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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: June 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 [ ] No [x]
22,989,397 shares of Common Stock, par value $.01 were outstanding on
August 31, 2000.
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VARIAGENICS, INC.
INDEX TO FINANCIAL STATEMENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of December 31, 1999 and June 30, 2000 ............................. 1
Statements of Operations for the Three and Six Months Ended June 30, 1999
and 2000 ............................................................................. 2
Statements of Cash Flows for the Six Months Ended June 30, 1999 and 2000 ............. 3
Notes to Financial Statements ........................................................ 4-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................... 9-13
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 ............................... 15-16
Item 5. Other Information ................................................................. 16
Item 6. Exhibits and Reports on Form 8-K .................................................. 16
Signature
Exhibit Index
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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VARIAGENICS, INC.
BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30, PRO FORMA
1999 2000 JUNE 30, 2000
---- ---- -------------
(Note 2)
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ASSETS
Current assets:
Cash and cash equivalents $1,827,519 $21,314,802 $103,679,802
Short-term investments 2,500,000 - -
Prepaid expenses and other current assets 194,195 1,341,647 241,647
--------- --------- -----------
Total current assets 4,521,714 22,656,449 103,921,449
Restricted cash 1,000,000 1,000,000 1,000,000
Property and equipment, net 3,753,586 4,659,573 4,659,573
Other assets 127,850 105,350 105,350
--------- --------- ----------
Total assets $9,403,150 $28,421,372 $109,686,372
========= ========== ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $314,984 $885,529 $885,529
Accrued expenses and other liabilities 740,332 1,161,979 1,161,979
Deferred revenue 42,000 41,667 41,667
Current portion of capital lease obligations 515,831 885,693 885,693
Line of credit, current portion 109,091 109,091 109,091
--------- --------- ---------
Total current liabilities 1,722,238 3,083,959 3,083,959
Capital lease obligations 877,463 1,277,659 1,277,659
Line of credit 100,000 45,455 45,455
Commitments and contingencies
Redeemable convertible preferred stock, $.01 par value; 11,576,461 and
16,241,167 shares authorized and 10,266,584 and 15,542,181 shares
issued and outstanding at December 31, 1999 and June 30, 2000,
respectively; 0 shares outstanding on a pro forma basis, redemption
value of $52,628,574 at June 30,2000 29,093,692 52,628,574 -
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value; 14,324,316 and 20,406,435 shares authorized,
750,105 and 1,136,391 shares issued and outstanding at December 31,
1999 and June 30, 2000, respectively; 70,000,000 shares authorized and
22,964,343 outstanding on a pro forma basis 7,501 11,364 229,643
Additional paid-in capital 18,822,467 38,576,518 172,251,813
Accumulated deficit (34,894,856) (43,925,566) (43,925,566)
Deferred compensation (6,325,355) (23,276,591) (23,276,591)
----------- ---------- -----------
Total stockholders' equity (deficit) (22,390,243) (28,614,275) 105,279,299
----------- ---------- -----------
Total liabilities, redeemable convertible preferred stock
and stockholders' equity (deficit) $9,403,150 $28,421,372 $109,686,372
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VARIAGENICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 2000 1999 2000
---- ---- ---- ----
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Revenue $79,052 $148,654 $173,433 $275,228
Costs and expenses:
Research and development 1,657,950 2,571,072 3,382,778 5,282,393
General and administrative 1,386,791 2,097,745 2,556,068 4,291,803
---------- --------- --------- ---------
Loss from operations (2,965,689) (4,520,163) (5,765,413) (9,298,968)
Other income (expense):
Interest income 17,510 290,592 32,520 405,625
Interest expense (573,288) (71,105) (1,098,500) (137,367)
Equity in loss of affiliate (99,308) - (250,000) -
---------- ---------- ----------- ------------
Net loss $(3,620,775) $(4,300,676) $(7,081,393) $(9,030,710)
============= =========== =========== =============
Dividends on redeemable convertible
preferred stock - (1,116,369) - (21,865,623)
------------ ----------- ------------ ------------
Net loss attributable to common
stockholders $(3,620,775) $(5,417,045) $(7,081,393) $(30,896,333)
============= =========== =========== =============
Net loss attributable to common
stockholders per share (basic and
diluted) $(6.34) $(5.73) $(12.76) $(36.82)
Weighted average common shares
outstanding (basic and diluted) 571,468 945,716 555,126 839,040
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VARIAGENICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,081,393) $(9,030,710)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 328,364 470,888
Accrued interest on convertible notes payable converted to
redeemable convertible preferred stock 238,383 -
Non-cash compensation expense 221,924 3,463,249
Equity in loss of affiliate 250,000 -
Common stock issued for license agreement - 428,100
Warrants issued for interest expense 793,264
Changes in assets and liabilities:
Prepaid expenses and other current assets 30,046 (1,147,452)
Other assets 108,580
Accounts payable 242,156 570,545
Accrued expenses 442,416 421,647
Deferred revenue - (333)
----------- -----------
Net cash used for operating activities (4,426,260) (4,824,066)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity of short-term investments - 2,500,000
Acquisition of property and equipment (463,829) (274,375)
Reimbursement from lessor 246,327 -
Cash paid for acquisitions and equity investments (250,000) -
---------- ---------
Net cash (used for) provided by investing activities (467,502) 2,225,625
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (77,213) (309,942)
Repayment of line of credit (27,273) (54,545)
Proceeds from issuance of notes payable to stockholders 4,264,601 -
Proceeds from issuance of preferred stock, net of issuance costs - 19,905,423
Proceeds from issuance of common stock 268 123,983
Proceeds from exercise of warrants - 2,420,805
---------- ----------
Net cash provided by financing activities 4,160,383 22,085,724
---------- -----------
Net (decrease) increase in cash and cash equivalents (733,379) 19,487,283
Cash and cash equivalents at beginning of period 733,979 1,827,519
----------- -----------
Cash and cash equivalents at end of period $600 $21,314,802
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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 June 30,
2000, had an accumulated stockholders' deficit of $43.9 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 7) 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.
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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 years
presented.
The following potentially dilutive common shares were excluded because
their effect was antidilutive (in thousands):
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JUNE 30, 1999 JUNE 30, 2000
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Convertible notes payable 6,322 -
Redeemable convertible preferred stock 2,840 15,542
Convertible preferred stock 78 -
Stock options 982 2,778
Warrants 287 1,322
Unvested restricted stock 50 24
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PRO FORMA BALANCE SHEET
In March 2000, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission for the Company to sell shares of its common stock in an initial
public offering ("IPO"). The IPO contemplated by that Registration Statement
was effective at July 20, 2000 (see Note 7). The pro forma balance sheet has
been prepared at June 30, 2000 to reflect: (1) the net proceeds from the sale
of common stock in the IPO and the concurrent private placement of shares at
an IPO price of $14.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses, (2) the conversion of all
redeemable convertible preferred stock into common stock and (3) the change
in the number of authorized common shares concurrent with the IPO.
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.
In March 2000, the FASB issued FASB Interpretation ("FIN") 44,
"Accounting for Certain Transactions Involving Stock Compensation and
interpretation of Accounting Principles Board ("APB") Opinion 25". FIN 44
clarifies the application of APB Opinion 25 and among other issues clarifies the
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following: the definition of an employee for purposes of applying APB Opinion
25; the criteria for determining whether a plan qualifies as a non-compensatory
plan; the accounting consequence of various modifications to the terms of
previously fixed stock options or awards; and the accounting for an exchange of
stock compensation awards in a business combination. FIN 44 is effective July 1,
2000, but certain conclusions in FIN 44 cover specific events that occurred
after either December 15, 1998 or January 12, 2000. The Company does not expect
the application of FIN 44 to have a material impact on the Company's financial
position or results of operations.
3. SUPPLEMENTAL CASH FLOW INFORMATION
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SIX MONTHS ENDED JUNE 30,
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1999 2000
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Acquisition of property and equipment under capital lease $ - $1,200,000
agreements
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4. COMMON STOCK
EXERCISE OF WARRANTS
In May 2000, warrant holders exercised warrants to purchase 610,949
shares of the Company's Series E preferred stock and 275,066 shares of common
stock, both at exercise prices of $2.73 per share. Net cash proceeds to the
Company aggregated $2.4 million.
EMPLOYEE STOCK PURCHASE PLAN
On May 15, 2000, the Board of Directors approved the Variagenics, Inc.
2000 Employee Stock Purchase Plan, subject to stockholder approval. This plan
allows employees of the Company to purchase common stock through payroll
deductions for 85% of fair market value. The Board of Directors authorized
reserving 475,800 shares of common stock for issuance under this plan.
STOCK AND OPTIONS ISSUED
In conjunction with entering into a license agreement with an
academic institution in June 2000, the Company issued 35,685 shares of common
stock. The Company recorded an expense of $0.4 million in the second quarter
of 2000 related to this agreement. Also in May and June 2000, the Company
issued 173,667 common stock options to employees and directors at an exercise
price of $3.78. As the exercise price is lower than the fair value of the
underlying stock on the grant date, the Company recorded deferred
compensation of $1.4 million which will be amortized over the vesting period.
Additionally, the Company issued 118,950 common stock options to a consultant
at an exercise price of $3.78. As these options vest over four years, the
Company will be required to remeasure the fair value of these options at each
reporting period prior to vesting and then finally at the vesting date. The
compensation charge recorded for these non-employee options for the three
months ended June 30, 2000 was $0.1 million.
For the six months ended June 30, 2000, the Company recorded
compensation expense of $2.8 million and $0.7 million for options and stock
granted to employees and non-employees, respectively.
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STOCK SPLIT
On June 15, 2000, the Board of Directors of the Company authorized a
1.1895 to 1 stock split. All share and per share information have been
retroactively restated to reflect the stock split.
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. Under the terms of a related
stock purchase agreement, an affiliate of Waters will make a direct
investment of $7.5 million in the Company at the time of the Company's IPO at
the offering price per share. In addition, the agreement provides for
payments of up to $7.0 million and royalties to the Company on sales of the
kits. At the Company's IPO, the Company will issue to Waters common stock
warrants equal to 15% of the shares purchased by Waters in the direct
investment. The value of the warrants at issuance will be recorded as a
reduction of the revenue recognized by the Company. Upon receiving approval
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in July, 2000,
Waters completed its direct investment and made an initial payment of $3.0
million. This payment will be recognized in revenue over the development
period of the alliance. (See Note 7)
6. COMMITMENTS AND CONTINGENCIES
LEASE LINES OF CREDIT
During the three months ended June 30, 2000, the Company increased its
borrowings under an existing equipment lease agreement to finance the purchase
of $1,200,000 of equipment.
7. SUBSEQUENT EVENTS
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 for net
proceeds of approximately $64.0 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.
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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, resulting in proceeds (net of underwriting discounts and commissions) of
$9,765,000. 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.
WATERS TRANSACTIONS
Pursuant to the alliance agreement discussed in Note 5, 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.
OPTION GRANTS
In July, 2000, the Company issued 189,725 common stock options to
employees and directors at an exercise price equal to the IPO price. As the
exercise price is equal to the fair value of the underlying stock at the grant
date, there will be no deferred compensation charge associated with these option
grants.
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. Under the proposed transaction
between SGI and NMI, the Company would receive a cash payment at the closing
for its shares of NMI. The amount of this payment would be recorded as a gain,
since the investment in NMI was reduced to zero in 1999 by recording the
Company's equity in NMI's losses. The transaction is expected to close on or
before September 28, 2000, and is subject to satisfactory completion of due
diligence and receipt of appropriate regulatory approvals.
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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.
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 NuCleave-TM- 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 June 30, 2000, we
had an accumulated stockholders' deficit of $43.9 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
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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 JUNE 30, 2000 AND 1999
REVENUES. Revenues totaled $0.1 million for each of the three month periods
ended June 30, 2000 and 1999. Revenues for the quarter ended June 30, 2000 were
from collaborations and revenues for the quarter ended June 30, 1999 were 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 $2.6 million for the quarter ended June 30,
2000 from $1.7 million for the quarter ended June 30, 1999. The increase was due
primarily to increased stock-based compensation expense relating to option
grants of approximately $0.3 million from the quarter ended June 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 $2.1 million for the quarter ended June 30,
2000 from $1.4 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 $0.9 million from the same quarter in
1999.
We recognized $1.3 million in the quarter ended June 30, 2000 and $0.1
million in the quarter ended June 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 $1.5
million for the three month period June 30, 2000, 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 $23.3
million for periods subsequent to June 30, 2000.
We recorded a decrease to expense of $0.2 million in the second
quarter of 2000 as compared to additional expense of $0.1 million in the
second 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. The expense reduction in the
second quarter of 2000 is due to a decrease in the estimated fair value of
our common stock versus the first quarter.
INTEREST INCOME. Interest income increased to $291,000 for the second quarter of
2000 from $18,000 for the comparable quarter in 1999 due to the increase in cash
from the sale of our Series F redeemable convertible preferred stock in March
2000.
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INTEREST EXPENSE. Interest expense decreased to $0.1 million for the second
quarter of 2000 from $0.6 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.
NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. The net loss
increased to $4.3 million for the second quarter of 2000 from $3.6 million for
the comparable quarter in 1999 primarily due to the reasons listed above,
partially offset by the equity in loss of affiliate of $0.1 million in 1999. The
net loss attributable to common stockholders for the quarter ended June 30, 2000
reflects the accretion of $1.1 million of dividends on outstanding redeemable
convertible preferred stock.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES. Revenues totaled $0.3 million for the six months ended June 30, 2000,
an increase of $0.1 million over the comparable period in 1999. Revenues for the
period ended June 30, 2000 were from collaborations and revenues for the period
ended June 30, 1999 were 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 $5.3 million for the six months ended June 30,
2000 from $3.4 million for the six months ended June 30, 1999. The increase was
due primarily to increased stock-based compensation expense relating to
option grants of approximately $1.2 million from the six month period ended
June 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 $4.3 million for the six
months ended June 30, 2000 from $2.6 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 $2.1 million
offset by a $0.2 million decrease in payroll and related expenses from the
same period in 1999.
We recognized $3.5 million in the six months ended June 30, 2000 and
$0.2 million in the six months ended June 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 for the six month period June 30, 2000, related to the issuance
of stock options to employees.
We also incurred expenses of $0.7 million in the first six months of
2000 and $0.2 million in the first six 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.
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INTEREST INCOME. Interest income increased to $406,000 for the first half of
2000 from $33,000 for the comparable period in 1999 due to the increase in cash
from the sale of our Series F redeemable convertible preferred stock in March
2000.
INTEREST EXPENSE. Interest expense decreased to $0.1 million for the first half
of 2000 from $1.1 million for the comparable period 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.
NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. The net loss
increased to $9.0 million for the first six months of 2000 from $7.1 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 $2.0 million for the first half of 2000, this
increased the loss attributable to common stockholders for the period to $30.9
million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $21.3 million at June 30, 2000, an
increase of $19.5 million from December 31, 1999. For the first six months of
2000, we used $4.8 million for operations, which consisted of the net loss of
$9.0 million offset by non-cash compensation expense of $3.5 million, the
issuance of $0.4 million in common stock in exchange for a license agreement,
and depreciation and amortization of $0.5 million. We used $0.3 million to
purchase fixed assets and received $22.1 million from our financing activities,
which included $19.9 million in net proceeds from our sale of Series F
redeemable convertible preferred stock, $1.7 million of proceeds from the
exercise of preferred stock warrants, and $0.9 million of proceeds from the
exercise of common stock options and warrants.
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
for net proceeds of approximately $64 million, net of underwriting discounts,
commissions and other offering costs. 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, resulting in proceeds, net of
underwriting discounts and commissions, of approximately $9.8 million.
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. Pursuant to this agreement,
upon receipt of approval under the Hart-Scott-Rodino Act in July 2000, the
Company received $7.5 million from Waters for the purchase of 535,714 shares
of the Company's common stock at the IPO price of $14.00 per share and also
received a $3.0 million initial alliance payment.
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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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
expectation. 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.
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.
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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 an 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.
(c) Recent Sales of Unregistered Securities. In June 2000, we issued
35,685 shares of our common stock to an academic institution in
connection with a licensing agreement. During the quarter ended June
30, 2000, employees, former employees and consultants exercised
options to purchase 45,889 shares of common stock for an aggregate
purchase price of $23,010. During the quarter ended June 30, 2000,
holders of Preferred Stock Purchase Warrants exercised Warrants for
610,949 shares of Series E Convertible Preferred Stock for an
aggregate purchase price of $1,669,259. During the quarter ended June
30, 2000, holders of Common Stock Purchase Warrants exercised Warrants
for 275,066 shares of Common Stock for an aggregate purchase price of
$751,546. During the quarter ended June 30, 2000,
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we granted options to purchase an aggregate of 292,617 shares of
common stock to employees, directors and consultants at an exercise
price of $3.78 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 $1,100,000 in
other related expenses, the net proceeds to the Company were
approximately $ 64,000,000. 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;
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- adopt the 2000 Employee Stock Purchase Plan;
- amend our Restated Certification 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
---------- -----------
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 Warrant to Purchase Stock issued to Waters Investments Limited
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the three month period ended June
30, 2000.
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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: September 1, 2000
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
---------- -----------
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 Warrant to Purchase Stock issued to Waters Investments Limited
27 Financial Data Schedule
