<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-Q
[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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 000-31577
-----------
INFORMAX, INC.
--------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 52-1687783
--------------------------------------------------------------------- ---------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer ID Number)
6010 Executive Boulevard, 10th Floor, Rockville, MD 20852
--------------------------------------------------------------------- ---------------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (240) 747-4000
N/A
--------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
19,444,113 shares common stock as of October 31, 2000
(Title of Class)
<PAGE> 2
INFORMAX, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PART I - CONDENSED CONSOLIDATED FINANCIAL INFORMATION PAGE
<S> <C>
Item 1.
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1999 and
September 30, 2000 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited) for the
Three-Month and Nine-Month Periods Ended September 30, 1999 and 5
2000
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Nine-Month Periods Ended September 30, 1999 and 2000 6
Notes to Condensed Consolidated Financial Statements 8
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 25
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
EXHIBIT INDEX 29
</TABLE>
Page 2
<PAGE> 3
PART I - CONDENSED CONSOLIDATED FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMAX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1999 2000
------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,398,937 $ 7,826,074
Accounts receivable (net allowance for doubtful
accounts of $15,000 at December 31, 1999
and $20,000 (unaudited) at September 30, 2000, respectively) 2,640,485 5,072,564
Income tax receivable 122,446 -
Deferred tax asset 676,379 -
Prepaid expenses 222,473 515,838
Deferred offering costs - 1,484,758
Other current assets 28,837 17,815
------------ ------------
Total current assets 5,089,557 14,917,049
------------ ------------
Property and equipment:
Computer equipment 1,060,435 2,745,874
Purchased software 58,306 194,823
Office furniture and equipment 537,908 881,454
Leasehold improvements 155,122 303,002
------------ ------------
1,811,771 4,125,153
Less: Accumulated depreciation and amortization (375,472) (961,443)
------------ ------------
Property and equipment - net 1,436,299 3,163,710
------------ ------------
Other assets:
Deposits 67,996 83,415
Loan to shareholder 69,360 -
Deferred tax asset 601,500 1,277,880
------------ ------------
Total other assets 738,856 1,361,295
------------ ------------
Total assets $ 7,264,712 $ 19,442,054
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
Page 3
<PAGE> 4
INFORMAX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 2000
------------- -------------
(unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 404,016 $ 1,659,648
Accounts payable to related parties 21,806 365,306
Accrued liabilities 933,125 394,131
Line of credit 550,000 1,400,000
Equipment loan facility - current portion 337,302 664,000
Capital lease obligations - current portion 113,293 86,061
Deferred revenue 1,689,997 3,071,651
------------ ------------
Total current liabilities 4,049,539 7,640,797
------------ ------------
Long-term liabilities:
Capital lease obligations - less current portion 92,208 31,475
Equipment loan facility - less current portion 623,245 1,075,973
Deferred revenue 121,673 749,013
------------ ------------
Total long-term liabilities 837,126 1,856,461
------------ ------------
Series A redeemable convertible preferred stock, par value
$0.01; 2,161,265 shares authorized, issued and outstanding
at December 31, 1999 and September 30, 2000 (unaudited) 4,095,054 4,456,679
------------ ------------
Series B redeemable convertible preferred stock, par value
$0.01; no shares authorized, issued and outstanding
at December 31, 1999, 950,747 shares authorized, issued
and outstanding at September 30, 2000 (unaudited) - 9,924,383
------------ ------------
Stockholders' equity:
Common stock - voting, par value $0.001, 1,595,455 and 100,000,000
shares authorized; 2,505,000 and 8,460,668 shares issued, and
2,254,500 and 8,460,668 shares outstanding at December 31, 1999
and September 30, 2000 (unaudited), respectively 2,505 8,461
Common stock - nonvoting, par value $0.001, 14,931,864 and 0 shares
authorized; 2,034,060 and 0 shares issued, and 1,716,760 and
0 shares outstanding at December 31, 1999
and September 30, 2000 (unaudited), respectively 2,034 -
Subscription receivable - (10,872)
Additional paid-in capital 970,806 8,010,372
Deferred compensation (400,208) (1,982,278)
Accumulated deficit (2,173,144) (10,461,949)
Treasury stock, 567,800 shares at cost at December 31, 1999
and no shares at September 30, 2000 (unaudited) (119,000) -
------------ ------------
Total stockholders' equity (1,717,007) (4,436,266)
------------ ------------
Total liabilities and stockholders' equity $ 7,264,712 $ 19,442,054
============ ============
</TABLE>
See notes to condensed consolidated financial statements
Page 4
<PAGE> 5
INFORMAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license and customer support $ 1,135,640 $ 4,070,702 $ 4,457,517 $ 8,925,236
Professional services 779,000 802,188 1,938,250 2,457,584
------------ ------------ ------------ ------------
Total revenues 1,914,640 4,872,890 6,395,767 11,382,820
------------ ------------ ------------ ------------
Cost of revenues:
Software license and customer support 71,491 189,942 218,348 422,973
Professional services (1) 422,151 434,622 1,152,908 1,314,570
------------ ------------ ------------ ------------
Total cost of revenues 493,642 624,564 1,371,256 1,737,543
------------ ------------ ------------ ------------
Gross profit 1,420,998 4,248,326 5,024,511 9,645,277
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative (2) 1,870,489 4,569,361 4,267,336 12,134,324
Research and development (3) 637,401 1,349,828 1,766,699 3,821,012
Stock based compensation 26,085 233,059 52,476 1,207,672
Depreciation and amortization 78,355 245,879 167,227 588,863
------------ ------------ ------------ ------------
Total operating expenses 2,612,330 6,398,127 6,253,738 17,751,871
------------ ------------ ------------ ------------
Loss from operations (1,191,332) (2,149,801) (1,229,227) (8,106,594)
------------ ------------ ------------ ------------
Other income (expense):
Investment earnings 42,673 51,299 44,777 67,068
Interest expense (21,654) (99,890) (54,581) (219,895)
Other (4,193) (21,358) (4,193) (29,384)
------------ ------------ ------------ ------------
Total other income (expense) 16,826 (69,949) (13,997) (182,211)
------------ ------------ ------------ ------------
Loss before income taxes (1,174,506) (2,219,750) (1,243,224) (8,288,805)
Income tax benefit (433,721) - (420,851) -
------------ ------------ ------------ ------------
Net loss $ (740,785) $ (2,219,750) $ (822,373) $ (8,288,805)
Beneficial Conversion - Series B redeemable
convertible preferred stock - (9,918,888) - (9,918,888)
Accretion of transaction costs and accrued dividend
on redeemable convertible preferred stock (88,219) (198,980) (88,219) (367,120)
------------ ------------ ------------ ------------
Net loss applicable to common shares (829,004) (12,337,618) (910,592) (18,574,813)
============ ============ ============ ============
Basic net loss applicable per common share $ (0.21) $ (1.55) $ (0.24) $ (3.00)
============ ============ ============ ============
Diluted net loss applicable per common share $ (0.21) $ (1.55) $ (0.24) $ (3.00)
============ ============ ============ ============
Weighted average common shares outstanding -
Basic and Diluted 3,938,586 7,976,872 3,843,186 6,186,653
============ ============ ============ ============
</TABLE>
(1) Cost of revenues - professional services includes stock based
compensation of $-0-, $1,254, $-0- and $6,751 for the three months ended
September 30, 1999 and 2000 and the nine months ended September 30, 1999
and 2000, respectively.
(2) Selling, general and administrative expenses excludes stock based
compensation of $23,162, $230,007, $32,805 and $1,075,746 for the three
months ended September 30, 1999 and 2000 and the nine months ended
September 30, 1999 and 2000, respectively.
(3) Research and development expenses excludes stock based compensation of
$2,923, $3,052, $19,671 and $131,926 for the three months ended September
30, 1999 and 2000 and the nine months ended September 30, 1999 and 2000,
respectively.
See notes to condensed consolidated financial statements
Page 5
<PAGE> 6
INFORMAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (822,373) $ (8,288,805)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 167,227 585,971
Loss on sale of furniture and equipment 4,194 7,511
Expense related to stock options, restricted stock and warrants 52,477 1,233,257
Deferred tax benefit (439,334) -
Changes in other assets:
Decrease (increase) in accounts receivable 543,734 (2,432,081)
Decrease in income tax receivable - 122,446
Increase in prepaid expenses (46,785) (293,364)
(Increase) decrease in other current assets (22,396) 11,022
Increase in deposits (57,113) (15,419)
Changes in other liabilities:
Increase in accounts payable 249,436 732,205
Decrease in accrued liabilities (142,038) (538,994)
Decrease in income tax payable (151,296) -
Decrease in billings in excess of cost on government contracts (79,796) -
(Decrease) increase in deferred revenue (559,894) 2,008,994
------------ ------------
CASH USED IN OPERATING ACTIVITIES (1,303,957) (6,867,257)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (984,069) (2,416,408)
Proceeds from sale of furniture and equipment 3,500 95,515
Increase in shareholder note receivable (65,000) -
Repayment of shareholder note receivable - 69,360
------------ ------------
CASH USED IN INVESTING ACTIVITIES (1,045,569) (2,251,533)
</TABLE>
Page 6
<PAGE> 7
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments on capital lease obligations (72,688) (87,965)
Proceeds from line of credit 168,239 1,500,000
Repayments on line of credit (68,239) (650,000)
Proceeds from equipment loan facility 644,710 1,553,579
Repayments on equipment loan facility (117,325) (774,153)
Closing costs for Series A preferred stock (81,384) -
Proceeds from sale of preferred stock 4,000,000 10,000,000
Increase in deferred offering costs - (698,943)
Proceeds from share options exercised and issuance of warrants 31,060 1,153,406
Proceeds from issuance of common stock 1,420 3,550,003
------------ ------------
CASH PROVIDED BY FINANCING ACTIVITIES 4,505,793 15,545,927
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,156,267 6,427,137
BEGINNING CASH AND CASH EQUIVALENTS 295,669 1,398,937
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 2,451,936 $ 7,826,074
============ ============
SUPPLEMENTAL INFORMATION ON NONCASH INVESTING
AND FINANCING TRANSACTIONS:
Purchases of equipment through capital lease obligations $ 14,581 $ -
============ ============
Retirement of treasury stock $ - $ 119,000
============ ============
Deferred offering costs $ - $ 785,815
============ ============
Stock purchased through subscription receivable $ - $ 10,872
============ ============
Supplemental cash flow information:
Cash paid for interest $ 54,581 $ 213,689
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
Page 7
<PAGE> 8
INFORMAX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements of InforMax, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information. These financial statements should
be read together with the 1999 financial statements and notes in the Company's
registration statement on Form S-1 filed with the SEC. Certain information and
footnote disclosures normally included in financial statements have been
condensed or omitted. In the opinion of the Company's management, the financial
statements reflect all adjustments necessary to present fairly the results of
operations for the three and nine months periods ended September 30, 2000 and
1999, the Company's financial position at September 30, 2000, and the cash flows
for the nine months periods ended September 30, 2000 and 1999. The results of
operations for the interim periods are not necessarily indicative of the results
of the entire year.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
New Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. As amended by Statement of Financial Accounting Standards
No. 137, this standard will be effective for the Company for fiscal years and
quarters beginning after December 31, 2000, and requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company has
not completed the process of evaluating the impact that will result from
adopting SFAS No. 133. The Company is therefore unable to predict the potential
impact that adopting SFAS No. 133 will have on its financial position and
results of operations when such statement is adopted.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". This SAB expresses the SEC's views on applying generally accepted
accounting principles to revenue recognition in financial statements. The
application of the SAB is not expected to have a material impact on the
Company's financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No.44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25." With the exception of
certain provisions, which require earlier application, this interpretation is
effective for all applicable transactions
Page 8
<PAGE> 9
beginning July 1, 2000. The Company does not expect that the adoption of this
Interpretation will have a material impact on its financial statements.
NOTE 3 - SUBSEQUENT EVENTS
On October 6, 2000 the Company completed an initial public offering of its
common stock pursuant to a registration statement on Form S-1 that was declared
effective by the SEC on October 2, 2000. The Company sold 5,750,000 shares of
common stock at a price per share of $16 in the offering. This amount included
5,000,000 shares of common stock offered by the final prospectus and an
additional 750,000 shares of common stock subject to the underwriters' over-
allotment option, which was exercised on October 5, 2000. The aggregate gross
proceeds of the shares offered and sold were $92,000,000. Expenses related to
the offering were $7,901,264 including underwriters' discounts and commissions
of $6,440,000.
During October 2000, The Company commenced a lease for a Cambridge,
Massachusetts office. This agreement, which expires on October 31, 2007,
requires the Company to make rental payments of $126,000 a year subject to an
annual escalation clause of 4%. The Company is entitled to a leasehold
improvement allowance of $52,500. The lease requires the Company to maintain a
security deposit of $130,500. To satisfy the security deposit requirement of the
lease, PNC Bank, NA has issued an irrevocable standby letter of credit for
$130,500 in favor of the lessor, which requires a compensating balance
arrangement of $130,500. Additionally, the Company commenced an amendment to its
existing San Francisco, California office lease. This agreement, which expires
on June 30, 2005, requires rental payments of $154,395 a year, subject to an
annual escalation clause. The Company is entitled to a $15,310 leasehold
improvement allowance. The lease requires an additional security deposit of
$66,935. To satisfy the security deposit requirement of the lease, PNC Bank, NA
will issue an irrevocable standby letter of credit in favor of the lessor,
requiring a compensating balance arrangement of $66,935. Further, the Company
entered into a fourth amendment of their existing Rockville, MD office space
lease. This amendment adds additional space and expires July 2006. The Company
is required to make rental payments of $87,666 a year, subject to an annual
escalation clause of 3%. An additional security deposit in the amount of $9,239
is required.
NOTE 4 - CONTINGENCIES
Government Audits - Payments to the Company on subcontracts with prime U.S.
Government contractors are subject to adjustment upon audit by various agencies
of the U.S. Government. For the years ended December 31, 1997, 1998 and 1999, no
audits of costs and the related payments have been performed by the various
agencies. At December 31, 1998, the Company accrued a potential liability for
billings in excess of costs incurred of $79,796 related to a cost-plus-fee
contract. In July 1999, this contract was converted to a time and material based
contract by signing new agreements. Any potential liabilities from the prior
contract ceased under the new agreements. At December 31, 1999, there are no
liabilities accrued related to the billing in excess of cost. In the opinion of
management, the final determination of these costs and related payments will not
have a material effect on the Company's financial position, results of
operations, or liquidity.
Litigation - In late 1998, litigation was filed in France by a former sales
representative. A hearing was held in 1999 and according to the decision of the
French court, the Company has been directed to pay $228,600 to the former
representative. The liability of $228,600 was accrued at December 31, 1999 and
paid in full in June 2000.
NOTE 5 - CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK - VOTING COMMON STOCK - NONVOTING
--------------------- ------------------------
ISSUED OUTSTANDING ISSUED OUTSTANDING
SHARES SHARES AMOUNT SHARES SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 2,505,000 2,254,500 $ 2,505 2,034,060 1,716,760 $ 2,034
Share options exercised - - - 3,932,215 3,932,215 3,932
Issuance of stock options - - - - - -
Issuance of common stock - - - 557,193 557,193 557
Issuance of warrants - - - - - -
Beneficial conversion of Series B redeemable
convertible preferred stock - - - - - -
Accretion of beneficial conversion of Series B
redeemable convertible preferred stock - - - - - -
Conversion of nonvoting to voting common stock 6,206,168 6,206,168 6,206 (6,206,168) (6,206,168) (6,206)
Warrant interest expense - - - - - -
Adjustments of deferred
compensation for variable stock
options and restricted stock - - - - - -
Amortization of deferred
compensation on stock options
and restricted stock - - - - - -
Accretion of transaction costs on
redeemable convertible preferred
stock - - - - - -
Accrual of dividend on redeemable
convertible preferred stock - - - - - -
Retirement of treasury stock (250,500) - (250) (317,300) - (317)
Net loss - - - - - -
------------------------------------------------------------------------------------
Balance, September 30, 2000 (unaudited) 8,460,668 8,460,668 $ 8,461 - - $ -
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
--------------
ADDITIONAL
PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
------ ------ ------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 567,800 $ (119,000) $ 970,806 $ (400,208)
Share options exercised - - 1,160,247 -
Issuance of stock options - - 712,803 (712,803)
Issuance of common stock - - 3,549,454 -
Issuance of warrants - - 13,492 -
Beneficial conversion of Series B redeemable
convertible preferred stock - - 9,981,888 -
Accretion of beneficial conversion of Series B
redeemable convertible preferred stock - - (9,981,888) -
Conversion of nonvoting to voting common stock - - - -
Warrant interest expense - - 5,430 -
Adjustments of deferred
compensation for variable stock
options and restricted stock - - 2,083,693 (2,083,693)
Amortization of deferred
compensation on stock options
and restricted stock - - - 1,214,426
Accretion of transaction costs on
redeemable convertible preferred
stock - - (207,118) -
Accrual of dividend on redeemable
convertible preferred stock - - (160,002) -
Retirement of treasury stock (567,800) 119,000 (118,433) -
Net loss - - - -
---------------------------------------------------------------
Balance, September 30, 2000 (unaudited) - $ - $ 8,010,372 $ (1,982,278)
===============================================================
</TABLE>
<TABLE>
<CAPTION>
SUBSCRIPTION ACCUMULATED
RECEIVABLE DEFICIT TOTAL
---------- ------- -----
<S> <C> <C> <C>
Balance, December 31, 1999 - $ (2,173,144) $ (1,717,007)
Share options exercised (10,872) - 1,153,307
Issuance of stock options - - -
Issuance of common stock - - 3,550,011
Issuance of warrants - - 13,492
Beneficial conversion of Series B redeemable
convertible preferred stock - - 9,981,888
Accretion of beneficial conversion of Series B
redeemable convertible preferred stock - - (9,981,888)
Conversion of nonvoting to voting common stock - - -
Warrant interest expense - - 5,430
Adjustments of deferred
compensation for variable stock
options and restricted stock - - -
Amortization of deferred
compensation on stock options
and restricted stock - - 1,214,426
Accretion of transaction costs on
redeemable convertible preferred
stock - - (207,118)
Accrual of dividend on redeemable
convertible preferred stock - - (160,002)
Retirement of treasury stock - - -
Net loss - (8,288,805) (8,288,805)
----------------------------------------------------
Balance, September 30, 2000 (unaudited) $ (10,872) $ (10,461,949) $ (4,436,266)
====================================================
</TABLE>
Page 9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of our consolidated financial condition and
results of operations. You should read this discussion together with our
consolidated financial statements and the related notes, which we have included
elsewhere in this report. We make some forward-looking statements in this report
on Form 10-Q about our future performance. These forward-looking statements
include numerous risks and uncertainties, such as those described below that
could cause our actual results to differ materially. Actual results may differ
from forward-looking statements for a number of reasons, including the
following:
RISKS RELATED TO OUR BUSINESS
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL ADVANCES AND DEVELOPMENTS NOW
OCCURRING IN BIOINFORMATIC SOFTWARE. IF WE ARE UNABLE TO DO SO, OUR PRODUCTS AND
SERVICES WILL BE LESS ATTRACTIVE TO CUSTOMERS AND OUR REVENUES AND COMPETITIVE
POSITION WILL SUFFER.
The market for our products and services is in the midst of rapid
technological change. In order for us to maintain a competitive position in our
industry and develop and market products that are attractive to customers, we
must:
- continue to enhance and expand the functions of our existing products;
and
- develop and introduce new software products and complementary services
that meet evolving customer needs and preferences and incorporate new
technologies.
Our products and services may not be able to keep pace with technological
change. We may not be able to identify in a timely manner important evolving
industry standards and may invest considerable resources in technologies that
rapidly become obsolete. Our products or product versions may also become
obsolete due to our competitors' introduction of products or services containing
advanced technology and functions. If we do not keep pace with technological
change, our products will not be as attractive to our customers and our
competitive position and sales of our products would be seriously harmed.
WE MUST ADD NEW CUSTOMERS AND RETAIN AND EXPAND UPON EXISTING CUSTOMER
RELATIONSHIPS IN ORDER TO GENERATE REVENUES TO SUPPORT THE GROWTH OF OUR
BUSINESS.
In order to generate additional revenues sufficient to support our continued
growth, we must add new customers and retain, and expand upon, our existing
customer relationships. These efforts depend significantly upon our successful
development of new products, product versions and services that respond to the
evolving needs of the genomic research community, as well as the success of our
sales and marketing efforts. In addition, much of our expectation for future
growth of revenues is based upon increased sales of our GenoMax product and the
establishment of our GenoMax brand. We expect to derive a significant portion of
our future professional services revenue from a relationship with the National
Center for Biotechnology Information (NCBI) at the National Institutes of Health
and that relationship, which is based on subcontractor arrangements, could be
terminated in the future.
THE CONTINUED ENHANCEMENT AND DEVELOPMENT OF OUR BIOINFORMATIC PRODUCTS AND
SERVICES DEPEND UPON THE RETENTION AND EXPANSION OF OUR RESEARCH AND PRODUCT
DEVELOPMENT GROUP.
The number of technical personnel with experience in the field of
bioinformatics is limited and competition for qualified employees is intense.
Our software was developed by an internal team that has had little turnover, but
that may not be the case in the future. We may not be successful in retaining
our technical employees or recruiting and training additional skilled personnel.
The loss of a significant number of employees in our research and
Page 10
<PAGE> 11
product development group, occurring at one instance or over a period of time,
could seriously harm our product development and enhancement efforts. We could
also incur significant costs associated with any resulting litigation or
disputes to protect our proprietary information.
PART OF OUR BUSINESS STRATEGY IS TO DEVELOP STRATEGIC RELATIONSHIPS WITH LARGER
ORGANIZATIONS AND PROVIDERS OF COMPLEMENTARY PRODUCTS AND SERVICES. IF WE ARE
NOT SUCCESSFUL IN DOING SO OUR ABILITY TO COMPETE COULD BE HARMED.
A component of our business strategy is to develop strategic relationships,
including co-marketing arrangements, content channeling and distribution
alliances, e-commerce offerings and Internet-hosted delivery partnerships. We
believe that through such relationships we can add revenues, improve our
competitive position and increase market awareness and acceptance of our
products. To date, we have entered into only a few of these strategic
relationships with providers of complementary products and services. If we are
unable to successfully develop these and other similar relationships, or if
these relationships do not yield the results we anticipate, our ability to
compete and to generate future revenues could be materially harmed. In addition,
most of our strategic relationships, other than our relationship with Amersham,
including our co-marketing relationships with Oracle, Compaq and Sun
Microsystems, are based on oral arrangements that are not enforceable and can be
terminated by either party at any time.
In August 2000, we entered into a long-term strategic relationship with
Amersham Pharmacia Biotech to jointly develop and market an expanded version of
GenoMax for pharmaceutical and biotech companies for integrating and analyzing
data from genomics, proteomics and drug screening production laboratories. The
agreement with Amersham can be terminated prior to the end of the term by mutual
agreement of the parties or by one party upon a breach by the other party. In
addition, if we do not use commercially reasonable efforts to develop the data
analysis system, Amersham can terminate the agreement. If the agreement is
terminated for any reason prior to the end of the term or if the relationship
otherwise does not result in the successful marketing of GenoMax to new customer
groups, we may be unable to recoup all of the substantial investment we will be
making in this collaboration and there would be a material adverse impact on our
anticipated future revenues.
WE HAVE INCURRED OPERATING LOSSES IN THE PAST RESULTING IN AN ACCUMULATED
DEFICIT. WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE.
We have incurred operating losses in most periods since our inception. We
incurred net losses of approximately $0.6 million for the year ended December
31, 1998 and approximately $1.3 million for the year ended December 31, 1999. We
incurred a net loss of approximately $8.3 million for the nine months ended
September 30, 2000. As of September 30, 2000, we had an accumulated deficit of
approximately $10.5 million. We expect to continue to incur net losses for the
foreseeable future. We expect to invest substantial financial and other
resources to:
- develop and introduce new products, product versions and services;
- expand our research and product development and sales and
marketing groups; and
- consider appropriate acquisitions and strategic relationships.
As a result, we expect that our expenses will increase significantly. We
cannot assure you that we will be able to generate sufficient additional
revenues to achieve profitability. Even if we are able to achieve profitability,
we may not be able to sustain profitability on a quarterly or annual basis.
Failure to achieve consistent profitability may limit our growth potential and
the value of our common stock.
REVENUE RECOGNITION RULES APPLICABLE TO SOFTWARE MAY REQUIRE THAT WE DEFER
RECOGNIZING REVENUES UNDER CERTAIN LICENSES UNTIL QUARTERS AFTER LICENSES ARE
EXECUTED OR FEES ARE RECEIVED. THIS CAN CAUSE OUR QUARTERLY RESULTS TO FLUCTUATE
SUBSTANTIALLY.
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We may not be able to recognize revenue associated with a particular
software license in the same quarter in which we enter into the agreement or in
which we collect licensing fees. Under some of our licenses we must deliver to a
customer an enhanced product version or additional module, and therefore we must
defer recognizing any payment previously received until delivery of all contract
elements are made. For example, in several of our GenoMax sales, our contracts
with customers stipulated future delivery of a gene expression analysis module.
In accordance with generally accepted accounting principles, we deferred
recognition of revenue on these contracts until delivery of the gene expression
analysis module. This module, included in GenoMax 3.0, was delivered on
September 15, 2000. If we are not able to release future modules as scheduled,
we will be required to defer the recognition of a significant amount of revenues
to quarters after those in which we collect licensing fees. Expenses associated
with software licenses, unlike revenues, are not typically deferred. The manner
in which we recognize revenue, in accordance with the revenue recognition rules
applicable to software under generally accepted accounting principles, may cause
our quarterly operating results to fluctuate substantially.
WE EXPECT OUR RESULTS OF OPERATIONS TO VARY FROM QUARTER TO QUARTER IN FUTURE
PERIODS AS A RESULT OF THE TIMING AND SEASONALITY OF OUR SOFTWARE SALES. THESE
FLUCTUATIONS MAKE IT DIFFICULT TO EVALUATE OUR BUSINESS AND COULD CAUSE
INSTABILITY IN OUR STOCK PRICE.
We anticipate that our operating results will fluctuate on a quarterly basis
as a result of a number of factors, many of which are outside of our control.
Factors that may cause our quarterly results to fluctuate include the following:
- the number and timing of orders for our GenoMax enterprise
product;
- the seasonal fluctuations of software procurement, particularly
for bioinformatics software;
- the timing of, commencement, delay, cancellation or completion of
our software licensing agreements, strategic relationships and
professional service activities;
- the timing of license, royalty and other payments received under
our agreements;
- the introduction or cancellation of products and services by us
and our competitors; and
- the timing of expenses associated with increased product
development, expanded sales and marketing efforts, and
acquisitions and strategic investments.
In particular, as a result of the academic calendar, European business
practices and commercial information technology procurement practices, we
generally experience a reduction in sales in the third quarter of each calendar
year which typically results in a corresponding reduction in operating revenues.
Due to the factors described above and other risks discussed herein, you
should not rely upon quarterly comparisons of our financial results. These
comparisons are not necessarily meaningful nor are they a reliable indicator of
our future performance. As a result of fluctuations in our quarterly results,
the market price of our common stock may be subject to significant fluctuation
and volatility.
OUR PRODUCTS AND SERVICES, PARTICULARLY OUR ENTERPRISE SOFTWARE SOLUTIONS,
REQUIRE A LENGTHY SALES CYCLE. THIS SALES CYCLE OFTEN REQUIRES US TO EXPEND
CONSIDERABLE RESOURCES. IF WE DEVOTE SIGNIFICANT RESOURCES TO SALES THAT DO NOT
MATERIALIZE, OUR REVENUES AND ABILITY TO ACHIEVE PROFITABILITY WOULD BE HARMED.
The sales cycle for our products and services, particularly our enterprise
software solutions on which much
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of our expectations for future growth are based, is a lengthy and involved
process. Our sales cycle is typically long for a number of reasons, including:
- the decision to license and deploy enterprise-wide software, by
its nature, is an organization-wide procurement decision, often
requiring an evaluation by a significant number of constituencies
in various functional and geographic areas, each often having
specific and possibly conflicting requirements; and
- the significant resources that are committed to an evaluation of
our software solutions by a potential customer organization
require us to expend substantial time, effort and money educating
them about the value and comparative advantages of our products.
In addition, our agreements with customers and strategic partners often contain
terms that are unique to that customer or partner and require extensive
negotiation. As a result, we may expend substantial funds and effort to
negotiate agreements for these products, but may ultimately be unable to
consummate a sale of our products and services.
THE LOSS OF THE SERVICES OF, OR THE DEVELOPMENT OF SUBSTANTIAL EXTERNAL TIME
COMMITMENTS BY, OUR SENIOR MANAGEMENT COULD HAVE A NEGATIVE EFFECT ON OUR
GROWTH.
The continued growth of our business is substantially dependent on the
performance of our senior management and key employees. We carry key person life
insurance on only Dr. Titomirov, our Chief Executive Officer, and Dr. Babenko,
our Chief Technology Officer. In addition, we have employment agreements with
only Dr. Babenko, Mr. Lehnen, our Chief Financial Officer, and Mr. Sullivan, our
Senior Vice President of Marketing and Sales. The loss of the services of any
member of our senior management or key personnel may significantly delay or
prevent the implementation of our business strategy and could have a material
adverse effect on the growth of our business.
Dr. Titomirov is also the chairman and a significant stockholder of an
unrelated company named RealTimeHealth.com, Inc. RealTimeHealth.com is currently
a development stage company that intends to allow health care consumers to
establish individual baseline genetic profiles and then monitor them for a
pattern variance over time through the Internet. RealTimeHealth.com intends to
hire and is currently seeking a chief executive officer. Dr. Titomirov currently
anticipates that his duties as chairman of RealTimeHealth.com will be limited to
setting its strategic direction and being involved in fundamental decisions and
activities of the board of directors generally. In August 2000, we received a
commitment letter regarding the continued services of Dr. Titomirov. Although
Dr. Titomirov's commitment letter states that he currently intends to devote a
majority of his professional working time to his duties as our Chief Executive
Officer, there could be periods where his activities with RealTimeHealth.com
substantially reduce the time devoted to our operations.
WE MAY INCUR SIGNIFICANT COSTS IN PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS OR
RESPONDING TO CLAIMS OF INFRINGEMENT FROM OTHERS.
We currently rely upon a combination of trademark, patent, copyright and
trade secret laws, employee and third party non-disclosure agreements and other
contracts to protect our proprietary rights. Nevertheless, our efforts to
protect our intellectual property may be inadequate and we may be unable to
prevent others from offering products and services substantially similar to
ours. We also need to secure and maintain adequate protection of our
intellectual property outside of the United States, because our sales are
global. The laws of some foreign countries do not protect proprietary rights to
the same extent as the laws of the United States, and many companies engaging in
international business have encountered considerable difficulties in
safeguarding their proprietary rights in foreign jurisdictions.
Moreover, third parties may claim that our current or future products or
services infringe upon their intellectual property. Litigation over these issues
could be a significant distraction and we may incur significant
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costs, including several damages. In the event that it is determined that one of
our products infringe upon another's proprietary rights, we may be required to
obtain a license in order to continue selling our products. That license may not
be available to us on favorable terms, or at all.
OUR SOFTWARE FACILITATES RESEARCH COLLABORATION AND THEREFORE SECURITY IS
IMPORTANT TO OUR CUSTOMERS. WE COULD BE EXPOSED TO LIABILITY AND A LOSS IN
CUSTOMER CONFIDENCE IF OUR PRODUCTS FAIL TO PROVIDE THAT SECURITY.
Our software facilitates collaboration among researchers and the sharing of
research results. If there is a breach or failure of the security functions in
our software, researchers' proprietary work product and data may be compromised
and our customers would lose confidence in our software. We may be exposed to
considerable liability from defects or breaches of security in our products.
IF WE CANNOT EFFECTIVELY MANAGE OUR GROWTH, AND SPECIFICALLY THE TRANSITION OF
OUR BUSINESS RELATED TO AN EMPHASIS ON THE SALE OF ENTERPRISE PRODUCTS, OUR
FUTURE PROSPECTS WOULD BE HARMED.
In recent years, we have experienced significant growth in the size of our
customer base and the scope of our products and services. We also have expanded
and intend to continue to expand our research and product development, marketing
and sales, and professional services organizations. These factors have placed,
and will continue to place, a significant strain on our management systems and
resources. We have only recently become a public company, which will place
additional strain on our administrative, financial and operational systems. Our
current accounting information system may be inadequate to support our growth.
Accordingly, we are presently transitioning to a new accounting information
system. Our ability to manage our growth effectively will depend upon the
ability of our officers and key employees to continue to implement and improve
our operational, administrative and financial control systems and to expand,
train and manage our workforce, and implement necessary changes to our
information systems, including our accounting information system.
Historically, we have focused on the development and sale of our Vector NTI
Suite of desktop products. We are currently seeking to increase market
penetration and brand recognition of our GenoMax enterprise software platform
and, accordingly are devoting an increasing portion of our resources to GenoMax
related marketing and sales and professional services efforts. Failure to
successfully manage that transition effectively would materially and adversely
affect nearly every aspect of our business and cause our financial condition and
results of operations to suffer.
WE SIGNIFICANTLY DEPEND UPON HOLDERS OF H-1B NON-IMMIGRANT VISAS TO STAFF OUR
RESEARCH AND PRODUCT DEVELOPMENT TEAM. OUR PRODUCT DEVELOPMENT AND ENHANCEMENT
EFFORTS COULD BE HARMED IF WE ARE NOT ABLE TO ADEQUATELY STAFF OUR TEAM BECAUSE
OF THE LIMITATIONS OF U.S. IMMIGRATION LAWS.
We recruit professionals for our research and product development group on
an international basis and, therefore, must comply with the immigration laws of
the United States. Most of our research and product development team are
citizens of other countries, with most of those working in the U.S. under H-1B
temporary visas. Under the American Competitiveness in the 21st Century Act of
2000, there is a statutory limit of 115,000 new H-1B visas that may be issued in
fiscal year 2000 and 195,000 visas in fiscal year 2001 and 2002, with such
limits decreasing in future periods beginning in fiscal year 2003. In any year
in which this limit is reached, we may be unable to obtain a sufficient number
of H-1B visas to employ those persons we would like to add to our research and
product development group. If we are unable to obtain H1-B visas for our
employees in sufficient quantities or in a timely manner, our product
development and enhancement efforts could be hampered. As a result, we may be
unable to deliver products that satisfy customer preferences and keep pace with
technological change.
WE MAY CONSIDER ACQUISITIONS OR STRATEGIC INVESTMENTS. WE HAVE LIMITED
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EXPERIENCE WITH THESE ACTIVITIES AND THE COSTS AND DISTRACTIONS FROM THOSE
ACTIVITIES COULD HARM OUR FUTURE GROWTH.
We may consider acquiring businesses, technologies or products that we
believe are a strategic fit with our business and strategy, although we only
have limited experience with these activities. If appropriate opportunities
become available, we could also issue additional equity securities that would
dilute current stockholders' ownership, or incur substantial debt to finance
such transactions. Methods of financing any acquisitions or strategic
investments could result in a negative impact on our financial condition. We may
have difficulties integrating the businesses, products, technologies or
personnel involved in any acquisition or strategic investment. Our integration
efforts may result in significant expenditures of operating, financial and
management resources that could materially and adversely affect our business.
Acquisitions involve many other risks, including potential loss of key employees
or customers, the assumption of significant liabilities, and the amortization of
the intangible assets of acquired companies. As a result of these and other
risks, any acquisitions or strategic investments may ultimately have a negative
impact on our business, results of operation and financial condition.
DEFECTS OR MALFUNCTIONS IN OUR SOFTWARE PRODUCTS, OR IN THE PRODUCTS OF OUR
TECHNOLOGY PARTNERS, COULD HURT OUR REPUTATION AMONG CUSTOMERS AND EXPOSE US TO
LIABILITY.
Our business and the level of customer acceptance of our bioinformatic
software products are dependent upon the continuous, effective and reliable
operation of our computer software and related tools and functions. Software
defects could occur in our current or future products. To the extent that our
software malfunctions and our customers' use of our products is interrupted, our
reputation and business could suffer. We may also be subject to liability for
the defects and malfunctions of third party technology partners and others with
whom our products and services interoperate.
WE MAY REQUIRE ADDITIONAL FUNDING TO EXECUTE OUR BUSINESS STRATEGY. IF THAT
FUNDING IS NOT AVAILABLE, OR NOT AVAILABLE ON TERMS ACCEPTABLE TO US, WE MAY BE
REQUIRED TO CURTAIL CERTAIN MARKETING AND PRODUCT DEVELOPMENT EFFORTS.
We expect that the proceeds from our initial public offering, our cash flow
from operations and our existing capital resources will be sufficient to fund
our operations for the next 24 months but it is possible that our growth will
require us to seek additional financing during this period. We may seek to
satisfy any additional capital needs through public or private equity offerings,
debt financings and other means. If we raise capital through the issuance of
additional equity securities, your ownership will be diluted. We may not be able
to obtain additional financing when we need capital on terms favorable to us, if
at all. If we cannot obtain such financing, we may be required to curtail our
marketing and sales activities and product development efforts.
RISKS RELATED TO OUR INDUSTRY
THE BIOINFORMATIC PRODUCTS AND SERVICES MARKET IS INTENSELY COMPETITIVE AND
EVOLVING AND WE MAY NOT ACHIEVE OR MAINTAIN MARKET LEADERSHIP FOR A VARIETY OF
REASONS.
We face, or expect to face, intense competition from:
- third party commercial software vendors;
- bioinformatics developers;
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- internal bioinformatics departments of some of our customers and
potential customers;
- organizations engaging in the provision of Internet-hosted,
bioinformatic software; and
- companies facilitating Internet-based e-commerce between
participants in our industry.
We believe that we compete most often with LION biosciences, NetGenics,
Compugen, Genomica, DNA Star, Rosetta Inpharmatics, DoubleTwist and GCG, a unit
of Pharmacopeia recently acquired from Oxford Molecular. Others, including
large, well-established software vendors, could readily enter this market. Many
of our competitors have longer operating histories, stronger name recognition
and significantly greater financial, technical and marketing resources than we
do. As a result of these advantages, our competitors may be better able to adopt
more aggressive pricing policies and better positioned to respond to changes in
customer preference or technology.
To remain competitive, we believe that we must continue to expand and
enhance the functionality of our bioinformatic software products and respond
timely and effectively to evolving industry standards or technology. In an
intensely competitive, technology driven business like ours, there is no
certainty that market leadership can be obtained or maintained for any
sustainable period.
NUMEROUS CUSTOMERS AND POTENTIAL CUSTOMERS FOR OUR BIOINFORMATIC SOFTWARE MAY
ELECT TO INTERNALLY DEVELOP OR CONTINUE TO DEVELOP THEIR OWN SOFTWARE WHICH
COULD HURT OUR SALES EFFORTS.
Our customers and potential customers, including providers of genomic and
proteomic data, may elect to internally develop or continue to develop their own
bioinformatic software. Potential customers for our products may be unwilling to
abandon their prior internal efforts to look to an outside, third party source
to provide their bioinformatic software solutions. As a result our efforts to
add new customers could be hampered.
IF GROWTH IN THE USE OF GENOMIC DATA DOES NOT OCCUR AS WE EXPECT, THE TARGET
MARKETS FOR OUR PRODUCTS AND SERVICES MAY NOT BE AS LARGE AS EXPECTED.
The application of genomic information to pharmaceutical discoveries,
agricultural production, environmental management and industrial processes is an
evolving and unproven practice. Few products have been developed and
commercialized resulting from recent genomic discoveries. If researchers do not
use genomic information in their discovery and development efforts at the level
we project, the target markets for our products and services will not
materialize and our prospects would be materially harmed.
OUR SALE OF BIOINFORMATIC PRODUCTS AND SERVICES COULD SUFFER IF THERE ARE
REDUCTIONS IN RESEARCH AND DEVELOPMENT EXPENDITURES OF OUR CUSTOMERS AND PUBLIC
FUNDING RELATED TO GENOMIC RESEARCH.
Sales of our products and services could suffer as a result of reductions in
customer research and development expenditures and public funding related to
genomic research. Our continued services to the NCBI and sales of our products
to other government and academic institutions could be negatively affected by
reductions in such public funding.
THE PRODUCTS AND THE ACTIVITIES OF OUR CUSTOMERS, INCLUDING THOSE IN THE
PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES, MAY BE SUBJECT TO CHANGING
REGULATION THAT COULD ADVERSELY AFFECT GENOMIC RESEARCH AND REDUCE MARKET DEMAND
FOR OUR PRODUCTS.
Because our customers' products potentially touch on areas involving human
health, they are affected by current or future government regulation, including
regulation by the U.S. Food and Drug Administration. Recently, the
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Clinton administration proposed legislation regarding oversight of the sale of
medical products over the Internet and announced its intention to implement a
set of regulatory initiatives governing genetically engineered agricultural
products. In addition, numerous laws covering genetic testing of humans, the
privacy and security of human genetic information, and the storage and
transmission of individually identifiable health care information have been
introduced or passed at the state and federal levels. Our sales may indirectly
be affected by changes in government regulation covering our customers in these
industries, including regulation relating to drug development, genomic research,
genetic testing, healthcare reform and the sale of products and transfer of
healthcare data over the Internet.
We cannot assure you that customers and potential customers for our
bioinformatic software products and related services will not curtail or defer
technology investments in response to the proposal or institution of these
governmental efforts. Moreover, any exposure by us to liability or increased
government scrutiny resulting from regulatory or legal changes would distract
the efforts of our organization and require us to spend significant time and
resources in connection with any resulting litigation or regulatory compliance.
OUR BUSINESS MAY BE MATERIALLY AND ADVERSELY AFFECTED AS A RESULT OF ETHICAL,
LEGAL AND SOCIAL CONCERNS SURROUNDING THE USE OF GENOMIC INFORMATION.
A number of ethical, legal and social concerns, including issues related to
privacy, confidentiality and fairness, have arisen as a result of the increased
availability of genomic information. Government and private entities are
currently exploring issues, including:
- ownership and control of genomic information;
- definition of normal conditions, disabilities and disorders; and
- determination of access rights to resulting expensive technologies
and responsibility for payment for treatment based on these
technologies.
As a result of these and numerous other ethical, legal and social issues,
government authorities may limit, or increasingly regulate biomolecular research
and the use of products resulting from such research. Such restrictions could
reduce the number of markets and potential customers for our products and could
materially and adversely affect our business.
CONSOLIDATION WITHIN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES MAY LEAD TO
FEWER CUSTOMERS FOR OUR PRODUCTS AND SERVICES. CONSOLIDATION COULD INCREASE
COMPETITION AND HARM OUR MARKETING AND SALES EFFORTS.
A significant portion of our customer base consists of pharmaceutical and
biotechnology companies. Mergers between large multinational pharmaceutical
companies have accelerated in recent years. Continued consolidation within the
pharmaceutical and biotechnology industries may result in fewer customers for
our products and services. If one of the parties to a consolidation uses the
products or services of our competitors, we may lose existing customers as a
result of such consolidation.
WE INTEGRATE THIRD PARTY DATABASES INTO OUR BIOINFORMATIC SOFTWARE PRODUCTS AND
MAY BE EXPOSED TO LIABILITY FOR CONTENT ERRORS IN THOSE DATABASES.
Available genomic, proteomic and other biomolecular data is vast and
complex, and errors in databases containing this information are inevitable. We
integrate data housed on public and private content databases into our
bioinformatic software products. We could be subject to claims of liability
associated with damages resulting from any erroneous third party data that we
integrate into our products or for which we facilitate delivery and analysis,
even if not integrated into our products.
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RISKS RELATED TO OUR CORPORATION AND HOLDERS OF OUR STOCK
THE TRADING PRICE OF OUR COMMON STOCK MAY FLUCTUATE WIDELY.
The trading price of our common stock may fluctuate widely as a result of
a large number of factors. The stock market has experienced extreme price and
volume fluctuations that have affected the market prices of many companies
involved in the software and biotechnology industries, which have often been
unrelated to the operating performance of these companies.
OUR EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES OWN A LARGE PERCENTAGE
OF OUR COMMON STOCK AND HAVE THE ABILITY TO INFLUENCE DECISIONS THAT COULD
ADVERSELY AFFECT OUR STOCK PRICE.
Our executive officers, directors and their affiliates own approximately
60.0% of the outstanding shares of common stock. As a result, these stockholders
are able to substantially influence all matters requiring stockholder approval
and, thereby, our management and affairs. Matters that require stockholder
approval include:
- election of directors;
- approval of certain mergers or consolidations;
- sale of all or substantially all of our assets; and
- issuance of large amounts of our shares in private transactions or
acquisitions.
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control of our company, which in turn could reduce the
market price of our common stock. This concentration may also prevent new
investors from influencing significant corporate decisions.
OUR CHARTER AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE
A TAKEOVER EVEN IF BENEFICIAL TO STOCKHOLDERS.
Our charter and our bylaws, and portions of Delaware law, contain provisions
that could make it more difficult for a third party to obtain control of
InforMax, even if doing so would be beneficial to stockholders. For example, our
amended and restated certificate of incorporation provides for a classified
board of directors, allows the board of directors to expand its size and fill
any vacancies without stockholder approval, and allows the board of directors to
classify and issue preferred stock without stockholder approval. Our bylaws
restrict the ability of stockholders to call a special meeting and require
advance notice of stockholder proposals. Delaware law makes it difficult for us
to be acquired by a significant stockholder that is not approved in advance by
our board of directors.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated.
OVERVIEW
We are a leading global provider of bioinformatic software solutions. Our
bioinformatic software enables the analysis and interpretation of genomic,
proteomic and other biomolecular data that form the genetic blueprint of all
living organisms. Since beginning commercial operations in 1993, we have
dedicated substantial resources to expand and enhance our software product
lines, increase our sales and marketing efforts, and enlarge and diversify our
customer base.
We believe that our position as a leading global provider of
bioinformatic software is based upon the number of our customers, our revenues,
and the size of our organization. In 1993, we commercially released our first
desktop software product, the current version of which is marketed as our Vector
NTI Suite 6.0 for desktop computers. In September 1998, we commercially released
our GenoMax enterprise
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computing platform (formerly known as Software Solution for Bio-Medicine), the
version 3.0 of which was commercially released on September 15, 2000. On
September 30, 2000, we commercially released Vector Enterprise, a networked
version of our Vector NTI Suite which incorporates a shared relational
database.
To date, we have sold over 9,000 licenses for our Vector NTI Suite of
software applications for desktop computers, with more than 20,000 estimated
users. We have also made 20 sales of our GenoMax enterprise platform for use by
a network of computers linked together for sharing data and computation. Our
customer base includes over 1,300 organizations worldwide, including over 500
biotechnology, pharmaceutical and agricultural biotechnology and life science
companies and over 800 academic and government research institutions. Our 10
largest customers accounted for less than 46% and 37% of our total software
license revenues for the period ended September 30, 2000 and December 31, 1999,
respectively.
In August 2000, we entered into a strategic relationship with Amersham
Pharmacia Biotech to jointly develop and market an expanded version of GenoMax
to provide an enterprise-wide data analysis system for pharmaceutical and
biotechnology companies, for integrating and analyzing data from genomics,
proteomics and drug screening production laboratories. In connection with this
relationship, Amersham purchased 950,747 shares of our preferred stock in
exchange for $10 million in cash. These shares were converted into 1,587,747
shares of our common stock upon the closing of our initial public offering.
Revenue
Our revenue has increased substantially in recent years. Revenue for the
year ended December 31, 1999 represents a four-year compound annual growth rate
of 105% and a 143% increase over the prior year. We provide sales, marketing,
implementation and support services for our products. Our Vector NTI Suite,
Vector Enterprise and GenoMax software products are considered off-the-shelf
products that require only routine installation to be fully functional by the
end user.
We currently generate revenues from software sales and software-related
professional services. Software sales consist of software license fees,
maintenance fees, and related customer training. Professional services have
historically consisted of software development services provided under contracts
to the National Center for Biotechnology Information (NCBI) at the National
Institutes of Health and beginning in 2000 have also included customer-specified
software installation, integration and customization services related to our
commercial software products. NCBI contracts for professional services through
intermediaries for whom we serve as a subcontractor. These agreements may be
terminated on behalf of NCBI at anytime.
We expect to generate future revenues from our channeling and
distribution alliances and from e-commerce offerings. Channeling alliances
include agreements with data content providers to integrate their biomolecular
databases with our software products and to resell subscriptions to these
databases to our customers. Distribution alliances include agreements with
providers of specialized bioinformatic hardware to integrate and resell their
hardware with our software products. Under our content channeling and hardware
distribution alliances, we intend to generate transaction fees and realize a
portion of the revenues for the products we resell. To date, we have entered
into four agreements to resell third party data content or technology hardware.
E-commerce offerings will include incorporating Internet hyperlinks into
our Vector NTI Suite and entering into related partnerships with laboratory
reagent vendors to generate transaction fees on sales we facilitate. In
September 2000, we entered into an agreement with Incyte Genomics, Inc., a
manufacturer and provider of genomic and other biomolecular databases. Under our
agreement we will incorporate hyperlinks into Vector NTI Suite that will direct
researchers to Incyte's website. These hyperlinks are intended to allow
researchers to register with Incyte and to purchase access to certain of its
genomic databases which can be used with the searching and analysis functions of
our Vector NTI Suite. These hyperlinks will also enable researchers to purchase
reagents from Incyte for their laboratory research. Under this agreement, we
will receive a portion of the net revenues associated with sales of Incyte's
database and reagent products and a fee based on the number of registrations
with Incyte, each as generated through the hyperlinks to be contained in Vector
NTI Suite.
Revenue Recognition
We recognize software license revenues based on the provisions of
Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, as amended
by SOP No. 98-4 and SOP No. 98-9. Software license fees are recognized as
revenue upon the customer's execution of a non-cancelable license agreement and
delivery of the
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software, provided that the license fee is fixed and determinable,
collectibility is probable, and no customization of the software is required.
In circumstances where the above criteria were not met and the fair value
for undelivered elements of a multiple element contract were not determinable,
revenue on the contract was entirely deferred until either fair value was
determinable or when all elements were delivered. If we were unable to establish
vendor specific objective evidence of fair value on the undelivered elements and
the only undelivered element was maintenance, then all revenue was recognized
ratably over the maintenance period.
In connection with our software licenses, we also enter into maintenance
contracts that provide for technical support and periodic unspecified upgrades.
During 1997 and 1998, we recognized maintenance revenue together with the
initial licensing fee upon delivery of the software when all of the following
were met:
- the maintenance fee was included with the initial licensing fee,
- the maintenance revenue to be recognized was for one year or less
- the estimated cost of providing maintenance during the arrangement
was insignificant, and
- any unspecified upgrades were expected to be minimal.
Due to the introduction of new modules, product enhancements, and product
versions, we increased our maintenance support staff and, as a result, the
estimated cost of providing maintenance services to our customers was no longer
deemed insignificant. Therefore, beginning in January 1999, revenues from all
software maintenance contracts were unbundled from software licenses based upon
vendor specific objective evidence of fair value and recognized ratably over the
maintenance period. Vendor specific objective evidence for maintenance contracts
is determined by the list price established by management of relevant authority
or by the renewal rate specified in the contract. We use the residual method to
recognize revenue on delivered elements when vendor specific objective evidence
of fair value has been determined for all undelivered elements. Discounts, if
any, are applied to the delivered elements if the residual method is used.
Amounts received in advance of the delivery of products or performance of
services are classified as deferred revenues.
Training is provided on a daily fee basis and we recognize revenue as the
services are provided.
Beginning in 2000, we have provided customer-specified software
installation, integration and customization services related to our commercial
software products on a time and materials basis and recognize revenue as the
services are provided. During 1997, 1998 and 1999 our professional services
revenue was derived from contracts related to software development services
provided to NCBI under time and materials subcontracts and a cost-plus-fixed-fee
subcontract. During 1999 the cost-plus-fixed-fee subcontract was converted upon
its renewal to a time and material contract. We recognize revenue under the time
and material subcontracts as the services are provided based upon contractual
rates. We recognized revenue under the cost-plus-fixed-fee subcontract as
recoverable costs were incurred, including a proportionate amount of the fixed
fee.
Quarterly Fluctuations
Our quarterly operating results have historically fluctuated and we
anticipate such results to continue to fluctuate significantly. Factors that may
cause our quarterly results to fluctuate include the timing of, commencement,
delay, cancellation or completion of our:
- software licensing agreements;
- product delivery schedules;
- strategic relationships; and
- professional service activities, including installation and
software modification.
Our results of operations may also fluctuate as a result of the number and
timing of orders for our GenoMax enterprise product, which can have a
significant effect on revenues for a particular quarter.
The manner in which we recognize revenue, in accordance with the
generally accepted accounting principles, may also cause our quarterly operating
results to fluctuate substantially. In accordance with these
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principles, we may be required to defer all or a portion of the revenue from
some of our software licenses sold in a particular quarter to a later quarter.
Expenses associated with software licenses are not typically so deferred. For
our maintenance contracts and professional services, we typically recognize
revenues over the term of the contract.
As a result of the academic calendar, European business practices and
commercial information technology procurement practices, we generally experience
a reduction in sales in the third quarter of each calendar year which typically
results in a corresponding reduction in operating revenues. Due to the factors
described above and other risks, you should not rely upon quarterly comparisons
of our financial results as these comparisons are not necessarily meaningful nor
are they a reliable indicator of our future performance.
Options and Amortization of Stock Based Compensation
For the period from July 1, 2000 through August 21, 2000, we granted
161,990 qualified options to employees and 33,400 nonqualified options to one
non-employee. These options were issued with an exercise price of $6.37 per
share. The deemed fair market value of the underlying common stock was $6.37 at
each grant date prior to July 10, 2000 and $15.00 at each grant date thereafter.
Deferred compensation related to the qualified options is $1,289,883, which will
be amortized over a four year vesting period using the declining balance method.
Compensation related to the nonemployee options, which vest over a three year
period, is $373,037. On September 26, 2000, we granted 643,340 qualified options
to employees with an exercise price of $15.00 per share.
RESULTS OF OPERATIONS FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
The following table summarizes our results of operations for the three
and nine months and second quarter of 2000, compared to the same periods of
1999, as a percentage of our total revenue for the respective periods.
<TABLE>
<CAPTION>
Three months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Software license and customer support 59% 84% 70% 78%
Professional services 41 16 30 22
------ ------ ------ ------
Total revenues 100 100 100 100
Cost of revenues:
Software license and customer support 4 4 3 4
Professional services 22 9 18 11
------ ------ ------ ------
Total cost of revenues 26 13 21 15
Gross profit 74 87 79 85
Operating expenses
Selling, general and administrative 97 94 67 107
Research and development 34 28 28 34
Stock based compensation 1 5 1 11
Depreciation and amortization 4 5 3 5
------ ------ ------ ------
Total operating expenses 136 132 99 157
Loss from operations (62) (45) (20) (72)
Other income (expense)
Investment earnings 2 1 1 1
Interest expense (1) (2) (1) (2)
Other - - - -
------ ------ ------ ------
Total other income (expense) 1 (1) - (1)
Loss before income taxes (61) (46) (20) (73)
Income tax benefit (23) - (7) -
------ ------ ------ ------
Net loss (38)% (46)% (13)% (73)%
====== ====== ====== ======
</TABLE>
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THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE SAME PERIODS
ENDED SEPTEMBER 30, 1999.
Revenues.
For the three months ended September 30, 2000, revenues increased 155% to
$4.9 million from $1.9 million in the corresponding period of 1999. For the nine
months ended September 30, 2000, revenue increased 78% to $11.4 million from
$6.4 million in the corresponding period in 1999.
Software sales revenue increased 258% to $4.1 million for the three
months ended September 30, 2000 from $1.1 million in the corresponding period of
1999. For the nine months ended September 30, 2000, software sales revenue
increased 100% to $8.9 million from $4.5 million in the corresponding period in
1999. These increases are attributable to continued increases in Vector NTI
sales and increased demand for our GenoMax product. Our third quarter revenues
also include recognition of revenue in the amount of $1.2 million that was
deferred at the end of the second quarter of 2000. This deferred revenue is
related to the delivery of our gene expression module, included as part of our
commercial release of GenoMax 30 on September 15, 2000, as stipulated in
certain of our license agreements.
Professional services revenue increased 3% to $0.80 million for the three
months ended September 30, 2000 from $0.78 million in the corresponding period
of 1999. For the nine months ended September 30, 2000, professional services
revenue increased 27% to $2.5 million from $1.9 million in the corresponding
period in 1999. This increase resulted primarily increased demand for services
under our software development service contracts with NCBI.
Cost of Revenues. For the three months ended September 30, 2000, cost of
revenues increased 27% to $0.63 million from $0.49 million in the corresponding
period of 1999. For the nine months ended September 30, 2000, cost of revenue
increased 27% to $1.7 million from $1.4 million in the corresponding period in
1999.
Costs of software license and customer support revenue increased 166% to
$0.19 million for the three months ended September 30, 2000 from $0.07 million
in the corresponding period of 1999. For the nine months ended September 30,
2000, costs of software license and customer support revenue increased 94% to
$0.42 million from $0.22 million in the corresponding period in 1999. This
increase resulted primarily from increased sales of our Vector NTI Suite and
sales of our GenoMax enterprise system. Costs of software revenues consist
primarily of manufacturing costs incurred on an as needed basis, cost of
shipping products, and the cost of providing training and customer support.
Costs of professional services revenues increased 3% to $0.44 million for
the three months ended September 30, 2000 from $0.42 million in the
corresponding period of 1999. For the nine months ended September 30, 2000,
costs of professional services revenues increased 14% to $1.3 million from $1.2
million in the corresponding period in 1999. This increase resulted primarily
from increased personnel on the NCBI subcontracts. Costs of professional
services revenues consist primarily of salaries, benefits, and related expenses
of our professional services personnel.
Margins on our software license and customer support and professional
services revenues improved for the three-month and nine-month periods ended
September 30, 2000 compared to the prior year primarily as a result of economies
of scale related to the increasing size of our customer base.
Selling, General and Administrative Expenses. For the three months ended
September 30, 2000, selling, general and administrative expenses increased 144%
to $4.6 million from $1.9 million in the corresponding period of 1999. For the
nine months ended September 30, 2000, selling, general and administrative
expenses increased 184% to $12.1 million from $4.3 million in the corresponding
period in 1999. This increase primarily reflects salary and benefits expenses
for additional personnel, and related expenses including increased rent and
travel costs to support our business and revenue growth, along with costs
associated with a significantly increased marketing effort. Of this increase,
headcount and resources devoted to sales and marketing experienced a
disproportionately large increase. Overall headcount for the period ended
September 30, 2000 was 205 compared to 103 in the corresponding period of 1999.
Research and Development Expenses. For the three months ended September
30, 2000, research and
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development expenses increased 112% to $1.4 million from $0.64 million in the
corresponding period of 1999. For the nine months ended September 30, 2000,
research and development expenses increased 116% to $3.8 million from $1.8
million in the corresponding period in 1999. The increase reflects expense for
an increase in the headcount of our research and product development team as we
expand our product development efforts. Overall headcount for the period ended
September 30, 2000 was 95 compared to 56 in the corresponding period of 1999.
Stock Based Compensation. For the three months ended September 30, 2000,
stock based compensation expenses increased 793% to $0.23 million from $0.03
million in the corresponding period of 1999. For the nine months ended September
30, 2000, stock based compensation increased 2201% to $1.2 million from $0.05
million in the corresponding period in 1999. The increase reflects compensation
related to discounted stock option grants and restricted stock awards.
Income Taxes. We incurred net losses for each of the three and nine
months ended September 30, 2000 and 1999. At present, we have an accumulated net
operating loss carryforward of $27.6 million of which $21.6 million is a result
of the exercise of non-qualified stock options. The tax provision for the three
months ended September 30, 1999 and 2000 was $0.4 million and $0.0 million,
respectively, using an effective rate of 36.9% and 0.0%, respectively. The tax
provision for the nine months ended September 30, 1999 and 2000 was $0.4 million
and $0.0 million, respectively using an effective rate of 33.8% and $0.0
million, respectively. The provisions reflect a valuation allowance recorded
against the increase in net operating losses and the change in book basis versus
tax basis of deferred revenue and stock based compensation.
Net Loss. We incurred a net loss of $2.2 million for the three months
ended September 30, 2000, compared with a net loss of $0.74 million for the
three months ended September 30, 1999. For the nine months ended September 30,
2000, we incurred a net loss of $8.3 million compared with a net loss of $0.8
million for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
From our commencement of commercial operations in 1993 until June 1999,
we funded our growth primarily with internally generated cash flow. In June
1999, we raised $4.0 million in venture financing. At September 30, 2000, we had
$7.8 million in cash and cash equivalents, a net increase of $5.4 million from
September 30, 1999, an increase of $6.4 million from December 31, 1999, and an
increase of $7.5 million from December 31, 1998.
During the nine months ended September 30, 2000 and 1999 we generated
$11.0 million and $6.3 million of cash receipts from sales activity,
respectively. For the years ended December 31, 1999 and 1998, we generated $9.0
million and $4.4 million of cash receipts from sales activity, respectively.
Gross cash used by operations for the nine months ended September 30, 2000 was
$18.6 million compared to $7.7 million for the nine months ended September 30,
1999. Gross cash disbursements for costs of revenue and operating expenses for
the year ended December 31, 1999 was $11.6 million compared to $4.4 million for
the year ended December 31, 1998. The net increase in cash disbursements for
costs of revenue and operating expenses over these periods reflects the
continued growth of our business, particularly as related to personnel and
related infrastructure expenses.
Net cash provided by financing activities was $16.3 million for the nine
months ended September 30, 2000 compared to net cash provided by financing
activities of $4.5 million for the comparable period in 1999. Net cash provided
by financing activities was $5.1 million for the year ended December 31, 1999
and $0.05 million for the comparable period in 1998. On June 22, 1999 we entered
into a purchase agreement with FBR Technology Venture Partners, LP for the sale
of 2,161,265 shares of our series A redeemable convertible preferred stock,
$0.01 par value. The shares were sold for an aggregate price of $4.0 million, or
$1.85 per share.
Net cash used in investing activities was $2.3 million for the nine
months ended September 30, 2000 compared to net cash used in investing
activities of $ 1.0 million for the comparable period in 1999. Net cash used in
investing activities was $1.4 million for the year ended December 31, 1999 and
$0.07 million for comparable period in 1998. The cash used in investing
activities over those periods were for the purchase of furniture and equipment.
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<PAGE> 24
In May 1999, we entered into a loan agreement and a security agreement
with PNC Bank, National Association, in connection with the creation of a credit
facility consisting of a secured revolving credit line and an equipment line of
credit. In February 2000, we entered into a fourth amendment to such loan
agreement increasing the maximum availability under each of the secured
revolving credit line and equipment line of credit to $3.0 million, for a total
of $6.0 million. As of the period ending September 30, 2000, the revolving
credit line and equipment line of credit had available facilities of $1.6
million and $1.3 million, respectively. In connection with this amendment, we
entered into an amended and restated revolving credit note and an amended and
restated equipment line of credit note.
The revolving credit note allows us to borrow, repay and re-borrow the
principal thereunder until February 2, 2001. An amount equal to our qualified
accounts receivable is available for borrowing under this note. Amounts
outstanding under the revolving credit note accrue interest at the prime rate as
reported in the Wall Street Journal plus one percent per annum with interest due
and payable each month. The principal and any accrued but unpaid interest are
due and payable on February 2, 2001, or such later date as may be agreed to by
PNC Bank and us.
The equipment line of credit note allows us to borrow the principal
amount thereunder until February 2, 2001. An amount equal to our qualified
equipment is available for borrowing under this note. Amounts outstanding under
the equipment line of credit note accrue interest at the prime rate as reported
in the Wall Street Journal plus one and one-quarter percent. With respect to
advances made prior to November 6, 1999, principal and interest accrued thereon
are payable in monthly principal amounts of $19,727 through and including April
15, 2002. For advances made after November 6, 1999, principal and interest
accrued thereon shall be made in monthly principal payments of $35,607 through
and including October 15, 2002
We have pledged our personal property, including our equipment,
trademarks and accounts receivable, to PNC Bank as security for any amounts owed
by us under these facilities. Under the loan agreement, we are generally
restricted from incurring additional indebtedness without the consent of PNC
Bank. We must also maintain various financial covenants, including minimum cash
balance and certain financial ratios. In addition, we may not declare or pay
dividends or, make any distribution with respect to any equity security during
the term of the loan agreement without the consent of PNC Bank.
In June 2000, we issued, in the aggregate, 557,191 shares of our common
stock in private sale transaction with four accredited investors and received
cash compensation totaling approximately $3.6 million.
On August 16, 2000, we sold 950,747 shares of our Series B redeemable
convertible preferred stock to Amersham Pharmacia Biotech for aggregate proceeds
of $10.0 million in cash. We are using these proceeds for working capital and
general corporate purposes. At the time of issuance of the Series B redeemable
convertible preferred stock, the deemed fair market value of the underlying
common stock was $15.00 per share. Therefore, the net proceeds of $9.9 million
were allocated to additional paid-in capital as a beneficial conversion feature
and such entire amount was immediately accreted to the Series B redeemable
convertible preferred stock on August 16, 2000. These shares were automatically
converted into 1,587,747 shares of our common stock at a conversion price of
$6.30 at the closing of our initial public offering.
In September 2000, PNC Bank established an irrevocable standby letter of
credit in favor of Pacific Gas & Electric Generating Company, in connection with
our execution of a sublease with Pacific Gas & Electric for our new Bethesda,
Maryland headquarters. The amount of this irrevocable standby letter of credit
will not exceed $460,200, and such amount can be drawn in the event that we are
in default under the sublease. The amount of the irrevocable standby letter of
credit is secured by our deposit with PNC Bank of an equal amount of cash that
is designated solely for use under the irrevocable standby letter of credit. The
irrevocable standby letter of credit expires on September 8, 2001. In connection
with the sublease for our Bethesda headquarters, we anticipate obtaining an
additional irrevocable standby letter of credit, surety bond or other form of
security for the remainder of our annual rental obligation of approximately
$1.35 million.
On July 11, 2000, we filed a registration statement on Form S-1 (File No.
333-41194) to register our initial public offering, on a firm commitment basis,
of up to 5,750,000 shares of our common stock, par value $.001 per share,
including 750,000 shares covered by an overallotment option granted to our
underwriters. Our registration statement was declared effective with the
Securities and Exchange Commission at 4:15 p.m., Washington, D.C. time, on
October 2, 2000. On October 5, 2000, our underwriters informed us of their
intention to exercise their
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overallotment option to purchase an additional 750,000 shares. On October 6,
2000, we completed our initial public offering of common stock, selling
5,750,000 shares of common stock at $16.00 per share, for net proceeds to us,
after deducting estimated expenses and underwriting discounts and commissions,
of approximately $84 million.
We believe that the net proceeds from our initial public offering, our
cash flows from sales and our existing capital resources will be adequate to
fund our operations for the next 24 months, although we may seek to raise
additional capital during that period. We may require additional funding to
execute our business strategy. If that funding is not available, or not
available on terms acceptable to us, we may be required to curtail certain
marketing and product development efforts.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCUSSION OF 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 credit facilities that are closely tied to market rates. 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 reduce default risk by investing in investment grade securities. A
hypothetical 100 basis point drop in interest rates along the entire interest
rate yield curve would not significantly affect the fair value of our interest
sensitive financial instruments at December 31, 1998 or December 31, 1999.
Declines in interest rates over time will, however, reduce our interest income
and expense while increases in interest rates over time will increase our
interest income and expense.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) On September 11, 2000, a certificate of amendment to our certificate
of incorporation was filed with the Secretary of State of the State of Delaware.
The amendment reclassified all of our authorized, issued and outstanding shares
of non-voting common stock into voting common stock, such resulting class of
voting common stock was also renamed common stock. The amendment also split each
outstanding share of common stock into 1.67 shares of common stock and reduced
the par value of such common stock from $.01 per share to $.001 per share. The
amendment also increased our authorized capitalization to 100 million shares of
common stock, par value $.001 per share and 20 million shares of preferred
stock, par value $.01 per share. On October 6, 2000, we amended and restated our
certificate of incorporation to include, among other things, the implementation
of a classified board of directors consisting of three classes with the members
of each such class serving staggered three year terms. On October 6, 2000, our
amended and restated bylaws also went into effect which contain provisions
restricting the ability of stockholders to call a special meeting and containing
certain advance notice provisions regarding stockholder proposals for
consideration at stockholder meetings. Simultaneously with the closing of our
initial public offering on October 6, 2000, all of our outstanding convertible
preferred stock, par value $.01 per share, automatically converted into
5,197,059 shares of our common stock
(c) Between July 1, 2000 and September 30, 2000, we granted options to
purchase a total of 838,730 shares of common stock under our Amended Equity
Incentive Compensation Plan to certain of our employees and directors. During
the period above, 23 optionees exercised options to purchase 674,660 shares of
common stock for aggregate consideration of $188,862.
On August 16, 2000, we issued 950,747 shares of our Series B preferred
stock in exchange for $10 million in cash. The shares of preferred stock were
converted on a 1-for-1.67 basis, into 1,587,747 shares of our common stock upon
the closing of our initial public offering on October 6, 2000.
The issuances above were issued without registration under the Securities
Act in reliance upon an exemption from registration under Section 4(2) as
transactions not involving a public offering.
(d) On October 2, 2000, our Registration Statement on Form S-1 (333-41194)
covering our initial public offering of 5,750,000 shares of common stock, par
value $.001 per share, was declared effective by the Securities and Exchange
Commission. On October 6, 2000, we completed our initial public offering of
5,750,000 shares of common stock, including 750,000 shares purchased by the
underwriters pursuant to their exercise of an overallotment option on October 5,
2000. The shares were sold to the public at $16.00 per share for gross proceeds
of $92.0 million. Net proceeds from the offering were approximately $84.0
million after deducting estimated expenses associated with the issuance and
distribution of the common stock of $7.9 million, including underwriting
discounts and commissions of $6.4 million. The managing underwriter of this
offering was Bear, Stearns & Co. Inc.
Currently, we have placed the net proceeds from the offering principally
in money market funds as well as other interest-bearing, investment-grade
securities. We expect to use the net proceeds from the offering to consider
opportunities to expand our business through the acquisition of additional
businesses, products and technologies and to establish joint ventures or other
collaborative arrangements which we believe complement our current or future
business. We also expect to use net proceeds to expand our research and
development and sales and marketing efforts as well as for working capital and
general corporate purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
By written consent dated August 16, 2000, a majority of our stockholders
of then outstanding voting common stock and preferred stock: (i) approved and
adopted the Second Amended Restated Certificate of Incorporation, which
increased our authorized capital and made such other changes in connection with
the issuance of Series B preferred stock, (ii) authorized and approved the
offering of Series B preferred stock, and (iii) approved and adopted the Second
Amended and Restated Bylaws. The approval of 1,926,178 shares of voting common
stock was received by written consent. The approval of all 2,161,265 shares of
preferred stock then outstanding was received.
By written consent dated September 8, 2000, a majority of our
stockholders of then outstanding voting common stock, non-voting common stock
and preferred stock: (i) approved an increase in the authorized amount
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under our equity incentive compensation plan, (ii) approved the amendment of our
certificate of incorporation to effect (a) a reclassification of our authorized,
issued and outstanding non-voting common stock into voting common stock, (b) a
1-for-1.67 split of our outstanding common stock, (c) the reduction of our
common stock par value from $.01 per share to $.001 per share, (d) an increase
in our authorized capital to 100 million shares of common stock and 20 million
shares of preferred stock, (ii) approved the adoption of an amended and restated
certificate of incorporation to be effective immediately prior to the closing of
our initial public offering which among other things implemented a classified
board of directors. The approval of 1,926,178 shares of voting common stock and
3,441,366 shares of non-voting common stock was received by written consent. The
approval of all 3,112,012 shares of preferred stock then outstanding was
received.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Restated Certificate of Incorporation of InforMax, Inc. *
3.2 Restated Bylaws of InforMax, Inc.*
4.1 Specimen Common Stock Certificate*
10.1 Amended Equity Incentive Compensation Plan of InforMax, Inc.
10.2 Fourth Addendum to Lease Agreement between InforMax, Inc. and
Jemal's/Cayre
27.1 Financial Data Schedule
* Incorporated by reference to InforMax, Inc.'s registration statement on Form
S-1 (333-41194).
b. Reports on Form 8-K
None.
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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.
Dated this 16th day of November, 2000.
INFORMAX, INC.
By: /s/ Dr. Alexander Titomirov
----------------------------
Dr. Alexander Titomirov
Chief Executive Officer
By: /s/ Joseph E. Lehnen
----------------------------
Joseph E. Lehnen
Chief Financial Officer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name Page No.
----------- ------------- --------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of InforMax, Inc. *
3.2 Restated Bylaws of InforMax, Inc.*
4.1 Specimen Common Stock Certificate*
10.1 Amended Equity Incentive Compensation Plan of InforMax, Inc.
10.2 Fourth Addendum to Lease Agreement
27.1 Financial Data Schedule
* Incorporated by reference to InforMax, Inc.'s registration statement on Form
S-1 (333-41194).
27.1 Financial Data Schedule
</TABLE>
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a. Exhibits
3.1 Restated Certificate of Incorporation of InforMax, Inc. *
3.2 Restated Bylaws of InforMax, Inc.*
4.1 Specimen Common Stock Certificate*
10.1 Amended Equity Incentive Compensation Plan of InforMax, Inc.
10.2 Fourth Addendum to Lease Agreement between InforMax, Inc. and
Jemal's/Cayre
27.1 Financial Data Schedule
* Incorporated by reference to InforMax, Inc.'s registration statement on Form
S-1 (333-41194).