<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
-----------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ____________ .
COMMISSION FILE NUMBER: 000-30369
VIROLOGIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3234479
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
270 EAST GRAND AVENUE
SOUTH SAN FRANCISCO, CA 94080
(Address of principal executive offices)
TELEPHONE NUMBER (650) 635-1100
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
AS OF JULY 31, 2000 THERE WERE 19,762,886 SHARES OF THE REGISTRANT'S
COMMON STOCK OUTSTANDING.
================================================================================
<PAGE> 2
VIROLOGIC, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NO.
<S> <C> <C>
ITEM 1 - FINANCIAL STATEMENTS
Condensed Balance Sheets as of June 30, 2000 and December 31, 1999.............. 2
Condensed Statements of Operations
For the three and six months ended June 30, 2000 and 1999....................... 3
Condensed Statements of Cash Flows
For the six months ended June 30, 2000 and 1999................................. 4
Notes to Condensed Financial Statements......................................... 5
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................. 8
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS...................................................... 16
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS.............................. 16
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES........................................ 16
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... 16
ITEM 5 - OTHER INFORMATION...................................................... 16
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K....................................... 16
SIGNATURES............................................................................... 17
</TABLE>
1
<PAGE> 3
VIROLOGIC, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 1,572 $ 2,208
Short-term investments ........................................... 36,173 --
Accounts receivable, net of allowance for doubtful
accounts of $238 and $63, respectively ........................ 2,198 550
Inventory ........................................................ 406 287
Restricted cash .................................................. 2,312 950
Other current assets ............................................. 991 310
-------- --------
Total current assets ........................................... 43,652 4,305
Property and equipment, net ...................................... 5,136 5,028
Other assets ..................................................... 493 444
-------- --------
Total assets ................................................... $ 49,281 $ 9,777
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 453 $ 1,457
Accrued liabilities .............................................. 1,713 869
Accrued compensation ............................................. 888 560
Current portion of loan .......................................... 1,225 897
-------- --------
Total current liabilities ...................................... 4,279 3,783
Long-term portion of loan ........................................ 1,410 1,051
Long-term deferred rent .......................................... 241 245
Commitments and contingencies
Stockholders' equity:
Preferred stock .................................................. -- 10
Common stock ..................................................... 20 5
Additional paid-in capital ....................................... 87,668 38,812
Deferred compensation ............................................ (4,211) (4,478)
Notes receivable from officers and employees ..................... (40) (46)
Accumulated deficit .............................................. (40,086) (29,605)
-------- --------
Total stockholders' equity ..................................... 43,351 4,698
-------- --------
Total liabilities and stockholders' equity ..................... $ 49,281 $ 9,777
======== ========
</TABLE>
(1) Derived from the audited financial statements included in the Company's
Registration Statement on Form S-1, No. 333-30896.
See accompanying notes to Condensed Financial Statements.
2
<PAGE> 4
VIROLOGIC, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue .............................................. $ 1,947 $ 166 $ 2,824 $ 251
Operating costs and expenses:
Cost of revenue .................................. 1,448 65 2,131 145
Research and development ......................... 2,385 2,418 4,661 4,013
Sales, general and administrative:
Non-cash stock based compensation .............. 1,151 -- 2,145 --
Other sales general and administrative
expenses ...................................... 2,423 1,310 4,869 2,166
-------- ------- -------- -------
Total costs and operating expenses ................... 7,407 3,793 13,806 6,324
-------- ------- -------- -------
Operating loss ....................................... (5,460) (3,627) (10,982) (6,073)
Interest income ...................................... 515 53 630 155
Interest expense ..................................... (72) (64) (129) (132)
-------- ------- -------- -------
Net loss ............................................. $ (5,017) $(3,638) (10,481) (6,050)
Deemed dividend to preferred stockholders ............ -- -- (15,700) --
-------- ------- -------- -------
Net loss allocable to common stockholders ............ $ (5,017) $(3,638) $(26,181) $(6,050)
Basic and diluted net loss per common share .......... $ (0.28) $ (0.51) $ (1.70) $ (0.84)
======== ======= ======== =======
Weighted-average shares used in computing basic
and diluted net loss per common share .............. 17,987 7,179 15,449 7,188
======== ======= ======== =======
</TABLE>
See accompanying notes to Condensed Financial Statements.
3
<PAGE> 5
VIROLOGIC, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ....................................................... $(10,481) $(6,050)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................................. 701 369
Stock-based compensation ....................................... 2,145 --
Changes in assets and liabilities:
Accounts receivable ....................................... (1,648) (74)
Inventory ................................................. (119) (254)
Other current assets ...................................... (681) (116)
Accounts payable and other current liabilities ............ (279) 1,215
-------- -------
Net cash used in operating activities ..................... (10,362) (4,910)
INVESTING ACTIVITIES
Intangible and other assets .................................... 218 (88)
Restricted cash ................................................ (1,362) (950)
Capital expenditures ........................................... (809) (1,555)
Purchases of short-term marketable securities .................. (38,173) --
Sales of short-term marketable securities ...................... 2,000 --
-------- -------
Net cash used in investing activities ..................... (38,126) (2,593)
FINANCING ACTIVITIES
Principal payments on long-term debt ........................... (529) (390)
Borrowings under long-term debt ................................ 1,216 --
Net proceeds from issuance of common stock,
net of common stock repurchases ........................... 31,459 35
Repayments of notes receivable ................................. 6 28
Net proceeds from issuance of preferred stock .................. 15,700 --
-------- -------
Net cash (used in) provided by
financing activities ................................... 47,852 (327)
-------- -------
Net increase (decrease) in cash and cash equivalents ...... (636) (7,830)
Cash and cash equivalents at beginning of period ............... 2,208 9,564
-------- -------
Cash and cash equivalents at end of period ..................... $ 1,572 $ 1,734
======== =======
</TABLE>
See accompanying notes to Condensed Financial Statements.
4
<PAGE> 6
VIROLOGIC, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. All adjustments (consisting only of adjustments of a normal
recurring nature) considered necessary for a fair presentation have been
included. Operating results for the three- and six-month periods ended June 30,
2000 and 1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. The condensed balance sheet as of
December 31, 1999 has been derived from the audited financial statements as of
that date. For further information, refer to the financial statements and notes
thereto included in our Registration Statement filed on Form S-1, effective May
1, 2000.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition
Sales are recognized on the accrual basis upon completion of tests made on
samples provided by its customers and the shipment of test results to those
customers. Services are provided to certain patients covered by various
third-party payer programs, including Medicare. Billings for services under
third-party payer programs are included in sales net of allowances for
contractual discounts and allowances for differences between the amounts billed
and estimated payment amounts.
Inventory
Inventory is stated at the lower of standard cost, which approximates actual
cost, or market. At June 30, 2000, inventories consisted mainly of raw materials
used in the performance of tests.
One-for-Two Reverse Stock Split
The accompanying financial statements have been adjusted retroactively to
reflect a one-for-two reverse stock split, which was effective on April 17,
2000.
Comprehensive Income (Loss)
For the three-month periods ended June 30, 2000 and June 30, 1999, there were no
comprehensive gains or losses. Therefore, comprehensive loss was equal to net
loss for those periods.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through net income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative are either offset against the change in fair value of
assets, liabilities, or firm commitments through earnings or recognized in the
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings. SFAS 133 is effective for the Company's year ending
December 31, 2001. The Company does not currently hold any derivatives and does
not expect this pronouncement to materially impact results of operations.
5
<PAGE> 7
Recent Accounting Pronouncements (continued)
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements," ("SAB 101"),
which provides guidance on the accounting for revenue recognition. The Company
is currently evaluating the applicability of SAB 101 to its existing agreements.
Should the Company conclude that its approach is different from the approach
described in SAB 101, it will change its method of accounting. As amended, SAB
101 is required to be implemented no later than December 31, 2000, for companies
with fiscal years beginning between December 16, 1999 and March 15, 2000.
On March 31, 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," which provides guidance on
several implementation issues related to Accounting Principles Board Opinion No.
25. The most significant are clarification of the definition of employee for
purposes of applying Opinion 25 and the accounting for options that have been
repriced. Under the interpretation, the employer-employee relationship would be
based on case law and Internal Revenue Service regulations. The FASB granted an
exception to this definition for outside directors. Under the interpretation,
repriced options effectively changed the terms of the plan, which would make it
a variable plan subject to compensation expense. The Company currently does not
have any options that have been repriced. The impact of the interpretation on
the Company's financial position and results of operations is not expected to be
material.
2. NET LOSS PER SHARE
Basic net loss per share is based on the weighted-average number of common
shares outstanding. Potentially dilutive securities, consisting of convertible
preferred stock, stock options and warrants, have been excluded from the diluted
earnings per share computations as their effect is antidilutive.
The computation of pro forma net loss per share and pro forma net loss per
common share includes shares issuable upon the conversion of outstanding shares
of convertible preferred stock (using the as-if converted method) from the
original date of issuance.
A reconciliation of pro forma basic and diluted net loss per common share is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Actual:
Net loss .................................................. $ (5,017) $(3,638) (10,481) (6,050)
Deemed dividend to preferred stockholders ................. -- -- (15,700) --
-------- ------- -------- -------
Net loss allocable to common stockholders ................. $ (5,017) $(3,638) $(26,181) $(6,050)
Basic and diluted net loss per common share ............... $ (0.28) $ (0.77) $ (1.70) $ (1.28)
======== ======= ======== =======
Weighted-average shares used in computing basic
and diluted net loss per common share ................ 17,987 4,729 15,449 4,738
======== ======= ======== =======
Pro forma:
Net loss allocable to common stockholders ................. $ (3,638) $(6,050)
======== =======
Shares used above ......................................... 4,729 4,738
Adjusted to reflect weighted-average effect of assumed
Conversion of preferred stock ......................... 2,450 2,450
-------- -------
Weighted-average shares used in pro forma basic and diluted
Net loss per common share ............................. 7,179 7,188
======== =======
Pro forma basic and diluted net loss per common share ..... $ (0.51) $ (0.84)
======== =======
</TABLE>
6
<PAGE> 8
3. DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS
In January and February 2000, ViroLogic consummated the sale of 8.5 million
shares of Series C convertible preferred stock, or 4.2 million shares of common
stock on an as-if converted basis, from which ViroLogic received proceeds of
approximately $15.7 million or $1.85 per share, or $3.70 per share on an
as-if-converted basis. At the date of issuance, ViroLogic believed the per share
price of $1.85, or $3.70 per share on an as-if-converted basis, represented the
fair value of the common stock. Subsequent to the commencement of ViroLogic's
initial public offering process, ViroLogic re-evaluated the fair value of its
common stock as of January and February 2000 and deemed it to be $11.90 per
share, for financial reporting purposes. Accordingly, the increase in fair value
has resulted in a beneficial conversion feature of $15.7 million that has been
recorded as a deemed dividend to preferred stockholders in the first quarter of
2000. ViroLogic recorded the deemed dividend at the date of issuance by
offsetting charges and credits to additional paid-in-capital, without any effect
on total stockholders' equity. The preferred stock dividend increases the loss
applicable to common stockholders in the calculation of basic and diluted net
loss per common share for the three-month period ended March 31, 2000. The
guidelines set forth in the Emerging Issues Task Force Consensus No. 98-5 limit
the amount of the deemed dividend to the amount of the proceeds of the related
financing.
4. INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK
On May 1, 2000, the Company completed its initial public offering in which it
sold 5,000,000 shares of Common Stock at $7.00 per share.
Upon the closing of the offering, all the Company's outstanding preferred stock
automatically converted into an aggregate of 9.6 million shares of common stock.
After the offering, the Company's authorized capital consisted of 60,000,000
shares of common stock, of which 19.7 million shares were outstanding as of June
30, 2000, and 5,000,000 shares of preferred stock, none of which was issued or
outstanding as of June 30, 2000.
7
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Quarterly Report on Form 10-Q are
forward-looking statements concerning the Company's operations, economic
performance and financial condition within the meaning of the federal securities
laws. These statements may be found under "Management's Discussion and Analysis
of Financial Condition and Results of Operation" and elsewhere in this report.
These forward-looking statements are subject to risks and uncertainties and
other factors, which may cause actual results to differ materially from the
anticipated results or other expectations expressed in such forward-looking
statements. These risks and uncertainties include, but are not limited to,
whether PhenoSense(TM) testing will achieve market acceptance, whether payers
will authorize reimbursement for our products, whether we will be able to expand
our sales and marketing capabilities, whether we encounter problems or delays in
automating our process, whether we successfully introduce new products using our
PhenoSense(TM) technology, whether intellectual property underlying our
PhenoSense(TM) technology is adequate, whether we are able to build brand
loyalty, and other risks and uncertainties detailed in our final Prospectus that
is part of our Registration Statement on Form S-1, as declared effective by the
SEC on May 1, 2000 (File No. 333-30896).
OVERVIEW
We are a biotechnology company developing and marketing innovative products to
guide and improve the treatment of viral diseases. We have developed a practical
way of directly measuring the impact of genetic mutations on drug resistance and
using this information to guide therapy. We have a patented technology, called
PhenoSense, which tests for drug resistance in viruses that cause serious
diseases such as AIDS, hepatitis B and hepatitis C. We believe our products have
the potential to revolutionize the way the healthcare industry treats these
diseases. Our first product, PhenoSense HIV, is a test that directly and
quantitatively measures the resistance, or susceptibility, of the patient's
human immunodeficiency virus to anti-viral drugs. The results help physicians
select appropriate drugs for their HIV patients. We commenced sales and
marketing activity for PhenoSense HIV in November 1999. We are also developing
PhenoSense products for other viral diseases. In addition, we are gathering a
large amount of test results and related clinical data, which we intend to
package in an interactive database that physicians can access over the Internet
for therapy guidance.
Since our inception, we have incurred significant losses and, as of June 30,
2000, our accumulated deficit was $40.1 million. Our losses have resulted
principally from costs incurred in research and development, clinical laboratory
scale-up, and from general and administrative costs associated with our
operations. We expect to continue to incur substantial costs in these areas, as
well as sales and marketing, and as a result, we will need to generate
significantly higher revenue to achieve profitability.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999
Net loss per share. Net loss for the quarter was $5.0 million, or $0.28 per
share, compared to a net loss of $3.6 million, or a pro forma net loss per share
of $0.51 per share, for the same period in 1999.
Revenue. Revenue rose to $1.9 million in the second quarter of 2000 from $0.2
million in the corresponding quarter of 1999, an increase of $1.7 million. The
increase was primarily attributable to revenues recognized from sales of
PhenoSense HIV to physicians for patient care. We expect revenues from the sales
of PhenoSense HIV for patient care to increase substantially relative to sales
of the product to pharmaceutical companies for use in clinical trials.
Cost of revenue. Cost of revenue increased to $1.5 million in the second quarter
of 2000 from $0.1 million in the corresponding quarter 1999, an increase of $1.4
million. The increase in cost of revenue was due to the higher volume of testing
performed in the second quarter of 2000. Included in these costs are materials
and supplies, labor and overhead related to the tests.
8
<PAGE> 10
Research and development. Research and development costs were $2.4 million in
the second quarter of both 2000 and 1999. These expenses are primarily related
to research and development efforts relating to our PhenoSense HIV test. We also
increased our spending on clinical trials of PhenoSense HIV. We expect research
and development spending to increase significantly over the next several years
as we expand our research and product development and automation efforts.
General and administrative. General and administrative expenses increased to
$2.5 million in the second quarter of 2000 from $1.1 million in the
corresponding quarter of 1999, an increase of $1.4 million. This increase was
primarily due to a $1.2 million non-cash compensation expense related to
granting of stock and options prior to our initial public offering. In addition,
we increased spending on salaries and benefits due to increased headcount.
Sales and marketing. Sales and marketing expenses increased to $1.1 million in
the second quarter of 2000 from $0.2 million in the corresponding quarter of
1999, an increase of $0.9 million. This increase was primarily due to the
deployment of our sales force. In addition, we increased spending on public
relations and marketing materials related to the commercialization of PhenoSense
HIV.
Interest income, net. Net interest income increased to $0.4 million in the
second quarter of 2000 from a net expense of $11,000 in the corresponding
quarter of 1999, an increase of $0.4 million. This increase was primarily due to
investment of the proceeds from the Company's IPO on May 1, 2000.
Six Months Ended June 30, 2000 and 1999
Net loss per share. Net loss for the first half of 2000, excluding a one-time
deemed dividend to preferred stockholders was $10.5 million, or $0.68 per share,
compared to a net loss of $6.1 million, or $0.84 per share, on a pro forma
basis, for the same period in 1999. In the first quarter of 2000, we recorded a
deemed dividend to preferred stockholders of $15.7 million which resulted from
the sale of Series C preferred stock in January and February of 2000, at a price
per share below the deemed fair value of our stock at the time of sale of the
preferred stock. Net loss allocable to common stockholders for the first half of
2000 was $26.2 million or $1.70 per common share.
Revenue. Revenue increased to $2.8 million in the first six months of 2000 from
$0.3 million in the corresponding quarter of 1999, an increase of $2.5 million.
The increase was primarily attributable to revenues recognized from sales of
PhenoSense HIV. We expect revenues from the sales of PhenoSense HIV for patient
care to increase substantially relative to sales of the product to
pharmaceutical companies for use in clinical trials.
Cost of revenue. Cost of revenue increased to $2.1 million in the first half of
2000 from $0.1 million in the corresponding period in 1999, an increase of $2.0
million. The increase in cost of revenue was due to the higher volume of testing
provided in the first half of 2000.
Research and development. Research and development costs increased to $4.7
million in the first six months of 2000 from $4.0 million in the corresponding
half of 1999, an increase of $0.7 million. The increase in research and
development expenses was primarily the result of increased staffing and expenses
related to research and development efforts relating to our PhenoSense HIV test.
We also increased our spending on clinical trials of PhenoSense HIV. We expect
research and development spending to increase significantly over the next
several years as we expand our research and product development and automation
efforts.
General and administrative. General and administrative expenses increased to
$5.1 million in the first half of 2000 from $1.8 million in the corresponding
period of 1999, an increase of $3.3 million. This increase was primarily due to
$2.2 million in non-cash compensation expenses related to granting of stock and
options prior to our initial public offering. In addition, we increased spending
on salaries and benefits due to increased headcount.
Sales and marketing. Sales and marketing expenses increased to $1.9 million in
the first six months of 2000 from $0.4 million in the corresponding half of
1999, an increase of $1.5 million. This increase was primarily due to the
deployment of our sales force. In addition, we increased spending on public
relations and marketing materials related to the commercialization of PhenoSense
HIV.
Interest income, net. Net interest income increased to $0.5 million in the first
half of 2000 from $23,000 in the corresponding quarter of 1999, an increase of
$0.5 million. This increase was primarily due to higher average cash and short
term investment balances.
9
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through public and
private sales of common and preferred stock and equipment financing
arrangements. During the first half of 2000, we received net proceeds of $31.5
from issuance of common stock in our initial public offering and $15.7 million
from issuance of preferred stock. We also financed equipment purchases totaling
approximately $0.8 million. As of June 30, 2000, we had approximately $37.7
million in cash, cash equivalents, short-term investments and restricted cash.
Net cash used in operating activities was $10.4 million and $4.9 million for the
six months ended June 30, 2000 and 1999, respectively. Net cash used in
investing activities was $38.1 million and $2.6 million for the six months ended
June 30, 2000 and 1999. Net cash provided by financing activities was $47.9
million for the six months ended June 30, 2000 and net cash used in financing
activities was $0.3 for the six months ended June 30, 1999.
On May 1, 2000, we completed the initial public offering of five million shares
of common stock at $7.00 per share. Total net proceeds to the Company were
approximately $31.5 million. We have invested the net proceeds in highly liquid,
interest bearing, investment grade securities. Our investment policy emphasizes
liquidity and preservation of principal over other portfolio considerations. We
select investments that maximize interest income to the extent possible by
investing excess cash in securities with different maturities to match projected
cash needs and limit risk by diversifying our investments.
In May 2000, we issued a letter of credit for $1.0 million from a commercial
bank, secured by a certificate of deposit of $1.0 million, as a deposit under
the terms of a lease for a new facility.
We believe that the net proceeds of our initial public offering together with
existing cash and marketable securities, borrowings under equipment financing
arrangements and anticipated cash flow from operations will be sufficient to
support our operations for at least the next two years. These estimates are
forward-looking statements that involve risks and uncertainties. Our actual
future capital requirements and the adequacies of our available funds will
depend on many factors, including those discussed under "Risk Factors".
Future capital requirements will also depend on the extent to which we acquire
or invest in businesses, products and technologies. If we should require
additional financing due to unanticipated developments, we cannot assure you
that additional financing or collaboration or licensing agreements will be
available when needed or that, if available, this financing will be obtained on
terms favorable to us or to our stockholders.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the then-prevailng
rate and the prevailing interest rate later rises, the principal amount of our
investment will probably decline. To minimize this risk in the future, we intend
to maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including commercial paper, money market funds,
government and non-government debt securities. The average duration of all of
our investments during the quarter ended June 30, 2000 was less than one year.
Due to the short-term nature of these investments, we believe we have no
material exposure to interest rate risk arising from our investments. Therefore
we have not included quantitative tabular disclosure in this report.
We have operated primarily in the United Stated and all sales to date have been
made in U.S. dollars. Accordingly, we have not had any material exposure to
foreign currency rate fluctuations.
RISK FACTORS
You should carefully consider the following factors and other information in
this Form 10-Q before deciding to invest in the shares.
WE EXPECT TO INCUR FUTURE OPERATING LOSSES AND MAY NOT ACHIEVE PROFITABILITY,
WHICH MAY CAUSE OUR STOCK PRICE TO FALL.
We have experienced significant and increasing operating losses each year since
our inception and expect to incur substantial additional operating losses for at
least the next two years. We experienced net losses of approximately $3.1
million in 1997, $8.1 million in 1998 and $17.1 million in 1999. As of June 30,
2000, we had an accumulated deficit of approximately $40.1 million. We expect to
continue to incur substantial operating losses for the foreseeable future
primarily as a result of expected increases in expenses for: sales and
marketing; expanding patient sample processing capabilities; research and
product development costs; acquisition of additional office space and other
necessary facilities; and general and administrative costs. If our history of
operating losses continues, our stock price may fall and you may lose part or
all of your investment.
10
<PAGE> 12
OUR PHENOSENSE TESTING PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD
LIMIT OUR FUTURE REVENUE.
Our ability to establish phenotypic resistance testing as the standard of care
to guide and improve the treatment of viral diseases will depend on physicians'
and clinicians' acceptance and use of phenotypic resistance testing. Phenotypic
resistance testing is new. We cannot predict the extent to which physicians and
clinicians will accept and use phenotypic resistance testing. They may prefer
competing technologies and products such as genotypic testing. The commercial
success of phenotypic resistance testing will require demonstrations of its
advantages and potential economic value in relation to the current standard of
care, as well as to genotypic testing. We have introduced only one product using
our proprietary PhenoSense technology, PhenoSense HIV, which we began actively
marketing in November 1999. We are still in the early stages of development of
new products applying our PhenoSense technology to other viral diseases. If
PhenoSense HIV is not accepted in the marketplace, our ability to sell other
PhenoSense products would be undermined. Market acceptance will depend on: our
marketing efforts and continued ability to demonstrate the utility of PhenoSense
in guiding anti-viral drug therapy; our ability to demonstrate the advantages
and potential economic value of our PhenoSense testing products over current
treatment methods and other resistance tests. If the market does not accept
phenotypic resistance testing, or our PhenoSense products in particular, our
ability to generate revenue will be limited.
OUR REVENUES WILL BE DIMINISHED IF PAYORS DO NOT AUTHORIZE REIMBURSEMENT FOR OUR
PRODUCTS.
Government and third-party payors, which reimburse patients and healthcare
providers for medical expenses, are attempting to contain or reduce the costs of
healthcare. This could limit the price that we can charge for our products and
hurt our ability to generate revenues. In the United States, federal and state
government healthcare programs have been attempting to reduce costs and
otherwise implement government control of healthcare costs. In addition,
increasing emphasis on managed care in the United States will continue to put
pressure on the pricing of healthcare products. Significant uncertainty exists
as to the reimbursement status of new medical products like PhenoSense HIV.
Third-party payors, including state payors and Medicare, are challenging the
prices charged for medical products and services. If government and other
third-party payors do not provide adequate coverage and reimbursement for
PhenoSense HIV or other phenotypic testing products, our revenues will be
reduced.
IF WE ARE UNABLE TO EXPAND OUR SALES AND MARKETING CAPABILITIES, WE MAY NOT BE
ABLE TO EFFECTIVELY COMMERCIALIZE OUR PRODUCTS.
We currently have nine sales people and limited marketing capability. In order
to commercialize our products effectively, we must expand our sales and
marketing capabilities or arrange with a third party to perform these services.
We may not be able to do this successfully. If we enter into co-promotion or
other marketing arrangements, our share of product revenues is likely to be
lower than if we directly marketed and sold our products through our own sales
force. If we fail to effectively commercialize our products our revenue will be
reduced.
WE HAVE LIMITED EXPERIENCE PROCESSING PATIENT SAMPLES FOR OUR PHENOSENSE HIV
TEST AND MAY ENCOUNTER PROBLEMS OR DELAYS IN EXPANDING OUR AUTOMATED TESTING
SYSTEMS, WHICH COULD RESULT IN LOST SALES REVENUE.
We have only recently begun to process a significant number of patient samples
and are continuing to develop our quality-control procedures. In order to meet
the projected demand for PhenoSense HIV and other future phenotypic resistance
testing products, we will have to process many more patient samples than we are
currently processing. Thus, we need to develop and implement additional
automated systems to perform our tests. We also need to develop more
sophisticated software to support the automated tests, analyze the data
generated by our tests, and report the results. We may not be able to do this.
Further, as we attempt to scale up our processing of patient samples, processing
or quality control problems may arise. If we are unable to consistently process
patient samples on a timely basis because of these or other factors, or if we
encounter problems with our automated processes, our revenues will be limited.
11
<PAGE> 13
WE FACE INTENSE COMPETITION, AND IF OUR COMPETITORS' EXISTING PRODUCTS OR NEW
PRODUCTS ARE MORE EFFECTIVE THAN OUR PRODUCTS, THE COMMERCIAL OPPORTUNITY FOR
OUR PRODUCTS WILL BE REDUCED OR ELIMINATED.
The commercial opportunity for our products will be reduced or eliminated if our
competitors develop and market new testing products that are superior to, or are
less expensive than, PhenoSense HIV or other phenotypic resistance testing
products we develop using our proprietary PhenoSense technology. The
biotechnology industry evolves at a rapid pace and is highly competitive. Our
major competitors include manufacturers and distributors of phenotypic drug
resistance technology, such as Virco N.V. We also compete with makers of
genotypic tests such as PE Biosystems Group of PE Corporation and Visible
Genetics Inc. Each of these competitors is attempting to establish its test as
the standard of care. Virco's phenotypic test and genotypic tests have been
commercially available for a longer time than has PhenoSense HIV. Genotypic
tests are cheaper and generally faster than our phenotypic resistance tests. We
hold a license from Roche Molecular Systems, Inc. for technology that we use in
our PhenoSense testing products. This license is non-exclusive. We believe that
many of our competitors, including Virco and other resistance testing companies,
also license this technology on non-exclusive terms. Our competitors may
successfully develop and market other testing products that are either superior
to those that we may develop or that are marketed prior to marketing of our
testing products. Some of our competitors have substantially greater financial
resources and research and development staffs than we do. In addition, some of
our competitors have significantly greater experience in developing products,
and in obtaining the necessary regulatory approvals of products and processing
and marketing products.
WE ARE DEPENDENT ON A LICENSE FOR TECHNOLOGY WE USE IN OUR PHENOSENSE TESTING,
AND OUR BUSINESS WOULD SUFFER IF THE LICENSE WAS TERMINATED OR NOT RENEWED.
We license technology that we use in our PhenoSense testing products from Roche
Molecular Systems, Inc. We hold this non-exclusive license for the patent term
of the licensed patents. In order to maintain this license, however, we must pay
royalties, make a semi-annual royalty report and participate in proficiency
testing. If Roche were to terminate this license or this license was not
renewed, we would have to change a portion of our testing methodology, which
would halt our testing, at least temporarily, and cause us to incur substantial
additional expenses.
THE INTELLECTUAL PROPERTY UNDERLYING OUR PHENOSENSE TECHNOLOGY AND TRADE SECRETS
MAY NOT BE ADEQUATE, ALLOWING THIRD PARTIES TO USE OUR PHENOSENSE TECHNOLOGY OR
SIMILAR TECHNOLOGIES, AND THUS REDUCING OUR ABILITY TO COMPETE IN THE MARKET.
The strength of our intellectual property protection is uncertain. In
particular, we cannot ensure that: - we were the first to invent the
technologies covered by our patent or pending patent applications - we were the
first to file patent applications for these inventions - others will not
independently develop similar or alternative technologies or duplicate any of
our technologies - any of our pending patent applications will result in issued
patents - any patents issued to us will provide a basis for commercially viable
products or will provide us with any competitive advantages or will not be
challenged by third parties. Other companies may have patents or patent
applications relating to products or processes similar to, competitive with or
otherwise related to our products. Patent law relating to the scope of claims in
the technology fields in which we operate, including biotechnology and
information technology, is still evolving and, consequently, patent positions in
our industry are generally uncertain. We cannot assure you that we will prevail
in any of these lawsuits or that, if successful, we will be awarded commercially
valuable remedies. In addition, it is possible that we will not have the
required resources to pursue such litigation or to otherwise protect our patent
rights. We also rely on unpatented trade secrets to protect our proprietary
technology. Other companies may independently develop or otherwise acquire
equivalent technology or gain access to our proprietary technology.
OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY CAUSE US TO ENGAGE IN COSTLY LITIGATION AND, IF WE ARE NOT SUCCESSFUL, COULD
CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING OUR PRODUCTS.
Third parties may assert infringement or other intellectual property claims
against us based on their patents or other intellectual property claims. We may
have to pay substantial damages, possibly including treble damages, for past
infringement if it is ultimately determined that our products infringe a third
party's patents. Further, we may be prohibited from selling our products before
we obtain a license, which, if available at all, may require us to pay
substantial royalties. Even if infringement claims against us are without merit,
defending a lawsuit takes significant time, may be expensive and may divert
management attention from other business concerns.
12
<PAGE> 14
WE MAY BE UNABLE TO BUILD BRAND LOYALTY BECAUSE OUR TRADEMARKS AND TRADE NAMES
MAY NOT BE PROTECTED.
Our registered or unregistered trademarks or trade names such as the name
PhenoSense, may be challenged, canceled, infringed, circumvented or declared
generic or determined to be infringing on other marks. We may not be able to
protect our rights to these trademarks and trade names, which we need to build
brand loyalty. Brand recognition is critical to our short-term and long term
marketing strategies especially as we commercialize future enhancements to our
products.
IF WE DO NOT SUCCESSFULLY INTRODUCE NEW PRODUCTS USING OUR PHENOSENSE
TECHNOLOGY, WE MAY NOT ACHIEVE PROFITABILITY.
We may not be able to develop and market phenotypic resistance testing products
for viral diseases other than HIV, including hepatitis B and hepatitis C. Demand
for these products will depend in part on the development by others of
additional anti-viral drugs to fight these diseases. Physicians will likely use
our resistance tests to determine which drug is best for a particular patient
only if there are multiple drug treatment options. Several anti-viral drugs are
in development but we cannot assure you that they will be approved for
marketing, or if these drugs are approved that there will be a need for our
resistance tests. If we are unable to develop and market phenotypic resistance
test products for other viral diseases, or if an insufficient number of
anti-viral drug products are approved for marketing, we may not achieve
profitability.
OUR BUSINESS OPERATIONS AND THE OPERATION OF OUR CLINICAL LABORATORY FACILITY
ARE SUBJECT TO STRINGENT REGULATIONS AND IF WE ARE UNABLE TO COMPLY WITH THEM,
WE MAY BE PROHIBITED FROM ACCEPTING PATIENT SAMPLES OR MAY INCUR ADDITIONAL
EXPENSE TO ATTAIN AND MAINTAIN COMPLIANCE.
The operation of our clinical laboratory facility is subject to a stringent
level of regulation under the Clinical Laboratory Improvement Amendments of
1988. Laboratories must meet various requirements, including requirements
relating to quality assurance, quality control and personnel standards. Our
laboratory is also subject to regulation by the State of California and various
other states. We have received accreditation by the College of American
Pathologists and therefore are subject to their requirements and evaluation. Our
failure to comply with applicable requirements could result in various
penalties, including loss of certification or accreditation. We believe that the
FDA will not at this time seek to fully regulate our PhenoSense products under
our current labeling and marketing plans. However, we cannot predict the extent
of future FDA regulation, and we might be subject in the future to greater
regulation, or different regulations, that could have a material effect on our
finances and operations. We also believe that the FDA will not require that
phenotypic testing conducted at a clinical laboratory be subject to premarketing
clearance. Although the FDA has stated in the past that it believes that its
jurisdiction extends to tests generated in a clinical laboratory, the agency has
said it will allow the home brewed tests to be run and the results
commercialized without FDA premarket approval. We cannot be sure, however, that
the FDA will not in the future require premarket clearance, and clinical data
demonstrating the sensitivity and specificity, of our PhenoSense products. If we
do not comply with existing or additional regulations, or if we incur penalties,
it could increase our expenses, prevent us from increasing revenues, or hinder
our ability to conduct our business. In addition, changes in existing
regulations or new regulations may delay or prevent us from marketing our
products.
CLINICIANS OR PATIENTS USING OUR PRODUCTS OR SERVICES MAY SUE US AND OUR
INSURANCE MAY NOT SUFFICIENTLY COVER ALL CLAIMS BROUGHT AGAINST US WHICH WILL
INCREASE OUR EXPENSES.
Clinicians, patients and others may at times seek damages from us if drugs are
incorrectly prescribed for a patient based on testing errors or similar claims.
Although we have obtained liability insurance coverage, we cannot guarantee that
liability insurance will continue to be available to us on acceptable terms or
that our coverage will be sufficient to protect us against all claims that may
be brought against us. We may incur significant legal defense expenses in
connection with a liability claim, even one without merit or for which we have
coverage.
13
<PAGE> 15
OUR LACK OF OPERATING EXPERIENCE MAY CAUSE US DIFFICULTY IN MANAGING OUR GROWTH
AND ATTRACTING AND RETAINING SKILLED PERSONNEL, WHICH COULD HINDER OUR RESEARCH
AND DEVELOPMENT EFFORTS AND IMPAIR OUR ABILITY TO COMPETE.
We have limited experience selling our products and processing patient samples.
To grow, we will need to improve and expand our operational and financial
systems. If our management is unable to manage our growth effectively, it is
possible that our systems and our facilities may become inadequate. Our success
also depends on our continued ability to attract and retain highly qualified
management and scientific personnel. Competition for personnel is intense. We
believe stock options are a critical component of motivating and retaining our
key employees. As we mature as a public company, stock options may be less
attractive to potential candidates for our management and scientific positions,
and, therefore, it may be more difficult to fill those positions. If we cannot
successfully attract and retain qualified personnel, our research and
development efforts could be hindered and our ability to run our business
effectively and compete with others in our industry will be harmed.
IF WE NEED TO RAISE ADDITIONAL CAPITAL TO BUILD OUR BUSINESS AND IT IS NOT
AVAILABLE ON COMMERCIALLY REASONABLE TERMS, OUR ABILITY TO COMPETE MAY BE
DIMINISHED.
We anticipate that our existing capital resources will enable us to maintain
currently planned operations for at least two years. However, we may need
additional funding sooner than anticipated. Our inability to raise capital would
seriously harm our business and product development efforts. In addition, we may
choose to raise additional capital due to market conditions or strategic
considerations even if we believe we have sufficient funds for our current or
future operating plans. To the extent that additional capital is raised through
the sale of equity or convertible debt securities, the issuance of these
securities could result in dilution to our stockholders. We currently have no
credit facility or committed sources of capital. To the extent operating and
capital resources are insufficient to meet future requirements, we will have to
raise additional funds to continue the development and commercialization of our
technologies. These funds may not be available on favorable terms, or at all. If
adequate funds are not available on attractive terms, we may be required to
curtail operations significantly or to obtain funds by entering into financing,
supply or collaboration agreements on unattractive terms.
WE MAY BE SUBJECT TO LITIGATION, WHICH WOULD BE TIME CONSUMING AND DIVERT OUR
RESOURCES AND THE ATTENTION OF OUR MANAGEMENT.
We were involved in a dispute with a significant stockholder and former
employee. We settled the dispute in November 1999. In connection with the
settlement, we purchased shares of our common stock held by him for $225,000 in
cash, and allowed him to retain other shares that we had a right to repurchase.
In 1999, we recorded $1.9 million in legal fees and costs related to this
settlement, including a non-cash charge related to the common stock retained by
him. In the future, our stockholders or former employees may bring further
claims and we may have to spend significant additional resources and time. Even
if we are eventually successful in our defense of any such claim, the time and
money spent may prevent us from operating our business effectively or profitably
or may distract our management.
OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER, MAKING IT LIKELY
THAT, IN SOME FUTURE QUARTER OR QUARTERS, WE WILL FAIL TO MEET ANALYSTS'
ESTIMATES OF OPERATING RESULTS OR FINANCIAL PERFORMANCE, CAUSING OUR STOCK PRICE
TO FALL.
If revenue declines in a quarter, our losses will likely increase or our
earnings will likely decline because many of our expenses are relatively fixed.
In the first year following the initial sales of our product in November 1999,
our revenues may fluctuate significantly as we build the market for our product.
In particular, research and development, sales and marketing and general and
administrative expenses are not affected directly by variations in revenue. In
addition, our cost of revenue could also fluctuate significantly due to
variations in the initial demand for our product and the relatively fixed costs
to produce it. We cannot accurately predict how volatile our future operating
results will be because our past and present operating results, which reflect
little sales activity, are not indicative of what we might expect in the future.
It is likely that in some future quarter or quarters, our operating results will
be below the expectations of securities analysts or investors. In this event,
the market price of our common stock may fall abruptly and significantly.
Because our revenue and operating results are difficult to predict, we believe
that period-to-period comparisons of our results of operations are not a good
indication of our future performance.
14
<PAGE> 16
IF A NATURAL DISASTER STRIKES OUR CLINICAL LABORATORY FACILITY WE WOULD BE
UNABLE TO PROCESS OUR CUSTOMERS' SAMPLES FOR A SUBSTANTIAL AMOUNT OF TIME AND WE
WOULD LOSE REVENUE.
We rely on a single clinical laboratory facility to process patient samples for
our PhenoSense HIV test and have no alternative facilities. We will also use
this facility for conducting other tests we develop, and even if we move into
different or additional facilities they will likely be in close proximity to our
current clinical laboratory. Our clinical laboratory and some pieces of
processing equipment are difficult to replace and could require substantial
replacement lead-time. Our processing facility may be affected by natural
disasters such as earthquakes and floods. Earthquakes are of particular
significance since our clinical laboratory is located in South San Francisco,
California, an earthquake-prone area. In the event our existing clinical
laboratory facility or equipment is affected by man-made or natural disasters,
we would be unable to process patient samples and meet customer demands or sales
projections. If our patient sample processing operations were curtailed or
ceased, we would not be able to perform our tests and we would lose revenue.
CONCENTRATION OF OWNERSHIP AMONG OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS MAY PREVENT INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE
DECISIONS.
At July 31, 2000, our directors, entities affiliated with our directors and our
executive officers own, in the aggregate, approximately 44% of our outstanding
common stock. These stockholders, as a group, are able to substantially
influence our management and affairs. If acting together, they would be able to
influence most matters requiring the approval by our stockholders, including the
election of directors, any merger, consolidation or sale of all or substantially
all of our assets and any other significant corporate transaction. The
concentration of ownership may also delay or prevent a change in our control at
a premium price if these stockholders oppose it.
OUR STOCK PRICE MAY BE VOLATILE, AND OUR STOCK COULD DECLINE IN VALUE.
The market prices for securities of biotechnology companies in general have been
highly volatile and may continue to be highly volatile in the future. The
following factors, in addition to other risk factors described in this section,
may have a significant adverse impact on the market price of our common stock: -
announcements of technological innovations or new commercial products by our
competitors - developments concerning proprietary rights, including patents -
publicity regarding actual or potential medical results relating to products
under development by our competitors - regulatory developments in the United
States and foreign countries - litigation - economic and other external factors
or other disaster or crisis - period-to-period fluctuations in financial
results.
IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK THE MARKET
PRICE OF OUR COMMON STOCK MAY FALL.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock may fall. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate. At July 31, 2000, approximately 14.7
million shares of common stock, representing 74.3% of our common stock
outstanding on that date, were unregistered and eligible for sale, subject to
compliance with Rule 144 or Rule 701 under the Securities Act. The holders of
these shares have agreed not to dispose of their shares until at least October
28, 2000. All or any portion of these shares may be released from this lock-up
by CIBC World Markets Corp. and us. In addition, sales of a substantial number
of shares could occur at any time after November 1, 2000. This may have an
adverse effect on the price of our common stock and may impair our ability to
raise capital in the future.
PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER,
WHICH COULD LIMIT THE PRICE INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR
OUR COMMON STOCK.
Provisions in our certificate of incorporation and bylaws may have the effect of
delaying or preventing an acquisition, or merger in which we are not the
surviving company or changes in our management. In addition, because we are
incorporated in Delaware, we are governed by the provisions of Section 203 of
the Delaware General Corporation Law. These provisions could discourage
acquisitions or other changes in our control and otherwise limit the price that
investors might be willing to pay in the future for our common stock.
15
<PAGE> 17
PART II
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On April 17, 2000, we filed an amendment to and restatement of our
Certificate of Incorporation effecting a one-for-two reverse stock
split of our outstanding common stock and adopting certain
anti-takeover and stockholder protection mechanisms.
(b) None.
(c) RECENT SALES OF UNREGISTERED SECURITIES.
During the quarter ended June 30, 2000, we issued and sold 31,043 shares
of our common stock to employees and consultants upon exercise of stock
options held by them for an aggregate exercise price of $2.85 per share.
For these issuances we relied on the exemption provided by Section 4(2) of
the Securities Act and Rule 701 promulgated thereunder.
During the quarter ended June 30, 2000, we issued and sold 8,747 shares of
our common stock upon exercise of outstanding warrants. For these
issuances we relied on the exemption provided by Section 4(2) of the
Securities Act.
(d) USE OF PROCEEDS
The effective date of our registration statement on Form S-1 (No.
333-30896) relating to our initial public offering was May 1, 2000. A
total of 5,000,000 shares of the Company's common stock in the aggregate
were sold at a price of $7.00 per share to an underwriting syndicate led
by CIBC World markets Corp, ING Barings LLC and Prudential Securities
Incorporated. The offering commenced on May 1, 2000, and closed on May 5,
2000. The initial public offering resulted in gross proceeds of
approximately $35.0 million, of which $2.5 million was applied toward the
underwriting discount. Expenses related to the offering totaled
approximately $1.7 million. Proceeds to the Company, net of underwriting
discount, were $32.5 million. From the time of receipt through June 30,
2000, all of the net proceeds were invested in short-term,
interest-bearing, investment grade securities.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the quarter ended June 30, 2000, we solicited the consent of
stockholders for the following matter:
On April 17, 2000, in an action by written consent, the Stockholders
approved an amendment to the our Certificate of Incorporation to become
effective after our IPO removing all references to the Series A, B and C
preferred stock, approved an amendment to our bylaws, approved an
amendment to our 2000 Equity Incentive Plan, approved our 2000 Employee
Stock Purchase Plan and related offering documents and approved our Form
of Indemnity Agreement for use with our officers and directors.
Stockholders holding 3,133,511 shares of common stock and 7,346,528 shares
of preferred stock consented to this action.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Caption
------------- ----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of South San
Francisco, County of San Mateo, State of California, on August 14, 2000.
By: /s/ WILLIAM D. YOUNG
-------------------------------------
William D. Young
Chief Executive Officer
(Principal Executive,
Financial and Accounting
Officer)
17
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits
--------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
18
