternative
non-infringing technology, require the Company to cease using the subject
technology or require the Company to license the subject technology from the
third party, all of which could have a material adverse effect upon the
Company's business, financial condition and results of operations. If any
licenses are required, there can be no assurance that the Company will be able
to obtain any such license on commercially reasonable terms, if at all, and if
these licenses are not obtained, the Company might be prevented from using
certain of its technologies. To the extent consistent with its business
objectives, the Company intends to resolve any such conflicts that develop
through negotiation or by entering into licensing arrangements regarding the
disputed technology. The Company's failure to obtain a license to any technology
that it may require to continue its efforts to develop drug discovery products
and services may have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is aware that patents may issue on certain targets and gene
endpoints and related technology or their use in screening assays that could
prevent the Company and its collaborators from developing screening assays using
such targets or endpoints, or relate to certain other aspects of technology
utilized or expected to be utilized by the Company.
In addition to patent protection, Xenometrix also relies upon copyright,
trademark and trade secret protection for its confidential and proprietary
information. In an effort to maintain the confidentiality and ownership of trade
secrets and proprietary information, the Company requires employees and
consultants to execute confidentiality and invention assignment agreements upon
commencement of a relationship with the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's trade secrets or other confidential information or that adequate
remedies would exist in the event of such unauthorized use or disclosure. The
loss or exposure of trade secrets possessed by the Company could adversely
affect its business. Like many high technology companies, Xenometrix may from
time to time hire scientific personnel formerly employed by other companies
involved in one or more areas similar to the activities conducted by the
Company. Although the Company requires its employees to maintain the
confidentiality of all confidential information of previous employers, there can
be no assurance that the Company or these individuals will not be subjected to
allegations of trade secret misappropriation or other similar claims as a result
of their prior affiliations.
Limited Success in the Drug Safety and Toxicology Market Until recently,
the Company's efforts have been focused upon commercializing its technology in
the field of molecular toxicology. Accordingly, the Company's products, services
and marketing efforts have been targeted toward customers performing toxicology
and drug safety testing. These toxicology and drug safety customers have been
slow to adopt the Company's products and services as part of their standard
testing procedures. The Company has had limited success in penetrating this
market, with product sales of approximately $611,000 and $764,000 for the years
ended June 30, 1998 and 1997, respectively. Although the Company intends to
continue to serve the drug safety and toxicology market, in the first calendar
quarter of 1997 the Company shifted its principal business and marketing focus
to serving the needs of the drug discovery and development market. For these and
other reasons, Xenometrix does not anticipate that sales in the toxicology and
drug safety market will increase materially in the near term, and it is possible
that such sales will continue to decline in future periods.
Dependence Upon Emerging Market; No Assurance of Market Acceptance The
Company believes that it is likely that any significant increases in sales of
products and services in future periods will be derived from sales to the drug
discovery and development market. The market for identifying and optimizing lead
drug compounds is new and evolving and there are many uncertainties associated
with the Company's entry into this new market, including lack of industry
acceptance, increasing competition, advances in technology and changes in laws,
regulations and industry practices. The backlog of compounds awaiting secondary
screening and optimization is a relatively recent phenomenon, resulting from the
use by drug researchers of new technologies (such as gene sequencing,
combinatorial chemistry and high throughput screening) to create large numbers
of potential lead drug compounds. The Company's future financial performance,
therefore, will be highly dependent upon the development and growth of this
market and the methods that drug researchers adopt or develop to identify and
optimize lead compounds.
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In order for Xenometrix to achieve broad market acceptance of its products
in drug lead identification and optimization applications, the Company must
demonstrate to drug researchers that its assays are useful and cost-effective
supplements to existing drug discovery and development technology and
techniques. There can be no assurance that the Company's existing or future
products will be commercially accepted by drug researchers. The Company's
targeted customer base may not change its current testing methods, may choose to
adopt methods marketed by competitors of the Company or may refuse to make the
investment necessary to purchase the Company's products. If market acceptance of
the Company's products does not develop, the Company's prospects and its results
of operations may be materially adversely affected. There can be no assurance
that the Company's products and services can be successfully adapted to meet the
needs of this new market, that these products and services will be received
positively by clients in this new market segment or that the Company will be
able to generate sufficient revenue from sales in this new market segment to
achieve profitability.
Dependence Upon Collaborative Arrangement One of the Company's strategies
to penetrate the drug discovery and development market is to enter into various
collaborative and licensing arrangements with major pharmaceutical corporations
and drug discovery firms. The Company recently reorganized its marketing
department in order to focus on identifying and cultivating corporate partnering
relationships. These arrangements may be necessary in order to obtain additional
gene lines or gain access to additional technologies so that the Company's
products and services can be adapted to the needs of the drug discovery and
development market, to establish joint marketing relationships with other firms
whose technology can be used in drug discovery and development, to obtain access
to additional drug compounds so that the Company's bioinformatics database can
be built and expanded, or to establish the utility of the Company's technology
in the drug discovery and development process.
It is common for biotechnology companies to have one or more significant
corporate partners or collaborative relationships. The Company has very limited
experience with respect to such relationships. There can be no assurance that
the Company will be successful in entering into meaningful arrangements on terms
acceptable to Xenometrix, that any collaborative partner will perform its
responsibilities under any such arrangement or that any or all of the
contemplated benefits from such collaborative arrangements will be realized. The
failure of the Company to successfully develop such relationships would have a
material adverse effect on the Company's business and results of operations.
Uncertainties Regarding Product Development and Technological Change Rapid
technological developments are expected to continue in the fields of drug
development and discovery, molecular response assessment and toxicology testing.
The Company believes that its future success will depend upon its ability to
develop, manufacture and market products and services that meet changing or
emerging customer needs and to anticipate successfully or respond to
technological changes on a cost effective and timely basis. Although the Company
is considering new products for commercial development, such development depends
upon the Company's ability to obtain adequate funding, make satisfactory
technical progress and validate the commercial potential of such products. There
can be no assurance that any of the Company's products that are currently in the
research and development stage will be successfully developed, that
technological changes will not render the Company's products obsolete, that the
Company's existing products and services can be successfully adapted to serve
the needs of the drug discovery and development market or that the Company will
be able to keep pace with technological developments.
Competition Competition in the drug discovery and development sector of
the biotechnology industry is intense. The Company believes that its assays may
be used throughout the secondary screening and lead optimization portions of
the drug discovery process. The Company, therefore, faces competition from
firms which are pursuing the same or similar technologies as those which
constitute the Company's technology platform, as well as from all other
technologies or processes that are or can be used by drug developers to develop
"hits" into lead compounds or to optimize lead compounds into drug development
candidates. The Company faces competition both from other firms which, like
Xenometrix, are developing drug discovery tools and services and from drug
researchers using their own proprietary drug discovery methods in house. As a
result, the Company faces competition from large pharmaceutical companies,
biotechnology companies, academic and research institutions and government
agencies.
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The Company's technology platform principally consists of using genetically
engineered cell based assays to measure gene activity. The Company also is
working to develop high throughput screening capabilities for its assays. A
number of pharmaceutical and biotechnology companies are active in the areas of
gene expression assays and high throughput screening. Such competitors include
Aurora Biosciences Corporation, Digital Gene Technology, Inc., Gene Logic, Inc.,
Cerep, S.A., Perkin-Elmer Corporation, Phase-1 Molecular Toxicology, Inc. and
OSIP. There may also be several private companies which are pursuing drug
discovery using gene transcription methods, which could be considered
competitors of the Company. In addition, the Company faces competition from
traditional methods used by drug researchers to identify and optimize lead
compounds, such as receptor binding assays, other in vitro assays and animal
testing.
There can be no assurance that pharmaceutical and biotechnology companies
which compete with the Company in specific areas will not merge or enter into
joint ventures or other alliances with one or more other such companies and
become more substantial competitors offering a broader platform of drug
discovery products and services. In addition, genomics, combinatorial chemistry
and primary screening firms, recognizing the growing bottleneck of compounds
awaiting evaluation and optimization, may also expand their businesses to
include secondary screening, optimization and assay development, either alone or
pursuant to alliances with others.
It is very common in the drug discovery industry for biotechnology firms to
have one or more significant corporate partners or collaborative arrangements.
An important part of the Company's strategy is to enter into such arrangements
with major pharmaceutical companies and other drug discovery firms. The Company,
therefore, competes for opportunities to enter into promising collaborative
arrangements with other biotechnology firms and also competes for the limited
funds which major pharmaceutical firms can commit to outsourced lead
identification and optimization activities.
The Company also competes with firms developing new or alternative methods
of drug discovery, such as rational drug design and DNA probe technology, which
may eliminate or significantly alter the market for identifying and optimizing
lead drug compounds. The Company's technological approaches may be rendered
obsolete or uneconomical by advances in existing technological approaches or the
development of different approaches by one or more of the Company's current or
future competitors.
Historically, pharmaceutical and biotechnology companies have maintained
close control over their research activities, including the synthesis, screening
and optimization of chemical compounds. Many of these companies, which represent
the greatest potential market for the Company's products and services, have
developed or are developing, at substantial cost, internal programs and
methodologies to approach drug discovery efforts. The Company competes with the
processes internally developed by pharmaceutical and biotechnology companies,
who must be convinced that Xenometrix's drug discovery products and services
justify outsourcing a portion of these activities to the Company.
As a result of drug discovery industry characteristics, many companies that
could be customers or collaborators of Xenometrix may also be actual or
potential competitors, either alone or in combination with other firms. Many of
Xenometrix's actual or potential competitors have been addressing the drug
discovery market for a longer period of time than the Company, have already
established corporate partnering relationships and have significantly greater
financial and other resources than those available to the Company. There can be
no assurance that the Company will be able to develop products which are
competitive with those offered by existing or future competitors.
Fluctuations in Operating Results The Company's operating results may vary
significantly from quarter to quarter or year to year, depending on factors such
as the timing of license agreements, timing of product development and
commercialization programs of the Company's customers, the timing and terms of
collaborative or corporate partner agreements entered into by Xenometrix, the
timing of increased research and development and sales and marketing expenses,
the timing and size of orders and the introduction of new products by the
Company and by competitors. The Company's current and planned expense levels are
based in part on its expectations as to future revenue. Consequently, revenue
and operating results may vary significantly from quarter to quarter or year to
year and revenue and operating results in any period will not necessarily be
predictive of results in subsequent periods.
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Manufacturing; Dependence on Outside Suppliers Although Xenometrix has
produced quantities of certain of its products for limited sales, it has no
experience in manufacturing its products in large commercial quantities, and
there can be no assurance that it will be able to make a successful transition,
if necessary, to large-scale commercial production or to manufacture its
products at a commercially viable cost.
Certain key components and raw materials used in the manufacturing of the
Company's products are currently provided by single source vendors. Although the
Company believes that alternative sources for such components and raw materials
are available, an interruption in the supply of a sole-sourced raw material
would have a material adverse effect on the Company's ability to manufacture
products until a new source of supply was qualified and, as a result, might have
a material adverse effect on the Company's business. In addition, an uncorrected
impurity or supplier's variation in a raw material, either unknown to the
Company or incompatible with the Company's manufacturing process, could have a
material adverse effect on the Company's ability to manufacture products and/or
the performance of the product. Also, because the Company is a small customer of
many of its suppliers, there can be no assurance that suppliers will devote
adequate resources to supplying the Company's needs.
Dependence Upon Key Personnel The Company depends on the services of
certain key personnel, particularly those of Stephen J. Sullivan, its President
and Chief Executive Officer, Ronald L. Hendrick, its Executive Vice President,
Chief Financial Officer and Secretary, Dr. Pauline Gee, its Vice President of
Research and Development and Dr. Mark B. Benjamin, its Vice President of
Business Development. The Company does not maintain key man insurance policies
on the lives of any of its executives. Currently, Mr. Sullivan has an employment
agreement with the Company that expires on January 13, 2000. Mr. Hendrick, Dr.
Gee and Dr. Benjamin have employment agreements with the Company which expire on
October 5, 1998. Xenometrix believes that the loss of the services of any of
these executives could have a material adverse effect on the Company.
Additionally, the Company's uncertain financial condition would make it
difficult to recruit qualified employees to replace any current employee leaving
the Company.
Competition among pharmaceutical and biotechnology companies for qualified
employees is intense, and the loss of any such qualified employees, or an
inability to attract, retain and motivate any additional highly skilled
employees necessary for the expansion of the Company's activities, could have a
material adverse effect on the Company. There can be no assurance that the
Company will be able to retain its existing personnel or to attract additional
qualified employees.
Risk of Contamination The Company relies heavily on the maintenance and
distribution of mammalian, bacterial and yeast cells for the manufacturing of
its various products. Although rare, contamination of cell culture, particularly
mammalian culture, by the introduction of agents such as molds, fungi,
mycoplasma or bacteria, is a risk associated with these processes. It is
possible for assays to perform aberrantly as a consequence of undetected
contamination. If such contamination were to be detected, the Company might be
required to halt production of particular assay(s) in order to establish the
cause and eliminate such contamination. The Company has established quality
control standards for minimizing the potential for contamination, and for
effectively eliminating contamination after it is detected, but cannot guarantee
that such contamination will not occur.
28
<PAGE> 29
Hazardous Materials The Company's research and development involves the
controlled use of hazardous materials, chemicals and various radioactive
compounds. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. Although the Company maintains
workers' compensation and liability insurance, there can be no assurance that,
in the event of such an accident, the Company would not be held liable for any
damages that result, that the Company's insurance coverage would be adequate to
cover such liabilities or that any such excess liability would not exceed the
resources of the Company. The Company may incur substantial costs of compliance
with environmental regulations if the Company expands its manufacturing
capacity.
Product Liability; Availability of Insurance Although the Company has
obtained product liability insurance, there can be no assurance that it will be
able to maintain such insurance on acceptable terms or that insurance will
provide adequate coverage against potential liabilities.
Anti-Takeover Effects of Certain Provisions of Certificate of Incorporation
and By-laws The Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 5,000,000 shares of Preferred Stock, par value $.001
per share. The Preferred Stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the Board of Directors,
without further action by the stockholders, and may include voting rights
(including the right to vote as a class or series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights,
and sinking fund provisions. The issuance of any Preferred Stock could
materially adversely affect the rights of holders of Common Stock and,
therefore, could reduce the value of the Common Stock. In addition, specific
rights granted to future holders of Preferred Stock could be used to restrict
the Company's ability to merge with, or sell its assets to, a third party,
thereby preserving control of the Company by present stockholders. The issuance
of Preferred Stock may, in some circumstances, deter or discourage takeover
attempts and other changes in control of the Company, including takeovers and
changes in control which some holders of the Common Stock may deem to be in
their best interests and in the best interests of the Company, by making it more
difficult for a person who has gained a substantial equity interest in the
Company to obtain voting control or to exercise control, thereby effectively
preserving control of the Company for the current controlling stockholders.
The Company's Certificate of Incorporation and By-laws (the "Charter
Documents") provide that (i) the Company's Board of Directors may fix the number
of Directors, (ii) the Company's Board of Directors may fill any vacancies of
the Board of Directors, (iii) stockholders may not act by written consent and
(iv) any stockholder proposals or director nominations be submitted to the
Company well in advance of the mailing of the Company's proxy statement. These
provisions in certain circumstances could discourage a future attempt to acquire
control of the Company, make it more difficult for stockholders to change the
composition of the Company's Board of Directors or management team and make a
proxy contest a less effective means of removing or replacing existing directors
or effecting a change in control of the Company which is opposed by the Board of
Directors.
ITEM 7
FINANCIAL STATEMENTS
The financial statements begin on page F1.
29
<PAGE> 30
PART III
ITEMS 9 THROUGH 12
The information contained in the Xenometrix Proxy Statement for the annual
meeting of stockholders proposed to be held November 18, 1998, under the
headings, "Election of Directors", "Executive Officers", "Executive
Compensation", "Security Ownership of Certain Beneficial Owners and Management",
"Certain Relationships and Related Transactions" and "Principal Stockholders" is
incorporated herein by reference. The Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days after June 30, 1998.
30
<PAGE> 31
PART IV
ITEM 13
EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
Exhibit
Number Description of Document
------- -----------------------
3.1+ Certificate of Incorporation of the Registrant, filed with the
Secretary of State of Delaware on June 15, 1992.
3.2+ Certificate of Merger of the Registrant filed with the Secretary
of State of Delaware on July 29, 1992.
3.3+ Certificate of Amendment of Certificate of Designation of the 5%
Cumulative Convertible Series A Preferred Stock of the
Registrant.
3.4+ Certificate of Amendment of Certificate of Designation of the 5%
Cumulative Convertible Series B Preferred Stock of the
Registrant.
3.5+ Certificate of Amendment of Certificate of Incorporation of the
Registrant with regard to the reverse stock split.
3.6+ Amended and Restated By-Laws of the Registrant.
3.7+ Certificate of Amendment of Certificate of Incorporation of the
Registrant with regard to the addition of Article XII.
3.8+ Certificate of Elimination of the 5% Cumulative Convertible
Series A Preferred Stock of the Registrant.
3.9+ Certificate of Elimination of the 5% Cumulative Convertible
Series B Preferred Stock of the Registrant.
3.10+ Certificate of Amendment of Certificate of Incorporation of the
Registrant with regard to the reduction of the number of the
Registrant's authorized shares.
3.11+ Amendment to the Amended and Restated By-laws of the Registrant
as approved by the Registrant's Board of Directors on September
12th, 1995 and September 27th, 1995.
4.1+ Certificate representing shares of Common Stock.
4.2+ Warrant.
4.3+ Warrant Agreement.
10.1+ Form of Indemnity Agreement between the Registrant and its
directors and executive officers.
10.2+ Employment Agreement, dated as of October 5, 1995, between the
Registrant and Edson D. de Castro.
10.3+ Employment Agreement, dated as of October 5, 1995, between the
Registrant and John H. Wheeler.
10.4+ Employment Agreement, dated as of October 5, 1995, between the
Registrant and Ronald L. Hendrick.
10.5+ Employment Agreement, dated as of October 5, 1995, between the
Registrant and Pauline Gee.
10.6+ Consulting Agreement, dated as of May 25, 1995, between the
Registrant and Spencer B. Farr.
10.7+ Amended and Restated Stock Option Plan of the Registrant.
10.8+ 1993 Non-Employee Directors Stock Option Plan of the Registrant.
10.9+ Form of Proprietary Information and Inventions Agreement between
the Registrant and each of its employees.
10.10+ Voting Agreement, dated as of December 2, 1994, among the
Registrant and certain of its stockholders.
10.11+ Registration Rights Agreement, dated as of December 31, 1991,
between the Registrant and certain of its stockholders.
31
<PAGE> 32
Exhibit
Number Description of Document
------- -----------------------
10.12+ Form of Subscription and Preferred Stock Purchase Agreement
between the Registrant and each purchaser of shares of its 5%
Cumulative Convertible Series A Preferred Stock.
10.13+ Form of Warrant for the Purchase of shares of 5% Cumulative
Convertible Series A Preferred Stock of the Registrant.
10.14+ Form of Preferred Stock Purchase Agreement among the Registrant
and the purchasers of shares of its 5% Cumulative Convertible
Series B Preferred Stock.
10.15+ Form of Amendment No. 2 to Subscription and Preferred Stock
Purchase Agreement among the Registrant and the purchasers of
shares of its 5% Cumulative Convertible Series A Preferred Stock.
10.16+** Exclusive License Agreement, effective October 1, 1994, between
the Regents of the University of California and the Registrant.
10.17+** License Agreement, effective January 18, 1992, between the
President and Fellows of Harvard College and the Registrant.
10.18+** License Agreement, dated May 27, 1992, among GeneBioMed, Inc.,
Robert Schiestl and Venmark Ltd.
10.19+ Lease Agreement, dated January 8, 1993, between Wilderness Place,
Ltd. and the Registrant.
10.20+ Exchange Agreement, dated as of January 31, 1993, between D.H.
Blair Holdings, Inc. and the Registrant.
10.21+ Amendment to Preferred Stock Purchase Agreement, dated as of May
6, 1994, among the Registrant and the purchasers of Shares of its
5% Cumulative Convertible Series B Preferred Stock.
10.22* License Agreement dated January 1, 1996 between Stanford
University and the Registrant.
10.23** License Agreement dated June 4, 1996 between The Wistar Institute
and the Registrant.
10.24*** Lease dated July 1, 1996 between Flatirons Cottonwood, Inc. and
the Registrant.
10.25*** Lease Termination Agreement effective July 1996 between
Wilderness Place, Ltd. and the Registrant.
10.26*** Lease Takeover Agreement effective July 1996 between NexStar
Pharmaceuticals, Inc. and the Registrant.
10.27# Employment Agreement, dated December 31, 1996, between the
Company and Stephen J. Sullivan.
10.28## Employment Agreement, dated September 19, 1997, between the
Company and Mark B. Benjamin.
10.29### Senior Line of Credit Agreement, dated September 25, 1997 between
Aires Domestic Fund, L.P., The Aries Fund, a Cayman Islands Trust
and the Registrant
10.30++ First Amendment dated December 18, 1997 to the Senior Line of
Credit Agreement, dated September 25, 1997 between Aries Domestic
Fund, L.P., The Aries Fund, a Cayman Islands Trust and the
Registrant
10.31++ Employment Agreement, dated December 9, 1997 between the Company
and Paul J. Koivuniemi
10.32++ Amendment dated January 16, 1998 to the Employment Agreement
dated October 5, 1995, between the Company and Ronald L. Hendrick
10.33++ Amendment dated January 16, 1998 to the Employment Agreement
dated October 5, 1995, between the Company and Pauline Gee
10.34++ Amendment dated January 16, 1998 to the Employment Agreement
dated September 19, 1997, between the Company and Mark B.
Benjamin
10.35++ Amendment dated January 16, 1998 to the Employment Agreement
dated December 9, 1997, between the Company and Paul J.
Koivuniemi
10.36+++ Amendment to the Senior Line of Credit Agreement and Notes, dated
as of March 25, 1998 by and among the Company, the Aries Domestic
Fund L.P. and the Aries Fund, a Cayman Islands Trust
32
<PAGE> 33
Exhibit
Number Description of Document
------- -----------------------
10.37oo Agreement dated February 24, 1998 between [ * ] and the
Registrant, regarding the granting of an exclusive option period
to negotiate a license under the Company's gene expression
profiling patents.
10.38+++ Amendment to the Senior Line of Credit Agreement and Notes, dated
as of March 25, 1998 by and among the Company, the Aries Domestic
Fund L.P. and the Aries Fund, a Cayman Islands Trust
10.39** License Agreement dated April 17, 1998 between Aurora Biosciences
Corporation and the Registrant.
10.40** Amendment to the Senior Line of Credit Agreement and Notes, dated
as of May 25, 1998 by and among the Company, the Aries Domestic
Fund L.P. and the Aries Fund, a Cayman Islands Trust
10.41** License Agreement dated June 5, 1998 between Cerep S.A. and the
Registrant.
10.42 Amendment to the Senior Line of Credit Agreement and Notes, dated
as of June 25, 1998 by and among the Company, the Aries Domestic
Fund L.P. and the Aries Fund, a Cayman Islands Trust
10.43** License Agreement dated July 27, 1998 between Phase-1 Molecular
Toxicology, Inc. and the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Summary Financial Information Schedule.
- --------------------------------------------------------------------------------
+ Incorporated herein by reference from Xenometrix's Form SB-2 Registration
Statement, Registration No. 33-96636-D, dated October 17, 1995.
o Incorporated herein by reference from Xenometrix's Form 10-QSB for the
quarter ended December 31, 1995.
** Xenometrix has been granted or is applying for confidential treatment with
respect to portions of these exhibits.
*** Incorporated herein by reference from Xenometrix's Form 10-KSB for the
fiscal year ended June 30, 1996.
# Incorporated herein by reference from Xenometrix's Form 10-QSB for the
quarter ended December 31, 1996.
## Incorporated herein by reference from Xenometrix's Form 10-KSB for the
fiscal year ended December 31, 1997.
### Incorporated herein by reference from Xenometrix's Form 10-QSB for the
quarter ended September 30, 1997.
++ Incorporated herein by reference from Xenometrix's Form 10-QSB for the
quarter ended December 31, 1997.
+++ Incorporated herein by reference from Xenometrix's Form 8-K, dated April
10, 1998.
oo Incorporated herein by reference from Xenometrix's Form 10-QSB for the
quarter ended March 31, 1998.
(b) Reports on Form 8-K
On April 10, 1998, Registrant filed a Form 8-K reporting that it had
entered into an agreement to amend its Senior Line of Credit agreement and
the senior secured promissory notes issued thereunder, extending the due
date on the notes to May 25, 1998, and increasing the interest rate on the
notes to 18%.
On June 4, 1998, Registrant filed a Form 8-K reporting that it had entered
into an agreement to amend its Senior Line of Credit agreement and the
senior secured promissory notes issued thereunder, extending the due date
on the notes to June 25, 1998.
33
<PAGE> 34
SIGNATURES
Pursuant to Section 13 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 on the 28th day of September, 1998.
XENOMETRIX, INC.
By: /s/ Stephen J. Sullivan
September 28, 1998 ------------------------------
Stephen J. Sullivan
President, Chief Executive Officer
And Director
By: /s/ Ronald L. Hendrick
September 28, 1998 ------------------------------
Ronald L. Hendrick
Executive Vice President, Chief
Financial Officer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Stephen J. Sullivan and Ronald L. Hendrick, or either
of them, his or her attorney-in-fact, each with the power of substitution, for
him or her in any and all capacities, to sign any amendments to this Report, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the Exchange Act, this Report has been signed on behalf of
Xenometrix and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Walter M. Lovenberg
Walter M. Lovenberg, Ph.D. Director September 28, 1998
/s/ John K. A. Prendergast
John K. A. Prendergast, Ph.D. Director September 28, 1998
/s/ Randal P. Schumacher
Randal P. Schumacher Director September 28, 1998
/s/ Ralph Z. Sorenson
Ralph Z. Sorenson, DBA. Director September 28, 1998
</TABLE>
34
<PAGE> 35
XENOMETRIX, INC.
Index To Financial Statements
<TABLE>
<S> <C>
Report of Independent Accountants.............................................................. F-1
Balance Sheet as of June 30, 1998 and 1997..................................................... F-2
Statement of Operations for the Years Ended June 30, 1998 and 1997............................. F-3
Statement of Changes in Stockholders' Equity for the Years Ended June 30, 1998 and 1997........ F-4
Statement of Cash Flows for the Years Ended June 30, 1998 and 1997............................. F-5
Notes to Financial Statements.................................................................. F-6
</TABLE>
<PAGE> 36
Report of Independent Accountants
To the Board of Directors and
Stockholders of Xenometrix, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of cash flows and of changes in stockholders' equity present fairly,
in all material respects, the financial position of Xenometrix, Inc. (the
"Company") at June 30, 1998 and 1997, and the results of its operations and its
cash flows for each of the years then ended in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit of $16,698,000 that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Broomfield, Colorado
September 1, 1998
F-1
<PAGE> 37
XENOMETRIX, INC.
Balance Sheet
<TABLE>
<CAPTION>
Assets
June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 341,000 $ 603,000
Accounts receivable, net of allowance for doubtful accounts
of $10,000 and $35,000 in 1998 and 1997, respectively 115,000 223,000
Account receivable from termination of lease -- 115,000
Inventory, net 55,000 101,000
Prepaid insurance 181,000 116,000
Other current assets 52,000 95,000
------------ ------------
Total current assets 744,000 1,253,000
Property and equipment, net 654,000 860,000
Patents, net of accumulated amortization of $427,000 and
$300,000 in 1998 and 1997, respectively 340,000 338,000
------------ ------------
$ 1,738,000 $ 2,451,000
============ ============
Liabilities and Stockholders' Equity
Accounts payable $ 356,000 $ 268,000
Accrued interest payable 158,000 2,000
Accrued salaries and wages 163,000 160,000
Other accrued liabilities 268,000 281,000
Senior promissory notes, net of discounts of $105,000 and
$225,000 in 1998 and 1997, respectively 1,395,000 275,000
------------ ------------
Total current liabilities 2,340,000 986,000
------------ ------------
Commitments and contingencies (Note 4)
Stockholders' Equity:
Preferred stock -- $0.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding
at June 30, 1998 and 1997 -- --
Common stock -- $0.001 par value; 20,000,000 shares
authorized, 2,948,000 and 2,945,000 shares issued and
outstanding at June 30, 1998 and 1997, respectively 3,000 3,000
Additional paid-in capital 16,093,000 15,795,000
Accumulated deficit (16,698,000) (14,333,000)
------------ ------------
Total stockholders' equity (602,000) 1,465,000
------------ ------------
$ 1,738,000 $ 2,451,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 38
XENOMETRIX, INC.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenue:
Products and services $ 611,000 $ 764,000
Licensing revenue 1,275,000 --
----------- -----------
Total revenue 1,886,000 764,000
Cost of revenue:
Cost of products and services 523,000 685,000
Cost of licensing revenue 104,000 --
----------- -----------
Total cost of revenue 627,000 685,000
----------- -----------
Gross profit 1,259,000 79,000
----------- -----------
Research and development 1,150,000 1,067,000
Selling, general and administrative 1,833,000 3,058,000
----------- -----------
Total operating expense 2,983,000 4,125,000
----------- -----------
Operating loss (1,724,000) (4,046,000)
Grant income -- 64,000
Interest income (expense), net (641,000) 112,000
Gain on early termination of lease -- 1,028,000
----------- -----------
Net loss $(2,365,000) $(2,842,000)
=========== ===========
Loss per common share - basic $ (0.80) $ (0.97)
=========== ===========
Weighted average shares outstanding 2,948,000 2,932,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 39
XENOMETRIX, INC.
Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Convertible
Common Stock Preferred Stock Additonal
------------------- ------------------ Paid in Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ------- ------- ------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 2,912,000 $ 3,000 - $ - $ 15,456,000 $ (11,491,000) $ 3,968,000
Stock options exercised 29,000 87,000 87,000
Public warrants exercised 4,000 27,000 27,000
Value allocated to warrants issued
with senior promissory notes 225,000 225,000
Net loss (2,842,000) (2,842,000)
--------- ------- ------- ----- ------------ ------------- ----------
Balance at June 30, 1997 2,945,000 3,000 - - 15,795,000 (14,333,000) 1,465,000
Stock options exercised 3,000 1,000 1,000
Value allocated to warrants issued
with senior promissory notes 187,000 187,000
Revaluation of warrants upon change
in exercise price 110,000 110,000
Net loss (2,365,000) (2,365,000)
--------- ------- ------- ----- ------------ ------------- ----------
Balance at June 30, 1998 2,948,000 $ 3,000 - $ - $ 16,093,000 $ (16,698,000) $ (602,000)
========= ======= ======= ===== ============ ============= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 40
XENOMETRIX, INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,365,000) $(2,842,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 349,000 334,000
Amortization of note discount 417,000 --
Provision for inventory obsolesence 5,000 52,000
Provision for doubtful accounts (25,000) 23,000
Net book value of retired assets 1,000 14,000
Changes in assets and liabilities:
Accounts receivable 133,000 (109,000)
Receivable from termination of operating lease 115,000 (115,000)
Inventory 41,000 (7,000)
Prepaid insurance (65,000) 9,000
Other current assets 43,000 5,000
Accounts payable and accrued liabilities 234,000 222,000
----------- -----------
Net cash used in operating activities (1,117,000) (2,414,000)
----------- -----------
Cash flows from investing activities:
Capital expenditures (17,000) (752,000)
Patent acquisition cost (129,000) (82,000)
----------- -----------
Net cash used in investing activities (146,000) (834,000)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of senior promissory notes and warrants 1,000,000 447,000
Net proceeds from issuance of common stock 1,000 114,000
----------- -----------
Net cash provided by financing activities 1,001,000 561,000
----------- -----------
Net change in cash (262,000) (2,687,000)
Cash and cash equivalents at beginning of year 603,000 3,290,000
----------- -----------
Cash and cash equivalents at end of year $ 341,000 $ 603,000
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 76,000 $ 1,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 41
XENOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Xenometrix, Inc. ("Xenometrix" or the "Company"), a Delaware corporation, is a
biotechnology company with proprietary gene response profiling technology
designed to help the pharmaceutical industry improve the effectiveness of drug
discovery and development. Xenometrix genetically engineers living cells with
gene promoters which enable researchers to quantify the level of gene induction
when the cells are exposed to pharmaceutical compounds. This proprietary
platform technology can be used by pharmaceutical and biotechnology companies to
optimize drug leads. Xenometrix offers this technology in the form of molecular
information assays to be used by customers in their laboratories. The Company
also offers a Client Research Laboratory service whereby customers send their
compounds to Xenometrix for testing and evaluation. In addition, Xenometrix is
engaged in licensing the technology covered by its issued United States and
European patents to companies seeking to practice this technology. Xenometrix
was incorporated on July 24, 1991.
Financial Condition
At June 30, 1998, Xenometrix had an accumulated deficit of $16,698,000 and has
incurred losses subsequent to June 30, 1998. It also has significant future cash
requirements related to the repayment of the Senior promissory notes (the
"Notes"), more fully described in Note 5, and to the further development of its
research, product development and manufacturing operations. At June 30, 1998,
the Company had cash of $ 341,000. Management believes that the cash on hand and
the cash to be provided by the subsequent transaction reported in Note 9 will be
sufficient to meet those requirements through at least October 25, 1998. The
Company is evaluating alternatives for raising additional capital. In the event
such additional capital cannot be raised in amounts sufficient to satisfy the
Notes together with accrued interest thereon, the Company will seek an extension
on the Notes. In the event such extension cannot be obtained, the interest rate
on the Notes will increase to 18% from 12%, the Company's assets will be subject
to foreclosure and the holders of the Notes will have the right to appoint a
majority of the Board of Directors.
Revenue Recognition, Concentration of Credit Risk and Concentration of Materials
Supply
Revenue from product sales is recognized upon shipment. Revenue from contract
laboratory services and product development is recognized as such services are
performed. Revenue from the up-front payments due to the Company under patent
licensing agreements is recognized upon signing of the agreements, provided the
Company has no future obligation with respect to such payments and provided the
arrangements contain no provisions which would permit offsetting those payments
against future royalties or other sums due to the Company.
Xenometrix sells its products and services primarily to companies in the
pharmaceutical, biotechnology, chemical, and consumer products industries as
well as to governmental agencies, which means receivables are concentrated in
these sectors. The market for the products and services sold by Xenometrix is to
a limited number of customers. During the year ended June 30, 1998, one customer
accounted for 19% of total sales. Export sales accounted for 34% of total sales,
with 19% in Switzerland, 6% in Belgium and the remaining 9% in several other
European and Asian countries. In the year ended June 30,1997, no single customer
accounted for more than 10% of total sales. Export sales accounted for 21% of
total sales, with 6% in Switzerland and the remaining 15% from several European
and Asian countries.
Certain key components and raw materials used in the manufacturing of
Xenometrix's products are currently provided by single source vendors. Although
Xenometrix believes that alternative sources for such components and raw
materials are available, an interruption in the supply of sole-sourced materials
could have a material adverse effect on Xenometrix's ability to manufacture
products until a new source of supply is found and, as a result, could have a
material adverse effect on the Company's business.
F-6
<PAGE> 42
Licensing Revenue
During the year ended June 30, 1998, the Company entered into one option
agreement and two nonexclusive license agreements relating to the licensing and
the sub-licensing of the Company's patents, licensed patents, and intellectual
property. In accordance with the terms of the option agreement, a third party
was granted a limited period during which it could negotiate with the Company
for an exclusive license in a particular field of use under certain of the
Company's patents. Upon termination of the option agreement by the third party,
the Company recognized the payments received for the option as revenue during
the year ended June 30, 1998. In accordance with the terms of the two
non-exclusive license agreements, the Company recognized up-front payments
received as licensing revenue during the year ended June 30, 1998. As of June
30, 1998, the Company has recorded in other accrued liabilities approximately
$104,000 of royalty expense relating to the sublicensing revenue generated above
under an existing licensing agreement with a university (Note 9).
Grant Income
During the year ended June 30, 1997, Xenometrix completed a research grant from
a United States government agency. This grant funded certain research
expenditures incurred by Xenometrix. Xenometrix records grant related expenses
when incurred and simultaneously recognizes grant income to the extent the
expenses are reimbursable under the terms of the grants. Xenometrix had no grant
income in the year ended June 30, 1998.
Research and Development Cost
Research and development costs are expensed as incurred.
Net Loss Per Common Share
Effective for the fiscal year ended June 30, 1998, net loss per common share is
computed using the Financial Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share" (EPS). SFAS No. 128
establishes new standards for computing and presenting EPS and supercedes all
prior EPS guidance found in APB Opinion 15. EPS for all prior periods has been
restated to conform with the requirements of SFAS No. 128.
Basic loss per common share is computed by dividing the net loss by the
weighted-average number of common shares outstanding during the period.
Diluted loss per share is computed using the treasury stock method, based upon
the weighted-average number of common shares, dilutive common stock equivalent
shares and the assumed conversion of any dilutive convertible securities
outstanding during the period. Because the inclusion of these common stock
equivalents and convertible securities would be anti-dilutive, they are excluded
from the Company's calculation of diluted loss per share.
Statement of Cash Flows
Xenometrix considers all highly liquid investments, purchased with a maturity of
three months or less, to be cash equivalents.
Inventory
Inventory is stated at the lower of cost or market and is computed using the
first-in, first-out method. Inventory is primarily comprised of raw materials at
June 30, 1998 and 1997, and is net of a reserve for inventory obsolescence of
$57,000 and $52,000 at June 30, 1998 and June 30, 1997, respectively.
Depreciation and Amortization
Depreciation and amortization is computed using the straight-line method over
the estimated useful lives of the respective assets, which ranges from three to
seven years. Leasehold improvements are amortized over the shorter of the
estimated asset life or the term of the lease. Maintenance and repairs are
expensed as incurred.
F-7
<PAGE> 43
Patent Cost
The cost of obtaining patents on the Company's technology is capitalized as
incurred. Amortization of that cost is computed using the straight-line method
over the estimated useful lives of five years.
Reclassifications
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash,
accounts receivable, accounts payable, accrued liabilities and long-term debt
approximate their fair values.
Significant Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities as of the date of the financial statements,
and the reported amounts of revenue and expenses during the periods. Significant
estimates have been made by management in several areas including the
realizability of the Company's deferred tax assets (see Note 7). Actual results
could differ materially from these estimates making it reasonably possible that
a change in these estimates could occur in the near term.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130, which is effective for all
periods beginning after December 15, 1997, establishes standards for reporting
and displaying comprehensive income and its components with the same prominence
as other financial statement items. All prior periods must be restated to
conform with the provisions of SFAS No. 130. The Company will adopt SFAS No. 130
during the quarter ended September 30, 1998, but does not expect the new
accounting standard to have a material effect on the Company's reported
financial results.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131, which is effective for fiscal
years beginning after December 15, 1997, establishes new disclosure requirements
for operating segments, including products, services, geographic areas, and
major customers. The Company will adopt SFAS No. 131 for the 1999 fiscal year,
but does not expect the new accounting standard to have a material effect on the
Company's reported financial results.
2. ACCOUNT RECEIVABLE FROM TERMINATION OF LEASE
In connection with its move to a new facility in October 1996, Xenometrix
entered into a lease termination agreement with its previous landlord and
entered into an agreement with another company which paid Xenometrix $700,000
upon termination of its prior lease, $18,000 for reimbursement of a portion of
its actual moving expenses, and additional consideration of $360,000 payable in
six quarterly installments beginning September 30, 1996 and continuing through
December 31, 1997. The present value of the total consideration due under this
agreement is shown as gain on termination of lease for the year ended June 30,
1997. The remaining quarterly payments of $120,000 net of unamortized discount,
are shown as account receivable from termination of lease at June 30, 1997.
These amounts were collected in the current fiscal year.
3. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is comprised of the following:
<TABLE>
<CAPTION>
June 30
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Laboratory equipment ............................. $ 420,000 $ 427,000
Leasehold improvements ........................... 501,000 501,000
Computer equipment and software .................. 204,000 190,000
Office equipment and furniture ................... 209,000 211,000
----------- -----------
1,334,000 1,329,000
Less accumulated depreciation and amortization ... (680,000) (469,000)
----------- -----------
$ 654,000 $ 860,000
=========== ===========
</TABLE>
Depreciation expense for the years ended June 30, 1998 and 1997 was
approximately $223,000 and $213,000, respectively.
F-8
<PAGE> 44
4. COMMITMENTS AND CONTINGENCIES
Leasing Arrangements
Xenometrix leases certain of its equipment and its facilities under
non-cancelable operating leases. Future minimum lease payments under such leases
at June 30, 1998 are as follows:
<TABLE>
<S> <C>
Year Ending June 30,
1999 ........................................... $ 353,000
2000 ........................................... 352,000
2001 ........................................... 343,000
2002 ........................................... 318,000
2003 ........................................... 26,000
Thereafter ............................................ --
----------
$1,392,000
==========
</TABLE>
Rent expense for the years ended June 30, 1998 and 1997 was approximately
$313,000 and $274,000, respectively.
Royalty Agreements
During the years ended June 30, 1998 and June 30, 1997, Xenometrix expensed
total royalties of $174,000 and $86,000 respectively. Xenometrix is obligated to
pay royalties on sales of testing kits or services and on sub-licensing revenues
pursuant to various technology licenses. Certain of these royalties are paid to
universities which have royalty sharing agreements with a current officer of the
Company. During the years ended June 30, 1998 and 1997, Xenometrix paid $75,000
and $65,000, respectively, to these universities.
5. SENIOR PROMISSORY NOTES
Between June 20, 1997 and January 12, 1998, Xenometrix issued Notes in the total
amount of $1,500,000 to serve as bridge financing. The Notes are collateralized
by a security interest in all of the assets of the Company. The Notes were
originally due March 25, 1998. The maturity date on the Notes was extended until
June 25, 1998, at an interest rate of 18% and was again extended at the original
interest rate of 12% until October 25, 1998. In the event of a sale of the
Company prior to October 25, 1998, the Notes are due at the closing of such
sale. In connection with the issuance of these Notes, the Xenometrix issued
warrants to purchase 499,995 shares of common stock. In consideration for the
most recent extension of the due date on the Notes, the exercise price of the
warrants was reduced to $0.37 per share and the Company agreed to pay 38.5% of
all gross licensing revenues received during the extension period to the Note
holders, as payment against the accrued interest and principal due on the Notes.
Debt issuance costs of approximately $53,000 were deferred at June 30, 1997, and
were amortized over the original term of the Notes. In the event of default by
the Company on the Notes, the interest rate will increase to 18% per annum, the
Note holders will have the right to appoint a majority of the Board of Directors
of the Company and the Company's assets will be subject to foreclosure.
F-9
<PAGE> 45
6. STOCK OPTIONS AND WARRANTS
Stock Options
Xenometrix has two stock option plans; an Employee Stock Option Plan ("Employee
Plan") and a Non-Employee Directors Stock Option Plan ("Director Plan"). In
November 1997, the shareholders authorized increases in the number of stock
options which may be granted under the Employee Plan and the Director Plan to
960,000 and 350,000 shares, respectively, of common stock. The stock options are
generally granted at an exercise price not less than the fair market value of
the common stock on the date of grant as determined by the Board of Directors.
Options granted generally vest over thirty-six months and expire ten years after
the date of grant.
On June 25, 1998, the Board of Directors authorized the cancellation of all
stock options with an exercise price in excess of the then current fair market
value of the common stock in consideration for the issuance of new stock options
exercisable for seventy-five percent of the number of cancelled options, at an
exercise price equal to the current fair market value of the common stock. All
other terms and conditions of the cancelled options were to apply to the
replacement options issued under this plan. Under the Employee Plan, 780,956
options with a weighted average exercise price of $4.08 were forfeited and
585,717 new options with a weighted average exercise price of $0.38 were
granted. Under the Director Plan, 80,000 options with a weighted average
exercise price of $5.26 were forfeited and 60,000 new options with a weighted
average exercise price of $0.38 were granted.
Stock option transactions are summarized below:
<TABLE>
<CAPTION>
Employee Plan Director Plan
------------------------------ ---------------------------
Weighted Weighted
Average Average
Exercise Price Exercise Price
of Shares Of Shares
Shares Under Plan Shares Under Plan
--------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1996................. 183,727 $4.13 87,045 $5.20
Granted...................................... 152,000 8.39 77,500 5.31
Exercised.................................... (8,811) 4.22 (10,500) 4.73
Forfeited.................................... (57,100) 5.90 (39,500) 5.83
--------- ----- ------- -----
Outstanding at June 30, 1997 ................ 269,816 6.57 114,545 5.10
Granted...................................... 1,304,255 1.66 60,000 0.38
Exercised.................................... (3,182) .22 - -
Forfeited.................................... (954,242) 3.90 114,545 5.10
--------- ----- ------- -----
Outstanding at June 30, 1998................. 616,647 $0.35 60,000 $0.38
========= ===== ======= =====
Available for issue, June 30, 1998 320,737 279,500
========= =======
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 1998:
<TABLE>
<CAPTION>
Outstanding Options Exercisable
--------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Price Outstanding In Years Price Exercisable Price
- ------------------- ----------- ----------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Employee Plan:
$0.11 4,545 4.75 $0.11 4,545 $0.11
0.15625 63,360 9.67 0.16 0 0.16
0.375 548,742 8.81 0.38 138,141 0.38
-------- ---- ----- ------- -----
616,647 8.87 $0.35 142,686 $0.37
======== ==== ===== ======= =====
Director Plan:
$0.375 60,000 7.99 $0.38 31,909 $0.38
======== ==== ===== ======= =====
</TABLE>
F-10
<PAGE> 46
The Company applies the intrinsic value method set forth in APB No. 25 in
accounting for its stock-based compensation plans. Net loss and net loss per
share as reported and as calculated pursuant to SFAS No. 123 to reflect the fair
value method of accounting for stock-based compensation plans (SFAS 123) were as
follows:
<TABLE>
<CAPTION>
Year Ended
------------------------------
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net Loss: As Reported $ 2,365,000 $ 2,842,000
SFAS 123 $ 2,846,000 $ 2,988,000
Basic Loss Per Share: As Reported $ 0.80 $ 0.97
SFAS 123 $ 0.97 $ 1.02
</TABLE>
The weighted average fair values of options is estimated at $0.94 per option
granted during the year ended June 30, 1998 and $3.05 per option granted during
the year ended June 30, 1997, using the Black-Scholes option pricing model with
the following weighted average assumptions: dividend yield of 0%, volatility of
110% and 42%, risk-free interest rate of 5.7% and 6.28%, and an expected life of
2 and 4 years, for the years ended June 30, 1998 and 1997, respectively.
Compensation cost for the options granted is computed reflecting the actual
forfeitures of options within the respective years.
In addition to the above options, options to purchase 110,000 units (consisting
of one common share of stock and a warrant to purchase an additional share for
$7.0875) at a price of $11.14 per unit are outstanding at June 30, 1998. These
options were granted in October 1995 in connection with the Company's initial
public offering (the "IPO"), as part of the underwriter's compensation. These
options expire in October 2000.
Stock Warrants
In August, 1995, Xenometrix issued warrants to purchase up to 18,182 shares of
common stock at a price of $8.40 per share to affiliates of a former director
and stockholder as consideration for the cancellation of a private placement
agreement. These warrants expire in August 2000.
Xenometrix issued warrants in connection with the 10% Senior Secured Promissory
Notes issued to serve as bridge financing prior to the Company's IPO in October
1995. The warrants are exercisable until October 2000 for the purchase of
200,000 shares of Xenometrix common stock at a price of $4.05 per share. Holders
of these warrants are entitled to "demand" and "piggyback" registration rights
with respect to the common stock issuable upon the exercise of these warrants.
In connection with its IPO, Xenometrix issued 1,235,900 warrants to purchase
newly issued common stock at a price of $7.0875 per share, until October 17,
2000. For these warrants to be exercisable, Xenometrix must maintain a current
registration statement with the Securities and Exchange Commission and
qualification with or approval from various state securities agencies. The
warrants are callable by Xenometrix after the public price of a share of
Xenometrix common stock is $13.50 or higher for 20 consecutive trading days.
In conjunction with the Notes issued in June 1997 through January 1998 (see Note
5), Xenometrix issued warrants to purchase 499,995 shares of common stock. In
consideration for the most recent extension of the due date on the Notes, the
exercise price of the warrants was reduced to $0.37 per share. The warrants are
exercisable during the ten year period ending on September 24, 2007. Holders of
these warrants are entitled to "demand" and "piggy-back" registration rights
with respect to the common shares issuable upon exercise of these warrants.
7. INCOME TAXES
At June 30, 1998, Xenometrix had net operating loss carryforwards for federal
income tax purposes of approximately $15,989,000. Annual utilization of the loss
carryforwards is subject to significant limitations due to
F-11
<PAGE> 47
historical changes in Xenometrix's ownership. Future changes in ownership could
further reduce the annual availability of these benefits. If unused, the
carryforwards will expire beginning in 2007.
The tax effects of significant items comprising the Company's deferred taxes are
as follows:
<TABLE>
<CAPTION>
June 30
---------------------------
1998 1997
Deferred tax assets ----------- -----------
<S> <C> <C>
Net operating loss carryforwards .................... $ 6,236,000 $ 5,135,000
Patent and start-up cost ............................ 118,000 95,000
Depreciation and amortization ....................... 110,000 67,000
Other temporary differences, net .................... 109,000 110,000
----------- -----------
6,573,000 5,407,000
Valuation allowance ................................. (6,573,000) (5,407,000)
----------- -----------
Net deferred tax assets ............................... $ 0 $ 0
=========== ===========
</TABLE>
Deferred tax assets have been reduced to zero by a valuation allowance based on
current evidence which indicates that it is currently not considered likely that
these benefits will be realized. The valuation allowance increased by $1,166,000
during the year ended June 30, 1998, primarily due to additional losses for
which no tax benefit was recorded.
8. RELATED PARTY TRANSACTIONS
Xenometrix has had agreements with two former members and a current member of
its Board of Directors, under which they provide certain scientific, managerial
and financial consulting services to Xenometrix. During the years ended June 30,
1998 and 1997, Xenometrix paid $43,000 and $128,000 for those services,
respectively.
The President of the investment groups holding Xenometrix's Notes is a former
member of the Board of Directors for Xenometrix.
9. SUBSEQUENT EVENTS
On July 30, 1998, Xenometrix announced that it had entered into a license
agreement with Phase One Molecular Toxicology Inc. ("Phase One") granting Phase
One a non-exclusive license to the gene expression profiling claims contained in
an issued European patent and a pending U.S. patent. The U.S. patent was
subsequently issued by the U.S. Patent Office on September 22, 1998 (see below).
The license incorporates up-front fees and a potential royalty stream for
Xenometrix. Phase One's Chairman and CEO is Dr. Spencer Farr, one of the named
inventors on the patents and a former officer and director of Xenometrix.
On September 22, 1998, the U.S. Patent Office issued U.S. Patent No. 5,811,231.
This is a broad, fundamental patent which the Company believes covers the
creation of most gene expression profiles utilizing all methods, including
high-density microarrays. During the period from April 1998 through September
1998, Xenometrix has entered into three agreements granting non-exclusive
licenses to the claims covered by this and other patents.
The Company's principal patents relate to gene expression profiling. Xenometrix
shares ownership of these patents with Harvard University, and has an exclusive
world-wide license (the "Agreement") to Harvard's portion of the intellectual
property. During the fiscal year ended June 30, 1998, approximately two-thirds
of the Company's total annual revenue was generated by option and license
agreements related to the Agreement. The Agreement obligates the Company to make
semi-annual payments to Harvard which include royalties on the sales of products
and services by the Company, and include a portion of the fees received by the
Company from the sub-licensing of these patents to third parties. At June 30,
1998, the Company determined that it owed Harvard approximately $108,000 under
the Agreement, which was due and payable on August 29, 1998. As of September 25,
1998, this amount had not been paid, due to the Company's lack of available
funds. Failure to make payments when due constitutes an event of default under
the Agreement. Continued failure to make such payment within ninety days after
receipt by the Company of a written notice of such event of default from
Harvard, is grounds for termination of the Agreement. In the event that this
payment is not made within the timeframe outlined above, the Company could lose
its license to Harvard's ownership interest in the patents which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
F-12
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
3.1+ Certificate of Incorporation of the Registrant, filed with the
Secretary of State of Delaware on June 15, 1992.
3.2+ Certificate of Merger of the Registrant filed with the Secretary
of State of Delaware on July 29, 1992.
3.3+ Certificate of Amendment of Certificate of Designation of the 5%
Cumulative Convertible Series A Preferred Stock of the
Registrant.
3.4+ Certificate of Amendment of Certificate of Designation of the 5%
Cumulative Convertible Series B Preferred Stock of the
Registrant.
3.5+ Certificate of Amendment of Certificate of Incorporation of the
Registrant with regard to the reverse stock split.
3.6+ Amended and Restated By-Laws of the Registrant.
3.7+ Certificate of Amendment of Certificate of Incorporation of the
Registrant with regard to the addition of Article XII.
3.8+ Certificate of Elimination of the 5% Cumulative Convertible
Series A Preferred Stock of the Registrant.
3.9+ Certificate of Elimination of the 5% Cumulative Convertible
Series B Preferred Stock of the Registrant.
3.10+ Certificate of Amendment of Certificate of Incorporation of the
Registrant with regard to the reduction of the number of the
Registrant's authorized shares.
3.11+ Amendment to the Amended and Restated By-laws of the Registrant
as approved by the Registrant's Board of Directors on September
12th, 1995 and September 27th, 1995.
4.1+ Certificate representing shares of Common Stock.
4.2+ Warrant.
4.3+ Warrant Agreement.
10.1+ Form of Indemnity Agreement between the Registrant and its
directors and executive officers.
10.2+ Employment Agreement, dated as of October 5, 1995, between the
Registrant and Edson D. de Castro.
10.3+ Employment Agreement, dated as of October 5, 1995, between the
Registrant and John H. Wheeler.
10.4+ Employment Agreement, dated as of October 5, 1995, between the
Registrant and Ronald L. Hendrick.
10.5+ Employment Agreement, dated as of October 5, 1995, between the
Registrant and Pauline Gee.
10.6+ Consulting Agreement, dated as of May 25, 1995, between the
Registrant and Spencer B. Farr.
10.7+ Amended and Restated Stock Option Plan of the Registrant.
10.8+ 1993 Non-Employee Directors Stock Option Plan of the Registrant.
10.9+ Form of Proprietary Information and Inventions Agreement between
the Registrant and each of its employees.
10.10+ Voting Agreement, dated as of December 2, 1994, among the
Registrant and certain of its stockholders.
10.11+ Registration Rights Agreement, dated as of December 31, 1991,
between the Registrant and certain of its stockholders.
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
10.12+ Form of Subscription and Preferred Stock Purchase Agreement
between the Registrant and each purchaser of shares of its 5%
Cumulative Convertible Series A Preferred Stock.
10.13+ Form of Warrant for the Purchase of shares of 5% Cumulative
Convertible Series A Preferred Stock of the Registrant.
10.14+ Form of Preferred Stock Purchase Agreement among the Registrant
and the purchasers of shares of its 5% Cumulative Convertible
Series B Preferred Stock.
10.15+ Form of Amendment No. 2 to Subscription and Preferred Stock
Purchase Agreement among the Registrant and the purchasers of
shares of its 5% Cumulative Convertible Series A Preferred Stock.
10.16+** Exclusive License Agreement, effective October 1, 1994, between
the Regents of the University of California and the Registrant.
10.17+** License Agreement, effective January 18, 1992, between the
President and Fellows of Harvard College and the Registrant.
10.18+** License Agreement, dated May 27, 1992, among GeneBioMed, Inc.,
Robert Schiestl and Venmark Ltd.
10.19+ Lease Agreement, dated January 8, 1993, between Wilderness Place,
Ltd. and the Registrant.
10.20+ Exchange Agreement, dated as of January 31, 1993, between D.H.
Blair Holdings, Inc. and the Registrant.
10.21+ Amendment to Preferred Stock Purchase Agreement, dated as of May
6, 1994, among the Registrant and the purchasers of Shares of its
5% Cumulative Convertible Series B Preferred Stock.
10.22* License Agreement dated January 1, 1996 between Stanford
University and the Registrant.
10.23** License Agreement dated June 4, 1996 between The Wistar Institute
and the Registrant.
10.24*** Lease dated July 1, 1996 between Flatirons Cottonwood, Inc. and
the Registrant.
10.25*** Lease Termination Agreement effective July 1996 between
Wilderness Place, Ltd. and the Registrant.
10.26*** Lease Takeover Agreement effective July 1996 between NexStar
Pharmaceuticals, Inc. and the Registrant.
10.27# Employment Agreement, dated December 31, 1996, between the
Company and Stephen J. Sullivan.
10.28## Employment Agreement, dated September 19, 1997, between the
Company and Mark B. Benjamin.
10.29### Senior Line of Credit Agreement, dated September 25, 1997 between
Aires Domestic Fund, L.P., The Aries Fund, a Cayman Islands Trust
and the Registrant
10.30++ First Amendment dated December 18, 1997 to the Senior Line of
Credit Agreement, dated September 25, 1997 between Aries Domestic
Fund, L.P., The Aries Fund, a Cayman Islands Trust and the
Registrant
10.31++ Employment Agreement, dated December 9, 1997 between the Company
and Paul J. Koivuniemi
10.32++ Amendment dated January 16, 1998 to the Employment Agreement
dated October 5, 1995, between the Company and Ronald L. Hendrick
10.33++ Amendment dated January 16, 1998 to the Employment Agreement
dated October 5, 1995, between the Company and Pauline Gee
10.34++ Amendment dated January 16, 1998 to the Employment Agreement
dated September 19, 1997, between the Company and Mark B.
Benjamin
10.35++ Amendment dated January 16, 1998 to the Employment Agreement
dated December 9, 1997, between the Company and Paul J.
Koivuniemi
10.36+++ Amendment to the Senior Line of Credit Agreement and Notes, dated
as of March 25, 1998 by and among the Company, the Aries Domestic
Fund L.P. and the Aries Fund, a Cayman Islands Trust
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
10.37oo Agreement dated February 24, 1998 between [ * ] and the
Registrant, regarding the granting of an exclusive option period
to negotiate a license under the Company's gene expression
profiling patents.
10.38+++ Amendment to the Senior Line of Credit Agreement and Notes, dated
as of March 25, 1998 by and among the Company, the Aries Domestic
Fund L.P. and the Aries Fund, a Cayman Islands Trust
10.39** License Agreement dated April 17, 1998 between Aurora Biosciences
Corporation and the Registrant.
10.40** Amendment to the Senior Line of Credit Agreement and Notes, dated
as of May 25, 1998 by and among the Company, the Aries Domestic
Fund L.P. and the Aries Fund, a Cayman Islands Trust
10.41** License Agreement dated June 5, 1998 between Cerep S.A. and the
Registrant.
10.42 Amendment to the Senior Line of Credit Agreement and Notes, dated
as of June 25, 1998 by and among the Company, the Aries Domestic
Fund L.P. and the Aries Fund, a Cayman Islands Trust
10.43** License Agreement dated July 27, 1998 between Phase-1 Molecular
Toxicology, Inc. and the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Summary Financial Information Schedule.
</TABLE>
- --------------------------------------------------------------------------------
+ Incorporated herein by reference from Xenometrix's Form SB-2 Registration
Statement, Registration No. 33-96636-D, dated October 17, 1995.
o Incorporated herein by reference from Xenometrix's Form 10-QSB for the
quarter ended December 31, 1995.
** Xenometrix has been granted or is applying for confidential treatment with
respect to portions of these exhibits.
*** Incorporated herein by reference from Xenometrix's Form 10-KSB for the
fiscal year ended June 30, 1996.
# Incorporated herein by reference from Xenometrix's Form 10-QSB for the
quarter ended December 31, 1996.
## Incorporated herein by reference from Xenometrix's Form 10-KSB for the
fiscal year ended December 31, 1997.
### Incorporated herein by reference from Xenometrix's Form 10-QSB for the
quarter ended September 30, 1997.
++ Incorporated herein by reference from Xenometrix's Form 10-QSB for the
quarter ended December 31, 1997.
+++ Incorporated herein by reference from Xenometrix's Form 8-K, dated April
10, 1998.
oo Incorporated herein by reference from Xenometrix's Form 10-QSB for the
quarter ended March 31, 1998.
<PAGE> 1
* TEXT OMITTED AND FILED SEPARATELY
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. SECTIONS 200.80(b)(4),
200.83 AND 240.24b-2
EXHIBIT 10.39
LICENSE AGREEMENT
BETWEEN
XENOMETRIX, INC.
AND
AURORA BIOSCIENCES CORPORATION
1
<PAGE> 2
LICENSE AGREEMENT
This Agreement is made this 17th day of April 1998 (the "Effective Date"), by
and between Xenometrix, Inc. ("Xeno"), a Delaware corporation with principal
offices at 2425 North 55th Street, Boulder, CO 80301-5700 and Aurora Biosciences
Corporation ("ABSC"), a Delaware corporation with principal offices at 11010
Torreyana Road, San Diego, California to license certain technology.
RECITALS
WHEREAS, XENO is the owner or exclusive licensee of the XENO Patents relating to
certain assays, technology and intellectual property further described herein,
and desires to license the same to ABSC; and
WHEREAS, ABSC seeks to obtain certain license rights and licensing rights under
the XENO Patents, according to the terms contained herein (the "Agreement");
Now, therefore, in consideration of the foregoing and the covenants and premises
contained herein the parties agree as follows:
1. DEFINITIONS
1.1. "Affiliate" means any corporation or other business entity controlled
by or in common control of an entity. Control, as used in the context
of a business entity, means the ownership directly or indirectly of
fifty percent (50%) or the maximum interest permitted by local law of
the voting securities of the person, corporation, or other entity or a
fifty percent (50%) or greater interest in the income of such
corporation or other entity or the ability otherwise of the entity to
secure that the affairs of such person, corporation or other entity
are managed in accordance with the such entity's wishes.
1.2. "Aurora Technology" means all Technology owned or Controlled by
Aurora.
1.3. "Confidential Information" means all information, compounds, data, and
materials received by either party from the other party pursuant to
this Agreement including, without limitation, Technology of each
party, subject to the exceptions set forth in Section 6.1.
1.4. "Consideration" shall mean money, revenue, or Equity Premium.
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<PAGE> 3
1.5. "Control" or "Controlled" means, in the context of intellectual
property, possession by a party of the ability to grant a license or
sublicense in accordance with the terms of this Agreement, and
without violating the terms of any agreement by such party with any
Third Party.
1.6. "Equity Premium" shall mean Consideration received by ABSC
attributable to the sale of a security, in excess of the fair market
value of the security, such fair market value to be measured by the
average closing price of the security on the principal U.S. stock
exchange upon which it trades, for the 10 trading days immediately
prior to the sale.
1.7. "Field" means [ * ]
1.8. "Harvard License Agreement" means the license agreement between the
President and Fellows of Harvard College and Venmark Ltd., now XENO,
executed on January 17, 1992.
1.9. "Intellectual Property" means any information and data which is not
generally known to the public, comprising: any new and useful
process, machine, manufacture, or composition of matter, or
improvement thereto, whether or not patentable, designs, concepts,
algorithms, formulae, software, techniques, practices, processes,
methods, knowledge, skill, experience, expertise and technical
information; copyrights; trade secrets; or patent rights (including
pending and issued any where in the world).
1.10. "Materials" means any biological or chemical entity for screening or
assays, including reagents, cells, promoters, enhancers, vectors,
plasmids, proteins and fragments thereof, peptides, antigens,
antibodies, antagonists, agonists, inhibitors, and chemicals.
1.11. "XENO Patents" means the U.S. patents and patent applications listed
on Exhibit A hereto, any patent applications filed prior or
subsequent to the Effective Date that claim the benefit of an early
filing date to any of the patent applications listed in Exhibit A,
and any reissues, extensions, substitutions, confirmations,
re-registrations, re-examinations, continuations, divisionals or
continuations-in-part of the foregoing patents and patent
applications, as well as all foreign counterparts or equivalents
thereof.
1.12. "Sublicensee" means a Third Party and its Affiliates (if any) that
have a sublicense from ABSC under the XENO Patents.
* CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24B-2 OF THE SECURITIES AND EXCHANGE COMMISSION ACT OF 1934, AS AMENDED.
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<PAGE> 4
1.13. "Technology" means Materials, Intellectual Property or both.
1.14. "Third Party" means any entity other than (i) ABSC and any of its
Affiliates, and (ii) XENO and any of its Affiliates.
1.15. "Valid Claim" means: (a) an enforceable claim under an issued patent
within the XENO Patents, which has not (i) expired or been canceled,
(ii) been declared invalid by an unreversed and unappealable decision
of a court or other appropriate body of competent jurisdiction, (iii)
been admitted to be invalid or unenforceable through reissue,
disclaimer or otherwise, and/or (iv) been abandoned.
2. LICENSES
2.1. Grant of Licenses Under the XENO Patents from XENO to ABSC.
2.1.1. Non-Exclusive License to XENO Patents. XENO hereby grants to
ABSC and its Affiliates a non-exclusive, worldwide license in the
Field under XENO's ownership interest in the XENO Patents to
make, use, have made, sell, have sold, offer for sale, import,
export or otherwise exploit any process, composition of matter or
other invention claimed in the XENO Patents.
2.1.2. Non-Exclusive Sublicense to XENO Patents under the Harvard
License Agreement. XENO hereby grants to ABSC and its Affiliates
a non-exclusive, worldwide sublicense in the Field under XENO's
right to sublicense the XENO Patents in the Harvard License
Agreement to make, use, have made, sell, have sold, offer for
sale, import, export or otherwise exploit any process,
composition of matter or other invention claimed in the XENO
Patents. ABSC acknowledges the Harvard License Agreement and
XENO's duties and obligations thereunder.
2.1.3. Right to Sublicense the XENO Patents.
2.1.3.1. XENO hereby grants ABSC the right to grant
non-exclusive, worldwide sublicenses in the Field to a Third
Party and its Affiliate(s) under XENO's ownership interest
in the XENO Patents to make, use, have made, sell, offer for
sale, import, export or otherwise exploit any process,
composition of matter or other invention claimed in the XENO
Patents.
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<PAGE> 5
2.1.3.2. XENO hereby grants ABSC the right to grant
non-exclusive, worldwide sublicenses in the Field to a Third
Party and its Affiliate(s) under XENO's right to sublicense
the XENO Patents in the Harvard License Agreement to make,
use, have made, sell, offer for sale, import, export or
otherwise exploit any process, composition of matter or
other invention claimed in the XENO Patents.
2.1.3.3. Sublicenses under Section 2.1.3 may be granted only to
licensees of Aurora Technology for use in conjunction with
Aurora Technology. The consideration for such sublicenses is
set forth in Section 3. The sublicense rights in this
Section 2.1.3 do not include the right to sub-sublicense.
2.1.3.4. The parties agree that ABSC hereby has the exclusive
right to negotiate with [ * ] for any sublicense in the
Field under either XENO's ownership interest in the XENO
Patents or XENO's right to sublicense the XENO Patents in
the Harvard License Agreement. If the scope of such a
potential license is broader than ABSC's rights of
sublicense herein, ABSC and XENO agree to negotiate in good
faith the terms of a broader sublicensing right for ABSC,
consistent with XENO's Third Party obligations at the time.
2.2. Miscellaneous Licensing Provisions.
2.2.1. Any sublicenses granted hereunder by ABSC and granted prior to
termination, shall terminate in accordance with such sublicensing
agreement. XENO covenants not to sue ABSC or its Affiliates or
Sublicensees for causes of action relating to the infringement of
XENO's intellectual property rights (including, patent,
copyright, trademark and trade secret rights) arising out of the
use or practice of any invention to which ABSC and its Affiliates
and Sublicensees have a license pursuant to Article 2 for so long
as such license is in force as effect.
3. COMPENSATION
3.1. Compensation for the XENO Patents License.
3.1.1. XENO Patent Licenses and Rights. As consideration for the
licenses and rights granted to ABSC pursuant to Sections 2.1.1
and 2.1.2 and otherwise herein, ABSC will pay to XENO:
* CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24B-2 OF THE SECURITIES AND EXCHANGE COMMISSION ACT OF 1934, AS AMENDED.
5
<PAGE> 6
a) [ * ] upon signing of the Agreement;
b) [ * ] per calendar year license fee payable on
January 1, 1999 and annually thereafter and such
fees paid in any calendar year are creditable
against the annual royalty for the same calendar
year to be paid by ABSC under Section 3.1.1(c),
and
c) An annual royalty calculated by multiplying a
[ * ] percent [ * ] royalty rate to the
Consideration received by ABSC for the sale of
products and services that are covered by a Valid
Claim of the Xeno Patents within the Field on a
country-by-country basis; provided however, that
the following are not subject to such a royalty:
[ * ].
d) No other royalties or milestones or additional
fees will be due pursuant to the license under
Sections 2.1.1 and 2.1.2. Royalty obligations of
Section 3.1.1 (c) will terminate on a
country-by-country basis.
3.1.2. Consideration to be paid by Third Parties for XENO Patents
sublicenses.
3.1.2.1. For each sublicense granted by ABSC under Sections
2.1.3, ABSC will pay to XENO per year the greater of [ * ]
dollars [ * ] or [ * ] percent [ * ] of the sublicense fees
agreed to by ABSC and the Third Party for a given sublicense
per year. XENO agrees and acknowledges that ABSC may retain
the remainder of the sublicense fee, and ABSC shall not be
obligated to pay to XENO any other compensation for such
sublicense. Notwithstanding the foregoing, ABSC will pay to
XENO [ * ] per year per excluded company to which ABSC has
not granted a sublicense if ABSC desires to maintain the
exclusive rights under Section 2.1.3.4 with respect to such
company.
3.1.3. Most Favored Nation for Sections 3.1.1, and 3.1.2. If prior to
the issuance of U.S. patent application 08/374,641 XENO has or
shall have entered into an agreement for a license of
substantially similar scope as the license granted in Sections
2.1.1 or 2.1.2 with a Third Party under the XENO Patents, XENO
shall promptly notify ABSC in writing if such license is valued
less than [ * ]. If such a license exists, ABSC shall have the
option of substituting such terms for those set forth herein.
Upon written notification by ABSC to XENO, ABSC will select a
* CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24B-2 OF THE SECURITIES AND EXCHANGE COMMISSION ACT OF 1934, AS AMENDED.
6
<PAGE> 7
consultant reasonably acceptable to XENO who will perform a confidential review
of the value of the terms of such Third Party agreement. If ABSC chooses to
substitute such terms and such substituted terms would require payments from
ABSC that have not then been made by ABSC, then ABSC shall promptly pay the same
to XENO. If ABSC chooses to substitute such terms and such substituted terms
exceed the amount owed to XENO, XENO shall credit the difference of such
overpayments to ABSC, as appropriate.
3.1.4. Royalty Reports, and Payments. Beginning on the Effective Date,
ABSC shall make written reports (even if there are no sales) and
earned royalty payments to within sixty (60) days after the end
of the each calendar quarter. This report shall state the number,
description, and aggregate profits according to product(s) and
service(s) during such completed calendar quarter, and resulting
calculation pursuant to Section 3.1.1(c) of earned royalty
payment due XENO for such completed calendar quarter. Concurrent
with the making of each such report, ABSC shall include payment
due XENO of royalties for the calendar quarter covered by such
report. All such reports, payments and the like shall be kept
confidential by XENO in accordance with provisions herein.
3.1.5. Accounting. ABSC agrees to keep and maintain records for a
period of three (3) years showing the manufacture, sale, use, and
other profits according to Section 3.1.1(c). Such records will
include general ledger records showing cash receipts and
expenses, and records which include sufficient detail to enable
the royalties payable hereunder by ABSC to be determined. ABSC
further agrees to permit its relevant books and records to be
examined by XENO confidentially pursuant to the provisions herein
and upon reasonable written request by XENO, from time to time
from three (3) years from the date of a transaction to the extent
necessary to verify reports provided for in the above section
titled royalty, reports, and payments. Such examination is to be
made by XENO or its designee, at the expense of XENO except in
the event that the results of the audit reveal an underreporting
of royalties due XENO of ten percent (10%) or more in any
calendar year, then the audit costs shall be paid by ABSC.
4. PROTECTION AND MAINTENANCE OF PATENT RIGHTS
XENO shall use reasonable efforts to continue to prosecute the XENO Patents to
obtain the broadest claims reasonably possible and to defend and maintain the
validity and enforceability of any issued claims. XENO shall control, at its
expense, the prosecution of all XENO Patents. XENO will provide ABSC with
written updates on the status of the prosecution of the XENO Patents at least
once per year. With the consent of XENO, not to be unreasonably withheld,
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<PAGE> 8
ABSC shall have the right, but not the obligation, to bring proceedings against
the excluded companies set forth in Section 2.1.3.4 for patent infringement of
the XENO Patents or otherwise enter into a license with such excluded companies
as set forth herein. ABSC will do so at its own risk and expense. At the request
of ABSC, XENO shall give ABSC, at ABSC's expense, all reasonable assistance
required or reasonably necessary to file suit against such excluded company and
conduct any such proceeding.
5. REPRESENTATIONS AND WARRANTIES
5.1. Representations and Warranties of ABSC and XENO.
Each party hereby represents and warrants:
Corporate Power. Such party is duly organized and validly
existing and in good standing under the laws of the state of
its incorporation and has all requisite corporate power and
authority to enter into this Agreement and to carry out the
provisions hereof.
Due Authorization. Such party is duly authorized to execute
and deliver this Agreement and to perform its obligations
hereunder.
Binding Agreement. This Agreement is a legal and valid
obligation binding upon it and enforceable in accordance with
its terms. The execution, delivery and performance of this
Agreement by such party does not conflict with any agreement,
instrument or understanding, oral or written, to which it is a
party or by which it may be bound, nor violate any law or
regulation of any court, governmental body or administrative
or other agency having jurisdiction over it.
5.2. Representations and Warranties of XENO.
XENO further represents and warrants to ABSC:
Right to License or Sublicense. It owns or Controls under
valid licenses, and will use best efforts to continue to own
or Control under valid licenses all right, title and interest
in and to the XENO Patents licensed or to be licensed or
sublicensed hereunder, except as otherwise provided or
disclosed herein.
Patents. It has provided to ABSC a copy of each of the XENO
Patents issued, pending or in preparation as of the Effective
Date, as listed on Exhibit A and as
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<PAGE> 9
requested by ABSC. To the best of XENO's knowledge, there
are no threatened or pending actions, suits, investigations,
claims, or proceedings in any way relating to the XENO
Patents, other than prosecution proceedings not relating to
interference or opposition proceedings. It does not own or
hold license rights to any patent or patent application not
listed in the applicable exhibit attached hereto which, if
issued, would be infringed by the ABSC or its Affiliates or
Sublicensee's activities pursuant to the licenses granted
herein. To the best of XENO's knowledge, no additional
patent rights that claim substantially the same patentable
gene expression profiling subject matter as the XENO Patents
licensed to ABSC herein exist or would prevent ABSC from
practicing the patentable methods and other patentable
subject matter claimed in the XENO Patents as contemplated
by this Agreement.
5.3 Negation of Warranties
Except as expressly set forth in this Agreement, XENO MAKES NO
REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER
EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR
THAT THE USE OF THE LICENSED PRODUCTS OR SERVICES WILL NOT
INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OR
ANY OTHER EXPRESS OR IMPLED WARRANTIES.
6. CONFIDENTIALITY
6.1. Confidential Information. Except as expressly provided herein, the
parties agree that, for the Term and five (5) years thereafter, the
receiving party shall keep completely confidential and shall not
publish or otherwise disclose to another party and shall not use for
any purpose other than to perform the purposes contemplated by this
Agreement any Confidential Information furnished to it by the
disclosing party hereto pursuant to this Agreement, except that to the
extent that it can be established by the receiving party by competent
proof that such Confidential Information:
was already known to the receiving party, other than under an
obligation of confidentiality, at the time of disclosure;
was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving
party;
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<PAGE> 10
became generally available to the public or otherwise part
of the public domain after its disclosure and other than
through any act or omission of the receiving party in breach
of this Agreement; or
was lawfully disclosed to the receiving party by a person
other than a party hereto,
or
was independently developed by the receiving party.
6.2. Permitted Use and Disclosures. Each party hereto may use or disclose
Confidential Information disclosed to it by the other party to the
extent such use or disclosure is reasonably necessary in filing or
prosecuting patent applications, prosecuting or defending litigation,
complying with applicable law, governmental regulation or court order,
submitting information to tax or other governmental authorities,
making a permitted sublicense or otherwise exercising its rights
hereunder, provided that if a party is required to make any such
disclosure of another party's Confidential Information, other than
pursuant to a confidentiality agreement, it will give reasonable
advance notice to the latter party of such disclosure and, save to the
extent inappropriate in the case of patent applications, will use
reasonable efforts to secure confidential treatment of such
information prior to its disclosure (whether through protective orders
or otherwise).
6.3. Confidential Terms. Except as expressly provided herein, each party
agrees not to disclose any material or financial terms of this
Agreement to another party without the consent of the other party, not
to be unreasonably withheld; provided, however, each party reserves
the right to make reasonable disclosures (including the redaction of
material or financial terms) as required by securities or other
applicable laws, or to actual or prospective investors or corporate
partners (including licensees and acquirers), or to accountants,
attorneys and other professional advisors on a need-to-know basis
under circumstances that reasonably ensure the confidentiality
thereof, or to the extent required by law. If such Confidential
Information is to become public information by such disclosure the
disclosing party must obtain the written consent of the non-disclosing
party in order to obtain protection of the Confidential Information if
necessary.
6.4. Press Release. Notwithstanding the foregoing, the parties shall agree
in writing upon a press release to announce the execution of this
Agreement. Thereafter, XENO and ABSC may each disclose to Third
Parties the information contained in such press release without the
need for further approval by the other.
7. TERMINATION
7.1.1 This Agreement shall continue until the last expiration date of all
patents licensed under this Agreement.
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7.1.2 Either party shall have the right to terminate this Agreement at any
time for a material breach of this Agreement by the other party,
provided that the non-breaching party shall have first given ninety
(90) days prior written notice (sixty (60) days in the event of
non-payment of any amounts due under this Agreement) to the breaching
party describing such breach and stating the non-breaching party's
intention to terminate this Agreement if such breach remains uncured,
and the breaching party thereafter fails to cure same within a
reasonable time.
7.1.3 ABSC may terminate this Agreement without cause at any time by
providing written notice to XENO of such termination and such
termination will be effective ninety (90) days thereafter. Any
termination pursuant to Section 7.1.3 shall not relieve ABSC of any
obligation or liability accrued hereunder prior to such termination,
including ABSC's obligation to pay royalties accrued or accruable.
The licenses granted hereunder and all sublicenses granted by ABSC
under this agreement shall terminate in the event the Agreement is
terminated by ABSC or termination by an arbitrator for an uncured
breach by ABSC.
7.1.4 XENO and ABSC acknowledge that this Agreement is an "executory
contract" as provided in Section 365(n) of Title 11, United States
Code (the "Bankruptcy Code"). XENO acknowledges that if XENO as a
debtor in possession or a trustee in bankruptcy in a case under the
Bankruptcy Code rejects the Agreement, ABSC may elect to retain its
rights under this Agreement as provided in Section 365(n) of the
Bankruptcy Code, including a right to any embodiments of any
technology licensed hereunder to the fullest extent permitted by law.
XENO or such bankruptcy trustee shall not interfere with the rights
of ABSC as provided in this Agreement, except as otherwise permitted
by law or equity.
8. MISCELLANEOUS
8.1. Binding Effect; Assignment. This Agreement shall be binding upon the
parties' respective successors and permitted assigns. Neither party
may assign this Agreement or any of its rights or obligations
hereunder without the prior written consent of the other party (not
to be unreasonably withheld), and any such attempted assignment shall
be void; provided, that ABSC and XENO may assign this Agreement as
part of a merger or consolidation in which the surviving entity
assumes all of ABSC's and XENO's rights and obligations hereunder or
a sale of substantially all of the assets of such party to which this
Agreement relates. The parties agree that in the event of the
termination of the Harvard License Agreement, the President and
Fellows of Harvard College shall have the option of assigning this
Agreement to it or terminating the licenses in Sections 2.1.2 and
2.1.3.2 together with the related obligations of ABSC under Sections
3.1.1 and 3.1.2.
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8.2. Effect of Waiver. No waiver of any default, condition, provisions or
breach of this Agreement shall be deemed to imply or constitute a
waiver of any other like default, condition, provision or breach of
this Agreement.
8.3. Limitation of Liability. NEITHER PARTY SHALL BE LIABLE TO THE OTHER
FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTIAL, OR INDIRECT DAMAGES
ARISING OUT OF THIS AGREEMENT, HOWEVER CAUSED, UNDER ANY THEORY OF
LIABILITY.
8.4. Indemnification. ABSC will defend, indemnify and hold XENO, its
officers, directors, employees, Affiliates and agents harmless against
any and all liability, loss, damage, claim or expense (including
attorney's fees) arising out of a suit by a Third Party from the
performance under this Agreement by ABSC; except to the extent such
claim is caused by the negligence or willful misconduct of XENO or a
breach of a representation of XENO. XENO will defend, indemnify and
hold ABSC, its officers, directors, employees, Affiliates and agents
harmless against any and all liability, loss, damage, claim or expense
(including attorney's fees) arising out of a suit by a Third Party
from the performance under this Agreement by XENO; except to the
extent such claim is caused by the negligence or willful misconduct of
ABSC or a breach of a representation of ABSC.
8.5. Diligence. ABSC agrees to use reasonable efforts to fulfill the
obligations of the express due diligence provision of the Harvard
License Agreement as it applies to a sublicense under the Harvard
License Agreement.
8.6. Force Majeure. Neither party shall lose any rights hereunder or be
liable to the other party for damages or losses (except for payment
obligations) on account of failure of performance by the defaulting
party if the failure is occasioned by war, strike, fire, act of
God(s), earthquake, flood , lockout, embargo, governmental acts or
orders or restrictions, failure of suppliers, or any other reason
where failure to perform is beyond the reasonable control and not
caused by the negligence or intentional conduct or misconduct of the
nonperforming party, and such party has exerted all reasonable efforts
to avoid or remedy such force majeure; provided, however, that in no
event shall a party be required to settle any labor dispute or
disturbance.
8.7. Amendment. No modification, supplement to or waiver of this Agreement
or any Addendum hereto or any of their provisions shall be binding
upon a party hereto unless made in writing and duly signed by an
authorized representative of both XENO and
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ABSC. In no event may the terms of this Agreement be changed, deleted,
supplemented or waived by any notice, purchase order, receipt,
acceptance, bill of lading or other similar form of document. A
failure of either party to exercise any right or remedy hereunder, in
whole or in part, or on one or more occasions, shall not be deemed
either a waiver of such right or remedy to the extent not exercised,
or of any other right or remedy, on such occasion or a waiver of any
right or remedy on any succeeding occasion.
8.8. Entire Agreement. This Agreement, and each Exhibit attached hereto,
and each supplemental written agreement contemplated hereunder, sets
forth the entire understanding and agreement of the parties as to the
subject matter thereof, and there are no other understandings,
representations or promises, written or verbal, not set forth herein
or on which either party has relied. If any provisions of any such
Addendum or supplemental written agreement conflict with any
provisions set forth in this Agreement, the provisions of this
Agreement shall take precedence, unless such Addendum or supplemental
written agreement expressly refers to the specific provision(s) of
this Agreement that it is intended to replace or modify (and which
shall be limited in force and effect to such Addendum or supplemental
written agreement only).
8.9. Notices. All Notices under this Agreement shall be given in writing
and shall be addressed to the parties at the following addresses:
For XENO:
Stephen J. Sullivan
CEO, President and Director
Xenometrix, Inc.
2425 North 55th Street
Boulder, Colorado 80301-5700
Copies to:
Paul J. Koivuniemi
Vice President, Legal Affairs and Corporate Secretary
Xenometrix, Inc.
2425 North 55th Street
Boulder, Colorado 80301-5700
For ABSC:
Paul A. Grayson
Senior Vice President, Corporate Development
Aurora Biosciences Corporation
11010 Torreyana Road
San Diego, CA. 92121
Copies to:
John D. Mendlein, Ph.D., J.D.
Vice President, Intellectual Property and Senior Legal Counsel
Aurora Biosciences Corporation
11010 Torreyana Road
San Diego, CA. 92121
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Notices shall be in writing and shall be deemed delivered when
received, if delivered by a courier, or on the second business day
following mailing, if sent by first-class certified or registered mail,
postage prepaid.
8.10. Arbitration. The parties recognize that disputes as to certain
matters may from time to time arise during the term of this Agreement
which relate to either party's rights and/or obligations hereunder. It
is the objective of the parties to establish procedures to facilitate
the resolution of disputes arising under this Agreement in an
expedient manner by mutual cooperation and without resort to
arbitration. The parties agree that prior to any arbitration
concerning this Agreement, XENO's CEO and ABSC's president will meet
in person or by video-conferencing in a good faith effort to resolve
any disputes concerning this Agreement. Within thirty (30) days of a
formal request by either party to the other, any party may, by written
notice to the other, have such dispute referred to their respective
officers designated or their successors, for attempted resolution by
good faith negotiations, such good faith negotiations to begin within
thirty (30) days after such notice is received. Except as otherwise
provided specifically herein, any controversy or claim under this
Agreement shall be solely settled by arbitration by one arbitrator
pursuant to the Commercial Arbitration Rules of the American
Arbitration Association (the "Association"); provided that the parties
shall first use their best efforts to resolve such dispute by
negotiation. The arbitration shall be conducted in San Diego,
California, if requested by XENO or in Boulder, Colorado if requested
by ABSC. The arbitrator shall be selected by the joint agreement of
the parties, but if they do not so agree within twenty (20) days of
the date of a request for arbitration, the selection shall be made
pursuant to the rules of the Association. The decision reached by the
arbitrator shall be conclusive and binding upon the parties hereto and
may be filed with the clerk of any court of competent jurisdiction,
and a judgment confirming such decision may, if desired by any party
to the arbitration, be entered in such court. Each of the parties
shall pay its own expenses of arbitration and the expenses of the
arbitrator(s) shall be equally shared; provided, however, that if in
the opinion of the arbitrator(s) any claim hereunder or any
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defense or objection thereto was unreasonable, the arbitrator(s) may
assess, as part of the award, all or any part of the arbitration
expenses (including reasonable attorneys' fees) against the party
raising such unreasonable claim, defense or objection. Nothing herein
set forth shall prevent the parties from settling any dispute by
mutual agreement at any time.
8.11. Governing Law. If an arbitration is requested by XENO this Agreement
shall be governed by and construed in accordance with the laws of the
State of California, without regard or giving effect to its principles
of conflict of laws. If an arbitration is requested by ABSC this
Agreement shall be governed by and construed in accordance with the
laws of the State of Colorado, without regard or giving effect to its
principles of conflict of laws.
8.12. Severability and Survival. This Agreement is intended to be
severable. If any provision(s) of this Agreement are or become
invalid, are ruled illegal by a court of competent jurisdiction or are
deemed unenforceable under the current applicable law from time to
time in effect during the term hereof, it is the intention of the
parties that the remainder of the Agreement shall not be affected
thereby and shall continue to be construed to the maximum extent
permitted by law at such time. It is further the intention of the
parties that in lieu of each such provision which is invalid, illegal,
or unenforceable, there shall be substituted or added as part of this
Agreement by such court of competent jurisdiction a provision which
shall be as similar as possible, in economic and business objectives
as intended by the parties to such invalid, illegal or unenforceable
provision, but shall be valid, legal and enforceable. Unless expressly
stated otherwise, the provision of Sections 1, 2, 4, 5, 6, 7 and 8 and
any other provision intended by its meaning to survive, will survive
the expiration or any other termination of this Agreement.
8.13. Independent Contractors. The parties hereto are acting as independent
contractors and shall not be considered partners, joint venturers or
agents of the other. Neither shall have the right to act on behalf of,
or to bind, the other.
8.14. Headings. Captions and paragraph headings are for convenience only
and shall not form an interpretative part of this Agreement. Unless
otherwise specifically provided, all references to an Article
incorporate all Articles or subsections thereunder. This Agreement
shall not be strictly construed against either party hereto and maybe
executed in two or more counterparts, each of which will be deemed an
original and the same instrument. This Agreement will not be
enforceable and shall have no effect if this Agreement is not executed
by XENO on or before April 17, 1998.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Agreement.
By: /s/ Stephen J. Sullivan Date: 4/17/98
------------------------------------ -------
Stephen J. Sullivan, M.B.A.
CEO and President
For Xenometrix, Inc.
By: /s/ Timothy J. Rink Date: 4/16/98
------------------------------------ -------
Timothy J. Rink M.D., Sc.D.
President, CEO and Chairman
For Aurora Biosciences Corporation
16
<PAGE> 17
EXHIBIT A
<TABLE>
<CAPTION>
===========================================================================================================
EUKARYOTIC GENE PROFILING
===========================================================================================================
PATENT/
APPLICATION # FILING DATE COUNTRY ISSUE DATE TITLE
- ------------------- ----------- --------- ---------- -------------------------------------
<S> <C> <C> <C> <C>
08/008,896 1/21/93 US
- ------------------- ----------- --------- ---------- -------------------------------------
08/374,641 7/21/95 US (Allowed). Methods and Diagnostic Kits Utilizing
Mammalian Stress Promoters to
Determine Toxicity of a Compound
- ------------------- ----------- --------- ---------- -------------------------------------
61243/94 1/21/94 Australia
- ------------------- ----------- --------- ---------- -------------------------------------
2154265 1/21/94 Canada
- ------------------- ----------- --------- ---------- -------------------------------------
0 680 517 1/21/94 EPC 11/12/97
- ------------------- ----------- --------- ---------- -------------------------------------
6-517147 1/21/94 Japan
- ------------------- ----------- --------- ---------- -------------------------------------
9601405-5 2/13/96 Singapore
- ------------------- ----------- --------- ---------- -------------------------------------
US94/00583 1/21/94 PCT
- ------------------- ----------- --------- ---------- -------------------------------------
694 06 772.5-08 Germany 11/25/97
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================================
BACTERIAL GENE PROFILING
=============================================================================================================
PATENT/
APPLICATION # FILING DATE COUNTRY ISSUE DATE TITLE
- ------------------- ----------- --------- ---------- ----------------------------------------
<S> <C> <C> <C> <C>
5,589,337 1/6/95 US 12/31/96 Methods and Diagnostic Kits for
Determining Toxicity Utilizing Bacterial
Stress Promoters Fused to Report Genes
- ------------------- ----------- --------- ---------- ----------------------------------------
651825 7/6/93 EPO 1/14/98
- ------------------- ----------- --------- ---------- ----------------------------------------
5,585,232 4/21/94 US 12/17/96 Methods and Diagnostics Kits for
Determining Toxicity Utilizing E. coli
Stress Promoters Fused to Reporter Genes
- ------------------- ----------- --------- ---------- ----------------------------------------
9601688-6 2/14/96 Singapore
- ------------------- ----------- --------- ---------- ----------------------------------------
2,139,667 7/9/93 Canada
- ------------------- ----------- --------- ---------- ----------------------------------------
6-503562 7/6/93 Japan
- ------------------- ----------- --------- ---------- ----------------------------------------
95-700038 7/6/93 Korea
- ------------------- ----------- --------- ---------- ----------------------------------------
07/910793 7/6/92 US
- ------------------- ----------- --------- ---------- ----------------------------------------
45884/93 7/6/93 Australia
- ------------------- ----------- --------- ---------- ----------------------------------------
95.004 7/6/93 Norway
=============================================================================================================
</TABLE>
17
<PAGE> 1
*TEXT OMITTED AND FILED SEPARATELY
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. SECTIONS 200.80(B)(4),
200.83 AND 240.24B-2
EXHIBIT 10.40
AMENDMENT TO THE SENIOR LINE OF CREDIT AGREEMENT AND NOTES
This is an Amendment to the Senior Line of Credit Agreement between
Aries Domestic Fund, L.P., The Aries Fund, a Cayman Islands Trust (collectively,
the "Funds"), and Xenometrix, Inc. (the "Company"), dated September 25, 1997
(the "Agreement") and the Amendment of March 25, 1998 extending the Maturity
Date of all of the Notes to May 25th, 1998.
Whereas, Xenometrix is engaged in discussions with [ * ] that may lead
to the sale of the Company, and;
Whereas, Xenometrix has demonstrated evidence of a pending agreement
for [ * ] through the attached Letter of Intent signed by [ * ] and Xenometrix,
which contains specific provisions for the repayment of the Notes, and;
Whereas, the existing line of credit, due to be retired on May 25,
1998, represents a potential impediment to the effective implementation of the
[ * ];
Now therefore, the Parties agree to amend the Agreement as follows:
The Funds agree to extend the Maturity Date of all of the Notes issued
under the Agreement to June 25, 1998.
All other terms of the Agreement, as amended, will continue to be in
full force during the extension period.
In witness whereof, the Parties hereto have caused this Amendment to be
executed by their respective duly authorized representative as of the day and
year written below.
XENOMETRIX, INC. THE ARIES FUND, A CAYMAN ISLAND
TRUST
By: /s/ STEPHEN J. SULLIVAN By: its Investment Manager, PARAMOUNT
----------------------- CAPITAL ASSET MANAGEMENT, INC.
Name: Stephen J. Sullivan
Its: President and CEO BY: /S/ LINDSAY A. ROSENWALD
Date: 5/25/98 ---------------------------------
Name: Lindsay A. Rosenwald, M.D.
Title: President
THE ARIES DOMESTIC FUND, L.P.
By: its General Partner, PARAMOUNT
CAPITAL ASSET MANAGEMENT, INC.
By: /s/ LINDSAY A. ROSENWALD
---------------------------------
Name: Lindsay A. Rosenwald, M.D.
Title: President
* CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24B-2 OF THE SECURITIES AND EXCHANGE COMMISSION ACT OF 1934, AS AMENDED.
<PAGE> 1
* TEST OMITTED AND FILED SEPARATELY
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. SECTIONS 200.80(B)(4),
200.83 AND 240.24B-2
EXHIBIT 10.41
LICENSE AGREEMENT
BETWEEN
XENOMETRIX, INC.
AND
CEREP S.A.
CEREP XENO Final License Agreement 1
<PAGE> 2
LICENSE AGREEMENT
This Agreement is made this 5th day of June 1998 (the "Effective Date"), by and
between Xenometrix, Inc. ("XENO"), a Delaware corporation with principal offices
at 2425 North 55th Street, Boulder, CO 80301-5700 and Cerep S.A. ("CEREP"), a
French corporation with principal offices at 260, Boulevard Saint Germain,
75007, Paris, France to license certain technology.
RECITALS
WHEREAS, XENO is the owner or exclusive licensee of the XENO Patents relating to
certain assays, technology and intellectual property further described herein,
and desires to non-exclusively license the same to CEREP; and
WHEREAS, CEREP seeks to obtain certain non-exclusive license rights and
licensing rights under the XENO Patents, according to the terms contained herein
(the "Agreement");
Now, therefore, in consideration of the foregoing and the covenants and promises
contained herein the parties agree as follows:
1 DEFINITIONS
1.1. "Affiliate" means any corporation or other business entity controlled
by, or in common control of an entity. Control, as used in the context
of a business entity, means the ownership directly or indirectly of
fifty percent (50%) of the voting securities of the person,
corporation, or other entity or a fifty percent (50%) or greater
interest in the income of such corporation or other entity or the
ability otherwise of the entity to secure that the affairs of such
person, corporation or other entity are managed in accordance with the
such entity's wishes.
1.2. "Confidential Information" means all information, compounds, data, and
Materials received by either party from the other party pursuant to
this Agreement including, without limitation, technology of each
party, subject to the exceptions set forth in Section 5.1.
1.3. "Control" or "Controlled" means, in the context of intellectual
property, possession by a party of the ability to grant a license or
sublicense in accordance with the terms of this Agreement, and without
violating the terms of any agreement by such party with any Third
Party.
CEREP XENO Final License Agreement 2
<PAGE> 3
1.4. "Field" means [ * ].
1.5. "Harvard License Agreement" means the license agreement between the
President and Fellows of Harvard College and Venmark Ltd., now XENO,
executed on January 17, 1992 attached hereto as Exhibit B.
1.6. "Licensed Product(s)" means products or components thereof claimed in
Xeno Patents or products or components thereof made in accordance with
or by means of Licensed Processes.
1.7. "Licensed Process(es)" means the processes claimed in Xeno Patents.
1.8. "Materials" means any biological or chemical entity for screening or
assays, including reagents, cells, promoters, enhancers, vectors,
plasmids, proteins and fragments thereof, peptides, antigens,
antibodies, antagonists, agonists, inhibitors, and chemicals.
1.9. "Net Sales" means the amounts received for sales or use of Licensed
Products or Licensed Processes less: customary trade, quantity or cash
discounts actually allowed and taken; amounts repaid or credited by
reason of rejection or return; and/or to the extent separately stated
on purchase orders, invoices or other documents or sale, taxes levied
on and/or other governmental charges made as to production, sale,
transportation, delivery or use and paid by or on behalf of CEREP.
1.10 "XENO Patents" means the U.S. patents and patent applications listed
on Exhibit A hereto, any patent applications filed prior or subsequent
to the Effective Date that claim the benefit of an early filing date
to any of the patent applications listed in Exhibit A, and any
reissues, extensions, substitutions, confirmations, re-registrations,
re-examinations, continuations, divisionals or continuations-in-part
of the foregoing patents and patent applications, as well as all
foreign counterparts or equivalents thereof.
1.11 "Third Party" means any entity other than (i) CEREP and any of its
Affiliates, and (ii) XENO and any of its Affiliates.
2. LICENSES
2.1. Grant of Licenses Under the XENO Patents from XENO to CEREP.
* CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24B-2 OF THE SECURITIES AND EXCHANGE COMMISSION ACT OF 1934, AS AMENDED.
CEREP XENO Final License Agreement 3
<PAGE> 4
2.1.1. Non-Exclusive License to XENO Patents. XENO hereby grants to
CEREP and its Affiliates a non-exclusive, worldwide license in
the Field under XENO's ownership interest in the XENO Patents to
make, use, have made, sell, have sold, offer for sale, import,
export or otherwise exploit any process, composition of matter or
other invention claimed in the XENO Patents.
2.1.2. Non-Exclusive Sublicense to XENO Patents under the Harvard
License Agreement. XENO hereby grants to CEREP and its Affiliates
a non-exclusive, worldwide sublicense in the Field under XENO's
right to sublicense the XENO Patents in the Harvard License
Agreement to make, use, have made, sell, have sold, offer for
sale, import, export or otherwise exploit any process,
composition of matter or other invention claimed in the XENO
Patents. CEREP acknowledges the Harvard License Agreement and
XENO's and CEREP's duties and obligations thereunder.
2.1.3. Right to Sublicense the XENO Patents.
2.1.3.1. XENO hereby grants CEREP the right to grant
non-exclusive, worldwide sublicenses in the Field to a
Third Party under XENO's ownership interest in the XENO
Patents to make, use, have made, sell, offer for sale,
import, export or otherwise exploit any process,
composition of matter or other invention claimed in the
XENO Patents.
2.1.3.2. XENO hereby grants CEREP the right to grant
non-exclusive, worldwide sublicenses in the Field to a
Third Party under XENO's right to sublicense the XENO
Patents in the Harvard License Agreement to make, use,
have made, sell, offer for sale, import, export or
otherwise exploit any process, composition of matter or
other invention claimed in the XENO Patents.
2.1.3.3. Sublicenses under Section 2.1.3 may be granted only to
customers of CEREP and [ * ] for use with CEREP
technology. The consideration for such sublicenses is set
forth in Section 3. The sublicense rights in this Section
2.1.3 do not include the right to sub-sublicense. For the
purpose of this provision, CEREP Technology shall mean all
services, know-how, proprietary technologies developed or
to be developed by CEREP or for CEREP in the Field.
* CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24B-2 OF THE SECURITIES AND EXCHANGE COMMISSION ACT OF 1934, AS AMENDED.
COMPENSATION
CEREP XENO Final License Agreement 4
<PAGE> 5
3. COMPENSATION
3.1. Compensation for the XENO Patents License.
3.1.1. XENO Patent Licenses and Rights. As consideration for the
licenses and rights granted to CEREP herein, CEREP will pay to
XENO:
a) [ * ] upon signing of the Agreement;
b) [ * ] per calendar year license fee payable on
January 1, 1999 and annually thereafter, or
c) A royalty of [ * ] percent [ * ] of Net Sales of
Licensed Products and Licensed Services in the
Field, whichever is highest.
d) Compensation for the XENO Patents License will be
due by CEREP to XENO until the termination of
this Agreement and at the most until the last
expiration date of all Xeno Patents.
3.1.2. Consideration to be paid by Third Parties for XENO Patents
sublicenses.
3.1.2.1. For each sublicense granted by CEREP under Section
2.1.3, CEREP will pay to XENO per year the greater of
[ * ] dollars [ * ] or [ * ] percent [ * ] of the
sublicense fees including royalties, upfront payments and
all other income to CEREP agreed to by CEREP and the Third
Party for a given sublicense per year.
3.1.3. Royalty Reports, and Payments. Beginning on the Effective
Date, CEREP shall make non-audited written reports (even if there
are no sales) and earned royalty payments to within thirty (30)
days after the end of the each calendar quarter. These reports
shall state the Net Sales of Licensed Product(s), Licensed
Service(s) and sublicense income during such completed calendar
quarter, and resulting calculations of royalty payment due XENO
for such completed calendar quarter. Concurrent with the making
of each such report, CEREP shall include payment due XENO of
royalties for the calendar quarter covered by such report. The
royalty will be solely due for the countries where there is an
issued Xeno Patent and where a valid claims is in effect.
* CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24B-2 OF THE SECURITIES AND EXCHANGE COMMISSION ACT OF 1934, AS AMENDED.
CEREP XENO Final License Agreement 5
<PAGE> 6
3.1.4. [ * ]
3.1.5. Accounting. CEREP agrees to keep and maintain records for a
period of three (3) years showing the manufacture, sale, use, Net
Sales and other income according to this Agreement. Such records
will include general ledger records showing cash receipts and
expenses, and records that include sufficient detail to enable
the royalties payable hereunder by CEREP to be determined. CEREP
further agrees to permit its relevant books and records to be
examined by XENO confidentially pursuant to the provisions
herein, from time to time from three (3) years from the date of a
transaction to the extent necessary to verify reports provided
for above. Such examination is to be made by XENO or its
designee, at the expense of XENO except in the event that the
results of a definitive audit reveal an underreporting of
royalties due XENO of five percent (5%) or more in any calendar
year, then the audit costs shall be paid by CEREP.
4. REPRESENTATIONS AND WARRANTIES
4.1. Representations and Warranties of CEREP and XENO.
Each party hereby represents and warrants:
Corporate Power. Such party is duly organized and validly
existing and in good standing under the laws of the state
and/or country of its incorporation and has all requisite
corporate power and authority to enter into this Agreement and
to carry out the provisions hereof.
Due Authorization. Such party is duly authorized to execute
and deliver this Agreement and to perform its obligations
hereunder.
Binding Agreement. This Agreement is a legal and valid
obligation binding upon it and enforceable in accordance with
its terms. The execution, delivery and performance of this
Agreement by such party does not conflict with any agreement,
instrument or understanding, oral or written, to which it is a
party or by which it may be bound, nor violate any law or
regulation of any court, governmental body or administrative
or other agency having jurisdiction over it.
* CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24B-2 OF THE SECURITIES AND EXCHANGE COMMISSION ACT OF 1934, AS AMENDED. 4.2
Negation of Warranties
CEREP XENO Final License Agreement 6
<PAGE> 7
4.2 Negation of Warranties
Except as expressly set forth in this Agreement, XENO MAKES NO
REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER
EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR
THAT THE USE OF THE LICENSED PRODUCTS OR SERVICES WILL NOT
INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OR
ANY OTHER EXPRESS OR IMPLED WARRANTIES.
4.3 Harvard License Agreement. XENO represents and warrants that the
Harvard License Agreement has not at the date hereof expired, been
terminated by either XENO or the President and Fellows of Harvard
College and that XENO has not at the date hereof received nor given
notice of termination for breach of the Harvard License Agreement. XENO
represents and warrants to use all reasonable efforts to maintain the
Harvard License Agreement, including, but not limited to complying with
its obligations to pay the compensation due for the Harvard License
Agreement.
4.4 Infringement. XENO warrants that, to the best of its knowledge to date,
use of the XENO Patents Licenses and Rights is not infringing any Third
Party patents. CEREP hereby agrees to notify XENO immediately of any
claim it receives for alleged patent infringement through use of XENO
Patents Licenses and Rights.
4.5 License Agreement to a Third Party. XENO warrants that XENO will not
license XENO patents and/or sublicense Harvard License Agreement to a
Third Party under financial and legal conditions substantially more
favorable than the terms of the present Agreement.
CONFIDENTIALITY
5.1. Confidential Information. Except as expressly provided herein, the
parties agree that, for the Term and five (5) years thereafter, the
receiving party shall keep completely confidential and shall not
publish or otherwise disclose to another party and shall not use for
any purpose other than to perform the purposes contemplated by this
Agreement any Confidential Information furnished to it by the
disclosing party hereto pursuant to this Agreement, except that to the
extent that it can be established by the receiving party by competent
proof that such Confidential Information:
CEREP XENO Final License Agreement 7
<PAGE> 8
was already known to the receiving party, other than under an
obligation of confidentiality, at the time of disclosure; was
generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving
party; became generally available to the public or otherwise
part of the public domain after its disclosure and other than
through any act or omission of the receiving party in breach of
this Agreement; or was lawfully disclosed to the receiving party
by a person other than a party hereto,
or
was independently developed by the receiving party.
5.2. Permitted Use and Disclosures. Each party hereto may use or disclose
Confidential Information disclosed to it by the other party to the
extent such use or disclosure is reasonably necessary in filing or
prosecuting patent applications, prosecuting or defending litigation,
complying with applicable law, governmental regulation or court order,
submitting information to tax or other governmental authorities,
making a permitted sublicense or otherwise exercising its rights
hereunder, provided that if a party is required to make any such
disclosure of another party's Confidential Information, other than
pursuant to a confidentiality agreement, it will give reasonable
advance notice to the latter party of such disclosure and, save to the
extent inappropriate in the case of patent applications, will use
reasonable efforts to secure confidential treatment of such
information prior to its disclosure (whether through protective orders
or otherwise).
5.3. Confidential Terms. Except as expressly provided herein, each party
agrees not to disclose any material or financial terms of this
Agreement to another party without the consent of the other party, not
to be unreasonably withheld; provided, however, each party reserves
the right to make reasonable disclosures (including the redaction of
material or financial terms) as required by securities or other
applicable laws, or to actual or prospective investors or corporate
partners (including licensees and acquirers), or to accountants,
attorneys and other professional advisors on a need-to-know basis
under circumstances that ensure the confidentiality thereof, or to the
extent required by law. If such Confidential Information is to become
public information by such disclosure the disclosing party must obtain
the written consent of the non-disclosing party in order to obtain
protection of the Confidential Information if necessary.
5.4. Press Release. Notwithstanding the foregoing, the parties shall agree
upon a press release to announce the execution of this Agreement.
Thereafter, XENO and CEREP may each disclose to Third Parties the
information contained in such press release without the need for
further approval by the other.
CEREP XENO Final License Agreement 8
<PAGE> 9
6. TERMINATION
6.1.1 This Agreement shall continue until the last expiration date of all
patents licensed under this Agreement.
6.1.2 Either party shall have the right to terminate this Agreement at any
time for a material breach of this Agreement by the other party,
provided that the non-breaching party shall have first given ninety
(90) days prior written notice (thirty (30) days in the event of
non-payment of any amounts due under this Agreement) to the breaching
party describing such breach and stating the non-breaching party's
intention to terminate this Agreement if such breach remains uncured,
and the breaching party thereafter fails to cure same within thirty
(30) days.
6.1.3 CEREP may terminate this Agreement without cause at any time by
providing written notice to XENO of such termination and such
termination will be effective ninety (90) days thereafter. Any
termination pursuant to Section 6.1.3 shall not relieve CEREP of any
obligation or liability accrued hereunder prior to such termination,
including CEREP's obligation to pay royalties accrued or accruable.
The licenses granted hereunder and all sublicenses granted by CEREP
under this agreement shall terminate in the event the Agreement is
terminated by CEREP or termination by an arbitrator for an uncured
breach by CEREP.
MISCELLANEOUS
7.1. Binding Effect; Assignment. This Agreement shall be binding upon the
parties' respective successors and permitted assigns. Neither party
may assign this Agreement or any of its rights or obligations
hereunder without the prior written consent of the other party (not to
be unreasonably withheld), and any such attempted assignment shall be
void; provided, that CEREP and XENO may assign this Agreement as part
of a merger or consolidation in which the surviving entity assumes all
of CEREP's and XENO's rights and obligations hereunder or a sale of
substantially all of the assets of such party to which this Agreement
relates. The parties agree that in the event of the termination of the
Harvard License Agreement, the President and Fellows of Harvard
College shall have the option of having this Agreement assigned to it
or terminating the licenses granted herein.
7.2. Effect of Waiver. No waiver of any default, condition, provisions or
breach of this Agreement shall be deemed to imply or constitute a
waiver of any other like default, condition, provision or breach of
this Agreement.
7.3. Limitation of Liability. NEITHER PARTY SHALL BE LIABLE TO THE OTHER
FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTIAL, OR INDIRECT DAMAGES
ARISING OUT OF THIS AGREEMENT, HOWEVER CAUSED, UNDER ANY THEORY OF
LIABILITY.
CEREP XENO Final License Agreement 9
<PAGE> 10
7.4. Indemnification. CEREP will defend, indemnify and hold XENO, its
officers, directors, employees, Affiliates and agents harmless against
any and all liability, loss, damage, claim or expense (including
attorney's fees) arising out of a suit by a Third Party from the
performance under this Agreement by CEREP; except to the extent such
claim is caused by the negligence or willful misconduct of XENO or a
breach of a representation of XENO. XENO will defend, indemnify and
hold CEREP, its officers, directors, employees, Affiliates and agents
harmless against any and all liability, loss, damage, claim or expense
(including attorney's fees) arising out of a suit by a Third Party
from the performance under this Agreement by XENO; except to the
extent such claim is caused by the negligence or willful misconduct of
CEREP or a breach of a representation of CEREP.
7.5. Patent Defense Costs. XENO will use reasonable efforts, at its
discretion to defend XENO patents at its own expense against any Third
Party infringement. CEREP at its option may elect to join in any
prosecution of Third Party infringer initiated by XENO at CEREP's
expense. In the event that CEREP is sued by a Third Party for
infringement of a Third Party's patent, XENO hereby agrees, if CEREP
so requests, to provide CEREP with all reasonable advice or technical
support that CEREP may deem appropriate as appropriate or necessary.
7.6. Diligence. CEREP agrees to use best efforts to fulfill the
obligations of the express due diligence provision of the Harvard
License Agreement as it applies to a sublicense under the Harvard
License Agreement.
7.7. Force Majeure. Neither party shall lose any rights hereunder or be
liable to the other party for damages or losses (except for payment
obligations) on account of failure of performance by the defaulting
party if the failure is occasioned by war, strike, fire, act of God,
earthquake, flood , lockout, embargo, governmental acts or orders or
restrictions, failure of suppliers, or any other reason where failure
to perform is beyond the reasonable control and not caused by the
negligence or intentional conduct or misconduct of the nonperforming
party, and such party has exerted all reasonable efforts to avoid or
remedy such force majeure; provided, however, that in no event shall a
party be required to settle any labor dispute or disturbance.
7.8. Amendment. No modification, supplement to or waiver of this Agreement
or any Addendum hereto or any of their provisions shall be binding
upon a party hereto unless
CEREP XENO Final License Agreement 10
<PAGE> 11
made in writing and duly signed by an authorized representative of
both XENO and CEREP. In no event may the terms of this Agreement be
changed, deleted, supplemented or waived by any notice, purchase
order, receipt, acceptance, bill of lading or other similar form of
document. A failure of either party to exercise any right or remedy
hereunder, in whole or in part, or on one or more occasions, shall not
be deemed either a waiver of such right or remedy to the extent not
exercised, or of any other right or remedy, on such occasion or a
waiver of any right or remedy on any succeeding occasion.
7.9. Entire Agreement. This Agreement, and each Exhibit attached hereto,
and each supplemental written agreement contemplated hereunder, sets
forth the entire understanding and agreement of the parties as to the
subject matter thereof, and there are no other understandings,
representations or promises, written or verbal, not set forth herein
or on which either party has relied. If any provisions of any such
Addendum or supplemental written agreement conflict with any
provisions set forth in this Agreement, the provisions of this
Agreement shall take precedence, unless such Addendum or supplemental
written agreement expressly refers to the specific provision(s) of
this Agreement that it is intended to replace or modify (and which
shall be limited in force and effect to such Addendum or supplemental
written agreement only).
CEREP XENO Final License Agreement 11
<PAGE> 12
7.10. Notices. All Notices under this Agreement shall be given in writing
and shall be addressed to the parties at the following addresses:
For XENO:
Stephen J. Sullivan
CEO, President and Director
Xenometrix, Inc.
2425 North 55th Street
Boulder, Colorado 80301-5700
Copies to:
Paul J. Koivuniemi
Vice President, Legal Affairs and Corporate Secretary
Xenometrix, Inc.
2425 North 55th Street
Boulder, Colorado 80301-5700
For CEREP:
Jean Thierry
Chairman & CEO
Cerep S.A.
260 Boulevard Saint Germaine
75007
Paris, France
Copies to:
Notices shall be in writing and shall be deemed delivered when
received, if delivered by a courier, overnight mail service or the
like, or a week following mailing, if sent by first-class certified or
registered mail, postage prepaid.
7.11. Arbitration. The parties recognize that disputes as to certain
matters may from time to time arise during the term of this Agreement
which relate to either party's rights
CEREP XENO Final License Agreement 12
<PAGE> 13
and/or obligations hereunder. It is the objective of the parties to
establish procedures to facilitate the resolution of disputes arising
under this Agreement in an expedient manner by mutual cooperation and
without resort to arbitration. The parties agree that prior to any
arbitration concerning this Agreement, XENO's CEO and CEREP's CEO will
meet in person or by video-conferencing in a good faith effort to
resolve any disputes concerning this Agreement. Within thirty (30)
days of a formal request by either party to the other, any party may,
by written notice to the other, have such dispute referred to their
respective officers designated or their successors, for attempted
resolution by good faith negotiations, such good faith negotiations to
begin within thirty (30) days after such notice is received. Except as
otherwise provided specifically herein, any controversy or claim under
this Agreement shall be solely settled by arbitration by one
arbitrator pursuant to the Commercial Arbitration Rules of the
American Arbitration Association (the "Association"); provided that
the parties shall first use their best efforts to resolve such dispute
by negotiation. The arbitration shall be conducted in New York, New
York. The arbitrator shall be selected by the joint agreement of the
parties, but if they do not so agree within twenty (20) days of the
date of a request for arbitration, the selection shall be made
pursuant to the rules of the Association. The decision reached by the
arbitrator shall be conclusive and binding upon the parties hereto and
may be filed with the clerk of any court of competent jurisdiction,
and a judgment confirming such decision may, if desired by any party
to the arbitration, be entered in such court. Each of the parties
shall pay its own expenses of arbitration and the expenses of the
arbitrator(s) shall be equally shared; provided, however, that if in
the opinion of the arbitrator(s) any claim hereunder or any defense or
objection thereto was unreasonable, the arbitrator(s) may assess, as
part of the award, all or any part of the arbitration expenses
(including reasonable attorneys' fees) against the party raising such
unreasonable claim, defense or objection. Nothing herein set forth
shall prevent the parties from settling any dispute by mutual
agreement at any time.
7.12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard or
giving effect to its principles of conflict of laws.
7.13. Severability and Survival. This Agreement is intended to be
severable. If any provision(s) of this Agreement are or become
invalid, are ruled illegal by a court of competent jurisdiction or are
deemed unenforceable under the current applicable law from time to
time in effect during the term hereof, it is the intention of the
parties that the remainder of the Agreement shall not be affected
thereby and shall continue to be construed to the maximum extent
permitted by law at such time. It is further the intention of the
parties that in lieu of each such provision which is invalid, illegal,
or unenforceable, there shall be substituted or added as part of this
Agreement by such court
CEREP XENO Final License Agreement 13
<PAGE> 14
of competent jurisdiction a provision which shall be as similar as
possible, in economic and business objectives as intended by the
parties to such invalid, illegal or unenforceable provision, but shall
be valid, legal and enforceable. Unless expressly stated otherwise,
any provision intended by its meaning to survive, will survive the
expiration or any other termination of this Agreement.
7.14. Independent Contractors. The parties hereto are acting as independent
contractors and shall not be considered partners, joint venturers or
agents of the other. Neither shall have the right to act on behalf of,
or to bind, the other.
Headings. Captions and paragraph headings are for convenience only and shall not
form an interpretative part of this Agreement. Unless otherwise specifically
provided, all references to an Article incorporate all Articles or subsections
thereunder. This Agreement shall not be strictly construed against either party
hereto and maybe executed in two or more counterparts, each of which will be
deemed an original and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement.
By: /s/ STEPHEN J. SULLIVAN Date: 6/5/98
------------------------ --------
Stephen J. Sullivan
CEO and President
For Xenometrix, Inc
.
By: /s/ THIERRY JEAN Date: 6/8/98
------------------------ --------
Thierry Jean
Chairman & CEO
For Cerep S.A.
CEREP XENO Final License Agreement 14
<PAGE> 15
EXHIBIT A
[TO BE UPDATED]
<TABLE>
<CAPTION>
===================================================================================================================================
EUKARYOTIC GENE PROFILING
===================================================================================================================================
PATENT/ FILING DATE COUNTRY ISSUE DATE TITLE
APPLICATION #
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
08/008,896 1/21/93 US
- -----------------------------------------------------------------------------------------------------------------------------------
08/374,641 7/21/95 US (Allowed). Methods and Diagnostic Kits Utilizing Mammalian
Stress Promoters to Determine Toxicity of a
Compound
- -----------------------------------------------------------------------------------------------------------------------------------
61243/94 1/21/94 Australia
- -----------------------------------------------------------------------------------------------------------------------------------
2154265 1/21/94 Canada
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 EPC 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
6-517147 1/21/94 Japan
- -----------------------------------------------------------------------------------------------------------------------------------
9601405-5 2/13/96 Singapore
- -----------------------------------------------------------------------------------------------------------------------------------
US94/00583 1/21/94 PCT
- -----------------------------------------------------------------------------------------------------------------------------------
694 06 772.5-08 Germany 11/25/97
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
===================================================================================================================================
BACTERIAL GENE PROFILING
===================================================================================================================================
PATENT/ FILING DATE COUNTRY ISSUE DATE TITLE
APPLICATION #
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5,589,337 1/6/95 US 12/31/96 Methods and Diagnostic Kits for Determining
Toxicity Utilizing Bacterial Stress Promoters
Fused to Report Genes
- -----------------------------------------------------------------------------------------------------------------------------------
651825 7/6/93 EPO 1/14/98
- -----------------------------------------------------------------------------------------------------------------------------------
5,585,232 4/21/94 US 12/17/96 Methods and Diagnostics Kits for Determining
Toxicity Utilizing E. coli Stress Promoters Fused
to Reporter Genes
- -----------------------------------------------------------------------------------------------------------------------------------
9601688-6 2/14/96 Singapore
- -----------------------------------------------------------------------------------------------------------------------------------
2,139,667 7/9/93 Canada
- -----------------------------------------------------------------------------------------------------------------------------------
6-503562 7/6/93 Japan
- -----------------------------------------------------------------------------------------------------------------------------------
95-700038 7/6/93 Korea
- -----------------------------------------------------------------------------------------------------------------------------------
07/910793 7/6/92 US
- -----------------------------------------------------------------------------------------------------------------------------------
45884/93 7/6/93 Australia
- -----------------------------------------------------------------------------------------------------------------------------------
95.004 7/6/93 Norway
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CEREP XENO Final License Agreement 15
<PAGE> 16
EXHIBIT B
Harvard License Agreement
CEREP XENO Final License Agreement 16
<PAGE> 1
EXHIBIT 10.42
AMENDMENT TO THE SENIOR LINE OF CREDIT AGREEMENT AND NOTES
This is an Amendment to the Senior Line of Credit Agreement between
Aries Domestic Fund, the Aries Fund, a Cayman Islands Trust (the "Funds"), and
Xenometrix, Inc. (the "Company"), dated September 25, 1997 (the "Agreement") and
the Amendments of March 25th, 1998 and May 25, 1998 extending the Maturity Date
of all of the Notes to June 25th, 1998, and to the Senior Secured Promissory
Notes (the "Notes") and Common Stock Warrants (the "Warrants") issued under the
Agreement.
Whereas, Xenometrix has demonstrated the ability to generate
non-exclusive licenses as evidenced by Aurora Biosciences Corporation (April 17,
1998) and CEREP, S.A. (June 5, 1998); and
Whereas, Xenometrix is engaged in licensing discussions with several
companies; and
Whereas, Xenometrix is engaged in discussions with other parties that
may lead to the sale of the Company, and;
Now therefore, the Parties agree to amend the Agreement, Notes and
Warrants, as follows:
The Funds agree to extend the Maturity Date of all of the Notes issued
under the Agreement to October 25, 1998, in exchange for Xenometrix paying to
the Funds a total of 38.5% of all gross licensing revenues received during the
extension period. Xenometrix will make these payments within five working days
of the receipt of said revenues. All payments shall be applied first to accrued
interest due on the principal balance up to the date of payment, and then to a
reduction of the principal balance.
Xenometrix agrees to make best efforts to pursue its licensing strategy
during this extension.
The Funds agrees to reduce the interest rate from 18% to a rate of
12%, for the duration of the extension period.
Xenometrix agrees to reduce the exercise price of the 499,995 Warrants
previously issued to the Funds under the Agreement to $0.37 per share.
In the event of an acquisition of Xenometrix by a third party, the
unpaid principal together with any accrued interest on the Notes shall be
immediately due and payable at the closing of such acquisition. In addition, if
the Company is acquired at a price per share that is greater than the exercise
price of the Warrants, the Funds agree to surrender all outstanding Warrants at
the closing of such acquisition in exchange for either cash or registered and
freely tradable common stock of the acquiring company in an aggregate amount
calculated by subtracting the exercise price of the Warrants from price per
share paid to Xenometrix shareholders, and multiplying the difference by the
number of Warrants outstanding at the closing.
Xenometrix acknowledges and agrees that this extension constitutes new
consideration, and, as such, shall be secured by the assets of Xenometrix.
Xenometrix agrees, at its expense, to execute, acknowledge, deliver and cause to
be duly filed all such further instruments and documents and take all such
actions as the Funds may from time to time request to better assure, preserve,
protect and perfect the security interest (the "Security Interest") in the
assets of Xenometrix, including the payment of any fees and taxes required in
connection with the execution and delivery of this Agreement, the granting of
the Security Interest and the filing of any financing statements (including
fixture filings) UCC-1's or other documents.
All other terms and conditions of the Agreement as amended will
continue to be in full force during the extension period.
<PAGE> 2
In witness whereof, the Parties hereto have caused this Amendment to be
executed by their respective duly authorized representative as of June 25, 1998.
XENOMETRIX, INC. THE ARIES FUND, A CAYMAN ISLAND TRUST
By: its Investment Manager, PARAMOUNT
By: /s/ STEPHEN J. SULLIVAN CAPITAL ASSET MANAGEMENT, INC.
------------------------
Name: Stephen J. Sullivan By: /s/ LINDSAY A. ROSENWALD
Title: President and CEO -----------------------------------
Date: 6/25/98 Name: Lindsay A. Rosenwald, M.D.
Title: President
THE ARIES DOMESTIC FUND, L.P.
By: its General Partner, PARAMOUNT
CAPITAL ASSET MANAGEMENT, INC.
By: /s/ LINDSAY A. ROSENWALD
-----------------------------------
Name: Lindsay A. Rosenwald, M.D.
Title: President
<PAGE> 1
* TEST OMITTED AND FILED SEPARATELY
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. SS.SS. 200.80(b)(4),
200.83 AND 240.24b-2
EXHIBIT 10.43
LICENSE AGREEMENT
BETWEEN
XENOMETRIX, INC.
AND
PHASE-1 MOLECULAR TOXICOLOGY INC.
PHASE-1 XENO License Agreement 1
<PAGE> 2
LICENSE AGREEMENT
This Agreement is made this 27th day of July 1998 (the "Effective Date"), by and
between Xenometrix, Inc. ("XENO"), a Delaware corporation with principal offices
at 2425 55th Street, Boulder, CO 80301-5700 and Phase-1 Molecular Toxicology
Inc. ("PHASE-1"), a Delaware corporation with principal offices at 1217 Parkway
Drive, Santa Fe, New Mexico 87505-7234 to license certain technology.
RECITALS
WHEREAS, XENO is the owner or exclusive licensee of the XENO Patents relating to
certain assays, technology and intellectual property further described herein,
and desires to non-exclusively license the same to PHASE-1; and
WHEREAS, PHASE-1 seeks to obtain certain non-exclusive license rights under the
XENO Patents, according to the terms contained herein (the "Agreement");
Now, therefore, in consideration of the foregoing and the covenants and promises
contained herein the parties agree as follows:
1. DEFINITIONS
1.1. "Affiliate" means any corporation or other business entity controlled
by, or in common control of an entity. Control, as used in the context
of a business entity, means the ownership directly or indirectly of
fifty percent (50%) of the voting securities of the person,
corporation, or other entity or a fifty percent (50%) or greater
interest in the income of such corporation or other entity or the
ability otherwise of the entity to secure that the affairs of such
person, corporation or other entity are managed in accordance with the
such entity's wishes.
1.2. "Confidential Information" means any and all product, process,
technical, marketing, financial, business, or other information, ideas
or know-how identified as confidential information of a party to this
agreement ("Confidential Information"), subject to the exceptions set
forth in Section 5.1. For purposes of this Section 1.2, Materials
owned or otherwise controlled by a party to this Agreement shall be
deemed to be Confidential Information of such party.
1.3. "Control" or "Controlled" means, in the context of intellectual
property, possession by a party of the ability to grant a license or
sublicense in accordance with the terms of this Agreement, and without
violating the terms of any agreement by such party with any Third
Party.
PHASE-1 XENO License Agreement 2
<PAGE> 3
1.4. "Field" means [ * ].
1.5. "Harvard License Agreement" means the license agreement between the
President and Fellows of Harvard College and Venmark Ltd., now XENO,
executed on January 17, 1992 attached hereto as Exhibit B.
1.6. "Licensed Product(s)" means products or components thereof claimed in
XENO Patents or products or components thereof made in accordance with
or by means of Licensed Processes.
1.7. "Licensed Process(es)" means the processes claimed in XENO Patents.
1.8. "Licensed Service(s)" means services performed on a commercial basis
for third parties or components thereof utilizing Licensed Product(s)
or Licensed Process(es) as defined herein.
1.9."Materials" means any biological or chemical entity for screening or
assays, including reagents, cells, promoters, enhancers, vectors,
plasmids, proteins and fragments thereof, peptides, antigens,
antibodies, antagonists, agonists, inhibitors, and chemicals.
1.10."Net Sales" means the amounts received for sales or use of Licensed
Products or Licensed Processes less: customary trade, quantity or cash
discounts actually allowed and taken; amounts repaid or credited by
reason of rejection or return; and/or to the extent separately stated
on purchase orders, invoices or other documents of sale, taxes levied
on and/or other governmental charges made as to production, sale,
transportation, delivery or use and paid by or on behalf of PHASE-1.
If Licensed Product(s) or Licensed Process(es) are sold separately as
a stand-alone product(s) or service(s), and in addition, in
combination with another product(s) or process(es) not claimed in the
XENO Patents, "Net Sales" for purposes of determining royalties on the
combination product shall be calculated by multiplying sales price of
the combination product by the fraction A/A+B where A is the price of
the Licensed Product(s) or Licensed Process(es) sold separately and B
is the price of the other
* CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24B-2 OF THE SECURITIES AND EXCHANGE COMMISSION ACT OF 1934, AS AMENDED.
PHASE-1 XENO License Agreement 3
<PAGE> 4
product(s) or process(es) in the combination product sold separately.
If the other product(s) or process(es) in combination is (are) not
sole separately, "Net Sales" for purposes of determining royalties
shall be calculated by multiplying sales price of the combination
product by the fraction A/C where A is the price of the Licensed
Product(s) or Licensed Process(es) sole separately and C is the price
of the combination product.
1.11."XENO Patents" means the U.S. patents and patent applications listed
on Exhibit A hereto, any patent applications filed prior or subsequent
to the Effective Date that claim the benefit of an early filing date
to any of the patent applications listed in Exhibit A, and any
reissues, extensions, substitutions, confirmations, re-registrations,
re-examinations, continuations, divisionals or continuations-in-part
of the foregoing patents and patent applications, as well as all
foreign counterparts or equivalents thereof.
1.12."Third Party" means any entity other than (i) PHASE-1 and any of its
Affiliates, and (ii) XENO and any of its Affiliates.
2. LICENSES
2.1. Grant of Licenses Under the XENO Patents from XENO to PHASE-1.
2.1.1.Non-Exclusive License to XENO Patents. XENO hereby grants to
PHASE-1 and its Affiliates a non-exclusive, worldwide license,
without the right to sub-license, in the Field under XENO's
ownership interest in the XENO Patents to make, use, have made,
sell, have sold, offer for sale, import, export or otherwise
exploit any process, composition of matter or other invention
claimed in the XENO Patents.
2.1.2.Non-Exclusive Sub-license to XENO Patents under the Harvard
License Agreement. XENO hereby grants to PHASE-1 and its
Affiliates a non-exclusive, worldwide sub-license, without the
right to sub-license, in the Field under XENO's right to
sub-license the XENO Patents in the Harvard License Agreement to
make, use, have made, sell, have sold, offer for sale, import,
export or otherwise exploit any process, composition of matter or
other invention claimed in the XENO Patents. PHASE-1 acknowledges
the Harvard License Agreement and XENO's and PHASE-1's duties and
obligations thereunder.
PHASE-1 XENO License Agreement 4
<PAGE> 5
3. COMPENSATION
3.1. Compensation for the XENO Patents License.
3.1.1.XENO Patent Licenses and Rights. As consideration for the
licenses and rights granted to PHASE-1 herein, PHASE-1 will pay
to XENO:
a) [ * ] upon signing of this Agreement, and [ * ].
b) A royalty of [ * ] percent of Net sales of
Licensed Products and Licensed Services in the
Field. Such amounts shall be paid to XENO within
30 (thirty) days after the end of each calendar
quarter and shall be creditable against the
minimum annual royalty pursuant to 3.1.1.c,
below.
c) A minimum annual royalty (the "Minimum Annual
Royalty") of [ * ] per year during the term of
this Agreement. The first such payment shall be
for the twelve month period (the "License Year")
commencing on the Effective Date of this
Agreement, and shall be paid to XENO within
thirty days after the end of the License Year. In
each year thereafter, Minimum Annual Royalties
shall be calculated for the corresponding License
Year and shall be payable within thirty days of
the end of such License Year. All quarterly
royalty payments paid to XENO for a given License
Year pursuant to 3.1.1.b, shall be creditable
against the Minimum Annual Royalty for that
License Year.
d) Compensation for the XENO Patents License will be
due by PHASE-1 to XENO until the termination of
this Agreement and at the most until the last
expiration date of all XENO Patents.
3.1.2.Royalty Reports, and Payments. Beginning on the Effective Date,
PHASE-1 shall make non-audited written reports (even if there are
no sales) and earned royalty payments to within thirty (30) days
after the end of the each calendar quarter. These reports shall
state the Net Sales of Licensed Product(s) and Licensed
Service(s) during such completed calendar quarter, and resulting
calculations of royalty payment due XENO for such completed
calendar quarter. Concurrent with the making of each such report,
PHASE-1 shall include payment due XENO of royalties for the
calendar quarter covered by such report. The royalty will be
solely due for
* CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT HAS BEEN OMITTED AND
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE
24B-2 OF THE SECURITIES AND EXCHANGE COMMISSION ACT OF 1934, AS AMENDED.
PHASE-1 XENO License Agreement 5
<PAGE> 6
the countries where there is an issued XENO Patent and where a
valid claim is in effect.
3.1.3. Accounting. PHASE-1 agrees to keep and maintain records
for a period of three (3) years showing the sale, use, and Net
Sales according to this Agreement. Such records will include
general ledger records showing cash receipts and expenses, and
records that include sufficient detail to enable the royalties
payable hereunder by PHASE-1 to be determined. PHASE-1 further
agrees to permit its relevant books and records to be examined
by XENO confidentially pursuant to the provisions herein, from
time to time during the period of 3 years after the date of
the royalties report covering such records to the extent
necessary to verify the accuracy of such reports provided for
above. Such examination is to be made by XENO or its designee,
at the expense of XENO except in the event that the results of
a definitive audit reveal an underreporting of royalties due
XENO of five percent (5%) or more in any calendar year, then
the audit costs shall be paid by PHASE-1.
3.1.4. "Most Favored Nations" Provision. PHASE-1 fees, royalties, and
payment plan represent the best available to all licensees to
date. If more favorable terms are agreed upon for other
substantially similar licenses and licensees, such terms will
be made available to PHASE-1.
4. REPRESENTATIONS AND WARRANTIES
4.1. Representations and Warranties of PHASE-1 and XENO.
Each party hereby represents and warrants:
Corporate Power. Such party is duly organized and validly
existing and in good standing under the laws of the state
and/or country of its incorporation and has all requisite
corporate power and authority to enter into this Agreement and
to carry out the provisions hereof.
Due Authorization. Such party is duly authorized to execute
and deliver this Agreement and to perform its obligations
hereunder.
Binding Agreement. This Agreement is a legal and valid
obligation binding upon it and enforceable in accordance with
its terms. The execution, delivery and performance of this
Agreement by such party does not conflict with any
PHASE-1 XENO License Agreement 6
<PAGE> 7
agreement, instrument or understanding, oral or written, to
which it is a party or by which it may be bound, nor violate
any law or regulation of any court, governmental body or
administrative or other agency having jurisdiction over it.
Third Party Rights and Interests. In addition, XENO hereby
represents and warrants that it has not granted and, during
the term of this Agreement, will not grant any rights or
interest to any party which is inconsistent with the rights
and licenses granted to PHASE-1 hereunder.
4.2 Negation of Warranties
Except as expressly set forth in this Agreement, XENO MAKES NO
REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER
EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR
THAT THE USE OF THE LICENSED PRODUCTS OR SERVICES WILL NOT
INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS OR
ANY OTHER EXPRESS OR IMPLED WARRANTIES.
4.3 Harvard License Agreement. XENO represents and warrants that the
Harvard License Agreement has not at the date hereof expired, been
terminated by either XENO or the President and Fellows of Harvard
College and that XENO has not at the date hereof received nor given
notice of termination for breach of the Harvard License Agreement. XENO
represents and warrants to use all reasonable efforts to maintain the
Harvard License Agreement, including, but not limited to complying with
its obligations to pay the compensation due for the Harvard License
Agreement.
4.4 Infringement. PHASE-1 hereby agrees to notify XENO immediately of any
claim it receives for alleged patent infringement through use of XENO
Patents.
5. CONFIDENTIALITY
5.1. Confidential Information. Except as expressly provided herein, the
parties agree that, for the Term and five (5) years thereafter, the
receiving party shall keep completely confidential and shall not
publish or otherwise disclose to another party and shall not use for
any purpose other than to perform the purposes contemplated by this
Agreement any Confidential Information furnished to it by the
disclosing party hereto pursuant to this Agreement, except that to the
extent that it can be established by the receiving party by competent
proof that such Confidential Information:
PHASE-1 XENO License Agreement 7
<PAGE> 8
was already known to the receiving party, other than under an
obligation of confidentiality, at the time of disclosure;
was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving
party;
became generally available to the public or otherwise part of
the public domain after its disclosure and other than through
any act or omission of the receiving party in breach of this
Agreement; or
was lawfully disclosed to the receiving party by a person
other than a party hereto,
or
was independently developed by the receiving party.
5.2. Permitted Use and Disclosures. Each party hereto may use or disclose
Confidential Information disclosed to it by the other party to the
extent such use or disclosure is reasonably necessary in filing or
prosecuting patent applications, prosecuting or defending litigation,
complying with applicable law, governmental regulation or court order,
submitting information to tax or other governmental authorities,
making a permitted sublicense or otherwise exercising its rights
hereunder, provided that if a party is required to make any such
disclosure of another party's Confidential Information, other than
pursuant to a confidentiality agreement, it will give reasonable
advance notice to the latter party of such disclosure and, save to the
extent inappropriate in the case of patent applications, will use
reasonable efforts to secure confidential treatment of such
information prior to its disclosure (whether through protective orders
or otherwise).
5.3. Confidential Terms. Except as expressly provided herein, each party
agrees not to disclose any material or financial terms of this
Agreement to another party without the consent of the other party, not
to be unreasonably withheld; provided, however, each party reserves
the right to make reasonable disclosures (including the redaction of
material or financial terms) as required by securities or other
applicable laws, or to actual or prospective investors or corporate
partners (including licensees and acquirers), or to accountants,
attorneys and other professional advisors on a need-to-know basis
under circumstances that ensure the confidentiality thereof, or to the
extent required by law.
5.4. Press Release. Notwithstanding the foregoing, the parties shall agree
upon a press release to announce the execution of this Agreement.
Thereafter, XENO and PHASE-1 may each disclose to Third Parties the
information contained in such press release without the need for
further approval by the other.
6. TERMINATION
6.1.1.This Agreement shall continue until the last expiration date of all
patents licensed under this Agreement.
PHASE-1 XENO License Agreement 8
<PAGE> 9
6.1.2.Either party shall have the right to terminate this Agreement at any
time for a material breach of this Agreement by the other party,
provided that the non-breaching party shall have first given ninety
(90) days prior written notice (thirty (30) days in the event of
non-payment of any amounts, including scheduled up-front fee payments
due under this Agreement) to the breaching party describing such
breach and stating the non-breaching party's intention to terminate
this Agreement if such breach remains uncured, and the breaching
party thereafter fails to cure same within thirty (30) days.
6.1.3.PHASE-1 may terminate this Agreement without cause at any time by
providing written notice to XENO of such termination and such
termination will be effective ninety (90) days thereafter. Any
termination pursuant to Section 6.1.3 shall not relieve PHASE-1 of
any obligation or liability accrued hereunder prior to such
termination, including PHASE-1's obligation to pay royalties accrued
or accruable. The licenses granted under this agreement shall
terminate in the event the Agreement is terminated by PHASE-1 or by
XENO for an uncured breach by PHASE-1.
7. MISCELLANEOUS
7.1. Binding Effect; Assignment. This Agreement shall be binding upon the
parties' respective successors and permitted assigns. Neither party
may assign this Agreement or any of its rights or obligations
hereunder without the prior written consent of the other party (not to
be unreasonably withheld), and any such attempted assignment shall be
void; provided, that PHASE-1 and XENO may assign this Agreement as
part of a merger or consolidation in which the surviving entity
assumes all of PHASE-1's and XENO's rights and obligations hereunder
or a sale of substantially all of the assets of such party to which
this Agreement relates. PHASE-1 shall have no rights to transfer or
sublicense this Agreement except as part of a merger or consolidation
as described above. The parties agree that in the event of the
termination of the Harvard License Agreement, the President and
Fellows of Harvard College shall have the option of having this
Agreement assigned to it or terminating the licenses granted herein.
7.2. Effect of Waiver. No waiver of any default, condition, provisions or
breach of this Agreement shall be deemed to imply or constitute a
waiver of any other like default, condition, provision or breach of
this Agreement.
7.3. Limitation of Liability. NEITHER PARTY SHALL BE LIABLE TO THE OTHER
FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTIAL, OR INDIRECT DAMAGES
ARISING OUT OF THIS AGREEMENT, HOWEVER CAUSED, UNDER ANY THEORY OF
LIABILITY.
PHASE-1 XENO License Agreement 9
<PAGE> 10
7.4. Indemnification. PHASE-1 will defend, indemnify and hold XENO, its
officers, directors, employees, Affiliates and agents harmless against
any and all liability, loss, damage, claim or expense (including
attorney's fees) arising out of a suit by a Third Party from the
performance under this Agreement by PHASE-1; except to the extent such
claim is caused by the negligence or willful misconduct of XENO or a
breach of a representation of XENO. XENO will defend, indemnify and
hold PHASE-1, its officers, directors, employees, Affiliates and
agents harmless against any and all liability, loss, damage, claim or
expense (including attorney's fees) arising out of a suit by a Third
Party from the performance under this Agreement by XENO; except to the
extent such claim is caused by the negligence or willful misconduct of
PHASE-1 or a breach of a representation of PHASE-1.
7.5. Patent Defense Costs. XENO will use reasonable efforts, at its
discretion, to enforce XENO patents at its own expense against any
Third Party infringement. PHASE-1 at its option and at its expense may
elect to join in any prosecution of a Third Party infringer of the
XENO Patents in the Field initiated by XENO. In the event that PHASE-1
is sued by a Third Party for infringement of a Third Party's patent,
XENO hereby agrees, if PHASE-1 so requests, to provide PHASE-1 with
all reasonable advice or technical support that PHASE-1 may reasonably
request at PHASE-1's expense.
7.6. Patent Marking. PHASE-1 agrees to mark all Licensed Product(s) and
Licensed Process(es), if applicable, in accordance with 35 U.S.C.
ss.287 and other applicable laws and regulations in thE territory
where such Licensed Product(s) is (are) manufactured, used or sold or
where such Licensed Process(es) is (are) sold. However,
notwithstanding the options provided under 35 U.S.C. ss.287, PHASE-1
will mark each product sold by it which could potentially be used to
infringe the claims of the XENO patents as follows: "This product is
sold under license from Xenometrix, Inc".
7.7. Diligence. PHASE-1 agrees to use best efforts to fulfill the
obligations of Section 2.2 (e) of the Harvard License Agreement as a
sublicensee of XENO under the Harvard License Agreement.
7.8. Force Majeure. Neither party shall lose any rights hereunder or be
liable to the other party for damages or losses (except for payment
obligations) on account of failure of performance by the defaulting
party if the failure is occasioned by war, strike, fire, act of God,
earthquake, flood, lockout, embargo, governmental acts or orders or
restrictions, failure of suppliers, or any other reason where failure
to perform is beyond the reasonable control and not caused by the
negligence or intentional conduct or misconduct of the nonperforming
party, and such party has exerted all reasonable efforts to avoid or
remedy such force majeure; provided, however, that in no event shall a
party be required to settle any labor dispute or disturbance.
PHASE-1 XENO License Agreement 10
<PAGE> 11
7.9. Amendment. No modification, supplement to or waiver of this Agreement
or any Addendum hereto or any of their provisions shall be binding
upon a party hereto unless made in writing and duly signed by an
authorized representative of both XENO and PHASE-1. In no event may
the terms of this Agreement be changed, deleted, supplemented or
waived by any notice, purchase order, receipt, acceptance, bill of
lading or other similar form of document. A failure of either party
to exercise any right or remedy hereunder, in whole or in part, or on
one or more occasions, shall not be deemed either a waiver of such
right or remedy to the extent not exercised, or of any other right or
remedy, on such occasion or a waiver of any right or remedy on any
succeeding occasion.
7.10. Entire Agreement. This Agreement, and each Exhibit attached hereto,
and each supplemental written agreement contemplated hereunder, sets
forth the entire understanding and agreement of the parties as to the
subject matter thereof, and there are no other understandings,
representations or promises, written or verbal, not set forth herein
or on which either party has relied. If any provisions of any such
Addendum or supplemental written agreement conflict with any
provisions set forth in this Agreement, the provisions of this
Agreement shall take precedence, unless such Addendum or supplemental
written agreement expressly refers to the specific provision(s) of
this Agreement that it is intended to replace or modify (and which
shall be limited in force and effect to such Addendum or supplemental
written agreement only).
7.11. Notices. All Notices under this Agreement shall be given in writing
and shall be addressed to the parties at the following addresses:
For XENO:
President
Xenometrix, Inc.
2425 North 55th Street
Boulder, Colorado 80301-5700
For PHASE-1:
President
PHASE-1 Molecular Toxicology Inc.
1217 Parkway Drive
Santa Fe, NM 87505-7234
PHASE-1 XENO License Agreement 11
<PAGE> 12
Notices shall be in writing and shall be deemed delivered when
received, if delivered by a courier, overnight mail service or the
like, or a week following mailing, if sent by first-class certified or
registered mail, postage prepaid.
7.12 Arbitration. The parties recognize that disputes as to certain
matters may from time to time arise during the term of this Agreement
which relate to either party's rights and/or obligations hereunder. It
is the objective of the parties to establish procedures to facilitate
the resolution of disputes arising under this Agreement in an
expedient manner by mutual cooperation and without resort to
arbitration. The parties agree that prior to any arbitration
concerning this Agreement, XENO's CEO and PHASE-1's CEO will meet in
person or by video-conferencing in a good faith effort to resolve any
disputes concerning this Agreement. Within thirty (30) days of a
formal request by either party to the other, any party may, by written
notice to the other, have such dispute referred to their respective
officers designated or their successors, for attempted resolution by
good faith negotiations, such good faith negotiations to begin within
thirty (30) days after such notice is received. Except as otherwise
provided specifically herein, any controversy or claim under this
Agreement shall be solely settled by arbitration by one arbitrator
pursuant to the Commercial Arbitration Rules of the American
Arbitration Association (the "Association"); provided that the parties
shall first use their best efforts to resolve such dispute by
negotiation. The arbitration shall be conducted in Boulder, Colorado.
The arbitrator shall be selected by the joint agreement of the
parties, but if they do not so agree within twenty (20) days of the
date of a request for arbitration, the selection shall be made
pursuant to the rules of the Association. The decision reached by the
arbitrator shall be conclusive and binding upon the parties hereto and
may be filed with the clerk of any court of competent jurisdiction,
and a judgment confirming such decision may, if desired by any party
to the arbitration, be entered in such court. Each of the parties
shall pay its own expenses of arbitration and the expenses of the
arbitrator(s) shall be equally shared; provided, however, that if in
the opinion of the arbitrator(s) any claim hereunder or any defense or
objection thereto was unreasonable, the arbitrator(s) may assess, as
part of the award, all or any part of the arbitration expenses
(including reasonable attorneys' fees) against the party raising such
unreasonable claim, defense or objection. Nothing herein set forth
shall prevent the parties from settling any dispute by mutual
agreement at any time.
7.13 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Colorado, without
regard or giving effect to its principles of conflict of laws.
7.14 Severability and Survival. This Agreement is intended to be
severable. If any provision(s) of this Agreement are or become
invalid, are ruled illegal by a court of competent jurisdiction
or are deemed unenforceable under the current applicable law
PHASE-1 XENO License Agreement 12
<PAGE> 13
from time to time in effect during the term hereof, it is the
intention of the parties that the remainder of the Agreement
shall not be affected thereby and shall continue to be construed
to the maximum extent permitted by law at such time. It is
further the intention of the parties that in lieu of each such
provision which is invalid, illegal, or unenforceable, there
shall be substituted or added as part of this Agreement by such
court of competent jurisdiction a provision which shall be as
similar as possible, in economic and business objectives as
intended by the parties to such invalid, illegal or
unenforceable provision, but shall be valid, legal and
enforceable. Sections 5 and 7 of this Agreement will survive the
expiration or any other termination of this Agreement
7.15 Independent Contractors. The parties hereto are acting as
independent contractors and shall not be considered partners,
joint venturers or agents of the other. Neither shall have the
right to act on behalf of, or to bind the other.
7.16 Headings. Captions and paragraph headings are for convenience
only and shall not form an interpretative part of this
Agreement. Unless otherwise specifically provided, all
references to an Article incorporate all Articles or subsections
thereunder. This Agreement shall not be strictly construed
against either party hereto and maybe executed in two or more
counterparts, each of which will be deemed an original and the
same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement.
By: /s/Stephen J. Sullivan Date: 7/27/98
------------------------ --------------------
Stephen J. Sullivan
CEO and President
For Xenometrix, Inc.
By: /s/ Spencer Farr Date: July 24, 1998
------------------------ --------------------
Spencer Farr, Ph.D.
Chairman, President and CEO
For Phase-1 Molecular Toxicology, Inc.
PHASE-1 XENO License Agreement 13
<PAGE> 14
EXHIBIT A
[TO BE UPDATED]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
EUKARYOTIC GENE PROFILING
- -----------------------------------------------------------------------------------------------------------------------------------
PATENT/ APPLICATION # FILING DATE COUNTRY ISSUE DATE TITLE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
08/008,896 1/21/93 US
- -----------------------------------------------------------------------------------------------------------------------------------
08/374,641 7/21/95 US (Allowed Methods and Diagnostic Kits Utilizing Mammalian
2/17/98). Stress Promoters to Determine Toxicity of a
Compound
- -----------------------------------------------------------------------------------------------------------------------------------
612434 1/21/94 Australia 6/11/98
- -----------------------------------------------------------------------------------------------------------------------------------
E160178 1/21/94 Austria 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 Belgium 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
2154265 1/21/94 Canada
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 Denmark 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 EPC 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 France 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
694 06 772.5-08 1/21/94 Germany 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
980400301 1/21/94 Greece 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 Hong Kong
- -----------------------------------------------------------------------------------------------------------------------------------
E77394 1/21/94 Ireland 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
20035BE/98 1/21/94 Italy 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
6-517147 1/21/94 Japan
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 Luxembourg 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 Monaco 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 Netherlands 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
US94/00583 1/21/94 PCT
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 Portugal 1/19/98
- -----------------------------------------------------------------------------------------------------------------------------------
9601405-5 2/13/96 Singapore
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 Spain 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 Sweden 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 Switzerland 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
0 680 517 1/21/94 UK 11/12/97
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PHASE-1 XENO License Agreement 14
<PAGE> 1
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-80889) of Xenometrix, Inc., of our report dated
September 1, 1998, appearing on page F-1 of this Form 10-KSB.
/s/ PricewaterhouseCoopers LLP
Broomfield, Colorado
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 341
<SECURITIES> 0
<RECEIVABLES> 125
<ALLOWANCES> 10
<INVENTORY> 55
<CURRENT-ASSETS> 744
<PP&E> 1,334
<DEPRECIATION> 680
<TOTAL-ASSETS> 1,738
<CURRENT-LIABILITIES> 2,340
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> (605)
<TOTAL-LIABILITY-AND-EQUITY> 1,738
<SALES> 611
<TOTAL-REVENUES> 1,886
<CGS> 523
<TOTAL-COSTS> 627
<OTHER-EXPENSES> 2,983
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 641
<INCOME-PRETAX> (2,365)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,365)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
