UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 MARCH 31, 2001. |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________. |
Commission File Number 000-31275
LARGE SCALE BIOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 77-0154648 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) |
3333 Vaca Valley Parkway, Suite 1000, Vacaville, CA 95688
(Address of principal executive offices and zip code)
(707) 446-5501
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of registrant’s common stock, as of April 30, 2001:
| CLASS | NUMBER OF SHARES OUTSTANDING | |
| Common Stock $0.001 par value | 24,535,991 |
LARGE SCALE BIOLOGY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
| Page | ||||||
| PART I — FINANCIAL INFORMATION | ||||||
| Item 1. | Financial Statements | |||||
| Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 (Unaudited) | 1 | |||||
| Condensed Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 (Unaudited) | 2 | |||||
| Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 (Unaudited) | 3 | |||||
| Notes to Condensed Consolidated Financial Statements | 4 | |||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 7 | ||||
| PART II — OTHER INFORMATION | ||||||
| Item 2. | Changes in Securities and Use of Proceeds | 22 | ||||
| Item 6. | Exhibits and Reports on 8-K | 22 | ||||
PART I — FINANCIAL INFORMATION
Item 1.Financial Statements
LARGE SCALE BIOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, 2001 | December 31, 2000 | |||||||||
| ASSETS | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 32,204,000 | $ | 40,030,000 | ||||||
| Marketable securities | 43,081,000 | 44,971,000 | ||||||||
| Prepaid expenses and other current assets | 2,203,000 | 1,923,000 | ||||||||
| Total current assets | 77,488,000 | 86,924,000 | ||||||||
| Property, plant, and equipment, net | 17,041,000 | 13,270,000 | ||||||||
| Intangible assets, net | 4,721,000 | 5,015,000 | ||||||||
| Other assets | 1,424,000 | 1,734,000 | ||||||||
| $ | 100,674,000 | $ | 106,943,000 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
| Current liabilities: | ||||||||||
| Accounts payable | $ | 3,102,000 | $ | 4,534,000 | ||||||
| Accrued expenses | 1,073,000 | 803,000 | ||||||||
| Current portion of long-term debt | 1,479,000 | 2,048,000 | ||||||||
| Deferred revenue and customer advances | 5,763,000 | 8,686,000 | ||||||||
| Total current liabilities | 11,417,000 | 16,071,000 | ||||||||
| Long-term debt | 405,000 | 423,000 | ||||||||
| Long-term deferred revenue | 421,000 | 657,000 | ||||||||
| Total liabilities | 12,243,000 | 17,151,000 | ||||||||
| Stockholders’ equity: | ||||||||||
| Common stock, issued and outstanding: | ||||||||||
| March 31, 2001 — 24,535,616 shares; December 31, 2000 — 24,446,325 shares | 190,464,000 | 190,097,000 | ||||||||
| Stockholders’ notes receivable | (52,000 | ) | (65,000 | ) | ||||||
| Deferred compensation | (4,557,000 | ) | (5,208,000 | ) | ||||||
| Accumulated deficit | (97,424,000 | ) | (95,032,000 | ) | ||||||
| Total stockholders’ equity | 88,431,000 | 89,792,000 | ||||||||
| $ | 100,674,000 | $ | 106,943,000 | |||||||
See accompanying notes to condensed consolidated financial statements.
1
LARGE SCALE BIOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended March 31, | ||||||||||
| 2001 | 2000 | |||||||||
| Revenues | $ | 5,981,000 | $ | 5,630,000 | ||||||
| Costs and expenses: | ||||||||||
| Development agreements | 1,435,000 | 2,023,000 | ||||||||
| Research and development | 4,808,000 | 3,623,000 | ||||||||
| General, administrative and marketing | 3,003,000 | 1,613,000 | ||||||||
| Amortization of goodwill and purchased intangibles | 325,000 | 222,000 | ||||||||
| Total costs and expenses | 9,571,000 | 7,481,000 | ||||||||
| Loss from operations | (3,590,000 | ) | (1,851,000 | ) | ||||||
| Other income (expense): | ||||||||||
| Interest income | 1,245,000 | 201,000 | ||||||||
| Interest expense | (47,000 | ) | (93,000 | ) | ||||||
| Change in fair value of warrant | — | 242,000 | ||||||||
| Total other income (expense) | 1,198,000 | 350,000 | ||||||||
| Net loss | $ | (2,392,000 | ) | $ | (1,501,000 | ) | ||||
| Net loss per share — basic and diluted | $ | (0.10 | ) | $ | (0.16 | ) | ||||
| Weighted average shares outstanding — basic and diluted | 24,500,550 | 9,333,526 | ||||||||
See accompanying notes to condensed consolidated financial statements.
2
LARGE SCALE BIOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended March 31 | |||||||||||
| 2001 | 2000 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (2,392,000 | ) | $ | (1,501,000 | ) | |||||
| Adjustments to reconcile net loss to net cash flows used in operating activities: | |||||||||||
| Depreciation of property, plant and equipment | 861,000 | 807,000 | |||||||||
| Amortization of intangible assets | 380,000 | 273,000 | |||||||||
| Accrued interest and amortized discount on marketable securities | 247,000 | (4,000 | ) | ||||||||
| Issuance of common stock for services | 5,000 | — | |||||||||
| Stock compensation expense | 651,000 | 662,000 | |||||||||
| Change in fair value of warrant | — | (242,000 | ) | ||||||||
| Changes in assets and liabilities: | |||||||||||
| Prepaid expenses and other current assets | (280,000 | ) | (586,000 | ) | |||||||
| Other assets | 141,000 | 25,000 | |||||||||
| Accounts payable | (189,000 | ) | (89,000 | ) | |||||||
| Accrued expenses | 529,000 | 354,000 | |||||||||
| Deferred revenue and customer advances | (3,159,000 | ) | (2,877,000 | ) | |||||||
| Net cash used in operating activities | (3,206,000 | ) | (3,178,000 | ) | |||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of marketable securities | (27,308,000 | ) | (4,034,000 | ) | |||||||
| Proceeds from matured marketable securities | 28,951,000 | 4,890,000 | |||||||||
| Capital expenditures | (5,875,000 | ) | (710,000 | ) | |||||||
| Increase in intangible assets | (86,000 | ) | (98,000 | ) | |||||||
| Exercise of call option | — | (74,000 | ) | ||||||||
| Net cash used in investing activities | (4,318,000 | ) | (26,000 | ) | |||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of common stock | 103,000 | 283,000 | |||||||||
| Proceeds from issuance of long-term debt | — | 120,000 | |||||||||
| Proceeds from stock note payments | 13,000 | 6,000 | |||||||||
| Change in restricted cash | 169,000 | (14,000 | ) | ||||||||
| Principal payments on long-term debt | (587,000 | ) | (486,000 | ) | |||||||
| Net cash used in financing activities | (302,000 | ) | (91,000 | ) | |||||||
| Net decrease in cash and cash equivalents | (7,826,000 | ) | (3,295,000 | ) | |||||||
| Cash and cash equivalents at beginning of period | 40,030,000 | 6,975,000 | |||||||||
| Cash and cash equivalents at end of period | $ | 32,204,000 | $ | 3,680,000 | |||||||
See accompanying notes to condensed consolidated financial statements.
3
LARGE SCALE BIOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Summary of Significant Accounting Policies
Large Scale Biology Corporation and its subsidiaries (collectively the “Company”) applies its proprietary proteomics and functional genomics technologies to develop products and establish commercial collaborations with pharmaceutical, biotechnology, chemical and other life science companies. The Company maintains its headquarters and a research facility in Vacaville, California, a processing facility in Owensboro, Kentucky and an additional research facility in Germantown, Maryland.
The Company was founded in 1987 to develop the GENEWARE® system, a viral-based gene expression technology in plants that enables the discovery, development and production of new biopharmaceuticals and gene-based agricultural products. The Company’s proprietary systems are supported by patents, patent applications and exclusive technology licenses.
The Company acquired 92.5% of Large Scale Proteomics Corporation (“Proteomics”) in February 1999 and the remaining 7.5% in March 2000. Proteomics’ automated, high-throughput ProGEX™ system provides a snapshot of the protein composition, or proteome, of cells and tissues, and is being used to rapidly identify changes in proteins that are associated with diseases or with a therapeutic effect.
In August 2000, the Company sold shares of common stock in its initial public offering (“IPO”).
Basis of Presentation — The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. 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 the Company’s management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. The interim financial information is not necessarily an indication of the results that may be expected for the entire year.
The unaudited Condensed Consolidated Financial Statements include the accounts of Large Scale Biology Corporation and its subsidiaries. All intercompany balances and transactions have been eliminated. The interim financial information should be read in conjunction with the Audited Consolidated Financial Statements and Notes thereto for the year ended December 31, 2000, included in the Company’s annual report on Form 10-K which was filed with the Securities and Exchange Commision on April 2, 2001.
Use of Estimates — The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the period. Actual results could differ from those estimates.
4
Revenue Recognition — Revenues are derived from development agreements consisting of research funding, technology access fees, milestone payments and government grants. Research funding revenue is recognized as services are performed and expenses are incurred. The Company’s development agreements generally provide for continued access by its partners to technologies developed under such agreements over the life of the development agreement. As a result, technology access fees and milestone payments received are deferred because their receipt does not represent the culmination of the earnings process. Revenue from technology access fees is recognized on a straight-line basis over the remaining life of the development agreement. Revenue related to milestone payments is recognized on a straight-line basis from the date of completion of the specified milestone over the remaining life of the development agreement. The life of a collaborative agreement is based on the terms of the agreement and does not include renewal periods, unless renewal is assured. Grant revenue is recognized as expenses are incurred and billed, except that revenue received for equipment purchases is deferred and recognized as revenue over the life of the related equipment.
Net Loss Per Share — Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares and any dilutive effect of potential common shares outstanding during the period. The weighted average numbers of shares for potentially dilutive securities are 1,435,371 and 12,809,643 for the three months ended March 31, 2001 and 2000, respectively, and are composed of incremental common shares issuable upon the exercise of stock options and warrants, and common shares issuable on conversion of convertible preferred stock. These shares were excluded from diluted loss per share because of their anti-dilutive effect. Therefore, diluted net loss per share is the same as basic net loss per share.
2. Acquisition of Large Scale Proteomics
During February 1999, Large Scale Biology Corporation acquired approximately 92.5% of the outstanding common stock of Proteomics in exchange for 2,287,634 shares of the Company’s Series G convertible preferred stock and options to purchase 60,562 shares of the Company’s common stock. The Series G convertible preferred stock was subsequently converted into 3,431,448 shares of common stock. This acquisition was accounted for by the purchase method of accounting. The purchase price of $25,100,000 for this business combination was based on the estimated fair value of the net tangible and intangible assets received. The operating results of Proteomics are included in the consolidated statement of operations of the Company as of February 1, 1999. As part of the acquisition, the Company acquired the option to purchase the remaining 7.5% of common stock of Proteomics. In March 2000, the Company exercised its option and acquired the remaining 7.5% of the outstanding common stock of Proteomics for $74,000.
The significant intangible assets acquired included in-process research and development of $21,362,000, core technology of $2,497,000 and the option to purchase the remaining 7.5% of Proteomics valued at $1,787,000. As a result of the acquisition of the remaining 7.5% of Proteomics, the Company recorded goodwill of $1,861,000 equal to the carrying value of the option and cash paid. The Company is amortizing the goodwill over three years from the date of the acquisition of the remaining 7.5%.
3. Stock Plans
In March 2001, the Company granted options to purchase an aggregate of 1,892,850 shares of the Company’s common stock to employees, directors, officers and a consultant. These options are exercisable at $6.19 per share over a ten-year period from the grant date and vest in quarterly installments over 4 years.
5
4. Dow Contract and Related Warrant
The Company entered into a Collaboration and License Agreement (the “Dow Agreement”) with The Dow Chemical Company and its subsidiary Dow AgroSciences LLC (collectively “Dow”) in September 1998. The Dow Agreement provides funding for sponsored genomics research, technology access fees, royalties upon product sales and payments when certain milestones are achieved. The Company is entitled to all funding received regardless of the results of the research. Accordingly, no obligation to repay or repurchase technology has been recorded. Revenues from Dow represented 87% and 88% of total revenues during the three months ended March 31, 2001 and 2000, respectively. The research collaboration under the Dow Agreement terminates on September 1, 2001. During 1998, the Company received cash of $10,000,000 in exchange for access to the Company’s technologies and a warrant granted to Dow (the “Dow Warrant”) to purchase 1,848,091 shares of the Company’s common stock subject to certain vesting provisions. The Company allocated $1,392,000 of the fee to the warrant and $8,608,000 to deferred revenue based on the estimated fair market value of the warrant. In addition, the Company receives payments for meeting certain milestones under the Dow Agreement. The access fees are amortized to revenue over the three-year term of the research collaboration under the Dow Agreement, and milestone payments are amortized over the remaining term of the research collaboration under the Dow Agreement from the date the milestone is achieved.
5. Subsequent Event
In April 2001, the Company adopted a stockholder rights plan. Under the plan, rights were distributed as a dividend at a rate of one right for each share of common stock held by stockholders of record as of the close of business on May 4, 2001, and subject to specified exceptions and limitations set forth in the rights plan, for any share of common stock that becomes outstanding thereafter. The rights plan was not adopted in response to any specific attempt to acquire the Company or its common stock. The rights will expire on April 27, 2011.
6
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this report and the 2000 audited consolidated financial statements and the accompanying notes included in our annual report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2001. This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this report contain forward-looking statements that involve risks and uncertainties, including statements regarding management’s expectations concerning future revenues and expense levels, capital expenditures and interest income, and other expectations regarding future operating results. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to the factors discussed under the heading “Factors That May Affect Our Business” below.
Overview
Large Scale Biology uses its proprietary proteomics and functional genomics technologies to develop products and establish commercial collaborations with pharmaceutical, biotechnology, chemical and other life sciences companies, to enable the transformation of proteomic and genomic information into multiple product opportunities, such as drug targets, therapeutics and diagnostics for drug effectiveness and toxicity.
Before February 1999, we were primarily engaged in the development and commercialization of genomics technologies. In February 1999, we acquired 92.5% of the outstanding common stock of Large Scale Proteomics Corporation, or Proteomics, a company primarily engaged in the development of proteomics technologies. In March 2000, we acquired the remaining 7.5% of Proteomics’ common stock. We used the purchase method of accounting to record this acquisition.
Substantially all of our revenues relate to our collaborative agreements and are derived from technology access fees, ongoing research funding and milestone payments for achievement of specific results. We record technology access fees and milestone payments as deferred revenue and amortize these payments on a straight-line basis over the remaining life of the related collaborative agreement. The life of a collaborative agreement is based on the terms of the agreement. We recognize research funding as services are performed.
In September 1998, we entered into a three-year collaboration and license agreement, or the Dow Agreement, with The Dow Chemical Company and its subsidiary Dow AgroSciences LLC, or collectively, Dow. Under the Dow Agreement, we receive funding for sponsored genomics research, and we are entitled to royalties if and when Dow sells products that result from this collaboration, and technology access fees and payments when we reach specific milestones. Revenues from the Dow Agreement represented 87% and 88% of our revenues during the three months ended March 31, 2001 and 2000, respectively. The research collaboration under the Dow Agreement terminates on September 1, 2001. Consequently, future revenues and operating margins could be materially lower than those we have reported for prior periods.
As a result of our investment in our technologies, we have incurred significant losses in each year since our inception in 1987. As of March 31, 2001, we had an accumulated deficit of $97.4 million. We expect additional losses as we expand our research and development efforts, make investments in strategic collaborations and enhance our technologies.
7
In late 2000, we initiated a Phase I clinical trial of the GENEWARE produced non-Hodgkin’s lymphoma vaccines and expanded internally funded research projects, including the assembly of our first version of the Human Protein IndexTM. In January 2001, we announced our collaboration with Biosite Diagnostics Incorporated, or Biosite, to produce antibodies for use in protein chips. We believe the resulting increase in expenses will enhance the value of our technologies but could delay our profitability and result in increased net losses.
Results of Operations
Comparison of the Three Months Ended March 31, 2001 and 2000
Revenues. Revenues for the three months ended March 31, 2001 were $6.0 million, an increase of $0.4 million, or 6%, over the three months ended March 31, 2000. Revenues earned under the Dow Agreement were $5.2 and $4.9 million in the three months ended March 31, 2001 and 2000, respectively. An increase of $1.0 million in revenues from the amortization of milestone payments was offset by a $0.7 million decrease in revenues from Dow research and development. The research collaboration under the Dow Agreement terminates on September 1, 2001. Therefore, we expect revenues from the Dow Agreement in 2001 to be less than in 2000. As of March 31, 2001, we had deferred revenues of $5.3 million relating to Dow that will be amortized through August 31, 2001. We believe that continued growth in our revenues for 2001 and beyond is dependent upon our successfully entering into new collaboration agreements in one or more of our key technology bases.
Development agreement expenses. Development agreement expenses relate to research activities incurred in connection with our collaborative agreements. Development agreement expenses for the three months ended March 31, 2001 were $1.4 million, a decrease of $0.6 million, or 29%, from the three months ended March 31, 2000. The decrease is attributable to a decreased level of research activity under the Dow Agreement. Research activities under the Dow Agreement accounted for $1.1 and $1.7 million of our development agreement expenses in the three months ended March 31, 2001 and 2000, respectively. We expect that development agreement expenses will continue to decrease upon the termination of the Dow research collaboration, unless offset by any increase to meet commitments under any new collaborative agreements.
Research and development expenses. Research and development expenses for the three months ended March 31, 2001 were $4.8 million, an increase of $1.2 million, or 33%, over the three months ended March 31, 2000. The increase is the result of $0.7 million of increased spending for expanded operations and new personnel at Proteomics and $0.3 million of increased salary expense for new personnel and wage rate increases at the Vacaville and Owensboro facilities. We anticipate that research and development expenses will increase significantly for non-Hodgkin’s lymphoma clinical trials and for new or expanded internally funded research projects. Under our agreement with Biosite, we have committed to pay $6.8 million over 14 months for program target antibodies. We expect that research and development expenses will increase accordingly beginning in the second quarter of this year. Unless we enter into a significant collaboration agreement upon termination of the Dow research collaboration, we anticipate that research resources we currently dedicate to the Dow research collaboration will be reallocated to internally funded commercial projects such as the Biosite arrangement. Such a reallocation of resources would result in a significant increase in our unreimbursed research and development expenses.
8
General, administrative and marketing expenses. General, administrative and marketing expenses for the three months ended March 31, 2001 were $3.0 million, an increase of $1.4 million, or 86%, over the three months ended March 31, 2000. The increase is the result of $0.5 million of increased salary expense for new administrative personnel and wage rate increases in Vacaville, $0.5 million of increased costs associated with our becoming a public company and $0.4 million of increased spending for expanded operations and new administrative personnel at Proteomics. We expect general, administrative and marketing expenses to be significantly higher for each quarter of 2001 as compared to 2000 for the same reasons these expenses increased this quarter and because we will add new business development personnel and incur associated costs beginning in the second quarter of 2001.
Amortization of goodwill and purchased intangibles. The amortization of goodwill and purchased intangibles of $0.3 and $0.2 million for the three months ended March 31, 2001 and 2000, respectively, relate to our purchase of 92.5% of Proteomics in February 1999 and the exercise of our option to purchase the remaining 7.5% in March 2000. We expect amortization charges for goodwill and purchased intangibles to be approximately $0.3 million per quarter through 2002 and $0.2 million in 2003.
Interest income (expense). Interest income increased to $1.2 million for the three months ended March 31, 2001, from $0.2 million for the three months ended March 31, 2000, due to the investment of the proceeds from our initial public offering of common stock, or IPO, in the third quarter of 2000. Although we expect interest income in 2001 to be more than interest income in 2000 as the proceeds from our IPO are invested over an entire year, quarterly interest income during 2001 is expected to decrease with the planned expenditures for operations and facilities and with the current trend of decreasing interest rates.
Change in fair value of warrant. The noncash gain of $0.2 million for the three months ended March 31, 2000 relates to the decrease in the fair value of a warrant we issued to Dow in connection with the Dow Agreement. This warrant had a “put option” that could have required us to repurchase common stock issued to Dow upon exercise of the warrant. This “put option” expired upon the effective date of our IPO. Consequently, the warrant liability was reclassified to permanent equity and no subsequent gains or charges will be incurred.
Liquidity and Capital Resources
From our inception up through March 31, 2001, we funded our operations through payments from our collaborative agreements of approximately $71 million, private sales of our equity securities of $48.5 million, other income of approximately $10 million, debt and warrant financing of approximately $7 million and $89 million from our IPO.
At March 31, 2001, we had cash and cash equivalents of $32.2 million and marketable securities of $43.1 million. Net cash used in operating activities of $3.2 million in the three months ended March 31, 2001 was principally due to $6.9 million paid to our suppliers and employees, partially offset by $1.5 million of research funding received under the Dow Agreement, $0.8 million from other agreements and interest from our investments of $1.4 million. We entered into an agreement with Biosite in January 2001 whereby we have committed to pay $6.8 million over 14 months for program targets. We therefore expect cash paid to suppliers and employees will increase accordingly. In the future, for us to achieve positive net cash flow from operating activities, we believe we must enter into new collaboration agreements and carefully manage the level of internally funded research and development activities.
9
Net cash used in investing activities of $4.3 million in the three months ended March 31, 2001 was principally due to $5.9 million for purchases of property, plant and equipment and $0.1 million for increases in intangible assets, partially offset by $1.6 million net proceeds from marketable securities. Our total planned expenditures for property, plant and equipment during 2001 are approximately $15.0 million. We anticipate that our capital expenditures will increase in the future to meet the demands from any new collaboration agreements and research and development efforts. We may use a portion of our cash to acquire or invest in complementary businesses, products or technologies, or to obtain the right to use such complementary technologies.
Net cash used in financing activities of $0.3 million in the three months ended March 31, 2001 was primarily the result of $0.4 million of net principal payments on long-term debt, partially offset by $0.1 million received from the exercise of stock options.
In the future, our liquidity and capital resources will depend upon, among other things, the level of our research and development activities, clinical, regulatory and marketing expenses and funding from our collaborations. We believe that our cash and cash equivalents and our marketable securities, together with revenues from our collaborations and other sources will be adequate to fund our anticipated cash and working capital requirements at least through December 31, 2002. During or after this period, if our capital resources are insufficient to meet our future capital requirements and expenses, we may need to sell additional equity or debt securities or obtain additional credit arrangements. Additional financing may not be available on terms acceptable to us or at all. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, or SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities and was effective for us beginning January 1, 2001. This statement requires balance sheet recognition of derivatives as assets or liabilities measured at fair value. Accounting for gains and losses resulting from changes in the values of derivatives is dependent on the use of the derivative and whether it qualifies for hedge accounting. The adoption of SFAS No. 133 did not have a material impact on our financial statements.
Factors That May Affect Our Business
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The following discussion highlights some of these risks and others are discussed elsewhere in this Form
10-Q.
This Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which involve risks and uncertainties. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, beliefs and assumptions. We use words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described below and elsewhere in this Report. You should not place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this Report. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
10
Risks Related To Our Business
We are at an early stage of development, and we may not be able to successfully develop and commercialize our products and technologies
We are in an early stage of development as an operating company, and we are subject to all the risks inherent in the development of a business enterprise, including the need for substantial capital to support the development of our products and technologies. We have had limited revenue from contract research and development services and collaborations. We are still developing our three primary database programs, Human Protein Index, or HPITM, Molecular Anatomy and PathologyTM, or MAPTM, and Molecular Effects of DrugsTM, or MEDTM, that we intend to commercialize. We have marketed a limited number of our own technologies. Though we have completed the first version of the HPI, we have not yet operated our ProGEx system on the large scale we believe will be necessary to complete our HPI database and other proteomics projects. In addition, we are still in the process of integrating our proprietary protein databases with information on gene function. If we are unable to manufacture and operate our ProGEx system on a large scale or to integrate our protein databases with information on gene function, we may not be able to achieve our objectives in the field of proteomics.
Our other anticipated products, including a novel vaccine for the treatment of non-Hodgkin’s lymphoma, or NHL, most likely will require that we enter into new collaborations before we can manufacture and market them, and they are subject to the governmental regulatory process. Because we are in new and developing fields, and our research focuses on new and unproven technologies, our therapeutic vaccines, drugs and proteins that we develop may not be effective in humans, or may not meet regulatory requirements for safety and efficacy. In addition, even if we successfully develop a product, there may not be a substantial commercial market for that product.
We are in new and developing fields and there may not be a market for our products and technologies
We focus our technologies on the new and developing fields of proteomics and functional genomics. Our research is fundamentally unique and we cannot assure the acceptance of its scientific merit or the benefits of products produced by it, or that the public will react favorably to it. Protein-based gene expression products and technologies, including our plant-derived proteins and our ProGEx system and GENEWARE technology, have limited commercial precedent. The usefulness of the information and products generated by our proteomics and functional genomics technologies is unproven, and our collaborators and potential collaborators may determine that they are not useful or cost-effective. In addition, we must develop these new products and technologies in time to meet market demand, if any. If we fail to do so, it is likely that other technologies and companies will predominate and we will not be able to earn a sufficient return on our investment.
11
We have a history of losses and cannot predict when we will become profitable, if at all
We have had net losses in each year since our inception in 1987. We sustained a net loss of approximately $2.4 million in the three months ended March 31, 2001 and had an accumulated deficit of approximately $97.4 million as of March 31, 2001. Milestone payments from the Dow Agreement were substantially lower in 2000 than 1999. We have not yet entered into any new collaborations that could make up for this decrease in cash flow. The research collaboration under the Dow Agreement will terminate September 1, 2001. We expect cash flow under the Dow Agreement to continue to decrease in 2001. In 2001, we expect to significantly increase amounts to fund research and development and to enhance our core technologies. As a result, we expect that our operating expenses will increase significantly and we will need to generate significant additional revenues from collaborations and the commercialization of our products and technologies to achieve profitability. We expect to incur substantial losses for the foreseeable future. If we are unable to enter into new collaborations, control our operating expenses and successfully commercialize our products and technologies, we may never become profitable.
We may require additional capital
In order for us to remain competitive so we can develop profitable and cash positive operations, we must continue to generate revenue from our products under development and our technologies, including our ProGEx and GENEWARE systems. We believe our cash and cash equivalents and our marketable securities at March 31, 2001, together with revenues from our collaborations and all other sources will be sufficient to fund our operations at least through December 31, 2002. However, changes in our business may occur that would consume available capital resources significantly sooner than we expect. If our capital resources are insufficient to meet future capital requirements and expenses, we will have to raise additional funds. If we raise additional funds by issuing equity securities, our existing stockholders may be diluted. We may raise this capital through public or private financings or additional collaborations, strategic partnerships or licensing arrangements. While we cannot predict our need for additional capital in the future, the amount required may be substantial and exceed tens of millions of dollars. If we are unable to raise sufficient additional capital, we will have to curtail or cease operations.
Alternative technologies may supersede our technologies or make them non-competitive
Genomics, proteomics and biomanufacturing fields are intensely competitive. They are characterized by extensive research efforts, which result in rapid technological progress. If our competitors succeed in developing products or technologies that are more effective than ours or that render our products or technologies obsolete or noncompetitive, our business will suffer. Many universities, public agencies and established pharmaceutical, biotechnology, chemical and other life sciences companies with substantially greater resources than we have are developing and using technologies and are actively engaging in the development of products similar to or competitive with our products and technologies. Like us, our competitors are using proteomics and genomics technologies to identify potential drug targets, therapeutic proteins and diagnostic marker proteins. In addition, our competitors have developed databases containing gene sequence, gene expression, genetic variation or other genomic information and are marketing or plan to market their data to pharmaceutical, biotechnology, chemical and other life sciences companies. To remain competitive, we must continue to invest in new and existing technologies, expand our databases and improve our bioinformatics software, including proprietary software used with our ProGEx system.
Our competitors may devise faster, more complete or more accurate methods to obtain proteomic and functional genomic information than our ProGEx and GENEWARE systems. There has been and continues to be substantial academic and commercial research effort devoted to the development of such methods. If a successful competitive method is developed, it could undermine the commercial basis for the products and technologies we intend to provide.
12
We may not be able to enter into collaborations necessary to fully develop and commercialize our products and technologies, and we will be dependent on our collaborators if we do
We intend to independently pursue some therapeutic product applications into the development stage. However, we expect to develop and commercialize most of our future products only in collaboration with pharmaceutical, biotechnology, chemical and other life sciences companies. Our success will depend in large part on our ability to enter into future collaborations with other companies for the research and development, pre-clinical and clinical testing and the regulatory approval and commercialization of our products. Our reliance upon these companies for these capabilities will reduce our control over such activities and could make us dependent upon them. To date, we have entered into only a limited number of collaborations. Generally, the scope of these collaborations has been to demonstrate the function of plant genes and the feasibility of using viral vectors to create proteins in plants and to identify marker proteins for drug development and diagnostics. Our existing agreements generally provide us with rights to participate financially in the commercial development of products resulting from the use of our technologies. We may be unable to obtain such rights in future collaborations. In addition, unforeseen delays or complications could arise and result in the breach of our contractual obligations with our collaborators and others, or render our technologies unable to perform at the quality and capacity levels required for success.
Conflicts with our collaborators could harm our business
Conflicts with our collaborators could have a negative impact on our relationships with them and impair our ability to enter into future collaborations, either of which could adversely affect our business. Our collaborators could develop competing products, preclude us from entering into collaborations with their competitors or terminate their agreements with us prematurely. Moreover, disagreements could arise with our collaborators over rights to our intellectual property and our rights to share in any of the future revenues from products or technologies resulting from use of our technologies, or our activities in separate fields may conflict with other business plans of our collaborators.
For example, Dow owns or controls patent rights in the field of viral vectors covering the infection of plants and the expression of foreign genes in plants, and has informed us that it believes that some of our plant viral activities may fall within the scope of its patents. If we are unable to resolve this matter, and are found to have infringed upon Dow’s rights, our product development and research activities related to plant viruses which fall within the scope of Dow’s patents may be delayed or terminated. These kinds of disagreements could result in costly and time-consuming litigation and divert our financial and managerial resources.
We must enter into agreements with third parties to provide sales and marketing services, or develop these capabilities on our own, if we are to successfully commercialize our products and technologies
We have no sales force, and we have only a limited marketing force. Although we plan to enter into sales and marketing arrangements with third parties, we may not be able to enter into these arrangements on favorable terms, if at all. If we cannot enter into these arrangements, we must develop a sales and marketing force with sufficient technical expertise to generate demand for our products and technologies. Our inability to develop or contract for effective sales and marketing capabilities would significantly impair our ability to develop and commercialize our products.
13
We may not be able to successfully manufacture our products in commercial quantities or at acceptable costs
We have not yet commercially manufactured any products using our technologies, including proteins manufactured with our GENEWARE technology. We have only produced products on a small, test scale. The failure of our technologies to provide safe, effective, useful or commercially viable approaches to the discovery and development of drug targets and proteins which can be used as therapeutics would significantly limit our business plan and future growth.
We may not be able to create and commercialize a combined proteomic and genomic source of information
We may not be able to successfully combine our proprietary protein data with genomic information. Even if we are able to integrate information on gene function with our proteomic databases, competing technologies may prove to be more effective or efficient, which would limit or eliminate our revenue opportunities. If we do not successfully create and commercialize a combined proteomic and genomic source of information, it could reduce our revenues.
We may be unable to recruit and retain senior management and other key scientific personnel on whom we are dependent
The loss of one or more of our senior management or other key scientific personnel could have a material adverse effect on our business and could inhibit our research and development and commercialization efforts. Although we have entered into employment agreements with some of our key personnel, these employment agreements are for a limited period of time and not all key personnel have employment agreements. There is currently a shortage of skilled senior management in the biotechnology industry, which is likely to continue and intensify. In addition, we face competition for research scientists and technical staff from other companies, academic institutions, government entities, nonprofit laboratories and other organizations. Failure to recruit and retain senior management and scientific personnel on acceptable terms would prevent us from achieving our business objectives.
Concentration of ownership among our existing executive officers, directors and principal stockholders enables them to collectively control all significant corporate decisions
Our directors, our executive officers and entities affiliated with our directors and our executive officers beneficially own, in the aggregate, approximately 41% of our outstanding common stock as of March 31, 2001. These stockholders as a group will be able to elect our directors and officers, control our management and affairs and be able to control most matters requiring the approval of our stockholders, including any merger, consolidation or sale of all or substantially all of our assets and any other significant corporate transaction. The concentration of ownership will also prevent a change of control of our Company at a premium price if these stockholders oppose it.
14
Our stockholder rights plan and provisions of our charter documents and Delaware law may inhibit a takeover, which could adversely affect our stock price
We recently adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of May 4, 2001. Subject to certain specified exceptions and limitations under the rights plan, we will continue to issue one right for each share of common stock that becomes outstanding after May 4, 2001. Each right entitles the holder to purchase one unit consisting of one one-hundredth of a share of our Series A Junior Participating Preferred Stock for $45 per unit. Under certain circumstances, if a person or group acquires 15% or more of our outstanding common stock, holders of the rights (other than the person or group causing their exercisability) will be able to purchase, in exchange for the $45 exercise price, shares of our common stock or of any company into which we are merged having a value of $90. In addition, the Board of Directors has the option, under certain circumstances, to exchange each right (other than rights held by the person or group triggering the Board of Directors’ option) for a share of common stock for no additional consideration on the part of the holder of the right. The rights expire on April 27, 2011. Our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) by causing substantial dilution of the stock ownership of a person or group attempting to acquire control of us. Our rights plan may have the effect of discouraging these attempts because a potential acquirer would have to negotiate with our Board of Directors to avoid suffering dilution.
Provisions in our charter and bylaws and applicable provisions of the Delaware General Corporation Law may also make it more difficult for a third party to acquire control of us without the approval of our board of directors. These provisions may make it more difficult or expensive for a third party to acquire a majority of our common stock or delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may adversely affect our stock price.
Risks Related to Our Industry
If companies in the pharmaceutical, biotechnology, chemical and life sciences industries do not succeed or their demand for our products and technologies decreases, then our revenues could be reduced
We expect to derive our revenues primarily from products and technologies provided to the pharmaceutical, biotechnology, chemical and life sciences industries. Accordingly, our success will depend directly on the success of companies in these industries and their demand for our products and technologies. Our operating results may fluctuate substantially due to reductions and delays in research and development expenditures by companies in those industries, or their unwillingness or inability to use our products and technologies. These reductions and delays may result from factors which are not within our control, such as:
| • | changes in economic conditions generally; | ||
| • | the extent to which companies in these industries conduct research and development involving proteomics and functional genomics in-house or through industry consortia; | ||
| • | the extent to which genomic information is or is not made publicly available; |
15
| • | consolidation within one or more of these industries; | ||
| • | changes in the regulatory environment affecting these industries; | ||
| • | pricing pressures; | ||
| • | market-driven pressures on companies to consolidate and reduce costs; and/or | ||
| • | other factors affecting research and development spending in these industries. |
If competitive products are better than our products, then our business may fail
The markets for protein development and production, including human and veterinary therapeutics and vaccines like the ones we are developing, are highly competitive. Virtually all of the genes in the human genome have been sequenced and we expect them to be identified within the next year. We face significant competition in our protein product development and production efforts from entities using alternative, and in some cases higher volume and larger scale, approaches for the same purpose. Competitors with substantially greater resources are actively developing products similar to or competitive with our products and potential products. Our competitors may succeed in developing products or obtaining regulatory approval before we do or in developing products that are more effective than those we develop or propose to develop. A large number of universities and other not-for-profit institutions, many of which are funded by the U.S. and foreign governments, are also conducting research to discover genes and their functions. Any one or more of these entities may discover and establish a patent position in one or more of the genes or proteins that we wish to commercialize.
In addition, several pharmaceutical, biotechnology, chemical and other life sciences companies engage in research and development in the use of unique gene expression systems to produce therapeutic proteins. These competitors may develop products earlier or obtain regulatory approvals faster than we may be able to, or develop products that are more effective than ours. At least one of our major competitors, Oxford Glycosciences, Plc., is located in Europe, and our ability to use our patent rights to prevent competition in the creation and use of proteomics-driven products and technologies is more limited outside of the United States. New developments are expected to continue, and discoveries by others may render our products and technologies noncompetitive, which could lead to the failure of our business.
We may not have access to sufficiently complete, accurate or defect-free data from outside sources, including genome sequence data which would increase our costs and could affect our product development efforts
The efforts of the Human Genome Project and private companies to create a complete catalog of the human genome may not enable us to fully integrate that data with our proprietary protein databases. In addition, we obtain our data from other sources, including our academic collaborators and our sources of cell and tissue samples. This data could contain errors or other defects which could corrupt our databases or increase our costs by requiring us to use alternative methods or sources to obtain such data. In addition, data sources may have acquired this information in a manner that violates various applicable legal requirements.
16
We and our collaborators may not obtain FDA and other approvals for our products in a timely manner, or at all
Drugs and diagnostic products are subject to an extensive and uncertain regulatory approval process by the FDA and comparable agencies in other countries. The regulation of new products is extensive, and the required process of laboratory testing and human studies is lengthy, expensive and uncertain. The burden of these regulations will fall on us to the extent we are developing proprietary products on our own. We may not be able to obtain the clearances and approvals necessary for the clinical testing, field-testing, manufacturing or marketing of our products. If the products are the result of a collaborative effort, these burdens may fall on our collaborators or we may share these burdens with them. We may not obtain FDA or other approvals for those products in a timely manner, or at all. We may encounter significant delays or excessive costs in our efforts to secure necessary approvals or licenses. Even if we obtain FDA regulatory approvals, the FDA extensively regulates manufacturing, labeling, marketing, promotion and advertising after product approval. Further, once a manufacturer obtains regulatory approval, a marketed product and its manufacturer are subject to continual review, and discovery of previously unknown problems with a product or manufacturer may result in restrictions on the product, manufacturer or manufacturing facility, including withdrawal of the product from the market. In some countries, regulatory agencies also set or approve the sale prices for drug products. Additionally, several of our product development areas may involve relatively new technology that has not been the subject of extensive product testing in humans. The regulatory requirements governing these products and related clinical procedures remain uncertain and the products themselves may be subject to substantial review by foreign governmental regulatory authorities that could prevent or delay approval in those countries. Regulatory requirements ultimately imposed on our products could limit our ability to test, manufacture and commercialize our products.
If new rules issued by the USDA adversely affect our collaborators’ ability to commercialize genetically modified products, then our ability to sell certain products and technologies will be severely impaired
We must comply with USDA regulations for outdoor releases of genetically engineered organisms as well as other products designed for use on or with agricultural products. Recently, the USDA released new regulations that prohibit the inclusion of genetically modified ingredients in products labeled as organic. The USDA regulations also prohibit the use of genetically modified fibers in clothing labeled as organic. These new regulations ultimately could make any products that may be developed with our collaborators, including Dow, unattractive to or too expensive for consumers, or could cause the government to prohibit their sale or use. In addition, the USDA prohibits growing and transporting genetically modified plants except pursuant to an exemption or under special permits. We may use genetically modified plants as screening or production hosts. Changes in USDA policy regarding the movement or field release of genetically modified plant hosts could adversely affect our business by increasing the cost of our products and technologies or decreasing consumer demand for those products and technologies or causing the government to prohibit their sale or use.
17
Future legal and regulatory requirements imposed by the FDA may limit or discourage the use of certain genetically engineered organisms and products, which could reduce our revenues
The FDA currently applies the same regulatory standards to foods developed through genetic engineering as it applies to foods developed through traditional plant breeding. However, genetically engineered food products will be subject to pre-market review if these products raise safety questions or if the FDA considers these products to be food additives. Our products and the products of our collaborators that contain genes that we identify or determine to have a particular function may be subject to lengthy FDA reviews and unfavorable FDA determinations if the FDA considers them to be food additives or if the FDA changes its policy. Also, we believe the FDA’s policy is that it will not require that genetically engineered agricultural products be labeled as such, provided that these products are as safe and have the same nutritional characteristics as conventionally developed products. The FDA may reconsider or change its labeling policies, or local or state authorities may enact labeling requirements. Any such labeling requirements could reduce the demand for genetically engineered products. In those products where production must be performed outdoors, the USDA prohibits manufacturers from growing and transporting genetically engineered plants except pursuant to an exemption or a permit under strict controls. If our future products are not exempted or covered by permits by the USDA, it may be impossible to sell such products.
If there is negative public reaction to the use of genetically engineered products and technologies, then the market for certain products and technologies we develop will be adversely affected
Future commercial success of some of our products and of the products of some of our collaborators, will depend in part on public acceptance of the use of genetically engineered products including drugs, plants and plant products. Claims that genetically engineered products are unsafe for consumption or pose a danger to the environment may influence public attitudes. Negative public reaction to genetically modified organisms and products could result in greater government regulation of genetic research and resultant products, including stricter labeling requirements, and could cause a decrease in the demand for our products. The subject of genetically engineered organisms has received negative publicity and aroused public debate in a number of countries, including the United States and the countries of the European Community. The expressed preferences of a significant portion of consumers, particularly in Europe, and to some extent in the United States, for non-genetically engineered food might substantially limit the marketing of genetically engineered food crops. Ethical and other concerns about our technologies, particularly the use of genes for commercial purposes and the products resulting from this use, could lead to greater regulation and trade restrictions on imports of genetically engineered products and adversely affect the market acceptance of our products and technologies. Governmental authorities could, for political or other reasons, limit the use of genetic processes or prohibit the practice of our GENEWARE technology. Consequently, if this regulation results in non-acceptance of food products derived from genetically engineered food crops it could reduce or eliminate any potential financial return from the Dow Agreement in agricultural gene discovery and function, and our ability to successfully collaborate with additional companies in the agricultural industry.
18
We may be sued for product liability and our product liability insurance may not be adequate
The testing, marketing and sale of our and our collaborators’ products will entail a risk of allegations of product liability, and third parties may assert substantial product liability claims against us. While we have limited product liability insurance to protect against this risk, adequate insurance coverage may not be available at an acceptable cost, if at all, in the future and a product liability claim or product recall could materially and adversely affect our business. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of the products we or our collaborators develop. If we are sued for any injury allegedly caused by our products or our collaborators’ products, our liability could exceed our total assets and our ability to pay the liability.
If we use hazardous materials in our business in a manner that causes injury or violates laws, we may be liable for substantial damages
Our research and development processes involve the use of hazardous materials, including chemicals and radioactive and biological materials. Our operations also produce hazardous waste products. The chemicals we use include, but are not limited to, flammable solvents such as methanol and ethanol, ethidium dye which is a commonly used fluorescent dye for visualizing DNA, and buffer solutions used in the purification of DNA. We also use several radioisotopes including phosphorous-32, carbon-14, sulfur-35, phosphorous-33, iodine-125 and hydrogen-3. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages and criminal penalties in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. Further, it is possible that the materials we use could contaminate another party’s property. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets and our ability to pay the liability. In addition, compliance with environmental laws and regulations is expensive, and current or future environmental regulations may impair our research and development and production efforts. Although we have general liability insurance, these policies do not cover claims arising from pollution from chemical or radioactive materials. Our collaborators are working with various types of hazardous materials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held responsible for any injury we or our collaborators cause to persons or property by exposure to, or release of, any hazardous materials.
Healthcare reform and restrictions on reimbursements may limit the financial returns from our products
Our ability and that of our collaborators to commercialize therapeutics and diagnostic products may depend in part on the extent to which government health administration authorities, private health insurers and other organizations will reimburse us for the cost of these products. These third parties are increasingly challenging both the need for and the price of new medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved therapeutics and diagnostics, and adequate third party reimbursement may not be available for any product to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development.
19
Risks Related to Our Intellectual Property
Patent protection in the biotechnology industry is uncertain, which may result in a decrease in the value of our products and technologies
We are involved in overlapping and rapidly evolving areas of biotechnology, pharmaceutical development and basic research involving viral vectors, plant transgenics, proteomics, functional genomics and immunotherapy. Each of these areas has been the subject of intense research and patenting activity throughout the world by our commercial competitors, actual and potential collaborators, academic institutions and government researchers. We cannot determine whether or not there are patents currently pending which, if issued, would prevent us from practicing our core technologies, commercializing them or developing commercially viable products based upon them.
The patent positions of biotechnology firms generally are highly uncertain and involve complex legal and factual questions that will determine who has the right to develop a particular product. No clear policy has emerged regarding the breadth of claims covered in biotechnology patents in general and those relating to gene sequences in particular. In addition, recently there has been public debate questioning whether genomic sequence data should be patentable. The biotechnology patent situation outside the United States is even more uncertain and is currently undergoing review and revision in many countries. Changes in, or different interpretations of, patent laws in the United States and other countries might allow others to use our discoveries or to develop and commercialize products and technologies similar to our products and technologies without any compensation to us. Our potential collaborators or customers may conclude that uncertainties about patent protection decrease the value of our databases, products and services.
Throughout the world there are numerous issued patents, as well as published foreign patent applications which may issue as patents, many of which relate to our current operations, our anticipated future operations and the products we are likely to develop. The scope of these patents is a matter of legal interpretation and is subject to uncertainty. We have not obtained, nor do we intend to obtain, opinions from our patent counsel that we have freedom to conduct our commercial activities free of claims of patent infringement from third parties. For example, we are aware of one company, Enzon, Inc., that has a broad portfolio of patents which generically claim single chain antibodies and that, in letters mailed to numerous companies including us, has asserted that any company using or making such antibodies will require a patent license from them. We are assessing these patents and have been informed that licenses are available, but if these licenses are required, we may not be able to obtain them on commercially reasonable terms.
Our patent applications may not result in issued patents that are enforceable
Our disclosures in our patent applications may not be sufficient to meet the statutory requirements for patentability in all cases. As a result, we do not know which of our patent applications will result in enforceable patents. Our patent applications may not issue as patents, and any patents that are issued to us may not provide commercially meaningful protection against competitors. Any issued patent may not provide us with competitive advantages. Others may challenge our patents or independently develop similar products which could result in an interference proceeding in the U.S. Patent and Trademark Office. Others may be able to design around our issued patents or develop products similar to our products. In addition, others may discover uses for genes or proteins other than those uses covered in our patents, and these other uses may be separately patentable.
20
Public disclosure and patents relating to genes and gene sequences held by others may limit our proprietary rights
The Human Genome Project and many companies and institutions have identified genes and deposited those sequences in public databases and are continuing to do so. These public disclosures might limit the scope of our claims or make unpatentable subsequent patent applications on full-length gene sequences. We are aware of issued patents and patent applications containing subject matter such that we or our licensees or collaborators may require a license or rights in order to research, develop or commercialize some of our products and technologies. We may find that licenses relating to such subject matter will not be available on acceptable terms, or at all.
Patent infringement or enforcement litigation or interference proceedings could be costly and disrupt our business and may prevent us from commercializing our products
The technology that we use to develop our products and key resources, and those that we incorporate in our products and technologies, may be subject to claims by third parties, including our collaborators, that they infringe the patents or proprietary rights of others. We also may need to enforce our patent rights in actions against others, which could be expensive. The risk of this occurring will tend to increase as the fields of proteomics, genomics and the biotechnology industry expand, more patents are issued and other companies attempt to discover genes and proteins and engage in other proteomics, genomics and biotechnology-related businesses. With respect to identifying proteins uniquely associated with disease states or as targets for drug therapy, we are aware that companies have published patent applications relating to nucleic acids encoding specific proteins. If the U.S. Patent and Trademark Office issues patents to these companies, their patents may limit our ability and the ability of our collaborators to practice under any patents that may be issued to us. Also, even if the U.S. Patent and Trademark office issues us a patent, the scope of coverage or protection afforded to the patent may be limited.
We may not be able to protect our know-how and trade secrets
We generally control the disclosure and use of our know-how and trade secrets using confidentiality agreements. It is possible, however, that:
| - Some or all confidentiality agreements will not be honored; | |||
| - Third parties will independently develop equivalent technology; | |||
| - Disputes will arise with our consultants, collaborators or others concerning the ownership of intellectual property; and/or | |||
| - Unauthorized disclosure of our know-how or trade secrets will occur. |
21
PART II — OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
In April 2001, the Company adopted a stockholder rights plan and declared a dividend of one right for each outstanding share of common stock to stockholders of record as of May 4, 2001. In addition, subject to specified exceptions and limitations under the plan, one right shall be issued with each share of common stock that becomes outstanding after May 4, 2001. Each right entitles the holder to purchase one unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred Stock for $45 per unit. If a person or group acquires 15% or more of the Company’s outstanding common stock and other conditions apply, holders of rights (except for certain excluded persons) will be able to purchase $90 worth of shares of the Company’s common stock or stock of another company with whom the Company is merged for each payment of the $45 exercise price. These rights expire on April 27, 2011.
The effective date of our Registration Statement on Form S-1, as amended (Registration No. 333-34198) was August 9, 2000. The estimated use of proceeds from our IPO for working capital set forth below includes operating expenses for research and development and for general and administrative activities. Provided below is a reasonable estimate of the amount of our net offering proceeds used in each of the following categories, through March 31, 2001:
| Construction of plant, building and facilities | $ | 4,720,000 | ||
| Purchase and installation of machinery and equipment | 3,929,000 | |||
| Purchases of real estate | 0 | |||
| Acquisition of other businesses | 0 | |||
| Repayment of indebtedness | 2,090,000 | |||
| Capitalized patent costs | 627,000 | |||
| Working capital | 4,637,000 | |||
| Temporary investments | 72,753,000 |
There are no other uses of net offering proceeds over $100,000. Moreover, none of the net offering proceeds were paid directly or indirectly to directors, officers, or their associates, persons owning 10% or more of any class of our equity securities, or our affiliates.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
(b) Reports on Form 8-K:
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Large Scale Biology Corporation | ||||
| Dated: May 15, 2001 | By: | |||
| /s/ William M. Pfann | ||||
| William M. Pfann | ||||
| Senior Vice President, Finance and Chief Financial Officer |
23
