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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 No. 000-31101
APPLIED MOLECULAR EVOLUTION, INC.
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(Exact name of registrant as
specified in its charter)
Delaware 33-0374014
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3520 Dunhill Street
San Diego, California 92121
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(Address of principal executive offices and zip code)
(858) 597-4990
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(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 $.001 par value 23,364,736 shares
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Class Outstanding at August 31, 2000
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INDEX
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PART I: FINANCIAL INFORMATION PAGE
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ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 2000 (unaudited) and
December 31, 1999 3
Consolidated Statements of Operations for the three and six months ended
June 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 7
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 10
PART II: OTHER INFORMATION
ITEM 1: Legal Proceedings 14
ITEM 2: Changes in Securities and Use of Proceeds 14
ITEM 3: Defaults Upon Senior Securities 15
ITEM 4: Submission of Matters to a Vote of Security Holders 15
ITEM 5: Other Information 15
ITEM 6: Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
APPLIED MOLECULAR EVOLUTION, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents $ 8,931 $ 1,974
Short-term investments 2,900 1,524
Prepaid expenses and other current assets 1,380 611
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Total current assets 13,211 4,109
Property and equipment, net 592 442
Patents, net 1,487 1,344
Other assets 43 42
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Total assets $ 15,333 $ 5,937
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 905 $ 629
Current portion of deferred revenue 237 237
Current portion of long-term obligations 18 18
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Total current liabilities 1,160 884
Deferred rent 107 114
Long-term deferred revenue 749 868
Long-term obligations, less current portion 8 17
Minority interest 147 224
Stockholders' equity:
Preferred stock, $.001 par value, 14,055,110 shares authorized,
13,884,568 shares issued and outstanding at June 30, 2000;
11,810,666 shares authorized, 11,640,124 shares issued and
outstanding at December 31, 1999 14 12
Common stock, $.001 par value, 27,296,832 shares authorized,
3,956,746 shares issued and outstanding at June 30, 2000;
22,450,000 shares authorized, 2,569,846 shares issued and
outstanding at December 31, 1999 4 3
Additional paid-in-capital 63,133 31,831
Notes receivable from stockholders (724) --
Deferred compensation (15,480) (649)
Unrealized loss on short-term investments (4) (8)
Accumulated deficit (33,781) (27,359)
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Total stockholders' equity 13,162 3,830
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Total liabilities and stockholders' equity $ 15,333 $ 5,937
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</TABLE>
See accompanying notes.
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APPLIED MOLECULAR EVOLUTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
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2000 1999 2000 1999
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Revenue
Contract revenue $ 318 $ 259 $ 1,039 $ 347
Other revenue 59 59 169 118
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Total revenue 377 318 1,208 465
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Operating expenses
Research and development 809 773 1,476 1,701
General and administrative 502 418 921 645
Non-cash, stock based compensation 4,249 34 5,434 71
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Total operating expenses 5,560 1,225 7,831 2,417
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Loss from operations (5,183) (907) (6,623) (1,952)
Minority interest 35 -- 78 --
Interest income, net 84 66 123 97
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Net loss (5,064) (841) (6,422) (1,855)
Deemed dividend on Series F preferred stock (10,100) -- (10,100) --
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Net loss applicable to common stockholders $(15,164) $ (841) $(16,522) $ (1,855)
======== ======== ======== ========
Basic and diluted net loss per common share
applicable to common stockholders $ (5.73) $ (0.33) $ (6.32) $ (0.81)
Basic and diluted net loss per common share $ (1.91) $ (0.33) $ (2.46) $ (0.81)
Weighted average shares used in computing basic
and diluted loss per common share 2,648 2,568 2,613 2,284
Pro forma basic and diluted net loss per common share $ (0.33) $ (0.06) $ (0.44) $ (0.13)
Weighted average shares used in computing basic
and diluted pro forma net loss per common share 15,194 14,208 14,705 13,924
</TABLE>
See accompanying notes.
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APPLIED MOLECULAR EVOLUTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
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2000 1999
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OPERATING ACTIVITIES
Net loss $ (6,422) $ (1,855)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of stock-based compensation 5,096 71
Depreciation and amortization 122 125
Compensation related to consultant stock option 338 --
Deferred revenue (118) 1,081
Deferred rent (7) (3)
Minority interest (78) --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (769) (329)
Accounts payable and accrued expenses 275 (158)
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Net cash used in operating activities (1,563) (1,068)
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INVESTING ACTIVITIES
Purchase of property and equipment (218) (11)
Purchase of short-term investments (1,907) (3,684)
Proceeds from sale of short-term investments 534 1,684
Patents (196) (84)
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Net cash flows used in investing activities (1,787) (2,095)
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FINANCING ACTIVITIES
Payments on long-term obligation (9) (9)
Issuance of preferred stock, net 10,028 --
Issuance of common stock, net 288 5,110
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Net cash flows provided by financing activities 10,307 5,101
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Net increase in cash and cash equivalents 6,957 1,938
Cash and cash equivalents at the beginning of the period 1,974 824
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Cash and cash equivalents at the end of the period $ 8,931 $ 2,762
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</TABLE>
See accompanying notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Business
Applied Molecular Evolution, Inc., or the Company or AME, a Delaware
corporation, was incorporated on August 14, 1989, as Ixsys, Inc., and
changed its name to Applied Molecular Evolution, Inc. in February 2000. The
Company has a broad technology platform termed AMEsystems(TM), which the
Company's management believes will provide AME with a valuable and efficient
solution to optimizing proteins with commercial potential. To date, the
Company has successfully utilized its proprietary technology to optimize
monoclonal antibodies for pharmaceutical and biotechnology companies.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals, which
are necessary for a fair statement of the results of the interim periods
presented, have been included. The results of operations for the interim
period are not necessarily indicative of results to be expected for any
other interim period or for the year as a whole. These unaudited
consolidated financial statements and footnotes thereto should be read in
conjunction with the audited financial statements and footnotes thereto
contained in the Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission, or the SEC, in the form in which it
became effective on July 27, 2000.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the consolidated financial
statements and related footnotes. Changes in the estimates may affect
amounts reported in future periods.
The consolidated financial statements include the accounts of the Company
and Novasite Pharmaceuticals, Inc., or Novasite, which is 78% owned by AME
and which was incorporated in July 1999. All significant intercompany
accounts and transactions have been eliminated.
3. Initial Public Offering of Common Stock
On July 27, 2000, the Company completed its initial public offering of
5,347,500 shares of common stock at $19.00 per share, including 697,500
shares of common stock issued pursuant to the underwriters' over-allotment
option. The combined gross proceeds raised by the Company from the offering
and over-allotment option were $101.6 million. Concurrent with the initial
public offering, 13,884,568 shares of convertible preferred stock were
converted to shares of common stock.
4. Computation of Net loss per share
Basic and diluted net loss per common share are presented in conformity with
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS No. 128) and Staff Accounting Bulletin 98 issued by the Staff of the
Securities and Exchange Commission (SAB 98), for all periods presented.
Under the provisions of SAB 98, common and preferred stock that has been
issued or granted for nominal consideration prior to the anticipated
effective date of the initial public offering must be included in the
calculation of basic and diluted net loss per common share as if these
shares had been outstanding for all periods presented. To date, the Company
has not issued or granted shares for nominal consideration. In accordance
with SFAS No. 128, basic and diluted net loss per share has been computed
using the weighted average number of shares of common stock outstanding
during the period, less shares subject to
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repurchase. Pro forma basic and diluted net loss per common share, as
presented in the statements of operations, has been computed for the three
and six months ended June 30, 2000 and 1999, as described above, and also
gives effect to the assumed conversion of preferred stock which
automatically converted to common stock upon the completion of the Company's
initial public offering (using the "as if converted" method) from the
original date of issuance.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements in this quarterly report that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified below and in
our other publicly available documents. We are under no obligation to update any
of these forward-looking statements after the filing of this quarterly report to
reflect actual results or changes in our expectations.
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto included in Item 1 of this quarterly
report. We also urge readers to review and consider our disclosures describing
various factors that affect our business, including the disclosures under
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Risk Factors and the audited financial statements and notes
thereto contained in our Registration Statement on Form S-1, filed with the SEC
in the form in which it became effective on July 27, 2000.
OVERVIEW
We are a leader in the application of directed evolution to the development of
biotherapeutics. Directed evolution is the process by which genes and proteins
are optimized for specific commercial purposes. We focus principally on applying
our technology to human biotherapeutics, the largest and most profitable target
market for directed evolution.
Since our formation, we have expended considerable resources on the development
of our AMEsystem technology and the development of Vitaxin, a product candidate
engineered from an antibody we licensed from The Scripps Research Institute.
Much of our research and development from 1995-1999 was allocated to preclinical
development and initial clinical trials for Vitaxin. In 1999 we licensed Vitaxin
to MedImmune, which is responsible for future clinical development expenses and
commercialization. MedImmune is preparing to initiate clinical trials with an
improved, second generation version of Vitaxin that we enhanced using our
AMEsystem technology.
To date we have generated revenue from research collaborations, product and
technology licenses, prepaid royalties and government grants. We have strategic
collaborations with MedImmune, Bristol-Myers Squibb, and Cell Matrix. We have
licensed intellectual property to Biosite Diagnostics, Inc. in exchange for a
non-refundable, prepaid, fixed royalty which is being recognized over six years,
the estimated useful lives of the related patents. Our government grants have
come from the National Institutes of Health. Research funding from corporate
collaborators and government grants is recognized as revenue when the services
are rendered.
We have incurred losses since our inception. As of June 30, 2000, we had an
accumulated deficit of $33.8 million. These losses and this accumulated deficit
resulted from the significant costs incurred in the development of our
technology platform and the clinical development of Vitaxin. We expect these
losses to increase as we continue to invest in our AMEsystem technology and
internal development projects.
We have capitalized the costs incurred to file patent applications. These costs
are amortized over a six-year estimated life from the date of patent issuance.
At June 30, 2000, we had capitalized costs related to issued patents totaling
approximately $422,000 (net of accumulated amortization) and approximately
$1,064,000 related to unissued patents. These capitalized patent costs are
material relative to our stockholders' equity at June 30, 2000. Our results of
operations could be materially impacted when we begin amortizing the costs
related to unissued
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patents. In addition, we expense all costs related to abandoned patent
applications. If we elect to abandon any of our currently issued or unissued
patents, the related expense could be material to our results of operations for
the period of the abandonment.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999
Revenue. Our revenue increased to $377,000 for the quarter ended June 30, 2000
from $318,000 for the same period in 1999, an increase of $59,000. Revenue from
collaborations accounted for 84% and 81% of all revenue for the quarters ended
June 30, 2000 and 1999, respectively.
Research and development. Research and development expenses increased to
$809,000 for the quarter ended June 30, 2000 from $773,000 for the same period
in 1999, an increase of $36,000. The increase was related primarily to increased
scientific staffing to support our collaborations and internal research
projects.
General and administrative. General and administrative expenses increased to
$502,000 for the quarter ended June 30, 2000 from $418,000 for the same period
in 1999, an increase of $84,000. The increase was due primarily to professional
fees in connection with the expansion of our business development efforts and an
increase in administrative staffing.
Stock-based compensation. Deferred compensation for options granted to employees
is the difference between the exercise price and the estimated fair value of our
common stock on the date the options were granted. Deferred compensation is
included as a component of stockholders' equity and is being amortized in
accordance with FASB Interpretation No. 28 over the vesting periods of the
related options, which is generally four years.
Deferred compensation for options granted to consultants has been determined in
accordance with the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", as the fair value of the equity
instruments issued, and is periodically remeasured as the underlying options
vest in accordance with EITF 96-18.
For the three months ended June 30, 2000, we recorded non-cash, stock based
compensation expenses of approximately $4.2 million ($1.3 million and $2.9
million related to research and development and general and administrative,
respectively), compared to $34,000 for the same period in 1999.
Deemed dividend on beneficial conversion of Series F preferred stock. On May 3,
2000 and June 15, 2000, we issued 1,133,333 shares and 1,111,111 shares of our
Series F preferred stock for $5.1 million and $5.0 million, respectively, which
converted into shares of common stock upon the closing of our initial public
offering. We recorded a charge of $10.1 million to earnings applicable to common
stockholders for the beneficial conversion feature embedded in the Series F
preferred stock.
Interest income, net. Net interest income increased to $84,000 for the quarter
ended June 30, 2000, from $66,000 for the quarter ended June 30, 1999, an
increase of $18,000. The increase was due primarily to our higher average cash
and investment balances during 2000 as a result of the Series F preferred stock
financing in the second quarter of 2000.
Six Months Ended June 30, 2000 and 1999
Revenue. Our revenue increased to $1.2 million for the six months ended June 30,
2000, from $465,000 for the same period in 1999, an increase of $743,000.
Revenue from collaborations accounted for 86% and 75% of all revenue for the six
months ended June 30, 2000 and 1999, respectively.
Research and development. Research and development expenses decreased to $1.5
million for the six months ended June 30, 2000, from $1.7 million for the same
period in 1999, a decrease of approximately $200,000. The decrease was related
primarily to the elimination of clinical costs and staffing related to the
Vitaxin project which were incurred in 1999 and were not
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incurred in 2000.
General and administrative. General and administrative expenses increased to
$921,000 for the six months ended June 30, 2000 from $645,000 for the same
period in 1999, an increase of $276,000. The increase was due primarily to
increased professional fees in connection with the expansion of our business
development efforts.
Stock-based compensation. For the six months ended June 30, 2000, we recorded
non-cash, stock based compensation expenses of approximately $5.4 million ($1.9
million and $3.5 million related to research and development and general and
administrative, respectively), compared to $71,000 for the same period in 1999.
Interest income, net. Net interest income increased to $123,000 for the six
months ended June 30, 2000 from $97,000 for the same period in 1999, an increase
of $26,000. The increase was due primarily to our higher average cash and
investment balances during 2000 as a result of the Series F preferred stock
financing in the second quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through private placements of equity
securities, with aggregate net proceeds of approximately $39.9 million through
June 30, 2000, and $16.6 million of cash generated from research collaborations
through June 30, 2000. In addition, we completed an initial public offering of
common stock on July 27, 2000 for cash proceeds of $94.5 million.
As of June 30, 2000, we had approximately $11.8 million in cash, cash
equivalents and short-term investments, compared to $3.5 million of cash, cash
equivalents and short-term investments as of December 31, 1999.
For the six months ended June 30, 2000, we used cash of approximately $1.6
million in operating activities to fund our net losses of $6.4 million, offset
by non-cash charges for depreciation and patent amortization totaling $122,000,
non-cash, stock based compensation totaling $5.4 million and decreases in
deferred revenue of $118,000. For the six months ended June 30, 2000, we used
cash of approximately $1.8 million in investing activities. Our investing
activities consisted primarily of purchases and sales of short-term investments,
and capital expenditures for property and equipment to be used in our business.
We expect to continue to make investments in our infrastructure, including
purchasing property and equipment to support our operations.
For the six months ended June 30, 2000, we generated $10.3 million of cash from
financing activities, primarily from the net proceeds of sales of common and
Series F preferred stock.
We expect our cash requirements to increase significantly in 2000 as we continue
our research and development efforts, hire additional personnel, grow our
administrative support activities and expand our facilities. We believe that our
current cash, cash equivalents and short-term investments, including proceeds we
received in July 2000 from our initial public offering, will be sufficient to
fund our operations for three years.
This estimate is a forward-looking statement that involves risks and
uncertainties. Our future capital requirements depend on several factors,
including: the success of our research and development efforts; our ability to
establish collaborative agreements; our costs of prosecuting and maintaining
patents; and market and competing technological developments.
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Our plans include the development of selected internal projects to a point where
they may be candidates for corporate collaborations. If we choose to develop and
commercialize any internal development projects without the assistance of
collaborators, the costs of development and commercialization would exceed our
capital resources. We would therefore need to seek additional sources of
financing to further develop these projects ourselves.
Should we require additional financing due to unanticipated developments, such
financing may not be available when needed or may not be available on favorable
terms. We may either delay, scale back or eliminate some or all of our research
and development programs for lack of funds. Furthermore, our ability to operate
as a going concern may be adversely affected by insufficient funds. If
additional funds are raised by issuing equity securities, substantial dilution
to existing stock holders my result.
ITEM 3: 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-prevailing rate and the prevailing interest rate later rises, the market
value 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, and government and non government debt securities. The average duration
of all of our investments in 1999 was less than one year. Due to the short-term
nature of these investments, we believe that we have no material exposure to
interest rates arising from our investments. Therefore, no quantitative tabular
disclosure is included in this report.
RISK FACTORS
WE HAVE NOT ACHIEVED PROFITABILITY AND MAY NEVER BECOME PROFITABLE.
We are at an early stage of development. We incurred a net loss of $6.4 million
for the six months ended June 30, 2000, and our revenue for that same period was
only $1.2 million. Additionally, we have had net losses each year since
inception and as of June 30, 2000, had an accumulated deficit of $33.8 million.
We expect to report a net loss for fiscal year 2000, and we expect to report
increasing net losses for the foreseeable future. We may never achieve
profitability. The size of our net losses will depend, in part, on the rate of
growth, if any, in our contract revenue and on the level of our expenses. To
date, we have derived most of our revenue from collaborations and expect to
continue to do so in the foreseeable future. Revenues from collaborations are
uncertain because our ability to secure future agreements will depend upon our
ability to address the needs of our potential collaborators. We expect to spend
significant amounts to fund research and development and enhance our core
technology. We expect that our operating expenses will increase significantly in
the near term, and consequently, we will need to generate significant additional
revenue to achieve profitability. Even if we do achieve profitability, we may
not be able to sustain or increase profitability on a quarterly or annual basis.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE. IF ADDITIONAL CAPITAL IS NOT
AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OPERATIONS.
We may need to raise more money to continue our operations. We may seek
additional funds from public and private stock offerings, corporate
collaborations, borrowings under lease lines of credit or other sources. If we
cannot raise more money, we may have to reduce our capital expenditures, scale
back our development of new products, reduce our workforce or license to others
products that we otherwise would seek to commercialize ourselves. We expect that
our current resources, together with future
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operating revenue, will be sufficient to fund operations for the next three
years. The amount of money we will need will depend on many factors, including:
- the success of our research and development efforts
- our ability to establish collaborative agreements
- our costs of prosecuting and maintaining patents
- market and competing technological developments
Additional capital may not be available on terms acceptable to us, or at all.
Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may include restrictive covenants.
THE COMMERCIAL UTILITY OF OUR AMESYSTEM TECHNOLOGY IS UNPROVEN AND MAY NEVER BE
REALIZED.
While we have met with initial success in applying our AMEsystem technology, to
prove the commercial value of our technology, we or our collaborators will need
to commercialize biotherapeutics that we have optimized. Successful
commercialization of biotherapeutics requires: preclinical testing, clinical
trials, regulatory approval, and commercial manufacturing. It will take us or
our collaborators many years to complete these steps for any biotherapeutic. If
we or our collaborators do not undertake and successfully complete these
activities, then our AMEsystem technology will be of little commercial value,
and our ability to generate revenue will be limited. Currently, there are no
products in clinical trials that have been developed using our technology.
WE HAVE OPTIMIZED ONLY ONE TYPE OF PROTEIN AND MAY NOT BE ABLE TO OPTIMIZE
OTHERS, THEREBY LIMITING OUR MARKET POTENTIAL.
To date we have optimized only antibodies for corporate collaborators. If we are
unable to apply our AMEsystem technology to other types of proteins, the scope
of our potential business will be significantly limited.
IF OUR COLLABORATORS ARE NOT SUCCESSFUL OR IF WE ARE UNABLE TO FIND
COLLABORATORS IN THE FUTURE, WE MAY NOT BE ABLE TO COMMERCIALIZE PRODUCT
CANDIDATES.
Our strategy for developing and commercializing product candidates calls for us
to enter into contractual arrangements with collaborators. We may be
unsuccessful in attracting collaborators to develop and commercialize our
products. Some collaborators may not perform their obligations as we expect, or
we may not derive any revenue from these arrangements. We do not know whether
these collaborators will successfully develop and market any products under
their respective agreements. Moreover, some of our collaborators are also
researching competing technologies and products targeted by our collaborative
programs. Our success depends in part upon the performance by these
collaborators of their responsibilities under these arrangements. We have no
control over the resources that any collaborator may devote to the development
and commercialization of products under these collaborations. Our collaborators
may terminate their agreements with us or otherwise fail to conduct their
collaborative activities successfully and in a timely manner. Our collaborators
may elect not to develop products arising out of our collaborative arrangements
or not to devote sufficient resources to develop, manufacture, market or sell
these products.
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IF PRODUCT CANDIDATES WE OPTIMIZE DO NOT RECEIVE REGULATORY APPROVAL, NEITHER WE
NOR OUR COLLABORATORS WILL BE ABLE TO COMMERCIALIZE THESE PRODUCTS.
The U.S. Food and Drug Administration must approve any therapeutic product
before it can be marketed in the United States. The regulatory process is
expensive and time-consuming. Before we or a collaborator can file a new drug
application with the FDA, the product candidate must undergo extensive testing,
including animal studies and human clinical trials that can take many years and
may require substantial expenditures. Data obtained from such testing may be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Changes in regulatory policy for product approval may cause
delays or rejections. Because our product candidates will be developed in a
novel way, government regulatory authorities may subject these product
candidates to greater scrutiny than those developed using more conventional
methods. Some of our collaborators are in early stages of the FDA regulatory
process for drugs we have optimized.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY, OUR
COMPETITIVE POSITION COULD BE HURT.
The patent positions of biopharmaceutical and biotechnology companies, including
our patent position, are generally uncertain and involve complex legal and
factual questions. We may be able to protect our proprietary rights from
infringement 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. Furthermore, others may independently develop
similar or alternative technologies or design around our patented technologies.
Litigation or other proceedings to defend or enforce our intellectual property
rights could require us to spend significant time and money and could disrupt
and harm our business.
We also rely upon trade secrets, technical know-how and continuing inventions to
develop and maintain our competitive position. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets or disclose our technology, and we may not be
able to meaningfully protect our trade secrets, or be capable of protecting our
rights to our trade secrets.
IF WE INFRINGE THIRD-PARTY PATENTS OR BREACH OUR LICENSE AGREEMENTS, LITIGATION
MAY DEPLETE OUR RESOURCES AND UNDERMINE OUR ABILITY TO USE OUR AMESYSTEM
TECHNOLOGY.
Our commercial success also depends in part on neither infringing valid,
enforceable patents or proprietary rights of third parties, nor breaching any
licenses that may relate to our technology and products. We are aware of
third-party patents that may relate to our technology. It is possible that we
may unintentionally infringe these patents or other patents or proprietary
rights of third parties. Any legal action taken against us or our collaborative
partners claiming damages and seeking to enjoin commercial activities relating
to our products and processes affected by third-party rights may require us or
our collaborators to obtain licenses in order to continue to manufacture or
market the affected products and processes. In addition, these actions may
subject us to potential liability for damages. We or our collaborators may not
prevail in an action, and any license required under a patent may not be made
available on commercially acceptable terms, or at all. Litigation could result
in substantial costs and the diversion of management's efforts, regardless of
the result of the litigation.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP OUR TECHNOLOGY.
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We are highly dependent on the principal members of our management and
scientific staff, particularly our President and Chief Executive Officer,
William D. Huse, M.D., Ph.D. If we lose their services we may not achieve our
objectives. In addition, recruiting and retaining qualified scientific personnel
to perform future research and development work will be critical to our success.
We do not have sufficient personnel to fully execute our business plan, and
there is currently a shortage of skilled executives and scientists, which is
likely to continue. As a result, competition for experienced executives and
scientists from numerous companies and academic and other research institutions
may limit our ability to hire or retain personnel on acceptable terms. If we
fail to attract and retain sufficient personnel, we may not be able to develop
or implement our technology.
PUBLIC PERCEPTION OF ETHICAL AND SOCIAL ISSUES MAY LIMIT THE USE OF OUR
TECHNOLOGY, WHICH COULD REDUCE OUR REVENUE.
Our success will depend upon our ability to develop products through the
application of our directed evolution technology. Governmental authorities
could, for social or other purposes, limit the use of genetic modification or
prohibit the practice of our technology. Ethical and other concerns about the
use of products derived from modified genes could adversely affect their market
acceptance. If, as a result, our technology or the products we develop cannot be
marketed, we would lose our core business.
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.
We use hazardous materials, including chemicals, and radioactive and biological
materials. These materials include o-phenylenediamine dihydrochloride, ethidium
bromide, and acrylamide. Our operations also produce hazardous waste products.
We cannot eliminate the risk of accidental contamination or discharge and any
resultant injury from these materials. 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, claimants may sue us for injury or
contamination that results from the use of these materials. Federal, state and
local laws and regulations govern the use, manufacture, storage, handling and
disposal of these materials. Compliance with environmental laws and regulations
may be expensive, and current or future environmental regulations may impair our
research, development, or production efforts.
IF PEOPLE ARE HARMED BY DRUGS DEVELOPED USING OUR AMESYSTEM TECHNOLOGY, WE MAY
BE SUED FOR PRODUCT LIABILITY.
We may be sued for product liability and other claims if our technology or
products developed from our technology are alleged to have caused harm. We may
not be able to avoid significant liability exposure. We maintain product
liability insurance, but we may not have sufficient coverage. If we are sued for
any injury caused by our products and found liable, our financial condition,
reputation and ability to find collaborators may be harmed.
SUBSTANTIAL SALES OF OUR COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD CAUSE
OUR STOCK PRICE TO FALL.
Future sales of common stock by our stockholders under Rule 144 of the
Securities Act of 1933, or the Securities Act, or through the exercise of
outstanding registration rights or otherwise could have an
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adverse effect on the price of our common stock. Some of our existing
stockholders have rights to require us to register their shares for future sale.
OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES OWN SLIGHTLY LESS THAN A
MAJORITY OF OUR SHARES AND MAY VOTE IN WAYS WITH WHICH YOU DISAGREE BECAUSE THEY
HAVE INTERESTS BOTH AS MANAGERS AND STOCKHOLDERS.
As of August 31, 2000, our officers and directors and their affiliates, in the
aggregate, own beneficially approximately 39.9% of our outstanding shares of
common stock. As a result, these stockholders, acting together, would be able to
effectively control most matters requiring approval by our stockholders,
including the election of a majority of the directors. If your interests as a
stockholder are different from their interests as both managers and
stockholders, you may not agree with their decisions.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) In connection with a private placement in May and June 2000, the
Company sold Series F preferred stock, which converted into
2,244,444 shares of common stock, to certain accredited investors
for net proceeds of approximately $10.0 million. The Company
relied upon the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, or the Securities Act, in
issuing these shares.
On various dates from April 1, 2000 through June 30, 2000, the
Company issued 1,365,915 shares of its common stock to various
employees and consultants pursuant to the exercise of options
granted under its 1992 Stock Plan or 2000 Stock Plan. The
exercise price per share ranged from $0.20 to $1.25. The Company
relied on the exemption provided by Rule 701 promulgated under
the Securities Act in issuing these shares.
(d) On July 27, 2000 the Company offered for sale 5,347,500 shares of
its common stock priced at $19.00 per share for an aggregate
offering price of $101.6 million in an initial public offering,
or IPO, led by an underwriting group consisting of CIBC World
Markets, PaineWebber Incorporated and SG Cowen. The proceeds of
the IPO to the Company, net of underwriting fees, were $94.5
million. IPO expenses are expected to be approximately $1.2
million. The effective date of the registration statement filed
by the company with the Securities and Exchange Commission in
connection with the IPO (File No. 333-36830) was July 27, 2000.
Because all of the proceeds from the IPO were generated after
June 30, 2000, none of these proceeds were used during the three
month
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or six month periods covered by this Report on Form 10-Q.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A majority of the Company's stockholders, by written consent,
approved: (i) an amendment and restatement to the Company's
Certificate of Incorporation, providing for, among other things,
an increase in the Company's authorized capital stock and
creation of a new series of preferred stock designated Series F
preferred stock; (ii) conditioned upon consummation of the IPO,
an amendment and restatement of the Company's Certificate of
Incorporation to, among other things, set the authorized "blank
check" preferred stock at 5,000,000 shares, provide for a
classified Board of Directors, eliminate the right of
stockholders to act by written consent and provide for certain
supermajority voting provisions; (iii) conditioned upon the
consummation of the IPO, an amendment and restatement of the
Company's by laws, to, among other things, eliminate the right of
stockholders to act by written consent and provide for certain
supermajority voting provisions; (iv) the adoption of the
Employee Stock Purchase Plan; (v) the adoption of a unified form
of indemnity agreement providing for indemnification for the
Company's officers and directors.
ITEM 5: OTHER INFORMATION
Not Applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K during the quarter
None.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 7, 2000 By: /s/ WILLIAM D. HUSE
---------------------------------------
William D. Huse, M.D., Ph.D., President
and Chief Executive Officer
Date: September 7, 2000 By: /s/ LAWRENCE E. BLOCH
---------------------------------------
Lawrence E. Bloch, M.D., Chief
Financial Officer, Vice President of
Business Development and Secretary
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