<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, 1999
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number: 0-27972
TREGA BIOSCIENCES, INC.
-----------------------------------------------------------------
(Exact Name of Registrant as Specified in its charter)
DELAWARE 51-0336233
-------------------------------------- -----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9880 CAMPUS POINT DRIVE, SAN DIEGO, CA 92121
(619) 410-6500
- -------------------------------------------------------------------------------
(Address, including zip code, and telephone, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT SEPTEMBER 30, 1999
------------------------------ ---------------------------------
<S> <C>
Common Stock, $0.001 par value 19,096,300
</TABLE>
<PAGE>
TREGA BIOSCIENCES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets at September 30, 1999 and December
31, 1998...................................................... 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1999 and 1998...................... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998............................. 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..................... 15
Item 6. Exhibits ..................................................... 15
SIGNATURE.............................................................. 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Trega Biosciences, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,323 $ 9,755
Short-term investments 5,144 6,507
Accounts receivable and other current assets 2,295 778
-------- --------
Total current assets 8,762 17,040
Property and equipment, net 3,999 4,123
Other assets 9,561 8,372
-------- --------
$ 22,322 $ 29,535
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,448 $ 1,539
Accrued compensation and other accrued liabilities 2,631 2,399
Current portion of debt obligations 2,730 1,251
Deferred revenue 1,770 3,794
-------- --------
Total current liabilities 8,579 8,983
Long-term debt obligations, net of current portion 2,135 2,689
Deferred rent 445 223
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 40,000,000
Issued and outstanding shares 19,096,300 and 17,481,097 at
September 30, 1999 and December 31, 1998, respectively 19 18
Additional paid-in capital 88,224 86,645
Common stock issuable 16 16
Deferred compensation (155) (609)
Accumulated deficit (76,941) (68,430)
-------- --------
Total stockholders' equity 11,163 17,640
-------- --------
$ 22,322 $ 29,535
-------- --------
-------- --------
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
3
<PAGE>
Trega Biosciences, Inc.
Consolidated Statements of Operations
(in thousands, except net loss per share)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended,
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Compound revenues $ 2,822 $ 132 $ 4,383 $ 402
Related party contract research 825 2,475 825 3,145
Contract research and license fees 277 1,086 1,658 3,670
Net sales 76 - 265 -
-------- -------- ------- --------
4,000 2,043 8,781 7,217
Costs and expenses:
Cost of sales 83 - 242 -
Research and development 4,593 4,658 13,534 13,533
Selling, general and administrative 1,682 1,227 5,187 3,619
-------- -------- ------- --------
6,358 5,885 18,963 17,152
-------- -------- ------- --------
Loss from operations before equity in losses
of affiliates (2,358) (3,824) (10,182) (9,935)
Equity in losses of affiliates (16) - (16) -
-------- -------- ------- --------
Loss from operations (2,374) (3,842) (10,198) (9,935)
Other income:
Interest income, net 32 142 174 429
Gain on sale of ChromaXome Corp - - 1,513 -
-------- -------- ------- --------
Net loss $ (2,342) $ (3,700) $ (8,511) $ (9,506)
-------- -------- ------- --------
-------- -------- ------- --------
Basic and diluted net loss per share $ (.13) $ (.26) $ (.47) $ (.68)
-------- -------- ------- --------
-------- -------- ------- --------
Shares used in computing basic and diluted
net loss per share 18,537 13,982 18,150 13,948
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
4
<PAGE>
Trega Biosciences, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------- ---------
(Unaudited)
<S> <C>
OPERATING ACTIVITIES
Net loss $ (8,511) $ (9,506)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 1,565 1,099
Amortization of note receivable discount (126) (38)
Amortization of deferred compensation 454 496
Equity in losses of affiliate 16 -
Accrued interest on notes payable - (81)
Loss/(Gain) on disposal of assets 2 (68)
Gain on sale of CXC (1,513) -
Changes in operating assets and liabilities, net of
effects from the transfer of assets from sale of CXC in
1999:
Accounts receivable (1,625) (384)
Other current assets 108 (347)
Accounts payable (91) 1,770
Other accrued liabilities 232 (453)
Deferred rent 222 139
Deferred revenue (2,024) 1,048
--------- ---------
Net cash (used in) operating activities (11,291) (6,325)
INVESTING ACTIVITIES
Purchase of short-term investments (6,134) (7,112)
Maturities of short-term investments 7,497 13,500
Purchase of property and equipment (1,117) (2,646)
Investment in affiliate (1,000) -
Proceeds from disposition of equipment - 198
Net proceeds from sale of CXC 1,705 -
Other assets 903 147
--------- ---------
Net cash provided by investing activities 1,854 4,087
FINANCING ACTIVITIES
Principal payments under debt obligations (1,017) (1,928)
Proceeds from equipment notes and notes payable 1,942 1,422
Issuance of common and preferred stock 80 240
--------- ---------
Net cash provided by (used in) financing activities 1,005 (266)
--------- ---------
Net (decrease) in cash and cash equivalents (8,432) (2,504)
Cash and cash equivalents at beginning of period 9,755 5,457
--------- ---------
Cash and cash equivalents at end of period $ 1,323 $ 2,953
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 239 $ 165
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL
ACTIVITIES:
Issuance of common stock for investment in affiliate $ 1,500 $ -
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
5
<PAGE>
Trega Biosciences, Inc.
Notes to Consolidated Financial Statements
September 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Trega
Biosciences, Inc. (the "Company"), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended September 30, 1999,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For more complete information, these financial
statements should be read in conjunction with the audited consolidated financial
statements and footnotes thereto for the year ended December 31, 1998, included
in the Company's Form 10-K filed with the Securities and Exchange Commission.
2. SIGNIFICANT ACCOUNTING POLICIES
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and disclosures made in the accompanying notes to the consolidated
financial statements. Actual results could differ from those estimates.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share." SFAS No. 128 requires the presentation of basic and diluted earnings per
share amounts. Basic earnings per share is calculated based upon the weighted
average number of common shares outstanding during the period while diluted
earnings per share also gives effect to all potential diluted common shares
outstanding during the period such as those underlying outstanding options,
warrants and convertible securities and contingently issuable shares. SFAS No.
128 is effective for periods ending after December 15, 1997. All common shares,
outstanding options, warrants and convertible securities and contingently
issuable shares have been excluded from the calculation of diluted earnings per
share, as their inclusion would be anti-dilutive.
Comprehensive Income (Loss)
During 1998, the Company adopted Statement of Financial Accounting Standard
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS No. 130
requires that all components of comprehensive income, including net income, be
reported in the financial statements in the period in which they are recognized.
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. Net
income and other comprehensive income, including foreign currency translation
adjustments and unrealized gains and losses on investments, are required to be
reported, net of their related tax effect, to arrive at comprehensive income.
For the three and nine months ended September 30, 1999 and 1998, comprehensive
loss is the same as net loss.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to
the presentation for the three and nine months ended September 30, 1999.
6
<PAGE>
3. EQUITY IN AFFILIATE
On August 20, 1999, the Company acquired 1,176,666 shares of Series B
Convertible Preferred Stock of ChemNavigator.com ("CNC") in exchange for $1.0
million in cash and 1.0 million shares of the Company's common stock, valued at
$1.5 million. As a result, the Company owns approximately 20% of the outstanding
equity securities of CNC. In addition, as part of the foregoing transaction, the
parties each acquired a warrant to acquire additional securities of the other.
Under these warrants, the Company has the right to acquire an additional 294,167
shares of CNC Series B Convertible Preferred Stock at a price of $5.00 per share
and CNC has a contingent right to acquire an additional 294,167 shares of the
Company's common stock at a price of $5.00 per share. CNC is preparing the
launch of an internet website where scientists will be able to conduct
structural searches among listed compounds and purchase compounds meeting
self-selected search criteria. The Company has agreed to list for sale certain
of its compounds on the CNC site.
The Company will account for its investment in CNC using the equity method.
In accordance with APB No. 18, a portion of the Company's investment in the
Series B Convertible Preferred Stock will be recognized as goodwill and
amortized accordingly. The value of the goodwill so treated is measured by the
excess of the value of the Series B Convertible Preferred Stock on the purchase
date, over the value of the Company's ownership interest in the net assets of
CNC. As a result, the Company will amortize $1.9 million over a five-year
period. The Company also will recognize its ratable share of profits and losses
measured by its ownership interest in CNC's equity, relative to the other
owners.
4. DEBT
LINE OF CREDIT
In August 1999, the Company entered into a line of credit in the amount of
$1.5 million that provides funds to be used primarily for working capital
purposes. The line of credit, which is secured by the general assets of the
Company, bears interest at prime plus .75% and is for a term of one year. The
line of credit contains covenants relating to cash flow coverage and minimum
cash balances. As of September 30, 1999, the Company is in compliance with all
debt covenants. In August the entire line of $1.5 million was accessed.
LONG-TERM DEBT
In December 1998, the Company obtained an equipment financing line of $2.2
million, of which it had accessed approximately $1.5 million by September 30,
1999. The loan, which is secured by the equipment, bears interest between 7.6%
and 8.7% and is to be repaid monthly over a four-year term.
In connection with the procurement of other fully funded equipment
financing lines, the Company entered into certain financial covenants
pertaining to the amount of its cash and marketable securities to be
maintained during the terms of the financing. These covenants require
maintenance of unrestricted cash (as defined in the applicable agreements,
but including marketable securities) greater than $6.0 million or 9 months'
historical cash needs in the case of certain equipment and greater than $4.0
million or 6 month's historical cash needs in the case of certain other
equipment. The Company's unrestricted cash, as defined in the agreements,
has dropped below the applicable levels thereby obligating the Company to
make security deposits of $490,223 with the lessor.
5. COMMON STOCK
During the three and nine months ended September 30, 1999, the Company
issued 1,024,205 and 1,615,203, shares of common stock, respectively, as a
result of the Company's investment in affiliate (see note 3 above), exercises of
options and participation in the Company's employee stock purchase plan, all of
which are included in common stock outstanding at September 30, 1999.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
WITHOUT LIMITATION, STATEMENTS USING WORDS SUCH AS "MAY," "POTENTIAL,"
"EXPECTS," "BELIEVES," "ESTIMATES," "PLANS," "INTENDS," "ANTICIPATES" AND
SIMILAR EXPRESSIONS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES (INCLUDING THOSE SET FORTH BELOW, IN THE SECTION OF THIS ITEM 2 OF
THIS QUARTERLY REPORT ON FORM 10-Q UNDER THE CAPTION "RISK FACTORS" AND IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998) THAT
COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THOSE PROJECTED. THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY
UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENTS ARE
BASED.
OVERVIEW
Trega Biosciences, Inc. (the "Company" or "Trega") is a drug discovery
company focused on accelerating the process of drug discovery by using small
molecule combinatorial chemistry and other drug discovery technologies to create
novel drugs having greater chances of clinical success. In combination with its
wholly owned subsidiary, NaviCyte, Inc. ("NaviCyte"), Trega offers drug
discovery products and services to the pharmaceutical and biopharmaceutical
industries. Trega also uses its drug discovery technologies in its internal
development programs, which are focused on discovering small molecules acting on
melanocortin receptors, which may be important in the treatment of inflammatory
and metabolic diseases.
In November 1998, the Company acquired NaviCyte, a privately-held company
engaged in (i) the sale of devices and licensing of a cell line used in
connection with predictive testing of drug candidates for absorption
characteristics and (ii) the development of a range of drug candidate selection
tools intended to be used to predict the pharmacokinetic characteristics of drug
candidates.
In March 1999, ChromaXome Corp. ("ChromaXome"), a wholly owned subsidiary of
the Company, sold substantially all of its assets. ChromaXome had focused on the
development and use of combinatorial biology techniques to create drug
candidates and other molecules of potential commercial interest from naturally
occurring microbial sources.
While at the time of these transactions the respective sizes of the
workforces of NaviCyte and ChromaXome were comparable, the Company anticipates
an increase in costs at NaviCyte over those at ChromaXome as development costs
related to NaviCyte's products and services under development are incurred. The
development of NaviCyte's products and services has necessitated the hiring of
additional employees.
The Company has entered into pharmaceutical alliances, providing partners
access to the Company's technologies in exchange for licensing fees and
potential milestone payments and royalties. The timing and occurence of such
transactions in the future, if any, can not be predicted. The timing and amounts
of revenues from such alliances, if any, are subject to significant fluctuations
and therefore the Company's results of operations for any period may not be
comparable to the results of operations for any other period and may not be
indicative of future operating results. The Company will be required to conduct
significant research, development and production activities during the next
several years to fulfill its obligations to corporate partners and for the
development of its own compounds. The Company has been unprofitable since its
inception and the Company is unable to predict when, if ever, it will become
profitable. As of September 30, 1999, the Company's accumulated deficit was
approximately $76,941,000.
RESULTS OF OPERATIONS
Third Quarter 1999 Compared With Third Quarter 1998
The Company recorded revenues of $4.0 million for the three months ended
September 30, 1999 compared with approximately $2.0 million for the same period
in 1998. Revenues increased $2.0 million, or 96% over the same quarter in the
prior year. This increase was due primarily to a $2.7 million increase in
revenues from the sale of the Company's Chem.Folio(TM) combinatorial libraries.
Partially offsetting this increase was a decrease in revenues from research
conducted under collaborative research agreements.
8
<PAGE>
As of September 30, 1999, the Company's financial statements reflect a
liability for deferred revenue in the amount of approximately $1.8 million. This
represents the excess of payments received from research collaborators over the
revenue from libraries and cells shipped or work performed, and will be
recognized when the correlative shipments are made or services are performed or
the period for performance expires.
Cost of sales in the third quarter of 1999 were primarily related to device
sales from the Company's subsidiary, NaviCyte. There were no device sales in the
comparable quarter of 1998.
The Company's research and development expenses remained substantially
unchanged for the three months ended September 30, 1999 and 1998, respectively.
The Company's selling, general and administrative expenses total
approximately $1.7 million and $1.2 million for the three months ended
September 30, 1999 and 1998, respectively. These expenses included
administrative salaries, legal, finance, investor relations and business
development and sales activities. The increase in selling, general and
administrative expenses are primarily attributable to the addition of
NaviCyte, its expenses and the costs associated with attempting to expand its
business and sales base. Selling, general and administrative expenses are
expected to increase as the Company's activities increase.
The Company's interest income decreased to approximately $114,000 for the
quarter ended September 30, 1999, compared to $185,000 for the same quarter in
1998. The decrease is a result of lower cash balances.
Interest expense for the three months ended September 30, 1999 and 1998 was
approximately $82,000 and $43,000, respectively. The increase in interest
expense for the quarter is a result of a line of credit and additional equipment
financing obligations, neither of which were in place during the comparative
quarter last year.
Nine Months Ended September 30, 1999 Compared With Nine Months Ended September
30, 1998
The Company recorded revenues of approximately $8.8 million for the nine
months ended September 30, 1999 compared with approximately $7.2 million for the
same period in 1998. This increase was due primarily to increased revenues from
the sale of the Company's Chem.Folio(TM) combinatorial libraries. The increase
was partially offset by a decrease in revenues from contract research
agreements, both related party and non-related party.
Cost of sales for the nine months ended September 30, 1999 is primarily
related to device sales from the Company's subsidiary, NaviCyte. There were no
device sales in the comparable nine months of 1998.
The Company's research and development expenses remained substantially
unchanged for the nine months ended September 30, 1999 and 1998. The Company
expects to continue to incur significant expenses in research and development
relating to combinatorial chemistry, melanocortin biology and the development of
other drug discovery technologies.
The Company's selling, general and administrative expenses total
approximately $5.2 million and $3.6 million for the nine months ended
September 30, 1999 and 1998, respectively. These expenses include
administrative salaries and legal, finance, investor relations and business
development and sales activities. The increase in selling, general and
administrative expenses is primarily attributable to the addition of
NaviCyte, its expenses and the costs associated with attempting to expand its
business and sales base. Selling, general and administrative expenses are
expected to increase as the Company's activities increase.
The Company's interest income decreased to approximately $415,000 for the
nine months ended September 30, 1999, compared to $609,000 for the same period
in 1998. The decrease is a result of lower cash balances.
Interest expense for the nine months ended September 30, 1999 and 1998 was
approximately $241,000 and $180,000, respectively. The increase in interest
expense for the quarter is a result of a line of credit and additional equipment
financing obligations, neither of which were in place during the comparative
quarter last year.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through September 30, 1999, the Company has financed its
activities primarily from public and private sales of equity, funding from
collaborations with corporate partners, sales derived from shipments of
combinatorial libraries or individual compounds, sales of custom peptides and
combinatorial peptide libraries (through its former subsidiary, Multiple Peptide
Systems,
9
<PAGE>
Inc.), sales of its businesses believed to be no longer strategic to the
Company and interest income. At September 30, 1999, the Company had cash,
cash equivalents and marketable securities aggregating $6.5 million compared
to $16.3 million on December 31, 1998. The Company has invested a significant
portion of its excess funds in cash equivalents and short-term investments
primarily of highly-rated debt instruments of financial institutions and
corporations. See Item 3, Qualitative and Quantitative Disclosure About
Market Risk.
The decrease in cash, cash equivalents and marketable securities at
September 30, 1999, resulted primarily from $11.3 million used to fund operating
activities, $1.1 million invested in property and equipment, $1.0 million
invested in ChemNavigator.com and $1.0 million repaid on debt from property and
equipment financing agreements. The decrease was offset, in part, by $1.7
million received through the sale of assets of the Company's former subsidiary,
ChromaXome Corp. and proceeds from property and equipment and other financing
agreements of $1.9 million.
On August 20, 1999, the Company acquired 1,176,666 shares of Series B
Convertible Preferred Stock of ChemNavigator.com ("CNC") in exchange for $1.0
million in cash and 1.0 million shares of the Company's common stock, valued at
$1.5 million. As a result, the Company owns approximately 20% of the outstanding
equity securities of CNC. In addition, as part of the foregoing transaction, the
parties each acquired a warrant to acquire additional securities of the other.
Under these warrants, the Company has the right to acquire an additional 294,167
shares of CNC Series B Convertible Preferred Stock at a price of $5.00 per share
and CNC has a contingent right to acquire an additional 294,167 shares of the
Company's common stock at a price of $5.00 per share. CNC is preparing the
launch of an internet website where scientists will be able to conduct
structural searches among listed compounds and purchase compounds meeting
self-selected search criteria. The Company has agreed to list for sale certain
of its compounds on the CNC site.
The Company will account for its investment in CNC using the equity method.
In accordance with APB No. 18, a portion of the Company's investment in Series B
Convertible Preferred Stock will be recognized as goodwill and amortized
accordingly. The value of the goodwill so treated is measured by the excess of
the value of the Series B Convertible Preferred Stock on the purchase date, over
the value of the Company's ownership interest in the net assets of CNC. As a
result, the Company will amortize $1.9 million over a five year period. The
Company also will recognize its ratable share of profits and losses measured by
its ownership interest in CNC's equity, relative to the other owners.
In August 1999, the Company entered into a line of credit in the amount of
$1.5 million that provides funds to be used primarily for working capital
purposes. The line of credit, which is secured by the general assets of the
Company, bears interest at prime plus .75% and is for a term of one year. The
line of credit contains covenants relating to cash flow coverage and minimum
cash balances. As of September 30, 1999, the Company is in compliance with all
debt covenants. In August the entire line of $1.5 million was accessed.
In June 1999, the Company entered into a Library Sales Agreement with
Janssen Research Foundation ("Janssen"), a division of Janssen Pharmaceutica
N.V., by which Janssen acquires combinatorial libraries as part of the Company's
Chem.Folio(TM) program. Under the terms of the agreement, the Company will give
Janssen non-exclusive access to its small-molecule combinatorial libraries in
exchange for an up-front payment on each compound delivered. The Company will
recognize revenue as libraries are shipped.
In March 1999 and February 1999, the Company entered into Software License
Agreements, through its subsidiary NaviCyte, with the R.W. Johnson
Pharmaceutical Research Institute ("PRI") and Schering-Plough Research Institute
("Schering-Plough") to collaborate on the use and development of the Company's
proprietary Pk-Informatics tools for the identification of new candidates for
drug development. Under the terms of the agreements, both companies will provide
data and make initial and milestone payments over the course of the further
development of the Company's proprietary In Vitro Determination for Evaluation
of ADME (IDEA (TM)) simulation software system and database. The Company will
license its software and computational models for use with both companies'
compound libraries. The Company has recorded a portion of upfront payments as
well as two milestones as revenue while the remaining portion of the upfront
payments have been recorded as deferred revenue.
In March 1999, the Company entered into a Library Sales Agreement with Isis
Pharmaceuticals, Inc. ("ISIS") by which ISIS acquires combinatorial libraries as
part of the Company's Chem.Folio(TM) program. Under the terms of the agreement,
the Company will give ISIS non-exclusive access to its small-molecule
combinatorial libraries in exchange for an up-front payment on each compound
delivered. ISIS also has the option to license synthetic protocols for libraries
from which active compounds are identified. The Company will recognize revenue
as libraries are shipped.
As of September 30, 1999, the Company had approximately $700,000
available under property and equipment financing agreements. In connection
with the procurement of other fully funded equipment financing lines, the
Company entered into certain financial covenants pertaining to the amount of
its cash and marketable securities to be maintained during the terms of the
financing. These covenants require maintenance of unrestricted cash (as
defined in the applicable agreements, but including marketable securities)
greater than $6.0 million or 9 months' historical cash needs in the case of
certain equipment and greater than $4.0 million or 6 month's historical cash
needs in the case of certain other equipment. The Company's unrestricted
cash, as defined in the agreements, has dropped below the applicable levels
thereby obligating the Company to make security deposits of $490,223 with the
lessor.
10
<PAGE>
During 1998, the Company moved into a combined research and development
facility and corporate headquarters in San Diego, California. The ten-year lease
covering the facility calls for annual rent of approximately $1.7 million and is
subject to a 3.5% annual escalation clause.
In June 1999, the Company signed a Mutual Release with Dura Pharmaceuticals
("Dura") which releases the parties from certain responsibilities set forth by
the original research agreement signed in February 1996 and terminates the
original research agreement other than in certain limited regards. Under the
original research agreement, the Company was committed to fund $6 million over
four years in a drug discovery and development collaboration using Dura's
proprietary drug delivery technology and Company compounds (such as HP 228). As
of September 30, 1999, $4.9 million of this obligation had been paid by the
Company. The Mutual Release provides that the outstanding balance due on this
obligation shall be limited to payments of $200,000, which was made upon
signing, and $138,414 due by March 31, 2000.
The Company intends to use its financial resources primarily to fund
research and development, the expansion of its combinatorial library inventories
and its drug discovery technology operations. The amounts actually expended for
each purpose may vary significantly depending on many factors. These factors
include the continuation of its research and development programs, the
acquisition or initiation of new research and development programs, the costs
involved in filing, prosecuting and enforcing patents, competing technological
and market developments.
The Company anticipates that its existing capital resources and funding
under an existing research and development collaboration, product sales
agreements, in existence and under negotiation, and notes due to the Company
in connection with the sale of assets of its wholly-owned subsidiary,
ChromaXome Corp., together with its currently available property and
equipment financing and line of credit, will be sufficient to fund its
current and planned operations through the second quarter of 2000. There can
be no assurances, however, that changes in the Company's research and
development plans or other changes affecting the Company's operating expenses
will not result in the expenditure of such resources before such time.
The Company will need to raise additional capital to fund its operations.
The Company expects that its primary potential revenue sources for the
foreseeable future will be sales of combinatorial libraries or compounds,
revenues generated by the Company's drug discovery technologies and additional
collaborative agreements. The Company intends to seek additional funding through
additional research and development agreements with suitable corporate
collaborators, extensions of an existing corporate collaborations, and through
public or private financings, if available and consistent with the Company's
business objectives. There can be no assurances, however, that such
collaboration arrangements, licensing or public or private financings will be
available on acceptable terms, if at all. If funds are raised through equity
arrangements, further dilution to stockholders may result. If adequate funds are
not available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research and development programs or take other
measures to cut costs, which could have a material adverse effect on the
Company.
OTHER MATTERS
Impact of Year 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements.
In 1998, Trega Biosciences Inc. developed a three-phase program for Y2K
information systems compliance. Phase 1 was to identify and solve Y2K issues in
the Company's significant information systems infrastructure and enterprise
business applications, including telecommunications and networking systems, as
well as accounting software. Phase 2 was to identify and plan for Y2K issues
that are specific to the Company's business units, including local software,
product matters, facilities related systems and vendor concerns. Phase 3 was the
final testing of each major area of exposure to ensure compliance, and the
development of contingency plans for unresolved Y2K deficiencies.
In Phase 1 of the program, the Company inventoried and assessed company-wide
systems, many of which were identified as being Y2K compliant. Some systems
software, hardware and firmware were in need of upgrades. These upgrades were
available from third party suppliers. Systems, which were not Y2K compliant,
have been upgraded.
11
<PAGE>
Under Phase 2, the Company identified and evaluated exposure to Y2K risk
from third-party vendors. The Company developed a list of critical vendors that
are either sole-source suppliers or preferred suppliers. The Company contacted
significant third parties regarding their Y2K readiness. The Company believes
that all equipment with preliminary issues was addressed and upgraded. There is
another class of third party vendors, however, from which the Company cannot
obtain assurances with regard to the Y2K compliance of their systems. For
example, the Company is dependent on electric, natural gas, water and telephone
utilities. Similarly, the Company is dependent upon its banks, payroll processor
and insurers. Disruption in one or more of the foregoing services could have a
material adverse impact on the Company.
The testing and contingency plan development under Phase 3, which began in
early 1999, has been completed.
The costs related to resolving Company Y2K issues to date have been less
than $100,000. However, there can be no assurance that Y2K compliance problems
will not be revealed in the future which could have a material adverse affect on
the Company's business, financial condition and results of operation. Many of
the Company's customers and vendors may be affected by Y2K issues which may
result in customers having reduced funds to purchase the Company's products or
suppliers experiencing difficulties in producing or shipping key components to
the Company on a timely basis or at all. Such third party issues could have a
material adverse affect on the Company's business, financial condition and
results of operations.
THIS DISCUSSION OF THE COMPANY'S Y2K STATUS CONSTITUTES A "YEAR 2000
READINESS DISCLOSURE" AS THAT ITEM IS DEFINED IN THE YEAR 2000 INFORMATION AND
READINESS DISCLOSURE ACT.
RISK FACTORS
THE COMPANY WISHES TO CAUTION READERS THAT THE FOLLOWING IMPORTANT FACTORS,
AMONG OTHERS (INCLUDING THOSE NOTED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998), IN SOME CASES HAVE AFFECTED, AND IN THE
FUTURE COULD AFFECT, THE COMPANY'S ACTUAL CONSOLIDATED RESULTS AND COULD CAUSE
THE COMPANY'S ACTUAL CONSOLIDATED RESULTS FOR FUTURE PERIODS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY, OR ON
BEHALF OF, THE COMPANY.
NEW AND UNCERTAIN TECHNOLOGIES AND BUSINESS
Drug discovery methods based upon combinatorial chemistry technology are
relatively new compared to traditional methods of drug discovery and there can
be no assurance that these methods will lead to the discovery or development of
commercial pharmaceutical products or that the Company will be able to employ
these or other methods of drug discovery successfully. Moreover, the Company's
technology development programs, including the Company's selection, screening
and predictive technology programs (conducted through NaviCyte) and the
Company's efforts to synthesize compounds through automation, are at early
stages of development, and there can be no assurance that such technology
programs will be developed or employed successfully, work efficiently or
otherwise enhance the Company's ability to engage effectively in drug discovery.
The types of combinatorial libraries the Company is capable of offering, the
nature of the compounds the Company is able to synthesize and the relative value
of any other drug development technologies which the Company may be able to
provide will, in large part, determine the demand for the Company's drug
discovery capabilities. An inability to offer competitive libraries or other
drug development technologies, or an inability to synthesize compounds that have
actual or potential utility, would have a material adverse effect on the
Company. Failures in the field of drug discovery, including combinatorial
chemistry, could have a material adverse effect on the Company.
DEPENDENCE ON COLLABORATORS
The Company's strategy for the utilization of its drug discovery
technologies and for the development, clinical testing, manufacturing and
commercialization of any compounds depends upon the formation of collaborations
and arrangements with corporate collaborators, licensors, licensees and others.
There may only be a limited number of pharmaceutical and biotechnology companies
that would potentially collaborate with the Company. Historically,
pharmaceutical and biotechnology companies have conducted lead compound
identification and optimization within their own research departments, due to
the highly proprietary nature of the activities being conducted, the central
importance of these activities to their drug discovery and development efforts
and the desire to obtain maximum patent and other proprietary protection on the
results of their internal programs. Pharmaceutical and biotechnology companies
must be convinced that the Company's drug discovery technologies and expertise
justify outsourcing these programs to the Company. The amount and timing of
resources that current and future collaborators, if any, devote to
collaborations with the Company are not within the control of the Company. There
can be no assurance that such collaborators will perform their obligations as
expected or that the Company will derive any additional revenue from such
arrangements. Because the Company's arrangements with its collaborators may
entail the
12
<PAGE>
provision of identical or similar libraries or compounds to multiple parties,
there can be no assurance that conflicts will not arise between collaborators
as to proprietary rights to particular libraries or as to particular
compounds in the Company's libraries. Moreover, the Company's collaborations
may be terminated under certain circumstances by its collaborators, which
terminations could result in the Company relinquishing rights to products
developed jointly with its collaborators. Any such conflicts or terminations
could have a material and adverse effect on the Company.
There can be no assurance that (i) the Company's present or any future
collaborators will not pursue their existing or alternative technologies in
preference to those of the Company, (ii) any product will be developed and
marketed as a result of such collaborations or (iii) the Company will be able to
negotiate additional collaborative arrangements in the future on acceptable
terms, if at all, or that such current or future collaborative arrangements will
be successful. To the extent that the Company chooses not to or is unable to
establish such arrangements, it will require substantially greater capital to
undertake the research, development and marketing of products at its own
expense. In addition, the Company may encounter significant delays in developing
compounds or find that the development, manufacture or sale of its proposed
products is materially and adversely affected by the absence of such
collaborative agreements.
EARLY STAGE OF PRODUCT DEVELOPMENT
The Company's research and product development programs (including the
Company's program with respect to potential drug candidates for the treatment of
diseases believed to be mediated by the melanocortin receptor pathway) are at
early stages. Any compounds resulting from the Company's research and
development programs are not expected to be commercially available for years, if
ever, even if any such compounds are successfully developed and proven to be
safe and effective. There can be no assurances that any of the Company's product
development efforts will be successfully completed, that development
arrangements with pharmaceutical partners will be established on acceptable
terms, if at all, that regulatory approvals will be obtained or will be as broad
as sought, that any candidate products will be capable of being produced in
commercial quantities at reasonable cost, or that any products, if introduced,
will achieve market acceptance or profitability.
Certain of the Company's technology development programs, including the
Company's selection, screening and predictive technology programs (conducted
through NaviCyte), may not result in products or services that can be utilized,
other than for certain limited development consortium purposes, within the
foreseeable future, if ever. There can be no assurances that these programs will
be successfully completed or result in products or services that are
efficacious, perceived as valuable by pharmaceutical partners or customers,
useful in the Company's internal development programs or otherwise an
enhancement to the Company's ability to engage effectively in drug discovery.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The continued development of the Company's technologies and compounds
will require the commitment of substantial additional funds to maintain the
competitiveness of its combinatorial chemistry technologies, to continue its
technology development programs (including the Company's selection, screening
and predictive technology programs (conducted through NaviCyte) and the
Company's efforts to synthesize compounds through automation) and to conduct
the costly and time consuming research and preclinical and clinical testing
necessary to advance potential drug candidates. The Company's future capital
requirements will depend on many factors, including, among others, (i)
continued scientific progress in its research and development programs, (ii)
the ability of the Company to establish and maintain collaborative
arrangements with respect to the Company's drug discovery technologies and
the clinical testing of candidate products, (iii) progress with preclinical
and clinical trials, (iv) the costs involved in further developing and
sustaining internal combinatorial chemistry and other drug discovery
capabilities, (v) the costs involved in developing additional drug discovery
technologies (including the Company's selection, screening and predictive
technology programs (conducted through NaviCyte) and the Company's efforts to
synthesize compounds through automation), (vi) the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims,
(vii) competing technological and market developments and (viii) changes in
the Company's existing research relationships. Although the Company estimates
that its existing capital resources and funding under existing research and
development collaboration, product sales agreements, in existence and under
negotiation, and notes due to the Company in connection with the sale of
assets of its wholly-owned subsidiary, ChromaXome, Corp, together with its
currently available property and equipment financing and line of credit, will
be sufficient to fund its current and planned operations through the second
quarter of 2000, there can be no assurance that changes will not occur that
would consume available capital resources before such time or that sufficient
funds will be available thereafter.
The Company anticipates that it will be required to raise additional capital
over a period of several years in order to conduct its operations. Such capital
may be raised through additional public or private financings, as well as
collaborative arrangements, borrowings and other available sources. There can be
no assurance that additional financing will be available on acceptable terms, if
at all. If adequate funds are not available, the Company may be required to
delay, reduce the scope of or eliminate one or more of its research or
development programs, which could have a material adverse effect on the Company.
13
<PAGE>
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has experienced significant operating losses since inception.
For the years ended December 31, 1998, 1997 and 1996, the Company had net losses
of approximately $12,801,000, $9,372,000 and $11,688,000, respectively. For the
nine months ended September 30, 1999, the Company recorded a net loss of
$8,511,000 and had an accumulated deficit at September 30, 1999 of approximately
$76,941,000.
The Company expects that its ability to achieve profitability will be partly
dependent upon the ability of the Company to enter into and achieve success
under additional collaborative arrangements or to expand and achieve success
under existing relationships. There can be no assurance that the Company will be
successful in entering into additional collaboration arrangements that will
result in revenues or that the Company will receive additional revenues under
existing collaboration arrangements. If the Company is unable to receive
significant additional revenues under collaboration arrangements, the Company
expects to incur additional operating losses in the future and expects
cumulative losses to increase as the Company's research and development efforts
and preclinical and clinical testing are expanded. Any revenues from the
achievement of milestones, royalties or license fees from the discovery,
development or sale of a commercial drug by a collaborator are not expected to
be material to the Company's financial position for several years, if at all.
The Company is unable to predict when, if ever, it will become profitable.
As a result of factors affecting the Company's business (including the
importance to the Company of collaborative arrangements and the Company's
inability to control the actions, timing, funding or success of its current and
potential collaborative partners), the revenues of the Company may vary
substantially from period to period. Thus, the Company's results for any one
period may not be indicative of the results which can be expected for any other
period.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its
long-term debt arrangements and, secondarily, its investments in certain
held-to-maturity securities. The Company invests its excess cash in highly
liquid short-term investments that are typically held for the duration of the
term of the respective instrument. The Company does not utilize derivative
financial instruments, derivative commodity instruments or other market risk
sensitive instruments, positions or transactions to manage exposure to interest
rate changes. Accordingly, the Company believes that, while the securities the
Company holds are subject to changes in the financial standing of the issuer of
such securities, the Company is not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices or other market changes that affect market risk sensitive
instruments.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 20, 1999, the Company acquired 1,176,666 shares of Series B
Convertible Preferred Stock of ChemNavigator.com ("CNC") in exchange for $1.0
million in cash and 1.0 million shares of the Company's common stock, valued
at $1.5 million. As a result, the Company owns approximately 20% of the
outstanding equity securities of CNC. In addition, as part of the foregoing
transaction, the parties each acquired a warrant to acquire additional
securities of the other. Under these warrants, the Company has the right to
acquire an additional 294,167 shares of CNC Series B Convertible Preferred
Stock at a price of $5.00 per share and CNC has a contingent right to acquire
an additional 294,167 shares of the Company's common stock at a price of
$5.00 per share. CNC is preparing the launch of an internet website where
scientists will be able to conduct structural searches among listed compounds
and purchase compounds meeting self-selected search criteria. The Company
has agreed to list for sale certain of its compounds on the CNC site. (See
Note 3 to the Company's Consolidated Financial Statements.)
The sale of the Company's securities to CNC was deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "1933 Act"),
by virtue of Section 4(2) thereof and Rule 506 of Regulation D thereunder
("Rule 506") as a transaction not involving any public offering. An
appropriate filing on Form D was made, CNC represented its intention to
acquire the securities for investment only and not with a view to the
distribution thereof, an appropriate legend was affixed to the certificates
representing the securities and CNC had adequate access to information about
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.1 (1) Series B Convertible Preferred Stock and Warrant
Purchase Agreement dated as of August 20, 1999
between ChemNavigator.com, Inc., the Company and
certain other parties.
10.2 (1) Stock and Warrant Issuance Agreement dated as of
August 20, 1999 between the Company and
ChemNavigator.com, Inc.
10.3 (1) Warrant to Purchase 294,164 Shares of the Common
Stock of ChemNavigator.com, Inc. dated August 20,
1999.
10.4 (1) Form of Warrant to Purchase 294,164 Shares of the
Common Stock of Trega Biosciences, Inc.
27.1 Financial Data Schedule
</TABLE>
---------------------------------
(1) Incorporated by reference from the Registrant's Current Report on
Form 8-K dated September 1, 1999 (Exhibits).
(b) Reports on Form 8-K
On September 1, 1999, the Company filed a report on Form 8-K relating to the
formation of a strategic relationship with ChemNavigator.com, Inc., a
privately held company.
15
<PAGE>
SIGNATURE
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.
Trega Biosciences, Inc.
Date: November 15, 1999 /s/ Michael G. Grey
--------------------
Michael G. Grey
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Gerard A. Wills
---------------------
Gerard A. Wills
Vice President, Finance and Chief Financial
Officer
(Principal Financial and Accounting Officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT SEPTEMBER 30, 1999 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000887920
<NAME> TREGA BIOSCIENCES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,323
<SECURITIES> 5,144
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