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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended June 30, 2001.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ___________ to
___________.
Commission File Number:
000-31633
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KOSAN BIOSCIENCES INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-3217016
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3832BAY CENTER PLACE, HAYWARD, CALIFORNIA 94545
(address of principal executive offices)
(510) 732-8400
(Registrant's telephone number, including area code)
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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
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. COMMON STOCK, $.001 PAR VALUE;
25,189,689 SHARES OUTSTANDING AT JULY 31, 2001.
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KOSAN BIOSCIENCES INCORPORATED
Form 10-Q
Quarter Ended June 30, 2001
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1: Condensed Financial Statements and Notes:
Condensed Balance Sheets as of June 30, 2001
and December 31, 2000..............................................3
Condensed Statements of Operations for the three months and six
months ended June 30, 2001 and 2000................................4
Condensed Statements of Cash Flows for the six
months ended June 30, 2001 and 2000................................5
Notes to Condensed Financial Statements............................6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................11
Item 3: Quantitative and Qualitative Disclosures About Market Risk........21
PART II OTHER INFORMATION
Item 1: Legal Proceedings.................................................22
Item 2: Changes in Securities and Use of Proceeds.........................22
Item 3: Defaults Upon Senior Securities...................................22
Item 4: Submission of Matters to a Vote of Security Holders...............22
Item 5: Other Information.................................................23
Item 6: Exhibits and Reports on Form 8-K..................................23
SIGNATURES ..................................................................24
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PART I. FINANCIAL INFORMATION
ITEM 1: CONDENSED FINANCIAL STATEMENTS AND NOTES
KOSAN BIOSCIENCES INCORPORATED
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
(unaudited) (1)
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 28,579 $ 36,425
Short-term investments ............................... 52,767 49,313
Other receivables .................................... 51 21
Prepaid expenses and other current assets ............ 482 515
--------- ---------
Total current assets .......................... 81,879 86,274
Property and equipment, net ............................ 3,595 3,133
Long-term investments .................................. 13,607 17,003
Notes receivable from related parties .................. 1,184 917
Other assets ........................................... 244 244
--------- ---------
Total assets .................................. $ 100,509 $ 107,571
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 1,385 $ 980
Accrued liabilities .................................. 1,497 1,597
Deferred revenue ..................................... -- 619
Current portion of capital lease obligation .......... 33 124
Current portion of equipment loans ................... 968 911
--------- ---------
Total current liabilities ..................... 3,883 4,231
Capital lease obligation, less current portion ......... -- 8
Equipment loans, less current portion .................. 1,468 1,967
Stockholders' equity:
Common stock ......................................... 25 25
Additional paid-in capital ........................... 141,963 141,590
Notes receivable from stockholders ................... (1,728) (2,079)
Deferred stock-based compensation .................... (7,903) (11,122)
Accumulated other comprehensive gain/(loss) .......... 388 (380)
Accumulated deficit .................................. (37,587) (26,669)
--------- ---------
Total stockholders' equity .................... 95,158 101,365
--------- ---------
Total liabilities and stockholders' equity .... $ 100,509 $ 107,571
========= =========
See accompanying notes.
(1) The balance sheet data at December 31, 2000 has been derived from the
audited financial statements at that date.
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KOSAN BIOSCIENCES INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2001 2000 2001 2000
-------- ------- -------- --------
Revenues:
Contract revenue ......................................... $ 717 $ 1,042 $ 1,726 $ 2,084
Grant revenue ............................................ 261 103 481 140
-------- ------- -------- --------
Total revenues .................................... 978 1,145 2,207 2,224
Operating expenses:
Research and development (including charges for
stock-based compensation of $1,319 and $1,675
in the three months ended June 30, 2001 and 2000,
respectively, and $2,831 and $2,597 in the six
months ended June 30, 2001 and 2000, respectively) ..... 6,742 4,358 12,306 7,621
General and administrative (including charges for
stock-based compensation of $407 and $369 in the
three months ended June 30, 2001 and 2000,
respectively, and $651 and $708 in the six months
ended June 30, 2001 and 2000, respectively) ............ 1,469 1,033 2,562 1,793
-------- ------- -------- --------
Total operating expenses .......................... 8,211 5,391 14,868 9,414
-------- ------- -------- --------
Loss from operations ....................................... (7,233) (4,246) (12,661) (7,190)
Other income, net .......................................... 238 432 1,743 511
-------- ------- -------- --------
Net loss ................................................... (6,995) (3,814) (10,918) (6,679)
Deemed dividend upon issuance of Series C
convertible preferred stock .............................. -- -- -- (11,267)
-------- ------- -------- --------
Net loss attributable to common stockholders ............... $ (6,995) $(3,814) $(10,918) $(17,946)
======== ======= ======== ========
Basic and diluted net loss per common share ................ $ (0.29) $ (0.73) $ (0.46) $ (3.57)
======== ======= ======== ========
Shares used in computing basic and diluted net loss per
common share ............................................. 24,066 5,224 23,955 5,029
See accompanying notes.
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KOSAN BIOSCIENCES INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net loss ........................................................ $(10,918) $ (6,679)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation ................................................ 583 421
Amortization ................................................ (654) 63
Amortization of stock-based compensation .................... 3,168 2,553
Other stock-based compensation .............................. 314 752
Issuance of convertible preferred stock for license fees .... -- 30
Loss on write-down of investment ............................ 990 --
Changes in assets and liabilities:
Other receivables ........................................... (30) 386
Prepaid expenses and other current assets ................... 33 72
Other assets and notes receivable from related parties ...... 46 (1,014)
Accounts payable ............................................ 405 264
Accrued liabilities ......................................... (100) 583
Deferred revenue ............................................ (619) (284)
-------- --------
Net cash used in operating activities .................... (6,782) (2,853)
-------- --------
INVESTING ACTIVITIES
Acquisition of property and equipment, net ...................... (1,045) (808)
Purchase of investments ......................................... (58,107) (4,591)
Proceeds from maturity of investments ........................... 58,481 719
-------- --------
Net cash used in investing activities .................... (671) (4,680)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net ..................... 148 44
Proceeds from issuance of convertible preferred stock, net of
issuance costs ................................................ -- 24,600
Proceeds from equipment loans ................................... -- 1,308
Principal payments under capital lease obligation ............... (99) (67)
Principal payments under equipment loans ........................ (442) (369)
-------- --------
Net cash (used in) provided by financing activities ...... (393) 25,516
-------- --------
Net (decrease) increase in cash and cash equivalents .............. (7,846) 17,983
Cash and cash equivalents at beginning of period .................. 36,425 1,032
-------- --------
Cash and cash equivalents at end of period ........................ $ 28,579 $ 19,015
======== ========
See accompanying notes.
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KOSAN BIOSCIENCES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
Kosan Biosciences Incorporated ("Kosan" or the "Company") was
incorporated under the laws of the State of California on January 6, 1995 and
commenced operations in 1996. In July 2000, the Company was reincorporated under
the laws of the state of Delaware. Kosan has proprietary gene-engineering
technologies for the manipulation and production of polyketides, a rich source
of pharmaceutical products.
The Company has funded its operations primarily through sales of common
stock, convertible preferred stock, contract payments under its collaboration
agreement, equipment financing arrangements and government grants. Prior to
achieving profitable operations, the Company intends to fund operations through
the additional sale of equity securities, strategic collaborations and debt
financing.
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. The information as of June 30,
2001, and for the three months and six months ended June 30, 2001 and 2000,
reflects all adjustments (including normal recurring adjustments) that the
management of the Company believes are necessary for a fair presentation of the
results for the periods presented. Results for any interim period are not
necessarily indicative of results for any future interim period or for the
entire year. The accompanying condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents and Investments
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. The Company
limits its concentration of risk by diversifying its investments among a variety
of issuers. The Company classifies all investment securities as
available-for-sale in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). Available-for-sale investments are recorded at fair
value based on quoted market prices, with unrealized gains and losses excluded
from earnings and reported in other comprehensive income (loss). Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value of
available-for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses. Gains and losses on the
sale of securities are recorded on the trade date and are determined using the
specific identification method.
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KOSAN BIOSCIENCES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company recognizes license and other up-front fees on a ratable
basis over the term of the respective agreement. Milestone payments are
recognized upon successful completion of a performance milestone event. Contract
revenues related to collaborative research and development agreements and
government grants are recognized on a ratable basis as services are performed.
Any amounts received in advance of performance are recorded as deferred revenue
until earned.
Research and Development
Research and development expenses consist of costs incurred for
Company-sponsored and collaborative research and development activities. These
costs consist of direct and indirect internal costs related to specific projects
as well as fees paid to other entities that conduct certain research activities
on behalf of the Company. Research and development expenses under the government
grants and collaborative agreements approximated the revenue recognized, less
milestone payments received under such arrangements.
Net Loss per Share
Basic and diluted net loss per common share is presented in conformity
with the Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"), for all periods presented. Following the guidance given by
the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 98,
common stock and convertible preferred stock that has been issued or granted for
nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of the basic and diluted net
loss per common share as if these shares had been outstanding for all periods
presented. To date, the Company has not issued or granted shares for nominal
consideration.
In accordance with SFAS 128, basic and diluted net loss per common share
has been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Diluted net
loss is not presented separately as the Company is in a net loss position, and
including common stock equivalents in the loss per share computation would be
antidilutive. Pro forma net loss per common share has been computed to give
effect to the automatic conversion of preferred stock into common stock
immediately prior to the completion of the Company's initial public offering
(using the if-converted method) from the original date of issuance.
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KOSAN BIOSCIENCES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the calculation of basic, diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net loss attributable to common stockholders . $ (6,995) $ (3,814) $(10,918) $(17,946)
======== ======== ======== ========
Weighted-average shares of common
stock outstanding ......................... 25,195 6,607 25,173 6,248
Less: weighted-average shares subject
to repurchase ............................. (1,129) (1,383) (1,218) (1,219)
-------- -------- -------- --------
Weighted-average shares used in computing
basic and diluted net loss per common share 24,066 5,224 23,955 5,029
======== ======== ======== ========
Basic and diluted net loss per common share .. $ (0.29) $ (0.73) $ (0.46) $ (3.57)
======== ======== ======== ========
Pro forma:
Shares used above ............................ 24,066 5,224 23,955 5,029
Pro forma adjustment to reflect weighted
effect of conversion of convertible
preferred stock ............................ -- 12,221 -- 11,027
-------- -------- -------- --------
Shares used in computing pro forma basic and
diluted net loss per common share ......... 24,066 17,445 23,955 16,056
======== ======== ======== ========
Pro forma basic and diluted net loss per share $ (0.29) $ (0.22) $ (0.46) $ (1.12)
======== ======== ======== ========
Stock-Based Compensation
The Company accounts for common stock options granted to employees using
the intrinsic value method and thus recognizes no compensation expense for
options granted with exercise prices equal to or greater than the deemed fair
value of the Company's common stock on the date of the grant.
Stock-based compensation expense for options granted to non-employees
has been determined in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and
Emerging Issues Task Force ("EITF") Consensus No. 96-18 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. The measurement of stock-based compensation
to non-employees is subject to periodic adjustment as the underlying securities
vest.
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KOSAN BIOSCIENCES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. COLLABORATIVE RESEARCH AND DEVELOPMENT AND LICENSE AGREEMENTS
The R.W. Johnson Pharmaceutical Research Institute
In September 1998, the Company signed a collaborative agreement with The
R.W. Johnson Pharmaceutical Research Institute and Ortho-McNeil Pharmaceutical,
Inc., both Johnson & Johnson companies. In August 2000, the Company amended its
collaborative research and development agreement. Under the terms of the amended
agreement, subject to termination provisions, the research program and funding
have been extended until at least December 28, 2001. In February 2001, the
Company received and recognized in full, a $250,000 milestone in connection with
this agreement.
License Agreements
The Company has collaborative and license agreements with several
academic and medical institutions. For the six months ended June 30, 2001 and
2000, the Company made payments under these agreements of approximately $164,000
and $42,500, respectively. At June 30, 2001, the Company estimated its
non-cancelable commitments under these agreements to be approximately $456,000.
3. COMPREHENSIVE GAIN/(LOSS)
For the three and six months ended June 30, 2001 and 2000, comprehensive
loss is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2001 2000 2001 2000
------- ------- -------- -------
Net loss ............................... $(6,995) $(3,814) $(10,918) $(6,679)
Unrealized gain/(loss) on
available-for-sale securities ........ (519) 14 (222)
6
Reclassification of write-down on
available-for-sale securities ........ 990 -- 990 --
------- ------- -------- -------
Comprehensive loss ..................... $(6,524) $(3,800) $(10,150) $(6,673)
======= ======= ======== =======
4. LOSS ON WRITE-DOWN OF INVESTMENT
In accordance with SFAS 115, the Company has determined that an
other-than-temporary decline in fair value of its investment in short-term
commercial paper of Southern California Edison ("So Cal Ed"), a utility company,
has occurred. At the time of purchase, the security was a high investment-grade
security, but was subsequently downgraded due to the financial uncertainty that
has resulted from the California energy crisis. The security matured on April
18, 2001, and So Cal Ed defaulted on payment. The initial cost of the security
was $3.0 million, and the security was valued at approximately 67% of cost at
June 30, 2001. Accordingly, the Company recorded a $990,000 loss on the related
write-down in the carrying value of the investment. Subsequent to the maturity
date of April 18, 2001, So Cal Ed has made interest payments on a monthly basis
at the stated interest rate of 6.64%.
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KOSAN BIOSCIENCES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. CAPITAL LEASES AND EQUIPMENT FINANCING
The Company leases certain equipment and facility improvements under
non-cancelable capital leases and debt obligations. The equipment loans have a
balloon payment at the end of the term. The interest rates of each of the leases
and loans are fixed at the time of the draw down, with the interest rates
ranging from 10.6% to 17.7%. In January 2000, the Company secured a $2.0 million
line of credit, of which $1.7 million had been utilized and approximately
$300,000 was allowed to expire at December 31, 2000.
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
June 30, December 31,
2001 2000
-------- ------------
Facilities-related ....... $ 342 $ 415
Compensation-related ..... 432 451
Professional services .... 447 250
Other .................... 276 481
------ ------
$1,497 $1,597
====== ======
7. SUBSEQUENT EVENT
In July 2001, the Company entered into a $2.5 million equipment line of
credit agreement (the "Line of Credit"). Each draw down has a repayment period
of 42 months and an interest rate that is fixed at the time of draw down. The
Company utilized approximately $1.1 million of the Line of Credit, which carries
with it an interest rate of 9.02%. Obligations under the Line of Credit are
payable in monthly installments of principal and interest and are secured by the
assets financed under the Line of Credit.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion of our financial condition and results of
operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expect, plan, anticipate, believe,
estimate, predict, potential or continue, the negative of terms like these or
other comparable terminology. Actual events or results may differ materially
from those anticipated in these forward-looking statements. All forward-looking
statements included in this document are based on information available to us on
the date hereof, and we assume no obligation to update any such forward-looking
statements. In evaluating these statements, you should specifically consider
various factors, including the risks outlined under the caption "Risk Factors
that May Affect Results of Operations and Financial Condition" set forth at the
end of this Item 2, the Risk Factors set forth in our Annual Report on Form 10-K
filed with the SEC and those contained from time to time in our other filings
with the SEC. We caution investors that our business and financial performance
are subject to substantial risks and uncertainties.
OVERVIEW
We have proprietary gene-engineering technologies for the manipulation
and production of polyketides, a rich source of pharmaceutical products. Kosan
uses its platform technologies to develop product candidates that target large
pharmaceutical markets. In infectious disease, we have a collaboration with The
R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson company,
focusing on the development of a next generation antibiotic.
We have incurred significant losses since our inception. As of June 30,
2001, our accumulated deficit was $37.6 million. We expect to incur additional
operating losses over the next several years as we continue to develop our
technologies and fund internal product research and development.
STOCK-BASED COMPENSATION
Stock-based compensation represents the difference between the exercise
price of an option and the deemed fair value of our common stock on the date of
the option grant calculated in accordance with Accounting Principles Board
Opinion No. 25 and its related interpretations. Such amounts are included as a
reduction of stockholders' equity and are being amortized to expense using the
graded vesting method over the vesting periods of the underlying options, which
are generally four years. Amortization of stock-based compensation has been
allocated to research and development expense and general and administrative
expense, as appropriate. We recognized stock-based compensation expense of $3.2
million and $2.6 million for the six months ended June 30, 2001 and 2000,
respectively. Based on deferred stock-based compensation recorded as of June 30,
2001, we expect to record amortization for deferred stock-based compensation
approximately as follows: $3.0 million for the six months remaining in 2001,
$3.2 million in 2002, $1.5 million in 2003 and $203,000 in 2004.
In connection with the grants of stock options and restricted stock to
non-employees, we recognize compensation on a ratable basis over the related
service period. We recognized other stock-based compensation for non-employees
of $314,000 and $752,000 in the six months ended June 30, 2001 and 2000,
respectively. In addition, we expect to recognize other stock-based compensation
in connection with stock options and restricted stock granted to non-employees
of $405,000 in the six months remaining in 2001, $685,000 in 2002, $337,000 in
2003, $219,000 in 2004 and $63,000 in 2005. The measurement of stock-based
compensation to our non-employees is subject to periodic adjustment as our stock
price changes and as the underlying securities vest. As such, changes to these
measurements could be substantial should we experience significant changes in
our stock price.
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RESULTS OF OPERATIONS
Revenues. Our revenues were $1.0 million and $2.2 million for the three
and six months ended June 30, 2001, compared to $1.1 million and $2.2 million in
the same periods in 2000. Grant revenue was $481,000 for the six months ended
June 30, 2001, compared to $140,000 in the same period last year. In addition,
during the six months ended June 30, 2001, we recognized a non-recurring
$250,000 milestone received in connection with the anti-infective collaboration
with The R.W. Johnson Pharmaceutical Research Institute. Included in the
year-to-date 2000 revenues was $250,000 in amortization of the up-front fee
received in connection with this collaboration. The initial term of the
collaboration with The R.W. Johnson Pharmaceutical Research Institute has been
extended to December 28, 2001. If we do not maintain or further extend this
agreement, or if it is terminated early, our revenues will significantly
decrease thereafter, unless we enter into additional collaborations.
Research and Development Expenses. Our research and development expenses
consist primarily of stock-based compensation, salaries and other
personnel-related expenses, facility-related expenses and fees paid to outside
service providers. Research and development expenses increased to $6.7 million
and $12.3 million for the three and six months ended June 30, 2001 from $4.4
million and $7.6 million for the same periods in 2000. These increases were
primarily attributable to our expanded research and development efforts,
including advancing our epothilone program toward the clinic and continued
investment in our internally funded programs and technologies. Stock-based
compensation decreased in the three months ended June 30, 2001 to $1.3 million
from $1.7 million for the same period in 2000 and increased for the six months
ended June 30, 2001 to $2.8 million from $2.6 million for the same period in
2000. We expect our research and development expenses will increase
substantially to fund the expansion of our technology platform, support our
collaborative research programs and advance our epothilone and other in-house
research programs into later stages of development.
General and Administrative Expenses. General and administrative expenses
increased to $1.5 million and $2.6 million for the three and six months ended
June 30, 2001 from $1.0 million and $1.8 million for the same periods in 2000.
This increase was primarily due to higher employee-related costs to support our
expanding research and development activities and added public company-related
expenses. We expect our general and administrative expenses will increase in the
future to support the continued growth of our research and development efforts
and to fulfill our obligations associated with being a publicly held company.
Interest Income. Interest income increased to $1.3 million and $2.9
million for the three and six months ended June 30, 2001 from $519,000 and
$678,000 for the same periods in 2000. This increase was due to higher average
investment balances due to aggregate net proceeds of $98.0 million received in
connection with our October 2000 initial public offering of common stock and the
issuance of Series C convertible preferred stock in March 2000.
Interest Expense. Interest expense decreased to $80,000 for the three
months ended June 30, 2001 from $87,000 for the same period in 2000 and
increased to $174,000 for the six months ended June 30, 2001 from $167,000 for
the same period in 2000. The decrease for the quarter ended June 30, 2001 from
the quarter ended June 30, 2000 resulted from normal amortization of our
existing debt.
Write-down of Investment. At June 30, 2001, we had approximately $3.0
million invested in short-term commercial paper of Southern California Edison
("So Cal Ed"), a utility company. The security matured on April 18, 2001 and So
Cal Ed defaulted on payment. Accordingly, for the quarter ended June 30, 2001,
we recorded a write-down on the carrying value of the investment of $990,000.
Due to the continuing uncertainty associated with the California energy crisis,
additional write-downs in the carrying value of the security may be required in
the event So Cal Ed experiences further adverse material changes in its
financial condition.
Beneficial Conversion Feature. In March 2000, we sold 804,196 shares of
Series C convertible preferred stock (which converted into 2,412,588 shares of
common stock at the closing of our initial public offering) for net proceeds of
approximately $24.6 million. After evaluating the fair value of our common
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stock in contemplation of our initial public offering, we determined that the
issuance of the Series C convertible preferred stock resulted in a beneficial
conversion feature calculated in accordance with EITF Consensus No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features." The
beneficial conversion feature was reflected as a deemed dividend of $11.3
million in our financial statements for the six months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception primarily through sales
of convertible preferred stock and common stock, totaling $119.1 million in net
proceeds, contract payments under our collaboration agreement, equipment
financing arrangements and government grants. As of June 30, 2001, we had $95.0
million in cash, cash equivalents and investments, compared to $102.7 million as
of December 31, 2000. Our funds are currently invested in U.S. Treasury and
government agency obligations, investment-grade asset-backed securities and
corporate obligations.
Our operating activities used cash of $6.8 million for the six months
ended June 30, 2001, compared to $2.9 million for the same period in 2000. Our
net loss of $10.9 million for the six months ended June 30, 2001 was partially
offset by non-cash expenses of $3.4 million related to stock-based compensation
and depreciation and amortization. Cash used for the same period in 2000 was
used primarily to fund our net operating losses of $6.7 million, partially
offset by non-cash expenses of $3.8 million related to stock-based compensation
and depreciation.
Our investing activities, excluding changes in our investments, for the
six months ended June 30, 2001 used cash of $1.0 million, compared to $808,000
for the same period in 2000, reflecting capital expenditures and facility
improvements as we continue to expand our laboratory capabilities.
Cash used in financing activities was $393,000 for the six months ended
June 30, 2001, compared to cash provided by financing activities of $25.5
million for the same period in 2000. Financing activities included $24.6 million
in net proceeds from the issuance of our Series C convertible preferred stock in
March 2000.
For periods subsequent to June 30, 2001, we have estimated our
non-cancelable commitments under our collaborative and license agreements to be
approximately $456,000.
We believe our existing cash and investments will be sufficient to meet
our anticipated cash requirements for at least 24 months. Our future capital
uses and requirements depend on numerous forward-looking factors. These factors
include, but are not limited to, the following:
- our ability to establish, and the amount of revenues received
under, any new collaborations;
- the progress and number of research programs carried out by us;
- the progress and success of pre-clinical and clinical trials of
our drug candidates;
- our ability to maintain our existing collaboration with The R.W.
Johnson Pharmaceutical Research Institute;
- the costs and timing of obtaining, enforcing and defending our
patent and intellectual property rights;
- the costs and timing of regulatory approvals; and
- expenses associated with unforeseen litigation.
For the next several years, we do not expect our operations to generate
the amounts of cash required for our future cash needs. In order to fulfill our
cash requirements, we expect to finance future cash needs through the sale of
equity securities, strategic collaborations and debt financing. We cannot assure
you that additional financing or collaboration and licensing arrangements will
be available when needed or that, if available, will be on terms favorable to us
or our stockholders. Insufficient funds may require us to
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delay, scale back or eliminate some or all of our research or development
programs, to lose rights under existing licenses or to relinquish greater or all
rights to product candidates at an earlier stage of development or on less
favorable terms than we would otherwise choose or may adversely affect our
ability to operate as a going concern. If additional funds are obtained by
issuing equity securities, substantial dilution to existing stockholders may
result.
FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
You should carefully consider the risks described below, together with
all of the other information included in this report, in considering our
business and prospects. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial also may impair our business operations.
The occurrence of any of the following risks could harm our business, financial
condition or results of operations.
WE HAVE A HISTORY OF NET LOSSES AND MAY NEVER BECOME PROFITABLE.
We commenced operations in 1996 and are still in an early stage of
development. We have not commercialized any products, and we have incurred
significant losses to date. As of June 30, 2001, we had an accumulated deficit
of approximately $37.6 million. To date, our revenues have been solely from
collaborations and government grants. Our expenses have consisted principally of
costs incurred in research and development and from general and administrative
costs associated with our operations. We have incurred net losses since our
inception, including a net loss of approximately $10.9 million for the six
months ended June 30, 2001. We expect our expenses to increase and to continue
to incur operating losses for at least the next several years as we continue our
research and development efforts for our drug candidates. The amount of time
necessary to commercialize any of our drug candidates successfully is long and
uncertain, and successful commercialization may not occur at all. As a result,
we may never become profitable.
IF WE DO NOT ESTABLISH AND MAINTAIN COLLABORATIONS WITH OTHER PARTIES, THE
DEVELOPMENT OF OUR PRODUCTS MAY BE DELAYED OR STOPPED.
Because we do not currently possess the financial and other resources
necessary to develop potential products that may result from our technologies,
or the financial and other resources to complete any approval processes that may
be required for these products, we must enter into collaborative arrangements to
develop many of our drug candidates. If we do not maintain or further extend our
current collaboration with The R.W. Johnson Pharmaceutical Research Institute
and Ortho-McNeil Pharmaceutical, Inc., both Johnson & Johnson companies, which
expires on December 28, 2001, subject to termination provisions, or if we do not
enter into new collaborative agreements, then our revenues will be significantly
reduced, and our drug candidates may not be developed, manufactured or marketed.
OUR POTENTIAL PRODUCTS ARE IN AN EARLY STAGE OF DEVELOPMENT, AND SUBSTANTIAL
ADDITIONAL EFFORT WILL BE NECESSARY FOR DEVELOPMENT.
Our technologies are new, and our drug candidates are in early stages of
research and development. We may not develop products that prove to be safe and
effective, meet applicable regulatory standards, are capable of being
manufactured at reasonable costs or can be marketed successfully. All of the
potential proprietary products that we are currently developing will require
significant development and investment, including extensive pre-clinical and
clinical testing, before we can submit any application for regulatory approval.
Before obtaining regulatory approvals for the commercial sale of any of our
products, we must demonstrate through pre-clinical testing and clinical trials
that our drug candidates are safe and effective in humans. We have not commenced
clinical testing of any of our potential products. Conducting clinical trials is
a lengthy, expensive and uncertain process. Completion of clinical trials may
take several years or more. The length of time generally varies substantially
according to the type, complexity, novelty and intended use of the drug
candidate. Our clinical trials, if commenced, may be suspended at any time, if
we or the U.S. Food and Drug Administration, or the FDA, believe the patients
participating in our studies are
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exposed to unacceptable health risks. We may encounter problems in our studies
that will cause us or the FDA to delay or suspend the studies.
Our commencement and rate of completion of clinical trials may be delayed by
many factors, including:
- ineffectiveness of the study compound, or perceptions by
physicians that the compound is not effective for a particular
indication;
- inability to manufacture sufficient quantities of compound for
use in clinical trials;
- failure of the FDA to approve our clinical trial protocols;
- slower than expected rate of patient recruitment;
- unforeseen safety issues; or
- government or regulatory delays.
If any future clinical trials are not successful, our business,
financial condition and results of operations will be harmed.
ANY INABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGIES ADEQUATELY COULD HARM OUR
COMPETITIVE POSITION.
Our success will depend in part on our ability to obtain patents and
maintain adequate protection of other intellectual property for our technologies
and products in the United States and other countries. If we do not adequately
protect our intellectual property, competitors may be able to use our
technologies and erode or negate our competitive advantage. The laws of some
foreign countries do not protect our proprietary rights to the same extent as
the laws of the United States, and we may encounter significant problems in
protecting our proprietary rights in these foreign countries.
The patent positions of biotechnology companies, including our patent
position, involve complex legal and factual questions and, therefore, validity
and enforceability cannot be predicted with certainty. Patents may be
challenged, deemed unenforceable, invalidated or circumvented. We will be able
to protect our proprietary rights from unauthorized use by third parties only to
the extent that our proprietary technologies are covered by valid and
enforceable patents or are effectively maintained as trade secrets. We will
apply for patents covering both our technologies and drug candidates as we deem
appropriate. However, we may fail to apply for patents on important technologies
or products in a timely fashion or at all, and in any event, the applications we
do file may not result in issued patents or, if issued, may be challenged. Our
existing patents and any future patents we obtain may not be sufficiently broad
to prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, others may
challenge or invalidate our patents, or our patents may fail to provide us with
any competitive advantages. If the use or validity of any of our patents is ever
challenged, resulting in litigation or administrative proceedings, we would
incur substantial costs and the diversion of management in defending the patent.
In addition, we generally do not control the patent prosecution of technology
that we license from others. Accordingly, we are unable to exercise the same
degree of control over this intellectual property as we would over technology we
own.
We rely upon trade secret protection for our confidential and
proprietary information. We have taken measures to protect our proprietary
information. These measures may not provide adequate protection for our trade
secrets or other proprietary information. We seek to protect our proprietary
information by entering into confidentiality agreements with employees,
collaborators and consultants. Nevertheless, employees, collaborators or
consultants may still disclose our proprietary information, and we may not be
able to protect our trade secrets effectively. In addition, others may
independently develop substantially equivalent proprietary information or
techniques or otherwise gain access to our trade secrets.
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LITIGATION OR OTHER PROCEEDINGS OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY
INFRINGEMENT WOULD REQUIRE US TO SPEND TIME AND MONEY AND COULD PREVENT US FROM
DEVELOPING OR COMMERCIALIZING PRODUCTS.
Our commercial success depends in part on not infringing the patents and
proprietary rights of other parties and not breaching any licenses that we have
entered into with regard to our technologies and products. Others have filed
patent applications and issued patents, and in the future are likely to continue
to file patent applications and issue patents, claiming genes, gene fragments,
compounds or other technologies that we used or may wish to use. If we use the
claimed technology in issued and unexpired patents, then we may need to obtain a
license from another party, enter into litigation or incur the risk of
litigation.
The biotechnology industry is characterized by extensive litigation
regarding patents and other intellectual property rights. We are aware of
patents and published patent applications that, if valid, and if we are
unsuccessful in circumventing or acquiring the rights to these patents, may
block our ability to commercialize products. We cannot be sure that other
parties have not been issued relevant patents that could affect our ability to
obtain patents or to operate as we would like to. Others may sue us in the
future to challenge our patent rights or claim infringement of their patents. An
adverse determination in litigation to which we may become a party could subject
us to significant liabilities to others, require us to license disputed rights
from others or require us to cease using the disputed technology.
We are aware of a significant number of patents and patent applications
relating to aspects of our technologies and families of compounds filed by, and
issued to, other parties. Others have filed patent applications or have been
granted patents claiming inventions also claimed by us, and we may have to
participate in an interference proceeding declared by the relevant patent
regulatory agency to determine priority of invention and, thus, the right to a
patent for these inventions in the United States. For example, we believe one or
more interferences or other legal proceedings to determine priority of invention
may be declared between patents and patent applications we own or have
exclusively licensed and patents owned by Novartis relating to epothilone
biosynthetic genes and epothilone D and related compounds and patents owned by
Abbott Laboratories relating to erythromycin polyketide synthase genes and
methods for altering polyketide synthase genes. Such a proceeding or a lawsuit
in which we are alleged to have infringed an issued patent could result in
substantial cost to us even if the outcome is favorable, and if the outcome is
unfavorable, we could be required to license the other party's rights, at terms
that may be unfavorable to us, or cease using the technology. Even if successful
on priority grounds, an interference may result in loss of claims based on
patentability grounds raised in the interference. Although patent and
intellectual property disputes in the biotechnology area are often settled
through licensing or similar arrangements, costs associated with these
arrangements may be substantial and could include ongoing royalties.
Furthermore, we cannot be certain that the necessary license would be available
to us on satisfactory terms, if at all.
Other parties have or may obtain future patents and claim that the use
of our technologies infringes these patents or that we are employing their
proprietary technology without authorization. We could incur substantial costs
and diversion of management and technical personnel in defending ourselves
against any of these claims or enforcing our patents against others.
Furthermore, parties making claims against us may be able to obtain injunctive
or other equitable relief, which could effectively block our ability to further
develop, commercialize and sell products, and could result in the award of
substantial damages against us. In the event of a successful claim of
infringement against us, we may be required to:
- pay damages;
- stop using our products or methods;
- develop non-infringing products or methods; and
- obtain one or more licenses from other parties.
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We may not be able to obtain these licenses at a reasonable cost, if at
all. In that event, we could encounter substantial delays in product
introductions while we attempt to develop alternative methods or products, which
we may not be able to accomplish.
Litigation or failure to obtain licenses could prevent us from
commercializing available products.
IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY THROUGH RECRUITING AND
RETAINING SKILLED EMPLOYEES AND EXPAND OUR MANAGEMENT AND IMPROVE OUR CONTROLS
AND SYSTEMS, WE MAY NOT BE ABLE TO MANAGE OUR DAY-TO-DAY OPERATIONS.
We have experienced a period of rapid and substantial growth that has
placed, and if this growth continues will further place, a strain on our human
and capital resources. If we are unable to manage this growth effectively, then
our losses could increase. The number of our employees increased from 62 on June
30, 2000 to 88 on June 30, 2001. Retaining our current employees and recruiting
qualified scientific personnel to perform future research and development work
will be critical to our success. Competition is intense for experienced
scientists, and we may not be able to retain or recruit sufficient skilled
personnel to allow us to pursue collaborations and develop our products and core
technologies to the extent otherwise possible. Additionally, we are highly
dependent on the principal members of our management and scientific staff, such
as our two co-founders, the loss of whose services would adversely impact the
achievement of our objectives. Although we maintain and are the beneficiary of
$1.0 million key-man life insurance policies for the lives of each of our two
co-founders, Dr. Daniel Santi, our chief executive officer, and Dr. Chaitan
Khosla, a director and consultant, we do not believe the proceeds would be
adequate to compensate us for their loss.
Our ability to manage our operations and growth effectively requires us
to continue to expend funds to expand our management and improve our controls
and systems. If we are unable to implement successfully these expansions and
improvements, then we may not be able to effectively manage our day-to-day
operations.
WE FACE INTENSE COMPETITION FROM LARGE PHARMACEUTICAL COMPANIES, BIOTECHNOLOGY
COMPANIES AND ACADEMIC GROUPS.
We face, and will continue to face, intense competition from
organizations such as large biotechnology and pharmaceutical companies, as well
as academic and research institutions and government agencies, that are pursuing
competing technologies and products. These organizations may develop
technologies or products that are superior alternatives to ours. Further, our
competitors in the polyketide gene engineering field may be more effective at
implementing their technologies to develop commercial products. Some of these
competitors have entered into collaborations with leading companies within our
target markets to produce polyketides for commercial purposes.
Any products that we develop through our technologies will compete in
multiple, highly competitive markets. Development of pharmaceutical products
requires significant investment and resources. Many of the organizations
competing with us in the markets for such products have greater capital
resources, research and development and marketing staffs, facilities and
capabilities, and greater experience in modifying DNA, obtaining regulatory
approvals and product manufacturing and marketing. Accordingly, our competitors
may be able to develop technologies and products more easily, which would render
our technologies and products and those of our collaborators obsolete and
noncompetitive.
IF WE FACE CLAIMS IN CLINICAL TRIALS OF A DRUG CANDIDATE, THESE CLAIMS WILL
DIVERT OUR MANAGEMENT'S TIME AND WE WILL INCUR LITIGATION COSTS.
We face an inherent business risk of clinical trial liability claims in
the event that the use or misuse of our potential products results in personal
injury or death. We may experience clinical trial liability claims if our drug
candidates are misused or cause harm before regulatory authorities approve them
for marketing. Even though we have obtained clinical trial liability insurance,
it may not be sufficient to cover claims that may be made against us. Clinical
trial liability insurance is expensive, difficult to obtain and may not be
available in the future on acceptable terms, if at all. Any claims against us,
regardless of
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their merit, could materially and adversely affect our financial condition,
because litigation related to these claims would strain our financial resources
in addition to consuming the time and attention of our management. If we are
sued for any injuries caused by our products, our liability could exceed our
total assets.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE
MATERIALS COULD BE TIME CONSUMING AND COSTLY.
Our research and development processes involve the controlled use of
hazardous materials, including hazardous chemicals and radioactive and
biological materials. Some of these materials may be novel, including bacteria
with novel properties and bacteria that produce biologically active compounds.
Our operations also produce hazardous waste products. We cannot eliminate the
risk of accidental contamination or discharge and any resultant injury from
these materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of these materials. We believe that
our current operations comply in all material respects with these laws and
regulations. We could be subject to civil damages in the event of an improper or
unauthorized release of, or exposure of individuals to, hazardous materials. In
addition, we could be sued for injury or contamination that results from our use
or others or the use by our collaborators or third parties of these materials,
and our liability may exceed our total assets. Compliance with environmental
laws and regulations may be expensive, and current or future environmental
regulations may impair our research, development or commercialization efforts.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. We currently do not have
adequate backup generators or alternate sources of power in the event of a
blackout, and our current insurance does not provide coverage for any damages we
may suffer as a result of any interruption in our power supply. If blackouts
interrupt our power supply, we would be temporarily unable to continue
operations at our facilities, including but not limited to the disruption of
laboratory experiments and product manufacturing cycles. Any such interruption
in our ability to continue operations at our facilities could damage our
reputation, lead to our failure to meet certain time-based milestones and could
result in lost contract revenue, any of which could substantially harm our
business and results of operations.
Furthermore, the deregulation of the energy industry instituted in 1996
by the California government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices have significantly increased over
the past year. If wholesale prices continue to increase, our operating expenses
will likely increase, as all of our facilities are located in California.
WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CORPORATE CHARTER DOCUMENTS THAT MAY
RESULT IN OUTCOMES WITH WHICH YOU DO NOT AGREE.
Our board of directors has the authority to issue up to 10,000,000
shares of undesignated preferred stock and to determine the rights, preferences,
privileges and restrictions of those shares without further vote or action by
our stockholders. The rights of the holders of any preferred stock that may be
issued in the future may adversely affect the rights of the holders of common
stock. The issuance of preferred stock could make it more difficult for third
parties to acquire a majority of our outstanding voting stock.
Our certificate of incorporation provides for staggered terms for the
members of the board of directors and prevents our stockholders from acting by
written consent. These provisions and other provisions of
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our bylaws and of Delaware law applicable to us could delay or make more
difficult a merger, tender offer or proxy contest involving us. This could
reduce the price that investors might be willing to pay for shares of our common
stock and result in the market price being lower than it would be without these
provisions.
SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US AND MAY NOT MAKE
DECISIONS THAT ARE IN THE BEST INTEREST OF ALL STOCKHOLDERS.
Our officers, directors and affiliates together control approximately
44% of our outstanding common stock. As a result, these stockholders, if they
act together, are able to exert a significant degree of influence over our
management and affairs and over matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may delay or prevent a change in
control of us and might affect the market price of our common stock, even when a
change may be in the best interests of all stockholders. In addition, the
interests of this concentration of ownership may not always coincide with our
interests or the interests of other stockholders and accordingly, these
stockholders could cause us to enter into transactions or agreements that we
would not otherwise consider.
OUR STOCK PRICE HAS BEEN, AND MAY CONTINUE TO BE, EXTREMELY VOLATILE.
The trading price of our common stock has been, and is likely to
continue to be, highly volatile and could be subject to wide fluctuations in
price in response to various factors, many of which are beyond our control,
including:
- announcements of technological developments in research by us or
our competitors;
- delay or failure in initiating, conducting, completing or
analyzing clinical trials or unsatisfactory design or results of
these trials;
- achievement of regulatory approvals;
- new products or services introduced or announced by us or our
competitors;
- changes in financial estimates by securities analysts;
- announcements of departures or departures of key personnel;
- announcements of litigation or an unfavorable outcome in
litigation; and
- sales of our common stock.
In addition, the stock market in general, and the Nasdaq National Market
and the market for biotechnology companies in particular, has experienced
extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. These broad
market and industry factors may seriously harm the market price of our common
stock, regardless of our operating performance. In the past, following periods
of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against that company. If this
type of litigation were instituted against us, we would be faced with
substantial costs and management's attention and resources would be diverted,
which could in turn seriously harm our business, financial condition and results
of operations.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CREATING INVESTOR LOSSES.
Our quarterly operating results have fluctuated in the past and are
likely to do so in the future. These fluctuations could cause our stock price to
fluctuate significantly or decline. Some of the factors that could cause our
operating results to fluctuate include:
- expiration of research contracts with collaborators or
government research grants, which may not be renewed or
replaced;
- the success rate of our discovery efforts leading to milestones
and royalties;
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- the timing and willingness of collaborators to commercialize our
products; and
- general and industry specific economic conditions, which may
affect our collaborators' research and development expenditures.
A large portion of our expenses is relatively fixed, including expenses
for facilities, equipment and personnel. Accordingly, if revenues decline or do
not grow due to expiration or termination of research contracts or government
research grants, failure to obtain new contracts or other factors, we may not be
able to reduce our operating expenses correspondingly. In addition, we expect
operating expenses to continue to increase. Failure to achieve increased levels
of revenues could therefore significantly harm our operating results for a
particular fiscal period.
Due to the possibility of fluctuations in our revenues and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price would probably decline.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we maintain our portfolio of cash
equivalents, short-term and long-term investments in a variety of securities,
including corporate obligations and money market funds. As of June 30, 2001,
approximately 86% of our total portfolio will mature in one year or less, with
the remainder maturing in less than two years.
At June 30, 2001, we had approximately $3.0 million invested in
short-term commercial paper of Southern California Edison, a utility company. At
the time of purchase, the security was a high investment-grade security, but
subsequently was downgraded due to the financial uncertainty that has resulted
from the California energy crisis. The security matured on April 18, 2001, and
Southern California Edison defaulted on payment. At June 30, 2001, the security
was valued at approximately 67% of cost. We have determined that there has been
an other-than-temporary decline in fair value of the security and recorded a
write-down of $990,000.
The following table represents the fair value balance of our cash, cash
equivalents and short-term and long-term investments that are subject to
interest rate risk by year of expected maturity and average interest rates as of
June 30, 2001 (dollars in thousands):
2001 2002 2003
---------- ---------- ------
Cash & equivalents $ 28,579 -- --
Average interest rates 4.05%
Short-term investments 31,533 $ 21,234 --
Average interest rates 5.44% 5.82%
Long-term investments -- 5,956 $7,651
Average interest rates 5.92% 4.65%
We did not hold derivative instruments as of June 30, 2001, and we have
never held such instruments in the past. In addition, we had outstanding debt,
consisting of borrowings under an equipment financing line of credit and capital
lease obligations, of $2.5 million as of June 30, 2001, with a range of interest
rates from 10.6% to 17.7%.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) On June 1, 2001, at the Company's Annual Meeting of Stockholders, the
Company's stockholders approved to amend the Company's Amended and
Restated Certificate of Incorporation, thereby reducing the authorized
number of shares of common stock from 200,000,000 shares to 100,000,000
shares, such Certificate of Amendment was filed with the State of
Delaware on July 18, 2001.
d) Use of Proceeds
Our initial public offering of common stock was effected in
October 2000, in which we sold 5,750,000 shares of our common stock.
The net proceeds of the 5,750,000 shares registered and sold
were approximately $73.4 million. We paid a total of approximately $5.6
million in underwriting discounts and commissions and approximately $1.5
million in other costs and expenses in connection with the offering
through June 2001. None of the expenses were paid, directly or
indirectly, to directors, officers or persons owning 10 percent or more
of our common stock.
We intend to continue to use the net proceeds for advancing our
drug candidates through pre-clinical and later stage development,
discovering or acquiring new drug candidates, expanding our technology
platform, capital expenditures, working capital, general corporate
purposes and possible future acquisitions. To date, we have not used any
of the net proceeds from the offering and, pending such use, our funds
have been invested in U.S. Treasury and government agency obligations,
investment-grade asset-backed securities and corporate obligations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Company held its Annual Meeting of stockholders on June 1,
2001.
b) The stockholders elected Chaitan Khosla, Ph.D., director of the
Company, to serve until the 2004 annual meeting of stockholders
and until his successor has been elected and qualified or until
his earlier resignation or removal. Directors whose term of
office as a director continued after the meeting are Daniel V.
Santi, M.D. Ph.D.; Peter Davis, Ph.D.; Jean Deleage, Ph.D.; and
Christopher Walsh, Ph.D.
Shares Voted In Shares
Candidate Favor Withheld
------------------------ ------------------ -----------------
Chaitan Khosla, Ph.D.... 17,758,209 9,824
c) The stockholders approved the proposed amendment to the
Company's Amended and Restated Certificate of Incorporation to
decrease the authorized number of shares of common stock by
100,000,000 shares to a total of 100,000,000 shares of
authorized common stock:
Shares voted in favor.......... 17,755,359
Shares voted against........... 11,974
Shares abstaining.............. 700
Broker non--votes.............. 0
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
No.
-------
3.1 Amended and Restated Certificate of Incorporation
3.2 Bylaws of Registrant (1)
4.1 Form of Specimen of Common Stock Certificate (1)
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter
ended June 30, 2001.
- ----------
(1) Filed with Kosan's Registration Statement on Form S-1, as amended (No.
333-33732), and incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Kosan Biosciences Incorporated
August 13, 2001 By: /s/ Daniel V. Santi
--------------------------------------
Daniel V. Santi, M.D., Ph.D.
Chairman and Chief Executive Officer
August 13, 2001 By: /s/ Susan M. Kanaya
--------------------------------------
Susan M. Kanaya
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- -----------------------
3.1 Amended and Restated Certificate of Incorporation
3.2 Bylaws (1)
4.1 Form of Specimen Common Stock Certificate (1)
- ----------
(1) Filed with Kosan's Registration Statement on Form S-1, as amended (No.
333-33732), and incorporated herein by reference.
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