Back to GetFilings.com
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2004
or
o TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number 000-50791
SENOMYX,
INC.
(Exact name of registrant
as specified in its charter)
|
Delaware
|
|
33-0843840
|
|
(State or other
jurisdiction of incorporation
or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
|
|
11099
North Torrey Pines Road
La Jolla, California
|
|
92037
|
|
(Address of principal
executive offices)
|
|
(Zip Code)
|
(858) 646-8300
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $.001 per share
(Title
of class)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes ý No o
Indicate by 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 o No ý
Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Act). Yes o No ý
As of June 30, 2004,
the aggregate market value of the voting stock held by non–affiliates of the
registrant, computed by reference to the last sale price of such stock as of
such date on the NASDAQ National Market, was approximately $55,531,900.
Excludes an aggregate of 15,853,152 shares of common stock held by officers and
directors and by each person known by the registrant to own 5% or more of the
outstanding common stock as of June 30, 2004. Exclusion of shares held by
any of these persons 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.
As of February 28,
2005, there were 25,435,739 shares of the registrant’s Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the registrant’s definitive Proxy Statement for the 2005 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this Form 10-K, are incorporated by reference in Part III,
Items 10-14 of this Form 10-K.
2
SENOMYX, INC.
Annual
Report on Form 10-K
For the
Fiscal Year Ended December 31, 2004
TABLE OF
CONTENTS
3
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements included or incorporated by reference in this Annual
Report on Form 10-K other than statements of historical fact, are
forward-looking statements. You can identify these and other forward-looking
statements by the use of words such as “may,” “will,” “could,” “anticipate,” “expect,”
“intend,” “believe,” “continue” or the negative of such terms, or other
comparable terminology. Forward-looking statements also include the assumptions
underlying or relating to such statements.
Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth below under the caption “Risk Factors” in Part II
Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in this Annual Report on Form 10-K and elsewhere in
this Annual Report on Form 10-K.
Readers are cautioned not to place undue reliance on forward-looking
statements. The forward-looking
statements speak only as of the date on which they are made and we undertake no
obligation to update such statements to reflect events that occur or
circumstances that exist after the date on which they are made except as
required by law.
PART I
Item 1. Business
Overview
We are
a biotechnology company using proprietary taste receptor-based assays and
screening technologies to discover and develop novel flavors, flavor enhancers
and taste modulators for the packaged food and beverage industry. We believe
our flavor ingredients will enable packaged food and beverage companies to
improve the nutritional profile of their products and may generate cost of
goods savings, while maintaining or enhancing taste. We license our flavor
ingredients to our collaborators on an exclusive basis, which we believe we will
provide these companies with the ability to differentiate their products. We
have entered into product discovery and development collaborations with four of
the world’s leading packaged food and beverage companies: Campbell Soup
Company, The Coca-Cola Company, Kraft Foods Global, Inc. and Nestlé SA. We
currently anticipate that we will derive all of our revenues from existing and
future collaborations. Our existing collaboration agreements provide for
research and development funding, milestone payments based upon our achievement
of research or development goals and, in the event of commercialization,
royalties on future sales of consumer products incorporating our flavors,
flavor enhancers and taste modulators. Our current programs focus on the
development of savory, sweet and salt flavor enhancers and bitter taste
modulators. In addition, future collaboration agreements may provide for
up-front license fees.
Flavors
are substances that impart tastes or aromas in foods and beverages. Individuals
experience the sensation of taste when flavors in food and beverage products
interact with taste receptors in the mouth. A taste receptor functions either
by physically binding to a flavor ingredient in a process analogous to the way
a key fits into a lock or by acting as a channel to allow ions to flow directly
into a taste cell. As a result of these interactions, signals are sent to the
brain where a specific taste sensation is registered. There are currently five
recognized primary senses of taste: umami, which is the savory taste of
glutamate, sweet, salt, bitter and sour.
We are
currently pursuing savory, sweet and salt flavor enhancer and bitter taste modulator
discovery and development programs. The goals of our savory program are to
enhance the taste of naturally occurring glutamate and enable the reduction or
elimination of added MSG. The goals of our sweet program are to enhance the
taste of natural and artificial sweeteners and enable a significant reduction
in added sweeteners. The goals of our salt program are to enhance the taste of
salt and enable a significant reduction in added salt. The goals of our bitter taste modulation
program are to reduce or block bitter taste and improve the overall taste
characteristics of packaged foods, beverages, over the counter (or OTC) health
care products and pharmaceutical products.
4
Industry Background
Packaged Food and Beverage Industry
Packaged
food and beverage products include carbonated and non-carbonated beverages,
frozen foods, snack foods, ice cream, pasta, canned soup and numerous other
products. According to recent data from Euromonitor International, an
independent research organization, worldwide sales of packaged food and
beverage products in 2003 were approximately $1.2 trillion, of which $260
billion was generated in the United States. Based on these estimates, of the
worldwide total, sales of packaged foods were approximately $958 billion and
sales of non-alcoholic beverages were approximately $278 billion. Based on
recent data from Euromonitor, Information Resources, Inc. and our
collaborators’ 2003 annual reports, we estimate that our collaborators’
combined worldwide sales in 2003 of their products that fall within their
exclusive product fields were $38 billion. Our collaboration agreements provide
that we will receive a royalty of 1% to 4% on our collaborators’ sales of
products containing our flavors, flavor enhancers or taste modulators. However,
our collaborators may not incorporate our flavors, flavor enhancers and taste
modulators into all of their products within their exclusive product fields.
Each
of our flavors, flavor enhancers and taste modulators addresses large,
potentially overlapping markets. The following table sets forth the four primary
taste areas on which we are focused and, for each taste area, provides examples
of product categories that could incorporate ingredients in those taste areas,
estimated worldwide sales, growth rates in 2003 and our estimates of the
worldwide sales for food and beverage products that fall within our existing
collaborators’ exclusive product fields.
|
Taste Areas
|
|
Example Product Categories
|
|
2003 Estimated
Worldwide Sales(1)
|
|
Estimated
Growth
Rate Over
2002(1)
|
|
2003 Estimated
Revenues Of
Existing
Collaborators
In Exclusive
Product Fields(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savory
|
|
Ready meals, sauces, spreads, frozen foods,
beverages, meal replacements, soups, pastas, dried foods, snack foods,
processed meats, processed cheeses and cracker products
|
|
$
|
362 billion
|
|
4.7
|
%
|
$
|
7.2 billion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sweet
|
|
Confectionaries, cereal, ice cream, beverages,
yogurt, dessert, spreads and bakery products
|
|
$
|
455 billion
|
|
4.4
|
%
|
$
|
15.7 billion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salt
|
|
Product categories are the same as those set forth
for savory taste area plus canned foods and bakery products
|
|
$
|
400 billion
|
|
4.5
|
%
|
$
|
10.2 billion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bitter
|
|
Products which contain bitter tastants, including
confectionary, beverages, ice cream, ready meals, canned foods and soups, and
products which utilize certain artificial sweeteners
|
|
$
|
428 billion
|
|
4.6
|
%
|
$
|
5.4 billion
|
|
(1) According
to recent Euromonitor data for packaged food and beverages, excluding
pharmaceutical and OTC health care applications.
(2) Based
on recent data from Euromonitor, Information Resources, Inc. and our
collaborators’ 2003 annual reports.
Flavor Industry
Flavors,
flavor enhancers and taste modulators are used in a variety of packaged food
and beverage products throughout the world. Flavors are substances that impart
tastes or aromas in foods or beverages. Flavor enhancers and taste modulators are
substances that supplement, enhance or modify the original flavor or aroma of
foods, without necessarily imparting noticeable flavors or aromas. Flavors,
flavor enhancers and taste modulators can originate from either naturally
occurring or chemically synthesized compounds.
5
While
some packaged food and beverage companies have their own internal research and
development programs, most have traditionally relied on purchases of flavors,
flavor enhancers and taste modulators from third parties. Historically,
flavors, flavor enhancers and taste modulators have been sold on a commodity
basis by independent manufacturers who make their products broadly available to
packaged food and beverage companies on a non-exclusive basis. This has limited
the ability of packaged food and beverage companies to use flavors, flavor
enhancers and taste modulators to differentiate their brands from competitors.
Traditionally,
flavor companies have discovered new flavors, flavor enhancers and taste
modulators primarily using inefficient, non-automated and labor-intensive trial
and error processes involving a limited number of trained taste testers. Using
this approach, taste testers must physically taste each potential flavor and
flavor enhancer compound to assess the taste characteristics of the compound.
Taste testers can assess only a limited number of potential flavors or flavor
enhancers at one time due to the sensory fatigue that results from repeated
tasting. As a result, only a small fraction of the available universe of
compounds can be tested economically.
In the
United States, most flavors, flavor enhancers and taste modulators are
regulated as GRAS substances under the provisions of the Federal Food, Drug and
Cosmetic Act, or FD&C Act. GRAS determinations for most new flavors, flavor
enhancers and taste modulators are made by an independent panel of scientists
administered by FEMA. Under the FEMA GRAS process we expect that for each of
our flavors, flavor enhancers and taste modulators it will take 12 to 18 months
and cost less than $1 million to conduct the safety studies and complete the
review by the FEMA expert panel. Once a flavor or flavor enhancer is determined
to be FEMA GRAS, it may be immediately incorporated into products for test
marketing and commercialization in the United States and in a number of other
countries.
Flavors, Flavor Enhancers and Taste Modulators
as a Source of Competitive Advantage
The
packaged food and beverage industry is comprised of a number of large and
highly competitive market segments. Small market share gains in specific large
market segments can translate into significant additional revenue for packaged
food and beverage companies. For example, according to recent Euromonitor data,
estimated 2003 worldwide sales of soft drinks were approximately $237.0
billion. Thus, an increase of a tenth of a percentage point in overall
worldwide market share would result in additional revenue of approximately
$237.0 million.
As a
result of these market opportunities, packaged food and beverage companies are
constantly seeking ways to differentiate their products, demand for which can
be greatly affected by very small actual or perceived improvements in flavor or
health profiles. Flavors, flavor enhancers and taste modulators can potentially
provide an important way to differentiate a particular product through enhanced
taste, health benefits, flavor ingredient exclusivity and cost of goods
savings.
• Taste.
Product taste is a critical competitive factor for packaged food and
beverage companies. These companies seek to use flavors, flavor enhancers and
taste modulators to improve or maintain taste while improving the nutritional profile
of packaged food and beverage products or reducing ingredient costs.
• Health Benefits. Packaged food and beverage companies are
exploring ways to improve overall nutritional quality of their products. It is
widely accepted that poor diet contributes to adverse health conditions such as
cardiovascular disease, diabetes and obesity. To address these concerns, many
companies have introduced reduced calorie, reduced sodium and reduced fat
content products to the market. Flavors, flavor enhancers and taste modulators
with specific desired characteristics provide an innovative way to reduce the
levels of ingredients that may contribute to these concerns without
compromising desirable taste attributes.
• Flavor Ingredient Exclusivity. Failure of packaged food and beverage
companies to differentiate their brands from their competition, including
private label products, may result in significant loss of market share, price
pressure and erosion of profit margins. Packaged food and beverage companies
spend millions of dollars creating brands and brand images to compete with
other products. Many of these competitive products contain the same or similar
flavor ingredients. The limited availability of proprietary flavors, flavor
enhancers and taste modulators makes it difficult for manufacturers to
differentiate their products based on flavor ingredients.
6
• Cost of Goods Savings. The packaged food and beverage industry
purchases enormous volumes of raw materials to produce their products.
According to CMP Information Limited, an independent research organization,
estimated worldwide sugar production in 2002 was over 135 million tons at a
total value exceeding $37.0 billion. Similarly, according to the 2003 Chemical
Economics Handbook, worldwide consumption of MSG was nearly 1.6 million metric
tons in 2002 at a cost of $1.4 billion. Flavors, flavor enhancers and taste
modulators can potentially facilitate a reduction in the volume of these
ingredients used in packaged food and beverage products, which could result in
significant decreases in costs and associated increases in profit margins.
Our Solution
We use
our proprietary taste receptor-based assays and screening technologies to
discover and develop novel flavors, flavor enhancers and taste modulators. We
have developed proprietary taste receptor-based assays that incorporate human
taste receptors. We use these assays in our high-throughput screening systems
to rapidly and efficiently screen our compound libraries and identify large
numbers of novel potential flavors, flavor enhancers and taste modulators. We
believe our approach improves the likelihood that compounds with the desired
characteristics can be discovered and then optimized into novel flavors, flavor
enhancers or taste modulators.
We
believe our approach will result in the discovery and development of flavors,
flavor enhancers and taste modulators that will provide the following valuable
solutions to the following key challenges faced by the packaged food and
beverage industry:
• Maintaining and Improving Taste. We are developing flavors, flavor enhancers
and taste modulators to enable our collaborators to improve or maintain taste
while improving the nutritional profile of packaged food and beverage products
or reducing ingredient costs.
• Reducing Sugar, Salt and MSG in Packaged Food and
Beverage Products. We are
developing flavors, flavor enhancers and taste modulators to enable our
collaborators to significantly reduce the levels of sugar, salt and MSG in
packaged food and beverage products while maintaining or improving taste. We
believe reducing the levels of such ingredients will improve the nutritional
profile of packaged food and beverage products.
• Blocking Undesirable Tastes. We are discovering taste modulators that we
believe will be useful in blocking bitter and other unwanted tastes associated
with certain packaged food, beverage, OTC health care products and
pharmaceutical products.
• Obtaining Exclusive Use of Proprietary Flavors,
Flavor Enhancers and Taste Modulators. We
are able to offer our collaborators exclusive use of our proprietary flavors,
flavor enhancers and taste modulators in defined packaged food and beverage
product categories. We believe this approach will assist our collaborators in
differentiating their products from those of their competitors.
• Reducing Cost of Goods. We believe our proprietary flavors,
flavor enhancers and taste modulators will enable our collaborators to reduce
overall raw material ingredient costs, particularly for those products
containing high levels of natural and artificial sweeteners and MSG.
Our Strategy
Our
goal is to become the leader in discovering, developing and commercializing new
and improved flavors, flavor enhancers and taste modulators. Key elements of
our strategy include:
• Collaborating With Leading Packaged Food and Beverage
Companies. We are
collaborating with leading packaged food and beverage companies to develop and
commercialize our product candidates. Our collaborators are responsible for
marketing, selling and distributing their products incorporating our flavors,
flavor enhancers and taste modulators. As a result, we expect to commercialize
our flavors, flavor enhancers and taste modulators without incurring significant
sales, marketing and distribution costs. We currently have collaborations with
Campbell Soup, Coca-Cola, Kraft Foods and Nestlé.
7
• Developing Flavors, Flavor Enhancers and Taste Modulators
that are Eligible for FEMA GRAS Determination.
We are focused on continuing the development of flavors,
flavor enhancers and taste modulators that will qualify for a FEMA GRAS
determination. We expect the FEMA GRAS process will take 12 to 18 months from
initiation of safety studies through the GRAS determination for each of our flavors,
flavor enhancers and taste modulators. Upon the GRAS determination, our
collaborators can begin to test market and commercialize products incorporating
our flavors, flavor enhancers or taste modulators. In the event that a
particular flavor enhancer or taste modulator is not eligible for FEMA GRAS
determination, we will dedicate our development efforts to alternative
compounds.
• Pursuing Additional Collaborations and Market Opportunities. We seek to establish additional
collaborations with leading packaged food and beverage companies to use flavors,
flavor enhancers or taste modulators developed through our existing programs
for exclusive use within new packaged food and beverage product fields. We
intend to receive from future collaborators license fees, research and
development funding, milestone payments and royalties on future sales of
products incorporating these flavors, flavor enhancers or taste modulators. In
addition, we plan to target fields in which our collaborators can incorporate
more than one of our flavors, flavor enhancers or taste modulators into a
particular product.
• Expanding Our Product Candidate Pipeline. We will continue to focus on the
discovery and development of additional flavor ingredients based on additional
taste receptors to address new taste areas. We also intend to improve the
beneficial characteristics of our current product candidates through the
development of next-generation flavors, flavor enhancers and taste modulators.
We will also continue to consider applications of our current products and
technologies outside of the packaged food and beverage industry.
• Maintaining and Expanding Technology Position. We believe our proprietary taste
receptor-based technologies, including our receptor discovery, assay
development and high-throughput screening technologies and natural and
synthetic compound libraries, provide us and our collaborators with significant
competitive advantages. We intend to continue to develop and acquire
proprietary technologies and related intellectual property rights to expand and
enhance our ability to discover and develop new proprietary flavors, flavor
enhancers and taste modulators.
Our Discovery and Development Process
The
following diagram summarizes our discovery and development process.
The
key elements of our Discovery and Development process are:
• Proprietary Taste Receptor-Based Assay
Development. The first step
in our discovery and development process is to develop proprietary assays based
on human taste receptors. Our assays are tests that measure interactions
between the taste receptors and potential flavors, flavor enhancers and taste
modulators. To date we have developed assays to test for compounds that affect
savory, sweet and salt taste. We are in the process of developing an assay for
bitter taste receptors.
• High-throughput Screening and Identification of Lead
Compounds. The next step in
our discovery and development process is to use our proprietary taste
receptor-based assays to identify compounds that bind to human taste receptors,
known as hits. We use automated high-throughput screening to rapidly evaluate
our libraries of diverse synthetic and natural compounds. A panel of taste testers
then evaluates the taste effect of the most potent hits. Based on this
evaluation, we designate hits that exhibit a positive taste effect as
proof-of-concept compounds. We then select the most promising of those
proof-of-concept compounds, which we call lead compounds, for optimization.
• Optimization of Lead Compounds and Selection of
Product Candidates. The next
step in our discovery and development process is to chemically enhance, or
optimize, our lead compounds to allow lower amounts of
8
the compound to be
used in the finished product or improve the enhancement effect to meet the
taste attribute goals of our collaborators. Optimization may also be required
to enhance the safety profile or to improve the physical properties of a
compound so that it is stable under manufacturing, storage and food preparation
conditions. We refer to optimized compounds that provide desirable taste
attributes in packaged food and beverage product prototypes as product candidates.
• Safety Studies and FEMA GRAS Determination of Product
Candidates. The next step in
our discovery and development process is to select, in conjunction with our
collaborators, one or more product candidates for commercialization. We then
evaluate the selected product candidate for safety. Following this evaluation,
we submit the safety data along with the physical and chemical properties of
the product candidate and a description of manufacturing and conditions of
intended use to the FEMA GRAS expert panel for review. Once our collaborator
selects a product candidate for commercialization, the FEMA GRAS process takes
approximately 12 to 18 months from initiation of safety studies through the
GRAS determination, depending upon the timing of the FEMA Expert Panel
meetings. We intend to use the data from the FEMA GRAS review to facilitate
approval of our flavors, flavor enhancers and taste modulators for use in
products sold outside of the United States.
Following
a FEMA GRAS determination, foods and beverages containing our proprietary flavors,
flavor enhancers and taste modulators can be immediately commercialized in the
United States. We anticipate, however, that our collaborators will test market
their products containing our flavors, flavor enhancers and taste modulators
through a series of consumer acceptance tests over a period of 6 to 12 months
prior to initiating any wide-scale commercialization.
Our Discovery and Development
Programs
We are
currently pursuing the discovery and development of flavors, flavor enhancers
and taste modulators through programs focused on savory, sweet, salt and
bitter. The following diagram indicates the principal compounds we are
developing in each program, and the current status of each compound.
Savory Enhancer Program
Using
SavoryScreenHT, our high-throughput savory receptor-based assay system, we have
identified two product candidates, S336 and S807, that enhance the savory taste
of glutamate. We believe that these product candidates will enhance the taste
of naturally occurring glutamate and/or enable the reduction or elimination of
added MSG and inosine monophosphate, or IMP, an expensive savory enhancer of
MSG taste, in a variety of foods and savory beverages, while maintaining or
improving the desired savory taste.
To
demonstrate the taste properties of S336 and S807, we tested each compound
against a reference sample consisting of MSG and IMP in amounts typically used
in foods to impart a savory taste. We tasted this reference sample against test
samples containing MSG and either S336 or S807 at concentrations of the test
compound of up to 3 parts per million, or ppm, which is typical of the
concentrations of FEMA GRAS flavors, flavor enhancers and taste modulators.
In
these tests, S336 enhanced the savory taste of MSG and, at the level used, was
significantly more potent than IMP in the reference sample. In a separate test,
a solution of S336 alone, in the absence of MSG and IMP, was found
9
to be
more savory than the reference sample. Based on these results, we believe that
the use of S336 may allow for a significant reduction or replacement of added
MSG and IMP in savory foods. In separate tests, S807 also enhanced the savory
taste of MSG and provided for a three-fold reduction in MSG levels, yet
maintained the same savory taste of the reference sample. S336 and S807 have
also each been shown to enhance the savory taste of MSG in a product prototype.
Our
collaborator has evaluated S336 and S807 for savory taste enhancement in
product prototypes. S336 is approximately three times more potent than S807 in
taste tests and exhibits greater water solubility compared to S807. Other
characteristics, such as heat stability, are similar for the two compounds. Based
on the results of such studies, our collaborator formally selected both S336
and S807 for development.
We
completed the safety assessment studies for S807 and S336 and submitted
applications for GRAS determination to the Expert Panel of the Flavor and
Extract Manufacturers Association (FEMA) in December 2004. In March 2005, we received notification
from FEMA that S807 and S336 have been determined to be GRAS. In addition, two other flavor enhancers, S263
and S976, which are related to S336, were also determined by FEMA to be
GRAS. A more detailed description of the
FEMA GRAS process is provided in Item I, Business – Our Discovery
and Development Process.
Sweet Enhancer Program
Using
SweetScreenHT, our high-throughput sweet receptor-based assay system, we
identified S1395 and S888, proof-of-concept compounds that enhance the sweet
taste of sugar. We believe that the enhancers we are developing in our sweet
enhancer program will enhance the sweet taste of natural and artificial
sweeteners used in a variety of packaged food and beverage products and may
provide for a significant reduction in added sweetener in the finished product
while maintaining or improving the desired sweet taste.
During
2004, we identified a number of novel sweet enhancers using our optimization
chemistry process. One compound, known
as S679, demonstrated enhanced potency in the receptor assay and in preliminary
taste tests over previous lead compounds S1395 and S888. We have found that S679 enhances the sweet
taste of fructose by approximately 1.6-fold (a 40% reduction) at a
concentration of 3 ppm in a product prototype.
S679 is undergoing further testing in product prototypes by our
collaborator.
Guided
by our taste receptor-based assays, we are continuing our chemistry optimization
efforts on S679 and several additional classes of compounds in order to
identify potential sweet enhancers that function at lower concentrations in
product prototypes. These efforts have
recently resulted in a number of new sweet enhancer compounds, including S763
and S299, which have demonstrated two-fold increased potency in our in vitro
sweet receptor-based assay compared to S679.
These compounds are being scaled up for taste tests in product
prototypes. As we make additional
progress in identifying potential product candidates, we will continue to
provide these enhancers to our collaborators for extensive testing in product
prototypes.
Salt Enhancer Program
Using
SaltScreenHT, our high-throughput salt receptor-based assay, we have identified
hundreds of compounds that enhance the activity of a taste receptor believed to
be involved in the taste of salt. The goal of our salt enhancer program is to
identify compounds that enhance the taste of salt and provide a significant
reduction in sodium levels in a variety of foods while maintaining or improving
the desired salt taste.
We
tested the most potent of the compounds identified by SaltScreenHT with our
electrophysiology-based assay SaltScreenEP. This assay identifies compounds
that specifically enhance the activity of ENaC, a taste receptor believed to be
involved in the taste of salt. Based on the initial screening results, we
selected compound S853 for further optimization. We synthesized and tested over 1,000
derivatives of S853 in the SaltScreenEP system. The most potent compounds, S112
and S225, are approximately 3,000-fold more potent than the original compound,
S853. We will need to synthesize additional compounds specific to human taste
ENaC channels to identify a taste proof-of-concept compound.
Bitter Taste Modulator Program
The
bitter modulator program is currently focused on building our BitterScreen
receptor-based assays for each of the 25 human T2R bitter receptors. The first step involves the identification of
at least one compound that
10
activates
each bitter taste receptor. In 2004, we
published our work on the bitter taste receptors T2R61 and T2R64, which are
activated by saccharin and acesulfame potassium (AceK), artificial sweeteners
that are known to have a bitter off-taste.
In addition, work is continuing on other T2R bitter receptors, and we
are also evaluating variations of each T2R bitter receptor that are thought to
be responsible for some people to taste a food ingredient as bitter while
others do not. The goal of our bitter
taste modulator program is to identify compounds that modulate or eliminate the
bitter taste associated with certain packaged food and beverage products, OTC
health care products and pharmaceutical products.
Product Discovery and Development
Collaborations
We
pursue collaborations with leaders in the packaged food and beverage market.
Under each of our current product discovery and development collaboration
agreements, we have agreed to conduct research and develop flavors, flavor
enhancers or taste modulators in one or more specified taste areas, such as
savory, sweet, salt or bitter. Each of these collaborations is focused on one
or more specific product fields, such as non-alcoholic beverages, wet soups, or
frozen foods. To date, we have entered into product discovery and development
collaborations with Campbell Soup, Coca-Cola, Kraft Foods and Nestlé.
All of
our current collaboration agreements provide for research and development
funding, milestone payments upon achievement of pre-defined research or
development targets and royalty payments based upon future product sales in the
event the collaborator commercializes a product incorporating our flavors,
flavor enhancers or taste modulators. The research and development funding
under each of these agreements is paid according to a fixed payment schedule.
Each of these collaborations provides us with a portion of the funding we
require to pursue the discovery and development of flavors, flavor enhancers
and taste modulators for the applicable program. Under each of these
agreements, we are primarily responsible for the discovery, development and
regulatory approval phases and any associated expenses, while our applicable
collaborator is responsible for selecting the consumer products that may
incorporate our flavors, flavor enhancers or taste modulators. Our collaborator
is also responsible for manufacturing, marketing, selling and distributing any
of these consumer products, and any associated expenses. We believe our
collaborations will allow us to benefit from our collaborators’
well-established brand recognition, global market presence, established sales
and distribution channels and other industry-specific expertise. Each of our
collaborations is governed by a joint steering committee, consisting of an
equal number of representatives of the collaborator and us. The steering
committees provide strategic direction and establish performance criteria for
the research, development and commercialization of our flavors, flavor
enhancers and taste modulators. All decisions of the steering committees must
be unanimous.
Each
of our collaboration agreements provides that we will conduct research and
development on flavors, flavor enhancers and taste modulators for use within
clearly defined packaged food and beverage product fields on an exclusive basis
for the collaborator during the collaborative period specified in each of the
agreements. Our current product discovery and development collaborators are not
prohibited from entering into research and development collaboration agreements
with third parties in any product field. Under the terms of each agreement, we
will retain rights to flavors, flavor enhancers and taste modulators that we
discover during the collaboration for use with the collaborator, or for our use
or with other collaborators outside of the defined product field. We will also
retain rights to any flavors, flavor enhancers and taste modulators that we
discover after the respective collaborative period. In addition, if the
collaborator terminates the agreement or, in the case of certain of our
agreements, fails after a reasonable time following regulatory approval or GRAS
determination to incorporate one or more of our flavors, flavor enhancers or
taste modulators into a product, it will no longer be entitled to use, and we
will have the right to license, the flavors, flavor enhancers or taste
modulators to other packaged food and beverage companies for use in any product
field.
Each
of our agreements terminates when we are no longer entitled to royalty payments
under the agreement. In addition, each agreement may be terminated earlier by
mutual agreement or by either party in the event of a breach by the other party
of its obligations under the agreement. Our agreement with Kraft Foods and our
initial agreement with Nestlé may each be terminated by our collaborator upon
60 days written notice, provided that it pay a specified termination fee if it
terminates the agreement prior to the end of the research collaborative period.
Campbell Soup may only terminate its agreement without cause on or after March 28,
2005 upon 60 days written notice, provided that it pay a specified termination
fee if it terminates the agreement after March 28, 2005 but prior to the
end of the collaborative period. Our agreement with Coca-Cola permits Coca-Cola
to terminate the agreement upon specified major corporate events. Our most
recent agreement with Nestlé gives Nestlé the right to terminate the agreement
11
without
cause on or after October 26, 2006 upon 90 days written notice, provided
that it pay a specified termination fee if it terminates the agreement after October 26,
2006 but prior to the end of the collaborative period.
Campbell Soup Company
In March 2001,
we entered into a collaboration agreement with Campbell Soup, a global
manufacturer and marketer of consumer food products, to work for a three-year
collaborative period to discover specified flavors and flavor enhancers in the
packaged food and beverage product fields of soups, including frozen soups. We
later amended the agreement to add the product field of specified savory
beverages in consideration for additional research and development payments and
potential milestone and royalty payments. We also extended the collaborative
period until the earlier of March 2006 or a GRAS determination, subject to
earlier termination under specified circumstances.
Under
the terms of the collaboration, Campbell Soup has agreed to pay to us certain
research and development funding. We are also eligible to receive a milestone
payment upon our achievement of a specific product development goal. Through December 31,
2004, we have received $7.9 million in research and development funding. If all
milestones are achieved, and including the $7.9 million in research and
development funding paid through December 31, 2004, we may be entitled to
payments which total up to $10.1 million in research and development funding
and milestone payments. In addition, in the event of commercialization, we are
entitled to receive royalties on future net sales of products containing a
discovered flavor or flavor enhancer from the date of introduction of each
product in each country until 17 years thereafter or until the expiration of
relevant patents in such country, whichever is earlier. We cannot assure you
that we will receive any future milestone payments or royalties under this
collaboration.
The Coca-Cola Company
In April 2002,
we entered into a collaboration agreement with Coca-Cola, the world’s largest
beverage company, to work for a three-year collaborative period with Coca-Cola
for the discovery and development of specified new flavors and flavor enhancers
in the product field of soft drinks and other non-alcoholic beverages. In
addition, we will work with Coca-Cola on a co-exclusive basis with Kraft Foods
for the discovery and development of flavor enhancers in a specified food and
beverage product field. In April 2004, we amended the agreement to extend
the collaborative period until April 2008.
Under
the agreement, Coca-Cola has agreed to pay certain research and development
funding over the collaborative period. We are also eligible to receive
milestone payments upon our achievement of specific product discovery and
development goals. Through December 31, 2004, we have received $5.5
million in research and development funding. If all milestones are achieved,
and including all research and development funding paid or payable, we may be
entitled to payments which total up to $14.8 million. In addition, in the event
of commercialization, we are entitled to receive royalties on future sales of
products containing a discovered flavor or flavor enhancer until the expiration
of relevant patents. We cannot assure you that we will receive any future
milestone payments or royalties under this collaboration. The collaborative
period is subject to early conclusion by Coca-Cola upon 60 days written notice
upon payment of a specified early conclusion fee, provided that Coca-Cola may
terminate the collaborative period without payment of an early conclusion fee
in the event that we fail to achieve a specified research and development goal
by April 22, 2006, subject to payment of research funding through July 22,
2006. In the event of early conclusion, Coca-Cola will no longer be entitled to
use, and we will have the right to license, any flavors or flavor enhancers
discovered prior to such early conclusion to third parties for use in any
product field, provided that Coca-Cola would retain non-exclusive rights in the
field of non-alcoholic beverages with the exception of dry powdered beverages.
Kraft Foods Global, Inc.
In December 2000,
we entered into a collaboration agreement with Kraft Foods, a global leader in
branded foods and beverages. The collaborative period for the original product
discovery and development program expired on its own terms in December 2003.
However, prior to December 2003 we amended our collaboration agreement to
provide for a new collaborative program through May 2005. Under this
program, we will work with Kraft Foods for the discovery and development of
flavor enhancers, on a co-exclusive basis with Coca-Cola in a specified food
and beverage product field.
12
Under
the collaboration agreement, as amended, Kraft Foods has agreed to pay us
certain research and development funding over a 4.5-year collaborative period.
We are also eligible to receive milestone payments upon our achievement of
specific product discovery and development goals. Through December 31,
2004, we have received $7.2 million in research and development funding and one
milestone payment of $375,000. If all milestones are achieved, and including
all research and development funding paid or payable, we may be entitled to
payments which total up to $8.6 million. In addition, in the event of
commercialization, we are entitled to receive royalties on future net sales of
products containing a discovered flavor enhancer from the date of introduction
of each product in each country until the earlier of 17 years thereafter or
until the expiration of relevant patents in such country. We cannot assure you
that we will receive any further milestone payments or royalties under this
collaboration.
Nestlé SA
In April 2002,
we entered into a collaboration agreement with Nestlé, the world’s largest food
company, to work for a three-year collaborative period to discover specified flavors
and flavor enhancers in the food and beverage product fields of dehydrated and
culinary food, frozen food and wet soup.
Under
the terms of the collaboration agreement, Nestlé has agreed to pay to us
certain research and development funding over three years. We are also eligible
to receive milestone payments upon our achievement by certain dates of specific
product discovery and development goals. Through December 31, 2004, we
have received $7.0 million in research and development funding and three
milestone payments of $375,000 each. If all milestones are achieved, and
including all research and development funding paid or payable, we may be
entitled to payments which total up to $9.6 million. In addition, in the event
of commercialization, we are entitled to receive royalties on future net sales
of products containing a discovered flavor or flavor enhancer from the date of
introduction of each product in each country until the expiration of relevant
patents. We cannot assure you that we will receive any further milestone
payments or royalties under this collaboration.
In October 2004,
we entered into a second product discovery and development collaboration
agreement with Nestlé to work for a five-year collaborative period focusing on
the discovery and commercialization of specified novel flavor ingredients in
the coffee and coffee whiteners field.
Under the terms of the agreement, Nestlé has agreed to pay us certain
research and development funding over five years, subject to earlier
termination under specified circumstances.
We are also eligible to receive milestone payments upon achievement of
specific product discovery and development goals. Through December 31, 2004, we have
received $450,000 in research and development funding. If all milestones are achieved, and including
all research and development funding paid or payable, we may be entitled to
payments which total up to $13.1 million.
In addition, in the event of commercialization, we are entitled to
receive royalties on future net sales of products containing a discovered
flavor ingredient from the date of introduction of each product in each country
until the expiration of relevant patents. We cannot assure you that we will
receive any milestone payments or royalties under this collaboration.
Our Technology
We
have discovered or in-licensed many of the key receptors that mediate taste in
mammals. Having isolated human taste receptors, we have created proprietary
taste receptor-based assay systems that provide a biochemical or electronic
readout when a test compound affects the receptor. To enable faster compound
discovery, we integrated our proprietary taste receptor-based screening assays
into a robot-controlled automated system that uses plates containing an array
of individual wells, each of which can screen a different compound. Our
receptor-based discovery and development process has enabled us to improve our
ability to find novel flavors, flavor enhancers and taste modulators over the
traditional use of simple taste tests.
Receptor Discovery and Assay Development
Technology
There
are currently five recognized primary senses of taste: umami, which is the
savory taste of glutamate, sweet, salt, bitter and sour. Scientists generally
believe that each taste sensation is recognized by a distinct taste receptor or
family of taste receptors in the mouth or on the tongue. A taste receptor
functions either by physically binding to a flavor ingredient in a process
analogous to the way a key fits into a lock or by acting as a channel to allow
ions to flow directly into a taste cell. The brain recognizes tastes by
determining which of the numerous receptors in the mouth have been contacted by
a given flavor ingredient. Savory, sweet and bitter taste compounds
13
bind to
taste receptors specific to each taste on the surface of taste bud cells. In
contrast, the taste of salt and the sour taste are thought to be recognized by
taste channels that allow the passage of particular ions into the taste bud
cells.
The
current status in the development of proprietary taste receptor-based assay
systems for human taste receptors is as follows:
• Savory Receptor.
Glutamate is a natural component of foods including tomatoes,
mushrooms, parmesan cheese, and meats. It is often added to foods in the form
of MSG to provide a savory flavor. The human savory receptor is composed of two
proteins called hT1R1 and hT1R3. The T1R proteins are members of the G
protein-coupled receptor, or GPCR, family and are expressed on the surface of
certain taste bud cells. We created SavoryScreenHT, a proprietary
high-throughput savory taste receptor-based assay system and demonstrated that
it responded to MSG and IMP. We have screened over 200,000 compounds in
SavoryScreenHT and identified a number of savory enhancers, including S807,
S336, S263 and S976, which were determined to be GRAS.
• Sweet Receptor.
The human sweet receptor is composed of two proteins called
hT1R2 and hT1R3. The hT1R3 protein is shared in common with the savory
receptor. Like the savory receptor, the sweet receptor is also a member of the
GPCR family and is expressed on the surface of certain taste bud cells. We
created SweetScreenHT, a proprietary high-throughput sweet taste receptor-based
assay system, and demonstrated that it responded to many different sweet-tasting
compounds including carbohydrate sweeteners and high potency artificial
sweeteners. We have screened over
200,000 compounds in SweetScreenHT and identified novel sweet flavor enhancers.
• Bitter Receptors. There are 25 bitter
receptors in humans. These are also
members of the GPCR protein family. Work
from model systems showed that the 25 bitter receptors are likely present
together in the same taste cell. The
bitter receptors are believed to have evolved as a defense mechanism from ingesting
poisonous substances. It is thought that
each bitter receptor recognizes a different set of bitter-tasting
compounds. We have characterized 10 of
the 25 T2R receptors and we aim to create a specific receptor-based assay for
each one.
• Salt Receptor.
In contrast to the GPCRs that mediate savory, sweet, and
bitter tastes, sodium ions and to a lesser extent potassium ions, are thought
to produce a salt taste via ion channels present on the surface of taste bud
cells. Ion channels are receptors that span the cell membrane and allow a flow
of ions into or out of cells. Published work suggests that the Epithelial
Sodium Channel, or ENaC, is a mediator of salt taste. We have developed two
proprietary ENaC-based assay systems, SaltScreenHT, a high-throughput system
capable of screening thousands of compounds per day, and SaltScreenEP, a
lower-throughput electrophysiology-based system. We demonstrated each of the
SaltScreen systems are responsive to sodium and therefore could be used to
identify novel salt flavor enhancers.
Screening Technologies and Compound Libraries
We
have developed or acquired access to expansive libraries of potential flavors,
flavor enhancers and taste modulators currently comprised of over 230,000
natural and synthetic compounds. We intend to continue to acquire or develop
additional compounds to add to our libraries. We have designed and selected our
libraries to comprise compounds that we believe are likely to be safe and
economical for use in packaged food and beverage products. We are using our
SavoryScreenHT, SweetScreenHT, SaltScreenHT, SaltScreenEP and BitterScreen
assay systems to screen the compounds in our libraries for their effects on
specific taste receptors. These systems use many of the same technologies that
pharmaceutical companies use to discover medicines. We also use these systems
to assist us in optimizing our lead compounds by rapidly and iteratively
testing the potency of the flavors, flavor enhancers and taste modulators
generated in the optimization process as the lead compound progresses to become
a product candidate.
Regulatory Process
Flavoring
substances, including flavors, flavor enhancers and taste modulators, intended
for use in foods in the United States are regulated under provisions of the
FD&C Act administered by the FDA. Flavor compounds sold in countries and
regions outside of the United States are also subject to regulations imposed by
national governments or regional regulatory authorities as is the case in the
European Union.
14
Regulation of Flavors, Flavor Enhancers and Taste
Modulators in the United States
In the
United States, the majority of flavor compounds are regulated by the FDA as
approved food additives, or as GRAS ingredients under the FD&C Act. The
Food Additive Amendments of 1958 prompted the flavor industry to establish in
1960 an Expert Panel of the Flavor and Extract Manufacturers Association, or
FEMA, an organization that has administered the GRAS program for flavors on behalf
of the industry for over 40 years. Another possible route to approval of a
flavoring compound would be a food additive petition to the FDA; however, few
flavors are currently approved via this route. We believe that the flavor
compounds, including flavors, flavor enhancers and taste modulators, we may
discover will be subject to the FEMA GRAS review process as described below.
GRAS Review Process. Flavor compounds that qualify for the GRAS
review process are generally intended to be consumed in small quantities and
have data supporting their safety under conditions of intended use. An expert
panel, convened to undertake a GRAS review, determines whether a compound is
generally recognized as safe under the conditions of its intended use. These
experts are qualified by scientific training and experience to evaluate the
safety of chemicals used in food and may declare certain compounds as having
been adequately shown through scientific procedures to be generally recognized
as safe under the conditions of their intended use. Under the GRAS process,
manufacturers are required to obtain safety data from the scientific literature
or through the conduct of safety studies, determine the estimated daily intake
of the flavor compound per person and submit a report to the GRAS review panel
describing the physical, chemical, safety, and metabolic properties of the
flavor compound. The entire GRAS determination process, including the safety
and metabolic studies, application preparation and GRAS panel review, can take
up to two years or longer. However, if there are prior safety data on the
compound or a compound with a related structure, then fewer safety studies may
be required for the GRAS review and the GRAS review process may be considerably
faster than two years.
The
most common types of GRAS review are:
• FEMA Expert Panel.
An independent panel of experts established by FEMA is
available for use by members of FEMA. The FEMA expert panel meets three times
per year. The conclusions of the expert panel regarding a flavor or flavor
enhancer are provided directly to the FDA and published in the journal Food
Technology. To our knowledge, the FDA has not challenged the FEMA expert panel’s
conclusion that the use of a flavoring substance is GRAS. In 2003, the FEMA
expert panel published their findings on 45 new compounds determined to be GRAS
for specific flavor applications. We have been an associate member of FEMA
since 2003 and we expect to obtain a GRAS determination of our flavor compounds
via the FEMA expert panel review.
• Specifically Convened Independent Panel. An independent, qualified panel of
experts in pertinent scientific disciplines may be formed by the manufacturer
to evaluate the safety of a specific compound for GRAS status. This process is
known as a “self determination of GRAS status.”
Food Additive Petition Process. Food ingredients that are not GRAS may be
considered food additives. Food additives require FDA approval prior to use in
foods. A compound may be ineligible for FEMA GRAS determination, and may be
considered a food additive, for a variety of reasons, including conditions of
intended use resulting in high dietary exposure, use for purposes other than a
flavor or flavor enhancer and the compound’s safety profile. If the compound is
considered a food additive, a food additive petition must be filed and approved
by the FDA. Examples of compounds that have gone through a food additive
petition include the artificial sweeteners Aspartame, Acesulfame K, and
Sucralose, and the fat substitute Olestra. The food additive petition approval
process for such food ingredients can take eight years or more. In the event
that a particular flavor or flavor enhancer is not eligible for FEMA GRAS
determination and therefore requires FDA approval prior to use, we will
dedicate our development efforts to alternative compounds that would be
eligible for a GRAS determination.
Benefits of the FEMA GRAS Process
There
are three key benefits of the FEMA GRAS review process:
• Rapid Time for Commercialization. Once a flavor compound is selected
for development by our collaborator, we expect the time to conduct the safety
studies and complete the review by the FEMA expert panel will be 12 to 18
months for the flavor compound, provided no additional studies are requested by
the panel or are necessary to explain unexpected safety study findings. This is
much faster than the typical
15
eight years or
longer to obtain FDA approval under the food additive petition process applicable
to other food ingredients. Once the compound is determined to be FEMA GRAS, it
can be immediately commercialized in the United States and other countries that
recognize the FEMA GRAS process. As described above, the initial phase of
commercialization may include compound manufacturing, incorporation of the
flavor enhancer into products, and the commercialization of products in
consumer test markets.
• Low Development Costs. The total costs for the FEMA GRAS
process, including synthesis of material for regulatory studies, contract
safety studies and preparation and submission of the FEMA GRAS application is
generally under $1 million per compound. This amount includes synthesis of
material for regulatory studies, contract metabolism and safety studies, and
preparation and submission of the FEMA GRAS application.
• Facilitated Approval in Other Countries. Approval of flavors for use
outside of the United States varies widely by country. According to FEMA, seven
countries, including Brazil, New Zealand and Australia, recognize compounds on
the FEMA GRAS list. An additional set of countries recognize compounds on
the FEMA GRAS list “in principle”. These include Canada, China, Philippines,
Taiwan, and Turkey. Approval in these countries typically requires specific
applications to the food safety authority of the individual countries but no
additional safety testing.
License Arrangements
We
have licensed rights from several companies and academic institutions,
including the following:
University of California
In March 2000,
we entered into a license agreement with the University of California under
which we obtained exclusive rights to certain technologies held by the
University of California that are involved in the biology of taste, including
specified receptors in two taste receptor families, T1Rs and T2Rs. The license
may be converted to a non-exclusive license, or terminated, by the University
of California if we fail to meet specified milestones relating to the discovery
of specified products and the sale of specified products and services. Our
exclusive rights are also subject to rights granted by the University of
California to the United States Government and a private medical foundation.
The agreement calls for the payment of a license issue fee, payable in
installments through 2005, annual maintenance fees commencing in 2006 and
royalties or service revenues on sales of any products developed using
technologies licensed under the agreement. Royalties will accrue in each
country for as long as there exists a valid patent claim covering a product
developed under the agreement. No royalty payments have accrued under the
agreement to date. The agreement will remain in effect until the later of the
expiration of the last to expire patent licensed under the agreement, or ten
years from the date that the last product to be developed under the agreement
is introduced to market in the United States. We may terminate the agreement at
any time, without cause, upon notice to the University of California. The
University of California may terminate the agreement upon a breach of our
obligations under the agreement. In addition, we are in discussions with the
University of California to amend the license agreement to include additional
related technology related to the coexpression of T1R taste receptors.
Aurora Biosciences Corporation
In November 2000,
we entered into a technology collaboration and license agreement with Aurora to
develop certain assay technologies, which was amended April 2002. Under
the collaboration, we developed high-throughput screening assays using Aurora’s
proprietary screening technologies. The agreement terminated in October 2002
and Invitrogen Corporation subsequently acquired certain surviving rights and
obligations under this agreement. Under the surviving terms of the agreement,
we maintain exclusive rights to use certain proprietary screening technologies
with our taste receptor targets for the discovery of flavors, flavor enhancers
and taste modulators. These exclusive rights are subject to rights granted
under other current and future license agreements in connection with the
purchase of certain screening systems, as well as Invitrogen’s right to grant
licenses under its proprietary technology to academic, government and other non-profit
organizations. Our rights with respect to the screening of flavors, flavor
enhancers and taste modulators are fully paid-up and will remain in effect,
except in the event that we breach any remaining obligations to Invitrogen
under the agreement. In November 2000, Aurora purchased 1,000,000 shares
of our Series C preferred stock for $4.8 million.
16
Competition
Our
goal is to be the leader in discovering novel flavors, flavor enhancers and
taste modulators for use in a wide range of packaged food and beverage
products. Other companies are possibly pursuing similar technologies and the
commercialization of products and services relevant to flavors, flavor
enhancers and taste modulators. Although we are not aware of any other
companies that have the scope of proprietary technologies and processes that we
have developed in our field, there are a number of competitors who possess
capabilities relevant to the flavor, flavor enhancer or taste modulation fields.
In
particular, we face substantial competition from companies pursuing the
commercialization of products and services relevant to taste using more
traditional methods for the discovery of flavors, flavor enhancers and taste
modulators. These competitors include leading flavor companies, such as
International Flavors & Fragrances Inc., Givaudan SA, Symrise, Quest
International and Firmenich. These companies provide flavors and other
products, such as oils, extracts and distillates, to consumer products
companies for use in a wide variety of products including foods, beverages,
confectionaries, dairy products and pharmaceuticals. We also face indirect
competition from other companies such as Newly Weds Foods, Inc., a
manufacturer of food coatings and seasonings for restaurants, airlines and the
food services industry. We currently compete and will continue to compete in
the future with these companies in collaborating with and selling flavor
products and technologies to manufacturers of packaged food and beverage
products. Many of these companies have substantially greater capital resources,
research and development resources and experience, manufacturing capabilities,
regulatory expertise, sales and marketing resources, established relationships
with consumer products companies and production facilities.
We may
in the future face competition from life sciences and other technology
companies and other commercial enterprises. These entities engage as we do in
biotechnology, biology or chemistry and could apply this technology to the
discovery and development of flavors, flavor enhancers and taste modulators. We
are aware of another company, Linguagen Corp., a privately-held company, that
we believe is involved in research on sweetness potentiators, salt substitutes
and bitter blockers, specifically adenosine 5’ monophosphate, or AMP, and has
announced research and development collaborations with a number of companies.
While we do not believe that either of these collaborations is competitive with
our product discovery and development efforts, we cannot guarantee that
products developed as a result of our competitors’ existing or future
collaborations will not compete with our flavors, flavor enhancers and taste
modulators.
Universities
and public and private research institutions are also potential competitors.
While these organizations primarily have educational objectives, they may
develop proprietary technologies related to the sense of taste or secure patent
protection that we may need for the development of our technologies and
products. We may attempt to license these proprietary technologies, but these
licenses may not be available to us on acceptable terms, if at all.
We are
not aware of any sweet or salt enhancer that is commercially available or in development
other than those we have discovered and are developing. Although savory flavor
enhancers, such as IMP, are commercially available, they are not very potent,
are expensive, are not patent protected and are sold as a commodity. The
blocking of bitter taste is typically accomplished by attempting to mask the
bitter taste with a sweetener or another flavor ingredient. Although AMP has received GRAS determination,
we do not believe this compound has been widely adopted into packaged food and
beverage products. However, our
competitors, either alone or with their collaborative partners, may succeed in
developing technologies or discovering flavors, flavor enhancers or taste
modulators that are similar or preferable in the areas of, among others, effectiveness,
safety, cost and ease of commercialization, and our competitors may obtain
intellectual property protection or commercialize such products sooner than we
do. Developments by others may render our product candidates or our
technologies obsolete. In addition, our current product discovery and
development collaborators are not prohibited from entering into research and
development agreements with third parties in any particular field.
Patents and Proprietary Rights
We
will be able to protect our proprietary rights from unauthorized use by third
parties only to the extent that our proprietary rights are described by valid
and enforceable patents or are effectively maintained as trade secrets.
Accordingly, we are pursuing and will continue to pursue patent protection for
our proprietary technologies. As of December 31, 2004 we had one issued
United States patent, 40 pending United States patent applications and 69
pending foreign applications covering various aspects of our proprietary
technology. In addition, we have exclusive
17
license
agreements with Johns Hopkins University, The University of California, Incyte
Corporation and Aurora covering an additional 38 issued United States patents,
27 pending United States patent applications, 25 issued foreign patents and 51
pending foreign applications.
Our
policy is to file patent applications and to protect technologies, inventions
and improvements to inventions that are commercially important to the development
of our business. For example, we may seek patent protection for receptors and
nucleic acid sequences encoding receptors that are involved in taste and the
use of such receptors to identify ingredients that modulate taste. We also rely
on trademarks to protect our proprietary technology. Generally, United States
patents have a term of 17 years from the date of issue or 20 years from the
earliest claimed priority date, whichever is later, for patents issued from
applications filed with the United States Patent and Trademark Office prior to June 8,
1995 or 20 years from the application filing date or earlier claimed priority
date in the case of patents issued from applications filed on or after June 8,
1995. Patents in most other countries have a term of 20 years from the date of
filing the patent application. Our success depends significantly upon our
ability to develop ingredients and technologies that are protected by our
intellectual property and that do not infringe any competitor patents. We intend
to continue to file patent applications as we discover and develop new flavors
or flavor enhancers and technologies.
Seeking
and obtaining patents may provide some degree of protection for our
intellectual property. However, our patent positions are highly uncertain and
may involve complex legal and factual questions. No consistent standard
regarding the allowability and enforceability of claims in many of the pending
patent applications has emerged to date. As a result, we cannot predict the
breadth of claims that will ultimately be allowed in our patent applications,
if any, including those we in-licensed or how we may be able to enforce our
patent claims against our competitors. In addition, we may not have been the
first to file patent applications for or to invent inventions relating to the
technologies upon which we rely, which would preclude us from obtaining issued
patents on the relevant inventions. We are aware of other companies and
academic institutions which have been performing research and have applied for
patents in the area of mammalian taste. In particular, other companies and
academic institutions have announced that they have identified taste receptors,
published data on taste receptor sequence information or have filed patent
applications on receptors and their use, including the University of
California, Linguagen, Monell Chemical Senses, Mount Sinai School of Medicine,
Scripps Research Institute, Warner Lambert and the German Institute of Human
Nutrition. If any of these companies or academic institutions are successful in
obtaining broad patent claims, such patents could potentially block our ability
to use various aspects of our discovery and development process and might
prevent us from developing or commercializing newly discovered flavors, flavor
enhancers or taste modulators or otherwise conducting our business.
We
also rely in part on trade secret protection for our confidential and
proprietary information and process. Our policy is to execute confidentiality
agreements with our employees and consultants upon the commencement of an
employment or consulting relationship. These agreements generally require that
all confidential information developed by the individual or made known to the
individual by us during the course of their employment shall be our exclusive
property. However, there can be no assurance that we will be able to
effectively enforce these agreements or that the subject proprietary
information will not be disclosed.
We are
not a party to any litigation, opposition, interference, or other potentially
adverse ex parte or inter-party governmental or non-governmental proceeding
with regard to our patent and trademark positions. However, if we become
involved in litigation, interference proceedings, oppositions or other intellectual
property proceedings, for example as a result of an alleged infringement, or a
third-party alleging an earlier date of invention, we may have to spend
significant amounts of money and time and, in the event of an adverse ruling,
we could be subject to liability for damages, invalidation of our intellectual
property and injunctive relief that could prevent us from using technologies or
developing products, any of which could have a significant adverse effect on
our business financial condition and results of operation. In addition, any
claims relating to the infringement of third-party proprietary rights, or
earlier date of invention, even if not meritorious, could result in costly
litigation, lengthy governmental proceedings, divert management’s attention and
resources and require us to enter royalty or license agreements which are not
advantageous if available at all.
Sales and Marketing
We do
not currently intend to establish internal sales and marketing capabilities.
Under our current collaboration agreements, our collaborators are responsible
for sales, marketing, and distribution of any packaged food or beverage product
incorporating our flavors, flavor enhancers and taste modulators. As a result,
we expect to
18
commercialize
our flavors, flavor enhancers and taste modulators without incurring
significant sales, marketing and distribution costs. Our four current
collaborators, Campbell Soup, Coca-Cola, Kraft Foods and Nestlé, are recognized
leaders in the sales, marketing, and distribution of packaged food and beverage
products.
Manufacturing
We
intend to utilize third parties to manufacture our flavors, flavor enhancers
and taste modulators. Under two of our existing product discovery and development
collaborations, our collaborator may, in its sole discretion, manufacture
itself or through a third party manufacturer the flavors, flavor enhancers or
taste modulators it licenses from us. The remaining three agreements require
the collaborator to identify with us a mutually agreed upon third party to
manufacture the flavors, flavor enhancers or taste modulators it licenses from
us. In some of these agreements, we maintain either the first right of
negotiation or an option to manufacture based on provisions within the
agreement.
There
are a number of reliable third party contract manufacturers available to
produce our flavors, flavor enhancers and taste modulators. Our current product
candidates are relatively simple structures making them easy and inexpensive to
produce. We do not anticipate any capacity issues because of our low volume
requirements and the number of reliable and available manufacturers.
Employees
As of December 31,
2004, we had 74 full-time employees, including 21 with Ph.D. degrees. Of our
full-time workforce, 52 employees are engaged in research and development and
22 are engaged in business development, finance and administration. We also
retain outside consultants. None of our employees are covered by collective
bargaining arrangements, and our management considers its relationships with
our employees to be good. We have entered into employment letter agreements
with Kent Snyder, Mark Zoller, Ph.D., Harry Leonhardt, Esq., and John
Poyhonen, the terms of which are included in the prospectus we filed pursuant
to Rule 424(b) of the Securities Act with the SEC on June 22,
2004 under the heading “Management—Employment Agreements.” We have entered into an employment letter
agreement with Nigel R.A. Beeley, Ph.D., the terms of which are included in
Item 11 of this Form 10-K.
Executive Officers
The
following table sets forth certain information concerning our executive
officers and their ages as of December 31, 2004:
|
Name
|
|
Age
|
|
Position
|
|
|
Kent Snyder
|
|
51
|
|
President, Chief Executive
Officer and Director
|
|
|
Mark J. Zoller, Ph.D.
|
|
51
|
|
Chief Scientific
Officer and Sr. Vice President, Research
|
|
|
Harry J. Leonhardt, Esq.
|
|
48
|
|
Vice President, General
Counsel and Corporate Secretary
|
|
|
John Poyhonen
|
|
44
|
|
Vice President and
Chief Financial and Business Officer
|
|
|
Nigel R.A. Beeley, Ph.D
|
|
53
|
|
Vice President,
Discovery
|
|
Kent Snyder, President and Chief Executive
Officer, joined us in June 2003 and has served as a member of our board of
directors since that time. Prior to joining us, from October 2001 to June 2003,
Mr. Snyder was retired. From July 1991 to October 2001, Mr. Snyder
held various marketing and sales management positions with Agouron
Pharmaceuticals, Inc., a Pfizer company. Mr. Snyder was President of
Global Commercial Operations at Agouron. Prior to holding the position of
President of Global Commercial operations, Mr. Snyder served as Senior
Vice President of Commercial Affairs and Vice President of Business
Development. Mr. Snyder received his B.S. from the University of Kansas
and his M.B.A. from Rockhurst College.
Mark J. Zoller, Ph.D., joined us in March 2000
as Vice President of Research and was promoted to Senior Vice President of
Research and Chief Scientific Officer in June 2001, which position he
still holds. From May 1992 to December 1999, Dr. Zoller held a
number of scientific management positions at ARIAD Pharmaceuticals, most
recently as Senior Vice President, Genomics and Scientific Director of the
Hoechst-ARIAD Genomics Center, which in December 1999 was acquired by
Aventis Pharmaceuticals. Dr. Zoller received his B.A. in Chemistry from
Pomona College and his Ph.D. in Chemistry from the University of California,
San Diego.
19
Harry J. Leonhardt, Esq., Vice President,
General Counsel and Corporate Secretary, joined us in September 2003. From
February 2001 to February 2003, Mr. Leonhardt served as
Executive Vice President of Business Development, General Counsel and Corporate
Secretary of Genoptix, Inc. From July 1996 to November 2000, Mr. Leonhardt
held senior management positions with Nanogen, Inc. and served most
recently as Senior Vice President, General Counsel and Secretary. Mr. Leonhardt
received his B.S. degree from the University of the Sciences in Philadelphia
and his Juris Doctorate from the University of Southern California Law Center.
John Poyhonen, Vice President and Chief
Financial and Business Officer, joined us in October 2003 as Vice
President and Chief Business Officer and was promoted in April 2004 to
Vice President and Chief Financial and Business Officer. From 1996 until October 2003,
Mr. Poyhonen served in various sales and marketing positions for Agouron
Pharmaceuticals, a Pfizer company, most recently as Vice President of National
Sales. Prior to holding this position, Mr. Poyhonen served as Vice
President of Marketing and Vice President of National Accounts. Mr. Poyhonen
received his B.A. in Marketing from Michigan State University and his M.B.A.
from the University of Kansas.
Nigel R.A. Beeley, Ph.D., joined us in June 2004 as Vice
President, Discovery. From March 1999
through June 2004, Dr. Beeley served as Vice President, Chief
Chemical Officer of Arena Pharmaceuticals, a biopharmaceutical company. From 1994 to 1998, Dr. Beeley was Senior
Director of Chemistry at Amylin Pharmaceuticals, Inc., a biotechnology
company, and from 1988 to 1994, he served as Head of Oncology-Chemistry for
Celltech, a biotechnology company. From
1980 to 1988, Dr. Beeley held positions of increasing seniority in the
cardiovascular group at Synthelabo Research, a pharmaceutical company, and,
from 1978 to 1980, he was a CNS medicinal chemist in the pharmaceutical
division of Reckitt and Coleman, a conglomerate. From 1976 to 1978, Dr. Beeley held a
Royal Society Overseas Research Fellow at ETH, Zurich, Switzerland. Dr. Beeley has a B.Sc. Honours (Class 1)
degree in Chemistry from the University of Liverpool, U.K. and a Ph.D. in
Chemistry from the University of Manchester, U.K.
Item 2. Properties
We
currently lease 86,962 square feet of laboratory and office space at 11099
North Torrey Pines Road, La Jolla, California 92037. Of this leased space, as
of December 31, 2004 we subleased approximately 26,207 square feet to
other companies. Our lease for this facility expires on December 31, 2006,
with an option to renew for an additional period of five years. Our current
monthly lease obligations for rent are approximately $258,000, which includes
space that has been sublet to other companies. In addition, we are responsible
for expenses associated with the use and maintenance of the building, such as
utilities and common area maintenance. These costs vary each month, and
historically have been approximately $132,000 per month. We believe that our
existing facilities are adequate to meet our business requirements for the
near-term and that additional space will be available on commercially
reasonable terms, if required.
Item 3. Legal Proceedings
We are
not a party to any material legal proceedings at this time.
Item 4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to a vote of our security holders during the quarter
ended December 31, 2004.
20
PART II
Item 5. Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchase of Equity Securities
Common Stock Market Price
Our
common stock commenced trading on the NASDAQ National Market on June 22,
2004 under the symbol “SNMX.” The following table sets forth the high and low
sales prices per share of our common stock as traded on the NASDAQ National
Market for the periods indicated.
|
Fiscal 2004 Quarter ended
|
|
March 31,
2004
|
|
June 30,
2004
|
|
September
30, 2004
|
|
December 31,
2004
|
|
|
High
|
|
$
|
n/a
|
|
$
|
7.70
|
|
$
|
9.95
|
|
$
|
11.75
|
|
|
Low
|
|
$
|
n/a
|
|
$
|
5.95
|
|
$
|
5.20
|
|
$
|
8.24
|
|
The last
sale price for our common stock as reported by the NASDAQ National Market on February 28,
2005 was $11.03 per share. As of February 28,
2005, there were approximately 138 shareholders of record of our common stock.
We
have never declared or paid any cash dividends to our shareholders. We do not
presently plan to pay cash dividends in the foreseeable future and intend to
retain any future earnings for reinvestment in our business.
Information
about our equity compensation plans is included in Item 12 of Part III of
this Annual Report.
Repurchases of Equity Securities
There were no
repurchases of equity securities in the fourth quarter of 2004.
Use of Proceeds
Our
initial public offering, referred to as the Offering, of our common stock, par
value $0.001, was effected through a Registration Statement on Form S-1
(File No. 333-113998) that was declared effective by the SEC on June 21,
2004. The Registration Statement covered
the offer and sale of up to 6,900,000 shares of our common stock for an
aggregate offering price of $41.4 million.
The Offering commenced on June 22, 2004. On June 25, 2004, 6,000,000 shares of
common stock were sold for an aggregate offering price of $36.0 million. On July 23, 2004, 450,000 shares of our
common stock were sold for an aggregate offering price of $2.7 million upon the
exercise of the underwriters’ over-allotment option. The Offering terminated following the sale of
all of the foregoing securities and the expiration of the underwriters’
over-allotment option. The Offering
resulted in aggregate proceeds to us of approximately $34.3 million, net of
underwriting discounts and commissions of approximately $2.7 million and
offering expenses of approximately $1.7 million, through a syndicate of
underwriters managed by Citigroup Global Markets Inc., Deutsche Bank Securities
Inc., Needham & Company, Inc. and First Albany Capital Inc.
No
offering expenses were paid directly or indirectly to any of our directors or
officers (or their associates) or person owning ten percent or more of any
class of our equity securities or to any other affiliates. All offering expenses were paid directly to
others.
As of December 31,
2004, we estimate that we had used approximately $472,000 for the purchase of
equipment and approximately $5.7 million for working capital expenditures. The remainder of the proceeds has been
invested into short-term securities and cash equivalents.
The
foregoing payments were direct payments made to third parties who were not our
directors or officers (or their associates), persons owning ten percent or more
of any class of our equity securities or any other affiliate, except that the
proceeds used for working capital included regular compensation for officers
and directors. The use of proceeds does
not represent a material change from the use of proceeds described in the
prospectus we filed pursuant to Rule 424(b) of the Securities Act
with the SEC on June 22, 2004.
21
Item 6. Selected
Financial Data
The
Statement of Operations Data and Balance Sheet Data presented below should be
read in conjunction with Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, and Item 8, Financial Statement
included in this Annual Report on Form 10-K. Amounts are in thousands, except share and per
share amounts.
|
|
|
Years ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue under collaborative agreements
|
|
$
|
8,347
|
|
$
|
9,537
|
|
$
|
7,327
|
|
$
|
2,275
|
|
$
|
115
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
16,907
|
|
16,802
|
|
17,635
|
|
16,263
|
|
6,137
|
|
|
General and administrative
|
|
5,553
|
|
4,096
|
|
4,154
|
|
4,952
|
|
3,196
|
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
1,411
|
|
1,293
|
|
540
|
|
1,240
|
|
1,854
|
|
|
General and administrative
|
|
4,625
|
|
4,997
|
|
158
|
|
378
|
|
372
|
|
|
Total operating expenses
|
|
28,496
|
|
27,188
|
|
22,487
|
|
22,833
|
|
11,559
|
|
|
Loss from operations
|
|
(20,149
|
)
|
(17,651
|
)
|
(15,160
|
)
|
(20,558
|
)
|
(11,444
|
)
|
|
Interest income, net
|
|
435
|
|
198
|
|
339
|
|
329
|
|
699
|
|
|
Net loss
|
|
$
|
(19,714
|
)
|
$
|
(17,453
|
)
|
$
|
(14,821
|
)
|
$
|
(20,229
|
)
|
$
|
(10,745
|
)
|
|
Basic and diluted net loss per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
(1.40
|
)
|
$
|
(10.03
|
)
|
$
|
(9.60
|
)
|
$
|
(17.30
|
)
|
$
|
(12.30
|
)
|
|
Pro Forma
|
|
$
|
(0.89
|
)
|
$
|
(0.97
|
)
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted net loss
per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
14,040,727
|
|
1,739,380
|
|
1,544,268
|
|
1,169,134
|
|
873,241
|
|
|
Pro Forma
|
|
22,143,380
|
|
17,944,686
|
|
|
|
|
|
|
|
(1) Please
see Note 1 to our financial statements for an explanation of the method
used to calculate the historical and pro forma net loss per share and the number
of shares used in the computation of the per share amounts.
|
|
|
As of December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments
available-for-sale
|
|
$
|
40,847
|
|
$
|
17,058
|
|
$
|
27,586
|
|
$
|
24,726
|
|
$
|
14,540
|
|
|
Working capital
|
|
36,841
|
|
15,160
|
|
22,667
|
|
20,862
|
|
12,345
|
|
|
Total assets
|
|
43,802
|
|
20,440
|
|
34,720
|
|
34,402
|
|
26,485
|
|
|
Long-term obligations
|
|
—
|
|
—
|
|
906
|
|
729
|
|
—
|
|
|
Accumulated deficit
|
|
(84,396
|
)
|
(64,682
|
)
|
(47,229
|
)
|
(32,408
|
)
|
(12,179
|
)
|
|
Total stockholders’ equity
|
|
38,373
|
|
17,104
|
|
28,219
|
|
29,057
|
|
23,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of our unaudited quarterly results of operations for the
years ended December 31, 2004 and 2003 is included in footnote 8 to our audited
financial statements, which are included in Item 8 of this Annual Report on
Form 10-K.
22
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and
results of operations should be read in conjunction with our Financial
Statements and the related Notes to Financial Statements in Item 8, “Financial
Statements and Supplementary Data” in this Annual Report on Form 10-K.
Certain statements contained in this annual report
on Form 10-K, including statements regarding the development, growth and
expansion of our business, our intent, belief or current expectations,
primarily with respect to our future operating performance, and the products we
expect to offer and other statements regarding matters that are not historical
facts, are “forward-looking statements” within the meaning of Section 27A
of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended, or Exchange Act, and are subject to the “safe harbor” created
by these sections. Future filings with the SEC, future press releases and
future oral or written statements made by us or with our approval, which are
not statements of historical fact, may also contain forward-looking statements.
Because such statements include risks and uncertainties, many of which are
beyond our control, actual results may differ materially from those expressed
or implied by such forward-looking statements. Some of the factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements can be found under the caption “Risk Factors,”
and elsewhere in this annual report on Form 10-K. Readers are cautioned not to place undue
reliance on forward-looking statements. The forward-looking statements speak
only as of the date on which they are made, and we undertake no obligation to
update such statements to reflect events that occur or circumstances that exist
after the date on which they are made.
Overview and Recent Developments
We are
a biotechnology company using proprietary taste receptor-based assays,
screening technologies and optimization chemistry to discover and develop novel
flavors, flavor enhancers and taste modulators for the packaged food and
beverage industry. We believe our flavor
ingredients will enable packaged food and beverage companies to improve the
nutritional profile of their products and generate cost of goods savings, while
maintaining or enhancing taste. We
license our flavor ingredients to our collaborators on an exclusive basis,
which we believe will provide these companies with the ability to differentiate
their products. We have entered into
product discovery and development collaborations with four of the world’s leading
packaged food and beverage companies: Campbell Soup Company, The Coca-Cola
Company, Kraft Foods Global, Inc. and Nestlé SA. We currently anticipate that we will derive
all of our revenues from existing and future collaborations. Our existing collaboration agreements provide
for research and development funding, milestone payments based upon our
achievement of research or development goals and, in the event of
commercialization, royalties on future sales of consumer products incorporating
our flavors, flavor enhancers and taste modulators. Our current programs focus on the development
of savory, sweet and salt flavor enhancers and bitter taste modulators. In addition, future collaboration agreements
may provide for up-front license fees.
We
have incurred significant losses since our inception in 1998 and, as of December 31,
2004 our accumulated deficit was $84.4 million.
We expect to incur additional losses over at least the next two years as
we continue to develop flavors, flavor enhancers and taste modulators. Our results of operations have fluctuated
from period to period and likely will continue to fluctuate substantially in
the future based upon:
• termination
of any of our product discovery and development collaboration agreements;
• our
ability to discover and develop new flavors, flavor enhancers and taste
modulators or the ability of our product discovery and development
collaborators to incorporate them into their products;
• our
ability to enter into new, or extend existing, product discovery and
development collaborations and technology collaborations;
• the
demand for our collaborators’ products containing our flavors, flavor enhancers
and taste modulators; and
• variability
of our stock-based compensation expense in conjunction with fluctuations of our
stock price.
23
On June 7,
2004 we effected a 4-for-7 reverse stock split of our outstanding common
stock. On June 16, 2004 we effected a 1-for-1.4005989 reverse stock
split of our outstanding common stock. On June 25, 2004 we completed
an initial public offering of 6,000,000 shares of common stock for proceeds to
us of $31.9 million, net of underwriting discounts, commissions, and offering
costs. In connection with the closing of our initial public offering all
outstanding shares of our convertible preferred Series A, B, C, D and E
stock were automatically converted into common stock. On July 23,
2004 pursuant to the exercise by the underwriters of an over-allotment option,
we closed the sale of an additional 450,000 shares of our common stock which
resulted in proceeds to us of $2.4 million, net of underwriting discounts,
commissions and offering costs.
In October 2004,
we entered into a second product discovery and development collaboration
agreement with Nestlé to work for a five-year collaborative period focusing on
the discovery and commercialization of specified novel flavor ingredients in
the coffee and coffee whiteners field. Under the terms of the agreement,
Nestlé has agreed to pay us certain research and development funding totaling
$11.7 million over five years, subject to earlier termination under specified
circumstances. We are also eligible to receive milestone payments upon
achievement of specific product discovery and development goals and, in the
event of commercialization, we are entitled to receive royalties on future net
sales of products containing a discovered novel flavor ingredient.
In March 2005,
we were notified by the Flavor and Extract Manufacturers Association (FEMA)
that our savory enhancers S807 and S336 have been determined to be Generally
Recognized as Safe (GRAS) under the provisions of the Federal Food, Drug and
Cosmetic Act, administered by the United States Food and Drug
Administration, In addition, two of our
other savory enhancers, S263 and S976, which are related to S336, were also
determined to be GRAS.
Revenue
We
derive revenue from our product discovery and development collaborations. To
date, our revenue has come solely from research and development funding and
milestone payments under our product discovery and development collaboration
agreements with Campbell Soup, Coca-Cola, Kraft Foods and Nestlé. As of December 31,
2004, we have recognized cumulative revenue under our collaborations of $27.6
million. If any of these collaborative agreements were to be terminated, this
could have a significant effect on future revenues.
From
the company’s inception date to the present, research and development payments
represented the primary source of our revenue. Based on current collaborations,
we anticipate that substantially all of our revenues in the near future will be
derived from research and development payments, and we may receive additional
milestone payments in the future upon the achievement of certain goals set
forth in our collaboration agreements.
In
addition, in the event our collaborators launch products incorporating our
flavors, flavor enhancers and taste modulators, we will receive royalty
payments based upon the future sales of those products, which, if received,
could be significantly larger than research and development funding or
milestone payments. In order for us to generate royalty revenue and become
profitable, we must retain our existing or establish new product discovery and
development collaborations and our collaborators must commercialize products
incorporating one or more of our flavors, flavor enhancers or taste modulators.
Our ability to generate royalty revenue is uncertain and will depend upon our
ability to meet particular research, development and commercialization
objectives.
Research and Development
Our
research and development expenses consist primarily of costs associated with
our discovery and development efforts in connection with our four primary
programs: savory, sweet, salt and bitter. We track research and development
costs by the type of cost incurred rather than by project. Research and
development costs are comprised of salaries and other personnel related
expenses, facilities and depreciation, research and development supplies,
patent and licensing, and outside services. We charge research and development
expenses to operations as incurred.
The
research and development payments we have received from our collaboration
agreements with Campbell Soup, Coca-Cola, Kraft Foods and Nestlé historically
have not covered all of our research and development expenses. We expect that
our research and development expenses are likely to increase in the future as a
result of our existing product discovery and development collaborations,
internal product discovery and development activities and technology
development and any expansion of these activities.
24
At
this time, due to the risks inherent in the discovery of flavors, flavor
enhancers and taste modulators, we are unable to estimate with any certainty
the costs we will incur in the continued development of our flavors, flavor
enhancers and taste modulators for commercialization. In March 2005, we
received FEMA GRAS determination on S807, S336, S263 and S976 from our savory
program. We anticipate that we will
receive FEMA GRAS determination on lead compounds in our sweet and salt
programs within an estimated 18 to 24 months and 24 to 30 months, respectively
from December 31, 2004. We have not
determined an estimate for the timing of FEMA GRAS determination for taste
modulators in our bitter program as of this time.
We
anticipate that we will make determinations regarding the research and
development projects to pursue and the funding of each project on an ongoing
basis in response to the progress of each discovery and development program, as
well as an ongoing assessment of its market potential. We cannot be certain
when any net cash inflow from the commercialization of our flavors, flavor
enhancers and taste modulators will commence.
In
2000, we paid $2.5 million to acquire a perpetual license from Aurora for the
rights to the use of certain assays and paid Incyte $6.5 million for access to
Incyte’s database for a three year period. The use of these assays and the
receptors identified from the database have been utilized in our efforts with
its collaborative partners. The license and database were determined to have
alternative future uses and therefore, capitalized and amortized to research
and development expense over the estimated useful life of the license and over
the three years of the access to the database.
Our
ability to complete the development of our current product candidates is
subject to many risks and uncertainties. These risks include the risks, among
others, that:
• we
are substantially dependent upon our collaborators for research and development
funding;
• our
collaborators may terminate their respective collaboration programs early;
• we
may not be able to discover flavors, flavor enhancers or taste modulators with
the desired taste attributes;
• we
may not be successful in developing flavors, flavor enhancers or taste
modulators with attributes required for use in commercial products;
• we
may be unable to maintain FEMA GRAS determination for our savory product
candidates; and
• we
may be unable to obtain FEMA GRAS determination for candidates in our other
programs.
If we
do not complete the development of our flavors, flavor enhancers and taste
modulators on a timely basis, our collaborators may terminate or not renew our
collaboration agreements, we may begin receiving revenue from the
commercialization of products incorporating our flavors, flavor enhancers and
taste modulators later than anticipated, or not at all, and it may be more
difficult to enter into new collaboration agreements. In any of these cases, we
may require substantial additional funding in order to continue development of
our flavors, flavor enhancers and taste modulators.
General and Administrative
General
and administrative expenses consist primarily of salaries and other personnel
related expenses related to business development, legal, financial and other
administrative functions. We expect that our general and administrative
expenses will continue to increase in 2005 as a result of becoming a public
company due to the additional reporting requirements imposed on public
companies, particularly in light of recently enacted legislation such as the
Sarbanes-Oxley Act of 2002 and related governmental and securities industry rules and
regulations.
Stock-Based Compensation
We
have recorded deferred compensation for stock options and stock awards granted
equal to the difference between the exercise price and the fair value of our
common stock on the date of grant as determined for the purpose of recording
our IPO cheap stock calculation. We record options or awards issued to
non-employees at their fair value in accordance with the Statement of Financial
Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based
Compensation, and periodically remeasure them in accordance with
Emerging Issues Task Force No.
25
(“EITF”)
96-18, Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring or in Conjunction with Selling Goods or
Services, and recognize them over the service period. In connection
with the grant of stock options to employees, we recorded deferred stock-based
compensation of $442,000 and $13.3 million for the years ended December 31,
2004 and 2003, respectively. We recorded these amounts as a component of
stockholders’ equity and amortize them, on an accelerated basis, as a non-cash
charge to operations over the vesting period of the options. We recorded
employee and non-employee stock-based compensation expense of $6.0 million,
$6.3 million and $698,000 for the years ended December 31, 2004, 2003 and
2002, respectively. We expect that the charges to be recognized in future
periods from amortization of deferred compensation related to employee stock
option grants will be $2.3 million, $1.0 million and $143,000 for the years
ending December 31, 2005, 2006 and 2007, respectively.
In December 2004,
the Financial Accounting Standards Board (FASB) issued revised statement No. 123
(SFAS No. 123R), Share-Based Payment,
which requires companies to expense the estimated fair value of employee stock
options and similar awards. The accounting provisions of SFAS No. 123R
will be effective for the third quarter of fiscal 2005. SFAS No. 123R
permits public companies to choose between the following two adoption methods:
1. A “modified
prospective” method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of SFAS No. 123R for all
share-based payments granted after the effective date and (b) based on the
requirements of SFAS No. 123 for all awards granted to employees prior to
the effective date of SFAS No. 123R that remain unvested on the effective
date, or
2. A “modified
retrospective” method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based
on the amounts previously recognized under SFAS No. 123 for purposes of
pro forma disclosures for either (a) all prior periods presented or (b) prior
interim periods of the year of adoption.
SFAS No. 123R,
which provides certain changes to the method for valuing stock-based
compensation among other changes, will apply to new awards and to awards that
are outstanding on the effective date and are subsequently modified or
cancelled. Compensation expense for outstanding awards for which the requisite
service had not been rendered as of the effective date will be recognized over
the remaining service period using the compensation cost calculated for pro
forma disclosure purposes under SFAS No. 123. For such pro forma
disclosures, please see the discussion under the heading “Stock-Based
Compensation” in Note 1 to our Financial Statements. We are in the process of determining how the
new method of valuing stock-based compensation as prescribed in SFAS No. 123R
will be applied to valuing stock-based awards granted after the effective date
and the impact the recognition of compensation expense related to such awards
will have on our financial statements.
Results of Operations
Years Ended December 31,
2004, 2003 and 2002
Revenue Under Collaboration Agreements
We
recorded revenue of $8.3 million, $9.5 million and $7.3 million during the
years ended December 31, 2004, 2003 and 2002, respectively. Research
and development payments and milestone payments under collaborations with
Campbell Soup, Coca-Cola, Kraft Foods, and Nestlé accounted for 100% of total
revenue for the years ended December 31, 2004, 2003 and 2002.
Research and Development Expenses
Our
research and development expenses (excluding stock-based compensation expenses
charged to research and development) were $16.9 million, $16.8 million and
$17.6 million for the years ended December 31, 2004, 2003 and 2002.
Stock-based compensation expenses charged to research and development for the
years ended December 31, 2004, 2003 and 2002 were $1.4 million, $1.3
million and $540,000, respectively. A comparison of research and
development expenses exclusive of stock-based compensation expenses by category
is as follows (in thousands):
26
|
|
|
Year Ended
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Salaries and personnel
|
|
$
|
7,211
|
|
$
|
5,466
|
|
$
|
4,951
|
|
|
Facilities and depreciation
|
|
4,449
|
|
4,498
|
|
3,083
|
|
|
Research and development supplies
|
|
1,989
|
|
2,299
|
|
3,260
|
|
|
Patent and licensing
|
|
1,588
|
|
3,741
|
|
4,103
|
|
|
Outside services
|
|
1,357
|
|
479
|
|
1,950
|
|
|
Miscellaneous
|
|
313
|
|
317
|
|
289
|
|
|
Total research and development expenses
|
|
$
|
16,907
|
|
$
|
16,802
|
|
$
|
17,635
|
|
Salaries and Personnel.
Our expenses for research and development personnel, including consultants,
were $7.2 million, $5.5 million and $5.0 million for the years ended December 31,
2004, 2003 and 2002, respectively. The increase of $1.7 million from 2003
to 2004 was primarily due to increases in payroll expenses, recruiting expenses
and employee benefits expenses of approximately $1.4 million, $158,000 and
$125,000, respectively. Our research and development staff increased from
an average of 50 for the year ended December 31, 2003 to an average of 56
for the year ended December 31, 2004. The increase in staff was
primarily to support continuing optimization of product candidates from our
research programs. The increase of
$515,000 from 2002 to 2003 was primarily due to increased salaries and
recruiting expenses. Our research and development staff increased from an
average of 45 for the year ended December 31, 2002 to an average of 50 for
the year ended December 31, 2003. The increase in staff was
primarily to support continuing optimization of product candidates from our
research programs.
Facilities and Depreciation. Our
facilities and depreciation expenses were $4.4 million, $4.5 million and
$3.1 million for the years ended December 31, 2004, 2003 and 2002,
respectively. The decrease of $49,000 from 2003 to 2004 was primarily
attributable to a reduction of depreciation expense of approximately $506,000,
offset by an increase in rent expense and other related costs of approximately
$436,000 incurred as a result of occupying additional space within our facility
for the full year, as opposed to part of the year in 2003. The increase of $1.4
million from 2002 to 2003 was primarily attributable to expanding into
additional space within our facility to accommodate additional research and
development personnel hired for optimization of product candidates.
Research and Development Supplies.
Our expenses for supplies used in research and development were $2.0 million,
$2.3 million and $3.3 million for the years ended December 31, 2004, 2003
and 2002, respectively. The decrease of $310,000 from 2003 to 2004 was
primarily attributable to reduced screening activities as our research and
development activities have advanced into certain less expensive optimization
activities. The decrease of $961,000
from 2002 to 2003 was primarily attributable to reduced chemical library
purchases and related screening activity as our research and development
activities advanced into certain less expensive compound optimization
activities.
Patent and Licensing.
Our patent and licensing expenses were $1.6 million, $3.7 million and $4.1
million for the years ended December 31, 2004, 2003 and 2002,
respectively. The decrease of $2.2 million from 2003 to 2004 was
primarily attributable to reduced licensing fees in 2004 compared to
2003. Included in licensing fees was the amortization of certain licenses
totaling $2.9 million for the year ended December 31, 2003. The
related licenses were fully amortized at December 31, 2003, thus we did
not have any costs relating to the amortization of these licenses for the year
ended December 31, 2004. This decrease was partially offset by an
increase of approximately $656,000 incurred for outside patent legal fees
associated with developing our intellectual property portfolio. The decrease of $362,000 from 2002 to 2003
was primarily attributable to reduced outside patent legal fees. Included in these costs was amortization of
licenses totaling $2.9 million in 2003 and $3.0 million in 2002.
Outside Services.
Our outside services expenses were $1.4 million, $479,000 and $2.0 million for
the years ended December 31, 2004, 2003 and 2002, respectively. The
increase of $878,000 from 2003 to 2004 was primarily attributable to costs
incurred for outsourced development activities, including regulatory studies
and product candidate synthesis scale-up.
The decrease of $1.5 million from 2002 to 2003 was primarily
attributable to the full year impact of the conclusion in 2002 of research and
development support performed by Aurora, which totaled $2.0 million, partially
offset by outsourced chemical synthesis and analysis of product candidates in
2003.
27
General and Administrative Expenses
Our
general and administrative expenses (excluding stock-based compensation
expenses charged to general and administrative) were $5.6 million, $4.1 million
and $4.2 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Stock-based compensation expenses charged to general and
administrative for the years ended December 31, 2004, 2003 and 2002 were
$4.6 million, $5.0 million and $158,000, respectively. The $1.5 million
increase in expenses (other than stock-based compensation expense) from 2003 to
2004 was primarily attributable to an increase in expenses for personnel and
related expenses of approximately $849,000, an increase in facilities expense
of approximately $319,000, and an increase in public relations and marketing
costs of approximately $263,000. The
$57,000 decrease in expenses from 2002 to 2003 was primarily attributable to a
decrease of $492,000 in personnel and related expenses attributable to reduced
business development activities and financing activities, offset by an increase
of $280,000 in facility costs and $155,000 in legal and miscellaneous costs.
Stock-based Compensation
Our
aggregate stock-based compensation expenses charged to both research and
development and general and administrative expenses decreased to $6.0 million
for the year ended December 31, 2004 from $6.3 million for the year ended December 31,
2003. The decrease in overall stock-based compensation expense is
primarily due to a decrease in compensation expense in 2004 compared to 2003
for stock options granted to employees, partially offset by an increase in
compensation expense in 2004 compared to 2003 for stock options granted to
non-employees, as the fair value of these options at December 31, 2004 was
revalued in accordance with EITF Issue No. 96-18. Our aggregate stock-based compensation
expenses charged to both research and development and general and
administrative expenses increased to $6.3 million for the year ended December 31,
2003 from $698,000 for the year ended December 31, 2002. The
increase in overall stock-based compensation expense is primarily due to an
increase in compensation expense in 2003 compared to 2002 for stock options
granted to employees and the increase in fair values of options granted in 2003
as a result of our initial public offering in June 2004. In connection with the grant of stock options
to employees, we recorded deferred stock-based compensation of $442,000 and
$13.3 million for the years ended December 31, 2004 and 2003,
respectively. We recorded these amounts as a component of stockholders’ equity
and amortize them, on an accelerated basis, as a non-cash charge to operations
over the vesting period of the options.
Interest Income, net
Interest
income was $435,000, $268,000 and $496,000 for the years ended December 31,
2004, 2003 and 2002, respectively. The increase of $167,000 from 2003 to
2004 was primarily attributable to our higher average cash balances for the
year ended December 31, 2004 as a result of our initial public offering in
June 2004, which generated higher interest earnings on those
balances. Conversely, the decrease of $228,000
from 2002 to 2003 was primarily attributable to our lower average cash balances
from the year ended December 31, 2003 as compared to the year ended December 31,
2002, which generated lower interest earnings on those balances. Interest
expense was $0, $70,000 and $157,000 for the years ended December 31,
2004, 2003 and 2002, respectively. Interest expense decreased $70,000 from
2004 to 2003 and $87,000 from 2003 to 2002 due to the payment in full of
equipment financing debt in July 2003.
Liquidity and Capital Resources
Since
our inception, we have financed our business primarily through private and
public placements of stock, research and development payments under our product
discovery and development collaborations with Campbell Soup, Coca-Cola, Kraft
Foods, and Nestlé, and interest income. As of December 31, 2004 we
had received in excess of $106.2 million in proceeds from the sales of common
and preferred stock. In addition, we had received $29.5 million in
non-refundable research and development payments and non-refundable milestone
payments from our collaboration agreements, and $2.3 million in interest
income. Over the remaining life of our current collaboration agreements,
we expect to receive an additional $19.2 million in non-refundable research and
development payments from our collaborators. In addition, we may receive
payments in the event we achieve research or development milestones and royalty
payments in the event our collaborators commercialize products incorporating
our flavors, flavor enhancers and taste modulators.
28
At December 31,
2004, we had $40.8 million in cash, cash equivalents and investments
available-for-sale as compared to $17.1 million at December 31, 2003, an
increase of $23.7 million. This overall increase resulted primarily from
the sale of common stock for net proceeds of $35.0 million.
Operating Activities
Operating
activities used cash of $10.1 million for the year ended December 31, 2004
compared to $8.3 million for the year ended December 31, 2003.
Operating cash flow in 2004 compared to the prior year period reflects an
increase in our net loss of $2.3 million. Non-cash expenses for the year
ended December 31, 2004 decreased $3.7 million to $7.5 million for the
year ended December 31, 2004 from $11.2 million for the year ended December 31,
2003. This decrease was primarily due to relative decreases in
depreciation and license amortization expense of approximately $3.6 million,
specifically the amortization of certain licenses totaling $2.9 million for the
year ended December 31, 2003. The related licenses were fully
amortized at December 31, 2003, thus we did not have any non-cash
amortization expense relating to the amortization of these licenses for the
year ended December 31, 2004. Additionally, net increases in
operating assets and liabilities over the year ended December 31, 2004
provided cash of $2.1 million, while net decreases in operating assets and
liabilities over the year ended December 31, 2003 used cash of $2.0
million.
Operating
activities used cash of $8.3 million for the year ended December 31, 2003
compared to $8.7 million for the year ended December 31, 2002.
Operating cash flow in 2003 compared to the prior year period reflects an
increase in our net loss of $2.6 million. Non-cash expenses for the year
ended December 31, 2003 increased $5.6 million to $11.2 million for the
year ended December 31, 2003 from $5.5 million for the year ended December 31,
2002. This increase was primarily due to the increase in amortization of
deferred compensation of $4.4 million from $635,000 in 2002 to $5.0 million in
2003. Additionally, stock-based
compensation for non-employees increased $1.2 million from $63,000 in 2002 to
$1.3 million in 2003. Additionally, net
decreases in operating liabilities over the year ended December 31, 2003
used cash of $1.4 million, while net increases in operating liabilities over
the year ended December 31, 2002 provided cash of $474,000.
Investing Activities
Investing
activities used cash of $21.3 million for the year ended December 31,
2004, and provided cash of $1.7 million for the year ended December 31,
2003. Cash used in 2004 reflects the purchases of available-for-sale
securities with the proceeds from our initial public offering in June 2004
to obtain higher rates of interest income. Cash provided in
2003 reflects the maturities of available-for-sale securities, partially offset
by purchases of available-for-sale securities.
Investing activities provided cash of $1.7
million for the year ended December 31, 2003, and used cash of $8.1
million for the year ended December 31, 2002. Cash provided in 2003
reflects the maturities of available-for-sale securities, partially offset by
purchases of available-for-sale securities. Cash used in 2002 reflects the
purchases of available-for-sale securities to obtain higher rates of interest
income, partially offset by the maturities of available-for-sale securities.
Financing Activities
Financing
activities provided cash of $35.0 million for the year ended December 31,
2004, used cash of $1.7 million for the year ended December 31, 2003, and
provided cash of $14.0 million for the year ended December 31, 2002.
Cash provided by financing activities in 2004 reflects the net proceeds from
the sale of common stock of $35.0 million, primarily from the sale of common
stock during our initial public offering. Cash used by financing
activities in 2003 reflects the repayment of equipment financing arrangements
of $1.8 million, offset by the net proceeds of $53,000 from the issuance of
common stock. Cash provided by financing
activities in 2002 reflects the net proceeds from the issuance of preferred
stock of $13.0 million and proceeds from equipment financing loans of $1.6
million, partially offset by the repayment of equipment financing loans of
$905,000.
29
As of December 31,
2004 future minimum payments due under our contractual obligations are as
follows (in thousands):
|
|
|
Payments Due by Period
|
|
|
|
|
Total
|
|
Less than 1
year
|
|
1-3 years
|
|
4-5 years
|
|
After 5 years
|
|
|
Operating leases
|
|
$
|
8,228
|
|
$
|
4,054
|
|
$
|
4,174
|
|
$
|
—
|
|
$
|
—
|
|
|
License payments
|
|
332
|
|
120
|
|
89
|
|
51
|
|
72
|
|
|
Total
|
|
$
|
8,560
|
|
$
|
4,174
|
|
$
|
4,263
|
|
$
|
51
|
|
$
|
72
|
|
As of December 31,
2004, we had no long-term debt obligations.
As of December 31,
2004, we have net open purchase orders (defined as total open purchase orders
at year end less any accruals or invoices charged to or amounts paid against
such purchase orders) totaling approximately $213,000. In the next twelve months, we also plan to
spend approximately $1.5 to $2.5 million on capital expenditures.
Our
future capital uses and requirements depend on numerous forward-looking
factors. These factors may include, but are not limited to, the
following:
• the
rate of progress and cost of research and development activities;
• the
number and scope of our research activities;
• the
costs of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights;
• our
ability to establish and maintain product discovery and development
collaborations;
• the
effect of competing technological and market developments;
• the
terms and timing of any collaborative, licensing and other arrangements that we
may establish; and
• the
extent to which we acquire or in-license new products, technologies or
businesses.
We
believe our available cash, cash equivalents, investments and existing sources
of funding will be sufficient to satisfy our anticipated operating and capital
requirements through at least the next 12 months.
Until
we can generate significant cash from our operations, we expect to continue to
fund our operations with existing cash resources that were primarily generated
from the proceeds of offerings of our equity securities and research and
development payments and milestone payments under our product discovery and development
collaborations. Under our existing collaboration agreements, assuming all
milestones are achieved and we receive all research and development funding, we
may be entitled to payments which total up to $26.6 million. In 2005, we
anticipate receiving $5.2 million in non-refundable research and development funding
and $375,000 in milestone payments. This
does not include any additional payments we may receive related to the
achievement of additional milestones, or to new collaborations or extensions of
existing collaborations. We may not
receive the payments if the collaborations are terminated or not renewed, or if
we do not achieve the milestones set forth in the collaboration
agreements. In addition, the timing of the receipt of milestone payments
in particular is uncertain, as we may achieve milestones significantly earlier
or later than we currently expect. We continue to pursue additional
collaborations, which could result in additional revenue. We may not
recognize revenues for research and development funding or milestones if the
collaborations are terminated, or if we do not achieve the milestones set forth
in the collaboration agreements. Our expenses will vary based upon (but
not limited to) the forward-looking factors listed above. Our non-cash
stock-based compensation expense will vary upon the volatility of our stock
price, the risk-free interest rate, the expected life of our stock options, the
closing price of our stock, the strike price at which stock options are granted
and the number of options granted. Our
non-cash stock-based compensation expense will vary upon the implementation of SFAS
No. 123R or other similar accounting changes.
As of December 31,
2004 and 2003, we did not have any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as special
purpose or structured finance entities, which would have been established for
the purposes of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not materially
exposed to any financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships.
30
Critical Accounting Policies
Our
discussion and analysis of our financial condition and results of operations
are based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States, or
GAAP. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities and expenses and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate these estimates, including
those related to revenue recognition, long-lived assets, accrued liabilities,
and income taxes. These estimates are based on historical experience and
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for judgments about the
carrying values of assets and liabilities. Actual results may differ from
these estimates under different assumptions or conditions. While our
significant accounting policies are described in more detail in Note 1 to our
financial statements, we believe the following accounting policies to be
critical to the judgments and estimates used in the preparation of our
financial statements:
Revenue Recognition.
Our
revenue recognition policies are in compliance with the Staff Accounting
Bulletin (“SAB”) No. 101 (as amended by SAB No. 104), Revenue Recognition in Financial Statements
and EITF Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. Revenue is deferred
for fees received before earned. Some of our agreements contain multiple
elements, including research funding, milestones, and royalties.
Revenue
from milestones is recognized when earned, as evidence by written
acknowledgement from the collaborator or other persuasive evidence that the
milestone has been achieved, provided that (i) the milestone event is
substantive and its achievability was not reasonably assured at the inception
of the agreement, and (ii) our performance obligations after the milestone
achievement will continue to be funded by the collaborator at a level
comparable to before the milestone achievement. If both of these criteria
are not met, the milestone payment is recognized over the remaining minimum
period of our performance obligations under the agreement. Non-refundable
upfront fees, if any, not associated with our future performance, will be
recognized when received. Amounts received for research funding are
recognized as revenues as the services are performed. Royalties to be
received based on product sales made by our collaborators incorporating our
product, if any, will be recognized as earned. To date, we have not
earned any royalties.
Stock-based Compensation.
As
permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, we account for stock options granted to employees
using the intrinsic value method in accordance with Accounting Principles
Board, or APB, Opinion No. 25, Accounting for Stock
Issued to Employees, and the Financial Accounting Standards Board,
or FASB, Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation – An Interpretation of APB 25. Pursuant to these guidelines, we measure the
intrinsic value of the option or restricted stock award on its grant date as
the difference between the purchase price of the restricted stock or the
exercise price of employee stock options and the fair market value of our stock
on the date of issuance or grant, and expense the difference, if any, over the
vesting period of the option or restricted stock award.
SFAS No. 123
required stock-based compensation to be accounted for under the fair value
method. If we adopted SFAS No. 123
to account for options granted to employees under our stock-based compensation
plans, our loss would have been materially impacted. The impact of this method is disclosed in the
notes to the financial statements.
Options
or stock awards are issued to non-employees are recorded at their fair value in
accordance with SFAS No. 123, and periodically remeasured in accordance
with EITF No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling Goods or Services, and recognized over the
related service period.
New Accounting Pronouncements
In March 2004,
the EITF reached a final consensus on Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. EITF Issue No. 03-1 requires that when the
fair value of an investment security is less than its carrying value, an
impairment exists for which the determination must be made as
31
to
whether the impairment is other-than-temporary. The EITF Issue No. 03-1
impairment model applies to all investment securities accounted for under SFAS No. 115,
Accounting for Certain Investments in Debt
and Equity Securities and to investment securities accounted for
under the cost method to the extent an impairment indicator exists. Under the
guidance, the determination of whether an impairment is other-than-temporary
and therefore would result in a recognized loss depends on market conditions
and management’s intent and ability to hold the securities with unrealized
losses. In September 2004, the FASB approved FASB Staff Position, or FSP,
EITF 03-1-1, which defers the effective date for recognition and measurement
guidance contained in EITF 03-1 until certain issues are resolved. As of December 31,
2004, these issues have not yet been resolved. We do not expect the adoption of
EITF 03-1 to have a material effect on our results of operations and financial
condition.
In December 2004,
the FASB issued SFAS No. 123R, Share-Based Payment,
which requires companies to expense the estimated fair value of employee stock
options and similar awards. This statement is a revision to SFAS No. 123
and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. The accounting provisions of SFAS No. 123R
will be effective for the third quarter of fiscal 2005.
SFAS No. 123R
permits public companies to choose between the following two adoption methods:
1. A “modified
prospective” method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of SFAS No. 123R for all
share-based payments granted after the effective date and (b) based on the
requirements of SFAS No. 123 for all awards granted to employees prior to
the effective date of SFAS No. 123R that remain unvested on the effective
date, or
2. A “modified
retrospective” method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based
on the amounts previously recognized under SFAS No. 123 for purposes of
pro forma disclosures for either (a) all prior periods presented or (b) prior
interim periods of the year of adoption.
As
permitted by SFAS No. 123, we currently account for share-based payments
to employees using APB Opinion No. 25’s intrinsic value method. The impact
of the adoption of SFAS No. 123R cannot be predicted at this time because
it will be depend on levels of share-based payments granted in the future.
However, valuation of employee stock options under SFAS No. 123R is
similar to SFAS No. 123, with minor exceptions. For information about what
our reported results of operations and earnings per share would have been had
we adopted SFAS No. 123, please see the discussion under the heading “Stock-based
Compensation” in Note 1 to our Financial Statements. Accordingly, the adoption
of SFAS No. 123R’s fair value method will have a significant impact on our
results of operations, although it will have no impact on our overall financial
position. SFAS No. 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature.
This requirement will reduce net operating cash flows and increase net
financing cash flows in periods after adoption. Due to timing of the release of
SFAS No. 123R, we have not yet completed the analysis of the ultimate
impact that this new pronouncement will have on the results of operations, nor
the method of adoption for this new standard.
Risk Factors
You should consider carefully the following information
about the risks described below, together with the other information contained
in this annual report on Form 10-K and in our other public filings, in
evaluating our business. If any of the following risks actually occurs, our
business, financial condition, results of operations and future growth
prospects would likely be materially and adversely affected. In these
circumstances, the market price of our common stock would likely decline.
Risks Related To Our Business
We are dependent on our product discovery and development
collaborators for all of our revenue and we are dependent on our current and
any future product discovery and development collaborators to develop and
commercialize any flavors, flavor enhancers or taste modulators we may
discover.
A key
element of our strategy is to commercialize our flavors, flavor enhancers and
taste modulators through product discovery and development collaborations. To
date, all of our revenue has been derived solely from research
32
and
development payments and milestone payments received under collaboration
agreements with Campbell Soup, Coca-Cola, Kraft Foods and Nestlé. Substantially
all of our revenue in the foreseeable future will result from these types of
payments from these collaborations, unless we successfully commercialize a
product candidate through these or other collaborators and earn royalties on
future sales of consumer products incorporating our flavors, flavor enhancers
or taste modulators.
Our
agreement with Campbell Soup provides for research and development funding
until March 2006 and gives Campbell Soup the right to terminate the
agreement earlier without cause on or after March 28, 2005, provided that
it pay a specified termination fee if it terminates the agreement after March 28,
2005 but prior to March 28, 2006. Our agreements with Coca-Cola and Kraft
Foods and our initial agreement with Nestlé provide for research and
development funding until April 2008, May 2005 and April 2005,
respectively, and give each party the right to conclude the respective
collaborative program earlier for any reason upon payment to us of a
termination fee, provided that Coca-Cola may terminate the collaborative period
without payment of an early conclusion fee in the event that we fail to achieve
a specified research and development goal by April 22, 2006, subject to
payment of research funding through July 22, 2006. Our most recent
agreement with Nestlé provides for research and development funding through October 2009
and gives Nestlé the right to terminate the agreement earlier without cause on
or after October 26, 2006, provided that it pay additional specified
research funding if it terminates the agreement after October 26, 2006 but
prior to October 26, 2009. If any or all of our agreements with
Campbell Soup, Coca-Cola, Kraft Foods and Nestlé expire or are terminated, our
revenue would significantly decline and if all of our agreements expire or are
terminated, our revenue would be substantially eliminated, which would have a
material adverse effect on our business, financial condition and results of
operations. Our collaborators may not renew their agreements with us or, if
they do, they may not be on terms that are as favorable to us as our current
agreements.
We do
not currently have a commercialized product and cannot assure you we will have
a commercialized product in the foreseeable future, or at all. We will be
dependent on our current and any other possible future collaborators to commercialize
any flavors, flavor enhancers or taste modulators that we successfully develop
and to provide the sales, marketing and distribution capabilities required for
the success of our business. We have limited or no control over the amount and
timing of resources that our current or any future collaborators may devote to
our programs or potential products. Our collaborators may decide not to devote
the necessary resources to the commercialization of our flavors, flavor
enhancers or taste modulators, or may pursue a competitor’s product if our flavors,
flavor enhancers or taste modulators do not have the characteristics desired by
the collaborator. These characteristics include, among other things,
enhancement properties, temperature stability, solubility, taste and cost. If
these collaborators fail to conduct their commercialization, sales and
marketing or distribution activities successfully and in a timely manner, we
will earn little or no royalty revenues from our flavors, flavor enhancers and
taste modulators and we will not be able to achieve our objectives or build a
sustainable or profitable business.
Our
present and any future product discovery and development collaboration
opportunities could be harmed if:
• our existing or any future
collaborators terminate their collaboration agreements with us prior to the
expiration of the agreements;
• we do not achieve our research and
development objectives under our collaboration agreements prior to the
termination of the collaboration periods;
• we disagree with our collaborators as
to the parties’ respective licensing rights to our flavors, flavor enhancers
and taste modulators, methods or other intellectual property we develop;
• we are unable to manage multiple
simultaneous collaborations;
• potential collaborators fail to spend
their resources on research and development due to general market conditions or
for any other reason; or
• consolidation in our target markets
limits the number of potential collaborators.
We may not be able to negotiate additional collaboration
agreements having terms satisfactory to us or at all.
We may
not be able to enter into additional product discovery and development
collaborations due to the exclusive nature of our current product discovery and
development collaborations. Each of our current collaboration agreements
provides that we will conduct research and development on flavors, flavor
enhancers and taste modulators for use within one or more defined packaged food
and beverage product fields on an exclusive basis for the respective
collaborator during the collaborative period specified in the agreement.
Because each of these agreements is exclusive or co-exclusive, we will not be
able to enter into a collaboration agreement with any other
33
food
and beverage company covering the same product field during the applicable
collaborative period. In addition, our collaborators’ competitors may not wish
to do business with us at all due to our relationship with our collaborators.
If we are unable to enter into additional product discovery and development
collaborations, our ability to sustain or expand our business will be
significantly diminished.
We may not be successful in developing flavors, flavor
enhancers or taste modulators useful for formulation into products.
We may
not succeed in developing flavors, flavor enhancers or taste modulators with
the appropriate attributes required for use in successful commercial products.
Successful flavors, flavor enhancers and taste modulators require, among other
things, appropriate biological activity, including the correct flavor or flavor
enhancer property for the product application, an acceptable safety profile,
including lack of toxicity or allergenicity, and appropriate physical or
chemical properties, including relative levels of stability, volatility and
resistance to heat. Successful flavors, flavor enhancers and taste modulators
must also be cost-efficient for our collaborators. We may not be able to
develop flavors, flavor enhancers or taste modulators that meet these criteria.
If we or our collaborators are unable to obtain and maintain
the GRAS determination or regulatory approval required before any flavors,
flavor enhancers or taste modulators can be incorporated into products that are
sold, we would be unable to commercialize our flavors, flavor enhancers and
taste modulators and our business would be adversely affected.
In March 2005,
we obtained a Generally Recognized as Safe, or GRAS, determination for S807,
S336, S263 and S976. Apart from these compounds,
we do not have GRAS determination or regulatory approval for any other product
candidate at this time. In the United States, the development, sale and
incorporation of our flavors, flavor enhancers or taste modulators into
products are subject to regulation by the Food and Drug Administration, or FDA,
and in some instances other government bodies. Obtaining and maintaining a GRAS
determination or regulatory approval is typically costly and can take many
years.
Depending
on the amount or intended use of a particular flavor enhancer or taste
modulator added to a product and the number of product categories in which the
flavor enhancer or taste modulator will be incorporated, specific safety
assessment protocols and regulatory processes must be satisfied before we or
our collaborators can commercially market and sell products containing any flavors,
flavor enhancers or taste modulators that we may discover. A key element of our
strategy is to develop flavors, flavor enhancers and taste modulators that will
be subject to review under the Flavor and Extract Manufacturers Association, or
FEMA, GRAS process, which we expect will take 12 to 18 months and is less
expensive than the alternative of filing a food additive petition with the FDA,
approval of which can take eight years or more. The FEMA GRAS review process
may take longer than 18 months and cost more than $1 million if additional
safety studies are requested by the FEMA expert panel or are necessary to
explain unexpected safety study findings. There is a risk that one or more of
our product candidates may not qualify for a FEMA GRAS determination. This may
occur for a variety of reasons, including the flavor enhancer or taste
modulator’s intended use, the amount of the flavor enhancer or taste modulator
intended to be added to packaged foods and beverages, the number of product
categories in which the flavor enhancer or taste modulator will be
incorporated, whether the flavor enhancer or taste modulator imparts sweetness,
the safety profile of the flavor enhancer or taste modulator and the FEMA
expert panel’s interpretation of the safety data. Even if we obtain a GRAS
determination with respect to a flavor enhancer or taste modulator, the FDA has
the ability to challenge such determination, which could materially adversely
affect our ability to market products on schedule or at all. In the event
that a particular flavor enhancer or taste modulator does not qualify for FEMA
GRAS determination, we will be required to pursue a lengthy FDA approval
process or dedicate our development efforts to alternative compounds, which
would further delay commercialization. In addition, laws, regulations or FDA
practice governing the regulatory approval process, the availability of the GRAS
determination process or the manufacture or labeling of such products, may
change in a manner that could adversely affect our ability to commercialize
products on schedule or at all.
Sales
of our flavors, flavor enhancers or taste modulators outside of the United
States will be subject to foreign regulatory requirements. In most cases,
whether or not a GRAS determination or FDA approval has been obtained, approval
of a product by the comparable regulatory authorities of foreign countries must
still be obtained prior to manufacturing or marketing the product in those
countries. A GRAS determination or FDA approval in the United States or in any
other jurisdiction does not ensure approval in other jurisdictions because the
requirements from jurisdiction to jurisdiction may vary widely. Obtaining
foreign approvals could result in significant delays,
34
difficulties
and costs for us and require additional safety studies and additional expenses.
If we fail to comply with these regulatory requirements or to obtain and
maintain required approvals, our ability to generate revenue will be
diminished.
We and
our collaborators may not be successful in overcoming these regulatory hurdles,
which could result in product launch delays, unanticipated expenses,
termination of collaborations, and flavors, flavor enhancers and taste
modulators not being approved for incorporation into consumer products. These
consequences would have a material adverse effect on our business financial
condition and results of operations.
Even if we or our collaborators receive a GRAS determination
or regulatory approval and incorporate our flavors, flavor enhancers or taste
modulators into products, those products may never be commercially successful.
Even
if we discover and develop flavors, flavor enhancers and taste modulators that
obtain the necessary GRAS determination or regulatory approval, our success
depends to a significant degree upon the commercial success of packaged food
and beverage products incorporating those flavors, flavor enhancers or taste
modulators. If these products fail to achieve or subsequently maintain market
acceptance or commercial viability, our business would be significantly harmed
because our royalty revenue is dependent upon consumer sales of these products.
In addition, we could be unable to maintain our existing collaborations or
attract new product discovery and development collaborators. Many factors may
affect the market acceptance and commercial success of any potential products
incorporating flavors, flavor enhancers or taste modulators that we may
discover, including:
• health concerns, whether actual or
perceived, or unfavorable publicity regarding our flavors, flavor enhancers and
taste modulators or those of our competitors;
• the timing of market entry as
compared to competitive products;
• the rate of adoption of products by
our collaborators and other companies in the flavor industry; and
• any product labeling that may be
required by the FDA or other United States or foreign regulatory agencies for
products incorporating our flavors, flavor enhancers and taste modulators.
We have a history of operating losses and we may not achieve
or maintain profitability.
We
have not been profitable and have generated substantial operating losses since
we were incorporated in September 1998. We incurred net losses of
approximately $19.7 million for the year ended December 31, 2004. As
of December 31, 2004, we had an accumulated deficit of approximately
$84.4 million. We expect to incur additional losses for at least the next
two years. The extent of our future losses will depend, in part, on the rate of
increase in our operating expenses and the rate of growth, if any, in our
revenue from our four existing and any future product discovery and development
collaborations as well as from other sources that may become available to us in
the future and on the level of our expenses. To date, our revenue has come
solely from research and development funding and milestone payments under our
product discovery and development collaboration agreements with Campbell Soup,
Coca-Cola, Kraft Foods and Nestlé. In order for us to generate royalty revenue
and become profitable, we must retain our existing product discovery and development
collaborations and our collaborators must commercialize products incorporating
one or more of our flavors, flavor enhancers or taste modulators, from which we
can derive royalty revenues. Our ability to generate royalty revenue is
uncertain and will depend upon our ability to meet particular research,
development and commercialization objectives.
We expect that our results of operations will fluctuate from
period to period, and this fluctuation could cause our stock price to decline,
causing investor losses.
Our
operating results have fluctuated in the past and are likely to vary
significantly in the future based upon a number of factors, many of which we
have little or no control over. We operate in a highly dynamic industry and
future results could be subject to significant fluctuations. These fluctuations
could cause us to fail to meet or exceed financial expectations of securities
analysts or investors, which could cause our stock price to decline rapidly and
significantly. Revenue and expenses in future periods may be greater or less
than revenue and expenses in the immediately preceding period or in the
comparable period of the prior year. Therefore, period-to-period comparisons of
our operating results are not necessarily a good indication of our future
performance. Some of the factors that could cause our operating results to
fluctuate include:
• termination of any of our product
discovery and development collaboration agreements;
35
• our ability to discover and develop flavors,
flavor enhancers and taste modulators or the ability of our product discovery
and development collaborators to incorporate them into packaged food and
beverage products;
• our receipt of milestone payments in
any particular period;
• the ability and willingness of
collaborators to commercialize products incorporating our flavors, flavor
enhancers and taste modulators on expected timelines, or at all;
• our ability to enter into new product
discovery and development collaborations and technology collaborations or to
extend the terms of our existing collaboration agreements and our payment
obligations, expected revenue and other terms of any other agreements of this
type;
• our ability, or our collaborators’
ability, to successfully satisfy all pertinent regulatory requirements;
• the demand for our collaborators’
products containing our flavors, flavor enhancers and taste modulators; and
• general and industry specific
economic conditions, which may affect our collaborators’ research and
development expenditures.
The price of our common stock is volatile.
The market prices for securities of biotechnology companies
historically have been highly volatile, and the market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. Since our initial public
offering in June 2004, the price of our common stock has ranged from
approximately $6 per share to approximately $13 per share in March 2005.
The market price of our common stock may fluctuate in response to many factors,
including:
• developments related to the FEMA GRAS
determination and international regulatory approval of our products;
• developments concerning our
collaborative agreements;
• announcements of technological
innovations by us or others;
• developments in patent or other
proprietary rights;
• results of safety evaluation of our
flavors, flavor enhancers and taste modulators;
• results of consumer acceptance
testing of our flavors, flavor enhancers and taste modulators by our
collaborators;
• future sales of our common stock by
existing stockholders;
• comments by securities analysts;
• general market conditions;
• fluctuations in our operating
results;
• government regulation;
• failure of any of our flavors, flavor
enhancers or taste modulators, if approved, to achieve commercial success; and
• public concern as to the safety of
our flavors, flavor enhancers, and taste modulators.
Changes in financial accounting standards related to stock
option expenses are expected to have a significant effect on our reported
results.
The
FASB recently issued a revised standard that requires that we record
compensation expense in the statement of operations for employee stock options
using the fair value method. The adoption of the new standard is expected to
have a significant effect on our reported earnings, although it will not affect
our cash flows, and could adversely impact our ability to provide accurate
guidance on our projected future financial results due to the variability of
the factors used to establish the value of stock options. As a result, the
adoption of the new standard in the third quarter of fiscal 2005 could
negatively affect our stock price and our stock price volatility.
We may need to obtain additional capital to fund our
operations.
If we
are unable to successfully commercialize our flavors, flavor enhancers and
taste modulators, we may need to obtain additional capital or change our
strategy to continue our operations. In addition, our business and
36
operations
may change in a manner that would consume available resources at a greater rate
than anticipated. In such event, we may need to raise substantial additional
capital to, among other things:
• fund new research, discovery or
development programs;
• advance additional product candidates
into and through the regulatory approval process; and
• acquire rights to products or product
candidates, technologies or businesses.
If we
require additional capital to continue our operations, we cannot assure you
that additional financing will be available on terms acceptable to us, or at
all. If adequate funds are not available or are not available on acceptable
terms, our ability to fund our operations, take advantage of opportunities,
identify and develop flavors, flavor enhancers and taste modulators, develop
technologies or otherwise respond to competitive pressures could be
significantly limited. In addition, if financing is not available, we may need
to alter our strategy or cease operations. In addition, issuances of debt or
additional equity could impact the rights of the holders of our common stock,
may dilute our stockholders’ ownership and may impose restrictions on our
operations. These restrictions could include limitations on additional
borrowing, specific restrictions on the use of our assets as well as
prohibitions on our ability to create liens, pay dividends, redeem our stock or
make investments.
If we lose our key personnel or are unable to attract and
retain qualified personnel, it could adversely affect our business.
Our
success depends to a significant degree upon the continued contributions of our
executive officers, management and scientific staff. If we lose the services of
one or more of these people and, in particular, Kent Snyder, our President and
Chief Executive Officer, or Mark Zoller, Ph.D., our Chief Scientific Officer
and Sr. Vice President, Research, the relationships we have with our collaborators
would likely be negatively impacted and we may be delayed or unable to develop
new product candidates, commercialize our existing product candidates or
achieve our other business objectives, any of which could cause our stock price
to decline. We have entered into employment letter agreements with the
following executive officers: Kent Snyder, Mark Zoller, Ph.D., Harry Leonhardt, Esq.,
our Vice President, General Counsel and Corporate Secretary and John Poyhonen,
our Vice President and Chief Financial and Business Officer. The terms of
these agreements are described under the heading “Management—Employment
Agreements” in our prospectus filed pursuant to Rule 424(b) of the
Securities Act with the SEC on June 22, 2004. We have entered into an employment letter
agreement with Nigel R.A. Beeley, Ph.D., our Vice President, Discovery, the
terms of which are included in Item 11 of this Form 10-K. All of our
employees are at-will employees, which means that either we or the employee may
terminate their employment at any time. We currently have no key person
insurance.
In
addition, our discovery and development programs depend on our ability to
attract and retain highly skilled scientists, including molecular biologists,
biochemists, chemists and engineers. We may not be able to attract or retain
qualified employees in the future due to the intense competition for qualified
personnel among technology-based businesses, particularly in the San Diego
area. We also face competition from universities and public and private
research institutions in recruiting and retaining highly qualified scientific
and management personnel. If we are not able to attract and retain the
necessary personnel to accomplish our business objectives, we may experience
constraints that will adversely affect our ability to meet the demands of our
current or any future product discovery and development collaborators in a
timely fashion or to support our independent discovery and development
programs.
We may encounter difficulties managing our growth, which
could adversely affect our business.
Our
strategy includes entering into and working on simultaneous flavor and flavor
enhancer discovery and development programs across multiple markets. We
increased the number of our full-time employees from seven on December 31,
1999 to 74 on December 31, 2004 and we expect to continue to grow to meet
our strategic objectives. If our growth continues, it will continue to place a
strain on us, our management and our resources. Our ability to effectively manage
our operations, growth and various projects requires us to continue to improve
our operational, financial and management controls, reporting systems and
procedures and to attract and retain sufficient numbers of talented employees.
We may not be able to successfully implement these tasks on a larger scale and,
accordingly, we may not achieve our research, development and commercialization
goals. If we fail to improve our operational, financial and management
information systems, or fail to effectively monitor or manage our new and
future employees or our growth, our business would suffer significantly. In
addition, no assurance can be made that we will be able to secure adequate
facilities to house our staff, conduct our research or achieve our business
objectives.
37
We will rely on third parties to manufacture our flavors,
flavor enhancers and taste modulators on a commercial scale.
We do
not have experience in manufacturing, nor do we have the resources or
facilities to manufacture, flavors, flavor enhancers and taste modulators on a
commercial scale. Therefore, the commercialization of our flavors, flavor
enhancers and taste modulators will depend in part on our or our collaborators’
ability to contract with third-party manufacturers of our flavors, flavor
enhancers and taste modulators on a large scale, at a competitive cost, with
the specified quality and in accordance with relevant food and beverage
regulatory requirements. Any such third-party manufacturers may encounter
manufacturing difficulties at any time that could result in delays in the
commercialization of potential flavors, flavor enhancers and taste modulators.
Our inability to find capable third-party manufacturers or to enter into agreements
on acceptable terms with third-party manufacturers could delay
commercialization of any products we may develop and may harm our relationships
with our existing and any future product discovery and development
collaborators and our customers. Moreover, if we are required to change from
one third-party manufacturer to another for any reason, the commercialization
of our products may be delayed further. In addition, if third-party
manufacturers fail to comply with the FDA’s good manufacturing practice regulations,
then we may be subject to adverse regulatory action including product recalls,
warning letters and withdrawal of our products, or our collaborators’ or
customers’ products, from the market.
Further,
because our flavors, flavor enhancers and taste modulators are regulated as
food products under the Federal Food, Drug and Cosmetic Act, we and the third
parties with which we collaborate or contract to manufacture, process, pack,
import or otherwise handle our products or our product ingredients, may be
required to comply with certain registration, prior notice submission,
recordkeeping and other regulatory requirements. Failure of any party in the
chain of distribution to comply with any applicable requirements under the
Federal Food, Drug and Cosmetic Act or the FDA’s implementing regulations may
adversely affect the manufacture and/or distribution of our products in
commerce.
If we acquire products, technologies or other businesses, we
will incur a variety of costs, may have integration difficulties and may
experience numerous other risks that could adversely affect our business.
If
appropriate opportunities become available, we may consider acquiring
businesses, technologies or products that we believe are a strategic fit with
our business. We currently have no commitments or agreements with respect to,
and are not actively seeking, any material acquisitions. We have limited
experience in identifying acquisition targets, successfully acquiring them and
integrating them into our current infrastructure. We may not be able to
successfully integrate any businesses, products, technologies or personnel that
we might acquire in the future without a significant expenditure of operating,
financial and management resources, if at all. In addition, future acquisitions
might be funded by issuances of additional debt or equity, which could impact
your rights as a holder of our common stock and may dilute your ownership
percentage. Any of the foregoing could have a significant adverse effect on our
business, financial condition and results of operations.
Risks Related To Our Industry
Our ability to compete in the flavor and flavor enhancer
market may decline if we do not adequately protect our proprietary
technologies.
Our
success depends in part on our ability to obtain and maintain intellectual
property that protects our technologies and flavors, flavor enhancers and taste
modulators. Patent positions may be highly uncertain and may involve complex
legal and factual questions, including the ability to establish patentability
of sequences relating to taste receptors, proteins, chemical synthesis
techniques, compounds and methods for using them to modulate taste for which we
seek patent protection. No consistent standard regarding the allowability or
enforceability of claims in many of our pending patent applications has emerged
to date. As a result, we cannot predict the breadth of claims that will
ultimately be allowed in our patent applications, if any, including those we
have in-licensed or the extent to which we may enforce these claims against our
competitors. The degree of future protection for our proprietary rights is
therefore highly uncertain and we cannot assure you that:
• we were the first to file patent
applications or to invent the subject matter claimed in patent applications
relating to the technologies upon which we rely;
• others will not independently develop
similar or alternative technologies or duplicate any of our technologies;
38
• others did not publicly disclose our
claimed technology before we conceived the subject matter included in any of
our patent applications;
• any of our patent applications will
result in issued patents;
• any of our patent applications will
not result in interferences or disputes with third parties regarding priority
of invention;
• any patents that may be issued to us,
our collaborators or our licensors will provide a basis for commercially viable
products or will provide us with any competitive advantages or will not be
challenged by third parties;
• we will develop additional
proprietary technologies that are patentable;
• the patents of others will not have
an adverse effect on our ability to do business; or
• new proprietary technologies from
third parties, including existing licensors, will be available for licensing to
us on reasonable commercial terms, if at all.
In
addition, patent law outside the United States is uncertain and in many
countries intellectual property laws are undergoing review and revision. The
laws of some countries do not protect intellectual property rights to the same
extent as domestic laws. It may be necessary or useful for us to participate in
opposition proceedings to determine the validity of our competitors’ patents or
to defend the validity of any of our or our licensor’s future patents, which
could result in substantial costs and would divert our efforts and attention
from other aspects of our business.
Technologies
licensed to us by others, or in-licensed technologies, are important to our
business. In particular, we depend on high-throughput screening technologies
that we licensed from Aurora Biosciences, technology related to certain taste
receptor sequences that we license from the University of California and others
and technology related to compound libraries that we license from third
parties. In addition, we may in the future acquire rights to additional
technologies by licensing such rights from existing licensors or from third
parties. Such in-licenses may be costly. Also, we generally do not control the
patent prosecution, maintenance or enforcement of in-licensed technologies.
Accordingly, we are unable to exercise the same degree of control over this
intellectual property as we do over our internally developed technologies.
Moreover, some of our academic institution licensors, collaborators and
scientific advisors have rights to publish data and information to which we
have rights. If we cannot maintain the confidentiality of our technologies and
other confidential information in connection with our collaborations, our
ability to protect our proprietary information or obtain patent protection in
the future may be impaired, which could have a significant adverse effect on
our business, financial condition and results of operations.
Many of the patent applications we and our licensors have
filed have not yet been substantively examined and may not result in patents
being issued.
Many
of the patent applications filed by us and our licensors were filed recently
with the United States Patent and Trademark Office and most have not been
substantively examined and may not result in patents being issued. Some of
these patent applications claim sequences that were identified from different
publicly available sequence information sources such as the High-Throughput
Genomic Sequences division of GenBank. It is difficult to predict whether any
of our or our licensors’ applications will ultimately be found to be patentable
or, if so, to predict the scope of any allowed claims. In addition, the
disclosure in our or our licensors’ patent applications, particularly in
respect of the utility of our claimed inventions, may not be sufficient to meet
the statutory requirements for patentability in all cases. As a result, it is
difficult to predict whether any of our or our licensors’ applications will be
allowed, or, if so, to predict the scope of any allowed claims or the
enforceability of the patents. Even if enforceable, others may be able to
design around any patents or develop similar technologies that are not within
the scope of such patents. Our and our licensors’ patent applications may not
issue as patents that will provide us with any protection or competitive
advantage.
Disputes concerning the infringement or misappropriation of
our proprietary rights or the proprietary rights of others could be time
consuming and extremely costly and could delay our research and development
efforts.
Our
commercial success, if any, will be significantly harmed if we infringe the
patent rights of third parties or if we breach any license or other agreements
that we have entered into with regard to our technology or business.
We are
aware of other companies and academic institutions that have been performing
research in the areas of taste modulation and flavors, flavor enhancers and
taste modulators. In particular, other companies and academic institutions have
announced that they have conducted taste-receptor research and have published
data on taste
39
receptor
sequence information and taste receptors or filed patent applications or
obtained patent protection on taste modulation or taste receptors and their
uses, including Linguagen Corp., Mount Sinai School of Medicine, The Scripps
Research Institute, the University of California, Monell Chemical Senses Corp.,
the Warner-Lambert Company, Virginia Commonwealth University and the German
Institute of Human Nutrition. To the extent any of these companies or academic
institutions currently have, or obtain in the future, broad patent claims, such
patents could block our ability to use various aspects of our discovery and
development process and might prevent us from developing or commercializing
newly discovered flavors, flavor enhancers and taste modulators or otherwise
conducting our business. The University of California, for example, claims
certain patent rights relating to the coexpression of T1R receptors that may
not have been licensed to us. While our technology is focused on the use of
human T1R receptors, we cannot assure you that it does not infringe such patent
rights. In such event, if we are not able to amend our license with the
University of California to include such patent rights and our technology is
found to interfere with or infringe such patent rights, our business, financial
condition and results of operations could suffer a significant adverse effect.
In addition, it is possible that some of the flavors, flavor enhancers or taste
modulators that are discovered using our technology may not be patentable or
may be covered by intellectual property of third parties.
We are
not currently a party to any litigation, interference, opposition, protest,
reexamination, reissue or any other potentially adverse governmental, ex parte
or inter-party proceeding with regard to our patent or trademark
positions. However, the life sciences and other technology industries are
characterized by extensive litigation regarding patents and other intellectual
property rights. Many life sciences and other technology companies have
employed intellectual property litigation as a way to gain a competitive
advantage. If we become involved in litigation, interference proceedings,
oppositions, reexamination, protest or other potentially adverse intellectual
property proceedings as a result of alleged infringement by us of the rights of
others or as a result of priority of invention disputes with third parties, we
might have to spend significant amounts of money, time and effort defending our
position and we may not be successful. In addition, any claims relating to the
infringement of third-party proprietary rights or proprietary determinations,
even if not meritorious, could result in costly litigation, lengthy
governmental proceedings, divert management’s attention and resources, or
require us to enter into royalty or license agreements that are not
advantageous to us.
Should
any person have filed patent applications or obtained patents that claim
inventions also claimed by us, we may have to participate in an interference
proceeding declared by the relevant patent regulatory agency to determine
priority of invention and, thus, the right to a patent for these inventions in
the United States. Such a proceeding could result in substantial cost to us
even if the outcome is favorable. Even if successful on priority grounds, an
interference action may result in loss of claims based on patentability grounds
raised in the interference action. Litigation, interference proceedings or
other proceedings could divert management’s time and efforts. Even unsuccessful
claims could result in significant legal fees and other expenses, diversion of
management’s time and disruption in our business. Uncertainties resulting from
initiation and continuation of any patent proceeding or related litigation
could harm our ability to compete and could have a significant adverse effect
on our business, financial condition and results of operations.
An
adverse ruling arising out of any intellectual property dispute, including an
adverse decision as to the priority of our inventions, could undercut or
invalidate our intellectual property position. An adverse ruling could also
subject us to significant liability for damages, including possible treble
damages, prevent us from using technologies or developing products, or require
us to negotiate licenses to disputed rights from third parties. Although patent
and intellectual property disputes in the technology area are often settled
through licensing or similar arrangements, costs associated with these arrangements
may be substantial and could include license fees and ongoing royalties.
Furthermore, necessary licenses may not be available to us on satisfactory
terms, if at all. Failure to obtain a license in such a case could have a
significant adverse effect on our business, financial condition and results of
operations.
If we are unable to protect our trade secrets and other
proprietary information, we could lose any competitive advantage we may have,
which could adversely affect our business.
We
rely in part on trade secret protection for our confidential and proprietary
information, know how and processes. Our policy is to execute proprietary
information and invention agreements with our employees and consultants upon
the commencement of an employment or consulting relationship. These agreements
generally require that all confidential information developed by the individual
or made known to the individual by us during the course of the individual’s
relationship with us be kept confidential and not be disclosed to third
parties. These
40
agreements
also generally provide that inventions conceived by the individual in the
course of their employment shall be our exclusive property. There can be no
assurance that we will be able to effectively enforce these agreements or that
proprietary information is our exclusive property. There can be no assurance
that the subject proprietary information will not be disclosed, that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets or that we can
meaningfully protect our trade secrets. Costly and time-consuming litigation
could be necessary to enforce and determine the scope of our proprietary
rights, and failure to obtain or maintain trade secret protection could
adversely affect our competitive business position.
Many potential competitors, including those who have greater
resources and experience than we do, may develop products or technologies that
make ours obsolete or noncompetitive.
The
life sciences and other technology industries are characterized by rapid
technological change, and the area of sensory or taste receptor research is a
rapidly evolving field. Our future success will depend on our ability to
maintain a competitive position with respect to technological advances.
Technological developments by others may result in our flavors, flavor
enhancers or taste modulators and technologies becoming obsolete.
In
particular, we face substantial competition from companies pursuing the
commercialization of products and services relevant to taste using more
traditional methods for the discovery of flavors, flavor enhancers and taste
modulators. These competitors include leading flavor companies, such as
International Flavors & Fragrances Inc., Givaudan SA, Symrise,
Quest International and Firmenich. We currently compete and will continue to
compete in the future with these companies in collaborating with and selling
flavor products and technologies to manufacturers of packaged food and beverage
products. Many of these companies have substantially greater capital resources,
research and development resources and experience, manufacturing capabilities,
regulatory expertise, sales and marketing resources, established relationships
with consumer products companies and production facilities.
We are
not aware of any products currently available or under development that would
compete with the flavors, flavor enhancers and taste modulators that we are
developing under our sweet and salt programs. Savory flavor enhancers,
particularly inosine monophosphate, or IMP, are commercially available, and we
will compete with the companies that produce these flavors. IMP is widely
available and is a generally accepted food additive by the packaged food and
beverage industry. As a result, our existing and future collaborators may
choose to incorporate IMP or similar savory flavor enhancers into their
packaged food and beverage products instead of our savory flavors, flavor
enhancers and taste modulators. In addition, we may compete with bitter
masking or bitter blocking compounds, such as adenosine 5’ monophosphate, or
AMP.
We may
in the future face competition from life sciences and other technology
companies and other commercial enterprises. These entities engage as we do in biotechnology,
biology or chemistry and could apply this technology to the discovery and
development of flavors, flavor enhancers and taste modulators. We are aware of
one other company, Linguagen Corp., a privately-held company that we believe is
involved in research on sweetness potentiators, salt substitutes and bitter
blockers, specifically AMP, and has announced research and development
collaborations with several companies. We cannot guarantee that products
developed as a result of our competitors’ existing or future collaborations
will not compete with our flavors, flavor enhancers and taste modulators.
Universities
and public and private research institutions are also potential competitors.
While these organizations primarily have educational objectives, they may
develop proprietary technologies related to the sense of taste or secure patent
protection that we may need for the development of our technologies and
products. We may attempt to license these proprietary technologies, but these
licenses may not be available to us on acceptable terms, if at all.
Our
competitors, either alone or with their collaborative partners, may succeed in
developing technologies or discovering flavors, flavor enhancers or taste
modulators that are more effective, safer, more affordable or more easily
commercialized than ours, and our competitors may obtain intellectual property
protection or commercialize products sooner than we do. Developments by others
may render our product candidates or our technologies obsolete. In addition,
our current product discovery and development collaborators are not prohibited
from entering into research and development collaboration agreements with third
parties in any product field. Our failure to compete effectively would have a
significant adverse effect on our business, financial condition and results of
operations.
41
We may be sued for product liability, which could adversely
affect our business.
Because
our business strategy involves the development and sale by our collaborators of
commercial products incorporating our flavors, flavor enhancers and taste
modulators, we may be sued for product liability. We may be held liable if any
product we develop and commercialize, or any product our collaborators
commercialize that incorporates any of our flavors, flavor enhancers or taste
modulators, causes injury or is found otherwise unsuitable during product
testing, manufacturing, marketing, sale or consumer use. In addition, the
safety studies we must perform and the FEMA GRAS determination we must obtain
prior to incorporating our flavors, flavor enhancers and taste modulators into
a commercial product will not protect us from any such liability.
If we
and our collaborators commence sale of commercial products we will need to
obtain product liability insurance, and this insurance may be prohibitively
expensive, or may not fully cover our potential liabilities. Inability to
obtain sufficient insurance coverage at an acceptable cost or otherwise to
protect against potential product liability claims could prevent or inhibit the
commercialization of products developed by us or our product discovery and
development collaborators. We may be obligated to indemnify our product
discovery and development collaborators for product liability or other losses
they incur as a result of our flavors, flavor enhancers and taste modulators.
Any indemnification we receive from such collaborators for product liability
that does not arise from our flavors, flavor enhancers and taste modulators may
not be sufficient to satisfy our liability to injured parties. If we are sued
for any injury caused by our flavors, flavor enhancers and taste modulators or
products incorporating our flavors, flavor enhancers and taste modulators, our
liability could exceed our total assets.
We use hazardous materials. Any claims relating to improper
handling, storage or disposal of these materials could be time consuming and
costly.
Our
discovery and development process requires our employees to routinely handle
hazardous chemical, radioactive and biological materials. Our operations also
produce hazardous waste products. Federal, state and local laws and regulations
govern the use, manufacture, storage, handling and disposal of these materials.
As a result of the increase in size of our operations, we were recently
re-classified from a small quantity to a large quantity generator of hazardous
waste. This reclassification may result in increased scrutiny of our operations
by the Environmental Protection Agency. Compliance with applicable
environmental laws and regulations may be expensive, and current or future
environmental regulations may impair our discovery and development efforts.
In
addition, we cannot entirely eliminate the risk of accidental contamination or
discharge and any resultant injury from these materials. Our property and
casualty policy has very limited coverage for damages or cleanup costs related
to radioactive contamination and pollutants and our general liability insurance
policy excludes coverage for damages and fines arising from biological or
hazardous waste disposal or contamination. We do not carry specific biological
or hazardous waste insurance. We may be forced to curtail operations or be sued
for any injury or contamination that results from our use or the use by others
of these materials, and our liability may exceed our total assets.
Risks
Related To Our Common Stock
Anti-takeover provisions in our charter documents and under
Delaware law may make an acquisition of us more complicated and the removal and
replacement of our directors and management more difficult.
Provisions
of our amended and restated certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would benefit our stockholders. These provisions
may also make it difficult for stockholders to remove and replace our board of
directors and management. These provisions:
• authorize the issuance of “blank
check” preferred stock by our board of directors, without stockholder approval,
which could increase the number of outstanding shares and prevent or delay a
takeover attempt;
• limit who may call a special meeting
of stockholders;
• prohibit stockholder action by
written consent, thereby requiring all stockholder actions to be taken at a
meeting of our stockholders; and
• establish advance notice requirements
for nominations for election to the board of directors or for proposing matters
that can be acted upon at stockholder meetings.
42
In
addition, the requirements of Section 203 of the Delaware General
Corporation Law may discourage, delay or prevent a third party from acquiring
us. These requirements are described under the heading “Description of Capital
Stock—Delaware Anti-Takeover Law and Certain Charter Provisions” in our
prospectus filed pursuant to Rule 424(b) of the Securities Act with
the SEC on June 22, 2004.
Our shareholder rights plan may hinder or prevent change of
control transactions.
Our
shareholder rights plans may discourage transactions involving an actual or
potential change in our ownership. In
addition, our board of directors may issue shares of preferred stock without
any further action by you. Such
issuances may have the effect of delaying or preventing a change in our
ownership. If changes in our ownership
are discouraged, delayed or prevented, it would be more difficult for our
current board of directors to be removed and replaced, even if you and other
stockholders believe such actions are in the best interests of us and our
stockholders.
Compliance with changing regulation of corporate governance
and public disclosure may result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and
Nasdaq National Market rules, are creating uncertainty for companies such as
ours. These new or changed laws, regulations and standards are subject to
varying interpretations in many cases due to their lack of specificity, and as
a result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies, which could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. We are committed to
maintaining high standards of corporate governance and public disclosure. As a result,
our efforts to comply with evolving laws, regulations and standards have
resulted in, and are likely to continue to result in, increased general and
administrative expenses and management time related to compliance activities.
In particular, our efforts to comply with Section 404 of the
Sarbanes-Oxley Act of 2002 and the related regulations regarding our required
assessment of our internal controls over financial reporting and our external
auditors’ audit of that assessment requires the commitment of significant
financial and managerial resources. If our efforts to comply with new or
changed laws, regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to practice, our
reputation may be harmed and we might be subject to sanctions or investigation
by regulatory authorities, such as the Securities and Exchange Commission. Any
such action could adversely affect our financial results and the market price
of our common stock.
If our officers, directors and largest stockholders choose
to act together, they may be able to control our management and operations,
acting in their best interests and not necessarily the interests of other
stockholders.
As of September 30,
2004, our executive officers, directors and stockholders with at least 5% of
our stock together beneficially owned approximately 63% of our common stock. If
these officers, directors and principal stockholders act together, they will be
able to exert a significant degree of influence over our management and affairs
and over matters requiring stockholder approval, including the election of
directors and approval of mergers or other business combination transactions.
The interests of this concentration of ownership may not always coincide with
our interests or the interests of investors in this offering or other
stockholders. For instance, officers, directors and principal stockholders,
acting together, could cause us to enter into transactions or agreements that
we would not otherwise consider. Similarly, this concentration of ownership may
have the effect of delaying or preventing a change in control of our company
otherwise favored by our other stockholders. This concentration of ownership
could depress our stock price.
We have never paid cash dividends on our capital stock and
we do not anticipate paying dividends in the foreseeable future.
We
have paid no cash dividends on any of our classes of capital stock to date, and
we currently intend to retain our future earnings, if any, to fund the
development and growth of our business. In addition, the terms of any future
debt or credit facility may preclude us from paying any dividends. As a result,
capital appreciation, if any, of our common stock will be your sole source of
potential gain for the foreseeable future.
43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our
primary exposure to market risk is interest income sensitivity, which is
affected by changes in the general level of United States interest rates. Due
to the nature of our short-term investments, we believe that we are not subject
to any material market risk exposure. We do not have any foreign currency or
other derivative financial instruments.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
44
Report
of Independent Registered Public Accounting Firm
To the Board of Directors
and Stockholders of Senomyx, Inc.
We have audited the
accompanying balance sheets of Senomyx, Inc. as of December 31, 2004
and 2003, and the related statements of operations, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31,
2004. 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 the standards of the Public Company Accounting Oversight
Board (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 consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and 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 Senomyx, Inc. at December 31,
2004 and 2003 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles.
|
|
/s/ ERNST &
YOUNG LLP
|
|
|
|
|
San Diego,
California
|
|
|
February 14,
2005
|
|
45
Senomyx, Inc.
Balance
Sheets
(In thousands, except share and per
share data)
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
Assets:
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,085
|
|
$
|
13,493
|
|
|
Investments available-for-sale
|
|
23,762
|
|
3,565
|
|
|
Other current assets
|
|
1,213
|
|
1,257
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
42,060
|
|
18,315
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
1,742
|
|
2,125
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
43,802
|
|
$
|
20,440
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
3,208
|
|
$
|
1,679
|
|
|
Other current liabilities
|
|
153
|
|
61
|
|
|
Deferred revenue
|
|
1,858
|
|
1,415
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
5,219
|
|
3,155
|
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
210
|
|
181
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
Convertible preferred stock, $.001 par value;
7,500,000 and 37,079,311 shares authorized, 0 and 25,825,827 shares
designated, 0 and 25,825,826 issued and outstanding at December 31, 2004
and 2003; liquidation preference of $79,690
|
|
—
|
|
70,150
|
|
|
Common stock, $.001 par value, 120,000,000 and
51,495,732 shares authorized; 25,309,565 and 2,020,736 shares issued and
outstanding at December 31, 2004 and 2003, respectively
|
|
25
|
|
2
|
|
|
Additional paid-in-capital
|
|
126,243
|
|
20,173
|
|
|
Deferred compensation
|
|
(3,492
|
)
|
(8,540
|
)
|
|
Accumulated other comprehensive income
|
|
(7
|
)
|
1
|
|
|
Accumulated deficit
|
|
(84,396
|
)
|
(64,682
|
)
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
38,373
|
|
17,104
|
|
|
|
|
|
|
|
|
|
Total liability and stockholders’ equity
|
|
$
|
43,802
|
|
$
|
20,440
|
|
See accompanying notes to financial statements.
46
Senomyx, Inc.
Statements
of Operations
(In thousands, except share and per
share data)
|
|
|
Years Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Revenue under collaborative agreements
|
|
$
|
8,347
|
|
$
|
9,537
|
|
$
|
7,327
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
16,907
|
|
16,802
|
|
17,635
|
|
|
General and administrative
|
|
5,553
|
|
4,096
|
|
4,154
|
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
Research and development
|
|
1,411
|
|
1,293
|
|
540
|
|
|
General and administrative
|
|
4,625
|
|
4,997
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
28,496
|
|
27,188
|
|
22,487
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(20,149
|
)
|
(17,651
|
)
|
(15,160
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
435
|
|
268
|
|
496
|
|
|
Interest expenses
|
|
—
|
|
(70
|
)
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,714
|
)
|
$
|
(17,453
|
)
|
$
|
(14,821
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(1.40
|
)
|
$
|
(10.03
|
)
|
$
|
(9.60
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted net loss
per share
|
|
14,040,727
|
|
1,739,380
|
|
1,544,268
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss per common share assuming
conversion of preferred stock, basic and diluted
|
|
$
|
(0.89
|
)
|
$
|
(0.97
|
)
|
$
|
(0.84
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma net loss per
common share assuming conversion of preferred stock, basic and diluted
|
|
22,143,380
|
|
17,944,686
|
|
17,749,574
|
|
See accompanying notes to
financial statements.
47
Senomyx, Inc.
Statements of Stockholders’
Equity
(In thousands,
except for share data)
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Common
stock
|
|
Additional
paid-in
|
|
Deferred
|
|
Unrealized
gain (loss) on
|
|
Accumulated
|
|
Total
stockholders’
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
issuable
|
|
capital
|
|
compensation
|
|
investments
|
|
deficit
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2001
|
|
21,312,752
|
|
$
|
57,147
|
|
1,769,257
|
|
$
|
2
|
|
$
|
6
|
|
$
|
5,305
|
|
$
|
(996
|
)
|
$
|
—
|
|
$
|
(32,408
|
)
|
$
|
29,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series E Convertible preferred stock
at $2.8999 per share for cash, net of issuance costs of $85
|
|
4,513,074
|
|
13,003
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
13,003
|
|
|
Issuance of common stock related to license agreement
|
|
—
|
|
—
|
|
1,632
|
|
—
|
|
(4
|
)
|
4
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Issuance of common stock to consultants
|
|
—
|
|
—
|
|
1,020
|
|
—
|
|
(2
|
)
|
2
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Issuance of common stock to employees related to the
exercise of options
|
|
—
|
|
—
|
|
218,225
|
|
—
|
|
—
|
|
290
|
|
—
|
|
—
|
|
—
|
|
290
|
|
|
Repurchase of common stock from employees
|
|
—
|
|
—
|
|
(46,243
|
)
|
—
|
|
—
|
|
(16
|
)
|
—
|
|
—
|
|
—
|
|
(16
|
)
|
|
Compensation related to restricted stock issued to
consultants
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
63
|
|
—
|
|
—
|
|
—
|
|
63
|
|
|
Compensation related to common stock issuable related
to license agreement
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3
|
|
|
Amortization of deferred compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
635
|
|
—
|
|
—
|
|
635
|
|
|
Reduction of deferred compensation for unvested
employee common stock options and restricted shares repurchased
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(73
|
)
|
73
|
|
—
|
|
—
|
|
—
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
6
|
|
—
|
|
6
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(14,821
|
)
|
(14,821
|
)
|
|
Comprehensive loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(14,815
|
)
|
|
Balance at December 31, 2002
|
|
25,825,826
|
|
70,150
|
|
1,943,891
|
|
2
|
|
3
|
|
5,575
|
|
(288
|
)
|
6
|
|
(47,229
|
)
|
28,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock related to license agreement
|
|
—
|
|
—
|
|
4,080
|
|
—
|
|
(3
|
)
|
3
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Issuance of common stock to employees related to the
exercise of options
|
|
—
|
|
—
|
|
29,273
|
|
—
|
|
—
|
|
23
|
|
—
|
|
—
|
|
—
|
|
23
|
|
|
Repurchase of unvested common stock from employees
|
|
—
|
|
—
|
|
(23,826
|
)
|
—
|
|
—
|
|
(19
|
)
|
—
|
|
—
|
|
—
|
|
(19
|
)
|
|
Compensation related to stock options to employees
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
13,329
|
|
(13,329
|
)
|
—
|
|
—
|
|
—
|
|
|
Issuance of restricted stock issued to consultants
|
|
—
|
|
—
|
|
67,318
|
|
—
|
|
—
|
|
49
|
|
—
|
|
—
|
|
—
|
|
49
|
|
|
Compensation related to restricted stock issued to
consultants
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,253
|
|
—
|
|
—
|
|
—
|
|
1,253
|
|
|
Amortization of deferred compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
5,037
|
|
—
|
|
—
|
|
5,037
|
|
|
Reduction of deferred compensation for unvested
employee common stock options and restricted shares repurchased
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(40
|
)
|
40
|
|
—
|
|
—
|
|
—
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5
|
)
|
—
|
|
(5
|
)
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(17,453
|
)
|
(17,453
|
)
|
|
Comprehensive loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(17,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
25,825,826
|
|
70,150
|
|
2,020,736
|
|
2
|
|
—
|
|
20,173
|
|
(8.540
|
)
|
1
|
|
(64,682
|
)
|
17,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Senomyx, Inc.
Statements
of Stockholders’ Equity
(In thousands,
except for share data)
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Common
stock
|
|
Additional
paid-in
|
|
Deferred
|
|
Unrealized
gain (loss) on
|
|
Accumulated
|
|
Total
stockholders’
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
issuable
|
|
capital
|
|
compensation
|
|
investments
|
|
deficit
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
25,825,826
|
|
$
|
70,150
|
|
2,020,736
|
|
$
|
2
|
|
$
|
—
|
|
$
|
20,173
|
|
$
|
(8,540
|
)
|
$
|
1
|
|
$
|
(64,682
|
)
|
$
|
17,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to employees related to the
exercise of options
|
|
—
|
|
—
|
|
667,509
|
|
1
|
|
—
|
|
688
|
|
—
|
|
—
|
|
—
|
|
689
|
|
|
Repurchase of unvested common stock from employees
and consultants
|
|
—
|
|
—
|
|
(41,661
|
)
|
—
|
|
—
|
|
(31
|
)
|
—
|
|
—
|
|
—
|
|
(31
|
)
|
|
Compensation related to stock options to employees
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
442
|
|
(442
|
)
|
—
|
|
—
|
|
—
|
|
|
Compensation related to restricted stock issued to
consultants
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,119
|
|
—
|
|
—
|
|
—
|
|
1,119
|
|
|
Amortization of deferred compensation
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4,917
|
|
—
|
|
—
|
|
4,917
|
|
|
Reduction of deferred compensation for unvested
employee stock options
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(573
|
)
|
573
|
|
—
|
|
—
|
|
—
|
|
|
Issuance of common stock related to exercise of
warrant
|
|
—
|
|
—
|
|
7,675
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Conversion of preferred stock to common stock
|
|
(25,825,826
|
)
|
(70,150
|
)
|
16,205,306
|
|
16
|
|
—
|
|
70,134
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Issuance of common stock in initial public offering,
net of issuance costs
|
|
—
|
|
—
|
|
6,450,000
|
|
6
|
|
—
|
|
34,291
|
|
—
|
|
—
|
|
—
|
|
34,297
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(8
|
)
|
—
|
|
(8
|
)
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(19,714
|
)
|
(19,714
|
)
|
|
Comprehensive loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(19,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
—
|
|
$
|
—
|
|
25,309,565
|
|
$
|
25
|
|
$
|
—
|
|
$
|
126,243
|
|
$
|
(3,492
|
)
|
$
|
(7
|
)
|
$
|
(84,396
|
)
|
$
|
38,373
|
|
See accompanying notes to financial statements.
49
Senomyx, Inc.
Statements
of Cash Flows
(In thousands)
|
|
|
Years Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,714
|
)
|
$
|
(17,453
|
)
|
$
|
(14,821
|
)
|
|
Adjustments to reconcile net loss to net cash used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
1,462
|
|
2,017
|
|
1,829
|
|
|
Common stock issued for license
|
|
—
|
|
—
|
|
3
|
|
|
Amortization of loan discount
|
|
—
|
|
8
|
|
5
|
|
|
Stock-based compensation for non-employees
|
|
1,119
|
|
1,253
|
|
63
|
|
|
Amortization of deferred compensation
|
|
4,917
|
|
5,037
|
|
635
|
|
|
Amortization of license fees
|
|
—
|
|
2,868
|
|
3,007
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Other assets
|
|
44
|
|
(581
|
)
|
77
|
|
|
Accounts payable and accrued expenses
|
|
1,621
|
|
(435
|
)
|
87
|
|
|
Deferred revenue
|
|
443
|
|
(1,151
|
)
|
387
|
|
|
Deferred rent
|
|
29
|
|
181
|
|
—
|
|
|
Net cash used in operating activities
|
|
(10,079
|
)
|
(8,256
|
)
|
(8,728
|
)
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(1,079
|
)
|
(552
|
)
|
(2,370
|
)
|
|
Purchases of available-for-sale securities
|
|
(27,505
|
)
|
(9,715
|
)
|
(30,953
|
)
|
|
Maturities of available-for-sale securities
|
|
7,300
|
|
11,927
|
|
25,177
|
|
|
Net cash (used in) provided by investing activities
|
|
(21,284
|
)
|
1,660
|
|
(8,146
|
)
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from loans
|
|
—
|
|
—
|
|
1,580
|
|
|
Repayment of loans
|
|
—
|
|
(1,768
|
)
|
(905
|
)
|
|
Proceeds from issuance of preferred stock
|
|
—
|
|
—
|
|
13,003
|
|
|
Proceeds from issuance of common stock
|
|
34,986
|
|
53
|
|
274
|
|
|
Repurchase of common stock
|
|
(31
|
)
|
—
|
|
—
|
|
|
Net cash provided by (used in) financing activities
|
|
34,955
|
|
(1,715
|
)
|
13,952
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
3,592
|
|
(8,311
|
)
|
(2,922
|
)
|
|
Cash and cash equivalents at beginning of year
|
|
13,493
|
|
21,804
|
|
24,726
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
17,085
|
|
$
|
13,493
|
|
$
|
21,804
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
—
|
|
$
|
74
|
|
$
|
147
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing
and financing activities:
|
|
|
|
|
|
|
|
|
Conversion of preferred stock into common stock
|
|
$
|
70,150
|
|
$
|
—
|
|
$
|
—
|
|
See accompanying notes to financial statements.
50
Senomyx, Inc.
Notes to Financial Statements
1.
Organization and Summary of Significant Accounting Policies
Organization and Business
Senomyx, Inc. (the “Company”)
was incorporated on September 16, 1998 in Delaware and commenced
operations in January 1999. The Company is a biotechnology company using
proprietary taste receptor-based assays, screening technologies and
optimization chemistry to discover and develop novel flavors, flavor enhancers
and taste modulators for the packaged food and beverage industry. The Company
has entered into product discovery and development collaborations with four of
the world’s leading packaged food and beverage companies: Campbell Soup Company
(“Campbell Soup”), The Coca-Cola Company (“Coca-Cola”), Kraft Foods Global, Inc.
(“Kraft Foods”), and Nestlé SA (“Nestlé”). The Company’s collaboration
agreements provide for research funding, milestone payments if the Company
achieves development goals and royalties on future sales of consumer products
incorporating the Company’s flavors, flavor enhancers and taste modulators. The
Company currently has programs focused on the development of savory, sweet,
salt and bitter flavors, flavor enhancers and taste modulators.
Use of Estimates
The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with a remaining maturity of
less than three months when purchased to be cash equivalents. Cash equivalents
are recorded at cost, which approximates market value.
Investments Available-for-Sale
The
Company’s surplus cash is invested in auction rate securities, government
agency bonds and United States Treasury securities with maturity dates of less
than one year. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity with all
amortization and accretion included in interest income. The Company’s
short-term investments are classified as available-for-sale and carried at
estimated fair value, as determined by quoted market prices, with unrealized
gains and losses reported in a separate component of accumulated other
comprehensive income. Realized gains and losses and declines in value judged to
be other-than-temporary, if any, on available-for-sale securities are included
in interest income. The cost of securities sold is based on the specific
identification method. Interest on securities classified as available-for-sale
is included in interest income.
Fair Value of Financial Instruments
The
carrying amount of cash and cash equivalents, investments available-for-sale,
accounts payable and accrued expenses are considered to be representative of
their respective fair value because of the short-term nature of those items.
Concentration of Credit Risk and Major Collaborations
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist of cash, cash equivalents and investments available-for-sale. The
Company limits its exposure to credit loss by placing its cash, cash
equivalents, and investments with high credit quality financial institutions in
instruments with short maturities.
51
The
Company derives its revenues from a relatively small number of collaborators.
For the year ended December 31, 2004, revenues from four collaborators
accounted for 17%, 23%, 24% and 36%, respectively, of total revenues. For the
year ended December 31, 2003, revenues from four collaborators accounted
for 22%, 28%, 28% and 22%, respectively, of total revenues. For the year ended December 31,
2002, revenues from four collaborators accounted for 31%, 23%, 27% and 19%,
respectively, of total revenues.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation and are
depreciated over the estimated useful lives of the assets (ranging from three
to five years) using the straight-line method. Leasehold improvements are amortized
over the estimated useful life of the asset or the lease term, whichever is
shorter.
Patent Costs
Costs
related to filing and pursuing patent applications are expensed as incurred, as
recoverability of such expenditures is uncertain.
Intangible Assets
The
Company amortizes intangible assets over their estimated useful lives. To date,
the intangible assets have consisted of certain technology and databases
acquired from Aurora Biosciences Corporation (“Aurora”) and Incyte Genomics, Inc.
(“Incyte”) which were amortized to research and development expense over three
years. As of December 31, 2003, the intangible assets were fully
amortized.
Impairment of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
Accounting for the Impairment or Disposal of
Long-Lived Assets, if indicators of impairment exist, the Company
assesses the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through undiscounted
future operating cash flows. If impairment is indicated, the Company measures
the amount of such impairment by comparing the fair value to the carrying
value. There have been no indicators of impairment through December 31,
2004.
Revenue Recognition
The
Company’s revenue recognition policies are in compliance with the Staff
Accounting Bulletin (“SAB”) No. 101 (as amended by SAB No. 104), Revenue Recognition in Financial Statements
and Emerging Issues Task Force (“EITF”) Issue 00-21, Revenue Arrangements with Multiple Deliverables.
Revenue is deferred for fees received before earned. Some of the Company’s
agreements contain multiple elements, including research funding, milestones
and royalties.
Revenue
from milestones is recognized when earned, as evidenced by written
acknowledgment from the collaborator or other persuasive evidence that the
milestone has been achieved, provided that (i) the milestone event is
substantive and its achievability was not reasonably assured at the inception
of the agreement, and (ii) the Company’s performance obligations after the
milestone achievement will continue to be funded by the collaborator at a level
comparable to before the milestone achievement. If both of these criteria are
not met, the milestone payment is recognized over the remaining minimum period
of the Company’s performance obligations under the agreement. Non-refundable
upfront fees, if any, not associated with future Company performance, will be
recognized when received. Amounts received for research funding are recognized
as revenues as the services are performed. Royalties to be received based on
product sales made by our collaborators incorporating our product, if any, will
be recognized as earned. To date, the Company has not earned any royalties.
Research and Development
Research
and development costs, including those incurred in relation to the Company’s
collaborative agreements, are expensed in the period incurred. Research and
development costs primarily consist of salaries and related expenses for
personnel, facilities and depreciation, research and development supplies,
patents and licenses and outside services. The Company has licensed certain
technology and databases used in its collaborative agreements, which have been
capitalized in accordance with SFAS No. 2,
52
Accounting
for Research and Development Costs, and amortized to research and development expense
over their estimated useful lives.
Comprehensive Income (Loss)
SFAS No. 130,
Reporting Comprehensive Income,
requires that all components of comprehensive income, including net income, be
reported in the financial statements in the period in which they are
recognized. Comprehensive income (loss) is defined as the change in equity
during a period from transactions and other events and circumstances from
non-owner sources. The Company’s accumulated other comprehensive income (loss),
as of December 31, 2004 and 2003, consisted of unrealized gains and losses
on investments available-for-sale and is reported in stockholders’ equity.
Deferred Rent
Rent
expense is recorded on a straight-line basis over the term of the lease. The
difference between rent expense accrued and amounts paid under the lease
agreement is recorded as deferred rent in the accompanying balance sheets.
Stock-Based Compensation
As
permitted by SFAS No. 123, Accounting
for Stock-Based Compensation, the Company has elected to follow
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”),
and related interpretations in accounting for its employee stock options. Under
APB No. 25, when the purchase price of restricted stock or the exercise
price of the Company’s employee stock options equals or exceeds the fair value
of the underlying stock on the date of issuance or grant, no compensation
expense is recognized. The Company has recorded deferred stock compensation of
$13.3 million during the year ended December 31, 2003 and $442,000
during the year ended December 31, 2004 for the difference between the
original exercise price per share determined by the Board of Directors and the
revised estimate of fair value per share at the respective grant dates.
Deferred stock compensation is recognized and amortized on an accelerated basis
in accordance with Financial Accounting Standards Board Interpretation (“FIN”) No. 28,
Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans, over the vesting period
of the related options, generally four years.
Options
or stock awards issued to non-employees are recorded at their fair value in
accordance with SFAS No. 123, Accounting
for Stock-Based Compensation, and EITF No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring or in Conjunction with Selling Goods or
Services, and are periodically revalued as the options vest and are
recognized as expense over the related service period. The Company granted
stock options and stock awards to non-employees as follows: 468,937, 97,508,
and 134,636 for the years ended December 31, 2004, 2003 and 2002,
respectively. Compensation expense related to non-employee stock option grants
and stock awards was $1.1 million, $1.3 million and $63,000 for the years
ended December 31, 2004, 2003 and 2002, respectively. The options were
valued using the Black-Scholes option pricing model with the following
weighted-average assumptions for the years ended December 31, 2004, 2003
and 2002: (a) risk free interest rates of 3.0%; (b) dividend yield of
0%, (c) expected volatility of 70%; and (d) expected life of five
years for all periods.
As
required under SFAS No. 123, the pro forma effects of employee stock-based
compensation on net loss are estimated at the date of grant using the
Black-Scholes option-pricing model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. Because the Company’s
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management’s opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The
fair value of options issued to employees was estimated at the date of grant
using the Black-Scholes option valuation model with the following weighted
average assumptions for the years ended December 31, 2004, 2003, and 2002:
(a) risk-free interest rate of 3.0%; (b) expected dividend yield of
0%; (c) volatility factor of 70%; and (d) five-year estimated life of
the options. The estimated weighted average fair value of stock options granted
during 2004, 2003 and 2002 was $6.55, $15.74 and $0.45, respectively.
53
For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the vesting period of the related options. The
Company’s pro forma information follows (in thousands, except per share data):
|
|
|
Years ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Net loss as reported
|
|
$
|
(19,714
|
)
|
$
|
(17,453
|
)
|
$
|
(14,821
|
)
|
|
Add: Stock-based employee compensation expense
included in net loss
|
|
4,917
|
|
5,037
|
|
635
|
|
|
Deduct: Stock-based employee compensation expense
determined under fair value method
|
|
(6,452
|
)
|
(5,120
|
)
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(21,249
|
)
|
$
|
(17,536
|
)
|
$
|
(14,622
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share as reported
|
|
$
|
(1.40
|
)
|
$
|
(10.03
|
)
|
$
|
(9.60
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share
|
|
$
|
(1.51
|
)
|
$
|
(10.08
|
)
|
$
|
(9.47
|
)
|
Net Loss Per Share
The
Company calculated net loss per share in accordance with SFAS No. 128, Earnings Per Share, and SAB No. 98.
Basic earnings per share (“EPS”) is calculated by dividing the net income or
loss by the weighted average number of common shares outstanding for the
period, without consideration for common stock equivalents. Diluted EPS is
computed by dividing the net income or loss by the weighted average number of
common share equivalents outstanding for the period determined using the
treasury-stock method. For purposes of this calculation, common stock subject
to repurchase by the Company, convertible preferred stock, options, and
warrants are considered to be common stock equivalents and are only included in
the calculation of diluted earnings per share when their effect is dilutive.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration (as defined), if any, would be included in the per share
calculations as if they were outstanding for all periods presented. No common
shares have been issued for nominal consideration.
The
following table sets forth the computation of basic and diluted, and unaudited
pro forma basic and diluted, net loss per share for the respective periods. The
unaudited pro forma basic and diluted net loss per share represent the weighted
average common shares outstanding reduced by the weighted average unvested
common shares subject to repurchase, and gives the effect to the conversion of
the convertible preferred stock into shares of common stock as if converted at
the date of original issuance.
|
|
|
Year ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Historical:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,714
|
)
|
$
|
(17,453
|
)
|
$
|
(14,821
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
14,354,942
|
|
1,975,074
|
|
1,890,369
|
|
|
Weighted average unvested common shares subject to
repurchase
|
|
(314,215
|
)
|
(235,694
|
)
|
(346,101
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted earnings per share
|
|
14,040,727
|
|
1,739,380
|
|
1,544,268
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(1.40
|
)
|
$
|
(10.03
|
)
|
$
|
(9.60
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,714
|
)
|
$
|
(17,453
|
)
|
$
|
(14,821
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share
|
|
$
|
(0.89
|
)
|
$
|
(0.97
|
)
|
$
|
(0.84
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares used above
|
|
14,040,727
|
|
1,739,380
|
|
1,544,268
|
|
|
Pro forma adjustment to reflect assumed weighted
average effect of conversion of preferred stock
|
|
8,102,653
|
|
16,205,306
|
|
16,205,306
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shares used to compute basic and diluted
net loss per share
|
|
22,143,380
|
|
17,944,686
|
|
17,749,574
|
|
54
|
|
|
Year ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Historical outstanding antidilutive securities
not included in diluted net loss per share calculation:
|
|
|
|
|
|
|
|
|
Preferred stock*
|
|
8,102,653
|
|
16,205,306
|
|
16,205,306
|
|
|
Common stock subject to repurchase
|
|
228,092
|
|
211,862
|
|
297,123
|
|
|
Options to purchase common stock
|
|
1,992,710
|
|
1,404,598
|
|
631,678
|
|
|
Warrants
|
|
—
|
|
10,199
|
|
10,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,323,455
|
|
17,831,965
|
|
17,144,306
|
|
* Represents the number of shares of common stock into
which preferred stock was convertible.
Segment Reporting
The
Company currently operates in a single operating segment. The Company generates revenues from
collaborations that result primarily from its underlying research and
development activities. In addition,
financial results are prepared and reviewed by management as a single operating
segment. The Company periodically
evaluates the benefits of operating in distinct segments and will report
accordingly when such distinction is made.
Effect of New Accounting Standards
In March 2004, the EITF reached a final consensus
on Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments.
EITF Issue No. 03-1 requires that when the fair value of an
investment security is less than its carrying value, an impairment exists for
which the determination must be made as to whether the impairment is
other-than-temporary. The EITF Issue No. 03-1 impairment model
applies to all investment securities accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities
and to investment securities accounted for under the cost method to the extent
an impairment indicator exists. Under the guidance, the determination of
whether an impairment is other-than-temporary and therefore would result in a
recognized loss depends on market conditions and management’s intent and
ability to hold the securities with unrealized losses. In September 2004,
the Financial Accounting Standards Board (“FASB”) approved FASB Staff Position
EITF 03-1-1, which defers the effective date for recognition and
measurement guidance contained in EITF Issue No. 03-1 until certain
issues are resolved. As of December 31,
2004 these issues have not been resolved. The Company does not expect the
adoption of EITF Issue No. 03-1 to have a material effect on its
results of operations and financial condition.
In December 2004, the FASB issued SFAS No. 123R,
Share Based Payment. This statement is a
revision to SFAS No. 123 and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95,
Statement of Cash Flows. This statement
requires a public entity to expense the cost of employee services received in
exchange for an award of equity instruments. This statement also provides
guidance on valuing and expensing these awards, as well as disclosure
requirements of these equity arrangements. This statement is effective for the
first interim reporting period that begins after June 15, 2005.
SFAS No. 123R permits public companies to choose
between the following two adoption methods:
1. A “modified
prospective” method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of SFAS No. 123R for all
share-based payments granted after the effective date and (b) based on the
requirements of
55
SFAS No. 123
for all awards granted to employees prior to the effective date of SFAS No. 123R
that remain unvested on the effective date, or
2. A “modified
retrospective” method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based
on the amounts previously recognized under SFAS No. 123 for purposes of
pro forma disclosures for either (a) all prior periods presented or (b) prior
interim periods of the year of adoption.
As permitted by SFAS No. 123, the Company
currently accounts for share-based payments to employees using APB Opinion No. 25’s
intrinsic value method. The impact of the adoption of SFAS No. 123R cannot
be predicted at this time because it will be depend on levels of share-based
payments granted in the future. However, valuation of employee stock options
under SFAS No. 123R is similar to SFAS No. 123, with minor
exceptions. The impact on the results of operations and earnings per share had
the Company adopted SFAS No. 123, is described in stock based compensation
section of Note 1 above. Accordingly, the adoption of SFAS No. 123R’s
fair value method will have a significant impact on the Company’s results of
operations, although it will have no impact on the Company’s overall financial
position. SFAS No. 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature.
This requirement will reduce net operating cash flows and increase net
financing cash flows in periods after adoption. Due to timing of the release of
SFAS No. 123R, the Company has not yet completed the analysis of the
ultimate impact that this new pronouncement will have on the results of
operations, nor the method of adoption for this new standard.
2.
Balance Sheet Details
Investments Available-for-Sale
The
following is a summary of investments available-for-sale securities at December 31,
2004 (in thousands):
|
|
|
Amortized Cost
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Estimated
Fair Value
|
|
|
Auction Rate Securities
|
|
$
|
13,775
|
|
$
|
—
|
|
$
|
—
|
|
$
|
13,775
|
|
|
Government Agency Bonds
|
|
9,994
|
|
—
|
|
(7
|
)
|
9,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,769
|
|
$
|
—
|
|
$
|
(7
|
)
|
$
|
23,762
|
|
The
following is a summary of investments available-for-sale securities at December 31,
2003 (in thousands):
|
|
|
Amortized Cost
|
|
Unrealized Gain
|
|
Unrealized Loss
|
|
Estimated
Fair Value
|
|
|
Government Agency Bonds
|
|
$
|
2,792
|
|
$
|
1
|
|
$
|
—
|
|
$
|
2,793
|
|
|
United States Treasury Securities
|
|
772
|
|
—
|
|
—
|
|
772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,564
|
|
$
|
1
|
|
$
|
—
|
|
$
|
3,565
|
|
Gross
realized gains and losses on available-for-sale securities were immaterial
during the years ended December 31, 2004 and 2003. All of the
available-for-sale securities have a contractual maturity at December 31,
2004 of one year or less.
56
Property and Equipment
Property
and equipment consists of the following (in thousands):
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
Scientific equipment
|
|
$
|
5,648
|
|
$
|
5,158
|
|
|
Computer equipment
|
|
1,974
|
|
1,711
|
|
|
Furniture and fixtures
|
|
346
|
|
223
|
|
|
Leasehold improvements
|
|
790
|
|
587
|
|
|
|
|
|
|
|
|
|
|
|
8,758
|
|
7,679
|
|
|
Less accumulated depreciation and amortization
|
|
(7,016
|
)
|
(5,554
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,742
|
|
$
|
2,125
|
|
Depreciation
and amortization expense was $1.5 million, $2.0 million, and
$1.8 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following (in thousands):
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
Accounts payable
|
|
$
|
463
|
|
$
|
372
|
|
|
Accrued employee benefits
|
|
1,648
|
|
906
|
|
|
Other accrued liabilities
|
|
1,097
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,208
|
|
$
|
1,679
|
|
3.
Product Discovery and Development Collaborations
Campbell Soup Company. In March 2001, the
Company entered into a collaboration agreement with Campbell Soup to work for a
three-year collaborative period for the discovery and development of specified
flavors and flavor enhancers. The agreement requires Campbell Soup to make
research funding payments over three years totaling $3.6 million. The
Company is also eligible to receive milestone payments upon the achievement of
a specific product development goal and, in the event of commercialization,
receive royalties on future net sales of collaborator products containing a
discovered ingredient.
The
agreement was amended in July 2002 to provide for an option to negotiate
the right to expand the field to include additional specified products. The
Company received $1.8 million from Campbell Soup for the option, which was
recorded as deferred revenue and recognized as revenue ratably over the
remaining term of the agreement (20 months). The agreement was further
amended in November 2002 to redefine earned royalties during the royalty
term.
In July 2003,
the Company received $650,000 in additional research support funding and
expense reimbursement. The payment was recorded as deferred revenue and is
being recognized as revenue ratably over the remaining term of the agreement
(eight months).
The
agreement was further amended in March 2004 to extend the collaborative
period until the earlier of March 2006 or when a flavor or flavor enhancer
selected by Campbell’s receives Generally Recognized as Safe determination,
subject to earlier termination under specified circumstances. Under the terms
of the extension, the Company will provide additional research and receive additional
research funding totaling $3.0 million for two additional years.
57
Through
December 31, 2004, the Company has received $7.9 million in research and
development funding. If all milestones are achieved, and including all research
and development funding paid or payable, the Company may be entitled to
payments which total up to $10.1 million. There is no guarantee that the
Company will receive any milestone payments or royalties under this collaboration.
The Coca-Cola Company. In April 2002, the
Company entered into a collaboration agreement with Coca-Cola for the discovery
and development of specified flavors and flavor enhancers. The agreement
requires Coca-Cola to make research funding payments over three years totaling
$6.0 million. The Company is also eligible to receive milestone payments
upon the achievement of specific product development goals and, in the event of
commercialization, receive royalties on future sales of collaborator products containing
a discovered ingredient.
The
agreement was amended in April 2004 to extend the collaborative period
until April 2008, subject to earlier termination under specified
circumstances. Under terms of the extension, the Company will provide additional
research and receive additional research funding totaling $6.0 million for
three additional years.
Through
December 31, 2004, the Company has received $5.5 million in research
and development funding. If all milestones are achieved, and including all research
and development funding paid or payable, the Company may be entitled to
payments which total up to $14.8 million. There is no guarantee that the
Company will receive any milestone payments or royalties under this
collaboration.
Kraft Foods Global, Inc. In December 2000, the
Company entered into a collaboration agreement with Kraft Foods for the
discovery and development of flavor enhancers. Under the terms of the
collaboration, Kraft Foods agreed to pay research funding of approximately
$1.4 million per year for three years. In May 2002, the agreement was
amended to provide for an additional collaborative program. The level of
research support under the original program was reduced from $1.4 million
to $1.1 million per year for the remainder of the research term. The
Company is eligible to receive milestone payments upon the achievement of
specific product development goals and, in the event of commercialization,
receive royalties on future net sales of collaborator products containing a
discovered ingredient.
Kraft
Foods agreed to make research funding payments related to the additional
program of $1.8 million over the period from May 2002 through December 2003
and $1.8 million over the period from January 2004 through May 2005.
The research effort approximates the funding levels. The Company is also
eligible to receive milestone payments upon the achievement of specific product
development goals and receive royalties on net sales of collaborator products
containing a discovered ingredient related to this additional program. The
Company earned a milestone in 2002 from the additional research program.
Through
December 31, 2004, the Company has received $7.2 million in research
and development funding and one milestone payment of $375,000. If all milestones
are achieved, and including all research and development funding paid or
payable, the Company may be entitled to payments which total up to
$8.6 million. There is no guarantee that the Company will receive any
further milestone payments or royalties under this collaboration.
Nestlé. In April 2002, the
Company entered into a collaboration agreement with Nestlé for the discovery
and development of specified flavors and flavor enhancers. The agreement
requires Nestlé to make research funding payments over three years totaling
$7.0 million. The Company is also eligible to receive milestone payments
upon the achievement of specific product development goals and, in the event of
commercialization, receive royalties on future net sales of collaborator products
containing a discovered ingredient. The Company received payments for the
achievement of three milestones in 2002, 2003, and 2004.
Through December 31,
2004, the Company has received $7.0 million in research and development
funding and three milestone payments of $375,000 each. If all milestones are
achieved, and including all research and development funding paid or payable,
the Company may be entitled to payments which total up to $9.6 million.
There is no guarantee that the Company will receive any further milestone
payments or royalties under this collaboration.
In October 2004, the
Company entered into a second product discovery and development collaboration
agreement with Nestlé to work for a five-year collaborative period focusing on
the discovery and commercialization of specified novel flavor ingredients. Under the terms of the agreement, Nestlé has
agreed to pay to the Company certain research and development funding totaling
$11.7 million over five years, subject to earlier termination under specified
circumstances. The Company is also eligible to receive milestone payments upon
achievement of specific product discovery and development goals, and in the
event of commercialization, is entitled to receive royalties on future net
sales of products containing a discovered novel flavor ingredient. There is no guarantee that the Company will
receive any milestone payments or royalties under this collaboration.
58
Under
this second agreement, through December 31, 2004, the Company has received
$450,000 in research and development funding. If all milestones are achieved,
and including all research and development funding paid or payable, the Company
may be entitled to payments which total up to $13.1 million. There is no
guarantee that the Company will receive any milestone payments or royalties
under this collaboration.
In
connection with the above listed collaboration agreements, the Company has
recognized revenue of $8.3 million, $9.5 million and
$7.3 million for the years ended December 31, 2004, 2003 and 2002,
respectively. As of December 31, 2004 and 2003, the Company has deferred
revenue of $1.9 million and $1.4 million, respectively.
4.
Technology Collaborations and License Agreements
Aurora Biosciences Corporation. In November 2000,
the Company entered into a technology collaboration and license agreement with
Aurora to develop certain assay technologies, which was amended in April 2002.
Under the collaboration, Aurora employed its proprietary technologies to
develop high-throughput screening assays for the Company. The agreement
terminated in October 2002 and Invitrogen Corporation subsequently
acquired certain surviving rights and obligations under this agreement. Under
the surviving terms of the agreement, the Company maintains exclusive rights to
use certain proprietary screening technologies with its taste receptor targets
for the discovery of flavors and flavor enhancers. These exclusive rights are
subject to rights granted under other current and future license agreements in
connection with the purchase of certain screening systems, as well as
Invitrogen’s right to grant licenses under its proprietary technology to
academic, government and other non-profit organizations. The Company paid a
licensing fee of $2.5 million that was capitalized and amortized to
research and development expense over the estimated useful life of three years.
As of December 31, 2003, the license was fully amortized. The Company made
cash research funding payments to Aurora totaling $4.7 million for
development services provided from November 2000 through October 2002
and a $100,000 milestone payment following the delivery of specified assays for
the discovery of flavor and fragrance molecules. All of these amounts were
expensed as incurred in each accounting period. In addition, in November 2000,
Aurora purchased 1,000,000 shares of the Company’s Series C
Convertible Preferred Stock for $4.8 million in cash. The Company
recognized expense related to research funding and amortization of the license
fee of $0, $694,000 and $2.8 million for the years ended December 31,
2004, 2003 and 2002.
Incyte Genomics, Inc. In December 2000, the
Company entered into a three-year agreement with Incyte that provided the Company
with access to Incyte’s databases for the identification of receptors that play
a role in taste and smell in order to accelerate the Company’s discovery of
flavor and fragrance molecules. Under the terms of the agreement, the Company
was required to pay $6.5 million for the databases. Concurrent with the
signing of the agreement, Incyte agreed to purchase 869,328 shares of the
Company’s Series D Convertible Preferred Stock for $6.5 million.
Since the amounts exchanged were equal, the Company accounted for the
transaction as a non-monetary exchange in 2000. The Company capitalized the
cost of the database and amortized the cost to research and development expense
over the three-year term of the agreement. The value ascribed to the databases
of $6.5 million was based on the fair value of the preferred stock issued.
The Company recorded amortization expense of $0, $2.2 million and $2.2
million for the years ended December 31, 2004, 2003 and 2002,
respectively.
The Company also has
other license agreements, of which the Company recognized expenses of $1.1
million, $934,000 and $442,000 for the years ended December 31, 2004, 2003
and 2002, respectively. The fees were charged to research and development
expense.
5.
Commitments
Leases and Loans
The
Company leases its primary office facility under an operating lease agreement
that expires on December 31, 2006, subject to a five-year extension option
by the Company. The lease provides for an annual minimum 3% rent increase.
Gross rent expense for the years ended December 31, 2004, 2003 and 2002
was $4.0 million, $3.9 million, and $2.9 million, respectively.
The Company subleases part of the facility, and the sublease rental income for
the years ended December 31, 2004, 2003 and 2002 was $899,000,
$1.4 million and $1.4 million, respectively. Sublease income is
recorded as an offset to the Company’s allocated facilities costs. The Company
has also entered into various operating lease agreements for office equipment.
59
At December 31,
2004, estimated annual future minimum rental payments under the Company’s
operating leases for the years ending December 31 are as follows (in
thousands):
|
|
|
Operating
Leases
|
|
|
2005
|
|
$
|
4,054
|
|
|
2006
|
|
4,166
|
|
|
2007
|
|
7
|
|
|
2008
|
|
1
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
8,228
|
|
Future
minimum rentals to be received under non-cancelable subleases, which expire
through 2006, total $676,000 and $735,000 for the years ended December 31,
2005 and 2006, respectively.
In July 2001,
the Company entered into a loan and security agreement with Silicon Valley Bank
for loan disbursements up to $3.0 million on capital equipment purchases.
From 2001 through 2003, the Company received advances totaling
$2.6 million on the Silicon Valley Bank loan for capital equipment
purchases. The advances accrued interest at 7.0% to 9.0%. In July 2003,
the Company paid off the remaining principal portion of the equipment loans
from Silicon Valley Bank in the amount of $1.3 million. In connection with
the equipment loan, warrants to purchase up to 10,199 shares of common
stock at $2.45 per share were issued to Silicon Valley Bank. The estimated fair
market value of the warrants of $16,000 was recorded as a discount on the
equipment loan and was amortized to interest expense over the term of the
equipment loan. The fair value was determined using the Black-Scholes option valuation
model. These warrants were exercised by
Silicon Valley Bank in November 2004.
In
connection with certain license and collaboration agreements, the Company’s
annual future minimum obligation payments are as follows, $120,000, $63,000, $26,000
$26,000 and $26,000 for the years ending December 31, 2005, 2006, 2007,
2008 and 2009, respectively.
6.
Stockholders’ Equity
Reverse Stock Split
On April 30,
2004 the Company’s board of directors approved a 4-for-7 reverse
stock split of the outstanding common stock, which was effected on June 7,
2004. On June 15, 2004 the Company’s board of directors approved a 1-for-1.4005989
reverse stock split of the outstanding common stock, which was effected on June 16,
2004. The accompanying financial
statements give retroactive effect to the reverse stock splits.
Initial Public Offering
On June 25,
2004, the Company completed an initial public offering, or IPO, of 6.0 million
shares of common stock for proceeds to the Company of $31.9 million, net of
underwriting discounts, commissions and offering expenses. On July 23, 2004 the Company closed the
sale of an additional 450,000 shares of common stock pursuant to the exercise
by the underwriters of an over-allotment option which resulted in proceeds to
the Company of $2.4 million, net of underwriting discounts, commissions and
offering expenses.
60
Convertible Preferred Stock
The Company’s certificate
of incorporation, as amended and restated, authorizes the Company to issue up
to 7,500,000 shares of Preferred Stock, with a par value of $0.001, in one or
more series. The Board of Directors may authorize the issuance of Convertible
Preferred Stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of the common stock. The
issuance of Convertible Preferred Stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could, among other
things, have the effect of delaying, deferring or preventing a change in
control of the Company and may adversely affect the market price of the common
stock and the voting and other rights of the holders of common stock. As of December 31, 2004 and 2003
convertible preferred stock authorized and outstanding is as follows:
|
|
|
As of December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
Shares
Authorized
|
|
Shares
Issued and
Outstanding
|
|
Liquidation
Value
|
|
Shares
Authorized
|
|
Shares Issued
and
Outstanding
|
|
Liquidation Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
—
|
|
—
|
|
$
|
—
|
|
8,648,158
|
|
8,648,158
|
|
$
|
8,648,158
|
|
|
Series A-1
|
|
—
|
|
—
|
|
—
|
|
8,648,158
|
|
—
|
|
8,648,158
|
|
|
Series B
|
|
—
|
|
—
|
|
—
|
|
2,605,326
|
|
2,605,326
|
|
2,605,326
|
|
|
Series B-1
|
|
—
|
|
—
|
|
—
|
|
2,605,326
|
|
—
|
|
2,605,326
|
|
|
Series C
|
|
—
|
|
—
|
|
—
|
|
1,000,000
|
|
1,000,000
|
|
1,000,000
|
|
|
Series D
|
|
—
|
|
—
|
|
—
|
|
869,328
|
|
869,328
|
|
869,328
|
|
|
Series E
|
|
—
|
|
—
|
|
—
|
|
12,703,015
|
|
12,703,014
|
|
12,703,015
|
|
|
Undesignated
|
|
7,500,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500,000
|
|
—
|
|
$
|
—
|
|
37,079,311
|
|
25,825,826
|
|
$
|
37,079,311
|
|
Upon
the closing of the initial public offering in June 2004, 25,825,826 shares
of convertible preferred stock outstanding automatically converted into
16,205,306 shares of common stock.
Warrants
In
2001, in connection with equipment financing (see Note 5), the Company
issued to Silicon Valley Bank warrants to purchase 10,199 shares of common
stock at a price of $2.45 per share. The warrants expire five years from the
closing of the sale and issuance of the Company’s common stock in an initial
public offering. The warrants were exercised in November 2004. No warrants were outstanding as of December 31,
2004.
Equity Incentive Plan
During
1999, the Company adopted the 1999 Equity Incentive Plan (the “Plan”), which
provides for the grant of incentive and non-statutory stock options and
restricted stock purchase rights to employees, directors and consultants of the
Company. The Plan, as amended, authorizes the Company to issue up to
4,965,000 shares of common stock. At December 31, 2004, the Company has
repurchased a total of 131,153 shares and 1,680,446 shares remain
available for grant under the Plan.
The
Plan allows the Company to grant restricted stock purchase rights at no less
than 85% of the fair value of the Company’s common stock as determined by the
Board of Directors at the date of the grant. All restricted stock purchase
rights vest in accordance with a vesting schedule determined by the Board
of Directors, typically over a four-year period. Under the Plan, 457,069 restricted stock
purchase rights have been granted at exercise prices ranging from $0.35 to
$0.94 per share, all of which have been exercised as of December 31, 2004,
of which no shares are subject to repurchase.
Options
granted under the Plan generally expire no later than ten years from the date
of grant (five years for a 10% stockholder). Options generally vest and become
fully exercisable over a period of five years, except for officers, directors
and consultants that may be made fully exercisable. The exercise price of
incentive stock options must be equal to at least the fair value of the Company’s
61
common stock on the date of grant, and the
exercise price of non-statutory stock options may be no less than 85% of the
fair value of the Company’s common stock on the date of grant. The exercise
price of any option granted to a 10% stockholder may be no less than 110% of
the fair value of the Company’s common stock on the date of grant. The Company has an option to repurchase all
unvested shares, at the original purchase price, upon the voluntary or
involuntary termination of employment with, or consulting services provided to,
the Company for any reason.
The
following is a further breakdown of the options outstanding as of December 31,
2004:
|
|
|
|
|
Options Outstanding
|
|
Options Vested and Exercisable
|
|
|
Range of Exercise
Prices
|
|
Number
of
Options
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
of
Options
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.34-0.34
|
|
1,828
|
|
5.6
|
|
$
|
0.34
|
|
1,828
|
|
$
|
0.34
|
|
|
$
|
0.74-0.74
|
|
568,115
|
|
8.5
|
|
$
|
0.74
|
|
126,265
|
|
$
|
0.74
|
|
|
$
|
0.74-6.00
|
|
169,656
|
|
6.3
|
|
$
|
2.12
|
|
150,513
|
|
$
|
1.98
|
|
|
$
|
6.02-6.02
|
|
1,025,674
|
|
8.6
|
|
$
|
6.02
|
|
27,487
|
|
$
|
6.02
|
|
|
$
|
6.30-9.50
|
|
227,437
|
|
9.6
|
|
$
|
8.50
|
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,992,710
|
|
8.5
|
|
|
|
306,093
|
|
|
|
The
following is a summary of stock option and stock award activity under the
equity incentive plan through December 31, 2004:
|
|
|
Number of
Shares
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2002
|
|
633,237
|
|
$
|
2.13
|
|
|
Granted
|
|
394,364
|
|
$
|
0.74
|
|
|
Exercised
|
|
(218,225
|
)
|
$
|
1.33
|
|
|
Cancelled
|
|
(177,822
|
)
|
$
|
2.25
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
|
631,554
|
|
$
|
1.50
|
|
|
Granted
|
|
888,702
|
|
$
|
0.74
|
|
|
Exercised
|
|
(29,273
|
)
|
$
|
0.78
|
|
|
Cancelled
|
|
(86,509
|
)
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
1,404,474
|
|
$
|
1.04
|
|
|
Granted
|
|
1,358,778
|
|
$
|
6.28
|
|
|
Exercised
|
|
(667,509
|
)
|
$
|
1.03
|
|
|
Cancelled
|
|
(103,033
|
)
|
$
|
4.02
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
1,992,710
|
|
$
|
4.46
|
|
The
following shares of common stock are reserved for future issuance:
|
|
|
December 31, 2004
|
|
|
Common stock options granted and outstanding
|
|
1,992,710
|
|
|
Common stock options reserved for future grant
|
|
1,680,446
|
|
|
|
|
|
|
|
Total common stock shares reserved for future
issuance
|
|
3,673,156
|
|
62
Shareholders’ Rights Plan
In February 2005,
the Company entered into a Share Purchase Rights Plan (the “Plan”). Terms of the Plan provide for a dividend
distribution of one preferred share purchase right (a “Right”) for each outstanding share of
common stock, par value $0.001 per share (the “Common Shares”), of the Company.
The dividend is payable on February 21, 2005 to the stockholders of record
on that date. Each Right entitles the registered holder to purchase from
the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $0.001 per share (the “Preferred Shares”), at a price of
$100.00 per one one-hundredth of a Preferred Share, subject to
adjustment. Each one one-hundredth of a share of Preferred Shares has
designations and powers, preferences and rights, and the qualifications,
limitations and restrictions which make its value approximately equal to the
value of a Common Share. The description and terms of the Rights are set
forth in a Rights Agreement, dated as of February 14, 2005 entered into
between the Company and Mellon Investor Services LLC, as rights agent.
7.
Income Taxes
Significant
components of the Company’s net deferred tax assets at December 31, 2004
and 2003 are shown below (in thousands). A valuation allowance of $29.5 million
and $23.4 million has been established to offset the net deferred tax
assets as of December 31, 2004 and 2003, respectively, as realization of
such assets is uncertain.
|
|
|
Years ended
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
22,728
|
|
$
|
18,230
|
|
|
Capitalized research and development
|
|
2,847
|
|
2,210
|
|
|
Research and development credits
|
|
2,633
|
|
1,995
|
|
|
Deferred revenue
|
|
757
|
|
577
|
|
|
Other, net
|
|
551
|
|
339
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
29,516
|
|
23,351
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
29,516
|
|
23,351
|
|
|
Valuation allowance for deferred tax assets
|
|
(29,516
|
)
|
(23,351
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
$
|
—
|
|
At December 31,
2004, the Company had federal and California tax net operating loss
carryforwards of approximately $62.7 million and $13.4 million,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2019 and 2009, respectively, unless previously utilized. The Company
also had federal and California research and development tax credit
carryforwards of approximately $1.8 million and $1.3 million,
respectively, which will begin to expire in 2019 unless previously utilized.
Pursuant
to Internal Revenue Code Section 382 and 383, use of the Company’s net
operating loss and credit carryforwards may be limited if a cumulative change
in ownership of more than 50% occurs within a three-year period.
63
8.
Summary of Quarterly Financial Data (unaudited)
The
following is a summary of the unaudited quarterly results of operations for the
years ended December 31, 2004 and 2003 (in thousands, except per share
amounts).
|
|
|
Year Ended December 31 ,2004
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
Selected Quarterly Financial Data:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,241
|
|
$
|
2,177
|
|
$
|
1,802
|
|
$
|
2,127
|
|
|
Total operating expenses
|
|
7,240
|
|
5,643
|
|
7,257
|
|
8,356
|
|
|
Net loss
|
|
(4,959
|
)
|
(3,430
|
)
|
(5,304
|
)
|
(6,021
|
)
|
|
Basic and diluted net loss per common share
|
|
$
|
(2.63
|
)
|
$
|
(0.79
|
)
|
$
|
(0.21
|
)
|
$
|
(0.24
|
)
|
|
|
|
Year Ended December 31 ,2003
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
|
Selected Quarterly Financial Data:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,203
|
|
$
|
2,203
|
|
$
|
2,365
|
|
$
|
2,766
|
|
|
Total operating expenses
|
|
5,555
|
|
6,162
|
|
7,363
|
|
8,108
|
|
|
Net loss
|
|
(3,296
|
)
|
(3,916
|
)
|
(4,950
|
)
|
(5,291
|
)
|
|
Basic and diluted net loss per common share
|
|
$
|
(1.97
|
)
|
$
|
(2.27
|
)
|
$
|
(2.80
|
)
|
$
|
(2.95
|
)
|
9.
Subsequent Events (unaudited)
In March 2005,
the Company announced that the Company has been notified by the Flavor and
Extract Manufacturers Association (“FEMA”) that its savory enhancers S807,
S336, S263 and S976 have been determined to be Generally Recognized as Safe (“GRAS”)
under the provisions of the Federal Food, Drug and Cosmetic Act, administered
by the United States Food and Drug Administration. The FEMA GRAS determination will enable
incorporation of the Company’s savory enhancers into a variety of food products.
64
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There
were no changes in or disagreements with Ernst & Young LLP on accounting
and financial disclosure required to be reported under this Item 9.
Item 9A. Controls and Procedures
Prior
to the filing of this annual report on Form 10-K, we carried out an
evaluation, under the supervision and with the participation of our management,
including our President and Chief Executive Officer and our Vice President and
Chief Financial and Business Officer, of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a - 15(e) or 15d -15(e) of
the Exchange Act) as of the end of the period covered by this annual report on Form 10-K.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in our periodic reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Based upon that
evaluation, our President and Chief Executive Officer and our Vice President
and Chief Financial and Business Officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this
annual report on Form 10-K.
An
evaluation was also performed under the supervision and with the participation
of our management, including our President and Chief Executive Officer and our
Vice President and Chief Financial and Business Officer, of any change in our
internal control over financial reporting that occurred during our last fiscal
quarter and that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. That evaluation did not
identify any change in our internal control over financial reporting that
occurred during our latest fiscal quarter and that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
Our
management, including our President and Chief Executive Officer and our Vice
President and Chief Financial and Business Officer, does not expect that its
disclosure controls will prevent all errors or potential fraud. A control
system, no matter how well conceived and operated, can provide only reasonable
and not absolute assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their cost. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons or by collusion of two or more people. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
control may become inadequate because of changes in conditions, or the degree
of compliance with policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Item 9B. Other Information
None.
65
PART III
Certain
information required by Part III of this Form 10-K is omitted
from this report because registrant will file a definitive Proxy Statement
within 120 days after the end of its fiscal year pursuant to Regulation 14A for
its 2005 Annual Meeting of Shareholders to be held on May 25, 2005 (the “Proxy
Statement”), and the information included therein is incorporated herein by
reference.
Item 10. Directors and Executive Officers of the Registrant
The
information with respect to executive officers required by this item is set forth
in Part I of this report.
We
have adopted a Code of Business Conduct and Ethics Policy that applies to our
directors and employees (including our principal executive officer, principal
financial officer, principal accounting officer and controller), and have
posted the text of the policy on our website (www.senomyx.com) in connection
with “Investor Relations” materials. In addition, we intend to promptly
disclose (i) the nature of any amendment to the policy that applies to our
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions and (ii) the
nature of any waiver, including an implicit waiver, from a provision of the
policy that is granted to one of these specified individuals, the name of such
person who is granted the waiver and the date of the waiver on our website in
the future.
The
other information required by this item is incorporated by reference to the
proxy statement to be filed with the SEC pursuant to Regulation 14A in
connection with our 2005 annual meeting.
Item 11. Executive Compensation
The
information required by this Item is incorporated herein by reference to the
information from the Proxy Statement under the section entitled “Executive
Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
information required by this Item is incorporated herein by reference to the
information from the Proxy Statement under the sections entitled “Security
Ownership of Certain Beneficial Owners and Management” and “Securities
Authorized for Issuance under Equity Compensation Plans.”
Item 13. Certain Relationships and Related Transactions
The
information required by this Item is incorporated herein by reference to the
information from the Proxy Statement under the section entitled “Certain
Relationships and Related Transactions.”
Item 14. Principle Accountant Fees and Services
The
information required by this Item is incorporated by herein by reference to the
information from the Proxy Statement under the section entitled “Principal
Accountant Fees and Services.”
66
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) 1. Financial Statements
See
Index to Financial Statements in Item 8 of this Annual Report on Form 10-K,
which is incorporated herein by reference.
2. Financial Statement Schedules
All
schedules have been omitted because they are not applicable or required, or the
information required to be set forth therein is included in the Financial
Statements or notes thereto included in Item 8 (“Financial Statements and
Supplementary Data”).
3. Exhibits
|
Exhibit
Footnote
|
|
Exhibit Number
|
|
Description of Document
|
|
|
(1)
|
|
3.1
|
|
Amended and Restated
Certificate of Incorporation as currently in effect.
|
|
|
(1)
|
|
3.2
|
|
Amended and Restated
Bylaws as currently in effect.
|
|
|
(1)
|
|
4.1
|
|
Form of Common
Stock Certificate.
|
|
|
(1)
|
|
4.2
|
|
Warrant dated
July 17, 2001, as amended November 14, 2001, issued to Silicon
Valley Bank.
|
|
|
(1)
|
|
4.3
|
|
Fourth Amended and
Restated Investor Rights Agreement dated November 14, 2001, as amended
February 27, 2002, between the Registrant and certain of its
stockholders.
|
|
|
(1)
|
|
10.1+
|
|
Form of Indemnity
Agreement.
|
|
|
(1)
|
|
10.2+
|
|
Amended and Restated
2004 Equity Incentive Plan and Form of Stock Option Agreement
thereunder.
|
|
|
(1)
|
|
10.3+
|
|
2004 Non-Employee
Directors’ Stock Option Plan and Form of Stock Option Agreement
thereunder.
|
|
|
(1)
|
|
10.4+
|
|
2004 Employee Stock
Purchase Plan and Form of Offering Document thereunder.
|
|
|
(1)
|
|
10.5+
|
|
Employment letter
agreement dated February 21, 2000 between the Registrant and Mark
Zoller, Ph.D.
|
|
|
(1)
|
|
10.6+
|
|
Employment letter
agreement dated June 7, 2000 between the Registrant and Klaus
Gubernator, Ph.D.
|
|
|
(1)
|
|
10.7+
|
|
Employment letter
agreement dated June 2, 2003 between the Registrant and Kent Snyder.
|
|
|
(1)
|
|
10.8+
|
|
Employment letter
agreement dated August 25, 2003 between the Registrant and Harry
Leonhardt, Esq.
|
|
|
(1)
|
|
10.9+
|
|
Employment letter
agreement dated September 8, 2003 between the Registrant and John
Poyhonen.
|
|
|
(1)
|
|
10.10
|
|
Expansion Lease dated
November 20, 1995 between Health Science Properties, Inc. and
Sequana Therapeutics, Inc., as amended, and Assignment and Assumption of
Lease, dated July 12, 2000, as amended, between the Registrant and Axys
Pharmaceuticals, Inc.
|
|
|
(1)
|
|
10.11*
|
|
Exclusive License and
Bailment Agreement dated March 10, 2000 between the Registrant and the
Regents of the University of California.
|
|
|
(1)
|
|
10.12*
|
|
Collaborative Research
and License Agreement dated November 1, 2000, as amended April 16,
2002, between the Registrant and Aurora Biosciences Corporation.
|
|
|
(1)
|
|
10.13*
|
|
Collaborative Research
and License Agreement dated December 6, 2000, as amended May 2,
2002, between the Registrant and Kraft Foods, Inc.
|
|
|
(1)
|
|
10.14*
|
|
Collaborative Research
and License Agreement dated March 28, 2001, as amended July 26,
2002, November 5, 2002 and February 19, 2004 between the Registrant
and Campbell Soup Company.
|
|
|
(1)
|
|
10.15*
|
|
Collaborative Research
and License Agreement dated April 18, 2002, as amended October 23,
2003, between the Registrant and Nestec, Ltd.
|
|
|
(1)
|
|
10.16*
|
|
Collaborative Research,
Development, Commercialization and License Agreement dated April 22,
2002 between the Registrant and the Coca-Cola Company.
|
|
|
(1)
|
|
10.17+
|
|
1999 Equity Incentive
Plan and Form of Stock Option Agreement thereunder.
|
|
|
(2)
|
|
10.18*
|
|
Collaborative Research
and License Agreement, dated October 26, 2004, between The Registrant
and Nestec Ltd.
|
|
|
|
|
23.1
|
|
Consent of Independent
Registered Public Accounting Firm.
|
|
|
|
|
24.1
|
|
Power of Attorney.
Reference is made to the signature page.
|
|
|
|
|
31.1
|
|
Certification of Kent
Snyder, Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
31.2
|
|
Certification of John
Poyhonen, Chief Financial and Business Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.1
|
|
Certification of Kent
Snyder, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted
|
|
67
|
|
|
|
|
pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.2
|
|
Certification of John
Poyhonen, Chief Financial and Business Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
+ Indicates
management contract or compensatory plan.
* Confidential treatment has been
requested with respect to certain portions of this exhibit. Omitted portions
have been filed separately with the Securities and Exchange Commission.
(1) Filed as an exhibit to Registration
Statement File No. 333-113998 and incorporated herein by reference.
(2) Filed as an exhibit to our Quarterly
Report of Form 10-Q for the quarter ended September 30, 2004
and incorporated herein by reference.
(b) Exhibits
See
Item 15(a) above.
(c) Financial Statement
Schedules
See
Item 15(a) above.
68
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
|
Senomyx, Inc.
|
|
|
By:
|
/S/ KENT SNYDER
|
|
|
|
Kent Snyder
|
|
|
|
President and
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
Dated: March 10,
2005
|
|
|
|
|
|
|
POWER
OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kent Snyder, Mark Leschly and John Poyhonen, and each
of them, as his or her true and lawful attorneys-in-fact and agents, 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 and all
amendments to this Report, 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, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming that all said attorneys-in-fact and agents, or any of them or
their or his substitute or substituted, may lawfully do or cause to be done by
virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
/S/ KENT SNYDER
|
|
President , Chief
Executive Officer and Director
|
|
March 10, 2005
|
|
|
Kent Snyder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/S/ MARK LESCHLY
|
|
Chairman of the Board
of Directors
|
|
March 10, 2005
|
|
|
Mark Leschly
|
|
|
|
|
|
|
|
|
Vice President and
Chief Financial and Business
|
|
March 9, 2005
|
|
|
/S/ JOHN POYHONEN
|
|
Officer
|
|
|
|
|
John Poyhonen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/S/ LORI ROBSON
|
|
Director
|
|
March 9, 2005
|
|
|
Lori Robson, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/S/ DAVID SCHNELL
|
|
Director
|
|
March 9, 2005
|
|
|
David Schnell, M.D.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/S/ JAY SHORT
|
|
Director
|
|
March 10, 2005
|
|
|
Jay Short, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/S/ TIMOTHY WOLLAEGER
|
|
Director
|
|
March 9, 2005
|
|
|
Timothy Wollaeger
|
|
|
|
|
|
69
EXHIBIT
INDEX
|
Exhibit
Footnote
|
|
Exhibit
Number
|
|
Description of Document
|
|
|
(1)
|
|
3.1
|
|
Amended and Restated
Certificate of Incorporation as currently in effect.
|
|
|
(1)
|
|
3.2
|
|
Amended and Restated
Bylaws as currently in effect.
|
|
|
(1)
|
|
4.1
|
|
Form of Common
Stock Certificate.
|
|
|
(1)
|
|
4.2
|
|
Warrant dated
July 17, 2001, as amended November 14, 2001, issued to Silicon
Valley Bank.
|
|
|
(1)
|
|
4.3
|
|
Fourth Amended and
Restated Investor Rights Agreement dated November 14, 2001, as amended
February 27, 2002, between the Registrant and certain of its
stockholders.
|
|
|
(1)
|
|
10.1+
|
|
Form of Indemnity
Agreement.
|
|
|
(1)
|
|
10.2+
|
|
Amended and Restated
2004 Equity Incentive Plan and Form of Stock Option Agreement
thereunder.
|
|
|
(1)
|
|
10.3+
|
|
2004 Non-Employee
Directors’ Stock Option Plan and Form of Stock Option Agreement
thereunder.
|
|
|
(1)
|
|
10.4+
|
|
2004 Employee Stock
Purchase Plan and Form of Offering Document thereunder.
|
|
|
(1)
|
|
10.5+
|
|
Employment letter
agreement dated February 21, 2000 between the Registrant and Mark
Zoller, Ph.D.
|
|
|
(1)
|
|
10.6+
|
|
Employment letter
agreement dated June 7, 2000 between the Registrant and Klaus
Gubernator, Ph.D.
|
|
|
(1)
|
|
10.7+
|
|
Employment letter
agreement dated June 2, 2003 between the Registrant and Kent Snyder.
|
|
|
(1)
|
|
10.8+
|
|
Employment letter
agreement dated August 25, 2003 between the Registrant and Harry
Leonhardt, Esq.
|
|
|
(1)
|
|
10.9+
|
|
Employment letter
agreement dated September 8, 2003 between the Registrant and John
Poyhonen.
|
|
|
(1)
|
|
10.10
|
|
Expansion Lease dated
November 20, 1995 between Health Science Properties, Inc. and
Sequana Therapeutics, Inc., as amended, and Assignment and Assumption of
Lease, dated July 12, 2000, as amended, between the Registrant and Axys
Pharmaceuticals, Inc.
|
|
|
(1)
|
|
10.11*
|
|
Exclusive License and
Bailment Agreement dated March 10, 2000 between the Registrant and the
Regents of the University of California.
|
|
|
(1)
|
|
10.12*
|
|
Collaborative Research
and License Agreement dated November 1, 2000, as amended April 16,
2002, between the Registrant and Aurora Biosciences Corporation.
|
|
|
(1)
|
|
10.13*
|
|
Collaborative Research
and License Agreement dated December 6, 2000, as amended May 2,
2002, between the Registrant and Kraft Foods, Inc.
|
|
|
(1)
|
|
10.14*
|
|
Collaborative Research
and License Agreement dated March 28, 2001, as amended July 26,
2002, November 5, 2002 and February 19, 2004 between the Registrant
and Campbell Soup Company.
|
|
|
(1)
|
|
10.15*
|
|
Collaborative Research
and License Agreement dated April 18, 2002, as amended October 23,
2003, between the Registrant and Nestec, Ltd.
|
|
|
(1)
|
|
10.16*
|
|
Collaborative Research,
Development, Commercialization and License Agreement dated April 22,
2002 between the Registrant and the Coca-Cola Company.
|
|
|
(1)
|
|
10.17+
|
|
1999 Equity Incentive
Plan and Form of Stock Option Agreement thereunder.
|
|
|
(2)
|
|
10.18*
|
|
Collaborative Research
and License Agreement, dated October 26, 2004, between The Registrant
and Nestec Ltd.
|
|
|
|
|
23.1
|
|
Consent of Independent
Registered Public Accounting Firm.
|
|
|
|
|
24.1
|
|
Power of Attorney.
Reference is made to the signature page.
|
|
|
|
|
31.1
|
|
Certification of Kent
Snyder, Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
31.2
|
|
Certification of John
Poyhonen, Chief Financial and Business Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.1
|
|
Certification of Kent
Snyder, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.2
|
|
Certification of John
Poyhonen, Chief Financial and Business Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
+ Indicates
management contract or compensatory plan.
* Confidential treatment has been
requested with respect to certain portions of this exhibit. Omitted portions
have been filed separately with the Securities and Exchange Commission.
(1) Filed as an exhibit to Registration
Statement File No. 333-113998 and incorporated herein by reference.
(2) Filed as an exhibit to our Quarterly
Report of Form 10-Q for the quarter ended September 30, 2004
and incorporated herein by reference.