<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
----------
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--------- Exchange Act of 1934. For the quarterly period ended September 30,
2000.
or
--------- 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
000-31633
----------
KOSAN BIOSCIENCES INCORPORATED
(Exact name of registrant as specified on its charter)
DELAWARE 94-3217016
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3832 BAY CENTER PLACE, HAYWARD, CALIFORNIA 94545
(address of principal executive officers)
(510)732-8400
(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 NO X
----- -----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. COMMON STOCK $.01 PAR VALUE;
25,152,728 SHARES OUTSTANDING AT OCTOBER 31, 2000.
<PAGE>
KOSAN BIOSCIENCES INCORPORATED
Form 10-Q
Quarter Ended September 30, 2000
<TABLE>
<CAPTION>
INDEX
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1: Condensed Financial Statements and Notes:
Condensed Balance Sheets as of September 30, 2000
and December 31, 1999 3
Condensed Statements of Operations for the three
and nine months ended September 30, 2000 and 1999 4
Condensed Statements of Cash Flows for the nine
month periods ended September 30, 2000 and 1999 5
Notes to Condensed Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk 22
PART II OTHER INFORMATION
Item 1: Legal Proceedings 23
Item 2: Changes in Securities and Use of Proceeds 23
Item 4: Submission of Matters to Vote of Security Holders 23
Item 6: Exhibits and Reports on Form 8-K 24
SIGNATURES 25
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1: Condensed Financial Statements and Notes
KOSAN BIOSCIENCES INCORPORATED
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------- ----------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,923 $ 1,032
Short-term investments 9,570 990
Other receivables 169 498
Prepaid expenses and other current assets 95 325
------------- ------------
Total current assets 14,757 2,845
Property and equipment, net 3,131 2,587
Long-term investments 15,603 8,442
Notes receivable from related party 751 87
Other assets 1,445 196
------------- ------------
Total assets $ 35,687 $ 14,157
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,200 $ 486
Accrued liabilities 1,177 626
Deferred revenue -- 409
Current portion of capital lease obligation 186 127
Current portion of equipment loan 876 447
------------- ------------
Total current liabilities 3,439 2,095
Equipment loan, less current portion 2,283 1,424
Capital lease obligation, less current portion 17 167
Stockholders' equity:
Convertible preferred stock 4 3
Common stock 7 5
Additional paid-in capital 68,073 24,848
Notes receivable from stockholders (2,075) (349)
Deferred stock-based compensation (13,531) (2,377)
Accumulated other comprehensive loss (7) (66)
Accumulated deficit (22,523) (11,593)
------------- ------------
Total stockholders' equity 29,948 10,471
------------- ------------
Total liabilities and stockholders' equity $ 35,687 $ 14,157
============= ============
</TABLE>
See accompanying notes.
(1) The balance sheet is derived from the audited financial statements included
in the Company's Registration Statement on Form S-1 filed with the SEC.
3
<PAGE>
KOSAN BIOSCIENCES INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Contract revenue $ 1,025 $ 969 $ 3,109 $ 3,996
Grant revenue 170 25 310 105
-------------- -------------- -------------- --------------
Total revenues 1,195 994 3,419 4,101
Operating expenses:
Research and development (Including
charges for stock-based compensation of
$1,925, $259, $4,522 and $662
respectively) 4,860 2,320 12,481 6,158
General and administrative (Including
charges for stock-based compensation of
$428, $23, $1,136 and $ 23 respectively) 1,022 331 2,815 1,143
-------------- -------------- -------------- --------------
Total operating expenses 5,882 2,651 15,296 7,301
-------------- -------------- -------------- --------------
Loss from operations (4,687) (1,657) (11,877) (3,200)
Interest income 530 160 1,208 494
Interest expense (94) (63) (261) (134)
Other income -- 170 -- 170
-------------- -------------- -------------- --------------
Net loss (4,251) (1,390) (10,930) (2,670)
Deemed dividend upon issuance of Series C
convertible preferred stock -- -- (11,267) --
-------------- -------------- -------------- --------------
Net loss attributable to common stockholders $ (4,251) $ (1,390) $ (22,197) $ (2,670)
============== ============== ============== ==============
Basic and diluted net loss per share $ (0.79) $ (0.30) $ (4.31) $ (0.60)
============== ============== ============== ==============
Shares used in computing basic and diluted net
loss per share 5,384 4,592 5,147 4,484
</TABLE>
See accompanying notes.
4
<PAGE>
KOSAN BIOSCIENCES INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------------------
2000 1999
---------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (10,930) $ (2,670)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 666 426
Amortization of stock-based compensation 4,544 228
Other stock-based compensation 1,114 457
Issuance of convertible preferred stock for license fees 30 --
Loss on disposal of property and equipment -- 10
Changes in assets and liabilities:
Other receivables 329 (40)
Prepaid expenses and other current assets 230 (307)
Other assets and notes receivable from related parties (1,913) (277)
Accounts payable 714 (243)
Accrued liabilities 551 446
Deferred revenue (409) (1,219)
---------------- -----------------
Net cash used in operating activities (5,074) (3,189)
---------------- -----------------
INVESTING ACTIVITIES
Acquisition of property and equipment, net (1,210) (1,415)
Purchase of short-term and long-term investments, net (15,682) 1,461
---------------- -----------------
Net cash provided by (used in) investing activities (16,892) 46
---------------- -----------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 60 21
Proceeds from issuance of convertible preferred stock, net 24,600 --
Proceeds from equipment loans 1,754 1,336
Principal payments under capital lease obligations (466) (87)
Principal payments under equipment loans (91) (198)
---------------- -----------------
Net cash provided by financing activities 25,857 1,072
---------------- -----------------
Net increase (decrease) in cash and cash equivalents 3,891 (2,071)
Cash and cash equivalents at beginning of period 1,032 3,049
---------------- -----------------
Cash and cash equivalents at end of period $ 4,923 $ 978
================ =================
</TABLE>
See accompanying notes.
5
<PAGE>
KOSAN BIOSCIENCES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
OVERVIEW
Kosan Biosciences Incorporated (the "Company") was incorporated under the
laws of the state of California on January 6, 1995 and commenced operations in
1996. In July 2000, the Company was reincorporated under the laws of the state
of Delaware. The Company was considered to be in the development stage through
December 31, 1998. The Company uses its technologies to develop drug candidates
from a class of natural compounds known as polyketides by manipulating the
natural process by which they are made. The Company's product development
opportunities currently target the areas of infectious disease, gastrointestinal
motility disorders, mucus hypersecretion, cancer, immunosuppression and nerve
regeneration.
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. The information as of September 30, 2000, and for the
three and nine months ended September 30, 2000 and September 30, 1999, in the
opinion of management, reflects all adjustments (including normal recurring
adjustments) necessary for a fair presentation of the results presented. Results
for any interim period are not necessarily indicative of results for any future
interim period or for the entire year. The accompanying financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's registration statement on Form S-1 (No. 333-33732).
REVENUE RECOGNITION
The Company recognizes license and other upfront fees on a ratable basis
over the term of the respective agreement. Milestone payments are recognized
upon successful completion of a performance milestone event. Contract revenues
related to collaborative research and development agreements and government
grants are recognized on a ratable basis as services are performed. Any amounts
received in advance of performance are recorded as deferred revenue.
STOCK-BASED COMPENSATION
The Company accounts for common stock options granted to employees using
the intrinsic value method and, thus recognizes no compensation expense for
options granted with exercise prices equal to or greater than the deemed fair
value of the Company's common stock on the date of the grant.
Stock-based compensation expense for options granted to non-employees has
been determined in accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and EITF 96-18
as the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. The measurement of
stock-based compensation to non-employees is subject to periodic adjustment as
the underlying securities vest.
6
<PAGE>
KOSAN BIOSCIENCES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
COMPREHENSIVE LOSS
For the three and nine months ended September 30, 2000 and 1999,
comprehensive loss is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss $ (4,251) $ (1,390) $ (22,197) $ (2,670)
Unrealized gain / (loss) on
Available-for-sale securities 53 5 59 (43)
------------ ------------- -------------- -------------
Comprehensive loss $ (4,198) $ (1,385) $ (22,138) $ (2,713)
============ ============= ============== =============
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, ("FASB"), issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Financial Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The adoption of SFAS 133 is not anticipated
to have an impact on the Company's results of operations of financial conditions
when adopted, as the Company holds no derivative financial instruments and does
not currently engage in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In October 12, 2000, the SEC issued a Frequently Asked Questions
document on SAB 101 to clarify the application of SAB 101 in particular
transactions. The Company believes that its current revenue recognition
principles comply with SAB 101.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Based Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"), which
provides clarification of Opinion 25 for certain issues such as the
determination of who is an employee, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. The Company does not expect that the adoption of FIN 44 will result
in material changes to its reported results of operations or financial position.
7
<PAGE>
KOSAN BIOSCIENCES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. NET LOSS PER SHARE
Basic and diluted net loss per common share is presented in conformity
with the Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"), for all periods presented. In accordance with SFAS 128,
basic and diluted net loss per common share has been computed using the
weighted-average number of shares of common stock outstanding during the
period, less shares subject to repurchase. Diluted net loss is not presented
separately as the Company is in a net loss position and including common
stock equivalents in the loss per share computation would be antidilutive.
Pro forma basic and diluted net loss per common share, as presented in the
statement of operations, has been computed for the three and nine months
ended September 30, 2000 and gives effect to the conversion of the 4,073,573
shares of convertible preferred stock into 12,220,719 shares of common stock
immediately prior to the completion of the Company's initial public offering
(using the if-converted method) from the original date of issuance.
The following table presents the calculation of basic, diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss attributable to common stockholders $ (4,251) $ (1,390) $ (22,197) $ (2,670)
============ ============= ============== =============
Weighted-average shares of common
stock outstanding 6,706 5,253 6,400 5,210
Less: weighted-average shares subject
to repurchase (1,322) (661) (1,253) (726)
------------ ------------- -------------- -------------
Weighted-average shares used in computing
basic and diluted net loss per share 5,384 4,592 5,147 4,484
============ ============= ============== =============
Basic and diluted net loss per share $ (0.79) $ (0.30) $ (4.31) $ (0.60)
============ ============= ============== =============
Pro forma:
Shares used above 5,384 5,147
Pro forma adjustment to reflect weighted effect
of conversion of convertible preferred stock 12,221 11,426
------------ --------------
Shares used in computing pro forma basic and
diluted net loss per share 17,605 16,573
============ ==============
Pro forma basic and diluted net loss per share $ (0.24) $ (1.34)
============ ==============
</TABLE>
8
<PAGE>
KOSAN BIOSCIENCES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. CAPITAL LEASES AND EQUIPMENT FINANCING
The Company leases certain equipment and facility improvements under
non-cancelable capital leases and debt obligations. The equipment loans have
a balloon payment at the end of the term. The interest rates of each of the
leases and loans are fixed at the time of the draw down, with the interest
rates range from 10.55% to 17.72%. In January 2000, the Company secured a
$2.0 million line of credit which is available for draw down through December
2000. The Company borrowed on this line of credit to fund equipment purchases
totaling approximately $446,000 in August 2000. The Company has approximately
$246,000 of available credit left on this existing line.
4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------- -------------------
<S> <C> <C>
Facilities related $ 466 $ 280
Compensation related 364 163
Professional fees 176 120
Other 171 63
------------------- -------------------
$ 1,177 $ 626
=================== ===================
</TABLE>
5. DEFERRED STOCK-BASED COMPENSATION
During the nine months ended September 30, 2000, in connection with the
grant of stock options to employees, the Company recorded deferred compensation
of approximately $15.7 million, representing the difference between the deemed
fair value of the common stock on the date such options were granted and the
applicable exercise prices. Such amounts are included as a reduction of
stockholder's equity and are being amortized to expense using the graded vesting
method over the vesting periods of the underlying stock options, which generally
are four years. The Company recognized amortization of deferred compensation of
$2.0 million and $4.5 million for the three months and nine months ended
September 30, 2000, respectively.
6. COLLABORATIVE LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
JOHNSON & JOHNSON
In September 1998, the Company signed a collaborative agreement with The R.W.
Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical, Inc.,
both Johnson & Johnson companies. In August 2000, the Company amended its
collaborative research and development agreement. Under the terms of the amended
agreement, subject to termination provisions, the research program and funding
have been extended until at least December 28, 2001.
9
<PAGE>
KOSAN BIOSCIENCES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. COLLABORATIVE LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
SLOAN-KETTERING INSTITUTE FOR CANCER RESEARCH
In August 2000, the Company signed a collaboration and license agreement
with the Sloan-Kettering Institute for Cancer Research relating to epothilones.
Under the agreement, the Company will use its technologies to produce a specific
epothilone compound to be tested in clinical trials and work collaboratively
with Sloan-Kettering to develop new compounds and production methods and to
conduct clinical trials. Additionally, the Company has paid to Sloan-Kettering
an initial license fee and will pay annual maintenance fees as well as payments
for research and development costs, including costs of clinical trials, over a
term of at least 24 months. If development efforts result in a marketable
product, the Company will make royalty payments based on product sales as well
as payments for reaching clinical development milestones. Estimated remaining
non-cancelable commitments under this agreement are approximately $384,000 in
addition to internal development efforts.
7. STOCKHOLDERS' EQUITY
In September 2000, the Company split its common stock 3-for-1 and increased
the authorized shares of common stock to 36,000,000 shares. All common stock and
options to purchase common stock and per share amounts in the accompanying
financial statements have been adjusted retroactively to reflect the stock
split. The conversion ratios of the respective series of convertible preferred
stock were automatically adjusted to reflect the stock split.
In October 2000, the Company increased its authorized shares of preferred
and common stock to 10,000,000 shares and 200,000,000 shares, respectively
8. SUBSEQUENT EVENTS
In October 2000, the Company completed its initial public offering of
5,750,000 shares of common stock, inclusive of the underwriters' over-allotment
option, at a price of $14.00 per share. The Company received approximately $73.4
million in net proceeds after underwriting discounts and other offering costs.
Upon the closing of the initial public offering, the 4,073,573 shares of
convertible preferred stock outstanding at September 30, 2000 were automatically
converted into 12,220,719 shares of common stock.
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion of our financial condition and results of
operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expect, plan, anticipate, believe,
estimate, predict, potential or continue, the negative of terms like these or
other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. All forward-looking statements included
in this document are based on information available to us on the date hereof,
and we assume no obligation to update any such forward-looking statements. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined under the caption "Risk Factors" set forth at the
end of this Item 2 and those contained from time to time in our other filings
with the Securities and Exchange Commission. We caution investors that our
business and financial performance are subject to substantial risks and
uncertainties.
OVERVIEW
We are a biotechnology company that has proprietary technologies to develop
potential pharmaceutical products that will address large markets. We use our
technologies to make new drug candidates derived from an important class of
natural product compounds known as polyketides. Our product opportunities
currently target the areas of infectious disease, gastrointestinal motility,
mucus hypersecretion, cancer, immunology and nerve regeneration. In infectious
disease, we have a collaboration with The R.W. Johnson Pharmaceutical Research
Institute, a Johnson & Johnson company, focusing on the development of a next
generation antibiotic. In cancer, we have a collaboration with the
Sloan-Kettering Institute for Cancer Research focusing on the development of
potential anti-cancer compounds known as epothilones.
In October 2000, we completed our initial public offering of 5,750,000
shares of common stock, inclusive of the underwriters' over-allotment option, at
a price of $14.00 per share. Net proceeds received in connection with this
offering was approximately $73.4 million, after deducting the underwriting
discounts and other offering costs.
We have incurred significant losses since our inception. As of September
30, 2000, our accumulated deficit was $22.5 million. We expect to incur
additional operating losses over the next several years as we continue to
develop our technologies and fund internal product research and development.
STOCK-BASED COMPENSATION
Stock-based compensation expense represents the difference between the
exercise price of an option and the deemed fair value of our common stock on the
date of the grant calculated in accordance with Accounting Principles Board
Opinion No. 25 and its related interpretations. Through September 30, 2000, we
recorded total deferred stock-based compensation of $18.6 million. Such amounts
are included as a reduction of stockholders' equity and are being amortized to
expense using the graded vesting method over the vesting periods of the
underlying options, which are generally four years. Stock-based compensation has
been allocated to research and development expense and general and
administrative
11
<PAGE>
expense, as appropriate. We recognized stock-based compensation
expense of $4.5 million in the nine months ended September 30, 2000 and $228,000
in the same period in 1999. Based on deferred stock-based compensation recorded
as of September 30, 2000, we expect to record amortization for deferred
stock-based compensation approximately as follows: $2.4 million for the
remaining three months in 2000, $6.1 million in 2001, $3.3 million in 2002, $1.5
million in 2003 and $231,000 in 2004. The amount of deferred compensation
expected to be recorded in future periods may decrease if unvested options for
which deferred stock-based compensation has been recorded are subsequently
canceled.
In connection with the grants of stock options and restricted stock to
non-employees, we recognize compensation on a ratable basis over the related
service period. We recognized other stock-based compensation of $1.1 million in
the nine months ended September 30, 2000 and $457,000 in the same period in
1999. In addition, we expect to recognize other stock-based compensation in
connection with stock options and restricted stock granted to non-employees of
$345,000 for the remaining three months in 2000, $1.3 million in 2001, $1.0
million in 2002, $382,000 in 2003 and $99,000 in 2004. The measurement of
stock-based compensation to our non-employees is subject to periodic adjustment
as our stock price changes and as the underlying securities vest. As such,
changes to these measurements could be substantial should we experience
significant changes in our stock price.
RESULTS OF OPERATIONS
REVENUE. Our revenues were $1.2 million and $3.4 million for the three and
nine months ended September 30, 2000 compared to $1.0 million and $4.1 million
in the same periods in 1999. The quarterly increase over the same period last
year was primarily due to higher funding from government grants. The decrease on
a year-to-date basis was due to a $1.0 million non-recurring milestone payment
recognized in 1999 under our collaboration with The R.W. Johnson Pharmaceutical
Research Institute, partially offset by higher grant revenue. The initial term
of this collaboration has been extended, subject to termination provisions, to
December 28, 2001. If we do not maintain or further extend this agreement, our
revenues will significantly decrease thereafter, or upon earlier termination,
unless we enter into additional collaborations.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
consist primarily of stock-based compensation, salaries and other
personnel-related expenses, facility related expenses, lab consumables and
depreciation of facilities and equipment. Research and development expenses
increased to $4.9 million and $12.5 million for the three and nine months ended
September 30, 2000 from $2.3 million and $6.2 million for the same periods in
1999. This increase was due in large part to higher stock-based compensation
expense of $1.9 million and $4.5 million in the three and nine months end
September 30, 2000 compared to $259,000 and $662,000 in the same periods in
1999. The remainder of the increase was primarily due to increased payroll and
personnel related expenses, including recruiting and relocation expenses. We
expect our research and development expenses will increase substantially to fund
the expansion of our technology platform, support our collaborative research
programs and advance our in-house research programs into later stages of
development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $1.0 million and $2.8 million for the three and nine months ended
September 30, 2000 from $331,000 and $1.1 million in the same periods in 1999.
This increase was primarily due to amortization of deferred stock-based
compensation of $428,000 and $1.1 million for the three and nine months ended
September 30, 2000 compared to $23,000 in each of the same periods of 1999. The
remaining increase was due to higher employee related costs to support our
expanding research and development activities. We expect our general and
administrative expenses will increase in the future to support the continued
growth of our
12
<PAGE>
research and development efforts and to fulfill our obligations associated with
being a publicly held company.
INTEREST INCOME. Interest income increased to $530,000 and $1.2 million for
the three and nine months ended September 30, 2000 from $160,000 and $494,000
for the same periods in 1999. This increase was due to higher average investment
balances due to the $24.6 million in net proceeds received in connection with
the issuance of Series C convertible preferred stock in March 2000 combined with
higher yields earned on investment balances.
INTEREST EXPENSE. Interest expense increased to $94,000 and $261,000 for
the three and nine months ended September 30, 2000 from $63,000 and $134,000 for
the same periods in 1999. The increase resulted from additional debt financing
associated with our capital purchases along with a higher cost of capital due to
rising interest rates during 2000.
OTHER INCOME. For the three and nine months ended September 30, 1999, other
income included a $170,000 termination fee received from the landlord of our
previously occupied facility for the buy-out of the rights to our sublease
agreement.
BENEFICIAL CONVERSION FEATURE. In March 2000, we sold 804,196 shares of
Series C convertible preferred stock (which converted into 2,412,588 shares of
common stock at the closing of our initial public offering) for net proceeds of
approximately $24.6 million. After evaluating the fair value of our common stock
in contemplation of our initial public offering, we determined that the issuance
of the Series C convertible preferred stock resulted in a beneficial conversion
feature calculated in accordance with Emerging Issues Task Force Consensus No.
98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features." The beneficial conversion feature was reflected as a deemed dividend
of $11.3 million in our financial statements for the nine months ended September
30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception primarily through sales of
convertible preferred stock, totaling $45.6 million in net proceeds, contract
payments under our collaboration agreement, equipment financing arrangements and
government grants. As of September 30, 2000, we had $30.1 million in cash and
investments compared to $10.5 million as of December 31, 1999. Our funds are
currently invested in U.S. Treasury and government agency obligations,
investment-grade asset-backed securities and corporate obligations. In October
2000, we completed our initial public offering, which generated net proceeds of
approximately $73.4 million, inclusive of the exercise of the underwriters'
over-allotment option.
Our operating activities used cash of $5.1 million for the nine months
ended September 30, 2000 compared to $3.2 million for the nine months ended
September 30, 1999. Our net loss of $10.9 million for the nine months ended
September 30, 2000 was partially offset by non-cash expenses of $6.3 million
related to stock-based compensation and depreciation expense.
Our investing activities, excluding changes in our investments, for the
nine months ended September 30, 2000 used cash of $1.2 million compared to $1.4
million for the nine months ended September 30, 1999 reflecting facility
improvements and capital expenditures as we continue to enhance our laboratory
capabilities.
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Cash provided by financing activities was $25.9 million for the nine months
ended September 30, 2000 compared to $1.1 million for the nine months ended
September 30, 1999. Financing activities included $24.6 million in net proceeds
from the issuance of our Series C convertible preferred stock in March 2000.
In January 2000, we secured a $2.0 million line of credit for facility
improvements and equipment purchases. As of September 30, 2000 we had drawn down
approximately $1.8 million and had $246,000 remaining available under this
credit facility.
For periods subsequent to September 30, 2000, we have estimated our
non-cancelable commitments under our collaboration with Sloan-Kettering to be
approximately $384,000 in addition to our internal development efforts under
this agreement.
We believe our existing cash and investments, together with the proceeds of
our October initial public offering, will be sufficient to meet our anticipated
cash requirements for at least 24 months. However, the actual amount of funds
that we will need during or after the next 24 months will be determined by many
factors, including those discussed in Risk Factors below. Our future capital
uses and requirements depend on numerous forward-looking factors. These factors
include, but are not limited to, the following:
- our ability to establish and the scope of any new collaborations;
- the progress and number of research programs carried out by us;
- the progress and success of preclinical and clinical trials of our
drug candidates;
- our ability to maintain our existing collaboration with The R.W.
Johnson Pharmaceutical Research Institute;
- the costs and timing of obtaining, enforcing and defending our
patent and intellectual rights;
- the costs and timing of regulatory approvals; and
- expenses associated with unforeseen litigation.
For the next several years, we do not expect our operations to generate the
amounts of cash required for our future cash needs. In order to fulfill our cash
requirements, we expect to finance future cash needs through the sale of equity
securities, strategic collaborations and debt financing. We cannot assure you
that additional financing or collaboration and licensing arrangements will be
available when needed or that, if available, will be on terms favorable to us or
our stockholders. Insufficient funds may require us to delay, scale back or
eliminate some or all of our research or development programs, to lose rights
under existing licenses or to relinquish greater or all rights to product
candidates at an earlier stage of development or on less favorable terms than we
would otherwise choose or may adversely affect our ability to operate as a going
concern. If additional funds are obtained by issuing equity securities,
substantial dilution to existing stockholders may result.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, ("FASB"), issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Financial Instruments and for Hedging Activities" ("SFAS 133")
which provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. The adoption of SFAS
133 is not anticipated to have an impact on the Company's results of
operations of financial conditions when adopted, as the Company holds no
derivative financial instruments and does not currently engage in hedging
activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company believes that its current revenue recognition principles
comply with SAB 101.
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In March 2000, the Financial Accounting Standards Board, ("FASB"), issued
FASB Interpretation No.44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No.25" ("FIN 44"), which provides
clarification of Opinion 25 for certain issues such as the determination of who
is an employee, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. The Company
does not expect that the adoption of FIN 44 will result in material changes to
its reported results of operations or financial position.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
You should carefully consider the risks described below, together with all
of the other information included in this report, in considering our business
and prospects. The risks and uncertainties described below are not the only ones
facing Kosan. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial also may impair our business operations. The
occurrence of any of the following risks could harm our business, financial
condition or results of operations.
WE HAVE A HISTORY OF NET LOSSES AND MAY NEVER BECOME PROFITABLE.
We commenced operations in 1996 and are still in an early stage of
development. We have not commercialized any products and we have incurred
significant losses to date. As of September 30, 2000, we had an accumulated
deficit of approximately $22.5 million. To date, our revenues have been solely
from collaborations and government grants. Our expenses have consisted
principally of costs incurred in research and development and from general and
administrative costs associated with our operations. We have incurred net losses
since our inception, including a net loss of approximately $10.9 million for the
nine months ended September 30, 2000. We expect our expenses to increase and to
continue to incur operating losses for at least the next several years as we
continue our research and development efforts for our drug candidates. The
amount of time necessary to successfully commercialize any of our drug
candidates is long and uncertain and successful commercialization may not occur
at all. As a result, we may never become profitable.
IF WE DO NOT ESTABLISH AND MAINTAIN COLLABORATIONS WITH OTHER PARTIES, THE
DEVELOPMENT OF OUR PRODUCTS MAY BE DELAYED OR STOPPED.
Because we do not currently possess the financial and other resources
necessary to develop potential products that may result from our technologies,
or the financial and other resources to complete any approval processes which
may be required for these products, we must enter into collaborative
arrangements to develop many of our drug candidates. If we do not maintain or
further extend our current collaboration with The R.W. Johnson Pharmaceutical
Research Institute and Ortho-McNeil
Pharmaceutical, Inc., both Johnson & Johnson companies, which expires on
December 28, 2001, subject to termination provisions, or if we do not enter into
new collaborative agreements, then our revenues will be reduced, and our drug
candidates may not be developed, manufactured or marketed.
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OUR POTENTIAL PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT AND SUBSTANTIAL
ADDITIONAL EFFORT WILL BE NECESSARY FOR DEVELOPMENT.
Our technologies are new and our drug candidates are in early stages of
research and development. We may not develop products that prove to be safe and
effective, meet applicable regulatory standards, are capable of being
manufactured at reasonable costs, or can be marketed successfully. All of the
potential proprietary products that we are currently developing will require
significant development and investment, including extensive preclinical and
clinical testing before we can submit any application for regulatory approval.
Before obtaining regulatory approvals for the commercial sale of any of our
products, we must demonstrate through preclinical testing and clinical trials
that our drug candidates are safe and effective in humans. We have not commenced
clinical testing of any of our potential products, nor have we submitted any
application to test any potential products in humans. Conducting clinical trials
is a lengthy, expensive and uncertain process. Completion of clinical trials may
take several years or more. The length of time generally varies substantially
according to the type, complexity, novelty and intended use of the drug
candidate. Our clinical trials, if commenced, may be suspended at any time if we
or the U.S. Food and Drug Administration, or the FDA, believe the patients
participating in our studies are exposed to unacceptable health risks. We may
encounter problems in our studies which will cause us or the FDA to delay or
suspend the studies. Our commencement and rate of completion of clinical trials
may be delayed by many factors, including:
- ineffectiveness of the study compound, or perceptions by physicians
that the compound is not effective for a particular indication;
- inability to manufacture sufficient quantities of compound for use
in clinical trials;
- failure of the FDA to approve our clinical trial protocols;
- slower than expected rate of patient recruitment;
- unforeseen safety issues; or
- government or regulatory delays.
If any future clinical trials are not successful, our business, financial
condition and results of operations will be harmed.
ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES COULD HARM OUR
COMPETITIVE POSITION.
Our success will depend in part on our ability to obtain patents and
maintain adequate protection of other intellectual property for our technologies
and products in the United States and other countries. If we do not adequately
protect our intellectual property, competitors may be able to use our
technologies and erode or negate our competitive advantage. The laws of some
foreign countries do not protect our proprietary rights to the same extent as
the laws of the United States, and we may encounter significant problems in
protecting our proprietary rights in these foreign countries.
The patent positions of biotechnology companies, including our patent
position, involve complex legal and factual questions and, therefore, validity
and enforceability cannot be predicted with certainty. Patents may be
challenged, deemed unenforceable, invalidated or circumvented. We will be able
to protect our proprietary rights from unauthorized use by third parties only to
the extent that our proprietary technologies are covered by valid and
enforceable patents or are effectively maintained as trade secrets. We will
apply for patents covering both our technologies and drug candidates as we deem
16
<PAGE>
appropriate. However, we may fail to apply for patents on important technologies
or products in a timely fashion or at all, and in any event, the applications we
do file may be challenged and may not result in issued patents. Our existing
patents and any future patents we obtain may not be sufficiently broad to
prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, others may
challenge or invalidate our patents, or our patents may fail to provide us with
any competitive advantages. If the use or validity of any of our patents is ever
challenged, resulting in litigation or administrative proceedings, we would
incur substantial costs and the diversion of management in defending the patent.
In addition, we generally do not control the patent prosecution of technology
that we license from others. Accordingly, we are unable to exercise the same
degree of control over this intellectual property as we would over technology we
own.
We rely upon trade secret protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information.
These measures may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators, and
consultants. Nevertheless, employees, collaborators, or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.
LITIGATION OR OTHER PROCEEDINGS OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY
INFRINGEMENT WOULD REQUIRE US TO SPEND TIME AND MONEY AND COULD PREVENT US FROM
DEVELOPING OR COMMERCIALIZING PRODUCTS.
Our commercial success depends in part on not infringing the patents and
proprietary rights of third parties and not breaching any licenses that we have
entered into with regard to our technologies and products. The biotechnology
industry is characterized by extensive litigation regarding patents and other
intellectual property rights. Other parties may have been issued relevant
patents or may have filed relevant patent applications that could affect our
ability to obtain patents or to operate as we would like to in our research,
development, and commercialization efforts. If we wish to use technologies
claimed by third parties in issued and unexpired patents, then we may need to
obtain license(s) from the owner(s) of such patent(s), enter into litigation, or
incur the risk of litigation. Litigation or failure to obtain necessary licenses
may impede our ability to obtain collaborations or to develop our products and
could prevent us or our collaborators from developing or commercializing our
products.
Other biotechnology and pharmaceutical companies have filed patent
applications and obtained patents, and in the future will likely continue to
file patent applications and obtain patents, claiming polyketide synthase genes,
gene fragments, and methods for modifying such genes or gene fragments. If these
patents are valid or if these applications issue into valid patents, we will
have to either circumvent the claims in these patents, or obtain licenses to use
the patented technology in order to use these genes or technologies in the
research, development and commercialization of our products and technologies. If
we are unsuccessful in circumventing or acquiring licenses to these patents, our
ability to research, develop or commercialize products may be blocked.
Third parties may sue us in the future to challenge our patent rights or
claim infringement of their patents. An adverse determination in litigation to
which we may become a party could subject us to significant liabilities to third
parties, require us to license disputed rights from third parties or require us
to cease using the disputed technology.
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<PAGE>
We are aware of a significant number of patents and patent applications
relating to aspects of our technologies and families of compounds filed by, and
issued to, third parties. If any of our competitors have filed patent
applications or have been granted patents claiming inventions also claimed by
us, we may have to participate in an interference proceeding declared by the
relevant patent regulatory agency to determine priority of invention and, thus,
the right to a patent for these inventions in the United States. Such a
proceeding could result in substantial cost to us even if the outcome is
favorable. For example, a number of companies have cloned polyketide synthase
genes and described in patents or publications technology to modify those genes
or express them in heterologous hosts using recombinant DNA technology. Such
companies include, for example, Abbott Laboratories (erythromycin, niddamycin);
Dow Agrosciences (spinosyn); Eli Lilly and Company (tylosin, spiramycin),
Novartis (soraphen, epothilone); and Merck (avermectin, lovastatin). Even if
successful on priority grounds, an interference may result in loss of claims
based on patentability grounds raised in the interference. Although patent and
intellectual property disputes in the biotechnology area are often settled
through licensing or similar arrangements, costs associated with these
arrangements may be substantial and could include ongoing royalties.
Furthermore, we cannot be certain that the necessary licenses would be available
to us on satisfactory terms, if at all.
Third parties may obtain patents in the future and then claim that the use
of our technologies infringes these patents or that we are employing their
proprietary technology without authorization. Patent applications in the United
States are secret until issued (certain United States patent applications will
be published under new laws that become effective later this year) into
corresponding patents, and the applications can be pending for several years
after filing. We could incur substantial costs and diversion of management and
technical personnel in defending ourselves against any of these claims or
enforcing our patents against others. Furthermore, parties making claims against
us may be able to obtain injunctive or other equitable relief which could
effectively block our ability to further develop, commercialize, and sell
products, and could result in the award of substantial damages against us. In
the event of a successful claim of infringement against us, we may be required
to:
- pay damages;
- stop using our products or methods;
- develop non-infringing products or methods; and
- obtain one or more licenses from third parties.
We may not be able to obtain these licenses at a reasonable cost, if at
all. In that event, we could encounter substantial delays in product
introductions while we attempt to develop alternative methods or products, which
we may not be able to accomplish.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH THROUGH RECRUITING AND
RETAINING SKILLED EMPLOYEES AND EXPAND OUR MANAGEMENT AND IMPROVE OUR CONTROLS
AND SYSTEMS, WE MANY NOT BE ABLE TO MANAGE OUR DAY-TO-DAY OPERATIONS.
We have experienced a period of rapid and substantial growth that has
placed, and if this growth continues will further place, a strain on our human
and capital resources. If we are unable to manage this growth effectively, then
our losses could increase. The number of our employees increased from 21 on
December 31, 1997 to 65 on September 30, 2000. Retaining our current employees
and recruiting qualified scientific personnel to perform future research and
development work will be critical to our success. Competition is intense for
experienced scientists, and we may not be able to retain or recruit
18
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sufficient skilled personnel to allow us to pursue collaborations and develop
our products and core technologies to the extent otherwise possible.
Additionally, we are highly dependent on the principal members of our management
and scientific staff, such as our two co-founders, the loss of whose services
would adversely impact the achievement of our objectives. Although we maintain
and are the beneficiary of $1.0 million key-man life insurance policies for the
lives of each of our two co-founders, Dr. Daniel Santi, our chief executive
officer, and Dr. Chaitan Khosla, a director and consultant, we do not believe
the proceeds would be adequate to compensate us for their loss.
Our ability to manage our operations and growth effectively requires us to
continue to expend funds to expand our management and improve our controls and
systems. If we are unable to successfully implement these expansions and
improvements, then we may not be able to effectively manage our day-to-day
operations.
WE FACE INTENSE COMPETITION FROM LARGE PHARMACEUTICAL COMPANIES, BIOTECHNOLOGY
COMPANIES AND ACADEMIC GROUPS.
We face, and will continue to face, intense competition from organizations
such as large biotechnology and pharmaceutical companies, as well as academic
and research institutions and government agencies, that are pursuing competing
technologies for modifying DNA. These organizations may develop technologies
that are superior alternatives to our technologies. Further, our competitors in
the polyketide gene engineering field may be more effective at implementing
their technologies to develop commercial products. Some of these competitors
have entered into collaborations with leading companies within our target
markets to produce polyketides for commercial purposes.
Any products that we develop through our technologies will compete in
multiple, highly competitive markets. Development of pharmaceutical products
requires significant investment and resources. Many of the organizations
competing with us in the markets for such products have greater capital
resources, research and development and marketing staffs, facilities and
capabilities, and greater experience in modifying DNA, obtaining regulatory
approvals, and product manufacturing and marketing. Accordingly, our competitors
may be able to develop technologies and products more easily, which would render
our technologies and products and those of our collaborators obsolete and
noncompetitive.
IF WE FACE CLAIMS IN CLINICAL TRIALS OF A DRUG CANDIDATE, THESE CLAIMS WILL
DIVERT OUR MANAGEMENT'S TIME AND WE WILL INCUR LITIGATION COSTS.
We face an inherent business risk of clinical trial liability claims in the
event that the use or misuse of our potential products results in personal
injury or death. We may experience clinical trial liability claims if our drug
candidates are misused or cause harm before regulatory authorities approve them
for marketing. We currently do not maintain clinical trial liability insurance
coverage. Even if we do obtain an insurance policy, it may not be sufficient to
cover claims that may be made against us. Clinical trial liability insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms, if at all. Any claims against us, regardless of their merit,
could materially and adversely affect our financial condition, because
litigation related to these claims would strain our financial resources in
addition to consuming the time and attention of our management. If we are sued
for any injuries caused by our products, our liability could exceed our total
assets.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE, OR DISPOSAL OF
THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY.
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<PAGE>
Our research and development processes involve the controlled use of
hazardous materials, including hazardous chemicals and radioactive and
biological materials. Some of these materials may be novel, including bacteria
with novel properties and bacteria that produce biologically active compounds.
Our operations also produce hazardous waste products. We cannot eliminate the
risk of accidental contamination or discharge and any resultant injury from
these materials. Federal, state, and local laws and regulations govern the use,
manufacture, storage, handling, and disposal of these materials. We believe that
our current operations comply in all material respects with these laws and
regulations. We could be subject to civil damages in the event of an improper or
unauthorized release of, or exposure of individuals to, hazardous materials. In
addition, we could be sued for injury or contamination that results from our use
or the use by third parties or our collaborators of these materials, and our
liability may exceed our total assets. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development, or commercialization efforts.
WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CORPORATE CHARTER DOCUMENTS THAT MAY
RESULT IN OUTCOMES WITH WHICH YOU DO NOT AGREE.
Our board of directors has the authority to issue up to 10,000,000 shares
of undesignated preferred stock and to determine the rights, preferences,
privileges and restrictions of those shares without further vote or action by
our stockholders. The rights of the holders of any preferred stock that may be
issued in the future may adversely affect the rights of the holders of common
stock. The issuance of preferred stock could make it more difficult for third
parties to acquire a majority of our outstanding voting stock.
Our certificate of incorporation provides for staggered terms for the
members of the board of directors and prevent our stockholders from acting by
written consent. These provisions and other provisions of our bylaws and of
Delaware law applicable to us could delay or make more difficult a merger,
tender offer or proxy contest involving us. This could reduce the price that
investors might be willing to pay for shares of our common stock and result in
the market price being lower than it would be without these provisions.
SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US, AND MAY NOT MAKE
DECISIONS THAT ARE IN THE BEST INTEREST OF ALL STOCKHOLDERS.
Our officers, directors and affiliates together control approximately 46%
of our outstanding common stock, including those shares issued in connection
with our October 2000 initial public offering. As a result, these stockholders,
if they act together, are able to exert a significant degree of influence over
our management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. In addition, this concentration of ownership may delay or prevent
a change in control of us and might affect the market price of our common stock,
even when a change may be in the best interests of all stockholders. In
addition, the interests of this concentration of ownership may not always
coincide with our interests or the interests of other stockholders and
accordingly, they could cause us to enter into transactions or agreements which
we would not otherwise consider.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, EXTREMELY VOLATILE.
The trading price of our common stock has been and is likely to continue to
be highly volatile and could be subject to wide fluctuations in price in
response to various factors, many of which are beyond our control, including:
20
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- announcements of technological developments in research by us or our
competitors;
- delay or failure in initiating, conducting, completing or analyzing
clinical trials or unsatisfactory design or results of these trials;
- achievement of regulatory approvals;
- new products or services introduced or announced by us or our
competitors;
- changes in financial estimates by securities analysts;
- announcements of departures or departures of key personnel; and
- sales of our common stock.
In addition, the stock market in general, and the Nasdaq National Market and
the market for biotechnology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of those companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against that company. If this type of litigation were
instituted against us, we would be faced with substantial costs and management's
attention and resources would be diverted, which could in turn seriously harm
our business, financial condition and results of operations.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CREATING INVESTOR LOSSES.
Our quarterly operating results have fluctuated in the past and are likely
to do so in the future. These fluctuations could cause our stock price to
fluctuate significantly or decline. Some of the factors which could cause our
operating results to fluctuate include:
- expiration of research contracts with collaborators or government
research grants, which may not be renewed or replaced;
- the success rate of our discovery efforts leading to milestones and
royalties;
- the timing and willingness of collaborators to commercialize our
products; and
- general and industry specific economic conditions, which may affect
our collaborators' research and development expenditures.
A large portion of our expenses are relatively fixed, including expenses
for facilities, equipment, and personnel. Accordingly, if revenues decline or do
not grow due to expiration or termination of research contracts or government
research grants, failure to obtain new contracts or other factors, we may not be
able to correspondingly reduce our operating expenses. In addition, we expect
operating expenses to continue to increase. Failure to achieve anticipated
levels of revenues could therefore significantly harm our operating results for
a particular fiscal period.
Due to the possibility of fluctuations in our revenues and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price would probably decline.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve the
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, our funds are currently invested in
U.S. Treasury and government agency obligations, investment-grade asset-backed
securities and corporate obligations. As of September 30, 2000, approximately
47% of our total portfolio will mature in one year or less, with the remainder
maturing in less than two years.
The following table represents the fair value balance of our cash, cash
equivalents, short-term and long-term investments that are subject to interest
rate risk by year of expected maturity and average interest rates as of
September 30, 2000 (dollars in thousands):
<TABLE>
<CAPTION>
2000 2001 2002
---- ---- ----
<S> <C> <C> <C>
Cash & equivalents $ 4,923 -- --
Average interest rates 5.94%
Short-term investments 4,160 $ 5,410
Average interest rates 6.15% 6.45%
Long-term investments -- 10,014 $ 5,589
Average interest rates 6.81% 7.1%
</TABLE>
We did not hold derivative instruments as of September 30, 2000, and we
have never held such instruments in the past. In addition, we had outstanding
debt, consisting of borrowings under an equipment financing line of credit
and capital lease obligations, of $3.4 million as of September 30, 2000, with
a range of interest rates of between 10.6% and 17.7%.
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PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Not applicable
Item 2: Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
During the quarter ended September 30, 2000, we issued 561,084 shares
of unregistered common stock to employees pursuant to the exercise of stock
options under our 1996 Stock Option Plan. These options were exercised at a
weighted average exercise price of $2.59 per share. The issuance of these
securities was deemed to be exempt from registration under the Securities Act in
reliance on Rule 701 of the Securities Act.
(d) Use of Proceeds From Sale of Registered Securities
In October 2000, we completed an initial public offering of our
common stock pursuant to a registration statement on Form S-1, file number
333-33732. All 5,750,000 shares of common stock offered, inclusive of 750,000
shares of common stock subject to the underwriters' over-allotment option, were
sold at a price per share of $14.00. The managing underwriters of our offering
were Lehman Brothers, CIBC World Markets, SG Cowen and Fidelity Capital Markets.
We paid a total of approximately $5.6 million in underwriting
discounts and commissions and expect other costs and expenses, other than
underwriting discounts and commissions, will total approximately $1.5 million in
connection with the offering. After deducting the underwriting discounts and
commissions and the offering costs and expenses, we estimate net proceeds of
approximately $73.4 million.
We intend to use the net proceeds for advancing our drug candidates
through preclinical and later stage development, discovering or acquiring new
drug candidates, expanding our technology platform, capital expenditures,
working capital, general corporate purposes and possible future acquisitions. To
date, we have not used any of the net proceeds from the offering and, pending
such use, our funds have been invested in U.S. Treasury and government agency
obligations, investment-grade asset-backed securities and corporate obligations.
Item 4: Submission of Matters to Vote of Security Holders
By written consent dated as of August 31, 2000, Kosan's stockholders
approved the following items in an action by written consent:
- approval of the Amended and Restated Certificate of Incorporation to
effect the 3-for-1 forward stock split and increase in the number of
authorized common shares;
- approval of the Amended and Restated Bylaws; - amendments to the
1996 Stock Option Plan;
- the adoption of the 2000 Non-Employee Director Stock Option Plan;
and
- the adoption of the 2000 Employee Stock Purchase Plan.
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Stockholders holding 77.47% of the shares (on an if converted into common
stock basis) outstanding at that time, consented to the foregoing.
Item 6: Exhibits and Reports on Form 8-K
a) Exhibit 27.1 Financial Data Schedule
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.
Kosan Biosciences Incorporated
November 13, 2000 By: /s/ Daniel V. Santi
-------------------
Daniel V. Santi, M.D., Ph.D.
Chairman and Chief Executive Officer
November 13, 2000 By: /s/ Susan M. Kanaya
-------------------
Susan M. Kanaya
Vice President, Finance and
Chief Financial Officer
(principal financial and accounting
officer)
25
