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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2000
Commission File No. 000-30681
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DENDREON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3203193
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3005 First Avenue
Seattle, Washington 98121
(206) 256-4545
(Address, including zip code, of Registrant's principal executive offices and
telephone number, including area code)
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Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $0.001 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required 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 [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the closing sale price of the Registrant's Common Stock
on March 1, 2001, as reported on the National Association of Securities Dealers
Automated Market, was approximately $186,246,000*.
As of March 1, 2001, the Registrant had outstanding 24,643,074 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definite Proxy Statement, which will be filed on or before April
30, 2001 with the Securities and Exchange Commission in connection with
Registrant's annual meeting of stockholders to be held on May 16, 2001, is
incorporated by reference into Part III of this Report.
* Excludes 9,122,568 shares of common stock held by directors and officers and
stockholders whose beneficial ownership exceeds 5 percent of the shares
outstanding at March 1, 2001. Exclusion of shares held by any person should not
be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.
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DENDREON CORPORATION
FORM 10-K
INDEX
Part I
Page
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Item 1. Business 4
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27
Part III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management 28
Item 13. Certain Relationships and Related Transactions 28
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 29
SIGNATURES
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Special Note on Forward Looking Statements
This Form 10-K contains forward-looking statements concerning matters that
involve risk and uncertainties. The statements contained in this report that
are not purely historical are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
concern matters that involve risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Words such as "believe," "expects," "likely," "may" and "plans" are
intended to identify forward-looking statements, although not all forward-
looking statements contain these words.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements. We are under no duty to update any of the forward-looking
statements after the date hereof to conform such statements to actual results or
to changes in our expectations.
Readers are urged to carefully review and consider the various disclosures
made by us in this Report which attempt to advise interested parties of the
factors which affect our business, including without limitation "Factors That
May Affect Results of Operations and Financial Condition" set forth herein.
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PART I
ITEM 1. BUSINESS
Overview
Dendreon discovers and develops novel products that harness the power of
the immune system to fight disease. The products most advanced in development
are therapeutic vaccines that stimulate a patient's immunity for the treatment
of cancer. Provenge is a therapeutic vaccine for the treatment of prostate
cancer and is in Phase III clinical trials, the final stage of product
development. We are conducting Phase II clinical trials for Mylovenge, our
therapeutic vaccine for the treatment of multiple myeloma, and our vaccine for
the treatment of breast, ovarian and colon cancer, APC8024, was cleared by the
Food and Drug Administration, or the FDA, to begin Phase I clinical trials at
the end of 2000. We have additional therapeutic vaccines in preclinical
development for the treatment of common malignancies, including lung, bladder
and uterine cancers. We combine our expertise in immunology and antigen
engineering, or modification, with our proprietary cell separation technologies
to develop therapeutic vaccines that stimulate cancer-fighting cells, a process
called cell-mediated immunity. We believe this is the key to eliminating cancer.
We also intend to pursue the application of our technologies in the fields of
autoimmune diseases, allergies and infectious diseases.
Current Cancer Therapies
Cancer is characterized by abnormal cells that proliferate uncontrollably
and metastasize, or spread, throughout the body, producing deposits of tumor
cells, called metastases. These proliferating cells form masses called tumors.
As the tumors grow, they cause tissue and organ failure and ultimately death.
To be effective, therapy must eliminate the cancer both at its site of
origin and at sites of metastases. Metastatic disease is often responsible for
the relapse and ultimate death of patients with cancer. Current treatments for
cancer include surgery, radiation, hormone therapy and chemotherapy. Surgery and
radiation therapy treat cancer at its origin but are limited because certain
tissues cannot be removed surgically and/or do not tolerate radiation. Moreover,
cancers frequently spread prior to detection, and surgery and radiation cannot
control metastases. Chemotherapy and hormone therapy are used to treat tumor
metastases. However, these therapies cause severe damage to normal tissue.
Additionally, chemotherapy and hormone therapy may shrink tumors but rarely
eliminate them completely.
Treatments known as immunotherapy stimulate the body's natural mechanism
for fighting disease and may overcome many of the limitations of current cancer
therapies. Immunotherapy may be particularly useful for the treatment of
residual disease.
The Immune System
Tumor Antigens. The immune system, the body's natural defense against
disease, is composed of a variety of specialized cells. These cells recognize
specific chemical structures, called antigens, that are found on disease-causing
agents. Antigens trigger an immune response, characterized by the proliferation
of immune system cells and the eventual removal of antigen from the body.
Dendritic Cells. A specialized class of immune system cells, called
dendritic cells, starts the immune response. Dendritic cells bind and take up
antigen from their surroundings and process the antigen into fragments that are
recognized by specific classes of immune cells, called lymphocytes. During this
antigen processing, dendritic cells mature, enabling them to present the
processed antigen to lymphocytes. Lymphocytes proliferate in response to their
interaction with dendritic cells and eliminate the disease-causing agent. There
are two main categories of lymphocytes: B-lymphocytes, or B-cells, and T-
lymphocytes, or T-cells. Each category of lymphocytes has a different role in
the immune response. T-cells combat disease by killing antigen bearing cells
directly. In this way, T-cells eliminate cancers and virally infected tissue. T-
cell immunity is also known as cell-mediated immunity and commonly is thought to
be the body's key defense against tumors and cells chronically infected by
viruses. In
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contrast, activation of B-cells leads to the production of specific antibodies,
which are primarily involved in preventing infectious disease.
Cancer Vaccines. The immune system recognizes and generates a strong
response to hundreds of thousands of different antigens introduced from the
environment. Tumors, however, frequently display antigens that are also found on
normal cells. Thus, the immune system may not distinguish between tumors and
normal cells and, therefore, may be unable to mount a strong anti-cancer
response. Tumors may also actively prevent dendritic cells from becoming mature,
thereby preventing full activation of the immune system. Thus, we believe the
key to directing the immune system to fight cancers is to modify, or engineer,
tumor antigens so that they are recognized by the immune system and to
manipulate dendritic cells to stimulate a vigorous cell-mediated immunity.
Our Therapeutic Cancer Vaccine Approach
We combine our expertise in antigen identification, antigen engineering and
dendritic cell processing to produce immunotherapeutic vaccines. Our ability
both to manipulate dendritic cells and to engineer antigens allows us to develop
vaccines that are designed to generate effective cell-mediated immune responses.
We have vaccines in development for eight common cancers. Our approach to
therapeutic cancer vaccines is to:
. identify antigens on cancer cells which are suitable targets for cancer
therapy;
. create proprietary, genetically engineered, Antigen Delivery
Cassettes(TM) that will be optimally processed by dendritic cells;
. isolate and activate dendritic cells using proprietary methods; and
. create cancer vaccines that combine dendritic cells and engineered
antigens to trigger cell-mediated immunity to destroy tumors.
Antigen Identification
Our objective is to identify antigens associated with as broad a population
of cancers as possible. We obtain antigens from several sources: our internal
discovery programs, public databases of genetic information and licenses from
third parties. Our internal antigen discovery programs begin by identifying
novel genes expressed in specific tissues or in malignant cells. We then
evaluate the expression of these genes in normal versus diseased tissue. We
consider the genes that we find localized in diseased tissue as candidates for
antigen engineering. Likewise, we also consider genes from external sources that
meet these criteria. To date, we have identified genes for 39 antigens that meet
these criteria and have incorporated five of these antigens into our therapeutic
vaccines for eight common cancers.
Antigen Engineering
We engineer antigens to produce proprietary therapeutic vaccines for
multiple cancers as well as other diseases. We designed antigen engineering to
trigger and maximize cell-mediated immunity by augmenting the uptake and
processing of the target antigen by the dendritic cell. We can affect the
quality and quantity of the immune response that is generated by adding,
deleting or modifying selected sequences of the antigen gene, together with
inserting the modified antigen into our Antigen Delivery Cassette.
Our Antigen Delivery Cassette is a protein that has three regions: the
region that enhances antigen binding and entry into dendritic cells; the region
that directs antigen processing along specific pathways for T-cell activation;
and the antigen itself. The Antigen Delivery Cassette targets each engineered
antigen to dendritic cells and provides a common key to unlock the potential to
process antigen.
The dendritic cell binding region is common to all of our Antigen Delivery
Cassettes and has the capability to recognize the dendritic cell and bind the
cassette to the dendritic cell surface. Binding stimulates the dendritic cell to
engulf the cassette. The antigen processing region then directs dendritic cells
to process antigen along pathways
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that stimulate cell-medicated immunity. The antigen region of the Antigen
Delivery Cassette thus gains access to processing by the dendritic cell, which
would otherwise be denied to non-engineered antigen. We believe this process
results in a potent cell-mediated immune response.
Our Antigen Delivery Cassette technology provides us with a foundation on
which new proprietary antigens are built. An example of our antigen engineering
approach is the antigen HER2 used for production of APC8024, our therapeutic
vaccine for the treatment of breast, ovarian, colorectal and pancreatic cancer.
The gene encoding a protein called HER2 is known to be associated with these
cancers. Because HER2 is poorly recognized as an antigen by the immune system,
we created a series of Antigen Delivery Cassettes, each with a distinct version
of the modified HER2 gene sequence. We then tested each of these cassettes in
preclinical models and identified and incorporated into our vaccine the one that
generated the most potent cell-mediated immune response and was most potent for
treating cancer in animals.
Dendritic Cell Processing and Vaccine Production
Our vaccine manufacturing process incorporates two elements: the Antigen
Delivery Cassette and dendritic cells isolated from blood. To obtain dendritic
cells, we first remove white blood cells from a patient's blood through a
standard blood collection process called leukapheresis. Dendritic cells are then
separated from other white blood cells using our proprietary cell separation
devices. Our process separates dendritic cells from tumors, which may suppress
dendritic cell function, and thereby allows dendritic cells to become fully
mature and activated.
We incubate the dendritic cells with the appropriate Antigen Delivery
Cassette under controlled conditions in which we have optimized conditions,
including concentration of the Antigen Delivery Cassette and dendritic cell
numbers. After 40 hours, the dendritic cells are optimally activated and are
ready to be used as a vaccine. We subject each vaccine to quality control
testing, including purity, potency and sterility testing. Our process requires
less than three days from white blood cell collection to vaccine administration.
Vaccine Delivery
Our vaccines are delivered as a 30-minute intravenous infusion given as an
outpatient procedure. A single vaccine infusion is sufficient to stimulate cell-
mediated immunity to the target antigen. Our clinical trials indicate that
maximum stimulation requires three infusions given at two-week intervals.
Patients in our trials typically complete a course of therapy in one month.
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Products
The following table summarizes the target indications and status of our
product development programs:
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OUR PRODUCTS AND PRODUCTS IN DEVELOPMENT
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Product Target Indication(s) Status(1)
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Therapeutic Vaccine Products
Provenge(TM) Hormone Refractory Prostate cancer Phase III
Hormone Sensitive Prostate cancer Phase II
Mylovenge(TM) Multiple myeloma Phase II
Amyloidosis
Other B-cell malignancies
APC8024 Breast cancer Phase I
Ovarian cancer
Colon cancer
PRI-Immunotherapy (2) Breast Cancer Preclinical
APC80NY Bladder cancer Preclinical
Lung cancer
Breast cancer
Prostate cancer
Ovarian/Uterine cancer
APC80TR Lung cancer Preclinical
Breast cancer
Prostate cancer
Colon cancer
Therapeutic Antibody Products
Danton(TM) (DN1924) Non-Hodgkin lymphoma Preclinical
Hodgkin's lymphoma
B-cell leukemias
Dantes(TM) (DN1921) Autoimmune diseases, including Preclinical
rheumatoid arthritis
Cell Separation Products
DACS(R)SC Kit Blood stem cell preparation for FDA Approved
transplantation
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(1) Status is as of March 1, 2001.
Preclinical means that a product is undergoing efficacy and safety
evaluation in disease models in preparation for human clinical trials.
Phase I-III clinical trials denote safety and efficacy tests in humans as
follows:
Phase I: Evaluation of safety and dosing.
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Phase II: Evaluation of safety and efficacy.
Phase III: Larger scale evaluation of safety and efficacy.
(2) Product of The R.W. Johnson Pharmaceutical Research Institute. See
discussion of our Research Collaboration and License Agreement with The
R.W. Johnson Pharmaceutical Research Institute under "Collaborations"
below.
Therapeutic Vaccine Products
Provenge for Prostate Cancer
Prostate cancer is the most common solid tumor malignancy in men in the
United States with over one million currently diagnosed with this disease. A
projected 198,000 new cases and 32,000 deaths are expected this year, making it
the second leading cause of cancer death in men.
The antigen component of Provenge is derived from the gene encoding a
marker for prostate cancer, prostatic acid phosphatase, which is found in
approximately 95% of prostate cancers. We have subjected prostatic acid
phosphatase to our antigen engineering process and have created a proprietary
Antigen Delivery Cassette.
We have initiated two double-blind placebo-controlled Phase III clinical
trials designed to demonstrate that Provenge is safe and effective for treating
hormone refractory prostate cancer (HRPC). The trials will determine if Provenge
delays disease progression and its associated pain. We expect to enroll 240 men
in these trials.
A Phase II trial is ongoing to evaluate the safety and efficacy of Provenge
in treating men with relapsed prostate cancer who have not received hormone
therapy. We expect to begin a Phase III trial in this setting in 2001.
Mylovenge for B-cell Malignancies: Multiple Myeloma and Amyloidosis
An estimated 14,000 people will be diagnosed with multiple myeloma, a
cancer of the blood, this year and over 11,000 individuals will die from this
disease in the United States. It accounts for approximately 10% of cancers of
the blood. Amyloidosis is a disease related to multiple myeloma, afflicting
approximately 2,500 individuals in the United States annually. Amyloidosis is
fatal in most cases.
Mylovenge utilizes a patient-specific antigen, called M protein, a unique
immunoglobulin, or antibody, produced by the patient's tumor and easily
collected from the blood. We are currently conducting a Phase II trial, in
collaboration with the Mayo Clinic, for the treatment of patients who have
residual myeloma after high dose chemotherapy and stem cell transplant. We are
also conducting a Phase II trial in multiple myeloma sites in the U.S. for the
treatment of patients with high numbers of tumor cells that are resistant to
standard therapy. Initial results have demonstrated tumor regression and disease
stabilization in a significant number of patients. In 2001, we expect to begin a
Phase II trial of Mylovenge combined with standard therapy.
We have also treated patients with amyloidosis with Mylovenge as part of
the Mayo Clinic Phase II trial. Some of these patients have shown significant
clinical improvement even to damaged organs. None of the patients had side
effects from treatment. We are currently enrolling additional amyloidosis
patients in this trial.
APC8024 for Treatment of Breast, Ovarian and Colon Cancers
APC8024 is our vaccine against tumors that have increased levels of a
protein called HER-2/neu on their surface. Increased levels of this protein are
found in approximately 25% of metastatic breast cancers, ovarian, pancreatic and
colon cancers. We have identified portions of the HER-2/neu molecule that
stimulate a potent cell-mediated immune response when engineered into our
Antigen Delivery Cassette.
Two Phase I trials are underway to evaluate APC8024 for the treatment of
patients with tumors that have HER-2/neu on their surface. The trials will
examine different doses and schedules of APC8024 for safety and
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ability to stimulate immunity. If successful, we plan to use the results of
these trials to select one treatment regimen for Phase II trials that will
examine the effectiveness of APC8024 for the treatment of specific cancers. We
are working in collaboration with The R.W. Johnson Pharmaceutical Research
Institute on this project.
APC80NY for Treatment of Multiple Cancers
APC80NY targets the NY-ESO protein that is present on many cancers,
including breast, prostate, lung, ovarian/uterine and bladder. We licensed the
NY-ESO antigen from the Ludwig Cancer Institute, where scientists performed a
series of preclinical studies that demonstrated NY-ESO is an excellent
immunotherapy target present in a wide variety of tumors. We are currently
engineering the NY-ESO antigen into our Antigen Delivery Cassette. This involves
identifying those regions of the molecule that stimulate the strongest cell-
mediated immunity and then combining those regions to yield a protein that is
most effectively presented by dendritic cells.
APC80TR for Treatment of Multiple Cancers
APC80TR targets the Trp-P8 antigen that is present on 100% of prostate
cancers and approximately 71% of breast cancers, 93% of colorectal cancers and
80% of lung cancers. Trp-P8 is the first antigen generated from our internal
antigen discovery program. We plan to engineer the Trp-P8 antigen into our
Antigen Delivery Cassette. We will identify the cassette that stimulates the
strongest cell-mediated immunity and use this protein for our vaccine, APC80TR.
Therapeutic Antibody Products
Danton (DN1924) Antibody for Treatment of Cancer
Danton (DN1924) is our therapeutic antibody which targets a unique antigen
present on normal and malignant blood cells and causes death of only malignant
cells. Danton's target is present on numerous blood-borne tumors, such as
Hodgkin's lymphoma, Non-Hodgkin lymphoma, and B-cell leukemias. Current
treatment for these cancers includes chemotherapy, radiation, and high dose
chemotherapy with stem cell transplantation, all of which are highly toxic and
curative only in a minority of cases. Preclinical studies suggest that Danton
(DN1924) can kill human cancer cells without apparent toxicity or immune
suppressive side effects. Furthermore, these preclinical studies suggest that
cancer cells may not develop resistance to this treatment over time.
Dantes (DN1921) Antibody for Treatment of Autoimmune Disease
Dantes (DN1921) is our therapeutic antibody that suppresses activities of
the immune system. Autoimmune diseases such as rheumatoid arthritis, systemic
lupus erythematosus, multiple sclerosis, myasthenia gravis and pemphigus
vulgaris, result from unwanted activities of the immune system. Current
therapeutics include nonspecific immune suppression by corticosteroids,
methotrexate and other drugs. Although these treatments may reduce tissue damage
in some patients, they are not curative.
Dantes (DN1921) is specific for a well-known target for immunosuppression,
HLA-DR. Previously, other companies have attempted to develop drugs that
targeted HLA-DR. Although those drugs were usually effective immunosuppressants,
they failed in preclinical studies due to unacceptable toxicity. We have
observed that immunosupression and toxicity are mediated by two separate parts
of the antibody molecule. We are developing Dantes (DN1921) to take advantage of
this observation. Dantes (DN1921) has shown significant immunosuppressive
abilities in our preclinical studies without producing toxicity.
Additional Vaccine Products
We believe that our vaccine technologies have additional potential
applications that we will pursue in the fields of autoimmune diseases, allergies
and infectious diseases.
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Cell Separation Products
We have developed proprietary cell separation technology which can be
tailored for specific cell types. This technology consists of two components:
specially engineered separation containers, and solutions called buoyant density
solutions. We prepare our buoyant density solutions to match the buoyant density
of a particular cell type. By matching buoyant densities in this manner, we are
able to control whether or not a specific cell type floats or sinks in the
solution. This allows us to isolate the desired cells easily, rapidly and
without the need for the biological reagents used in conventional cell
separation techniques.
In 1996, we received a marketing authorization in the United States on a
family of our separation devices. In 1999, we obtained pre-marketing approval,
or a PMA, from the FDA for our DACS(R)SC kit and in July 2000, we granted
exclusive worldwide marketing and distribution rights to Charter Medical, Ltd.,
for this device. This product uses our cell separation technology to prepare
stem cells for transplantation following high dose chemotherapy, which is
standard therapy for many blood cell malignancies, such as multiple myeloma,
lymphoma and leukemias. Stem cells, sometimes called hematopoietic progenitor
cells, are collected from the blood before chemotherapy and infused afterwards
to restore the destroyed marrow.
We also use our cell separation technology to isolate dendritic cells for
our cancer vaccines. For cell types outside of our interests, we license our
technology to third parties. For example, we currently have agreements to allow
BioTransplant, Inc. and Osiris Therapeutics, Inc. to use our technology to
isolate cells for their products.
Collaborations
Kirin Brewery Co., Ltd.
Kirin Brewery Co., Ltd. (Kirin) is our collaborator for the marketing and
development of our vaccines in Asia. We have granted Kirin an exclusive license
to our proprietary dendritic cell technology for the development and
commercialization of our products in Japan and other Asian countries. We also
granted Kirin an option to obtain an exclusive license to commercialize in these
countries other products we develop with our dendritic cell technology. In
exchange, Kirin has granted us an option to obtain an exclusive license to
commercialize in North America any products developed by Kirin under this
agreement.
Additionally, we conduct collaborative research with Kirin intended to
create improvements in our dendritic cell technology and to develop new
products. By agreement, Kirin will own all rights in these improvements and will
exclusively license them to us. We also supply Kirin with devices, reagents and
some of our proprietary antigens. Kirin, in turn, supplies us with some of its
proprietary antigens and other items. We and Kirin have also agreed to
collaborate in the clinical development and commercialization in the European
Union of novel products jointly developed under our agreements and to share
equally in any profits.
In connection with these agreements, Kirin has paid us an upfront license
fee of $5.0 million. In December 1998, Kirin exercised an option under the
agreement to receive rights to our prostate program for which Kirin paid us $1.0
million and is obligated to pay us up to an additional $4.0 million in fees and
milestone payments. Kirin is solely responsible for the development and clinical
trials of the prostate program in Japan. We will also receive royalties on sales
of any products in Japan that utilize the licensed technology. In April 2000,
Kirin exercised an option under the agreement to receive rights to our multiple
myeloma program for which Kirin paid us $1.0 million and is obligated to pay us
up to an additional $4.0 million in fees and milestone payments. Kirin is solely
responsible for the development and clinical trials of the multiple myeloma
program in Japan. We will also receive royalties on sales of products in Japan
that utilize the licensed technology.
Additionally, Kirin is obligated to support our research efforts. We
received from Kirin $2.3 million and $1.3 million for research funding in 2000
and 1999, respectively. We are obligated to pay royalties to Kirin on products
that we sell in North America, developed by or in collaboration with Kirin under
these agreements. We and Kirin are also obligated to pay for items supplied by
the other party at the fully-burdened manufacturing cost plus a handling fee.
Kirin has the right to terminate these agreements without cause on 90 days
written notice after January 1, 2002. Pursuant to these agreements, in February
2000, we exercised our right to have Kirin purchase
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$5.0 million of our common stock in a private placement that closed
simultaneously with the completion of our initial public offering at the initial
public offering price of $10.00 per share.
The R.W. Johnson Pharmaceutical Research Institute
In October 2000, we entered into a Research Collaboration and License
Agreement with The R.W. Johnson Pharmaceutical Research Institute (R.W.
Johnson), a division of Ortho-McNeil Pharmaceutical, Inc. and a member of the
Johnson & Johnson family of companies. The agreement provides for studies of
R.W. Johnson technology and of our technology to determine their respective
feasibility as immunotherapy products for the treatment of tumors which express
a defined antigen present on breast, ovarian and colorectal cancers. The
research plan, covering a defined territory and field, will be performed jointly
by us and R.W. Johnson. It will involve at least two Phase I clinical trials of
human subjects.
Under the agreement, R.W. Johnson paid us a study fee of $3.0 million and a
milestone payment of $1.0 million at the initiation of clinical trials under our
Investigational New Drug application, filed with the FDA in November 2000, for
APC8024, our proprietary antigen activated dendritic cell product. The agreement
also provides in part that R.W. Johnson will fund the research plan by paying us
for our research effort. During 2000, R.W. Johnson also paid to the Company,
$1.1 million to acquire capital assets on behalf of R.W. Johnson provided for in
the collaboration research plan. R.W. Johnson will receive exclusive access to
the work and its results and an exclusive right to negotiate with us during the
term of the agreement regarding further activities in the territory and field
covered by the agreement.
The agreement provides that during the course of this collaboration, we and
R.W. Johnson will endeavor to agree upon terms for future collaboration using
R.W. Johnson's and our respective separate and/or combined technologies.
Manufacturing
We manufacture the Antigen Delivery Cassettes used to conduct preclinical
and clinical trials. We manufacture our Antigen Delivery Cassettes as
recombinant proteins using standard production methods in compliance with
current good manufacturing practices, or cGMP. We intend to rely on third party
contract manufacturers to produce larger quantities of Antigen Delivery
Cassettes for product commercialization.
We own and operate cell-processing centers in Mountain View, California and
Seattle, Washington. In addition, we use four third-party dendritic cell-
processing centers operated in conjunction with the Mayo Clinic in Rochester,
Minnesota, Kirin in Tokyo, Japan, the American Red Cross in Philadelphia,
Pennsylvania, and Progenitor Cell Therapy in Hackensack, New Jersey.
We also manufacture cell separation devices that isolate cells from blood
and other bodily fluids. We rely on subcontractors to manufacture these devices
in full compliance with cGMP.
Intellectual Property
We protect our technology through United States and foreign patent filings,
trademarks and trade secrets. As of March 1, 2001, we had 87 United States and
foreign patents and 223 patent applications pending. In addition, we have
licensed from others 67 issued patents or patent applications pending. Our
issued patents expire on dates from May 22, 2007 through July 17, 2018. In
addition, our issued and allowed patents include patents that are directed to
the solutions and devices by which cells can be isolated and manipulated,
including claims that apply specifically to the isolation of dendritic cells,
and claims on the use of these cells for immunotherapy, such as for the
treatment of diseases such as B-cell malignancies. We have also received claims
on treatment methods covering a variety of immunostimulatory antigen
compositions. These include our Antigen Delivery Cassette for use with a variety
of tumor antigens and specifically, the prostate antigen containing cassette,
for which we have independent patent protection. We intend to continue using our
scientific expertise to pursue and patent new developments with respect to uses,
compositions and factors to enhance our position in the cancer vaccine field.
Patents, if issued, may be challenged, invalidated or circumvented. Thus, any
patent that we own or license from third parties may not
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provide adequate protection against competitors. Our pending patent
applications, those we may file in the future, or those we may license from
third parties may not result in issued patents. Also, patents may not provide us
with adequate proprietary protection or advantages against competitors with
similar or competing technologies. For example, we are aware of others that have
had patents issued to them in the dendritic cell field relating to methods to
isolate, culture or activate dendritic cells and relating to the treatment with
antigens of cancers such as prostate cancer. As a result of potential conflicts
with the proprietary rights of others, we may in the future have to prove we are
not infringing the patent rights of others or be required to obtain a license to
the patent. We do not know whether such a license would be available on
commercially reasonable terms, or at all.
We also rely on trade secrets and unpatentable know-how that we seek to
protect, in part, by confidentiality agreements. Our policy is to require our
officers, employees, consultants, contractors, manufacturers, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with us be kept confidential and not disclosed to
third parties except in specific limited circumstances. We also require signed
confidentiality or material transfer agreements from companies that are to
receive our confidential data. In the case of employees, consultants and
contractors, confidentiality agreements with them generally provide that all
inventions conceived by the individual while rendering services to us shall be
assigned to us as our exclusive property. However, it is possible that these
parties may breach those agreements, and we may not have adequate remedies for
any breach. It is also possible that our trade secrets or unpatentable know-how
will otherwise become known or be independently developed by competitors.
Competition
The biotechnology and biopharmaceutical industries are characterized by
rapidly advancing technologies, intense competition and a strong emphasis on
proprietary products. Many entities, including pharmaceutical and biotechnology
companies, academic institutions and other research organizations are actively
engaged in the discovery, research and development of products that could
compete directly with our products under development. Companies, including AVI
Biopharma, Inc., Cell Genesys, Inc., NW Biotherapeutics, Inc., Therion Biologics
Corporation and Vical Incorporated, have disclosed that they are developing
cancer vaccines that may compete with Provenge. These competitors may succeed in
developing and marketing cancer vaccines that are more effective than or
marketed before Provenge. However, to our knowledge, we are the only company
that has begun Phase III clinical development of a therapeutic cancer vaccine
for prostate cancer.
Many companies, including major pharmaceutical companies, are also
developing alternative therapies that may compete with our other products in the
fields of cancer, autoimmune diseases, allergies and infectious diseases. Many
of the companies developing cancer vaccines and alternative treatments have
significantly greater financial resources and expertise in research and
development, manufacturing, preclinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing. Others have partnered with large
established companies to obtain access to these resources. Smaller companies may
also prove to be significant competitors, particularly through the establishment
of collaborative arrangements with large, established companies.
Our ability to commercialize our products and compete effectively will
depend, in large part, on;
. our ability to advance Provenge and Mylovenge through clinical trials
and to successfully manufacture and market these vaccines;
. the price of our vaccines relative to other products or competing
treatments;
. the effectiveness of our sales and marketing efforts and those of our
marketing partners;
. the perception by physicians and other members of the health care
community of the safety, efficacy and benefits of our vaccines compared
to those of competing products or therapies;
. the willingness of physicians to adopt a new treatment regimen
represented by our dendritic cell technology; and
12
. unfavorable publicity concerning cancer vaccines.
Competition among products approved for sale will be based, among other
things, upon efficacy, reliability, product safety, price and patent position.
Our competitiveness will also depend on our ability to advance our technologies,
license additional technology, maintain a proprietary position in our
technologies and products, obtain required government and other public and
private approvals on a timely basis, attract and retain key personnel and enter
into corporate partnerships that enable us and our collaborators to develop
effective products that can be manufactured cost-effectively and marketed
successfully.
Employees
As of December 31, 2000, we had 99 employees. None of our employees is
subject to a collective bargaining agreement, and we believe that our relations
with our employees are good.
Executive Officers of the Registrant
Our executive officers and their ages as of March 1, 2001 were as follows:
NAME AGE POSITION
- ---- --- --------
Christopher S. Henney, Ph.D., D.Sc. 60 Chief Executive Officer and
Chairman of the Board of Directors
T. Dennis George, J.D. 62 Senior Vice President, Corporate Affairs,
General Counsel and Secretary
Martin A. Simonetti 43 Senior Vice President, Finance,
Chief Financial Officer, and Treasurer
David L. Urdal, Ph.D. 51 President, Chief Scientific Officer,
and Vice Chairman of the Board
Frank H. Valone, M.D. 51 Senior Vice President, Medical and
Regulatory Affairs, and Chief Medical Officer
Christopher S. Henney, Ph.D., D.Sc., has served as our Chief Executive
Officer and Director since May 1995 and as our Chairman of the Board of
Directors since January 2001. In 1989, Dr. Henney co-founded ICOS Corporation, a
publicly-held biotechnology company, where from 1989 to 1995, Dr. Henney served
as Executive Vice President, Scientific Director and Director. In 1981, Dr.
Henney co-founded Immunex Corporation, a publicly-held biotechnology company,
where from 1981 to 1989, he held various positions, including Director, Vice
Chairman and Scientific Director. Dr. Henney is also a former academic
immunologist. Dr. Henney currently serves as a director of Techne Corporation,
Sonus Pharmaceuticals Inc., Bionomics, Inc. and Structural Genomix, Inc. Dr.
Henney received a B.Sc. with Honors, a Ph.D. in experimental pathology and a
D.Sc. for his contributions to immunology from the University of Birmingham,
England.
T. Dennis George, J.D., has served as our Senior Vice President of
Corporate Affairs, General Counsel and Secretary since December 1999. From 1977
until joining us, Mr. George was a partner in the law firm George, Hull, Porter
& Kohli, P.S. in Seattle, Washington. Mr. George is a member of the Washington
State, King County and American Bar Associations and is a former president of
the Federal Bar Association of the Western District of Washington. Mr. George is
admitted to the U.S. Supreme Court, U.S. Court of Appeals for the Ninth Circuit
and U.S. District Courts for the Western and Eastern Districts of Washington.
Mr. George received a B.S. with honors from Northern Michigan University and a
J.D. with honors from the University of Wisconsin Law School.
13
Martin A. Simonetti has served as our Chief Financial Officer and Treasurer
since joining us in January 1999 and Senior Vice President, Finance since
January 2001. From 1991 to 1998, Mr. Simonetti was employed at Amgen Inc., a
pharmaceutical company, where he held various positions, including Vice-
President Operations and Finance of Amgen BioPharma and their Director of
Colorado Operations. From 1984 to 1991, Mr. Simonetti was employed at Genentech,
Inc., a biotechnology company, first as a scientist in their Medicinal and
Analytical Chemistry Department and later, after obtaining an M.B.A., as a
financial analyst and quality group controller. Mr. Simonetti received a B.S.
and an M.S. in Nutrition from the University of California, Davis and an M.B.A.
from the University of Santa Clara.
David L. Urdal, Ph.D., has served as our President since January 2001 and
as our Chief Scientific Officer and Vice Chairman of our Board of Directors
since joining us in July 1995. From 1982 until July 1995, Dr. Urdal held various
positions with Immunex Corporation, including President of Immunex Manufacturing
Corporation, Vice President and Director of Development, and head of the
departments of biochemistry and membrane biochemistry. Dr. Urdal received a B.S.
and M.S. in Public Health and a Ph.D. in Biochemical Oncology from the
University of Washington.
Frank H. Valone, M.D., has served as our Senior Vice President, Medical and
Regulatory Affairs, since January 1999 and as our Chief Medical Officer since
1994. From 1991 until joining us, Dr. Valone was Associate Professor of Medicine
at Dartmouth-Hitchcock Medical Center, Norris Cotton Cancer Center. From 1984 to
1991, Dr. Valone held various positions at the VA Medical Center in San
Francisco, including Chief of Hematology/ Oncology. From 1982 to 1991, Dr.
Valone held faculty positions at the University of California, San Francisco,
including Associate Professor of Medicine. Prior to that time, Dr. Valone served
as an instructor in Medicine at Harvard Medical School and instructor in Medical
Oncology at the Dana Farber Cancer Institute. Dr. Valone received a B.A. from
Hamilton College and an M.D. from Harvard Medical School.
ITEM 2. PROPERTIES
We lease approximately 70,650 square feet of laboratory, manufacturing and
office space in Seattle, Washington under a lease expiring December 2008. The
lease may be extended at our option for two consecutive five-year periods. We
sublease to a subtenant approximately 11,100 square feet of this leased space
under a lease expiring March 2004. We lease approximately 25,000 square feet of
laboratory, manufacturing and office space in Mountain View, California under a
lease expiring June 2006. This lease may be extended at our option for one five
year period. We sublease to a subtenant approximately 18,600 square feet of this
leased space under a sublease expiring June 2001.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market System under the
symbol "DNDN". Public trading of our common stock commenced on June 16, 2000.
Prior to this time, there was no public market for our stock. The following
table summarizes our common stock's high and low sales prices for the periods
indicated as reported by the Nasdaq National Market System.
2001 High Low
- ---- ---- ---
First Quarter (through March 9, 2001) $14.81 $ 9.44
2000
- ----
Second Quarter (from June 16, 2000 to June 30, 2000) $16.56 $ 9.69
Third Quarter $25.00 $12.25
Fourth Quarter $22.63 $12.00
As of March 1, 2001, there were approximately 167 holders of record of our
common stock. We have never declared or paid cash dividends on our capital
stock. We currently intend to retain any future earnings to fund the development
and growth of our business and do not currently anticipate paying any cash
dividends in the foreseeable future. Future dividends, if any, will be
determined by our board of directors.
Recent Sales of Unregistered Securities
On February 4, 2000, we sold an aggregate of 970,708 of Series E Preferred
Stock at a price per share of $4.25 to a group of private accredited investors
for gross proceeds of $4.1 million. All shares of preferred stock outstanding as
of the date of our initial public offering automatically converted to common
stock immediately prior to the completion of our initial public offering. The
sale and issuance of the above securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended, in reliance upon
Section 4(2) of the Securities Act or Regulation D promulgated thereunder, as
transactions by an issuer not involving a public offering. The recipients of
securities in the above transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with us, to information about the Company.
Use of Proceeds From Sales of Registered Securities
The Registration Statement (SEC File No. 333-31920) for our initial public
offering (the "Offering") became effective June 16, 2000, covering an aggregate
of 5,175,000 shares of our common stock, including the underwriters' over-
allotment option. The Offering commenced June 16, 2000, and on June 21, 2000, we
issued 4,500,000 shares of our common stock at an initial public offering price
of $10.00 per share. Offering proceeds, net of underwriting discounts and
commissions and offering expenses of approximately $4.8 million, were
approximately $40.3 million. Prudential Vector HealthCare Group, a unit of
Prudential Securities Incorporated, was the managing underwriter of the
Offering, and SG Cowen Securities Corporation and Pacific Growth Equities, Inc.
were the co-managers. In July 2000, the underwriters exercised their over-
allotment option and purchased an additional 385,732 shares of our common stock
at the $10.00 per share initial public offering price. The completion of this
offering, including the over-allotment option, resulted in the sale of an
aggregate of 4,885,732 shares of common stock, for total gross proceeds of $48.9
million, which resulted in net proceeds to us of approximately $43.8 million,
after deducting underwriting discounts and commissions and offering expenses.
None of the offering proceeds were paid, directly or indirectly, to: (i)
directors or officers, or their associates; (ii) persons owning ten percent or
more of any class of our equity securities; or (iii) affiliates.
From the effective date of the Registration Statement through December 31,
2000, we used approximately $3.3 million of the Offering proceeds to fund
clinical trials, research, preclinical and commercialization activities for our
therapeutic vaccine products, to increase our dendritic cell processing and
antigen manufacturing capacity,
15
and for general corporate purposes, including working capital. The remaining
proceeds from the Offering are invested in commercial paper, money market
securities and certificates of deposit.
ITEM 6. SELECTED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes appearing
elsewhere in this report.
Year Ended December 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except per share data)
Total revenue $ 6,519 $ 3,719 $ 866 $ 793 $ 474
Operating expenses:
Research and development 17,191 10,222 8,064 5,290 5,093
General and administrative 7,262 6,110 2,893 2,894 2,209
Sales and marketing 250 -- -- -- --
-------- -------- -------- ------- -------
Total operating expenses 24,703 16,332 10,957 8,184 7,302
-------- -------- -------- ------- -------
Loss from operations (18,184) (12,613) (10,091) (7,391) (6,828)
Interest and other income, net:
Interest income 2,828 414 361 267 226
Interest expense (613) (351) (41) (47) (114)
Other income (loss), net -- 32 (2) 8 --
-------- -------- -------- ------- -------
Interest and other income, net 2,215 95 318 228 112
-------- -------- -------- ------- -------
Loss before income taxes (15,969) (12,518) (9,773) (7,163) (6,716)
Provision for income taxes 100 -- 600 -- --
-------- -------- -------- ------- -------
Net loss (16,069) (12,518) (10,373) (7,163) (6,716)
Deemed dividend upon issuance of convertible
preferred stock (4,110) (285) -- -- --
-------- -------- -------- ------- -------
Net loss attributable to common stockholders $(20,179) $(12,803) $(10,373) $(7,163) $(6,716)
======== ======== ======== ======= =======
Basic and diluted net loss per common share $(1.57) $(13.54) $(16.48) $(21.37) $(58.47)
======== ======== ======== ======= =======
Shares used in computation of basic and diluted net
loss per common share 12,840 946 630 335 115
======== ======== ======== ======= =======
Pro forma basic and diluted net loss per share $(1.04) $(1.07)
======== ========
Pro forma shares used in computation of basic and
diluted net loss per share (1) 19,339 11,963
======== ========
16
December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------ ------
Balance Sheet Data: (in thousands)
Cash, cash equivalents, short- and long-term investments $ 97,155 $13,813 $ 9,930 $8,223 $3,397
Working capital 74,560 9,738 6,465 7,471 2,692
Total assets 109,558 17,375 12,038 9,910 4,840
Long-term obligations, less current portion 1,469 2,799 531 -- 171
Total stockholders' equity 85,519 5,569 2,779 8,306 3,598
(1) See Note 9 of notes to financial statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Since our inception in 1992, our activities have primarily been associated
with the development and testing of our cancer vaccines. Our business activities
have included:
. product research and development;
. development of our proprietary cell separation technology;
. development of our proprietary Antigen Delivery Cassette technology;
. regulatory and clinical affairs;
. establishing manufacturing capabilities; and
. intellectual property prosecution.
We have incurred significant losses since our inception. As of December 31,
2000, our accumulated deficit was $67.6 million. We have incurred net losses
since inception as a result of research and development expenses, general and
administrative expenses in support of our operations, and sales and marketing
expenses. We anticipate incurring net losses over at least the next several
years as we complete our clinical trials, apply for regulatory approvals,
continue development of our technology and expand our operations.
RESULTS OF OPERATIONS
Years Ended December 31, 2000 and 1999
Revenue. Revenue increased approximately 75% in 2000 to $6.5 million, from
$3.7 million in 1999. Revenue in 2000 consisted of $6.1 million from
collaborative and license agreements and $460,000 of grant revenue. Revenue in
1999 consisted of $3.5 million from collaborative and license agreements and
$261,000 of grant revenue. The year to year increase was primarily due to $1.5
million revenue related to agreements we entered into with R.W. Johnson and a
$1.0 million increase in revenue related to agreements we entered into with
Kirin.
Research and Development Expenses. Research and development expenses
increased approximately 68% in 2000 to $17.2 million, from $10.2 million in
1999. Of the $7.0 million increase in research and development expenses, $1.6
million was due to product development expenses, including fees paid to third
parties associated with conducting clinical trials, $1.4 million was due to
personnel related costs, $1.2 million was due to non-cash stock-based
compensation, $1.2 million was due to supplies and $961,000 was due to
facilities and depreciation expense.
General and Administrative Expenses. General and administrative expenses
increased approximately 19% in 2000 to $7.3 million, from $6.1 million in 1999.
Of the $1.2 million increase in general and administrative expenses, $1.7
million was due to personnel related expenses, and $308,000 was due to non-cash
stock-based compensation offset by a decrease in facilities and depreciation
expense of $1.2 million.
17
Sales and Marketing. Sales and marketing expenses were $250,000 in 2000
and $0 in 1999. Of the $250,000 increase in sales and marketing expenses,
$139,000 was due to personnel related expenses and $111,000 was due to
consulting expenses.
Interest Income. Interest income increased approximately 583% to $2.8
million in 2000, from $414,000 in 1999. The increase in 2000 was attributable to
higher average balances of cash, cash equivalents, short and long-term
investments.
Interest Expense. Interest expense increased approximately 75% to $613,000
in 2000, from $351,000 in 1999. This was attributable to interest expense
associated with a loan we obtained in June 1999.
Income Tax Expense. Income tax expense was $100,000 in 2000. The income
tax expense related to a withholding tax assessed by Japan on certain payments
received from Kirin. Due to operating losses and the inability to recognize the
benefits therefrom, there was no provision for income taxes in 1999.
Years Ended December 31, 1999 and 1998
Revenue. Revenue increased approximately 329%, to $3.7 million in 1999
from $866,000 in 1998. Revenue in 1999 consisted of $3.5 million from
collaborative and license agreements and $261,000 of grant revenue. Revenue in
1998 consisted of $629,000 from collaborative and license agreements and
$237,000 of grant revenue. The year to year increase was primarily due to a $3.0
million increase in revenue related to agreements we entered into with Kirin.
Research and Development Expenses. Research and development expenses
increased approximately 27%, to $10.2 million in 1999 from $8.1 million in 1998.
Of the $2.1 million increase in research and development expenses, $1.9 million
was due to facilities and depreciation expense, $354,000 was due to non-cash
stock-based compensation, $280,000 was due to supplies and $112,000 was due to
product development expenses, including fees paid to third parties associated
with conducting clinical trials offset by a decrease in salaries and personnel
related costs of $469,000.
General and Administrative Expenses. General and administrative expenses
increased approximately 111%, to $6.1 million in 1999 from $2.9 million in 1998.
Of the $3.2 million increase in general and administrative expenses, $1.3
million was due to facilities and depreciation expenses, $1.1 million was due to
salaries and other personnel related expenses, $523,000 was due to professional
fees and $341,000 was due to non-cash stock-based compensation.
Interest Income. Interest income increased approximately 15%, to $414,000
in 1999 from $361,000 in 1998. This was attributable to higher average balances
of cash, cash equivalents and short-term investments.
Interest Expense. Interest expense increased approximately 756%, to
$351,000 in 1999 from $41,000 in 1998. This was attributable to interest expense
associated with a loan we obtained in June 1999.
Income Tax Expense. Due to operating losses and the inability to recognize
the benefits therefrom, there was no provision for income taxes in 1999. Income
tax expense in 1998 was $600,000 and related to a withholding tax assessed by
Japan on certain payments received from Kirin.
Revenue Recognition
Non-refundable, up-front payments received in connection with collaborative
research and development agreements are deferred and recognized on a straight-
line basis over the relevant periods specified in the agreement, generally the
research term.
Revenue related to collaborative research with the Company's corporate
collaborators is recognized as research services are performed over the related
funding periods for each agreement. Under these agreements, the Company is
required to perform research and development activities as agreed or specified
in each agreement. The payments
18
received under research collaboration agreements are not refundable if the
research effort is not successful. Payments received in advance of the services
provided are deferred and recognized as revenue over the future performance
periods.
Revenue related to grant agreements is recognized as related research and
development expenses are incurred.
Milestone and royalty payments are recognized in full at such time as the
specified milestone has been achieved. Revenue from product supply agreements is
recorded when the product is shipped or when all obligations under the
agreements are met.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 is based upon existing accounting rules and provided specific
guidance on how those accounting rules should be applied and specifically
addresses revenue recognition for non-refundable technology access fees in the
biotechnology industry. The adoption of SAB 101 in 2000 did not have a material
impact on the financial position or results of operations of the Company.
As of December 31, 2000, we had deferred revenues of approximately $14.8
million.
Net Operating Loss Carryforwards
At December 31, 2000, we had net operating loss carryforwards of
approximately $29.5 million to offset any future federal and state taxable
income. If not utilized, the tax net operating loss carryforwards will expire at
various dates beginning in 2009 through 2012. We also had research and
development tax credit carryforwards at December 31, 2000, of approximately $2.1
million for federal income tax purposes. Utilization of the net operating losses
and credits may be subject to a substantial annual limitation due to the change
in the ownership provisions of the Internal Revenue Code of 1986, as amended,
and similar state provisions. The annual limitation may result in the expiration
of net operating losses and credits before utilization.
Stock-Based Compensation Expense
Stock-based compensation expense consists of the amortization of deferred
stock-based compensation resulting from the grant of stock options at exercise
prices subsequently deemed to be less than the fair value of the common stock on
the grant date. We recorded total deferred stock-based compensation of $3.1
million in 2000, $2.1 million in 1999, and $589,000 in 1998. We initially
recorded these amounts as a component of stockholders' equity and are amortizing
them by charges to operations over the vesting period of the options using the
graded vesting method. We recorded amortization of deferred stock-based
compensation of $2.3 million in 2000, $844,000 in 1999, and $149,000 in 1998. We
expect amortization of deferred stock-based compensation expense to be $1.4
million in 2001, $741,000 in 2002, $274,000 in 2003 and $15,000 in 2004.
Deemed Dividend Upon Issuance of Convertible Preferred Stock
We recorded a deemed dividend of $4.1 million and $285,000 in 2000 and
1999, respectively, for the issuance of Series E convertible preferred stock.
The incremental fair value determined on the date of issuance for each closing
of Series E convertible preferred stock is deemed to be the equivalent of a
preferred stock dividend. We recorded the deemed dividend at the date of
issuance by offsetting charges and credits to additional paid-in capital,
without any effect on total stockholders' equity. The amount increased the loss
attributable to common s6tockholders in the calculation of net loss per share
for 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, short-term and long-term investments were $97.2
million at December 31, 2000. We have financed our operations since inception
through our initial public offering, follow-on public offering, the private
placement of equity securities, revenue from collaborative arrangements, grant
revenue, interest income earned on cash, cash equivalents and investments,
equipment lease line financings and loan facilities. Since January 1, 2000, we
received net proceeds of $9.1 million from private financing activities and
$84.0 million from
19
our public offerings of our common stock. In 1999, we received net proceeds of
$13.1 million from private financing activities. In 1998, we received net
proceeds of $4.7 million from private financing activities. To date, inflation
has not had a material effect on our business.
Since our inception, investing activities, other than purchases and
maturities of short-term and long-term investments, have consisted primarily of
purchases of property and equipment. At December 31, 2000, our investment in
equipment and leasehold improvements was $4.7 million. We have an agreement with
a financing company under which we have financed purchases of $2.5 million of
leasehold improvements, laboratory, computer and office equipment. The lease
terms are 48 months and bear interest at rates ranging from 10.8% to 14.3% per
year. We also have a tenant improvement allowance of $3.5 million from the
lessor of our Seattle, Washington facility. As of December 31, 2000, we had
committed to the expenditure of $2.8 million for laboratory and manufacturing
space at this facility, leaving approximately $700,000 available. The
improvement allowance bears interest at the rate of 12.5% per year and is repaid
monthly over the length of the original lease.
Net cash used in operating activities for the years ended December 31,
2000, 1999, and 1998 was $8.8 million, $12.1 million and $2.9 million,
respectively. Expenditures in all periods were a result of increased research
and development expenses, general and administrative expenses in support of our
operations and sales and marketing expenses.
In June 1999, we obtained a loan in the amount of $3.0 million from a
financial lender. The loan bears interest at an annual rate of 13.3%. We made
monthly interest payments on this loan for the first six months and will make
principal and interest payments for 24 months thereafter.
As of December 31, 2000, we anticipate that our cash on hand and cash
generated from our collaborative arrangements will be sufficient to enable us to
meet our anticipated expenditures for at least the next 24 months, including,
among other things:
. supporting our clinical trial efforts;
. continuing internal research and development;
. development of sales and marketing capabilities; and
. development of manufacturing capabilities.
However, we may need additional financing prior to that time. Additional
financing may not be available on favorable terms or at all. If we are unable to
raise additional funds should we need them, we may be required to delay, reduce
or eliminate some of our development programs and some of our clinical trials.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133, which was effective for the Company on January 1, 2001, requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Management believes that the adoption of SFAS No. 133 will not have a material
impact on the Company's financial position, results of operations and cash
flows.
FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
We have a history of operating losses; we expect to continue to incur
losses and we may never be profitable.
As of December 31, 2000, we had an accumulated deficit of $67.6 million.
These losses have resulted principally from costs incurred in our research and
development programs and from our general and administrative costs. We have
derived no significant revenues from product sales or royalties. We do not
expect to achieve significant product sales or royalty revenue for a number of
years, and are not able to predict when we might do so. We expect to incur
additional operating losses in the future. These losses may increase
significantly as we expand development and clinical trial efforts.
20
Our ability to achieve long-term profitability is dependent upon obtaining
regulatory approvals for our products and successfully commercializing our
products alone or with third parties. However, our operations may not be
profitable even if any of our products under development are commercialized.
We may require additional funding, and our future access to capital is
uncertain.
It is expensive to develop cancer vaccines and conduct clinical trials for
vaccines. We plan to continue to simultaneously conduct clinical trials and
preclinical research for many different cancer and autoimmune disease vaccines,
which is costly. Our future revenues may not be sufficient to support the
expenses of our operations and the conduct of our clinical trials and
preclinical research.
We believe that our cash on hand at December 31, 2000, and cash generated
from our collaborative arrangements will be sufficient to meet our projected
operating and capital requirements for at least the next 24 months. However, we
may need additional financing within this timeframe depending on a number of
factors, including the following:
. our degree of success in commercializing cancer vaccine products;
. the amount of milestone payments we receive from our collaborators;
. the rate of progress and cost of our research and development and
clinical trial activities;
. the costs of preparing, filing, prosecuting, maintaining and enforcing
patent claims and other intellectual property rights;
. emergence of competing technologies and other adverse market
developments;
. changes in or terminations of our existing collaboration and licensing
arrangements; and
. the cost of manufacturing scale-up and development of marketing
operations, if we undertake those activities.
We may not be able to obtain additional financing on favorable terms or at
all. If we are unable to raise additional funds when we need them, we may be
required to delay, reduce or eliminate some or all of our development programs
and some or all of our clinical trials. We also may be forced to license to
others technologies that we would prefer to develop internally. If we raise
additional funds by issuing equity securities, further dilution to stockholders
may result, and new investors could have rights superior to holders of our
outstanding shares.
We are subject to extensive regulation, which can be costly, time consuming
and subject us to unanticipated delays; even if we obtain regulatory
approval for some of our products, those products may still face regulatory
difficulties.
All of our potential products, cell processing and manufacturing
activities, are subject to comprehensive regulation by the FDA in the United
States and by comparable authorities in other countries. The process of
obtaining FDA and other required regulatory approvals, including foreign
approvals, is expensive and often takes many years and can vary substantially
based upon the type, complexity and novelty of the products involved. Provenge,
Mylovenge and our other products are novel; therefore, regulatory agencies lack
experience with them which may lengthen the regulatory review process, increase
our development costs and delay or prevent commercialization of Provenge,
Mylovenge and our other products. No cancer vaccine using dendritic cell
technologies has been approved for marketing. Consequently, there is no
precedent for the successful commercialization of products based on our
technologies. In addition, we have had only limited experience in filing and
pursuing applications necessary to gain regulatory approvals, which may impede
our ability to obtain timely FDA approvals, if at all. We have not yet sought
FDA approval for any vaccine product. We will not be able to
21
commercialize any of our potential products until we obtain FDA approval, and so
any delay in obtaining, or inability to obtain, FDA approval would harm our
business.
If we violate regulatory requirements at any stage, whether before or after
marketing approval is obtained, we may be fined, forced to remove a product from
the market and experience other adverse consequences including delay, which
could materially harm our financial results. Additionally, we may not be able to
obtain the labeling claims necessary or desirable for the promotion of our
products. We may also be required to undertake post-marketing trials. In
addition, if we or others identify side effects after any of our vaccines are on
the market, or if manufacturing problems occur, regulatory approval may be
withdrawn and reformulation of our vaccines, additional clinical trials, changes
in labeling of our vaccines, and additional marketing applications may be
required.
An investigational new drug application must become effective before human
clinical trials may commence. The investigational new drug application is
automatically effective 30 days after receipt by the FDA, unless before that
time the FDA requests an extension to review the application, or raises concerns
or questions about the conduct of the trials as outlined in the application. In
the latter case, the sponsor of the application and the FDA must resolve any
outstanding concerns before clinical trials can proceed. However, the submission
of an investigational new drug application may not result in the FDA authorizing
us to commence clinical trials in any given case.
Preclinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the efficacy and safety of the
product. The FDA regulates preclinical studies under a series of regulations
called the current Good Laboratory Practices regulations. If the sponsor
violates these regulations the FDA, in some cases, may invalidate the studies
and require that the sponsor replicate those studies.
We may take longer to complete our clinical trials than we project, or we
may not be able to complete them at all.
Although for planning purposes we project the commencement, continuation
and completion of our clinical trials, a number of factors, including scheduling
conflicts with participating clinicians and clinical institutions, and
difficulties in identifying and enrolling patients who meet trial eligibility
criteria, may cause significant delays. We may not commence or complete clinical
trials involving any of our products as projected or may not conduct them
successfully.
We rely on academic institutions or clinical research organizations to
conduct, supervise or monitor some or all aspects of clinical trials involving
our products. We will have less control over the timing and other aspects of
these clinical trials than if we conducted them entirely on our own. If we fail
to commence or complete, or experience delays in, any of our planned clinical
trials, our stock price and our ability to conduct our business as currently
planned could be harmed.
If testing of a particular product does not yield successful results, then
we will be unable to commercialize that product.
Our research and development programs are at an early stage. We must
demonstrate our products' safety and efficacy in humans through extensive
preclinical and clinical testing. We may experience numerous unforeseen events
during, or as a result of, the testing process that could delay or prevent
commercialization of our products, including the following:
. safety and efficacy results attained in early human clinical trials, as
in our prostate cancer and multiple myeloma trials, may not be
indicative of results that are obtained in later clinical trials;
. the results of preclinical studies may be inconclusive, or they may not
be indicative of results that will be obtained in human clinical trials;
. after reviewing test results, we or our collaborators may abandon
projects that we might previously have believed to be promising;
22
. we, our collaborators or regulators, may suspend or terminate clinical
trials if the participating subjects or patients are being exposed to
unacceptable health risks; and
. the effects our potential products have may not be the desired effects
or may include undesirable side effects or other characteristics that
preclude regulatory approval or limit their commercial use if approved.
Clinical testing is very expensive, can take many years, and the outcome is
uncertain. A minimum of 12 months will elapse before we learn the results of our
prostate cancer vaccine trial. The data collected from our clinical trials may
not be sufficient to support approval by the FDA of Provenge, our prostate
cancer vaccine, or any of our other vaccine products. The clinical trials of
Provenge, Mylovenge, our multiple myeloma vaccine, and our other products under
development may not be completed on schedule and the FDA may not ultimately
approve any of our product candidates for commercial sale. If we fail to
adequately demonstrate the safety and efficacy of a cancer vaccine under
development, this would delay or prevent regulatory approval of the vaccine,
which could prevent us from achieving profitability.
We rely on third parties to perform a variety of functions and have limited
manufacturing and cell processing capabilities, which could limit our
ability to commercialize our products.
We rely in part on collaborators and other third parties to perform for us
or assist us with a variety of important functions, including research and
development, manufacturing and clinical trials management. We also license
technology from others to enhance or supplement our technologies. We have never
manufactured our cancer vaccines and other products on a commercial scale, and
we may not be able to manufacture our products at a cost or in quantities
necessary to make them commercially viable. We intend to rely on third party
contract manufacturers to produce large quantities of materials needed for
clinical trials and product commercialization. Third party manufacturers may not
be able to meet our needs with respect to timing, quantity or quality. If we are
unable to contract for a sufficient supply of needed materials on acceptable
terms, or if we should encounter delays or difficulties in our relationships
with manufacturers, our clinical testing may be delayed, thereby delaying the
submission of products for regulatory approval or the market introduction and
subsequent sales of our products. Any such delay may lower our revenues and
potential profitability.
Moreover, we and any third-party manufacturers that we may use must
continually adhere to current Good Manufacturing Practices, or cGMP, regulations
enforced by the FDA through its facilities inspection program. If our facilities
or the facilities of these manufacturers cannot pass a pre- approval plant
inspection, the FDA premarket approval of our vaccines will not be granted. In
complying with cGMP and foreign regulatory requirements, we and any of our
third-party manufacturers will be obligated to expend time, money and effort in
production, record-keeping and quality control to assure that our products meet
applicable specifications and other requirements. If we or any of our third-
party manufacturers fail to comply with these requirements, we may be subject to
regulatory action.
We have constructed two facilities for cell processing, the manufacture of
antigens and final formulation of our cancer vaccines. We also use four, third-
party cell processing centers. These six facilities may not be sufficient to
meet our ongoing needs for our prostate and multiple myeloma clinical trials.
Additionally, if we decide to manufacture our products in commercial quantities
ourselves, we will require substantial additional funds and will be required to
hire and train significant numbers of employees, construct additional facilities
and comply with applicable regulations for these facilities, which are
extensive. We may not be able to develop production facilities that both meet
regulatory requirements and are sufficient for all clinical trials or commercial
use.
If we lose or are unable to secure collaborators, or if our collaborators,
including Kirin, do not apply adequate resources to their collaboration
with us, our product development and potential for profitability may
suffer.
We intend to enter into collaborations for one or more of the research,
development, manufacturing, marketing and other commercialization activities
relating to some of our products under development. We have entered into a
collaboration with Kirin relating to the development and commercialization of
our products based on our dendritic cell technologies in Asia. As our
collaborator, Kirin funds testing, makes regulatory filings and may manufacture
and market our products in Asia. The amount and timing of resources applied by
Kirin or other potential collaborators to our joint efforts are not within our
control.
23
If any collaborator breaches or terminates its agreement with us, or fails
to conduct its collaborative activities in a timely manner, the
commercialization of our products under development could be slowed down or
blocked completely. It is possible that Kirin or other collaborators will change
their strategic focus, pursue alternative technologies or develop alternative
products, either on their own or in collaboration with others, as a means for
developing treatments for the diseases targeted by our collaborative programs.
The effectiveness of our collaborators in marketing our products will also
affect our revenues and earnings.
Our collaborations with Kirin or others may not continue or be successful
and we may not receive any further research funding, milestone or royalty
payments. We intend to continue to enter into new collaborative agreements in
the future. However, we may not be able to successfully negotiate any additional
collaborative arrangements. If established, these relationships may not be
scientifically or commercially successful. Any additional collaborations would
likely subject us to some or all of the risks described above with respect to
our collaboration with Kirin. Disputes may arise between us and Kirin, and other
potential collaborators, as to a variety of matters, including financial or
other obligations under our agreements. These disputes may be both expensive and
time-consuming and may result in delays in the development and commercialization
of products.
We are dependent on single-source vendors for some of our components.
We currently depend on single-source vendors for some components of our
vaccine manufacturing process, cell separation devices and buoyant density
solution, including sterilization and packaging. There are, in general,
relatively few alternative sources of supply for these products. While these
vendors have produced our products with acceptable quality, quantity and cost in
the past, they may be unable or unwilling to meet our future demands.
Establishing additional or replacement suppliers for these products could take a
substantial amount of time. If we have to switch to a replacement vendor, the
manufacture and delivery of our products could be interrupted for an extended
period.
If we are unable to protect our proprietary rights, we may not be able to
compete effectively or operate profitably.
Our success is dependent in part on obtaining, maintaining and enforcing
our patents and other proprietary rights and our ability to avoid infringing the
proprietary rights of others. Patent law relating to the scope of claims in the
biotechnology field in which we operate is still evolving and, consequently,
patent positions in our industry may not be as strong as in other more well-
established fields. Accordingly, the United States Patent and Trademark Office
may not issue patents from the patent applications owned by or licensed to us.
If issued, the patents may not give us an advantage over competitors with
similar technology.
As of March 1, 2001, we owned 87 patents and had licenses to additional
patents. However, the issuance of a patent is not conclusive as to its validity
or enforceability and it is uncertain how much protection, if any, will be given
to our patents if we attempt to enforce them and they are challenged in court or
in other proceedings, such as oppositions, which may be brought in foreign
jurisdictions to challenge the validity of a patent. A third party may challenge
the validity or enforceability of a patent after its issuance by the Patent
Office. It is possible that a competitor may successfully challenge our patents
or that a challenge will result in limiting their coverage. Moreover, the cost
of litigation to uphold the validity of patents and to prevent infringement can
be substantial. If the outcome of litigation is adverse to us, third parties may
be able to use our patented invention without payment to us. Moreover, it is
possible that competitors may infringe our patents or successfully avoid them
through design innovation. To stop these activities we may need to file a
lawsuit. These lawsuits are expensive and would consume time and other
resources, even if we were successful in stopping the violation of our patent
rights. In addition, there is a risk that a court would decide that our patents
are not valid and that we do not have the right to stop the other party from
using the inventions. There is also the risk that, even if the validity of our
patents were upheld, a court would refuse to stop the other party on the ground
that its activities are not covered by, that is, do not infringe, our patents.
In addition to the intellectual property rights described above, we also
rely on unpatented technology, trade secrets and confidential information.
Therefore, others may independently develop substantially equivalent information
and techniques or otherwise gain access to or disclose our technology. We may
not be able to effectively protect our rights in unpatented technology, trade
secrets and confidential information. We require each
24
of our employees, consultants and advisors to execute a confidentiality
agreement at the commencement of an employment or consulting relationship with
us. However, these agreements may not provide effective protection of our
information or, in the event of unauthorized use or disclosure, they may not
provide adequate remedies.
The use of our technologies could potentially conflict with the rights of
others.
Our competitors or others may have or acquire patent rights that they could
enforce against us. If they do so, then we may be required to alter our
products, pay licensing fees or cease activities. If our products conflict with
patent rights of others, third parties could bring legal actions against us or
our collaborators, licensees, suppliers or customers, claiming damages and
seeking to enjoin manufacturing and marketing of the affected products. If these
legal actions are successful, in addition to any potential liability for
damages, we could be required to obtain a license in order to continue to
manufacture or market the affected products. We may not prevail in any legal
action and a required license under the patent may not be available on
acceptable terms or at all.
We may incur substantial costs as a result of litigation or other
proceedings relating to patent and other intellectual property rights.
The cost to us of any litigation or other proceeding relating to
intellectual property rights, even if resolved in our favor, could be
substantial. Some of our competitors may be better able to sustain the costs of
complex patent litigation because they have substantially greater resources. If
there is litigation against us, we may not be able to continue our operations.
Should third parties file patent applications, or be issued patents
claiming technology also claimed by us in pending applications, we may be
required to participate in interference proceedings in the United States Patent
and Trademark Office to determine priority of invention. We may be required to
participate in interference proceedings involving our issued patents and pending
applications. We may be required to cease using the technology or to license
rights from prevailing third parties as a result of an unfavorable outcome in an
interference proceeding. A prevailing party in that case may not offer us a
license on commercially acceptable terms.
We are exposed to potential product liability claims, and insurance against
these claims may not be available to us at a reasonable rate in the future.
Our business exposes us to potential product liability risks, which are
inherent in the testing, manufacturing, marketing and sale of pharmaceutical
products. We have clinical trial coverage and we intend to obtain product
liability coverage in the future. However, insurance coverage may not be
available to us at an acceptable cost, if at all. We may not be able to obtain
insurance coverage that will be adequate to satisfy any liability that may
arise. Regardless of merit or eventual outcome, product liability claims may
result in decreased demand for a product, injury to our reputation, withdrawal
of clinical trial volunteers and loss of revenues. Thus, whether or not we are
insured, a product liability claim or product recall may result in losses that
could be material.
Competition in our industry is intense and many of our competitors have
substantially greater managerial resources than we have.
Competition in the cancer vaccine, infectious disease, autoimmune disease
and allergy fields is intense and is accentuated by the rapid pace of
technological development. Research and discoveries by others may result in
breakthroughs which may render our products obsolete even before they generate
any revenue. There are products currently under development by others that could
compete with the products that we are developing. Many of our competitors have
substantially greater research and development capabilities and manufacturing,
marketing, financial and managerial resources than we do. Our competitors may:
. develop safer or more effective immunotherapeutics and other therapeutic
products;
. reach the market more rapidly, reducing the potential sales of our
products; or
. establish superior proprietary positions.
25
We understand that companies, including AVI Biopharma, Inc., Cell Genesys,
Inc., NW Biotherapeutics, Inc., Therion Biologics Corporation and Vical
Incorporated may be developing prostate cancer vaccines that could potentially
compete with Provenge, if Provenge is successfully developed. These competitors
may succeed in developing and marketing cancer vaccines that are more effective
than or marketed before Provenge.
We anticipate that we will face increased competition in the future as new
companies enter our markets and as scientific developments surrounding
immunotherapy and other cancer therapies continue to accelerate. If our products
receive marketing approval but cannot compete effectively in the marketplace,
our profitability and financial position would suffer.
We must expand our operations to commercialize our products, which we may
not be able to do.
We will need to expand and effectively manage our operations and facilities
to successfully pursue and complete future research, development and
commercialization efforts. To grow we will need to add personnel and expand our
capabilities, which may strain our existing managerial, operational, financial
and other resources. To compete effectively and manage our growth, we must:
. train, manage and motivate a growing employee base;
. accurately forecast demand for our products; and
. expand existing operational, financial and management information
systems.
If we fail to manage our growth effectively, our product development and
commercialization efforts could be curtailed or delayed.
If we lose key management and scientific personnel or cannot recruit
qualified employees, our product development programs and our research and
development efforts will be harmed.
Our success depends, to a significant extent, upon the efforts and
abilities of Christopher S. Henney, Ph.D., D.Sc., our Chairman of the Board of
Directors and Chief Executive Officer, and David L. Urdal, Ph.D., our President
and Chief Scientific Officer, and other members of senior management. The loss
of the services of one or more of our key employees could delay our product
development programs and our research and development efforts. We do not
maintain key person life insurance on any of our officers, employees or
consultants.
Competition for qualified employees among companies in the biotechnology
and biopharmaceutical industry is intense. Our future success depends upon our
ability to attract, retain and motivate highly skilled employees. In order to
commercialize our products successfully, we may be required to expand
substantially our workforce, particularly in the areas of manufacturing,
clinical trials management, regulatory affairs, business development and sales
and marketing. These activities will require the addition of new personnel,
including management, and the development of additional expertise by existing
management personnel.
Our stock price may continue to be highly volatile.
The trading price for our common stock has been and we expect it to
continue to be volatile. The price at which our common stock trades depends upon
a number of factors, including our historical and anticipated operating results
and general market and economic conditions, which are beyond our control.
Factors such as fluctuations in our financial and operating results, the results
of preclinical and clinical trials, announcements of technological innovations
or new commercial products by us or our competitors, developments concerning
proprietary rights and publicity regarding actual or potential performance of
products under development by us or our competitors could also cause the market
price of our common stock to fluctuate substantially. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations.
These broad market fluctuations may lower the market price of our common stock.
Moreover, during period of stock market volatility, share prices of many
biotechnology companies have often fluctuated in a manner not necessarily
related to the companies' operating performance. Accordingly, our common stock
may be subject to greater price volatility than the stock market as a whole.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2000, we had short-term investments of $32.0 million and
long-term investments of $14.7 million. Our short-term and long-term investments
are subject to interest rate risk and will decline in value if market interest
rates increase. The estimated fair value of our short- and long-term
investments, assuming a 100 basis point increase in market interest rates, would
decrease by $312,000, which would not materially impact the Company's
operations. Our outstanding bank loans and capital lease obligations are all at
fixed interest rates and therefore have minimal exposure to changes in interest
rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements, together with related notes and the
report of Ernst & Young, LLP, independent accounts, are listed in Items 14(a)
and included herein beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors
and nominees is incorporated by reference to the Company's 2001 Proxy Statement
under the caption "Election of Directors", and for the executive officers of the
Company, the information is included in Part I, Item 1, under the caption
"Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
2001 Proxy Statement under the caption "Compensation of Executive Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
2001 Proxy Statement under the caption "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
2001 Proxy Statement under the captions "Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions."
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Index to Financial Statements and Report of Independent Auditors.
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this report.
Page
----
Index to Financial Statements F-1
Report of Ernst & Young LLP, Independent Auditors F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
(2) Index to Financial Statement Schedules.
None required.
(3) Exhibits.
29
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation.(2)
3.2 Bylaws.(1)
4.1 Specimen Common Stock certificate.(1)
10.1 Indemnity Agreement between the Registrant and each of its directors
and certain of its officers.(2)
10.2 2000 Equity Incentive Plan, as amended.*
10.3 2000 Employee Stock Purchase Plan.(2)*
10.4 Fourth Amended and Restated Stockholders' Agreement, dated September 3,
1999, between the Registrant and certain holders of the Registrant's
securities.(1)
10.5 Series E Preferred Stock Purchase Agreement, dated September 3,
1999.(1)
10.6 Registration Rights and Shareholder's Agreement, dated October 18,
1999, between the Registrant and Fresenius AG.(1)
10.7 Warrant to purchase 250,000 shares of common stock issued by the
Registrant to Fresenius AG, dated October 18, 1999.(1)
10.8 Letter dated September 3, 1998 regarding employment arrangement of
Christopher S. Henney and David L. Urdal.(1)
10.9 Lease Agreement, dated October 27, 1992 and commencing July 1, 1993,
between the Registrant and Vanni Business Park General Partnership.(1)
10.10 Lease Agreement, dated July 31, 1998, between the Registrant and ARE-
3005 First Avenue, LLC.(1)
10.11 Loan and Security Agreement, dated July 30, 1999, between the
Registrant and Transamerica Business Credit Corporation.(1)
10.12 Amended and Restated Master Lease Agreement, dated May 28, 1999,
between the Registrant and Transamerica Business Credit Corporation.(1)
10.13 Second Amendment to Master Lease Agreement, dated January 31, 2000,
between the Registrant and Transamerica Business Credit Corporation.(1)
10.14+ Collaborative License Agreement, dated December 10, 1998, between the
Registrant and Kirin Brewery Co., Ltd.(1)
10.15+ Research and License Agreement, dated February 1, 1999, between the
Registrant and Kirin Brewery Co., Ltd.(1)
10.16+ Manufacturing and Supply Agreement, dated July 27, 1999, between the
Registrant and Kirin Brewery Co., Ltd.(1)
10.17+ Joint Commercialization Agreement, dated February 1, 2000, between the
Registrant and Kirin Brewery Co., Ltd.(1)
10.18 Stock Purchase Agreement, dated June 16, 2000, between the Registrant
and Kirin Brewery, Co., Ltd.(2)
10.19+ Research Collaboration and License Agreement, dated October 1, 2000,
between the Registrant and The R.W. Johnson Pharmaceutical Research
Institute, a division of Ortho-McNeil Pharmaceutical, Inc.(2)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (contained on signature page).
- -----------------------------
(1) Filed as an exhibit to Registration Statement on Form S-1, File No. 333-
31920.
(2) Filed as an exhibit to Registration Statement on Form S-1, File No. 333-
47706
+ Confidential treatment granted as to certain portions of this Exhibit.
* Management compensatory plans and arrangements required to be filed as
exhibits to this Report.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed in the fourth quarter of 2000.
(c) Exhibits
See exhibits listed under Item 14(a)(3).
(d) Financial Statement Schedules
The financial statement schedules required by this item are listed under
Item 14(a)(2).
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, King County, State of Washington, on this 30th day of March, 2001.
DENDREON CORPORATION
By: /s/ Christopher S. Henney, Ph.D., D.Sc.
--------------------------------------
Christopher S. Henney, Ph.D., D.Sc.
Chief Executive Officer and
Chairman of the Board of Directors
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Christopher S. Henney, Ph.D., D.Sc. and
Martin A. Simonetti, his or her true and lawful attorneys-in-fact each acting
alone, with full power of substitution and resubstitution, for him or her and in
his or her name, place and stead in any and all capacities to sign any or all
amendments to this report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitutes, each acting
alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ Christopher S. Henney, Ph.D., D.Sc. Chief Executive Officer and Chairman of the March 30, 2001
- --------------------------------------------- Board of Directors (Principal Executive
Christopher S. Henney, Ph.D., D.Sc. Officer)
/s/ Martin A. Simonetti Chief Financial Officer, Senior Vice March 30, 2001
- --------------------------------------------- President, Finance, and Treasurer
Martin A. Simonetti (Principal Financial and Accounting Officer)
/s/ William Crouse Director March 30, 2001
- ---------------------------------------------
William Crouse
/s/ Gerardo Canet Director March 30, 2001
- ---------------------------------------------
Gerardo Canet
/s/ Timothy Harris, Ph.D. Director March 30, 2001
- ---------------------------------------------
Timothy Harris, Ph.D.
/s/ Ruth Kunath Director March 30, 2001
- ---------------------------------------------
Ruth Kunath
/s/ Ralph Shaw Director March 30, 2001
- ---------------------------------------------
Ralph Shaw
/s/ David L. Urdal, Ph.D. Director March 30, 2001
- ---------------------------------------------
David L. Urdal, Ph.D.
/s/ Douglas Watson Director March 30, 2001
- ---------------------------------------------
Douglas Watson
31
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation.(2)
3.2 Bylaws.(1)
4.1 Specimen Common Stock certificate.(1)
10.1 Indemnity Agreement between the Registrant and each of its directors
and certain of its officers.(2)
10.2 2000 Equity Incentive Plan, as amended.
10.3 2000 Employee Stock Purchase Plan.(2)
10.4 Fourth Amended and Restated Stockholders' Agreement, dated September 3,
1999, between the Registrant and certain holders of the Registrant's
securities.(1)
10.5 Series E Preferred Stock Purchase Agreement, dated September 3,
1999.(1)
10.6 Registration Rights and Shareholder's Agreement, dated October 18,
1999, between the Registrant and Fresenius AG.(1)
10.7 Warrant to purchase 250,000 shares of common stock issued by the
Registrant to Fresenius AG, dated October 18, 1999.(1)
10.8 Letter dated September 3, 1998 regarding employment arrangement of
Christopher S. Henney and David L. Urdal.(1)
10.9 Lease Agreement, dated October 27, 1992 and commencing July 1, 1993,
between the Registrant and Vanni Business Park General Partnership.(1)
10.10 Lease Agreement, dated July 31, 1998, between the Registrant and ARE-
3005 First Avenue, LLC.(1)
10.11 Loan and Security Agreement, dated July 30, 1999, between the
Registrant and Transamerica Business Credit Corporation.(1)
10.12 Amended and Restated Master Lease Agreement, dated May 28, 1999,
between the Registrant and Transamerica Business Credit Corporation.(1)
10.13 Second Amendment to Master Lease Agreement, dated January 31, 2000,
between the Registrant and Transamerica Business Credit Corporation.(1)
10.14+ Collaborative License Agreement, dated December 10, 1998, between the
Registrant and Kirin Brewery Co., Ltd.(1)
10.15+ Research and License Agreement, dated February 1, 1999, between the
Registrant and Kirin Brewery Co., Ltd.(1)
10.16+ Manufacturing and Supply Agreement, dated July 27, 1999, between the
Registrant and Kirin Brewery Co., Ltd.(1)
10.17+ Joint Commercialization Agreement, dated February 1, 2000, between the
Registrant and Kirin Brewery Co., Ltd.(1)
10.18 Stock Purchase Agreement, dated June 16, 2000, between the Registrant
and Kirin Brewery, Co., Ltd.(2)
10.19+ Research Collaboration and License Agreement, dated October 1, 2000,
between the Registrant and The R.W. Johnson Pharmaceutical Research
Institute, a division of Ortho-McNeil Pharmaceutical, Inc.(2)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (contained on signature page).
- -----------------------------
(1) Filed as an exhibit to Registration Statement on Form S-1, File No. 333-
31920.
(2) Filed as an exhibit to Registration Statement on Form S-1, File No. 333-
47706
+ Confidential treatment granted as to certain portions of this Exhibit.
32
DENDREON CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
Report of Ernst &Young LLP, Independent Auditors........................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Dendreon Corporation
We have audited the accompanying balance sheets of Dendreon Corporation as
of December 31, 2000 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dendreon Corporation as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
Ernst & Young LLP
Seattle, Washington
February 9, 2001
F-2
DENDREON CORPORATION
BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
------------------------
2000 1999
-------- --------
ASSETS
------
Current assets:
Cash and cash equivalents.......................................................... $ 50,493 $ 7,085
Short-term investments............................................................. 32,011 6,728
Accounts receivable................................................................ 6,855 813
Other current assets............................................................... 2,915 576
-------- --------
Total current assets.................................................................. 92,274 15,202
Property and equipment, net........................................................... 1,762 1,499
Long-term investments................................................................. 14,651 --
Deposits and other assets............................................................. 871 674
-------- --------
Total assets.......................................................................... $109,558 $ 17,375
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................................................... $ 1,246 $ 377
Accrued liabilities................................................................ 2,400 757
Accrued compensation............................................................... 1,969 505
Deferred revenue................................................................... 9,924 2,434
Current portion of long-term debt.................................................. 1,565 1,033
Current portion of capital lease obligations....................................... 610 358
-------- --------
Total current liabilities............................................................. 17,714 5,464
Deferred revenue, less current portion................................................ 4,856 3,543
Long-term debt, less current portion.................................................. 281 1,967
Capital lease obligations, less current portion....................................... 1,188 832
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized,
no shares and 12,108,369 shares issued and outstanding at December 31,
2000 and 1999, respectively.................................................... -- 12
Common stock, $0.001 par value; 80,000,000 shares authorized, 24,449,958
and 1,111,058 shares issued and outstanding at December 31, 2000 and
1999, respectively............................................................. 24 1
Additional paid-in capital......................................................... 155,413 58,838
Deferred stock-based compensation.................................................. (2,442) (1,715)
Accumulated deficit................................................................ (67,636) (51,567)
Accumulated other comprehensive income............................................. 160 --
-------- --------
Total stockholders' equity............................................................ 85,519 5,569
-------- --------
Total liabilities and stockholders' equity............................................ $109,558 $ 17,375
======== ========
See accompanying notes.
F-3
DENDREON CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Year Ended December 31,
------------------------------------------
2000 1999 1998
---- ---- ----
Revenue:
Collaborative and license revenue............................. $ 6,059 $ 3,458 $ 629
Grant revenue................................................. 460 261 237
----------- -------- --------
Total revenue.................................................. 6,519 3,719 866
Operating expenses:
Research and development...................................... 17,191 10,222 8,064
General and administrative.................................... 7,262 6,110 2,893
Sales and marketing........................................... 250 -- --
----------- -------- --------
Total operating expenses....................................... 24,703 16,332 10,957
----------- -------- --------
Loss from operations........................................... (18,184) (12,613) (10,091)
Interest and other income, net:
Interest income............................................... 2,828 414 361
Interest expense.............................................. (613) (351) (41)
Other income (loss), net...................................... -- 32 (2)
----------- -------- --------
Interest and other income, net................................. 2,215 95 318
----------- -------- --------
Loss before income taxes....................................... (15,969) (12,518) (9,773)
Provision for income taxes..................................... 100 -- 600
----------- -------- --------
Net loss....................................................... (16,069) (12,518) (10,373)
Deemed dividend upon issuance of convertible
preferred stock............................................... (4,110) (285) --
----------- -------- --------
Net loss attributable to common stockholders................... $ (20,179) $(12,803) $(10,373)
=========== ======== ========
Basic and diluted net loss per share........................... $(1.57) $(13.54) $(16.48)
=========== ======== ========
Shares used in computation of basic and diluted net
loss per share................................................ 12,839,866 945,761 629,562
=========== ======== ========
See accompanying notes.
F-4
DENDREON CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share amounts)
Convertible
Preferred Stock Common Stock Additional Deferred
--------------------- ------------------ Paid-in Stock-Based
Shares Amount Shares Amount Capital Compensation
------------ ------- ---------- ------ ----------- -------------
Balance, January 1, 1998 8,072,524 $ 8 615,441 $ 1 $ 36,973 $ --
Exercise of stock options for cash....................... -- -- 79,041 -- 47 --
Issuance of Series D convertible preferred stock for
cash at $5.00 per share (net of issuance costs of $35) 937,000 1 -- -- 4,649 --
Deferred stock-based compensation........................ -- -- -- -- 589 (589)
Amortization of deferred stock-based compensation........ -- -- -- -- -- 149
Net loss................................................. -- -- -- -- -- --
----------- ---- ---------- --- -------- -------
Balance, December 31, 1998 9,009,524 9 694,482 1 42,258 (440)
Exercise of stock options for cash....................... -- -- 416,576 -- 217 --
Issuance of Series E convertible preferred stock for
cash at $4.25 per share (net of issuance costs of $27).. 3,098,845 3 -- -- 13,140 --
Issuance of stock warrants............................... -- -- -- -- 1,104 --
Deferred stock-based compensation........................ -- -- -- -- 2,119 (2,119)
Amortization of deferred stock-based compensation........ -- -- -- -- -- 844
Net loss................................................. -- -- -- -- -- --
----------- ---- ---------- --- -------- -------
Balance, December 31, 1999 12,108,369 12 1,111,058 1 58,838 (1,715)
Exercise of stock options for cash....................... -- -- 810,366 1 423 --
Issuance of Series E convertible preferred stock for
cash at $4.25 per share (net of issuance costs of $15).. 970,708 1 -- -- 4,109 --
Conversion of preferred stock to common stock on a
1 to 1.1 basis.......................................... (13,079,077) (13) 14,386,945 14 (1) --
Proceeds from initial public offering (net of issuance
costs of $5,023)........................................ -- -- 4,885,732 5 43,829 --
Issuance of common stock for cash........................ -- -- 500,000 1 4,999 --
Proceeds from follow-on public offering (net of
issuance costs of $2,872)............................... -- -- 2,753,000 2 40,141 --
Exercise of stock warrants............................... -- -- 2,857 -- -- --
Deferred stock-based compensation........................ -- -- -- -- 3,075 (3,075)
Amortization of deferred stock-based compensation........ -- -- -- -- -- 2,348
Comprehensive loss:
Net loss................................................ -- -- -- -- -- --
Net unrealized gain on securities available-for-sale.... -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
---------------------------------------------------------------------
Balance, December 31, 2000 -- $ -- 24,449,958 $24 $155,413 $(2,442)
=====================================================================
Accumulated
Other Total
Accumulated Comprehensive Stockholders'
Deficit Income Equity
------------ ------------------- --------------
Balance, January 1, 1998 $(28,676) $ -- $ 8,306
Exercise of stock options for cash....................... -- -- 47
Issuance of Series D convertible preferred stock for
cash at $5.00 per share (net of issuance costs of $35).. -- -- 4,650
Deferred stock-based compensation........................ -- -- --
Amortization of deferred stock-based compensation........ -- -- 149
Net loss................................................. (10,373) -- (10,373)
-------- ------------------- --------
Balance, December 31, 1998 (39,049) -- 2,779
Exercise of stock options for cash....................... -- -- 217
Issuance of Series E convertible preferred stock for
cash at $4.25 per share (net of issuance costs of $27).. -- -- 13,143
Issuance of stock warrants............................... -- -- 1,104
Deferred stock-based compensation........................ -- -- --
Amortization of deferred stock-based compensation........ -- -- 844
Net loss................................................. (12,518) -- (12,518)
-------- ------------------- --------
Balance, December 31, 1999 (51,567) -- 5,569
Exercise of stock options for cash....................... -- -- 424
Issuance of Series E convertible preferred stock for
cash at $4.25 per share (net of issuance costs of $15).. -- -- 4,110
Conversion of preferred stock to common stock on a
1 to 1.1 basis.......................................... -- -- --
Proceeds from initial public offering (net of issuance
costs of $5,023)........................................ -- -- 43,834
Issuance of common stock for cash........................ -- -- 5,000
Proceeds from follow-on public offering (net of
issuance costs of $2,872)............................... -- -- 40,143
Exercise of stock warrants............................... -- -- --
Deferred stock-based compensation........................ -- -- --
Amortization of deferred stock-based compensation........ -- -- 2,348
Comprehensive loss:
Net loss................................................ (16,069) -- (16,069)
Net unrealized gain on securities available-for-sale.... -- 160 160
--------
Comprehensive loss -- -- (15,909)
------------------------------------------------
Balance, December 31, 2000 $(67,636) $160 $ 85,519
================================================
See accompanying notes
F-5
DENDREON CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-----------------------------------
2000 1999 1998
---- ---- ----
Operating Activities:
Net loss.......................................................... $(16,069) $(12,518) $(10,373)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation................................................... 705 485 370
Non-cash stock-based compensation expense...................... 2,348 844 149
Non-cash interest expense...................................... 93 38 --
Non-cash research and development expense...................... -- 190 --
Changes in assets and liabilities:
Accounts receivable............................................ (6,042) (534) 213
Other current assets........................................... (2,339) (283) 49
Deposits and other assets...................................... (290) (79) (393)
Deferred revenue............................................... 8,803 (294) 6,690
Accounts payable............................................... 869 (187) 112
Accrued liabilities and compensation........................... 3,107 235 256
-------- -------- --------
Net cash used in operating activities........................ (8,815) (12,103) (2,927)
-------- -------- --------
Investing Activities:
Purchases of investments.......................................... (94,358) (6,211) --
Maturities of investments......................................... 54,583 2,530 4,414
Purchases of property and equipment............................... (968) (850) (658)
-------- -------- --------
Net cash provided by (used in) investing activities.......... (40,743) (4,531) 3,756
-------- -------- --------
Financing Activities:
Proceeds from equipment financing arrangement..................... 1,172 700 800
Proceeds from (payments on) long-term debt........................ (1,154) 3,000 --
Payments on capital lease obligations............................. (564) (224) (205)
Proceeds from sale of common stock................................ 88,978 -- --
Proceeds from sale of preferred stock............................. 4,110 13,143 4,650
Proceeds from exercise of stock options........................... 424 217 47
-------- -------- --------
Net cash provided by financing activities.................... 92,966 16,836 5,292
-------- -------- --------
Net increase in cash and cash equivalents........................... 43,408 202 6,121
Cash and cash equivalents at beginning of year...................... 7,085 6,883 762
-------- -------- --------
Cash and cash equivalents at end of year............................ $ 50,493 $ 7,085 $ 6,883
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest.......................... $ 520 $ 308 $ 41
======== ======== ========
Cash paid during the period for foreign income taxes.............. $ 100 $ -- $ 600
======== ======== ========
See accompanying notes.
F-6
DENDREON CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
Dendreon Corporation (the Company) was founded in 1992 as a Delaware-based
corporation headquartered in Mountain View, California. The Company relocated to
Seattle, Washington in 1999.
The Company is dedicated to the discovery and development of novel products
that harness the power of the immune system to fight disease. The products most
advanced in development are therapeutic vaccines that stimulate a patient's
immunity for the treatment of cancer.
Cash, Cash Equivalents, Short and Long-Term Investments
The Company considers investments in highly liquid instruments purchased
with a remaining maturity of 90 days or less to be cash equivalents. The amounts
are recorded at cost, which approximate fair market value. The Company's cash
equivalents, short and long-term investments consist principally of commercial
paper, money market securities, corporate bonds/notes and certificates of
deposit.
The Company has classified its entire investment portfolio as available-
for-sale. Available-for-sale securities are carried at fair value, with
unrealized gains and losses reported as a separate component of stockholders'
equity and included in accumulated other comprehensive income. The amortized
cost of investments is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and accretion are included in interest
income. Interest earned on securities is included in interest income.
The cost of securities sold is based on the specific identification method.
There were no gross realized gains or losses during the years ended December 31,
2000, 1999 and 1998.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, which is
generally three to four years. Computers and equipment leased under capital
leases are amortized over the shorter of the useful lives of the related assets
or the lease term. Leasehold improvements are stated at cost and amortized using
the straight-line method over the remaining life of the lease or five years,
whichever is shorter.
Concentrations of Credit Risk
The Company is subject to concentration of credit risk, primarily from its
investments. Credit risk for investments is managed by purchase of investment
grade securities, A1/P1 for money market instruments and A or better for debt
instruments, and diversification of the investment portfolio among issuers and
maturities.
Revenue Recognition
Non-refundable, up-front payments received in connection with collaborative
research and development agreements are deferred and recognized on a straight-
line basis over the relevant periods specified in the agreement, generally the
research term.
Revenue related to collaborative research with the Company's corporate
collaborators is recognized as research services are performed over the related
funding periods for each agreement. Under these agreements, the Company is
required to perform research and development activities as agreed or specified
in each agreement. The payments received under research collaboration agreements
are not refundable if the research effort is not successful.
F-7
Payments received in advance of the services provided are deferred and
recognized as revenue over the future performance periods.
Revenue related to grant agreements is recognized as related research and
development expenses are incurred.
Milestone and royalty payments are recognized in full at such time as the
specified milestone has been achieved. Revenue from product supply agreements is
recorded when the product is shipped or when all obligations under the
agreements are met.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 is based upon existing accounting rules and provided specific
guidance on how those accounting rules should be applied and specifically
addresses revenue recognition for non-refundable technology access fees in the
biotechnology industry. The adoption of SAB 101 in 2000 did not have a material
impact on the financial position or results of operations of the Company.
Research and Development Expenses
Research and development expenses consist of costs incurred for proprietary
and collaborative research and development and costs incurred under product
supply agreements prior to product approval. These costs are expensed as
incurred.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations,
in accounting for employee stock options rather than the alternative fair value
accounting allowed by Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation
expense related to the Company's employee stock options is measured based on the
intrinsic value of the stock option. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide pro forma disclosure of the impact of
applying the fair value method of SFAS No. 123. The Company recognizes
compensation expense for options granted to non-employees in accordance with the
provisions of SFAS No. 123 and the Emerging Issues Task Force consensus Issue
96-18, "Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services,"
which require using a Black-Scholes option pricing model and re-measuring such
stock options to the current fair market value as the underlying option vests.
Deferred stock-based compensation consists of amounts recorded when the
exercise price of an option is lower than the subsequently determined fair value
of the underlying common stock on the date of grant. Deferred stock-based
compensation is amortized over the vesting period of the underlying option using
the graded vesting method.
Net Loss Per Share
Basic and diluted net loss per share of common stock are presented in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (FAS 128). The calculation of basic and diluted net loss per share
has been detailed in Note 9.
Fair Value of Financial Instruments
At December 31, 2000, the Company had the following financial instruments:
cash, cash equivalents, short- and long-term investments, accounts receivable,
accounts payable, accrued liabilities, and long-term debt. The carrying value of
cash, cash equivalents, short and long-term investments, accounts receivable,
accounts payable, and accrued liabilities approximates their fair value based on
the liquidity of these financial instruments or their
F-8
short-term nature. The carrying value of debt approximates fair value based on
the market interest rates available to the Company for debt of similar risk and
maturities.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which will be
effective for the year ending 2001. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company believes the adoption of SFAS 133 will not have a material effect on the
financial statements, since it currently does not hold derivative instruments or
engage in hedging activities.
Reclassifications
Certain amounts have been reclassified in prior year financial statements
to conform with current year presentations.
2. Significant Agreements
In October 2000, the Company entered into a Research Collaboration and
License Agreement with The R.W. Johnson Pharmaceutical Research Institute (R.W.
Johnson), a division of Ortho-McNeil Pharmaceutical, Inc. and a member of the
Johnson & Johnson family of companies. The agreement provides for studies of
R.W. Johnson's technology and the Company's technology to determine their
respective feasibility as immunotherapy products for the treatment of tumors
which express a defined antigen present on breast, ovarian and colorectal
cancers. The research plan, covering a defined territory and field, will be
performed jointly by the Company and R.W. Johnson. The research plan will
involve at least two Phase I clinical trials of human subjects. The Company
received a non-refundable study fee of $3.0 million upon signing the agreement.
The Company also received a $1.0 million payment in December 2000 after the
Company received FDA acceptance on an Investigational New Drug application.
These payments have been deferred and are being recognized on a straight line
basis over the 27-month term of the agreement. R.W. Johnson will also provide
funding to the Company for research and development on a full time equivalent
basis, capital purchases related to the agreement, and contract costs as
provided for in the collaboration research plan. During the year ended December
31, 2000, the Company recognized revenue of $1.5 million related to this
agreement, of which $1.1 million related to the research and development
funding.
R.W. Johnson paid the Company $1.1 million to acquire capital assets
provided for in the collaboration research plan. This restricted cash is
included in the cash and cash equivalents balance and accrued liabilities
balance at December 31, 2000. As of December 31, 2000, no capital assets were
purchased under this agreement.
In December 1998, the Company and Kirin Brewery Co., Ltd. (Kirin) entered
into a collaborative license agreement. The Company granted Kirin an exclusive
license to employ the Company's dendritic cell technology in the development of
therapeutic products for commercialization in Japan and certain other Asian
countries. The Company also granted Kirin an option to obtain an exclusive
license to commercialize in those countries, other products developed by the
Company. In exchange, Kirin granted the Company an option to obtain an exclusive
license to commercialize in North America any products developed by Kirin under
this agreement. The Company received a nonrefundable, up-front fee of $5.0
million upon signing the agreement for the license rights granted under the
agreement. In February 1999, the Company and Kirin also entered into a joint
research agreement relating to dendritic cell product development. Under the
terms of the agreement, Kirin will fund a minimum of $1.4 million per year for
up to five years. In July 1999, the Company and Kirin entered into a
manufacturing and supply agreement. Under the agreement, each party may supply
the other with antigens or other supplies.
In December 1998 and April 2000, Kirin exercised options under the
collaboration agreement to receive rights to the Company's prostate program and
multiple myeloma program, respectively. Kirin is solely responsible for the
development and clinical trials of the prostate and multiple myeloma programs in
Japan. The Company received a
F-9
$1.0 million non-refundable, up-front option fee on exercise of each of the
options. The up-front option fees have been deferred and are being recognized on
a straight-line basis over the five year research term. The Company will also
receive royalties on sales of any products that utilize the licensed technology.
Under the terms of the agreement, Kirin made a $2.0 million equity
investment in the Company as part of the Series D offering. In February 2000,
the Company exercised its right under the collaboration agreement to require
Kirin to purchase $5 million of the Company's common stock. The purchase was
closed in a private placement concurrent with the closing of the Company's
initial public offering at the initial public offering price.
During the years ended December 31, 2000, 1999 and 1998, the Company
recognized revenue of $4.1 million, $3.1 million, and $100,000 respectively,
related to the Kirin agreements.
3. Investments
Securities available-for-sale, short- and long-term, consisted of the following:
Cost or Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
December 31, 2000 (in thousands)
Corporate debt securities $46,502 $190 $(30) $46,662
======= ==== ==== =======
There were no unrealized gains or losses on available-for-sale short-term
investments at December 31, 1999.
Securities available-for-sale at cost or amortized cost and fair market value by
contractual maturity were as follows:
Cost or Fair
Amortized Market
Cost Value
--------- -------
December 31, 2000 (in thousands)
Due in one year or less $31,942 $32,011
Due after one year through five years 14,560 14,651
------- -------
$46,502 $46,662
======= =======
4. Property and Equipment
Property and equipment consisted of the following:
December 31,
------------------
2000 1999
---- ----
(in thousands)
Furniture and office equipment..................... $ 364 $ 295
Laboratory and manufacturing equipment............. 2,931 2,382
Computer equipment................................. 643 328
Leasehold improvements............................. 773 746
------ ------
4,711 3,751
Less accumulated depreciation and amortization..... 2,949 2,252
------ ------
$1,762 $1,499
====== ======
Property and equipment included assets under capitalized leases of $2.5
million and $1.5 million at December 31, 2000 and 1999, respectively.
Accumulated amortization related to assets under capital leases was $843,000 and
$412,000 at December 31, 2000 and 1999, respectively.
5. Employee Notes Receivable
The Company has made loans to certain employees in connection with
individual employment agreements. The loans bear interest at annual rates from
4.7% to 5.5% per year and are either forgiven over five years based on
F-10
continued employment, or due immediately upon each employee's termination.
During the years ended December 31, 2000, 1999 and 1998, the Company recognized
$15,000 , $24,000 and $31,000, respectively, as an expense associated with these
notes. The balance was $105,000 at December 31, 2000 and 1999, and has been
classified in deposits and other assets on the accompanying balance sheets.
6. Long-Term Debt and Capital Lease Obligations
In June 1999, the Company obtained a term loan in an amount of $3.0 million
from a financial lender. The loan bears interest at an annual rate of 13.3% and
is collateralized by the Company's assets including receivables and equipment.
Interest-only payments were paid monthly for six months and 24 payments of
principal and interest are due monthly thereafter. In connection with the term
loan, the Company issued a warrant to purchase 85,800 shares of common stock at
an exercise price of $4.55. The warrant is exercisable for seven years from the
date of issuance. The Company has valued the warrant using the Black-Scholes
valuation method with the following assumptions: no dividend yield; expected
life of seven years; risk-free interest rate of 6.1%; and volatility of 0.75.
The fair value assigned to the warrant of $232,000 is being amortized using the
effective interest method, as additional interest expense over the term of the
loan.
Future principal payments under the term loan agreement and the future
minimum lease payments under capital lease obligations were as follows as of
December 31, 2000:
Capital
Term Lease
Loan Obligations
------------- -----------
Year ending December 31: (in thousands)
2001................................ $1,565 $ 739
2002................................ 281 667
2003................................ -- 444
2004................................ -- 213
------ ------
Total payments........................ 1,846 2,063
Less amount representing interest..... -- 265
------ ------
Present value of payments............. 1,846 1,798
Less current portion of obligations... 1,565 610
------ ------
Long-term portion of obligations...... $ 281 $1,188
====== ======
The Company has a $3.0 million lease line agreement. As of December 31,
2000, $2.5 million was advanced under the agreement and $0 was available under
the agreement. All of the assets leased under the agreement were sold and leased
back by the Company. No gains or losses were recognized as a result of the sale
or leaseback. The Company has the right to repurchase the leased assets at the
end of the lease term for 10% of the original equipment cost. In connection with
the original lease line, the Company issued a warrant to purchase 9,167 shares
of common stock exercisable for ten years at a price of $3.27 per share. In
connection with the lease extension in 1999, the Company issued a warrant to
purchase 3,300 shares of common stock exercisable for seven years at a price of
$4.55 per share. Both warrants were valued using the Black-Scholes valuation
method and the resulting fair values were determined to be insignificant.
7. Stockholders' Equity
Convertible Preferred Stock
In June 2000, immediately upon the closing of the Company's initial public
offering, 13,079,077 shares of convertible preferred stock were converted to
14,386,945 shares of common stock on a 1 to 1.1 basis. The number of shares of
common stock and applicable per share information presented in the financial
statements have been restated to reflect this stock split. No preferred stock
was designated and outstanding as of December 31, 2000.
Convertible preferred stock designated and outstanding as of December 31,
1999 was as follows:
F-11
Number of Shares
--------------------------- Aggregate
Issued and Net Liquidation
Designated Outstanding Proceeds Preference
---------- ----------- -------- -----------
(in thousands, except share information)
Series A........ 507,500 500,000 $ 9,964 $10,000
Series B........ 4,264,375 4,264,345 14,459 14,542
Series C........ 3,308,179 3,308,179 11,693 11,909
Series D........ 937,000 937,000 4,650 4,685
Series E........ 4,705,882 3,098,845 13,143 13,170
---------- ---------- ------- -------
13,722,936 12,108,369 $53,909 $54,306
========== ========== ======= =======
In August 1999, the Company offered Series E preferred stock at a per-share
price of $4.25. Through December 31, 1999, 3,098,845 shares of preferred stock
were issued for net proceeds of $13.1 million. The offering was completed in
February 2000 when an additional 970,708 shares of preferred stock were issued
for net proceeds of $4.1 million.
At the date of issuance, the Company believed the per share price of $4.25
represented the fair value of the preferred stock. The subsequently determined
fair value of the Company's common stock ranged from $5.45 to $9.09 per share,
and was in excess of the fair value of the preferred stock. Accordingly, the
incremental fair value determined on the date of issuance for each closing of
Series E preferred stock, is deemed to be the equivalent of a preferred stock
dividend, limited to the extent of the proceeds from the issuance for each
closing. The Company recorded a deemed dividend of $4.1 million, and $285,000
for the years ended December 31, 2000 and 1999, respectively, by offsetting
charges and credits to additional paid-in capital, without any effect on total
stockholders' equity. The amount increased the loss attributable to common
stockholders in the calculation of net loss per share for the years ended
December 31, 2000 and 1999.
Warrants
In February 1998, the Company issued an exclusive license for its cell
collection and isolation technology for the use in the field of hematopoetic
stem cell reconstitution of cancer patients, for which the Company received a
non-refundable, up front fee of $1.0 million. The agreement was terminated in
October 1999. In connection with the termination, the Company issued a warrant
to purchase 275,000 shares of the Company's common stock for nominal
consideration. The warrant is exercisable for five years at an exercise price of
$4.55 per share. The warrant has been valued using the Black-Scholes valuation
method with the following assumptions: no dividend yield; expected life of five
years; risk-free interest rate of 6.1%; and volatility of 0.75. As of the date
of the termination of the agreement, the Company had recognized $317,000 in
revenue under the agreement during 1998 and 1999. The fair value assigned to the
warrant of $873,000 has been offset against the remaining deferred revenue of
$683,000 and the remainder of $190,000 has been charged to research and
development expense.
In 1997, the Company issued a warrant to purchase 38,195 shares of common
stock in connection with an agreement for financial services provided to the
Company. The warrant is exercisable at a price of $3.27 per share for a ten-year
period. The Company valued the warrant issued in 1997 using the Black-Scholes
valuation method with the following assumptions: no dividend yields, expected
life of 10 years, risk-free interest rate of 6% and volatility of 0.5. The value
of the warrant was determined to be insignificant, and consequently, no expense
has been recorded.
Additional warrants for 118,188 shares of common stock are outstanding and
exercisable at December 31, 2000.
Stock Option Plans
On March 1, 2000, the board of directors adopted, and the stockholders
approved on May 1, 2000, the 2000 Equity Incentive Plan (the 2000 Plan), which
amended and restated the 1996 Plan. A total of 4,400,000 shares of common stock
were authorized and reserved for issuance under the 2000 Plan, an increase of
550,000 shares over that previously authorized under the 1996 Plan. Each year,
the number of shares reserved for issuance under the 2000 Plan will
automatically be increased by the lessor of (i) 5% of the total number of shares
of the Company's common stock then outstanding, (ii) 550,000 shares, or (iii) a
number to be determined by the Company's Board of
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Directors. On January 1, 2001, the number of shares reserved for issuance under
the 2000 Plan was automatically increased by 550,000 shares, to an aggregate of
4,950,000 shares.
The options granted under the 2000 Plan may be either incentive stock
options or nonqualified stock options. Options granted under the 2000 Plan
expire no later than 10 years from the date of grant. The option price shall be
at least 100% of the fair value on the date of grant for incentive stock
options, and no less than 85% of the fair value for nonqualified stock options.
If, at the time the Company grants an option, the optionee possesses more than
10% of the total combined voting power of all classes of stock of the Company,
the option price shall be at least 110% of the fair value and shall not be
exercisable more than five years after the date of grant. The options generally
become exercisable in increments over a period of four years from the date of
grant, with the first increment vesting after one year. Options may be granted
with different vesting terms from time to time.
At December 31, 2000, the Company had 6,600 options outstanding under a
prior stock option plan.
A summary of the Company's stock option activity follows:
Year Ended December 31,
----------------------------------------------------------------------------------
1998 1999 2000
------------------------- ------------------------- ---------------------------
Weighted- Weighted- Weighted-
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Option Price Option Price Option Price
--------- --------- --------- --------- --------- ---------
Outstanding--beginning of period............ 1,494,988 $0.45 1,876,199 $0.54 1,888,873 $ 0.67
Options granted at fair value............... -- -- -- -- 1,275,433 9.87
Options granted at less than fair value..... 625,900 0.75 665,720 0.95 -- --
Options exercised........................... (79,041) 0.49 (416,576) 0.55 (810,366) 0.52
Options forfeited........................... (165,648) 0.55 (236,470) 0.62 (40,397) 1.32
--------- --------- ---------
Outstanding--end of period.................. 1,876,199 0.54 1,888,873 0.67 2,313,543 5.78
========= ========= =========
Exercisable at end of period................ 1,125,582 0.47 881,075 0.50 607,789 1.03
========= ========= =========
Weighted-average fair value of options
granted during the period.................. 1.84 4.34 12.36
At December 31, 2000, there were 460,825 shares available for future grant
under the 2000 Plan.
Information regarding the weighted-average remaining contractual life and
weighted-average exercise price of options outstanding and options exercisable
at December 31, 2000 for selected price ranges was as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-Average
Remaining Contractual Weighted-Average Weighted-Average
Exercise Prices Shares Life (in years) Exercise Price Shares Exercise Price
------------------ --------- --------------------- ---------------- ------ ----------------
$ 0.18 - $ 0.68 406,559 6.08 $ 0.52 359,994 $ 0.50
$ 0.73 - $ 0.75 37,125 7.08 0.75 34,100 0.75
$ 0.91 - $ 0.91 569,352 8.16 0.91 193,195 0.91
$ 1.82 - $ 1.82 400,133 9.03 1.82 5,500 1.82
$ 4.55 - $13.00 137,000 9.33 4.86 - -
$14.06 - $14.06 618,874 9.95 14.06 - -
$15.38 - $20.69 144,500 9.83 17.49 15,000 15.44
--------- -------
$ 0.18 - $20.69 2,313,543 8.58 5.78 607,789 1.03
========= =======
During the years ended December 31, 2000, 1999 and 1998, in connection with
the grant of certain options to employees, the Company recorded deferred stock-
based compensation of $3.1 million, $2.1 million and $589,000, respectively,
representing the difference between the exercise price and the subsequently
determined fair value of the Company's common stock on the date such stock
options were granted. Deferred stock-based compensation is being amortized on a
graded vesting method. During the years ended December 31, 2000, 1999 and 1998,
the
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Company recorded non-cash deferred stock-based compensation expense of $2.3
million, $844,000 and $149,000, respectively.
Pro Forma Information
Pro forma information regarding net loss is required by SFAS No. 123 as if
the Company had accounted for its employee stock options under the fair value
method. The fair value of the Company's options was estimated at the date of
grant using the minimum value method for periods prior to the Company's initial
public offering and the Black-Scholes method for subsequent periods, with the
following assumptions for 2000, 1999 and 1998 and no dividend yields; expected
lives of the options of four years; and risk-free interest rates of 6.0%, 6.1%
and 6.0%, respectively; and volatility of 145%, 0% and 0%, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The following
table illustrates what net loss would have been had the Company accounted for
its stock options under the provisions of FAS 123.
Year Ended December 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Pro forma net loss attributable to common
stockholders..................................... $(20,998) $(12,882) $(10,403)
======== ======== ========
Pro forma net loss per share...................... $ (1.64) $ (13.62) $ (16.52)
======== ======== ========
Common Stock Reserved
As of December 31, 2000, common stock was reserved as follows:
Employee stock purchase plan........................... 1,485,000
Common stock warrants.................................. 529,650
Common stock options................................... 2,774,368
---------
4,789,018
=========
8. Income Taxes
Due to operating losses and the inability to recognize the benefits
therefrom, there was no federal or state provision for income taxes. The Company
was subject to a withholding tax of $100,000, $0, and $600,000 in Japan related
to certain payments received from Kirin for the years ended December 31, 2000,
1999 and 1998, respectively.
As of December 31, 2000, the Company had federal and state net operating
loss carryforwards of approximately $29.5 million. The Company also had federal
research and development tax credit carryforwards of approximately $2.1 million.
The net operating loss and credit carryforwards will expire at various dates
beginning on 2009 through 2012, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets were as follows:
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December 31,
------------------------
2000 1999
-------- --------
(in thousands)
Net operating loss Carryforwards.............. $ 10,341 $ 10,886
Deferred revenue.............................. 3,047 2,381
Research credits.............................. 2,094 1,209
Capitalized research and development.......... 9,279 5,824
Other......................................... 759 927
-------- --------
Total deferred tax assets..................... 25,520 21,227
Valuation allowance........................... (25,520) (21,227)
-------- --------
Net deferred tax assets....................... $ -- $ --
======== ========
The net deferred tax asset has been fully offset by a valuation allowance.
The valuation allowance increased by $4.3 million and $4.9 million during the
years ended December 31, 2000 and 1999, respectively.
9. Net Loss Per Share
In accordance with FAS 128, the Company has determined the basic and
diluted net loss per share using the weighted-average number of shares of common
stock outstanding during the period. Pro forma basic and diluted net loss per
share of common stock gives effect to the conversion of the convertible
preferred stock which was automatically converted to common stock immediately
prior to the completion of the Company's initial public offering from the
original date of issuance using the as-if-converted method.
The following table presents the calculation of basic, diluted, and pro
forma basic and diluted net loss per share:
2000 1999 1998
---- ---- ----
(in thousands except share and per share information)
Net loss attributable to common stockholders................... $ (20,179) $ (12,803) $(10,373)
=========== =========== ========
Basic and diluted:
Weighted-average number of shares used for basic
and diluted per share amounts................................ 12,839,866 945,761 629,562
=========== =========== ========
Basic and diluted net loss per share........................... $ (1.57) $ (13.54) $ (16.48)
=========== =========== ========
Pro forma (unaudited):
Shares used above............................................. 12,839,866 945,761
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock............ 6,498,771 11,017,615
----------- -----------
Shares used in computing pro forma basic and
diluted net loss per share................................... 19,338,637 11,963,376
=========== ===========
Pro forma basic and diluted net loss per share................ $ (1.04) $ (1.07)
=========== ===========
The Company has excluded all convertible preferred stock and outstanding
stock options from the calculation of diluted net loss per common share because
all such securities are antidilutive for the periods presented. The total number
of shares related to outstanding options and warrants, that was excluded from
the calculations of diluted net loss per common share, prior to the application
of the treasury stock method for options, was 2,843,193, 15,662,818 and
11,868,158 for December 31, 2000, 1999 and 1998, respectively.
10. Lease and Rental Commitments
In July 1993, the Company leased a facility in Mountain View, California
under a noncancelable operating lease expiring in June 2006. The Company has
subleased a portion of this facility under a lease expiring in June 2001.
In October 1998, the Company entered into a lease agreement for a facility
in Seattle, Washington under a noncancelable operating lease. The lease term is
ten years and the Company has the option to extend the lease term for two five-
year periods with the same terms and conditions except for rent, which adjusts
to market rate. The Company has subleased a portion of this facility under a
lease expiring March 2004. The lessor has also provided the Company a tenant
improvement allowance of up to $3.5 million. At December 31, 2000, the Company
had
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expended or committed $2.8 million, which will be repaid monthly as an addition
to the base rent expense over the term of the lease, with interest at 12.5% per
year.
Sublease rental income is accounted for as a deduction of rent expense.
Rent expense for the years ended December 31, 2000, 1999 and 1998 was $2.1
million, $3.2 million, and $495,000, respectively, which is net of sublease
rental income of $1.3 million, $561,000 and $0, respectively.
Future minimum lease payments under noncancelable operating leases and
future minimum rentals to be received under noncancelable subleases at December
31, 2000, were as follows:
Operating Noncancelable
Leases Subleases
--------- -------------
Year ending December 31: (in thousands)
2001.................................... $ 2,108 $ 605
2002.................................... 1,872 394
2003.................................... 1,872 404
2004.................................... 1,872 101
2005.................................... 1,872 --
Thereafter.............................. 6,606 --
------- ------
Total minimum lease payments.............. $16,202 $1,504
======= ======
11. Related-Party Transactions
Two founders are providing consulting services to the Company. The Company
has the right to terminate these contracts at any time. The Company incurred
$25,000, $120,000 and $132,000, in consulting fees during the years ended
December 31, 2000, 1999 and 1998, respectively, under these agreements.
12. Employee Benefit Plan
The Company has a 401(k) plan for those employees who meet eligibility
requirements. Eligible employees may contribute up to 20% of their eligible
compensation, subject to IRS limitations. Company contributions to the plans are
discretionary as determined by the Board of Directors. There were no employer
contributions in 2000, 1999 or 1998.
13. Employee Stock Purchase Plan
Upon the completion of the initial public offering, the Company implemented
the 2000 Employee Stock Purchase Plan (the Purchase Plan), which was approved by
the Board of Directors on March 1, 2000 and approved by the stockholders on May
1, 2000. A total of 1,485,000 shares of common stock were reserved for issuance
under the Purchase Plan. Each year, the number of shares reserved for issuance
under the Purchase Plan will automatically be increased by the least of (i) 1%
of the total number of shares of the Company's common stock then outstanding,
(ii) 440,000 shares, or (iii) a number determined by the Company's Board of
Directors. On January 1, 2001, the number of shares reserved for issuance under
the Purchase Plan was automatically increased by 244,499 shares, to an aggregate
of 1,729,499 shares.
The Purchase Plan permits eligible employees to purchase common stock at a
discount, but only through payroll deductions during defined offering periods.
The price at which common stock is purchased under the Purchase Plan is equal to
85% of the lower of the fair market value of the common stock at the
commencement date of each offering period or the relevant purchase date. Other
than the first offering which was from the effective date of the initial public
offering to July 31, 2002, all following offerings are twenty four months long.
14. Major Customers
Revenues from the following customers represented greater than 10% of total
revenues:
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Year Ended
December 31,
----------------------
2000 1999 1998
---- ---- ----
Customer A......................... 8% 7% 27%
Customer B......................... 63% 84% 12%
Customer C......................... 2% 4% 24%
Customer D......................... -- 4% 30%
Customer E......................... 23% -- --
15. Quarterly Information (Unaudited)
The following table summarizes the unaudited statement of operations for
each quarter of 2000 and 1999.
-----------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ---------- ---------------- --------------
2000 (in thousands, except per share amounts)
Total revenue $ 1,181 $ 1,105 $ 1,318 $ 2,915
Total operating expenses 4,905 5,311 6,498 7,989
Loss from operations (3,724) (4,206) (5,180) (5,074)
Net loss attributable to common stockholders (7,772) (4,185) (4,386) (3,836)
Basic and diluted net loss per share (6.10) (0.88) (0.20) (0.16)
-----------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ---------- ---------------- --------------
1999 (in thousands, except per share amounts)
Total revenue $ 686 $ 926 $ 834 $ 1,273
Total operating expenses 3,865 4,241 3,954 4,272
Loss from operations (3,179) (3,315) (3,120) (2,999)
Net loss attributable to common stockholders (3,114) (3,320) (3,114) (3,255)
Basic and diluted net loss per share (4.39) (3.73) (2.94) (2.76)
F-17