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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

          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.

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

          The number of shares outstanding of registrant’s common stock, $0.001 par value, as of May 9, 2003:  25,526,842

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          Some of the statements contained in this report constitute forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “expect,” “plan,” “anticipate,” “believe,” or “continue” and variations of these words or comparable words. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Our Business section and Management’s Discussion and Analysis of Financial Condition and Results of Operations contain many such forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. The risk factors contained in this report, under the heading Factors That May Affect Our Business, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ from the expectations described or implied in our forward-looking statements.

          Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

          Large Scale Biology Corporation, LSBC, our logo, GENEWARE, PLURIGEN, ProGEx and other product and trade names are trademarks of or registered trademarks of Large Scale Biology Corporation in the United States and/or other countries. Other product and trade names mentioned herein may be trademarks and/or registered trademarks of their respective companies. References in this report to “the Company,” “our,” “we” and “us” refer collectively to Large Scale Biology Corporation, a Delaware corporation, and its predecessors and subsidiaries.

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Large Scale Biology Corporation
Form 10-Q
For the Quarter Ended March 31, 2003
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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

Large Scale Biology Corporation
Condensed Consolidated Balance Sheets
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Large Scale Biology Corporation
Condensed Consolidated Statements of Operations
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Large Scale Biology Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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Large Scale Biology Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.  The Company and Summary of Significant Accounting Policies

          Large Scale Biology Corporation is a research and development company.  Our goals include the development of therapeutic products using our proprietary technologies and expertise and the delivery of services to potential customers including protein marker discovery and the biomanufacture of therapeutic proteins, vaccines and industrial biomolecules.  Examples of therapeutic products we are developing include:

          The Company’s proprietary systems are supported by patents and patent applications.  The Company’s corporate office and genomics research facility are located in Vacaville, California.  The Company’s biomanufacturing plant is located in Owensboro, Kentucky, and the Company’s proteomics research facility is located in Germantown, Maryland.

          The Company incurred net losses of $33,184,000 and $20,689,000 and negative operating cash flows of $23,932,000 and $18,451,000 in the years ended December 31, 2002 and 2001, respectively.  These negative cash flows were financed primarily by proceeds from the Company’s IPO in 2000.  If we are unable to generate significant revenues in 2003 or generate other potential sources of working capital including partnerships, mergers or sales of assets or technologies, the Company’s operations may be adversely affected.

          Basis of Presentation — The unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial information.  Accordingly, these financial statements and notes thereto do not include certain disclosures normally associated with financial statements prepared in accordance with accounting principles generally accepted in the United States of America.  This interim financial information should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2002 included in the Company’s Annual Report on Form 10-K.

          The unaudited condensed consolidated financial statements include the accounts of Large Scale Biology Corporation and its subsidiaries.  All intercompany balances and transactions have been eliminated.  In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) and disclosures considered necessary for a fair presentation of the results of the interim periods presented.  This interim financial information is not necessarily indicative of the results of any future interim periods or for the Company’s full year ending December 31, 2003.

          Segment Reporting — The Company operates in one reportable segment.

          Stock-Based Compensation — We account for stock-based employee compensation plans using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations.    Stock options issued to non-employees as consideration for goods or services provided to the Company are accounted for under the fair value method in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation”, which requires that compensation expense be recognized for all such options.

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          The following table presents the pro forma effect on the Company’s reported net loss and net loss per share if we had applied the fair value method to our stock-based employee compensation plans for all periods presented:

          The pro forma adjustments assume the fair value of stock-based employee compensation awards are amortized over the vesting period, typically 3-4 years for stock options. The fair value of stock options are estimated at the date of grant using the Black-Scholes option-pricing model. The Company did not grant any stock options in the three months ended March 31, 2003 or 2002.

          Net Loss Per Share — Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period.  Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period plus the potential dilutive effect of common shares issuable upon exercise or conversion of outstanding stock options and warrants during the period.  The weighted average number of potentially dilutive common shares were 12,028 and 167,373 for the three months ended March 31, 2003 and 2002, respectively.  These shares are excluded from diluted net loss per share because of their anti-dilutive effect.

2.  Impairment of Property

          The Company’s proteomics division leases approximately 53,000 square feet of commercial space in Germantown, Maryland.  In 2000 and 2001, we added approximately $5.6 million of improvements to the leased space to construct a laboratory, computer rooms, offices and common areas.  Approximately 44,000 square feet of the leased space is improved and approximately 9,000 square feet remains unimproved.  The leasehold improvements are being amortized on a straight-line basis over the ten-year lease term.

          In the first quarter of 2003, the Company’s board of directors approved a plan to concentrate the operations of our proteomics division into approximately 10,000 square feet of the improved space and solicit a sublease for the remaining leased space.  As a result, we assessed the carrying value of the leasehold improvements related to the excess laboratory and office space for impairment.  Based upon a comparison of the carrying value of the leasehold improvements and the future minimum rent payments related to the excess improved space with the market value of similar leased space in the Germantown area, we concluded that the leasehold improvements were impaired.  Accordingly, we recognized an adjustment of $1,698,000 in the first quarter of 2003 to reduce the carrying value of the excess leasehold improvements to fair market value. If we cannot sublease the excess leased space or if we sublease such space at rates well below the market value assumed in our impairment calculation, we may realize an additional material impairment charge in the future.

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Item 2. 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 unaudited condensed consolidated financial statements and related notes included in this Report and our audited consolidated financial statements and related notes for the year ended December 31, 2002 included in our Annual Report on Form 10-K.

Overview

          In the first quarter of 2003, the Company continued to realize material negative operating cash flows although our negative cash flows in the first quarter were significantly lower than the prior year period and comparable to the fourth quarter of 2002.  We expect to reduce our current rate of cash usage by implementing further cost saving initiatives in 2003.  Such initiatives may include the cancellation of certain internally funded research projects, subleasing excess office and laboratory space at our proteomics facility, headcount reductions and the further delay or abandonment of certain patent applications.  We may begin realizing such cost savings in the second quarter of 2003.  However, in order for us to approach positive operating cash flows, we must generate significant revenues, and until such time, we expect to realize material negative operating cash flows in the foreseeable future.

          Our working capital balance equaled $18.3 million at March 31, 2003.  Based upon our net operating cash usage of $4.1 million in the first quarter of 2003, we believe that our working capital is sufficient to support our current level of operations through at least March 31, 2004.  The Company’s ability to continue as a going concern significantly beyond March 31, 2004 depends on our ability to generate significant revenues, reduce our operating costs and/or pursue other potential sources of working capital including partnerships, mergers or sales of assets or technologies.  However, we cannot provide any assurance that we will generate significant revenues, reduce our operating costs by a material amount, or that other sources of working capital will be available to the Company.

Results of Operations

          Revenues increased $429,000, or 101%, in the three months ended March 31, 2003 compared to the prior year period.  This increase is primarily attributable to our contract with the National Institute of Environmental Health Sciences, or NIEHS, which commenced in the third quarter of 2002.  We expect revenues in the second quarter of 2003 to be materially consistent with the first quarter, absent any new revenue sources that we may generate in the second quarter.

          Development agreement costs consist mainly of personnel expenses, research materials and overhead costs related to activities performed under revenue generating research agreements or government contracts.  These costs generally increase as we enter into new revenue generating agreements or contracts and generally decrease as such agreements or contracts are completed.  Development agreement costs increased $808,000 in the three months ended March 31, 2003 compared to the prior year period.  This increase is primarily attributable to our contract with the NIEHS, which commenced in the third quarter of 2002.  We expect development agreement costs in the second quarter of 2003 to be materially consistent with the first quarter, absent any new research agreements or government contracts that we may enter in the second quarter.

          Research and development expenses consist mainly of personnel expenses, consulting and outside research services, research materials and overhead costs related to internally funded research activities.  These expenses are directly affected by our revenue generating activities which require a shift of personnel from our internally funded research activities.  Research and development expenses decreased $3.1 million, or 49%, in the three months ended March 31, 2003 compared to the prior year period.   This decrease is primarily attributable to headcount reductions incurred in June 2002 as part of a company-wide restructuring, the elimination of several consulting and outside research services and the increased allocation of resources from internally funded research activities to revenue generating projects.  We expect research and development expenses in the second quarter of 2003 to be materially consistent with the first quarter, absent any cost reduction initiatives that may be implemented in the second quarter and any material change in the allocation of personnel to or from revenue generating agreements or contracts.

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          General and administrative expenses largely consist of non-research personnel.  General and administrative expenses decreased $947,000, or 26%, in the three months ended March 31, 2003 compared to the prior year period.  This decrease is primarily attributable to headcount reductions incurred in June 2002 as part of a company-wide restructuring and a reduction of outside legal costs due to the internalization of patent application processes and the abandonment of certain patent applications.  We expect general and administrative expenses in the second quarter of 2003 to be materially consistent with the first quarter, absent any cost reduction initiatives or restructuring charges that may be implemented or be incurred, respectively, in the second quarter.

          Impairment of property represents a write-down of the carrying value of leasehold improvements at our proteomics division.  We concluded that such property was impaired as of March 31, 2003 based upon a comparison of the carrying value of the leasehold improvements with the fair market value of similarly improved office and laboratory space in the local area.

Liquidity and Capital Resources

          The reduction of cash used in operating activities in the three months ended March 31, 2003 compared to the prior year period is primarily attributable to a company-wide restructuring in June 2002 as well as other cost saving initiatives implemented throughout 2002.  On a sequential basis, cash used in operating activities in the first quarter of 2003 was up slightly from $3.8 million in the fourth quarter of 2002 primarily due to a decrease in revenue in the same periods. We expect to continue using cash in operating activities in the second quarter of 2003, consistent in amount with the first quarter.

          Our current rate of cash usage is not sustainable for a long-term period compared to our balance of cash, cash equivalents and marketable securities at March 31, 2003.  Given our current financial condition and recent financial performance, we believe our ability to attract additional working capital through equity or debt issuance is limited.  Accordingly, our strategy to improve our operating cash flows and increase our working capital is to generate significant revenues and/or enter into agreements with other companies to partner the cost of developing specified products.  However, our liquidity position may adversely affect our product development efforts and thereby impair our ability to generate new sources of revenue.  We have delayed further clinical trials of our non-Hodgkin’s lymphoma vaccine until we secure funding from a partner.  If we are unsuccessful in partnering the cost of these clinical trials, further development of this product may be delayed indefinitely.  We are also pursuing a partner to fund the clinical trials of our alpha-galactosidase A product.  We may also delay the further development of other key products or technologies depending on the cost to continue development and our ability to improve our operating cash flows and/or attract funding from other companies.  Furthermore, our liquidity position may limit our ability to negotiate favorable terms in contract discussions with potential customers or partners.

Critical Accounting Policies

          We consider the following accounting policies to be critical given they involve estimates and judgments made by management and are important for our investors’ understanding of our operating results and financial condition. 

          Revenue Recognition — We may earn revenues from several sources including:  1) research and collaboration agreements and government grants that consist of one or more revenue sources including technology access fees, milestone payments and research funding; 2) license fees; and 3) royalties.  We recognize revenues for each of these components as follows:

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          Technology access fees are typically up-front, non-refundable payments and represent consideration from our collaboration partners for access and rights to the Company’s technologies for the term of the research agreement.  The Company’s technologies are normally integral to the objectives of the research collaboration and, therefore, receipt of a technology access fee does not represent the culmination of an earnings process.  Accordingly, we recognize revenue from technology access fees on a straight-line basis over the original term of the agreement, not including renewal periods unless renewal is assured at the time the agreement is executed.  The unrecognized portion of technology access fees is reported as deferred revenue.

          Milestone payments are triggered by the Company’s achievement of performance objectives that are defined in research agreements.  Milestone achievements typically require acceptance or approval by our collaboration partners.  Also, our collaboration partners retain access to the technologies underlying the milestone achievement for the remaining term of the agreement.  Accordingly, we recognize revenue from milestone payments on a straight-line basis from the date of completion of the applicable performance objective to the end of the original term of the agreement, not including renewal periods unless renewal is assured at the time the agreement is executed.  The unrecognized portion of milestone payments is reported as deferred revenue. 

          We receive funding for sponsored research or feasibility studies from commercial companies, government agencies and educational institutions.  Funding for sponsored research or feasibility studies is typically non-refundable and not based upon performance objectives or customer acceptance.  Also, we may receive funding in the form of periodic payments or reimbursement of actual costs.  Accordingly, revenue from sponsored research and feasibility studies is recognized using the percentage of completion method or recognized as expenses are incurred depending on the form of funding.  Under the percentage of completion method, the total contract value is multiplied by the percentage of actual research costs incurred to date compared to the estimated total costs to complete the contract as a whole.  If collection of any funding is not assured, revenue recognized is limited to the lesser of the percentage of completion calculation or actual cash received to date.  Revenue received for equipment purchases is deferred and recognized as revenue over the life of the agreement.

          We provide licenses to third parties for the exclusive or non-exclusive access to certain of the Company’s technologies for commercial development purposes.  We may receive fees from such licenses in the form of up-front payments, additional payments upon achievement of milestones, and royalty rights upon the successful commercialization by the licensee of a product containing the licensed technology.  License agreements normally provide immediate access by the licensee to the Company’s technology and do not require the Company to provide any research services or other support toward the licensee’s commercial development efforts.  Accordingly, we recognize up-front license fees as revenue upon the effective date of the licensee’s first access to the Company’s technologies.  Additional license fees payable upon achievement of milestones are recognized as revenue upon such achievement and royalty payments are recognized as revenue when earned by the Company.   

          Intangible and Long Lived Assets — The Company’s intangible and long-lived assets include capitalized costs of filing patent applications that relate to commercially viable technologies, capitalized license fees for rights to specified intellectual property, and property and equipment related to our research facilities in California and Maryland and our biomanufacturing facility in Kentucky.  All intangible and long lived assets are amortized or depreciated over the shorter of (1) their estimated useful lives, (2) the estimated period that the assets will generate revenue, or (3) the statutory or contractual term in the case of patents and intellectual property licenses.  Estimates of useful lives and periods of expected revenue generation are reviewed periodically for appropriateness and are based upon management’s judgment.  We evaluate our intangible assets and our long-lived assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  If any of our intangible assets or long-lived assets are considered to be impaired, the amount of impairment to be recognized is equal to the excess of the carrying amount of the assets over the fair value of the assets.

          Stock-Based Compensation — The Company normally grants stock options having fixed exercise prices and a fixed number of shares of common stock that may be acquired.  We account for stock options granted to employees and directors, as well as other stock-based employee compensation plans, using the intrinsic value method of accounting.  As such, we recognize compensation expense for stock options only if the quoted market value of the Company’s common stock exceeds the exercise price of the option on the grant date.  Any

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compensation expense realized per the intrinsic value method is amortized over the vesting period of the option.   Stock options issued to non-employees as consideration for goods or services provided to the Company are accounted for under the fair value method, which requires that compensation expense be recognized for all such options.

Factors That May Affect Our Business

Risks Related To Our Business

          Because we are not presently generating significant revenues and cash flows, we are funding virtually all of our product development initiatives internally. At the same time, because our cash flow is substantially reduced compared to the last three years, we are experiencing increasing pressure to curtail spending and otherwise reduce costs.  We implemented a major reorganization in June 2002 to reduce costs.  If we cannot increase our cash flow in the very near term, we will be required to take one or more of the following actions: further restructure our operations and potentially incur significant one-time charges; delay, reduce the scope of, or eliminate one or more of our research and development programs; further reduce patent-related expenses, effectively foregoing our rights to future technologies or products; obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop or commercialize on our own; or sell or license the rights to certain of our products or technologies on terms that are worse than we might have been able to obtain in a different environment.  If our cash flows continue to deteriorate or we take significant steps to reduce our expenses, potential collaborators may question our ability to operate as a going concern and to perform and choose not to do business with us, which would make it harder for us to improve our cash flows.

          Since our inception, we have never generated enough cash to cover our expenses and we will need to continue to spend substantial funds to continue our product development programs. We do not know with certainty whether our cash reserves and any cash flows from operations or financing will be sufficient to fund our operations significantly beyond 2003. We may be unsuccessful in entering into any new collaboration that results in significant revenues or cash flow. We have limited cash and credit available, and may be unable to raise additional financing or establish additional lines of credit to meet our anticipated and unanticipated working capital requirements.  Our future capital requirements depend upon many factors, including:

          In the event we raise capital via equity financing, existing stockholders could experience significant dilution, as our stock price currently fluctuates near $1.00 and we expect that the amount of additional capital we will require would be substantial.  We may raise this capital through public or private financings or additional collaborations, strategic partnerships or licensing arrangements.  If adequate funds are not available to satisfy either short- or long-term capital requirements, we might be required to significantly limit or cease our operations or delay or abandon some of our planned future expenditures, any of which actions would likely harm our business.

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          We are in danger of being delisted from the NASDAQ National Market.  On January 24, 2003, we received a notice from the NASDAQ Qualifications Department that indicated that our common stock had closed for 30 consecutive trading days below the applicable minimum bid price of $1.00. Under current NASDAQ National Market listing requirements, we have until July 23, 2003 to demonstrate that the market price for our common stock has closed at or above a bid price of $1.00 per share for at least ten consecutive trading days.   To ensure continued listing on the NASDAQ National Market, the Company must regain compliance with the minimum bid price requirement and thereafter maintain compliance with the minimum bid price requirement and the other NASDAQ National Market listing requirements.  We cannot assure you that we will regain or maintain compliance with these requirements.  If we do not meet these requirements, we expect that our common stock would be traded on the NASDAQ SmallCap Market or the NASD Over-The-Counter Bulletin Board.  In the event of delisting from the NASDAQ National Market, we expect to pursue listing on the NASDAQ SmallCap Market.  Further, if we fail to comply with the NASDAQ National Market listing requirements, the ability of stockholders to buy and sell shares of our common stock might be affected, and the efficiency of the trading market for our common stock could significantly impair our ability to raise capital in the public markets should we desire to do so in the future. In addition, our stock could also potentially be subject to what are known as the “penny stock” rules, which place additional requirements on broker-dealers who sell or make a market in such securities. Consequently, if we were removed from the NASDAQ National Market, the ability or willingness of broker-dealers to sell or make a market in our common stock might decline.

     We have a history of losses and cannot predict when we will become profitable, if at all

          We have realized net losses in each year since our inception in 1987 and we had an accumulated deficit of $156.5 million as of March 31, 2003.  From September 1998 through August 2001, almost all of our revenues came from our research collaboration with Dow. The research collaboration with Dow ended on August 31, 2001 and we expect no additional revenues under our contract with Dow for the foreseeable future. We have not yet entered into any new collaborations of a magnitude that could make up for the decrease in cash flow and revenues resulting from the completion of our research collaboration with Dow. We expect to continue to spend significant amounts to develop products and to fund our operations. As a result we will need to generate significant additional revenues from collaborations and the commercialization of our products and technologies to achieve profitability. We expect to incur substantial losses in the foreseeable future. If we are unable to enter into major new collaborations, control our operating expenses and successfully commercialize our products and technologies, we may never become profitable and we may fail.

     We most likely will require additional capital

          In order for us to develop profitable and cash-positive operations, we must generate revenue from our products under development and our technologies.  Since our inception, we have never generated enough cash to cover our expenses and we expect to continue to spend substantial funds to continue our product development programs and to fund our operations. In addition, the risks inherent in developing innovative products, such as NHL vaccines, make it difficult to forecast with certainty the capital required to commercialize our products. If our capital resources are insufficient to meet future capital requirements and expenses, we will have to raise additional funds. If we raise additional funds by issuing equity securities, existing stockholders may be diluted. We may raise this capital through public or private financings or additional collaborations, strategic partnerships or licensing arrangements. We expect that the amount of additional capital we will require would be substantial.  Our access to capital markets may be restricted by depressed stock valuations or other factors over an extended period of time.  We may be unsuccessful in entering into any new collaboration that results in significant revenues or cash flow. If we are unable to raise sufficient additional capital or generate sufficient cash flows, we will have to curtail or cease operations.

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          The loss of one or more of our senior management or other key scientific personnel could significantly harm our business, cause collaborators to cease dong business with us or potential collaborators to decline to do business with us, and could otherwise inhibit our research and development and commercialization efforts.  None of our key personnel are subject to employment agreements. We face competition for research scientists and technical staff from other companies, academic institutions, government entities, nonprofit laboratories and other organizations.  We have implemented 10% cash salary reductions substituting non-cash stock compensation for over twenty of our highest paid employees to conserve cash.  Failure to recruit and retain senior management and scientific personnel on acceptable terms may prevent us from achieving our business objectives.

          We restructured our operations in 2002, resulting in substantial workforce reductions.  These reductions were effected in all functional areas.  Our top management was restructured in April 2003.  These changes and reductions or future changes and reductions may create concerns in our employee base about job security, our direction or focus, and the continued viability of the Company.  Such concerns could lower productivity, make it more likely that some of our key employees will seek new employment and require us to hire replacements, and cause concern among collaborators or potential collaborators about doing business with us. These factors also may make the management of our business more difficult and make it harder for us to attract employees in the future.

          We are in an early stage of commercialization, and we are subject to all the risks inherent in the development of a business enterprise, including the need for substantial capital to support the development of our products and technologies.

          Our anticipated products, most likely will require that we enter into new collaborations before we can manufacture and/or market them.  One of our products, our vaccines for the treatment of non-Hodgkin’s lymphoma, cannot be further developed without a collaboration in the foreseeable future. Vaccines are also subject to the governmental regulatory process. Because we are in new and developing fields, and our research focuses on new and unproven products, our therapeutic vaccines, proteins and other therapeutics under development may not be effective in humans, or may not meet regulatory requirements for safety and efficacy. In addition, even if we successfully develop a product, there may not be a substantial commercial market for that product at commercially viable prices.

     We are in new and developing fields and there may not be a market for our technologies

          Our technologies, including our ProGEx system and GENEWARE technology, have limited commercial precedent. Much of our research is fundamentally unique and we cannot assure the acceptance of its scientific merit or the benefits of products produced by it, nor that the public will react favorably to it. The usefulness of the information and products generated by our proteomics, functional genomics and bioinformatics technologies is unproven, and our collaborators and potential collaborators may determine that they are not useful, cost-effective, or otherwise unacceptable to them. We generate large amounts of data from our research with genes and proteins and we may not be able to mine or integrate this data in a timely manner, or turn it into commercially viable information. In addition, because our fields are characterized by rapid innovation, we must complete development of our technologies in time to meet market demand, if any. If we fail to do so, it is likely that other technologies and companies will predominate and we will not be able to earn a sufficient return on our investment.

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          To a large extent, decisions by businesses and other entities to collaborate or otherwise do business with us are discretionary, and the decision making process typically takes many months to complete. We believe that the prolonged slowdown in the U.S. and global economies generally, and the biotechnology and pharmaceutical industries in particular, has caused, and may continue to cause potential collaborators and customers to defer decisions to work with us or to access our technologies. As a result, we expect that revenues and cash flows will be uncertain for the next several quarters. Therefore, it is difficult to accurately assess and predict the future demand for our products, technologies and services. If these economic conditions continue, such conditions will likely have a continuing, adverse effect on our revenues and operating results.

     Alternative technologies may supersede our technologies or make them non-competitive

          Genomics, proteomics, biomanufacturing and bioinformatics are intensely competitive fields. They are characterized by extensive research efforts, which result in rapid technological progress that can render existing technologies obsolete or economically noncompetitive. If our competitors succeed in developing products or technologies that are more effective than ours or that render our products or technologies obsolete or noncompetitive, our business will suffer. Many universities, public agencies and established pharmaceutical, biotechnology, chemical and other life sciences companies with substantially greater resources than we have are developing and using technologies and are actively engaging in the development of products similar to or competitive with our products and technologies. Like us, our competitors are using proteomics and genomics technologies to identify potential drug targets, therapeutic proteins and diagnostic marker proteins.  To remain competitive, we must continue to invest in new technologies and improve existing technologies.  If our revenues and cash flows do not improve significantly, we will not have the resources to continue such investment.

          Our competitors may devise faster, more complete or more accurate methods to obtain proteomic and functional genomic information than our technologies and systems, including our ProGEx and GENEWARE systems. There has been and continues to be substantial academic and commercial research effort devoted to the development of such methods. If a successful competitive method is developed, it would undermine the commercial basis for the products and technologies we intend to provide.

          We are independently pursuing some therapeutic product applications into the development stage. However, we expect to develop and commercialize most of our future products in collaboration with pharmaceutical and biotechnology companies. For example, our strategy concerning our NHL vaccine involves seeking a partner to complete the development of this product. We cannot assure you that such collaborative arrangements will be available to us on acceptable terms, or at all.  If our cash flows continue to deteriorate or we take significant steps to reduce our expenses, potential partners may question our ability to perform and choose not to do business with us, which would make it harder for us to find a partner and would harm our ability to commercialize our products.  Our success will depend in large part on our ability to enter into future collaborations with other companies for the financing of development and/or regulatory approval and commercialization of our products. Our reliance upon these companies for these capabilities will reduce our control over such activities and could make us dependent upon them. To date, we have entered into only a limited number of collaborations. Generally, the scope of these collaborations has been to demonstrate the function of plant genes and the feasibility of using viral vectors to create proteins in plants and to identify marker proteins for drug development and diagnostics. Some of our existing agreements provide us with rights to participate financially in the commercial development of products resulting from the use of our technologies. We may be unable to obtain such rights in future collaborations. In addition, unforeseen delays or complications could arise and result in the breach of our contractual obligations with our collaborators and others, or render our technologies unable to perform at the quality and capacity levels required for success.

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     Conflicts with collaborators or licensees could harm our business

          Conflicts with collaborators could have a negative impact on our relationships with them, including on our revenues to be derived from certain of these relationships, and impair our ability to enter into future collaborations, either of which could adversely affect our business. Collaborators could develop competing products, preclude us from entering into collaborations with their competitors or terminate their agreements with us prematurely. Moreover, disagreements could arise with collaborators or licensees over rights to our intellectual property, our rights to share in any of the future revenues from products or technologies resulting from use of our technologies, our rights to payments for achievement of milestones or our performance of research and development activities on behalf of collaborators, or our activities in separate fields may conflict with other business plans of our collaborators or licensees.

          Although we plan to enter into sales and marketing arrangements with third parties, we may not be able to enter into these arrangements on favorable terms, if at all.  We must also continue to develop a business development force with sufficient technical expertise to generate demand for our products and technologies. Our possible inability to develop business development personnel, or contract for effective sales and marketing capabilities would significantly impair our ability to develop and commercialize our products and technologies.

     We may not be able to successfully manufacture products in commercial quantities or at acceptable costs

          The failure of our technologies to provide safe, effective, useful or commercially viable approaches to the discovery, development and/or production of drug targets and proteins which can be used as therapeutics would significantly limit our business plan and future growth.

          Our directors, our executive officers and principal stockholders affiliated with our directors and executive officers beneficially own, in the aggregate, approximately 29% of our outstanding common stock as of April 30, 2003.  The concentration of ownership in combination with other common stockholders may collectively influence significant corporate transactions such as mergers, changes in control, consolidation or sale of some or all of our assets, and other significant corporate transactions requiring shareholder approval.

          We have adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of May 4, 2001. Subject to certain specified exceptions and limitations under the rights plan, we will continue to issue one right for each share of common stock that becomes outstanding after May 4, 2001. Each right entitles the holder to purchase one unit consisting of one one-hundredth of a share of our Series A Junior Participating Preferred Stock for $45 per unit. Under certain circumstances, if a person or group acquires 15% or more of our outstanding shares of common stock, holders of the rights (other than the person or group causing their exercisability) will be able to purchase, in exchange for the $45 exercise price, shares of our common stock or of any company into which we are merged having a value of $90. In addition, the board of directors has the option, under certain circumstances, to exchange each right (other than rights held by the person or group triggering the board of directors’ option) for a share of common stock for no additional consideration on the part of the holder of the right. The rights expire on April 27, 2011. Our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) by causing substantial dilution of the stock ownership of a person or group attempting to acquire control of us. Our rights plan may have the effect of discouraging takeover attempts because a potential acquirer would have to negotiate with our board of directors to avoid suffering dilution.

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          Provisions in our charter and bylaws and applicable provisions of the Delaware General Corporation Law may also make it more difficult for a third party to acquire control of us without the approval of our board of directors. These provisions may make it more difficult or expensive for a third party to acquire a majority of our common stock or delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may adversely affect our stock price.

Risks Related to Our Industry

          We expect to derive our revenues primarily from products and technologies provided to the pharmaceutical, biotechnology and life sciences industries. Accordingly, our success will depend directly on the success of companies in these industries and their demand for our products, services and technologies. Our operating results may fluctuate substantially due to reductions and delays in expenditures by companies in those industries, or their unwillingness or inability to use our products and technologies. These reductions and delays may result from factors that are not within our control, such as:

     If competitive products are better than our products, then our business may fail

          The markets for protein development and production, including human and veterinary therapeutics and vaccines such as the ones we are developing, are highly competitive. We face significant competition in our protein product development and production efforts from entities using alternative, and in some cases higher volume and larger scale, approaches for the same purpose. Competitors with substantially greater resources are actively developing products similar to or competitive with our products and potential products. Our competitors may succeed in developing products or obtaining regulatory approval before we do or in developing products that are more effective than those we develop or propose to develop. A large number of universities and other not-for-profit institutions, many of which are funded by the U.S. and foreign governments, are also conducting research to discover genes and their functions. Any one or more of these entities may discover and establish a patent position in one or more of the genes or proteins that we wish to commercialize.

          In addition, several pharmaceutical, biotechnology, chemical and other life sciences companies engage in research and development in the use of unique gene expression systems to produce therapeutic proteins. These competitors may develop products earlier or obtain regulatory approvals faster than we may be able to, or develop products that are more effective than ours. New developments are expected to continue, and discoveries by others may render our products and technologies noncompetitive, which could lead to the failure of our business.

     We and our collaborators may not obtain FDA and other approvals for our products in a timely manner, or at all

          Drugs and diagnostic products are subject to an extensive and uncertain regulatory approval process by the FDA and comparable agencies in other countries. The regulation of new products is extensive, and the required process of laboratory testing and human studies is lengthy, expensive and uncertain. The burden of these regulations will fall on us to the extent we are developing proprietary products. We may not be able to obtain the clearances and approvals necessary for the clinical testing, field-testing, manufacturing or marketing of our products. If the products

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are the result of a collaborative effort, these burdens may fall on our collaborators or we may share these burdens with them. We may not obtain FDA or other approvals for those products in a timely manner, or at all. We may encounter significant delays or excessive costs in our efforts to secure necessary approvals or licenses. Even if we obtain FDA regulatory approvals, the FDA extensively regulates manufacturing, labeling, marketing, promotion and advertising after product approval. Further, once a manufacturer obtains regulatory approval, a marketed product and its manufacturer are subject to continual review, and discovery of previously unknown problems with a product or manufacturer may result in restrictions on the product, manufacturer or manufacturing facility, including withdrawal of the product from the market. In some countries, regulatory agencies also set or approve the sale prices for drug products. Additionally, several of our product development areas may involve relatively new technology that has not been the subject of extensive product testing in humans. The regulatory requirements governing these products and related clinical procedures remain uncertain and the products themselves may be subject to substantial review by the FDA and foreign governmental regulatory authorities that could prevent or delay approval. Regulatory requirements ultimately imposed on our products could limit our ability to test, manufacture and commercialize our products.

     USDA rules could adversely affect us or our collaborators

          We must comply with USDA regulations for outdoor releases of genetically engineered organisms as well as other products designed for use on or with agricultural products. In addition, the USDA prohibits growing and transporting genetically modified plants except pursuant to an exemption or under special permits. We may use genetically modified plants as screening or production hosts. Changes in USDA policy regarding the movement or field release of genetically modified plant hosts could adversely affect our business by increasing the cost of our products and technologies or decreasing consumer demand for those products and technologies or causing the government to prohibit their sale or use.  If we fail to comply with such rules or policies, we may be subject to financial loss or be liable for costs incurred as a result of non-compliance.

          Future commercial success of some of our products and of the products of some of our collaborators, will depend in part on public acceptance of the use of genetically engineered products including drugs, plants and plant products. Claims that genetically engineered products are unsafe for consumption or pose a danger to the environment may influence public attitudes. Negative public reaction to genetically modified organisms and products could result in greater government regulation of genetic research and resultant products, including stricter labeling requirements, and could cause a decrease in the demand for our products, even if such products do not result from GMO organisms.

     We may be sued for product liability and our product liability insurance may not be adequate

          The testing, marketing and sale of our and our collaborators’ products will entail a risk of allegations of product liability, and third parties may assert substantial product liability claims against us. While we have limited product liability insurance to protect against this risk, adequate insurance coverage may not be available at an acceptable cost, if at all, in the future and a product liability claim or product recall could materially and adversely affect our business. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of the products we or our collaborators develop. If we are sued for any injury allegedly caused by our products or our collaborators’ products, our liability could exceed our total assets and our ability to pay the liability.

          Our research and development processes involve the use of hazardous materials, including chemicals and radioactive and biological materials. Our operations also produce hazardous waste products. The chemicals we use include, but are not limited to, flammable solvents such as methanol and ethanol, ethidium dye which is a commonly used fluorescent dye for visualizing DNA, and buffer solutions used in the purification of DNA, and various organic solvents, acids and bases.  We also use several radioisotopes including phosphorous-32, carbon-14, sulfur-35,

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phosphorous-33, iodine-125 and hydrogen-3. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages and criminal penalties in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. Further, it is possible that the materials we use could contaminate another party’s property. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets and our ability to pay the liability. In addition, compliance with environmental laws and regulations is expensive, and current or future environmental regulations may impair our research and development and production efforts. Although we have general liability insurance, these policies do not cover claims arising from pollution from chemical, radioactive or biological materials. Our collaborators may also be working with various types of hazardous materials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held responsible for any injury we or our collaborators cause to persons or property by exposure to, or release of, any hazardous materials.

     Healthcare reform and restrictions on reimbursements may limit the financial returns from our products

          Our ability and that of our collaborators to commercialize therapeutics and diagnostic products may depend in part on the extent to which government health administration authorities, private health insurers and other organizations will pay the cost of these products. These third parties are increasingly challenging both the need for and the price of new medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved therapeutics and diagnostics, and adequate third party reimbursement may not be available for any product to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development.

Risks Related to Our Intellectual Property

          We are involved in overlapping and rapidly evolving areas of biotechnology, pharmaceutical development and basic research involving viral vectors, plant transgenics, proteomics, functional genomics, protein transformation, and immunotherapy. Each of these areas has been the subject of intense research and patenting activity throughout the world by our commercial competitors, actual and potential collaborators, academic institutions and government researchers. We cannot determine whether or not there are patents currently pending that, if issued, would prevent us from practicing our core technologies, commercializing them or developing commercially viable products based upon them.

          The patent positions of biotechnology firms generally are highly uncertain and involve complex legal and factual questions that will determine who has the right to develop a particular product. Changes in, or different interpretations of, patent laws in the United States and other countries might allow others to use our discoveries or to develop and commercialize products and technologies similar to our products and technologies without any compensation to us. Our potential collaborators or customers may conclude that uncertainties about patent protection decrease the value of our databases, products and services.

          Throughout the world there are numerous issued patents, as well as published foreign patent applications which may issue as patents, many of which relate to our current operations, our anticipated future operations and the products we are likely to develop. The scope of these patents is a matter of legal interpretation and is subject to uncertainty. We have not obtained, but we may in the future obtain, opinions from our patent counsel that we have freedom to conduct our commercial activities free of claims of patent infringement from third parties. For example, we are aware of one company, Enzon, Inc., that through its subsidiary, SCA Ventures, Inc., owns or has licensed a broad portfolio of patents to single-chain antigen binding proteins. Enzon, in a letter mailed to numerous companies including us, has stated that it would like to discuss providing a license under these patents. In addition, Dow owns or controls certain patent rights in the field of viral vectors covering the infection of plant cells and the expression of foreign genes in plant cells, and has informed us that it believes that some of our plant viral activities may fall within the scope of its patents. Two patents issued to us in October 2001 reference the Dow-controlled patents and conclude that they do not constitute prior art. If we are unable to resolve this matter, and are found to have infringed

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upon Dow’s rights, our product development and research activities related to plant viruses which fall within the scope of Dow’s patents may be delayed or terminated. These kinds of disagreements could result in costly and time-consuming litigation and divert our financial and managerial resources.  Epicyte Pharmaceuticals, Inc., in a letter mailed to several companies, invited us to participate in a licensing program under their patent for marking immunoglobulins in plants.  Maxygen, Inc. sent us a cautionary letter regarding our GRAMMR ™ molecular evolution technology.  Maxygen owns several patents to its own proprietary methods.  We are not aware of any overlap between our activities and the Maxygen patents.  If it turns out that we require a license from either of these companies, it would increase the cost of doing business in these areas.  If a dispute should arise between LSBC and either of these companies, it could result in delay or termination of these activities.

     Our patent applications may not result in issued patents that are enforceable

          Our disclosures in our patent applications may not be sufficient to meet the statutory requirements for patentability in all cases. As a result, we do not know which of our patent applications will result in enforceable patents. Our patent applications may not issue as patents, and any patents that are issued to us may not provide commercially meaningful protection against competitors. Any issued patent may not provide us with competitive advantages. Others may challenge our patents or independently develop similar products which could result in an interference proceeding in the U.S. Patent and Trademark Office. Others may be able to design around our issued patents or develop products similar to our products. In addition, others may discover uses for genes or proteins other than those uses covered in our patents, and these other uses may be separately patentable.

     Public disclosure and patents relating to genes and gene sequences held by others may limit our proprietary rights

          The Human Genome Project and many companies and institutions have identified genes and deposited those sequences in public databases and are continuing to do so. These public disclosures might limit the scope of our claims or make unpatentable subsequent patent applications on full-length gene sequences. We are aware of issued patents and patent applications containing subject matter such that we or our licensees or collaborators may require a license or rights in order to research, develop or commercialize some of our products and technologies. We may find that licenses relating to such subject matter will not be available on acceptable terms, or at all.

          The technology that we use to develop our products and key resources, and those that we incorporate in our products and technologies, may be subject to claims by third parties, including our collaborators, that they infringe the patents or proprietary rights of others. Technologies of our collaborators may also be subject to infringement or similar claims which could impair our collaborative product development and commercialization efforts. We also may need to enforce our patent rights in actions against others, which could be expensive. The risk of such events occurring will tend to increase as the fields of proteomics, genomics and the biotechnology industry expand, more patents are issued and other companies attempt to discover genes and proteins and engage in other proteomics, genomics and biotechnology-related businesses.

          With respect to identifying proteins uniquely associated with disease states or as targets for drug therapy, we are aware that companies have published patent applications relating to nucleic acids encoding specific proteins. If the U.S. Patent and Trademark Office issues patents to these companies, their patents may limit our ability and the ability of our collaborators to practice under any patents that may be issued to us. Also, even if the U.S. Patent and Trademark office issues us a patent, the scope of coverage or protection afforded to the patent may be limited.

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     We may not be able to protect our know-how and trade secrets

          We generally control the disclosure and use of our know-how and trade secrets using confidentiality agreements. It is possible, however, that:

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

          The Company’s exposures to market risks are fully explained in our Annual Report on Form 10-K for the year ended December 31, 2002.  No material changes to the information provided in our Annual Report have occurred subsequent to December 31, 2002 through March 31, 2003.

Item 4.  Controls and Procedures

          (a) Evaluation of disclosure controls and procedures. Regulations under the Securities Exchange Act of 1934 require public companies, including our company, to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Our chief executive officer and our chief financial officer, based upon their evaluation of our disclosure controls and procedures within 90 days before the filing date of this report, concluded that as of their evaluation date, our disclosure controls and procedures were effective for this purpose.

          (b) Changes in internal controls.  There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date our chief executive officer and chief financial officer carried out their evaluation as referenced in the above paragraph.

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PART II – OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds

          (d) Use of Proceeds. During the third quarter of 2000, the Company received net proceeds of approximately $89 million from an initial public offering of the Company’s common stock.  Provided below is a reasonable estimate of the amount of IPO net proceeds used in each of the following categories, through March 31, 2003: 

          The use of proceeds for working capital includes expenses for research and development and general and administrative activities.  Cash and investments consist of money market funds, commercial paper, corporate and U.S. government agency notes, and bank certificates of deposit.

          None of the IPO net proceeds were paid directly or indirectly to directors, officers, or their associates, persons owning 10 percent (10%) or more of any class of our equity securities, or our affiliates.  The use of IPO net proceeds set forth above does not represent a material change from the anticipated use of proceeds described in the prospectus contained in our Registration Statement on Form S-1 (SEC Registration No. 333-34198), declared effective on August 9, 2000.

Item 6.  Exhibits and Reports on Form 8-K

(a)          List of Exhibits:

(b)          Reports on Form 8-K:

               No reports on Form 8-K were filed during the period covered by this Report.

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SIGNATURE

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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CERTIFICATIONS

I, Kevin J. Ryan, Chief Executive Officer, certify that:

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I, Ronald J. Artale, Chief Financial Officer, certify that:

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Exhibit Index