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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO 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
Commission File number 000-29173
DIVERSA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3297375
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10665 Sorrento Valley Road, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code is (858) 453-7020
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. [ X ] Yes [ ] No
The number of shares of the Registrant's Common Stock outstanding as of November
6, 2000 was 34,864,871.
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DIVERSA CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999..........................................3
Condensed Statements of Operations (unaudited) for the
three and nine months ended September 30, 2000 and 1999........4
Condensed Statements of Cash Flows (unaudited) for the
nine months ended September 30, 2000 and 1999..................5
Notes to Condensed Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....13
PART II- OTHER INFORMATION
Item 1. Legal Proceedings..............................................15
Item 2. Change in Securities and Use of Proceeds.......................15
Item 3. Defaults Upon Senior Securities................................15
Item 4. Submission of Matters to a Vote of Securities Holders..........15
Item 5. Other Information..............................................16
Item 6. Exhibits and Reports on Form 8-K...............................16
SIGNATURES..............................................................17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DIVERSA CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------- ---------------
ASSETS (unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 93,327 $ 2,553
Short-term investments..................................................... 117,035 2,594
Accounts receivable........................................................ 752 15,571
Other current assets....................................................... 767 596
---------------- --------------
Total current assets.................................................... 211,881 21,314
Property and equipment, net................................................. 11,106 3,096
Acquired technology rights, net............................................. 2,370 2,487
Long-term receivable........................................................ 4,756 4,054
Other assets................................................................ 111 121
---------------- --------------
Total assets............................................................ $ 230,224 $ 31,072
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................................... $ 2,357 $ 668
Accrued liabilities........................................................ 2,630 1,653
Deferred revenue........................................................... 5,196 4,491
Current portion of capital lease obligations............................... 767 600
Current portion of notes payable........................................... 971 ---
---------------- --------------
Total current liabilities............................................... 11,921 7,412
Capital lease obligations, less current portion............................. 2,906 2,677
Notes payable, less current portion......................................... 3,919 ---
Deposit from sublessee...................................................... 300 300
Long-term deferred revenue.................................................. 18,275 15,094
Redeemable Convertible Preferred Stock - $0.001 par value, 60,718,183
shares authorized and 60,220,183 shares issued and outstanding at
December 31, 1999........................................................... --- 48,402
Stockholders' equity (deficit):
Series E Convertible Preferred Stock - $0.001 par value, 5,555,556 shares
authorized, issued and outstanding at December 31, 1999...................
--- 6
Common Stock, $0.001 par value, 65,000,000 shares authorized and 34,862,176
shares issued and outstanding at September 30, 2000; 28,630,349 shares
authorized and 2,945,390 shares issued and
outstanding at December 31, 1999............................................
35 3
Additional paid-in capital.................................................. 260,614 20,102
Deferred compensation....................................................... (2,687) (5,520)
Notes receivable from stockholders.......................................... --- (36)
Accumulated deficit......................................................... (65,370) (57,351)
Accumulated other comprehensive loss........................................ 311 (17)
---------------- --------------
Total stockholders' equity (deficit)................................... 192,903 (42,813)
---------------- --------------
Total liabilities and stockholders' equity (deficit)................... $ 230,224 $ 31,072
================ ==============
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to condensed financial statements.
3
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DIVERSA CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------------------------------------- -------------------------------------
Revenue:
Collaborative revenue.......................... $ 5,202 $ 3,693 $ 14,267 $ 5,766
Grant and product revenue...................... 376 292 1,090 693
--------------- --------------- --------------- ----------------
Total revenue.................................. 5,578 3,985 15,357 6,459
--------------- --------------- --------------- ----------------
Operating costs and expenses:
Research and development...................... 6,726 2,797 16,823 7,877
Selling, general and administrative........... 1,875 878 4,885 3,208
Non-cash, stock-based compensation charges.... 1,647 446 9,019 2,565
--------------- --------------- --------------- ----------------
Total operating costs and expenses............. 10,248 4,121 30,727 13,650
--------------- --------------- --------------- ----------------
Loss from operations........................... (4,670) (136) (15,370) (7,191)
Interest income, net........................... 3,337 30 7,847 114
Other income, net.............................. 22 22 38 68
--------------- --------------- --------------- ----------------
Loss before income taxes........................ (1,311) (84) (7,485) (7,009)
Provision for income taxes...................... 75 --- 225 ---
--------------- --------------- --------------- ----------------
Net loss before preferred dividends............. (1,386) (84) (7,710) (7,009)
Dividends on preferred stock.................... --- --- 310 ---
--------------- --------------- --------------- ----------------
Net loss applicable to common stockholders...... $ (1,386) $ (84) $ (8,020) $ (7,009)
=============== =============== =============== ================
Net loss per share, basic and diluted........... $ (0.04) $ (0.04) $ (0.27) $ (3.34)
Weighted average shares used in calculating basic
and diluted net loss per share................ 34,801 2,323 29,602 2,098
Pro forma net loss per share, basic and diluted. --- $0.00 $(0.24) $(0.28)
Weighted average shares used in calculating pro
forma basic and diluted net loss per share..... --- 25,157 33,011 24,932
</TABLE>
See accompanying notes to condensed financial statements.
4
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DIVERSA CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
<S> <C> <C>
2000 1999
--------------------- -------------------
Operating activities:
Net loss applicable to common stockholders................................. $ (8,020) $(7,009)
Adjustments to reconcile net loss to net cash provided in operating
activities:
Depreciation and amortization.......................................... 1,689 998
Non-cash dividends paid to Series A, B and D preferred stockholders.... 310 ---
Non-cash, stock based compensation charges............................. 9,019 2,565
Changes in operating assets and liabilities:
Accounts receivable............................................... 14,819 (140)
Other assets...................................................... (863) 68
Accounts payable and accrued expenses............................. 2,666 (450)
Deferred revenue.................................................. 3,886 2,109
--------------------- -------------------
Net cash provided by (used for) operating activities....................... 23,506 (1,859)
--------------------- -------------------
Investing activities:
Purchases of short-term investments........................................ (122,570) (5,354)
Sales and maturities of short-term investments............................. 8,458 604
Purchases of property and equipment........................................ (9,583) (649)
Other...................................................................... --- 3
--------------------- -------------------
Net cash used for investing activities................................. (123,695) (5,396)
--------------------- -------------------
Financing activities:
Net proceeds from sale of common and preferred stock....................... 185,640 7,440
Principal payments on capital leases....................................... (453) (1,319)
Advances under capital lease obligations................................... 819 621
Proceeds from notes payable................................................ 5,029 ---
Principal payments on notes payable........................................ (108) ---
Repayment of notes receivable from stockholders............................ 36 44
--------------------- -------------------
Net cash provided by financing activities.............................. 190,963 6,786
--------------------- -------------------
Net increase in cash and cash equivalents..................................... 90,774 (469)
Cash and cash equivalents at beginning of period.............................. 2,553 4,473
--------------------- -------------------
Cash and cash equivalents at end of period.................................... $ 93,327 $ 4,004
===================== ===================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................................. $ 351 $ 215
===================== ===================
Unrealized holding gain (loss) on
investments............................................................ $ 328 $ (12)
===================== ===================
</TABLE>
See accompanying notes to condensed financial statements.
5
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DIVERSA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Business
Diversa Corporation (the "Company") was incorporated in Delaware in 1992 and
discovers, evolves and commercializes novel genes and gene pathways from diverse
environmental sources for use in pharmaceutical, agricultural, chemical
processing and industrial applications.
2. Basis of Presentation
The accompanying unaudited financial statements have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, which are necessary for a fair statement of the
results of the interim periods presented, have been included. The results of
operations for the interim period are not necessarily indicative of results to
be expected for any other interim period or for the year as a whole. These
unaudited condensed financial statements and related footnotes should be read in
conjunction with the audited financial statements and related footnotes
contained in the Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on December 16, 1999, as amended.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the condensed financial statements and related
footnotes. Changes in the estimates may affect amounts reported in future
periods.
Certain reclassifications of prior year balances have been made to conform to
the current format.
3. Offering of Common Stock
On February 17, 2000, the Company completed its initial public offering of
8,337,500 shares of common stock at $24.00 per share, including 1,087,500 shares
of common stock issued pursuant to the underwriters' over-allotment option. The
combined gross proceeds raised by the Company from the offering and over-
allotment option was $200.1 million. Concurrent with the initial public
offering, 22,834,011 shares of redeemable and convertible preferred stock were
converted to shares of common stock.
4. Income Taxes
The provision for income taxes for the quarter ended September 30, 2000 reflects
the expected combined federal and state tax rates offset by the benefit from the
utilization of net operating loss carryforwards.
6
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5. Computation of Net Loss Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128"), basic earnings per share reflect the
historical weighted average shares of common stock and exclude any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share include the dilutive effects of such securities. Earnings (loss) per
share amounts for all periods conform to SFAS No.128 and the requirements of
Staff Accounting Bulletin No. 98.
For comparison purposes, the schedule below presents pro forma net loss per
common share (basic and diluted) for the three and nine months ended September
30, 2000 and 1999, respectively, assuming the conversion of preferred stock to
common stock upon completion of the Company's initial public offering. During
the nine month period ended September 30, 2000, the Company paid dividends of
$310,000 on preferred stock. However, assuming the conversion of preferred
stock to common stock and no dividends, the net loss reported for the first nine
months ended September 30, 2000 would have been $7.7 million.
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------- --------------------------
<S> <C> <C> <C> <C>
Net loss applicable to common shares............. $(1,386) $ (84) $(8,020) $(7,009)
Net loss per common share, basic and diluted..... $ (0.04) $ (0.04) $ (0.27) $ (3.34)
Weighted average shares used in computing basic
and diluted loss per common share............... 34,801 2,323 29,602 2,098
Pro forma net loss per common share, basic and
diluted......................................... --- $ (0.00) $ (0.24) $ (0.28)
Weighted average shares used in computing pro
forma basic and diluted net loss per share...... --- 25,157 33,011 24,932
Net loss before preferred dividends.............. $(1,386) $ (84) $(7,710) $(7,009)
Pro forma net loss before preferred dividends
per common share, basic and diluted............. $ (0.04) $ (0.00) $ (0.23) $ (0.28)
Weighted average shares used in computing pro
forma basic and diluted net loss per share...... 34,801 25,157 33,011 24,932
</TABLE>
6. Recently Issued Accounting Standards
SFAS No. 133, "Accounting for Derivative Financial Instruments and for Hedging
Activities" ("SFAS 133"), will be effective for our fiscal year 2001. This
statement establishes accounting and reporting standards requiring that every
derivative instrument, including derivative
7
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instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. SFAS 133 is not anticipated
to have a significant impact on our operating results or financial condition
when adopted, since we currently do not engage in hedging activities or invest
in derivative instruments.
7. Comprehensive Loss
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), requires reporting
and displaying comprehensive income (loss) and its components which, for the
Company, includes net loss and unrealized gains and losses on investments. In
accordance with SFAS 130, the accumulated balance of other comprehensive income
is disclosed as a separate component of stockholders' equity (deficit).
For the three and nine months ended September 30, 2000 and 1999, respectively,
the comprehensive loss consisted of:
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C>
Net loss $ (1,386) $ (84) $ (8,020) $ (7,009)
Other comprehensive loss:
Unrealized gain (loss) on investments 445 2 328 (12)
------------------ ----------------- ------------------ ------------------
Comprehensive loss $ (941) $ (82) $ (7,692) $ (7,021)
------------------ ----------------- ------------------ ------------------
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The statements in this quarterly report that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified below and in
our other publicly available documents. We are under no obligation to update
any of these forward-looking statements after the filing of this quarterly
report to reflect actual results or changes in our expectations.
The following information should be read in conjunction with the condensed
financial statements and the notes thereto included in Item 1 of this quarterly
report. We also urge readers to review and consider our disclosures describing
various factors that affect our business, including the disclosures under
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Risk Factors and the audited financial statements and related
footnotes contained in our Registration Statement on Form S-1, filed on December
16, 1999, as amended.
8
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Overview
We were founded in December 1992 and began operations in May 1994. We believe
that we are the global leader in discovering and developing novel enzymes and
other biologically active compounds from diverse environmental sources for use
in pharmaceutical, agricultural, chemical processing, and industrial
applications. To date, we have generated revenue from research collaborations,
government grants and enzyme product sales. Our strategic partners include
Novartis Seeds AG, Novartis Agribusiness Biotechnology Research, Inc., The Dow
Chemical Company, Aventis Animal Nutrition S.A. (formerly Rhone-Poulenc Animal
Nutrition S.A.), Danisco Cultor, Invitrogen Corporation and Celanese Ltd. Our
current government grants are from the National Institute of General Medical
Sciences, the National Cancer Institute and the National Institute of
Environmental Health Sciences. Our enzyme product sales through September 2000
are comprised of research kits and Pyrolase 160 and 200, enzymes used in oil and
gas recovery.
We have dedicated substantial resources to the development of our proprietary
technologies, which include capabilities for sample collection from the world's
microbial populations, generation of environmental gene libraries, screening of
these libraries using ultra-high throughput methods capable of analyzing more
than a billion genes per day and optimization employing our gene evolution
technologies.
Our revenue has increased significantly since our inception, and for the nine
months ended September 30, 2000, revenue grew 138% compared to the nine months
ended September 30, 1999. This increase was primarily attributable to the
addition of new strategic collaborations, which include exclusivity fees,
technology access and development fees and research funding. Research funding
is recognized as revenue when the services are rendered. Revenue from
exclusivity, technology access and development fees is recognized over the term
of the strategic collaboration. Revenue from milestone payments is recognized
when the milestone is achieved. Our strategic partners often pay us before we
recognize the revenue, and these payments are deferred until earned. As of
September 30, 2000, we had current and long-term deferred revenue totaling $23.5
million.
We have incurred substantial operating losses since our inception. As of
September 30, 2000, our accumulated deficit was $65.4 million. We expect to
incur additional operating losses over the next few years as we continue to
develop our technologies and fund internal product research and development.
Results of Operations
Three Months Ended September 30, 2000 and 1999
Revenue
Our revenue increased $1.6 million to $5.6 million for the quarter ended
September 30, 2000 from $4.0 million for the same period in 1999. Revenue from
collaborations accounted for 93% of total revenue for each of the quarters ended
September 30, 2000 and 1999.
9
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This increase was primarily attributable to the addition of several new
strategic collaboration agreements signed in 1999 and 2000, including the recent
collaboration with Celanese Ltd. announced during the third quarter of 2000.
Research and Development Expenses
Our research and development expenses increased $3.9 million to $6.7 million for
the quarter ended September 30, 2000 from $2.8 million for the same period in
1999.
This increase was primarily attributable to expansion of our collaborations and
increased investment in several key programs and technologies, including
advancement of our small molecule drug discovery program and our human protein
therapeutic program, and increased investment in our ultra high-throughput
screening and whole-cell optimization technologies. We expect that our research
and development expenses will continue to increase substantially to support our
collaborative research activities and our internal programs and technologies.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased $1.0 million to $1.9
million for the quarter ended September 30, 2000 from $0.9 million for the same
period in 1999.
This increase was primarily attributable to the expansion of administrative
infrastructure to support our growth and requirements as a public company. We
expect that our selling, general and administrative expenses will continue to
increase to support our growth and activities as a public company.
Non-Cash, Stock-Based Compensation Charges
Deferred compensation for options granted to employees has been determined as
the difference between the exercise price and the fair value of our common
stock, as estimated by us for financial reporting purposes, on the date options
were granted. Deferred compensation for options and warrants granted to
consultants has been determined in accordance with the Statement of Financial
Accounting Standards No. 123 as the fair value of the equity instruments issued
and is periodically remeasured as the underlying options vest in accordance with
EITF 96-18.
For the quarter ended September 30, 2000, we recorded amortization of deferred
compensation of approximately $0.9 million, compared to $0.4 million for the
quarter ended September 30, 1999. We also recorded non-cash compensation
charges of $0.7 million in the quarter ended September 30, 2000 for stock
options and warrants granted to consultants.
Interest Income, net
Interest income increased to $3.5 million for the quarter ended September 30,
2000 from $0.1 for the same period in 1999, due to higher average cash balances.
Interest expense increased to $0.2 million for the quarter ended September 30,
2000 from $0.1 for the same period in 1999.
10
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Provision for Income Taxes
We have significant net operating loss carryforwards for federal and state
income taxes. We also have federal research and development tax credit
carryforwards. Our utilization of the net operating loss and tax credit
carryforwards may be subject to substantial annual limitations pursuant to
Section 382 of the Internal Revenue Code, and similar state provisions, as a
result of changes in our ownership structure. The annual limitations may result
in the expiration of net operating losses and credits prior to utilization.
We recorded a provision for income taxes of $0.1 million for the quarter ended
September 30, 2000 based on our estimated tax liability for 2000, assuming we
are subject to alternative minimum taxes under which net operating loss
carryforwards are available to offset 90% of our tax liability. Our estimate
generally reflects upfront payments from collaborators as taxable in the year
received. During 1999, we incurred a net operating loss and accordingly did not
record a provision for income taxes.
Nine Months Ended September 30, 2000 and 1999
Revenue
Our revenue increased $8.9 million to $15.4 million for the nine months ended
September 30, 2000 from $6.5 million for the same period in 1999. Revenue from
collaborations accounted for 93% and 89% of total revenue for the nine months
ended September 30, 2000 and 1999, respectively.
This increase was primarily attributable to the addition of several new
strategic collaboration agreements signed in 1999 and 2000.
Research and Development Expenses
Our research and development expenses increased $8.9 million to $16.8 million
for the nine months ended September 30, 2000 from $7.9 million for the same
period in 1999.
This increase was primarily attributable to expansion of collaborative research
activities and investment in several key internal programs and technologies.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased $1.7 million to $4.9
million for the nine months ended September 30, 2000 from $3.2 million for the
same period in 1999.
This increase was primarily attributable to the expansion of administrative
infrastructure to support our growth and requirements as a public company.
Non-Cash, Stock-Based Compensation Charges
11
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For the nine months ended September 30, 2000, we recorded amortization of
deferred compensation of approximately $3.2 million, compared to amortization of
deferred compensation of $2.6 million for the nine months ended September 30,
1999.
We also recorded aggregate non-cash compensation charges of $5.8 million for the
nine months ended September 30, 2000, including $4.1 million in conjunction with
the acceleration of vesting for stock options held by employees and $1.7 million
for stock options and warrants granted to consultants.
Interest Income, net
Interest income increased to $8.2 million for the nine months ended September
30, 2000 from $0.4 for the same period in 1999, due to higher average cash
balances. Interest expense increased to $0.4 million for the nine months ended
September 30, 2000 from $0.3 for the same period in 1999.
Provision for Income Taxes
We recorded a provision for income taxes of $0.2 million for the nine months
ended September 30, 2000 based on our estimated tax liability for 2000.
Liquidity and Capital Resources
Since inception, we have financed our business primarily through the sale of
common and preferred stock and over $43 million of funding received from
strategic partners. As of September 30, 2000, we had cash, cash equivalents
and short-term investments of approximately $210.4 million. Our funds are
currently invested in U.S. Treasury and government agency obligations and
investment-grade corporate obligations. During 2000, we entered into an
equipment financing line of credit agreement with a lender to finance up to $12
million in equipment purchases through March 31, 2001. As of September 30,
2000, we had $7.1 million available under the credit agreement.
As part of our plan to lease new executive offices and research and development
facilities in 2000, we are constructing a pilot manufacturing facility that will
be used for process development activities. The pilot manufacturing facility
will include two 500-litre fermenters and will occupy approximately 3,000 square
feet of the new facility. Our costs for property and equipment relating to the
pilot manufacturing facility will be approximately $2.9 million, all of which we
anticipate funding through our equipment financing line of credit.
Additionally, we expect to fund $1.5 million in enhancements to our SciLect
project in 2000, which will be funded through working capital. These estimates
are forward-looking statements that involve risks and uncertainties. As of
September 30, 2000, we had purchase commitments totaling $2.7 million relating
to the pilot facility and $1.2 million relating to the SciLect project.
12
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Our operating activities provided cash of $23.5 million for the nine months
ended September 30, 2000. Our cash provided by operating activities consisted
primarily of collections on accounts receivable as of December 31, 1999, offset
in part by cash used to fund operations.
Our investing activities used cash of $123.7 million in the nine months ended
September 30, 2000. Our investing activities consisted primarily of purchases
of U.S. Treasury and government agency obligations and investment-grade
corporate obligations and of property and equipment.
Our financing activities provided $191.0 million for the nine months ended
September 30, 2000. Our financing activities consisted primarily of the sale of
8,337,500 shares of common stock in connection with our initial public offering
of common stock in February 2000. Also contributing were proceeds received
through the issuance of notes payable under our equipment financing line of
credit, partially offset by principal payments made against our capital leases
and notes payable.
We believe that our current cash, cash equivalents and marketable securities and
funding received from collaborators and government grants will be sufficient to
satisfy our anticipated cash needs for working capital and capital expenditures
for the foreseeable future. This estimate is a forward-looking statement that
involves risks and uncertainties. Our capital requirements depend on several
factors, including: the level of research and development investment required to
maintain our technology leadership position; our ability to enter into new
agreements with strategic partners or to maintain or extend the terms of our
existing collaborative agreements, and the terms of any agreements of this type;
the success rate of our discovery efforts associated with milestones and
royalties; our ability to successfully commercialize products developed
independently and the demand for such products; the timing and willingness of
strategic partners to commercialize our products that would result in royalties;
costs of recruiting and retaining qualified personnel; and our need to acquire
or license complementary technologies or acquire complementary businesses.
If additional capital is required to operate our business, we cannot assure you
that additional financing will be available on terms favorable to us, or at all.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund our operations, take advantage of opportunities, develop
products or technologies or otherwise respond to competitive pressures could be
significantly limited. In addition, if additional financing is required to
operate our business but is not available, we may need to limit or ultimately
cease operations.
If we raise additional funds through the issuance of equity securities, the
percentage ownership of our existing stockholders will be reduced, stockholders
may experience additional dilution or such equity securities may provide for
rights, preferences or privileges senior to those of the holders of our common
stock. If we raise additional funds through the issuance of debt securities,
such debt securities would have rights, preferences and privileges senior to
holders of common stock, and the terms of such debt could impose restrictions on
our operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
13
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Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Our risk associated with fluctuating interest expense is limited, however, to
our capital leases and equipment financing line of credit, the interest rates
under which are closely tied to market rates, and our investments in interest
rate sensitive financial instruments. Under our current policies, we do not use
interest rate derivative instruments to manage exposure to interest rate
changes. We seek to ensure the safety and preservation of our invested
principal funds by limiting default risk, market risk and reinvestment risk. We
mitigate default risk by investing in investment grade securities. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair value of our
interest sensitive financial instruments at December 31, 1999 and September 30,
2000. Declines in interest rates over time will, however, reduce our interest
income, while increases in interest rates over time will increase our interest
expense.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
A Registration Statement on Form S-1 (File No. 333-92853) relating to the
initial public offering of our common stock was declared effective by the
Securities and Exchange Commission on February 11, 2000. Upon completion of our
initial public offering, we received net proceeds of $184.7 million after
expenses. None of the proceeds from our initial public offering were used to
pay expenses of, or make payments to, our directors, officers, or affiliates or
10% owners of any class of our equity securities. From the time of receipt
through September 30, 2000, we have continued to invest the net proceeds from
the offering in cash equivalents and short-term investments.
In August 2000, we issued to consultants an aggregate of 10,795 shares of our
common stock and warrants to purchase 21,552 shares of our common stock at a
weighted-average exercise price of $32.45 per share. We issued the securities
in connection with an estimated $700,000 of consulting services performed by the
consultants. We have relied on Section 4, subsection (2), under the Securities
Act of 1933, as amended, for exemption from the registration requirements under
the Securities Act. Each recipient of our securities represented its intention
to acquire the securities for investment only and not with a view to the
distribution thereof. The stock certificates and warrants bear a legend to the
effect that such securities have not been registered under the Securities Act or
any state securities laws and can not be sold or transferred in the absence of
such registration or an exemption therefrom. All recipients were knowledgeable,
sophisticated and experienced in making investment decisions of this kind and
received adequate information about us in connection with their investment.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
15
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Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------------------------------------------------------------------
+10.39 Addendum to the "Collaboration Agreement" between Novartis
Agribusiness Biotechnology Research, Inc. and Diversa Corporation,
dated September 1, 2000.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
+ Confidential Treatment will be requested with respect to portions of
this exhibit. Omitted portions will be filed separately with the
Securities and Exchange Commission.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIVERSA CORPORATION
Date November 14, 2000 /s/ Karin Eastham
--------------------------------------------
Karin Eastham
Senior Vice President, Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
TO
FORM 10-Q
DIVERSA CORPORATION
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------------------------------------------------------------------
+10.39 Addendum to the "Collaboration Agreement" between Novartis
Agribusiness Biotechnology Research, Inc. and Diversa Corporation,
dated September 1, 2000.
27.1 Financial Data Schedule.
+ Confidential Treatment will be requested with respect to portions of
this exhibit. Omitted portions will be filed separately with the
Securities and Exchange Commission.
18
