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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
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 June 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.
(1) [X] Yes [ ] No; (2) [X] Yes [ ] No
The number of shares of the Registrant's Common Stock outstanding as of
August 9, 2000 was 34,760,949.
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DIVERSA CORPORATION
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999....................................... 3
Condensed Statements of Operations (unaudited) for the
three and six months ended June 30, 2000 and 1999........... 4
Condensed Statements of Cash Flows (unaudited) for the
six months ended June 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... 14
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
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>
JUNE 30, DECEMBER 31,
2000 1999
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(unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 131,923 $ 2,553
Short-term investments ..................................................... 69,256 2,594
Accounts receivable ........................................................ 7,642 15,571
Other current assets ....................................................... 2,808 596
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Total current assets .................................................... 211,629 21,314
Property and equipment, net ................................................. 6,616 3,096
Acquired technology rights, net ............................................. 2,409 2,487
Long-term receivable ........................................................ 4,600 4,054
Other assets ................................................................ 111 121
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Total assets ............................................................ $ 225,365 $ 31,072
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ........................................................... $ 1,136 $ 668
Accrued liabilities ........................................................ 3,149 1,653
Deferred revenue ........................................................... 5,409 4,491
Current portion of capital lease obligations ............................... 1,101 600
--------- ---------
Total current liabilities ............................................... 10,795 7,412
Capital lease obligations, less current portion ............................. 4,771 2,677
Deposit from sublessee ...................................................... 300 300
Long-term deferred revenue .................................................. 18,267 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 35,752,329
shares issued and outstanding at June 30, 2000; 28,630,349 shares authorized
and 2,945,390 shares issued and outanding at December 31, 1999 ............. 35 3
Additional paid-in capital .................................................. 258,421 20,102
Deferred compensation ....................................................... (3,105) (5,520)
Notes receivable from stockholders .......................................... -- (36)
Accumulated deficit ......................................................... (63,985) (57,351)
Accumulated other comprehensive loss ........................................ (134) (17)
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Total stockholders' equity (deficit) ................................... 191,232 (42,813)
--------- ---------
Total liabilities and stockholders' equity (deficit) ................... $ 225,365 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenue:
Collaborative revenue .......................... $ 5,001 $ 1,640 $ 9,065 $ 2,072
Grant and product revenue ...................... 373 275 715 402
-------- -------- -------- --------
Total revenue ................................... 5,374 1,915 9,780 2,474
-------- -------- -------- --------
Operating costs and expenses:
Research and development ....................... 5,523 2,882 10,097 5,080
Selling, general and administrative ............ 1,707 1,302 3,010 2,329
Non-cash, stock-based compensation charges ..... 1,817 1,608 7,372 2,119
-------- -------- -------- --------
Total operating costs and expenses .............. 9,047 5,792 20,479 9,528
-------- -------- -------- --------
Loss from operations ............................ (3,673) (3,877) (10,699) (7,054)
Interest income, net ............................ 3,098 47 4,510 84
Other income, net ............................... 13 25 15 45
-------- -------- -------- --------
Loss before income taxes ........................ (562) (3,805) (6,174) (6,925)
Provision for income taxes ...................... 75 -- 150 --
-------- -------- -------- --------
Net loss before preferred dividends ............. (637) (3,805) (6,324) (6,925)
Dividends on preferred stock .................... -- -- 310 --
-------- -------- -------- --------
Net loss applicable to common stockholders ...... $ (637) $ (3,805) $ (6,634) $ (6,925)
======== ======== ======== ========
Net loss per share, basic and diluted ........... $ (0.02) $ (1.78) $ (0.25) $ (3.49)
Weighted average shares used in calculating basic
and diluted net loss per share ................. 34,608 2,132 26,607 1,985
Pro forma net loss per share, basic and diluted . -- $ (0.15) $ (0.21) $ (0.28)
Weighted average shares used in calculating pro
forma basic and diluted net loss per share ..... -- 24,966 32,106 24,819
</TABLE>
See accompanying notes to condensed financial statements.
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DIVERSA CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
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<S> <C> <C>
Operating activities:
Net loss applicable to common stockholders ............................... $ (6,634) $ (6,925)
Adjustments to reconcile net loss to net cash provided in operating
activities:
Depreciation and amortization ........................................ 1,017 727
Non-cash dividends paid to Series A, B and D preferred stockholders .. 310 --
Non-cash, stock based compensation charges ........................... 6,904 2,119
Changes in operating assets and liabilities:
Accounts receivable ............................................... 7,934 (186)
Other assets ...................................................... (176) 30
Accounts payable and accrued expenses ............................. 1,962 (609)
Deferred revenue .................................................. 779 3,203
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Net cash provided by (used for) operating activities ................. 12,096 (1,641)
--------- ---------
Investing activities:
Purchases of short-term investments ...................................... (72,279) (3,601)
Sales and maturities of short-term investments ........................... 5,500 1,022
Purchases of property and equipment ...................................... (4,536) (493)
Other .................................................................... 2,857 (1)
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Net cash used for investing activities ............................... (68,458) (3,073)
--------- ---------
Financing activities:
Net proceeds from sale of common and preferred stock ..................... 185,143 7,438
Principal payments on capital leases ..................................... (265) (557)
Payments on long-term note payable ....................................... -- (552)
Advances under capital lease obligations ................................. 819 490
Repayment of notes receivable from stockholders .......................... 35 44
--------- ---------
Net cash provided by financing activities ............................ 185,732 6,863
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Net increase in cash and cash equivalents ................................... 129,370 2,149
Cash and cash equivalents at beginning of period ............................ 2,553 4,473
--------- ---------
Cash and cash equivalents at end of period .................................. $ 131,923 $ 6,622
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ................................. $ 204 $ 171
========= =========
Unrealized holding loss on investments ................................... $ 134 $ 14
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
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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 agricultural, chemical processing, industrial
and pharmaceutical 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 footnotes thereto should be read in
conjunction with the audited financial statements and footnotes thereto
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 shares of preferred
stock were converted to shares of common stock.
4. INCOME TAXES
The provision for income taxes for the quarter ended June 30, 2000 reflects the
expected combined federal and state tax rates offset by the benefit from the
utilization of net operating loss carryforwards.
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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 six months ended June 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 six month period ended June 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 six months
ended June 30, 2000 would have been $6.3 million.
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------------- --------------------
<S> <C> <C> <C> <C>
Net loss applicable to common shares .......... $ (637) $ (3,805) $ (6,634) $ (6,925)
Net loss per common share, basic and diluted .. $ (0.02) $ (1.78) $ (0.25) $ (3.49)
Weighted average shares used in computing basic
and diluted loss per common share ............ 34,608 2,132 26,607 1,985
Pro forma net loss per common share, basic and
diluted ...................................... -- $ (0.15) $ (0.21) $ (0.28)
Weighted average shares used in computing pro
forma basic and diluted net loss per share ... -- 24,966 32,106 24,819
Net loss before preferred dividends ........... $ (637) $ (3,805) $ (6,324) $ (6,925)
Pro forma net loss before preferred dividends
per common share, basic and diluted .......... $ (0.02) $ (0.15) $ (0.20) $ (0.28)
Weighted average shares used in computing pro
forma basic and diluted net loss per share ... 34,608 24,966 32,106 24,819
</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
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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 six months ended June 30, 2000 and 1999, respectively, the
comprehensive loss consisted of:
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------- -------------------
<S> <C> <C> <C> <C>
Net loss ..................... $ (637) $(3,805) $(6,634) $(6,925)
Other comprehensive loss:
Unrealized loss on investments (134) (14) (134) (14)
------- ------- ------- -------
Comprehensive loss ........... $ (771) $(3,819) $(6,768) $(6,939)
------- ------- ------- -------
</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 notes
thereto 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.), Dansico Cultor and Invitrogen Corporation. 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 to date are comprised of research kits and
Pyrolase 160, an enzyme 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 six
months ended June 30, 2000, revenue grew 295% compared to the six months ended
June 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 June 30, 2000, we
had current and long-term deferred revenue totaling $23.7 million.
We have incurred substantial operating losses since our inception. As of June
30, 2000, our accumulated deficit was $64.0 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 June 30, 2000 and 1999
Revenue
Our revenue increased $3.5 million to $5.4 million for the quarter ended June
30, 2000 from $1.9 million for the same period in 1999. Revenue from
collaborations accounted for 93% and 86% of total revenue for the quarters ended
June 30, 2000 and 1999, respectively.
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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
recently announced joint venture with The Dow Chemical Company to develop and
commercialize products for the industrial enzyme market and, to a much lesser
extent, higher revenue from government grants.
Research and Development Expenses
Our research and development expenses increased $2.6 million to $5.5 million for
the quarter ended June 30, 2000 from $2.9 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.
Such investments advanced our human protein therapeutic and small molecule
discovery programs in fields such as antibiotics and cancer therapeutics, and
expanded our technologies in high-throughput screening and whole-cell
optimization. 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 $0.4 million to $1.7
million for the quarter ended June 30, 2000 from $1.3 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 requirements 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 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 June 30, 2000, we recorded amortization of deferred
compensation of approximately $1.0 million, compared to $1.6 million for the
quarter ended June 30, 1999. We also recorded non-cash compensation charges of
$0.8 million in the quarter ended June 30, 2000 for stock options granted to
consultants.
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Interest Income, net
Interest income increased to $3.2 million for the quarter ended June 30, 2000
from $0.1 for the same period in 1999, due to higher average cash balances.
Interest expense was $0.1 million for the quarters ended June 30, 2000 and
1999, respectively.
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 $75,000 for the quarter ended June
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.
Six Months Ended June 30, 2000 and 1999
Revenue
Our revenue increased $7.3 million to $9.8 million for the six months ended June
30, 2000 from $2.5 million for the same period in 1999. Revenue from
collaborations accounted for 93% and 84% of total revenue for the six months
ended June 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 $5.0 million to $10.1 million
for the six months ended June 30, 2000 from $5.1 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 $0.7 million to $3.0
million for the six months ended June 30, 2000 from $2.3 million for the same
period in 1999.
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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
For the six months ended June 30, 2000, we recorded amortization of deferred
compensation of approximately $2.3 million, compared to amortization of deferred
compensation of $2.1 million for the six months ended June 30, 1999.
We also recorded aggregate non-cash compensation charges of $5.1 million for the
six months ended June 30, 2000, including $4.1 million in conjunction with the
acceleration of vesting for stock options held by employees and $1.0 million for
stock options granted to consultants.
Interest Income, net
Interest income increased to $4.7 million for the six months ended June 30, 2000
from $0.3 for the same period in 1999, due to higher average cash balances.
Interest expense was $0.2 million for the six months ended June 30, 2000 and
June 30, 1999.
Provision for Income Taxes
We recorded a provision for income taxes of $150,000 for the six months ended
June 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 funding from strategic partners and government
grants. In addition to $31.4 million received from inception through June 30,
2000, our partners are also committed to fund at least $84.1 million under
existing agreements through 2005, excluding milestone payments, license and
commercialization fees and royalties or profit sharing. As of June 30, 2000, we
had cash, cash equivalents and short-term investments of approximately $201.2
million. Our funds are currently invested in U.S. Treasury and government agency
obligations and investment-grade corporate obligations. We also have obtained a
commitment from a lender to finance up to $12 million in equipment purchases
through March 31, 2001.
As part of our plan to lease new executive offices and research and development
facilities in 2000, we plan to construct 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 an 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 June 30, 2000, we had purchase commitments totaling $1.6 million relating
to the pilot facility and $1.2 million relating to the SciLect project.
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Our operating activities provided cash of $12.1 million for the six months ended
June 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 $68.5 million in the six months ended June
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 $185.7 million for the six months ended June
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 under our
equipment financing lines of credit, partially offset by principal payments made
against our lines of credit.
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 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.
In such situation, 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 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.
YEAR 2000
In our Registration Statement on Form S-1, filed on December 16, 1999, as
amended, we discussed the nature and progress of our plans to become Year 2000
compliant. We have
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completed our remediation and testing of systems and, as a result of those
planning and implementation efforts, we experienced no significant disruptions
in mission critical information technology and non- information technology
systems and believe those systems successfully responded to the Year 2000 date
change. We incurred expenses of less than $50,000 in connection with remediating
our systems. We are not aware of any material problems resulting from Year 2000
issues, either with our products and services, our internal systems, or the
products and services of third parties. We will continue to monitor our mission
critical computer applications and those of our suppliers throughout the year
2000 to ensure that we promptly address any latent Year 2000 matters that may
arise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 lease obligations, 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 ensure the safety
and preservation of our invested principal funds by limiting default risks,
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 June 30, 2000 due to the relatively short maturities of
our investments. Declines in interest rates over time will, however, reduce our
interest income, while increases in interest rates over time will increase our
interest expense.
14
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Change in Securities and Use of Proceeds
(d) We completed our initial public offering in February 2000, in which we
received net proceeds of $184.7 million after expenses. None of the proceeds
from our initial public offering were used to pay expenses or make payments to
our directors, officers, or affiliates or 10% owners of any class of our equity
securities. From March 31, 2000 through June 30, 2000 we have continued to
invest the net proceeds from the offering in cash equivalents and short-term
investments.
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
--------------------------------------------------------------------------------
+10.36 Limited Liability Company Agreement of New Venture LLC, dated June
29, 2000.
+10.37 Industrial Enzymes Research Agreement between New Venture LLC and
Diversa Corporation, dated June 29, 2000.
+10.38 Industrial Enzyme License Agreement between New Venture LLC and
Diversa Corporation, dated June 29, 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 August 11, 2000 /s/ Karin Eastham
--------------------------------------------
Karin Eastham
Senior Vice President, Finance,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
17
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EXHIBIT INDEX
TO
FORM 10-Q
DIVERSA CORPORATION
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------------------------------------------------------------------
+ 10.36 Limited Liability Company Agreement of New Venture LLC, dated June
29, 2000.
+ 10.37 Industrial Enzymes Research Agreement between New Venture LLC and
Diversa Corporation, dated June 29, 2000.
+ 10.38 Industrial Enzyme License Agreement between New Venture LLC and
Diversa Corporation, dated June 29, 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
