<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended: September 30, 2000
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to_________
Commission file number: 0-31035
VARIAGENICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3182077
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
60 Hampshire St., Cambridge, MA 02139-1548
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (617) 588-5300
Former name, former address, and former year, if changed since last report:
Not applicable
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /x/ No / /
23,108,296 shares of Common Stock, par value $.01 were outstanding on November
9, 2000.
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VARIAGENICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of December 31, 1999 and September 30, 2000.................................. 1
Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 2000....... 2
Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 2000................. 3
Notes to Financial Statements.................................................................. 4-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 8-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 14
Item 2. Changes in Securities and Use of Proceeds................................................ 14-15
Item 3. Defaults Upon Senior Securities.......................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders...................................... 15
Item 5. Other Information........................................................................ 15
Item 6. Exhibits and Reports on Form 8-K......................................................... 16
Signature......................................................................................... 17
Exhibit Index..................................................................................... 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VARIAGENICS, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,827,519 $95,357,638
Short-term investments 2,500,000 6,379,713
Prepaid expenses and other current assets 194,195 1,166,230
------------ -------------
Total current assets 4,521,714 102,903,581
Restricted cash 1,000,000 1,000,000
Property and equipment, net 3,753,586 4,687,684
Other assets 127,850 99,100
------------ -------------
Total assets $9,403,150 $108,690,365
============ =============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $314,984 $569,455
Accrued expenses and other liabilities 740,332 929,162
Deferred revenue 42,000 2,053,649
Current portion of capital lease obligations 515,831 891,861
Line of credit, current portion 109,091 109,091
------------ -------------
Total current liabilities 1,722,238 4,553,218
Capital lease obligations 877,463 1,062,275
Line of credit 100,000 18,182
Commitments and contingencies
Redeemable convertible preferred stock, $.01 par value; 11,576,461 shares
authorized and 10,266,584 shares issued and outstanding at
December 31, 1999 29,093,692 --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value; 14,324,316 and 70,000,000 shares
authorized, 750,105 and 23,102,902 shares issued and
outstanding at December 31, 1999 and September 30, 2000, 7,501 231,029
respectively
Additional paid-in capital 18,822,467 174,567,162
Accumulated deficit (34,894,856) (50,089,129)
Deferred compensation (6,325,355) (21,652,372)
------------ -------------
Total stockholders' equity (deficit) (22,390,243) 103,056,690
------------ -------------
Total liabilities, redeemable convertible preferred stock
and stockholders' equity (deficit) $9,403,150 $108,690,365
============ =============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
1
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VARIAGENICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $85,154 $763,402 $258,587 $1,038,630
Costs and expenses:
Research and development 1,891,694 3,681,690 5,274,471 8,964,084
General and administrative 3,747,922 4,484,787 6,303,992 8,776,588
----------- ----------- ------------ ------------
Loss from operations (5,554,462) (7,403,075) (11,319,876) (16,702,042)
Other income (expense):
Interest income 67,860 1,300,994 100,380 1,706,619
Interest expense (362,815) (61,482) (1,461,315) (198,850)
Equity in loss of affiliate -- -- (250,000) --
----------- ----------- ------------ ------------
Net loss $(5,849,417) $(6,163,563) $(12,930,811) $(15,194,273)
=========== =========== ============ ============
Dividends on redeemable convertible
preferred stock (811,433) (240,581) (811,433) (22,106,204)
----------- ----------- ------------ ------------
Net loss attributable to common stockholders
$(6,660,850) $(6,404,144) $(13,742,244) $(37,300,477)
=========== =========== ============ ============
Net loss attributable to common stockholders
per share (basic and diluted) $(10.75) $(0.35) $(23.82) $(5.56)
Weighted average common shares outstanding
(basic and diluted) 619,833 18,258,810 576,952 6,709,439
</TABLE>
The accompanying notes are an integral part of these
financial statements.
2
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VARIAGENICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 2000
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(12,930,811) $(15,194,273)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 471,210 758,872
Accrued interest on convertible notes payable converted to redeemable
convertible preferred stock 296,967 --
Non-cash compensation expense 1,516,755 7,712,270
Equity in loss of affiliate 250,000 --
Non-cash charge for preferred stock issued to cancel agreements with
affiliate and affiliate's investors 1,040,000 --
Common stock issued for license agreement -- 428,100
Warrants issued for interest expense 1,050,533 --
Deferred revenue from alliance payment -- 2,491,150
Changes in assets and liabilities:
Prepaid expenses and other current assets 72,575 (972,035)
Other assets 86,579 (5,000)
Accounts payable (409,919) 254,471
Accrued expenses 348,641 188,830
Deferred revenue 41,666 20,499
----------- -----------
Net cash used for operating activities (8,165,804) (4,317,116)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of short-term investments -- 2,500,000
Purchase of short-term investments (6,607,473) (6,379,713)
Acquisition of property and equipment (609,382) (579,220)
Reimbursement from lessor 273,098 --
Cash paid for equity investment (250,000) --
----------- -----------
Net cash used for investing activities (7,193,757) (4,458,933)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (118,372) (519,158)
Repayment of line of credit (354,334) (81,818)
Proceeds from issuance of notes payable to stockholders 4,665,000 --
Proceeds from issuance of preferred stock, net of issuance costs 10,630,808 19,905,423
Proceeds from issuance of common stock 168 161,279
Proceeds from exercise of warrants -- 2,570,257
Proceeds from initial public offering, net of issuance costs -- 73,053,910
Proceeds from private placement of common stock, net of issuance costs -- 7,216,275
----------- -----------
Net cash provided by financing activities 14,823,270 102,306,168
----------- -----------
Net (decrease) increase in cash and cash equivalents (536,291) 93,530,119
Cash and cash equivalents at beginning of period 733,979 1,827,519
----------- -----------
Cash and cash equivalents at end of period $197,688 $95,357,638
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
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VARIAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Variagenics, Inc. (the "Company") was incorporated in Delaware on
December 7, 1992. The Company was originally formed to develop a pharmacogenomic
approach to cancer therapy. The Company has broadened that focus to discover
genetic variations characterized by SNPs and other genetic differences. The
Company will use this information to optimize drugs in development, develop new
drug targets and bring diagnostic products to market. Prior to January 1, 2000,
the Company was in the development stage and, accordingly, presented financial
statements as prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 7.
The Company has incurred losses since its inception and, as of
September 30, 2000, had an accumulated deficit of $50.1 million. Additional
operating losses are anticipated through at least the end of 2001, as the
Company expands the commercialization of its products and services to the
clinical research market and fully implements its business strategy. This
expansion is expected to result in increases in research and development,
marketing and sales, and general and administrative expenses.
Management believes that the Company's cash reserves, including the net
proceeds from the sale of stock (see Note 6) and expected short-term revenue
will be sufficient to fund operations at least through the year 2002. During or
after this period, if cash generated by operations is insufficient to satisfy
liquidity requirements, the Company may need to issue additional equity or debt
securities or obtain additional credit arrangements.
The Company is subject to risks common to companies in the industry
including, but not limited to, uncertainty of product development and
commercialization, lack of marketing and sales history, dependence on key
personnel, market acceptance of products, product liability, protection of
proprietary technology, ability to raise additional financing, and compliance
with FDA and other governmental regulations.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete annual financial statements. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair statement have been included. Interim results
are not necessarily indicative of results that may be expected for a full year.
These financial statements and notes should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1999
included in the Company's Registration Statement on Form S-1, as amended (No.
333-33558) which was declared effective by the Securities and Exchange
Commission on July 20, 2000.
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 and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NET LOSS PER SHARE AND COMPREHENSIVE LOSS
Net loss per share is computed under SFAS No. 128 "Earnings Per Share."
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding, excluding unvested restricted stock. Diluted net
loss per share does not differ from basic net loss per share since potential
common shares are antidilutive for all periods presented and, therefore, are
excluded from the calculation of diluted net loss per share. Comprehensive loss
is equal to net loss for all periods presented.
The following potentially dilutive common shares were excluded because
their effect was antidilutive (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
---- ----
<S> <C> <C>
Redeemable convertible preferred stock 10,267 --
Stock options 1,695 2,968
Warrants 2,241 1,311
Unvested restricted stock 40 --
Employee stock purchase plan -- 4
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities," which was amended by SFAS No.
137 and is effective for fiscal years beginning after June 15, 2000. The
statement establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 also requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Adoption of this standard is not
expected to have a material impact on the financial position or results of
operations of the Company.
3. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 2000
---- ----
<S> <C> <C>
Acquisition of property and equipment under capital lease $ -- $1,200,000
agreements
</TABLE>
5
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4. COMMON STOCK
STOCK AND OPTIONS ISSUED
For the nine months ended September 30, 2000, the Company recorded
compensation expense of $5.5 million and $2.2 million for options and stock
granted to employees and non-employees, respectively.
5. ALLIANCE AGREEMENT
In June 2000, the Company entered into an alliance agreement with
Waters Technologies Corporation ("Waters"), a life science company, whereby
Waters will manufacture, distribute and sell consumable reagent kits for use in
the Company's NuCleave DNA analysis system. Pursuant to this agreement, on July
26, 2000, the Company received $7,500,000 from Waters for the purchase of
535,714 shares of the Company's common stock and a $3,000,000 payment due to the
Company upon receipt of approval under the Hart-Scott-Rodino Act. Concurrent
with the share purchase, the Company issued to Waters a warrant to purchase
80,357 shares of common stock at $14.00 per share, the IPO price. The $3,000,000
payment was recorded as deferred revenue, and the warrants were valued at
$500,000, which was recorded as a reduction of deferred revenue. For the three
months ended September 30, 2000, $508,850 has been recognized as revenue under
this agreement. The net deferred revenue is being recognized in revenue over the
development period of the alliance. The alliance agreement further provides for
payments to the Company based on the achievement of certain milestones, and
royalties on annual sales of product.
6
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6. INITIAL PUBLIC OFFERING
On July 26, 2000, the Company completed an initial public offering in
which it sold 5,000,000 shares of common stock at $14.00 per share. Concurrent
with the closing of the offering, the underwriters exercised an over-allotment
option to purchase an additional 750,000 shares at $14.00 per share. Net
proceeds from the offering and over-allotment option were approximately $73.1
million, net of underwriting discounts, commissions and other offering costs.
Upon the closing of the offering, all the Company's redeemable convertible
preferred stock converted into 15,542,181 shares of common stock. A vote of the
Company's shareholders in July, 2000 increased the number of authorized shares
of common stock to 70,000,000 and preferred stock to 5,000,000 in anticipation
of the IPO.
7. INVESTMENT IN NOVA MOLECULAR, INC.
In August, 2000, SignalGene, Inc. ("SGI") of Montreal, Canada,
announced its intent to merge with Nova Molecular, Inc. ("NMI"), an entity in
which the Company holds a minority interest. In September, 2000, SGI withdrew
the offer.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE SECTIONS OF OUR REGISTRATION STATEMENT ON FORM S-1 FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION AND DECLARED EFFECTIVE ON JULY 20, 2000,
AS AMENDED, ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS".
OVERVIEW
We are engaged in developing technologies for the discovery and
commercialization of drugs and diagnostics based on genetic differences among
individuals. As a pharmacogenomics company offering a full range of solutions
to support key steps of the drug discovery and development process, we
discover genetic variations characterized by the most common form of genetic
variability, single nucleotide polymorphisms, or SNPs, and other genetic
differences and use this information to improve and enhance drugs in
development and develop new drug targets. We also intend to use our
technology to bring high-value diagnostic products to market. We have
developed our NuCleaveTM proprietary method for testing genes using mass
spectrometry, a tool used to measure molecular weight, for use in clinical
research, and we develop assays which may be used as diagnostics. From
inception in December 1992 through 1996, the main focus of our research
activities was directed toward developing a pharmacogenomic approach to
cancer therapy. In 1996 that focus was broadened to include SNP discovery and
development of pharmacogenomic technologies. Since our inception in 1992, our
operating activities have been primarily devoted to research and development,
recruiting personnel, raising capital, acquiring assets and business
development. In the second half of 1999, we recognized revenue from our first
commercial collaboration.
We have incurred losses since our inception and, as of September 30,
2000, we had an accumulated deficit of $50.1 million. We anticipate incurring
additional operating losses through at least the end of 2001, as we expand
the commercialization of our products and services to the clinical research
market and we fully implement our business strategy. This expansion is
expected to result in increases in research and development, marketing and
sales, and general and administrative expenses. Payments under contracts,
collaborations and licensing arrangements will be subject to significant
fluctuation in both timing and amount and, therefore, our results of
operations for any period may not be comparable to the results of operations
for any other period.
SOURCES OF REVENUE AND REVENUE RECOGNITION
Our revenue to date has been generated from collaborations and research
grants from a governmental agency. We recognize revenue from collaborations and
grants in the period in which our specific performance obligations under the
terms of the contracts are satisfied and related costs are incurred. Payments
received in advance under agreements are recorded as deferred revenue until
earned.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Revenues increased to $0.8 million for the quarter ended September
30, 2000 from $0.1 million for the quarter ended September 30, 1999. Revenues
for the quarter ended September 30, 2000
8
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were from: a continuing collaboration with Covance, Inc., a new alliance with
Waters Technologies Corporation, and revenues earned under our Variagenics
Impact Program. In June 2000, we entered into an alliance agreement with Waters
Technologies Corporation which provides for an equity investment in the Company
and payments to us of up to $7.0 million. The alliance agreement further
provides for payments to the Company based on the achievement of certain
milestones, and royalties on annual sales of product. Revenues for the quarter
ended September 30, 1999 were primarily from a Small Business Innovation and
Research grant from the National Institute of Health.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist
primarily of salaries and related personnel costs, consumable laboratory
supplies, facilities and equipment expenses, license fees and fees paid to
scientific advisors, consultants and sponsored research providers. We expense
our research and development costs as they are incurred. Research and
development expenses increased to $3.7 million for the quarter ended September
30, 2000 from $1.9 million for the quarter ended September 30, 1999. The
increase was due primarily to increased stock-based compensation expense
relating to option grants of approximately $1.3 million and increased payroll
and related benefits of approximately $0.3 million due to increased headcount.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and related expenses for executive, business development,
finance and other administrative personnel, facility operations and equipment
costs, legal expenses for general legal activities and preparation of
intellectual property filings, recruiting and marketing. General and
administrative expenses increased to $4.5 million for the quarter ended
September 30, 2000 from $3.7 million for the comparable period of 1999. The
increase in general and administrative expense was primarily due to increased
stock-based compensation expense of approximately $1.7 million from the same
quarter in 1999, increased payroll, related benefits and recruiting costs of
approximately $0.2 million, increased business development costs of
approximately $0.2 million, and patent filing costs of approximately $0.1
million offset by $1.8 million of charges in 1999 in connection with the
cancellation of our agreements with Nova Molecular, Inc.
We recognized $4.3 million in the quarter ended September 30, 2000 and
$1.3 million in the quarter ended September 30, 1999, in equity-related charges
resulting from grants of options and stock to employees and options and
restricted stock to non-employees. These charges are included in research and
development or general and administrative expenses depending upon the nature of
the work performed by the individuals receiving the grants.
We incurred expenses of $2.8 million and $0.1 million for the three
month periods ended September 30, 2000 and 1999, respectively, related to the
issuance of stock options to employees. The options granted to employees
generally vest over four years, which will result in additional compensation
expense of $21.7 million for periods subsequent to September 30, 2000. We
recorded an expense of $1.5 million in the third quarter of 2000 versus $1.2
million in the third quarter of 1999, related to restricted stock and options
granted to non-employees. Non-employee equity grants are subject to
remeasurement over the vesting period and we cannot estimate the income or
expense we will recognize in future periods because the amount expensed will
depend on a number of variables, including our stock price.
INTEREST INCOME. Interest income increased to $1.3 million for the third quarter
of 2000 from $0.1 million for the comparable quarter in 1999 due to the increase
in cash from the initial public offering and concurrent private placement of our
common stock in July 2000.
INTEREST EXPENSE. Interest expense decreased to $0.1 million for the third
quarter of 2000 from $0.4 million for the comparable quarter in 1999 due to
interest from convertible notes and warrants recorded in the 1999 quarter. These
obligations were no longer outstanding in the year 2000 period.
9
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NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. The net loss
increased to $6.2 million for the third quarter of 2000 from $5.8 million for
the comparable quarter in 1999 primarily due to the reasons listed above. The
net loss attributable to common stockholders for the quarters ended September
30, 2000 and 1999 reflects the accretion of $0.2 million and $0.8 million,
respectively, of dividends on outstanding redeemable convertible preferred stock
prior to its conversion to common stock at the initial public offering in July
2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Revenues totaled $1.0 million for the nine months ended September 30,
2000, an increase of $0.8 million over the comparable period in 1999. Revenues
for the period ended September 30, 2000 were from a continuing collaboration
with Covance, Inc., a new alliance with Waters Technologies Corporation, and
revenues earned under our Variagenics Impact Program. Revenues for the period
ended September 30, 1999 were primarily from a Small Business Innovation and
Research grant from the National Institute of Health.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist
primarily of salaries and related personnel costs, consumable laboratory
supplies, facilities and equipment expenses, license fees and fees paid to
scientific advisors, consultants and sponsored research providers. We expense
our research and development costs as they are incurred. Research and
development expenses increased to $9.0 million for the nine months ended
September 30, 2000 from $5.3 million for the nine months ended September 30,
1999. The increase was due primarily to increased stock-based compensation
expense relating to option grants of approximately $2.4 million and increased
lab materials and consumable supplies of $0.5 million versus the nine month
period ended September 30, 1999, and to license fees of $0.4 million recognized
in the quarter ended June 30, 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and related expenses for executive, business development,
finance and other administrative personnel, facility operations and equipment
costs, legal expenses for general legal activities and preparation of
intellectual property filings, recruiting and marketing. General and
administrative expenses increased to $8.8 million for the nine months ended
September 30, 2000 from $6.3 million for the comparable period of 1999. The
increase in general and administrative expense was primarily due to increased
stock-based compensation expense of approximately $3.8 million. This increase
was offset by $1.8 million of charges in 1999 in connection with the
cancellation of our agreements with Nova Molecular, Inc.
We recognized $7.7 million in the nine months ended September 30, 2000
and $1.5 million in the nine months ended September 30, 1999, in equity-related
charges resulting from grants of options and stock to employees and options and
restricted stock to non-employees. These charges are included in research and
development or general and administrative expenses depending upon the nature of
the work performed by the individuals receiving the grants.
We incurred expenses of $5.5 million and $0.1 million for the nine
month periods ended September 30, 2000 and 1999, respectively, related to the
issuance of stock options to employees. We also incurred expenses of $2.2
million in the first nine months of 2000 and $1.4 million in the first nine
months of 1999, related to restricted stock and options granted to
non-employees. Non-employee equity grants are subject to remeasurement over
the vesting period and we cannot estimate the expense we will recognize in
future periods because the amount expensed will depend on a number of
variables, including our stock price.
10
<PAGE>
INTEREST INCOME. Interest income increased to $1.7 million for the first nine
months of 2000 from $0.1 million for the comparable period in 1999 due to the
increase in cash from the initial public offering and concurrent private
placement of our common stock in July 2000 and the sale of our Series F
redeemable convertible preferred stock in March 2000.
INTEREST EXPENSE. Interest expense decreased to $0.2 million for the first nine
months of 2000 from $1.5 million for the comparable period in 1999 due to
interest from convertible notes and warrants recorded in the 1999 period. These
obligations were no longer outstanding in the year 2000 period.
NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. The net loss
increased to $15.2 million for the first nine months of 2000 from $12.9 million
for the comparable period in 1999 primarily due to the reasons listed above,
partially offset by the equity in loss of affiliate of $0.3 million in 1999. In
March 2000, we issued redeemable convertible preferred stock at $4.29 per share
for net proceeds of $19.9 million. The issuance of these shares resulted in a
beneficial conversion feature, which we recorded as a dividend of $19.9 million
to the preferred holders. Coupled with the accretion of dividends on redeemable
convertible preferred stock of $2.2 million for the first nine months of 2000,
this increased the loss attributable to common stockholders for the period to
$37.3 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $95.4 million at September 30, 2000,
an increase of $93.5 million from December 31, 1999. For the first nine months
of 2000, we used $4.3 million for operations, which consisted of the net loss of
$15.2 million offset by non-cash compensation expense of $7.7 million, deferred
revenue of $2.5 million, the issuance of $0.4 million in common stock in
exchange for a license agreement, and depreciation and amortization of $0.8
million. We used $3.9 million (net of $2.5 million of maturities) to purchase
short-term investments, and $0.6 million to purchase fixed assets. We received
$102.3 million from our financing activities, which included net proceeds of
$73.1 million from our initial public offering, $19.9 million from our sale of
Series F redeemable convertible preferred stock, $7.2 million from a private
placement of our common stock, $2.6 million from the exercise of warrants, and
$0.2 million from the exercise of common stock options.
On July 26, 2000, the Company completed an initial public offering
in which it sold 5,000,000 shares of common stock at $14.00 per share.
Concurrent with the closing of the offering, the underwriters exercised an
over-allotment option to purchase an additional 750,000 shares at $14.00 per
share. These transactions resulted in net proceeds of approximately $73.1
million, net of underwriting discounts, commissions and other offering costs.
Pursuant to an alliance agreement, on July 26, 2000, the Company received
$7,500,000 from Waters Technologies Corporation for the purchase of 535,714
shares of the Company's common stock and a $3,000,000 payment due to the
Company upon receipt of approval under the Hart-Scott-Rodino Act.
We believe that our cash reserves, including the net proceeds from the
sale of our stock and our expected short-term revenue will be sufficient to fund
our operations at least through the year 2002. During or after this period, if
cash generated by operations is insufficient to satisfy our liquidity
requirements, we may need to issue additional equity or debt securities or
obtain additional credit arrangements. Additional financing may not be available
on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders.
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<PAGE>
We cannot assure you that our business or operations will not change in
a manner that would consume available resources more rapidly than anticipated.
We also cannot assure you that we will not require substantial additional
funding before we can achieve profitable operations. Our capital requirements
depend on numerous factors, including the following:
- our ability to enter into additional collaborative agreements;
- competing technological and market developments;
- changes in our existing collaborative relationships;
- the cost of filing, prosecuting, defending and enforcing patent claims
and other intellectual property rights;
- the purchase of additional capital equipment;
- the expansion of our facilities;
- the progress of our existing and future milestone and royalty
producing activities; and
- the availability of additional funding, if necessary, and if at all,
on favorable terms.
IMPACT OF INFLATION
We do not believe inflation has had a material impact on our business
or operating results during the periods presented.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act that
involve risks and uncertainties. Discussions containing forward-looking
statements may be found in the material set forth under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" as well as in
this report generally. We generally use words such as "believe," "may," "could,"
"will," "intend," "expect," "anticipate," "plan," and similar expressions to
identify forward-looking statements. You should not place undue reliance on
these forward-looking statements. Our actual results could differ materially
from those anticipated in the forward-looking statements for many reasons,
including the risks described above and elsewhere in this report.
Although we believe the expectations reflected in the forward-looking
statements are reasonable, they related only to events as of the date on which
the statements are made, and we cannot assure you that our future results,
levels of activity, performance or achievements will meet these expectations.
Moreover, neither we nor any other person assumes responsibility for the
accuracy and completeness of the forward-looking statements. We do not intend to
update any of the forward-looking statements after the date of this report to
conform these statements to actual results or to changes in our expectations,
except as required by law.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is principally confined to our cash
equivalents and investments, all of which have maturities of less than one year.
We maintain a non-trading investment portfolio of investment grade, liquid debt
securities that limits the amount of credit exposure to any one issue, issuer or
type of instrument. The fair value of these securities approximates their cost.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not involved in any legal proceedings that are material to our
business or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Prior to the effectiveness of our Registration Statement on Form
S-1, we amended our Restated Certificate of Incorporation to
effect a 1.1895-for-1 stock split of our issued and outstanding
shares of common stock and to change our authorized capital stock
to 25,000,000 shares of common stock, giving effect to the stock
split. Upon the completion of our initial public offering, we
restated our Certificate of Incorporation to change our
authorized capital stock to 70,000,000 shares of common stock and
5,000,000 shares of preferred stock. Under the terms of our
Restated Certificate of Incorporation, the Board of Directors
will be authorized to issue up to 5,000,000 shares of preferred
stock in one or more series without stockholder approval. The
Board of Directors also has discretion to determine the rights,
preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption privileges
and liquidation preferences, of each series of preferred stock.
The rights of holders of our common stock will be subject to, and
may be adversely affected by, the rights of any preferred stock
that the Board may designate in the future.
Upon the closing of our initial public offering, all of our
outstanding shares of Preferred Stock were automatically
converted into 15,542,181 shares of Common Stock.
Upon the closing of our initial public offering, we amended and
restated our Bylaws. Our Bylaws now provide for a classified
Board of Directors in which the Board is divided into three
classes with staggered three-year terms. Any vacancy may only be
filled by a vote of the majority of the directors then in office.
In contrast to the Bylaws which were in effect prior to our
initial public offering, the amended and restated Bylaws provide
that stockholders can only take action at an annual meeting or
special meeting, and not by written action in lieu of a meeting.
The amended and restated Bylaws also provide limitations upon
stockholders' ability to call special meetings of stockholders
and impose advance notice and information disclosure requirements
for stockholder proposals.
The classification of the Board of Directors, the limitation on
filling of vacancies and the advance notice and information
disclosure requirements for stockholder proposals could make it
more difficult for a third party to acquire, or discourage a
third party from acquiring, control of our Company. Finally,
although Delaware law provides generally that a majority of
shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, our
amended and restated Bylaws require the affirmative vote of
holders of at least 70% of the votes which all stockholders would
be entitled to cast in any annual election of directors or class
of directors to amend or repeal any of the provisions of our
amended and restated Bylaws.
(b) Not applicable.
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<PAGE>
(c) Recent Sales of Unregistered Securities. During the quarter ended
September 30, 2000, employees, former employees and consultants
exercised options to purchase 35,367 shares of common stock for
an aggregate purchase price of $21,319. During the quarter ended
September 30, 2000, holders of Common and Preferred Stock
Purchase Warrants exercised Warrants for 88,613 shares of common
stock for an aggregate purchase price of $150,001. During the
quarter ended September 30, 2000, we granted options to purchase
an aggregate of 242,572 shares of common stock to employees,
directors and consultants at a weighted average exercise price of
$15.33 per share.
The securities issued in the foregoing transactions were either
(i) offered and sold in reliance upon exemptions from the
Securities Act of 1933 ("Securities Act") registration
requirements set forth in Sections 3(b) and 4(2) of the
Securities Act, and any regulations promulgated thereunder,
relating to sales by an issuer not involving any public offering,
or (ii) in the case of certain options to purchase shares of
common stock and shares of common stock issued upon the exercise
of such options, such offers and sales were made in reliance upon
an exemption from registration under Rule 701 promulgated under
Section 3(b) of the Securities Act. No underwriters were involved
in the foregoing sales of securities.
(d) Use of Proceeds from Sale of Registered Securities. On July
20, 2000, in connection with our initial public offering, the
Securities and Exchange Commission declared a Registration
Statement on Form S-1 (No.333-33558) effective that registered
5,750,000 shares of our common stock. The managing
underwriters were Credit Suisse First Boston Corporation,
Chase Securities Inc. and SG Cowen Securities Corporation. On
July 26, 2000, we sold 5,000,000 of such shares of our common
stock at an initial public offering price of $14.00 per share,
generating gross offering proceeds of $70,000,000. After
deducting $4,900,000 in underwriting discounts and
approximately $1,800,000 in other related expenses, the net
proceeds to the Company were approximately $ 63,300,000. On
July 26, 2000, we sold an additional 750,000 shares of Common
Stock at the initial public offering price of $14.00 per share
pursuant to the exercise by the underwriters of their
over-allotment option with respect to such shares, generating
additional gross offering proceeds of $10,500,000. After
deducting $735,000 in underwriting discounts, the additional
net proceeds to the Company were $9,765,000.
The proceeds from our initial public offering have been invested
in money market funds and corporate obligations. We intend to use
the net proceeds for general corporate purposes, including
research and development and potential acquisitions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Prior to the consummation of our initial public offering on July 26,
2000, the stockholders took the following actions by written consent
in lieu of a special meeting in accordance with the General
Corporation Law of the State of Delaware and the By-Laws of the
Company:
On July 10, 2000 stockholders representing approximately 94.4% of
our outstanding shares entitled to vote acted to:
- elect Anthony H. Wild, Ph.D. and William A. Scott, Ph.D. to
our Board of Directors;
- increase the number of shares subject to our 1997 Employee,
Director and Consultant Stock Option Plan from 2,497,950 to
4,758,000 shares;
- adopt the 2000 Employee Stock Purchase Plan;
- amend our Restated Certificate of Incorporation to effect a
1.1895-for-1 stock split of our issued and outstanding shares
of Common Stock prior to the effectiveness of our Registration
Statement on Form S-1 and change our authorized capital stock
to 25,000,000 shares of common stock, giving effect to the
stock split;
- approve amended and restated Bylaws and an amended and
restated Certificate of Incorporation, each to be effective
upon completion of our initial public offering; and
- approve the division of our Board of Directors into three
staggered classes, each of whose members will serve for a
three year term.
ITEM 5. OTHER INFORMATION
Not applicable.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-1, No. 333-33558, and incorporated herein by reference)
3.2 Restated Bylaws of the Company (filed as Exhibit 3.4 to the Company's Registration Statement on Form S-1,
No. 333-33558, and incorporated herein by reference)
4.1 Specimen certificate for shares of common stock (filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, No. 333-33558, and incorporated herein by reference)
*10.1 Amendment No. 1 to Alliance Agreement Between Covance Inc. and the Company, effective
September 1, 2000
27 Financial Data Schedule
</TABLE>
---------------
* Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Company's application
requesting confidential treatment under Rule 24b-2 of the Exchange Act.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the three month period ended
September 30, 2000.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Variagenics, Inc.
By: /s/ RICHARD P. SHEA
-------------------------------
Richard P. Shea
Chief Financial Officer and Treasurer
(Principal accounting and finance officer)
Date: November 14, 2000
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-1, No. 333-33558, and incorporated herein by reference)
3.2 Restated Bylaws of the Company (filed as Exhibit 3.4 to the Company's Registration Statement on Form S-1,
No. 333-33558, and incorporated herein by reference)
4.1 Specimen certificate for shares of common stock (filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, No. 333-33558, and incorporated herein by reference)
*10.1 Amendment No. 1 to Alliance Agreement Between Covance Inc. and the Company, effective
September 1, 2000
27 Financial Data Schedule
</TABLE>
---------------------
* Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Company's application
requesting confidential treatment under Rule 24b-2 of the Exchange Act.
18
