SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File No. 001-31326
SENESCO TECHNOLOGIES, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 84-1368850
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
303 George Street, Suite 420, New Brunswick, New Jersey 08901
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(Address of Principal Executive Offices) (Zip Code)
(732) 296-8400
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(Issuer's Telephone Number, Including Area Code)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes: X No:
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State the number of shares outstanding of each of the Issuer's classes of
common stock, as of April 30, 2003:
Class Number of Shares
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Common Stock, $0.01 par value 11,880,045
Transitional Small Business Disclosure Format (check one):
Yes: No: X
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SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
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TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements...................................... 1
CONDENSED CONSOLIDATED BALANCE SHEET
as of March 31, 2003 (unaudited) and June 30, 2002............. 2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2003 and March 31, 2002,
For the Nine Months Ended March 31, 2003 and March 31, 2002,
and From Inception on July 1, 1998 through March 31, 2003
(unaudited).................................................... 3
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
From Inception on July 1, 1998 through March 31, 2003
(unaudited).................................................... 4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended March 31, 2003 and March 31, 2002,
and From Inception on July 1, 1998 through March 31, 2003
(unaudited).................................................... 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited).................................................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11
Overview....................................................... 11
Factors That May Affect Our Business, Future Operating Results
and Financial Condition........................................ 21
Liquidity and Capital Resources................................ 30
Changes to Critical Accounting Policies and Estimates.......... 33
Results of Operations.......................................... 34
Item 3. Controls and Procedures................................... 37
PART II. OTHER INFORMATION.
Item 5. Other Information......................................... 38
Item 6. Exhibits and Reports on Form 8-K.......................... 38
SIGNATURES AND CERTIFICATIONS............................................ 39
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PART I. FINANCIAL INFORMATION.
------------------------------
ITEM 1. FINANCIAL STATEMENTS.
Certain information and footnote disclosures required under generally
accepted accounting principles have been condensed or omitted from the following
consolidated financial statements pursuant to the rules and regulations of the
Securities and Exchange Commission. However, Senesco Technologies, Inc., a
Delaware corporation, and its wholly owned subsidiary, Senesco, Inc., a New
Jersey corporation (collectively, "Senesco" or the "Company"), believe that the
disclosures are adequate to assure that the information presented is not
misleading in any material respect.
The results of operations for the interim periods presented herein are not
necessarily indicative of the results to be expected for the entire fiscal year.
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SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
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(A DEVELOPMENT STAGE COMPANY)
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CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
March 31, June 30,
2003 2002
------------------ -----------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 76,239 $ 798,711
Short-term investments........................................................ 3,045,108 2,872,432
Accounts receivable........................................................... -- 75,000
Prepaid expenses and other current assets..................................... 170,917 55,772
-------------- --------------
Total Current Assets..................................................... 3,292,264 3,801,915
Long-term investments......................................................... -- 993,535
Property and equipment, net................................................... 82,867 79,581
Intangibles................................................................... 465,614 347,978
Security deposit.............................................................. 7,187 7,187
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TOTAL ASSETS............................................................. $ 3,847,932 $ 5,230,196
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 62,131 $ 80,201
Accrued expenses.............................................................. 365,524 296,347
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Total Current Liabilities.............................................. 427,655 376,548
Grant payable................................................................. 90,150 67,972
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TOTAL LIABILITIES........................................................ 517,805 444,520
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STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; authorized 5,000,000 shares,
no shares issued........................................................... -- --
Common stock, $0.01 par value; authorized 30,000,000 shares,
issued and outstanding 11,880,045 shares................................... 118,800 118,800
Capital in excess of par...................................................... 12,234,373 12,157,679
Deficit accumulated during the development stage.............................. (9,023,046) (7,430,321)
Deferred compensation related to issuance of options and warrants............. -- (60,482)
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Total Stockholders' Equity................................................. 3,330,127 4,785,676
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................. $ 3,847,932 $ 5,230,196
============== ==============
See Notes to Condensed Consolidated Financial Statements.
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SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
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(A DEVELOPMENT STAGE COMPANY)
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(unaudited)
From Inception on
For the Three For the Three For the Nine For the Nine July 1, 1998
Months Ended Months Ended Months Ended Months Ended through
March 31, March 31, March 31, March 31, March 31,
2003 2002 2003 2002 2003
------------- ------------- ------------- --------------- ---------------
Revenue................................ $ -- $ -- $ 10,000 $ 125,000 $ 210,000
----------- ----------- ----------- ------------- -------------
Operating Expenses:
General and administrative........... 294,403 300,400 1,056,416 976,528 6,084,193
Research and development............. 237,687 100,949 597,774 257,925 2,097,350
Stock-based compensation............. -- 94,146 137,177 635,186 1,498,435
----------- ----------- ----------- ------------- -------------
Total Operating Expenses............... 532,090 495,495 1,791,367 1,869,639 9,679,978
----------- ----------- ----------- ------------- -------------
Loss From Operations................... (532,090) (495,495) (1,781,367) (1,744,639) (9,469,978)
Sale of state income tax loss.......... -- -- 130,952 150,551 341,834
Interest income, net................... 16,407 12,675 57,690 5,227 105,098
----------- ----------- ----------- ------------- -------------
Net Loss............................... $ (515,683) $ (482,820) $(1,592,725) $ (1,588,861) $ (9,023,046)
=========== =========== =========== ============= =============
Basic and Diluted Net Loss Per Common
Share.................................. $ (0.04) $ (0.05) $ (0.13) $ (0.18)
=========== =========== =========== =============
Basic and Diluted Weighted Average
Number of Common
Shares Outstanding..................... 11,880,045 10,527,346 11,880,045 8,925,427
=========== =========== =========== =============
See Notes to Condensed Consolidated Financial Statements.
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SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
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(A DEVELOPMENT STAGE COMPANY)
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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------
FROM INCEPTION ON JULY 1, 1998 THROUGH MARCH 31, 2003
-----------------------------------------------------
(unaudited)
Deferred
Deficit Compensation
Accumulated Related to the
Capital in During the Issuance of
Excess of Development Options and
Common Stock Par Value Stage Warrants Total
-------------------- ----------------- ----------------- -------------- -----------
Shares Amount
------ ------
Common stock outstanding........... 2,000,462 $ 20,005 $ (20,005) -- -- --
Contribution of capital............ -- -- 85,179 -- -- $ 85,179
Issuance of common stock in reverse
merger on January 22, 1999 at $0.01
per share.......................... 3,400,000 34,000 (34,000) -- -- --
Issuance of common stock for cash
on May 21, 1999 at $2.63437
per share.......................... 759,194 7,592 1,988,390 -- -- 1,995,982
Issuance of common stock for
placement fees on May 21, 1999 at
$0.01 per share.................... 53,144 531 (531) -- -- --
Fair market value of options
and warrants granted on September
7, 1999............................ -- -- 252,578 -- $ (72,132) 180,446
Fair market value of warrants
granted on October 1, 1999......... -- -- 171,400 -- (108,600) 62,800
Fair market value of warrants
granted on December 15, 1999....... -- -- 331,106 -- -- 331,106
Issuance of common stock for cash
on January 26, 2000 at $2.867647
per share.......................... 17,436 174 49,826 -- -- 50,000
Issuance of common stock for cash
on January 31, 2000 at $2.87875
per share.......................... 34,737 347 99,653 -- -- 100,000
Issuance of common stock for cash
on February 4, 2000 at $2.934582
per share.......................... 85,191 852 249,148 -- -- 250,000
(continued)
See Notes to Condensed Consolidated Financial Statements.
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SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
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(A DEVELOPMENT STAGE COMPANY)
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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------
FROM INCEPTION ON JULY 1, 1998 THROUGH MARCH 31, 2003
-----------------------------------------------------
(unaudited)
Deferred
Deficit Compensation
Accumulated Related to the
Capital in During the Issuance of
Excess of Development Options and
Common Stock Par Value Stage Warrants Total
-------------------- ----------------- ----------------- -------------- -----------
Shares Amount
------ ------
Issuance of common stock for
cash on March 15, 2000 at
$2.527875 per share................ 51,428 $ 514 $ 129,486 -- -- $ 130,000
Issuance of common stock for cash
on June 22, 2000 at $1.50 per
share.............................. 1,471,700 14,718 2,192,833 -- -- 2,207,551
Commissions, legal and bank fees
associated with issuances for the
year ended June 30, 2000........... -- -- (260,595) -- -- (260,595)
Fair market value of warrants
granted on October 2, 2000......... -- -- 80,700 -- -- 80,700
Fair market value of warrants
granted on September 4, 2001....... -- -- 41,800 -- -- 41,800
Fair market value of warrants
granted on October 15, 2001........ -- -- 40,498 -- -- 40,498
Fair market value of options and
warrants granted on November 1,
2001............................... -- -- 138,714 -- -- 138,714
Issuance of common stock and
warrants for cash from
November 30, 2001 through
April 17, 2002..................... 3,701,430 37,014 6,440,486 -- -- 6,477,500
Fair market value of options and
warrants granted on December 1,
2001............................... -- -- 262,550 -- -- 262,550
(continued)
See Notes to Condensed Consolidated Financial Statements.
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SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
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(A DEVELOPMENT STAGE COMPANY)
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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------
FROM INCEPTION ON JULY 1, 1998 THROUGH MARCH 31, 2003
-----------------------------------------------------
(unaudited)
Deferred
Deficit Compensation
Accumulated Related to the
Capital in During the Issuance of
Excess of Development Options and
Common Stock Par Value Stage Warrants Total
-------------------- ----------------- ----------------- -------------- -----------
Shares Amount
------ ------
Issuance of common stock and
warrants associated with bridge
loan conversion on December 3,
2001............................... 305,323 $ 3,053 $ 531,263 -- -- $ 534,316
Fair market value of options
vested and extended on January 1,
2002............................... -- -- 94,146 -- -- 94,146
Commissions, legal and
bank fees associated with
issuances for the year ended
June 30, 2002...................... -- -- (846,444) -- -- (846,444)
Fair market value of warrants
vested on October 15, 2002......... -- -- 27,832 -- -- 27,832
Fair market value of warrants
vested on November 1, 2002......... -- -- 69,665 -- -- 69,665
Fair value of options and warrants
vested and change in
fair value of options and warrants
granted............................ -- -- 118,695 -- $ 180,732 299,427
Net loss........................... -- -- -- $ (9,023,046) -- (9,023,046)
---------- --------- ----------- ------------ ---------- ----------
Balance at March 31, 2003.......... 11,880,045 $ 118,800 $12,234,373 $ (9,023,046) $ -- $3,330,127
========== ========= =========== ============ ========== ==========
See Notes to Condensed Consolidated Financial Statements.
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SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
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(A DEVELOPMENT STAGE COMPANY)
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
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(unaudited)
From Inception on
For the Nine Months Ended July 1, 1998 through
March 31, March 31,
2003 2002 2003
--------------- -------------- ----------------------
Cash flows from operating activities:
Net loss........................................................ $ (1,592,725) $ (1,588,861) $ (9,023,046)
Adjustments to reconcile net loss
to net cash used in operating activities:
Noncash capital contribution.................................... -- -- 85,179
Noncash conversion of accrued expenses into equity.............. -- 131,250 131,250
Issuance of common stock and warrants for interest.............. -- 9,316 9,316
Issuance and vesting of stock options and warrants
for services................................................. 137,177 635,186 1,498,435
Depreciation and amortization................................... 30,138 17,056 84,871
(Increase) decrease in operating assets:
Accounts receivable............................................. 75,000 -- --
Prepaid expense and other current assets........................ (115,145) 5,324 (170,917)
Security deposit................................................ -- -- (7,187)
Increase (decrease) in operating liabilities:
Accounts payable................................................ (18,070) (87,605) 62,131
Accrued expenses................................................ 69,177 (96,371) 365,524
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Net cash used in operating activities........................... (1,414,448) (974,705) (6,964,444)
--------------- -------------- ----------------
Cash flows from investing activities:
Patent costs.................................................... (117,636) (119,355) (475,631)
Redemption (purchase) of investments, net....................... 820,859 -- (3,045,108)
Purchase of property and equipment.............................. (33,425) (13,595) (157,721)
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Net cash provided by (used in) investing activities............. 669,798 (132,950) (3,678,460)
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Cash flows from financing activities:
Proceeds from grant............................................. 22,178 11,076 90,150
Proceeds from issuance of bridge notes.......................... -- 525,000 525,000
Proceeds from issuance of common stock and warrants, net........ -- 4,044,273 10,103,993
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Cash provided by financing activities........................... 22,178 4,580,349 10,719,143
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Net increase (decrease) in cash and cash equivalents............ (722,472) 3,472,694 76,239
Cash and cash equivalents at beginning of period................ 798,711 14,330 --
--------------- -------------- ----------------
Cash and cash equivalents at end of period...................... $ 76,239 $ 3,487,024 $ 76,239
=============== ============== ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest...................... $ -- $ -- $ 22,317
=============== ============== ================
Supplemental schedule of noncash financing activity:
Conversion of bridge notes into stock......................... $ -- $ 534,316 $ 534,316
=============== ============== ================
See Notes to Condensed Consolidated Financial Statements.
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SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
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(A DEVELOPMENT STAGE COMPANY)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended June 30, 2002.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all adjustments, consisting
solely of those which are of a normal recurring nature, necessary to present
fairly its financial position as of March 31, 2003 and as of June 30, 2002, the
results of its operations for the three month periods ended March 31, 2003 and
2002, the results of its operations and cash flows for the nine month periods
ended March 31, 2003 and 2002 and for the period from inception on July 1, 1998
through March 31, 2003.
Interim results are not necessarily indicative of results for the full
fiscal year.
Senesco is a development stage functional genomics company whose mission is
to: (i) enhance the quality and productivity of fruits, flowers, vegetables and
agronomic crops through the control of cell death in plants (senescence); and
(ii) develop novel approaches to treat programmed cell death diseases in humans
(apoptosis) (e.g., rheumatoid arthritis, macular degeneration, glaucoma, heart
disease, Alzheimer's disease and Parkinson's disease), which are the result of
premature cell death in humans, and cancer, a group of diseases in which
apoptosis is blocked. Agricultural results to date include longer shelf life of
perishable produce, increased seed and biomass yield and greater tolerance to
environmental stress. Mammalian results to date include: determining the
expression of the Company's patent-pending genes in both ischemic and
non-ischemic heart tissue; correlating such genes to certain key immune
regulators known as cytokines that have been found to be involved in apoptosis;
and inducing apoptosis in human cancer cell lines derived from tumors.
NOTE 2 - LOSS PER SHARE:
Net loss per common share is computed by dividing the loss by the weighted
average number of common shares outstanding during the period. Since September
7, 1999, the Company has had outstanding options and warrants to purchase its
common stock, $0.01 par value per share (the "Common Stock"); however, for the
three months and nine months ended March 31, 2003 and 2002, shares to be issued
upon the exercise of the options and warrants are not included in the
computation of diluted loss per share as the effect is anti-dilutive.
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SENESCO TECHNOLOGIES, INC. AND SUBSIDIARY
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(A DEVELOPMENT STAGE COMPANY)
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)
NOTE 3 - STOCK OPTIONS AND WARRANTS:
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Options to purchase Common Stock have been
granted at or above the fair market value of the stock as of the date of grant.
Accordingly, no compensation costs have been recognized for the stock option
plan. Had compensation costs been determined based on the fair value as of the
grant dates for those awards consistent with the method of FASB No. 123, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below:
THREE MONTHS ENDED MARCH 31, 2003 2002
--------------------------------------------------------------------------------
Net loss:
As reported $ (515,683) $ (482,820)
Stock-based employee compensation costs (200,625) (136,500)
================================================================================
Pro forma $ (716,308) $ (619,320)
================================================================================
Loss per share:
As reported $ (.04) $ (.05)
Stock-based employee compensation costs (.02) (.01)
================================================================================
Pro forma $ (.06) $ (.06)
================================================================================
NINE MONTHS ENDED MARCH 31, 2003 2002
--------------------------------------------------------------------------------
Net loss:
As reported $(1,592,725) $(1,588,861)
Stock-based employee compensation costs (737,841) (982,684)
================================================================================
Pro forma $(2,330,566) $(2,571,545)
================================================================================
Loss per share:
As reported $ (.13) $ (.18)
Stock-based employee compensation costs (.07) (.11)
================================================================================
Pro forma $ (.20) $ (.29)
================================================================================
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The estimated grant date present value reflected in the above table is
determined using the Black-Scholes model. The material factors incorporated in
the Black-Scholes model in estimating the value of the options reflected in the
above table for the three months and nine months ended March 31, 2003 and 2002
include the following: (i) an exercise price equal to the fair market value of
the underlying stock on the dates of grant; (ii) an option term range of 5 to 10
years; (iii) a risk-free rate range of 3.00% to 4.22% and 4.24% to 5.18%,
respectively, that represents the interest rate on a U.S. Treasury security with
a maturity date corresponding to that of the option term; (iv) volatility of
147.83%; and (v) no annualized dividends paid with respect to a share of Common
Stock at the date of grant. The ultimate values of the options will depend on
the future price of the Common Stock, which cannot be forecast with reasonable
accuracy.
NOTE 4 - SIGNIFICANT EVENTS:
On March 28, 2003, the Company filed a registration statement with the
Securities and Exchange Commission (the "SEC") to register all of the 3,000,000
shares of Common Stock underlying the Company's 1998 Stock Incentive Plan, as
amended. The registration statement was deemed effective by the SEC upon filing.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
OUR BUSINESS
The primary business of Senesco Technologies, Inc., a Delaware corporation
incorporated in 1999, and its wholly-owned subsidiary, Senesco, Inc., a New
Jersey corporation incorporated in 1998, collectively referred to as "Senesco,"
"we," "us" or "our," is the research, development and commercial exploitation of
a potentially significant platform technology involving the identification and
characterization of genes that we believe control the programmed cell death of
plant cells, also known as senescence, and mammalian cells, also known as
apoptosis.
AGRICULTURAL APPLICATIONS
Our technology goals for agricultural applications are to: (i) extend the
shelf-life of perishable plant products; (ii) produce larger and leafier crops;
(iii) increase yield in horticultural and agronomic crops; and (iv) reduce the
harmful effects of environmental stress.
Senescence is the natural aging of plant tissues. Loss of cellular membrane
integrity is an early event during the senescence of all plant tissues that
prompts the deterioration of fresh flowers, fruits and vegetables. This loss of
integrity, which is attributable to the formation of lipid metabolites in
membrane bilayers that phase-separate, causes the membranes to become leaky. A
decline in cell function ensues, leading to deterioration and eventual death, or
spoilage, of the tissue. A delay in senescence increases shelf-life and extends
the plant's growth timeframe, which allows the plant to devote more time to the
photosynthetic process. We have shown that the additional energy gained in this
period leads directly to increased seed production, and therefore increases crop
yield. Seed production is a vital agricultural function. For example,
oil-bearing crops store oil in their seeds. We have also shown that reducing
premature senescence allows the plant to allocate more energy toward growth,
leading to larger plants, with increased biomass, and more leafy crops. Most
recently, we have demonstrated that reducing premature senescence results in
crops which exhibit increased resilience to water deprivation and salt stress.
Drought and salt resistant crops may ultimately be more cost effective due to
reduced loss in the field and less time spent on crop management.
The technology presently utilized by the industry for increasing the
shelf-life in certain flowers, fruits and vegetables relies primarily on
reducing ethylene biosynthesis, and hence only has application to the limited
number of plants that are ethylene-sensitive.
Our research focuses on the discovery and development of certain gene
technologies, which are designed to confer positive traits on fruits, flowers,
vegetables, forestry species and agronomic crops. To date, we have isolated and
characterized the senescence-induced lipase gene, deoxyhypusine synthase, or
DHS, gene and Factor 5A gene in certain species of plants. Our goal is to
inhibit the expression of, or silence, these genes to delay senescence, which
will in turn extend shelf-life, increase biomass, increase yield and increase
resistance to environmental stress, thereby demonstrating proof of concept in
each category of crop. We have licensed this technology to various strategic
partners and have entered into a joint venture, and we intend to continue to
license this technology to additional strategic partners and/or enter into
additional joint ventures.
-11-
We are currently working with lettuce, melon, tomato, canola, Arabidopsis,
a model plant that produces oil in a manner similar to canola, banana, certain
species of trees and alfalfa, and have obtained proof of concept for the lipase,
DHS and Factor 5A genes in several of these plants. Also, we have initiated
field trials of lettuce and bananas with our respective partners. Near-term
research and development initiatives include: (i) silencing or reducing the
expression of DHS and Factor 5A genes in these plants; and (ii) propagation and
testing of plants with our silenced genes. We have also completed our research
and development initiative in carnation flower, which yielded a 100% increase in
shelf-life through the inhibition of the DHS reaction.
HUMAN HEALTH APPLICATIONS
Inhibiting Apoptosis
--------------------
We have also isolated the DHS and programmed cell death Factor 5A genes in
mammalian tissue. Our preliminary research reveals that DHS and Factor 5A genes
regulate apoptosis in animal and human cells. The mammalian apoptosis isoforms
of the DHS and Factor 5A genes were first isolated from the ovarian tissue,
specifically the corpus luteum, of rats, which undergoes apoptosis naturally at
the end of the female reproductive cycle. The sequences of the mammalian
apoptosis DHS and Factor 5A genes are very similar to those of the corresponding
plant genes in keeping with their common functions. Moreover, inhibiting the
function of the Factor 5A gene in rats has been shown to inhibit the induction
of corpus luteum apoptosis. Apoptosis, as manifested by DNA fragmentation, was
clearly detectable in super-ovulated control female rats within three hours of
treatment with prostaglandin F2a. This hormone induces corpus luteum apoptosis
naturally in mammals, but in super-ovulated animals in which the activation of
Factor 5A had been inhibited, DNA fragmentation reflecting apoptosis was not
apparent. Thus, just as these genes can be used to delay senescence in plants,
this experiment shows that they may also be used to inhibit apoptosis in
mammals. We believe that our technology has potential application as a means of
controlling a broad range of diseases that are attributable to premature
apoptosis, including neurodegenerative diseases, such as Alzheimer's disease and
Parkinson's disease, retinal diseases, such as glaucoma and macular
degeneration, heart disease, stroke and rheumatoid arthritis. We have commenced
pre-clinical research on heart tissue samples from both ischemic and
non-ischemic patients with heart disease and have found that Factor 5A is
significantly upregulated in ischemic heart tissue. Ischemia is the restriction
of blood supply to the heart that can result in heart attacks and damage to
heart tissue. We have also found that upregulation of Factor 5A correlates to
upregulation of two key inflammatory cytokines, Interleukin-1 and
Interleukin-18, which are pro-inflammatory molecules and are indicated in
numerous apoptopic diseases. In addition, we have initiated cell-line studies
for applications of our technology to glaucoma.
Accelerating Apoptosis
----------------------
Conversely, we have also established in pre-clinical studies that our
apoptosis Factor 5A gene is able to kill cancer cells. Tumors arise when cells
that have been targeted to undergo apoptosis are unable to do so because of an
inability to activate the apoptotic pathways. When our apoptosis Factor 5A gene
was introduced into RKO cells, a cell line derived from human carcinoma and COS7
cells, an immortal, cancer-like cell line from monkeys, virtually all cells
expressing the Factor 5A gene underwent apoptosis. Moreover, just as the
senescence Factor 5A gene appears to facilitate expression of the entire suite
of genes required for programmed cell death in plants, the apoptosis Factor 5A
gene appears to regulate expression of a suite of genes required for programmed
cell
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death in mammals. For example, over-expression of apoptosis Factor 5A up
regulates p53, an important tumor suppressor gene that promotes apoptosis in
cells with damaged DNA and also down regulates bcl 2, a suppressor of apoptosis.
Because the Factor 5A gene appears to function at the initiation point of the
apoptotic pathways, we believe that our gene technology has potential
application as a means of combating a broad range of cancers.
AGRICULTURAL TARGET MARKETS
Our technology embraces crops that are reproduced both through seeds and
propagation, which are the only two means of commercial crop reproduction.
Propagation is a process whereby the plant does not produce fertile seeds and
must reproduce through cuttings from the parent plant which are planted and
become new plants. In order to address the complexities associated with
marketing and distribution in the worldwide market, we have adopted a
multi-faceted commercialization strategy, in which we plan to enter into
licensing agreements or other strategic relationships with a variety of
companies or other entities on a crop-by-crop basis.
In November 2001, we entered into a worldwide exclusive development and
license agreement, referred to herein as the Harris Moran License, with Harris
Moran Seed Company to commercialize our technology in lettuce and certain melons
for an indefinite term, unless terminated by either party pursuant to the terms
of the agreement. In connection with the Harris Moran License, we received an
initial license fee of $125,000 in November 2001. Upon the completion of certain
marketing and development benchmarks set forth in the Harris Moran License, we
will receive an additional $3,875,000 in development payments over a multi-year
period along with royalties upon commercial introduction.
To date, the development steps performed by Harris Moran and us have all
been completed on schedule in accordance with the protocol set forth in the
Harris Moran License. There has been extensive characterization of our genes in
lettuce in a laboratory setting. The initial lab work has produced genetically
modified seed under greenhouse containment, which has been followed by
substantial field trials for evaluation. These field trials represent a vital
step in the process necessary to develop a commercial product. Harris Moran
foresees additional field trials of our technology by June 2003.
In June 2002, we entered into a three-year worldwide exclusive development
and option agreement, referred to herein as the ArborGen Agreement, with
ArborGen, LLC to develop our technology in certain species of trees. In
connection with the ArborGen Agreement, we received an initial development fee
of $75,000 in July 2002. Upon the completion of certain development benchmarks
set forth in the ArborGen Agreement, we will receive an additional $225,000 in
periodic development payments over the term of the ArborGen Agreement. The
ArborGen Agreement also grants ArborGen an option to acquire an exclusive
worldwide license to commercialize our technology in various other forestry
products, and upon the execution of a license agreement, we will receive a
license fee and royalties from ArborGen.
In September 2002, we entered into an exclusive development and license
agreement, referred to herein as the Cal/West License, with Cal/West Seeds to
commercialize our technology in certain varieties of alfalfa. The Cal/West
License will continue until the expiration of the patents set forth in the
agreement, unless terminated earlier by either party pursuant to the
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terms of the agreement. The Cal/West License also grants Cal/West an exclusive
option to develop our technology in various other forage crops. In connection
with the execution of the Cal/West License, we received an initial fee of
$10,000 from Cal/West. Upon the completion of certain development benchmarks, we
will receive an additional $20,000 in periodic payments, and upon the
commercialization of certain products, we will receive royalty payments from
Cal/West.
In October 2002, we entered into a non-exclusive sales representative
agreement to market and promote our technology in the People's Republic of
China. Under the terms of the agreement, we will pay a commission to the sales
representative based on a percentage of the gross license fees we receive. With
the assistance of the sales representative, in November 2002, we executed a
non-binding letter of intent with the Tianjin Academy of Agricultural Sciences
for the exclusive use of our technology in a variety of fruit and vegetable
crops in China. We are currently in discussions with representatives of the
Academy as well as government representatives from the city of Tianjin and from
a central government department of China. We have also initiated discussions
with a Chinese biotechnology seed company. Such a company would be necessary to
secure the financing for the proposed agreement with the Academy and to
commercialize the seeds developed with our technology under the proposed
license. Due to the size and scope of the proposed agreement and the
complexities of doing business in China, and in light of the current SARS health
crisis in China, we anticipate that our ongoing discussions will continue over
the course of the next several months.
HUMAN HEALTH TARGET MARKETS
We believe that our gene technology could have broad applicability in the
human health field, by either inhibiting or accelerating apoptosis. Inhibiting
apoptosis may be useful in preventing or treating a wide range of diseases
attributed to premature apoptosis, including stroke, heart disease, rheumatoid
arthritis, retinal diseases such as glaucoma, and macular degeneration and
neurodegenerative diseases such as Alzheimer's disease and Parkinson's disease.
Accelerating apoptosis may be useful in treating certain forms of cancer because
the body's immune system is not able to force cancerous cells to undergo
apoptosis.
COMPETITION
Competitors who are presently attempting to distribute their technology
have generally utilized one of the following distribution channels: (i)
licensing technology to major marketing and distribution partners; (ii) entering
into strategic alliances; or (iii) developing in-house production and marketing
capabilities. In addition, some competitors are owned by established
distribution companies, which alleviates the need for strategic alliances, while
others are attempting to create their own distribution and marketing channels.
Our competitors in the field of delaying plant senescence are companies
that develop and produce transformed plants in which ethylene biosynthesis has
been silenced. Such companies include, among others: Paradigm Genetics; Aventis
Crop Science; Mendel Biotechnology; Bionova Holding Corporation; Renessen LLC;
Exelixis Plant Sciences, Inc.; PlantGenix, Inc.; and Eden Bioscience.
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Companies working in the field of apoptosis research include, among others:
Cell Pathways, Inc.; Trevigen, Inc.; Idun Pharmaceuticals; Novartis; Introgen
Therapeutics, Inc.; Genta, Inc.; and Oncogene, Inc.
MARKETING PROGRAM
Based upon our multi-faceted commercialization strategy, we anticipate that
there may be a significant period of time before plants enhanced using our
technology reach consumers. Thus, we have not begun to actively market our
technology directly to consumers, but rather, we have sought to establish
ourselves within the industry through presentations at industry conferences, our
website and direct communication with prospective licensees.
RESEARCH PROGRAM
Our subsequent research and development initiatives include: (i) further
developing the lipase, DHS and Factor 5A gene technology in lettuce, melon and
banana, and implementing the technology in a variety of other commercially
important agricultural crops such as tomato, alfalfa and trees; (ii) testing the
resultant crops for new beneficial traits such as increased yield and increased
tolerance to environmental stress; and (iii) assessing the role of the DHS and
Factor 5A genes in human diseases through the accumulation of additional data
from pre-clinical experiments with cell lines, mammalian tissue and animal
models. Our strategy for agriculture focuses on various plants to allow
flexibility that will accommodate different plant reproduction strategies among
the different sectors of the broad agricultural and horticultural markets.
Our research and development is performed by third party researchers at our
direction, pursuant to various research and license agreements. The primary
research and development effort takes place at the University of Waterloo in
Ontario, Canada, where the technology was developed, and at the University of
Colorado. Additional research and development is performed by our partners in
connection with the Harris Moran License, the ArborGen Agreement, the Cal/West
License and the Anawah Agreement, as well as through the joint venture with
Rahan Meristem Ltd. in Israel. During the three months ended March 31, 2003 and
March 31, 2002, we incurred aggregate research and development expenses of
$237,687 and $100,949, respectively. During the nine months ended March 31, 2003
and March 31, 2002, we incurred aggregate research and development expenses of
$597,774 and $257,925, respectively. As of March 31, 2003, our aggregate
research and development expenses since inception totaled $2,097,350.
For the three months ended March 31, 2003, approximately 50% of our
research and development expenses were incurred on mammalian research
applications. Since our inception, the proportion of research and development
expenses on mammalian applications has increased, as compared to plant
applications. This change is primarily due to the fact that our research focus
on mammalian applications has increased and some of our research costs for plant
applications have shifted to our research partners.
JOINT VENTURE
On May 14, 1999, we entered into a joint venture agreement with Rahan
Meristem Ltd., an Israeli company engaged in the worldwide export marketing of
banana germ-plasm, referred to herein as the Rahan Joint Venture. Rahan Meristem
accounts for approximately 10% of the worldwide export of banana seedlings. We
have contributed, by way of a limited, exclusive, world-wide license to the
Rahan Joint Venture, access to our technology, discoveries, inventions
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and know-how, whether patentable or otherwise, pertaining to plant genes and
their cognate expressed proteins that are induced during senescence for the
purpose of developing, on a joint basis, genetically enhanced banana plants
which will result in a banana that has a longer shelf-life. Rahan Meristem has
contributed its technology, inventions and know-how with respect to banana
plants. Rahan Meristem and we equally own the Rahan Joint Venture.
The Rahan Joint Venture applied for and received a conditional grant that
totals approximately $340,000, which constitutes 50% of the Rahan Joint
Venture's research and development budget over a four-year period, ending on May
31, 2003, from the Israel - U.S. Binational Research and Development Foundation,
or BIRD Foundation, referred to herein as the BIRD Grant. Such grant, along with
certain royalty payments, shall only be repaid to the BIRD Foundation upon the
commercial success of the Rahan Joint Venture's technology. The commercial
success is measured based upon certain benchmarks and/or milestones achieved by
the Rahan Joint Venture. The Rahan Joint Venture reports these benchmarks
periodically to the BIRD Foundation. As of March 31, 2003, we have directly
received a total of $90,150, $11,089 of which was received during the current
quarter, from the BIRD Foundation for research and development expenses we have
incurred which are associated with the research and development efforts of the
Rahan Joint Venture. We expect to receive an additional installment of the BIRD
Grant as our expenditures associated with the Rahan Joint Venture increase above
certain levels. Our portion of the Rahan Joint Venture's aggregate expenses
totaled approximately $25,000 and $24,500 for the nine months ended March 31,
2003 and March 31, 2002, respectively, and is included in research and
development expenses. As of March 31, 2003, our portion of the Rahan Joint
Venture's aggregate expenses to date totaled approximately $155,000.
All aspects of the Rahan Joint Venture's research and development
initiative are proceeding on time, or are ahead of the original schedule laid
out at the inception of the Rahan Joint Venture. Both the DHS and lipase genes
have been identified and isolated in banana, and the Rahan Joint Venture is
currently in the process of silencing these genes. The resultant plants will be
tested to assess extended shelf-life of banana fruit and enhanced tolerance to
environmental stress. Banana plants containing our technology are currently
being tested in field trials.
Consistent with our commercialization strategy, we intend to attract other
companies interested in strategic partnerships, joint ventures or licensing our
technology. The Harris Moran License, the ArborGen Agreement, the Cal/West
License and the Rahan Joint Venture are the first successes toward the execution
of our strategy.
INTELLECTUAL PROPERTY
Research and Development
------------------------
The inventor of our technology, John E. Thompson, Ph.D., is the Associate
Vice-President, Research and former Dean of Science at the University of
Waterloo in Ontario, Canada, and is our Executive Vice President of Research and
Development. Dr. Thompson is also one of our directors and owns 4.8% of the
outstanding shares of our common stock, $0.01 par value, as of March 31, 2003.
On September 1, 1998, we entered into a three-year research and development
agreement with the University of Waterloo and Dr. Thompson as the principal
inventor, referred to herein as the First Research and Development Agreement.
Effective
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September 1, 2001 and 2002, we extended the First Research and Development
Agreement for an additional one-year period and two-year period, respectively.
Effective May 1, 2002, we entered into a new one-year research and development
agreement with the University of Waterloo and Dr. Thompson, referred to herein
as the Second Research and Development Agreement. The First Research and
Development Agreement and the Second Research and Development Agreement are
collectively referred to herein as the Research and Development Agreements.
The Research and Development Agreements provide that the University of
Waterloo will perform research and development under our direction, and we will
pay for the cost of this work and make certain payments to the University of
Waterloo. In return for payments made under the Research and Development
Agreements, we have all rights to the intellectual property derived from the
research. As of March 31, 2003, we have paid the University of Waterloo an
aggregate of approximately US $1,120,000 under the First Research and
Development Agreement. Under the second extension to the First Research and
Development Agreement, we are obligated to pay Can $1,092,800, which represented
approximately US $744,000 as of March 31, 2003. Under the Second Research and
Development Agreement, we are obligated to pay Can $50,000, which represented
approximately US $34,000 as of March 31, 2003. During the three month periods
ended March 31, 2003 and March 31, 2002, we incurred expenses of $94,814 and
$66,075, respectively, in connection with the Research and Development
Agreements. During the nine month periods ended March 31, 2003 and March 31,
2002, we incurred expenses of $285,551 and $180,225, respectively, in connection
with the Research and Development Agreements.
Effective May 1, 1999, we entered into a consulting agreement for research
and development with Dr. Thompson. On July 1, 2001, we renewed the consulting
agreement with Dr. Thompson for an additional three year term as provided for
under the terms and conditions of the agreement. Effective January 1, 2003, the
agreement was amended to provide for an increase in the monthly payments to Dr.
Thompson from $3,000 to $5,000 through June 2004. The agreement shall
automatically renew for an additional three year term, unless either of the
parties provides the other with written notice within six months prior to the
end of the term.
In September 2002, we entered into an exclusive worldwide collaboration
agreement, referred to herein as the Anawah Agreement, with Anawah, Inc.
(formerly Tilligen, Inc.) to establish a research alliance to develop and
commercialize certain genetically enhanced species of produce. Under the Anawah
Agreement, Anawah will license its proprietary technology to us and will also
perform certain transformation functions in order to develop seeds in certain
species of produce that have been enhanced with our technology. The Anawah
Agreement will continue until the expiration of the patents set forth in the
agreement, unless terminated earlier by either party pursuant to the terms of
the agreement. In connection with the execution of the Anawah Agreement, we
incurred an initial research and development fee of $200,000, which is being
amortized over the term of the research to be performed under the agreement.
Upon the completion of certain development benchmarks, we will incur additional
research and development fees, and upon commercialization of the enhanced
produce, we will make certain royalty payments to Anawah.
Our future research and development program focuses on the discovery and
development of certain gene technologies which intend to extend shelf life and
to confer other positive traits on fruits, flowers, vegetables and agronomic row
crops and on expanding our mammalian
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research programs. Over the next twelve months, we are planning the following
research and development initiatives: (i) the development of plants that possess
new beneficial traits, such as protection against drought, with emphasis on
lettuce, melon, corn, forestry products, alfalfa and the other species described
below with several entities, including Anawah; (ii) the development of enhanced
lettuce and melon plants through the Harris Moran License; (iii) the development
of enhanced trees through the ArborGen Agreement; (iv) the development of
enhanced alfalfa through the Cal/West License; (v) the isolation of new genes in
the Arabidopsis, tomato, lettuce, soybean, canola seed and melon plants, among
others, at the University of Waterloo; (vi) the isolation of new genes in the
banana plant through the Rahan Joint Venture; (vii) the transformation of seed
enhanced with our technology; and (viii) assessing the function of the DHS and
Factor 5A genes in human diseases at the University of Waterloo and the
University of Colorado. We may further expand our research and development
program beyond the initiatives listed above.
Patent and Patent Applications
------------------------------
Dr. Thompson and his colleagues, Dr. Yuwen Hong and Dr. Katalin Hudak,
filed a patent application on June 26, 1998, referred to herein as the Original
Patent Application, to protect their invention, which is directed to methods for
controlling senescence in plants. By assignment dated June 25, 1998 and recorded
with the United States Patent and Trademark Office, or PTO, on June 26, 1998,
Drs. Thompson, Hong and Hudak assigned all of their rights in and to the
Original Patent Application and any other applications filed in the United
States or elsewhere with respect to the invention and/or improvements thereto to
Senesco, L.L.C. We succeeded to the assignment and ownership of the Original
Patent Application. Drs. Thompson, Hong and Hudak filed an amendment to the
Original Patent Application on February 16, 1999, referred to herein as the
Amended Patent Application and together with the Original Patent Application,
the First Patent Application, titled "DNA Encoding A Plant Lipase, Transgenic
Plants and a Method for Controlling Senescence in Plants." The Amended Patent
Application serves as a continuation of the Original Patent Application.
Concurrent with the filing of the Amended Patent Application with the PTO and as
in the case of the Original Patent Application, Drs. Thompson, Hong and Hudak
assigned to us all of their rights in and to the Amended Patent Application and
any other applications filed in the United States or elsewhere with respect to
such invention and/or improvements thereto. Drs. Thompson, Hong and Hudak have
received shares of our common stock in consideration for the assignment of the
First Patent Application. The inventions, which were the subject of the First
Patent Application, include a method for controlling senescence of plants, a
vector containing a cDNA whose expression regulates senescence, and a
transformed microorganism expressing the lipase of the cDNA. We believe that the
inventions provide a means for delaying deterioration and spoilage, which could
greatly increase the shelf-life of fruits, vegetables, and flowers by silencing
or substantially repressing the expression of the lipase gene induced coincident
with the onset of senescence.
We filed a second patent application, referred to herein as the Second
Patent Application, and together with the First Patent Application,
collectively, the Patent Applications, on July 6, 1999, titled "DNA Encoding A
Plant Deoxyhypusine Synthase, Transgenic Plants and a Method for Controlling
Programmed Cell Death in Plants." The inventors named on the patent are Drs.
John E. Thompson, Tzann-Wei Wang and Dongen Lily Lu. Concurrent with the filing
of the Second Patent Application with the PTO and as in the case of the First
Patent Application, Drs. Thompson, Wang and Lu assigned to us all of their
rights in and to the Second Patent
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Application and any other applications filed in the United States or elsewhere
with respect to such invention and/or improvements thereto. Drs. Thompson, Wang
and Lu have received options to purchase our common stock as consideration for
the assignments of the Second Patent Application. The inventions include a
method for the genetic modification of plants to control the onset of either
age-related or stress-induced senescence, an isolated DNA molecule encoding a
senescence induced gene, and an isolated protein encoded by the DNA molecule.
We have broadened the scope of our intellectual property protection by
utilizing the Patent Cooperation Treaty to facilitate international filing and
prosecution of the Patent Applications. The First Patent Application was
published through the Patent Cooperation Treaty in August 2000, and then between
August 2001 and October 2001, was filed in Australia, Canada, China, Japan,
Korea, New Zealand and Europe through the European Patent Office, which has
twenty member states. Israel and Mexico are the last remaining countries in
which we have opted to file that have yet to issue a filing date. The Patent
Cooperation Treaty published the Second Patent Application in January 2001.
We have filed several new Continuations in Part and Divisional Patent
Applications on both the First Patent Application and the Second Patent
Application to protect our intellectual property pertaining to new technological
developments. We have also filed one additional application (the "Third Patent
Application") followed by a substantial Continuation in Part, in addition to
those listed above, which pertain to the possible mammalian applicability of our
technology. The Third Patent Application is focused on suppressing cell death as
a prospective therapy for a wide range of diseases and the Continuation in Part
focuses on accelerating cell death as a means of treating cancer. We have filed
a second Continuation in Part on the Third Patent Application based on data we
gathered in studies of ischemic heart tissue. We intend to continue our strategy
of enhancing these new patent applications through the addition of data as it is
collected.
On March 25, 2003, we were granted Patent No. 6,538,182, entitled "DNA
Encoding a Plant Deoxyhypusine Synthase, A Plant Eukaryotic Initiation Factor
5A, Transgenic Plants and A Method For Controlling Senescence and Programmed
Cell Death in Plants", from the PTO. This patent represents successful
prosecution of some of the claims set forth in the Second Patent Application.
Further divisional applications which cover other claims from the Second Patent
Application are currently being reviewed by the PTO.
GOVERNMENT REGULATION
At present, the U.S. federal government regulation of biotechnology is
divided among three agencies: (i) the U.S. Department of Agriculture regulates
the import, field-testing and interstate movement of specific types of genetic
engineering that may be used in the creation of transformed plants; (ii) the
Environmental Protection Agency regulates activity related to the invention of
plant pesticides and herbicides, which may include certain kinds of transformed
plants; and (iii) the Food and Drug Administration regulates foods derived from
new plant varieties. The FDA requires that transformed plants meet the same
standards for safety that are required for all other plants and foods in
general. Except in the case of additives that significantly alter a food's
structure, the FDA does not require any additional standards or specific
approval for genetically engineered foods but expects transformed plant
developers to consult the FDA before introducing a new food into the market
place.
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We believe that our current activities, which to date have been confined to
research and development efforts, do not require licensing or approval by any
governmental regulatory agency. However, we, or our licensees, may be required
to obtain such licensing or approval from governmental regulatory agencies prior
to the commercialization of our genetically transformed plants and mammalian
technology.
EMPLOYEES
In addition to the scientists performing funded research for us at the
University of Waterloo and the University of Colorado, as of March 31, 2003 and
currently, we have four employees and one consultant, four of whom are executive
officers and are involved in our management.
The officers are assisted by a Scientific Advisory Board that consists of
prominent experts in the fields of plant and mammalian cell biology. Alan
Bennett, Ph.D., who serves as the Chairman of the Scientific Advisory Board, is
the Executive Director of the Office of Technology Transfer at the University of
California. His research interests include: the molecular biology of tomato
fruit development and ripening; the molecular basis of membrane transport; and
cell wall disassembly. Charles A. Dinarello, M.D., who serves as a member of the
Scientific Advisory Board, is a Professor of Medicine at the University of
Colorado School of Medicine, a member of the U.S. National Academy of Sciences
and the author of over 500 published research articles. In addition to his
active academic research career, Dr. Dinarello has held advisory positions with
two branches of the National Institutes of Health and positions on the Board of
Governors of both the Weizmann Institute and Ben Gurion University. Russell L.
Jones, Ph.D., who serves as a member of the Scientific Advisory Board, is a
professor at the University of California, Berkeley and an expert in plant cell
biology and cell death. Dr. Jones is also an editor of Planta, Annual Review of
Plant Physiology and Plant Molecular Biology as well as Research Notes in Plant
Science. Additionally, he has held positions on the editorial boards of Plant
Physiology and Trends in Plant Science.
In addition to his service on the Scientific Advisory Board, we utilize Dr.
Bennett as a consultant experienced in plant transformation. Effective November
1, 2001, we had entered into a one-year consulting agreement with Dr. Bennett,
which provided for monthly payments of $2,400 to Dr. Bennett through October 31,
2002. Effective November 1, 2002, we entered into another one-year consulting
agreement with Dr. Bennett on the same terms and conditions.
Furthermore, pursuant to the Research and Development Agreements, the
majority of our research and development activities are conducted at the
University of Waterloo under the supervision of Dr. Thompson. We utilize the
University's substantial research staff including graduate and post-graduate
researchers.
We have also undertaken pre-clinical apoptosis research at the University
of Colorado under the supervision of Dr. Dinarello. This research is performed
pursuant to specific project proposals that have agreed-upon research outlines,
timelines and budgets. We may also contract research to additional university
laboratories or to other companies in order to advance the development of our
technology.
We may hire additional employees over the next twelve months to meet the
needs created by possible expansion of our operations.
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SAFE HARBOR STATEMENT
The statements contained in this Quarterly Report on Form 10-QSB that are
not historical facts are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements may be
identified by, among other things, the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should," or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. In particular, our
statements regarding the anticipated growth in the markets for our technologies,
the continued advancement of our research, the approval of our Patent
Applications, the possibility of governmental approval in order to sell or offer
for sale to the general public a genetically engineered plant or plant product,
the successful implementation of our commercialization strategy, including the
success of the Harris Moran License, the ArborGen Agreement, the Cal/West
License, the Anawah Agreement and the Research and Development Agreements, the
successful implementation of the Rahan Joint Venture, the conversion of the
letter of intent with the Tianjin Academy of Agricultural Sciences into an
executed agreement, statements relating to our Patent Applications, the
anticipated longer term growth of our business, and the timing of the projects
and trends in future operating performance are examples of such forward-looking
statements. The forward-looking statements include risks and uncertainties,
including, but not limited to, the timing of revenues due to the variability in
size, scope and duration of research projects, regulatory delays, research study
results which lead to cancellations of research projects, and other factors,
including general economic conditions and regulatory developments, not within
our control. The factors discussed herein and expressed from time to time in our
filings with the Securities and Exchange Commission could cause actual results
and developments to be materially different from those expressed in or implied
by such statements. The forward-looking statements are made only as of the date
of this filing, and we undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
FACTORS THAT MAY AFFECT OUR BUSINESS, FUTURE OPERATING RESULTS AND FINANCIAL
CONDITION
The more prominent risks and uncertainties inherent in our business are
described below. However, additional risks and uncertainties may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations may suffer.
WE HAVE A LIMITED OPERATING HISTORY AND HAVE INCURRED SUBSTANTIAL LOSSES AND
EXPECT FUTURE LOSSES.
We are a developmental stage biotechnology company with a limited operating
history and limited assets and capital. We have incurred losses each year since
inception and have an accumulated deficit of $9,023,046 at March 31, 2003. We
have generated minimal revenues by licensing certain of our technology to
companies willing to share in our development costs. However, our technology may
not be ready for widespread commercialization for several years. We expect to
continue to incur losses over the next two to three years because we anticipate
that our expenditures on research and development, commercialization and
administrative activities will significantly exceed our revenues during that
period. We cannot predict when, if ever, we will become profitable.
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WE DEPEND ON A SINGLE PRINCIPAL TECHNOLOGY.
Our primary business is the development and commercial exploitation of
technology to identify, isolate, characterize, and silence genes which control
the aging and death of cells in plants and mammals. Our future revenue and
profitability critically depend upon our ability to successfully develop
senescence and apoptosis gene technology and later market and license such
technology at a profit. We have conducted experiments on certain crops with
favorable results and have conducted certain preliminary cell-line experiments,
which have provided us with data upon which we have designed additional research
programs. However, we cannot give any assurance that our technology will be
commercially successful or economically viable for all crops or mammalian
applications.
In addition, no assurance can be given that adverse consequences might not
result from the use of our technology such as the development of negative
effects on plants or mammals or reduced benefits in terms of crop yield or
protection. Our failure to obtain market acceptance of our technology or to
successfully commercialize such technology or develop a commercially viable
product would have a material adverse effect on our business.
WE OUTSOURCE ALL OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES.
We rely on third parties to perform all of our research and development
activities. Our primary research and development efforts take place at the
University of Waterloo in Ontario, Canada, where our technology was developed,
at the University of Colorado, at Anawah, Inc., formerly known as Tilligen,
Inc., and with our commercial partners. At this time, we do not have the
internal capabilities to perform our research and development activities.
Accordingly, the failure of third-party research partners, such as the
University of Waterloo, to perform under agreements entered into with us, or our
failure to renew important research agreements with these third parties, would
have a material adverse effect on our ability to develop and exploit our
technology.
WE HAVE SIGNIFICANT FUTURE CAPITAL NEEDS.
As of March 31, 2003, we had cash and highly-liquid investments valued at
$3,121,347 and working capital of $2,864,609. We believe that we can operate
according to our current business plan for at least twelve months using our
available reserves. To date, we have generated minimal revenues and anticipate
that our operating costs will exceed any revenues generated over the next
several years. Therefore, we anticipate that we will be required to raise
additional capital in the future in order to operate according to our current
business plan. We may require additional funding in less than twelve months, and
additional funding may not be available on favorable terms, if at all. In
addition, in connection with such funding, if we need to issue more equity
securities than our certificate of incorporation currently authorizes, or more
than 20% of the shares of our common stock outstanding, we may need stockholder
approval. If stockholder approval is not obtained or if adequate funds are not
available, we may be required to curtail operations significantly or to obtain
funds through arrangements with collaborative partners or others that may
require us to relinquish rights to certain of our technologies, product
candidates, products or potential markets. Investors may experience dilution in
their investment from future offerings of our common stock. For example, if we
raise additional capital by issuing equity securities, such an issuance would
reduce the percentage ownership of existing stockholders. In addition, assuming
the exercise of all options and warrants granted, as of March 31, 2003, we had
12,131,802 shares of common stock authorized but unissued, which may be issued
from time
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to time by our board of directors without stockholder approval. Furthermore, we
may need to issue securities that have rights, preferences and privileges senior
to our common stock. Failure to obtain financing on acceptable terms would have
a material adverse effect on our liquidity.
Since inception, we have financed all of our operations through private
equity financings. Our future capital requirements depend on numerous factors,
including:
o the scope of our research and development;
o our ability to attract business partners willing to share in our
development costs;
o our ability to successfully commercialize our technology;
o competing technological and market developments;
o our ability to enter into collaborative arrangements for the development,
regulatory approval and commercialization of other products; and
o the cost of filing, prosecuting, defending and enforcing patent claims
and other intellectual property rights.
OUR BUSINESS DEPENDS ON OUR PATENTS, LICENSES AND PROPRIETARY RIGHTS AND THE
ENFORCEMENT OF THESE RIGHTS.
As a result of the substantial length of time and expense associated with
developing products and bringing them to the marketplace in the agricultural and
biotechnology industries, obtaining and maintaining patent and trade secret
protection for technologies, products and processes is of vital importance. Our
success will depend in part on several factors, including, without limitation:
o our ability to obtain patent protection for technologies, products and
processes;
o our ability to preserve trade secrets; and
o our ability to operate without infringing the proprietary rights of other
parties both in the United States and in foreign countries.
We have been issued one patent by the PTO. We have also filed patent
applications in the United States for our technology, which technology is vital
to our primary business, as well as several Continuations in Part on these
patent applications. Our success depends in part upon the enforcement of our
patent rights and whether patents are granted for our pending patent
applications.
Furthermore, although we believe that our technology is unique and will not
violate or infringe upon the proprietary rights of any third party, there can be
no assurance that such claims will not be made or if made, could be successfully
defended against. If we do not obtain and maintain patent protection, we may
face increased competition in the United States and internationally, which would
have a material adverse effect on our business.
Since patent applications in the United States are maintained in secrecy
until patents are issued, and since publication of discoveries in the scientific
and patent literature tend to lag behind actual discoveries by several months,
we cannot be certain that we were the first creator of the inventions covered by
our pending patent applications or that we were the first to file patent
applications for these inventions.
In addition, among other things, we cannot guarantee that:
-23-
o our patent applications will result in the issuance of patents;
o any patents issued or licensed to us will be free from challenge and
that if challenged, would be held to be valid;
o any patents issued or licensed to us will provide commercially
significant protection for our technology, products and processes;
o other companies will not independently develop substantially equivalent
proprietary information which is not covered by our patent rights;
o other companies will not obtain access to our know-how;
o other companies will not be granted patents that may prevent the
commercialization of our technology; or
o we will not require licensing and the payment of significant fees or
royalties to third parties for the use of their intellectual property in
order to enable us to conduct our business.
If any relevant claims of third-party patents which are adverse to us are
upheld as valid and enforceable, we could be prevented from commercializing our
technology or could be required to obtain licenses from the owners of such
patents. We cannot guarantee that such licenses would be available or, if
available, would be on acceptable terms.
We could become involved in infringement actions to enforce and/or protect
our patents. Regardless of the outcome, patent litigation is expensive and time
consuming and would distract our management from other activities.
The laws of some foreign countries do not protect proprietary rights to the
same extent as the laws of the United States, and many companies have
encountered significant problems and costs in protecting their proprietary
rights in these foreign countries.
Patent law is still evolving relative to the scope and enforceability of
claims in the fields in which we operate. We are like most biotechnology
companies in that our patent protection is highly uncertain and involves complex
legal and technical questions for which legal principles are not yet firmly
established. In addition, if issued, our patents may not contain claims
sufficiently broad to protect us against third parties with similar technologies
or products, or provide us with any competitive advantage.
The PTO and the courts have not established a consistent policy regarding
the breadth of claims allowed in biotechnology patents. The allowance of broader
claims may increase the incidence and cost of patent interference proceedings
and the risk of infringement litigation. On the other hand, the allowance of
narrower claims may limit the value of our proprietary rights.
Our success also depends upon know-how, unpatentable trade secrets, and the
skills, knowledge and experience of our scientific and technical personnel. As a
result, we require all employees to agree to a confidentiality provision that
prohibits the disclosure of confidential information to anyone outside of our
company, during the term of employment and thereafter. We also require all
employees to disclose and assign to us the rights to their ideas, developments,
discoveries and inventions. We also attempt to enter into similar agreements
with our consultants, advisors and research collaborators. We cannot guarantee
adequate protection for our trade secrets, know-how or other proprietary
information against unauthorized use or disclosure. We occasionally provide
information to research collaborators in academic institutions and request the
collaborators to conduct certain tests. We cannot guarantee that the academic
institutions will not assert intellectual property rights in the results of the
tests conducted by the research collaborators, or that the academic institutions
will grant licenses
-24-
under such intellectual property rights to us on acceptable terms, if at all. If
the assertion of intellectual property rights by an academic institution is
substantiated, and the academic institution does not grant intellectual property
rights to us, these events could have a material adverse effect on our business
and financial results.
WE WILL HAVE TO PROPERLY MANAGE OUR GROWTH.
As our business grows, we may need to add employees and enhance our
management, systems and procedures. We will need to successfully integrate our
internal operations with the operations of our marketing partners,
manufacturers, distributors and suppliers to produce and market commercially
viable products. Although we do not presently intend to conduct research and
development activities in-house, we may undertake those activities in the
future. Expanding our business will place a significant burden on our management
and operations. Our failure to effectively respond to changes brought about by
our growth may have a material adverse effect on our business and financial
results.
WE HAVE NO MARKETING OR SALES HISTORY AND DEPEND ON THIRD-PARTY MARKETING
PARTNERS.
We have no history of marketing, distributing or selling biotechnology
products and we are relying on our ability to successfully establish marketing
partners or other arrangements with third parties to market, distribute and sell
a commercially viable product both here and abroad. Our business plan also
envisions creating strategic alliances to access needed commercialization and
marketing expertise. We may not be able to attract qualified sub-licensees,
distributors or marketing partners, and even if qualified, such marketing
partners may not be able to successfully market agricultural products or human
health applications developed with our technology. If we fail to successfully
establish distribution channels, or if our marketing partners fail to provide
adequate levels of sales, we will not be able to generate significant revenue.
WE DEPEND ON PARTNERS TO DEVELOP AND MARKET PRODUCTS.
In its current state of development, our technology is not ready to be
marketed to consumers. We intend to follow a multi-faceted commercialization
strategy that involves the licensing of our technology to business partners for
the purpose of further technological development, marketing and distribution. We
are seeking business partners who will share the burden of our development costs
while our technology is still being developed, and who will pay us royalties
when they market and distribute products incorporating our technology upon
commercialization. The establishment of joint ventures and strategic alliances
may create future competitors, especially in certain regions abroad where we do
not pursue patent protection. If we fail to establish beneficial business
partners and strategic alliances, our growth will suffer and the continued
development of our technology may be harmed.
COMPETITION IN THE AGRICULTURAL AND BIOTECHNOLOGY INDUSTRIES IS INTENSE AND
TECHNOLOGY IS CHANGING RAPIDLY.
Many agricultural and biotechnology companies are engaged in research and
development activities relating to senescence and apoptosis. The market for
plant protection and yield enhancement products is intensely competitive,
rapidly changing and undergoing consolidation. We may be unable to compete
successfully against our current and future competitors, which may result in
price reductions, reduced margins and the inability to achieve market acceptance
for products containing our technology. Our competitors in the field of plant
senescence gene
-25-
technology are companies that develop and produce transgenic plants and include
major international agricultural companies, specialized biotechnology companies,
research and academic institutions and, potentially, our joint venture and
strategic alliance partners. Such companies include: Paradigm Genetics; Aventis
Crop Science; Mendel Biotechnology; Renessen LLC; Exelixis Plant Sciences, Inc.;
PlantGenix, Inc.; and Eden Bioscience, among others. Some of the companies
involved in apoptosis research include: Cell Pathways, Inc.; Trevigen, Inc.;
Idun Pharmaceuticals; Novartis; Introgen Therapeutics, Inc.; Genta, Inc.; and
Oncogene, Inc. Many of these competitors have substantially greater financial,
marketing, sales, distribution and technical resources than us and have more
experience in research and development, clinical trials, regulatory matters,
manufacturing and marketing. We anticipate increased competition in the future
as new companies enter the market and new technologies become available. Our
technology may be rendered obsolete or uneconomical by technological advances or
entirely different approaches developed by one or more of our competitors.
OUR BUSINESS IS SUBJECT TO VARIOUS GOVERNMENT REGULATIONS.
At present, the U.S. federal government regulation of biotechnology is
divided among three agencies: (i) the USDA regulates the import, field testing
and interstate movement of specific types of genetic engineering that may be
used in the creation of transgenic plants; (ii) the EPA regulates activity
related to the invention of plant pesticides and herbicides, which may include
certain kinds of transgenic plants; and (iii) the FDA regulates foods derived
from new plant varieties. The FDA requires that transgenic plants meet the same
standards for safety that are required for all other plants and foods in
general. Except in the case of additives that significantly alter a food's
structure, the FDA does not require any additional standards or specific
approval for genetically engineered foods, but expects transgenic plant
developers to consult the FDA before introducing a new food into the
marketplace. Use of our technology, if developed for human health applications,
will also be subject to FDA regulation.
We believe that our current activities, which to date have been confined to
research and development efforts, do not require licensing or approval by any
governmental regulatory agency. However, federal, state and foreign regulations
relating to crop protection products and human health applications developed
through biotechnology are subject to public concerns and political
circumstances, and, as a result, regulations have changed and may change
substantially in the future. Accordingly, we may become subject to governmental
regulations or approvals or become subject to licensing requirements in
connection with our research and development efforts. We may also be required to
obtain such licensing or approval from the governmental regulatory agencies
described above, or from state agencies, prior to the commercialization of our
genetically transformed plants and mammalian technology. In addition, our
marketing partners who utilize our technology or sell products grown with our
technology may be subject to government regulations. The imposition of
unfavorable governmental regulations on our technology or the failure to obtain
licenses or approvals in a timely manner would have a material adverse effect on
our business.
THE HUMAN HEALTH APPLICATIONS OF OUR TECHNOLOGY ARE SUBJECT TO A LENGTHY AND
UNCERTAIN REGULATORY PROCESS.
The FDA must approve any drug or biologic product before it can be marketed
in the United States. In addition, prior to being sold outside of the U.S., any
products resulting from the application of our mammalian technology must be
approved by the regulatory agencies of
-26-
foreign governments. Prior to filing a new drug application or biologics license
application with the FDA, we would have to perform extensive pre-clinical
testing and clinical trials, which could take several years and may require
substantial expenditures. Any failure to obtain regulatory approval could delay
or prevent us from commercializing our mammalian technology.
CLINICAL TRIALS ON OUR HUMAN HEALTH APPLICATIONS MAY BE UNSUCCESSFUL IN
DEMONSTRATING EFFICACY AND SAFETY, WHICH COULD DELAY OR PREVENT REGULATORY
APPROVAL.
Clinical trials may reveal that our mammalian technology is ineffective or
harmful, which would significantly limit the possibility of obtaining regulatory
approval for any drug or biologic product manufactured with our technology. The
FDA requires submission of extensive pre-clinical, clinical and manufacturing
data to assess the efficacy and safety of potential products. Furthermore, the
success of preliminary studies does not ensure commercial success, and
later-stage clinical trials may fail to confirm the results of the preliminary
studies.
CONSUMERS MAY NOT ACCEPT OUR TECHNOLOGY.
We cannot guarantee that consumers will accept products containing our
technology. Recently, there has been consumer concern and consumer advocate
activism with respect to genetically engineered consumer products. The adverse
consequences from heightened consumer concern in this regard could affect the
markets for products developed with our technology and could also result in
increased government regulation in response to that concern. If the public or
potential customers perceive our technology to be genetic modification or
genetic engineering, agricultural products grown with our technology may not
gain market acceptance.
WE DEPEND ON OUR KEY PERSONNEL.
We are highly dependent on our scientific advisors, consultants and
third-party research partners. Dr. Thompson is the inventor of our technology
and the driving force behind our current research. The loss of Dr. Thompson
would severely hinder our technological development. Our success will also
depend in part on the continued service of our key employees and our ability to
identify, hire and retain additional qualified personnel in an intensely
competitive market. We do not maintain key person life insurance on any member
of management. The failure to attract and retain key personnel could limit our
growth and hinder our research and development efforts.
CERTAIN PROVISIONS OF OUR CHARTER, BY-LAWS AND DELAWARE LAW COULD MAKE A
TAKEOVER DIFFICULT.
Certain provisions of our certificate of incorporation and by-laws could
make it more difficult for a third party to acquire control of us, even if the
change in control would be beneficial to stockholders. Our certificate of
incorporation authorizes our board of directors to issue, without stockholder
approval, except as may be required by the rules of the American Stock Exchange,
5,000,000 shares of preferred stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of our common stock. Similarly, our by-laws do not restrict our board of
directors from issuing preferred stock without stockholder approval.
In addition, we are subject to the Business Combination Act of the Delaware
General Corporation Law which, subject to certain exceptions, restricts certain
transactions and business combinations between a corporation and a stockholder
owning 15% or more of the corporation's
-27-
outstanding voting stock for a period of three years from the date such
stockholder becomes a 15% owner. These provisions may have the effect of
delaying or preventing a change of control of us without action by our
stockholders and, therefore, could adversely affect the value of our common
stock.
Furthermore, in the event of our merger or consolidation with or into
another corporation, or the sale of all or substantially all of our assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, our board of directors is required to provide accelerated
vesting of outstanding options.
OUR MANAGEMENT AND OTHER AFFILIATES HAVE SIGNIFICANT CONTROL OF OUR COMMON STOCK
AND COULD CONTROL OUR ACTIONS IN A MANNER THAT CONFLICTS WITH OUR INTERESTS AND
THE INTERESTS OF OTHER STOCKHOLDERS.
As of March 31, 2003, our executive officers, directors and affiliated
entities together beneficially own approximately 45.7% of the outstanding shares
of our common stock, assuming the exercise of options and warrants which are
currently exercisable, held by these stockholders. As a result, these
stockholders, acting together, will be able to exercise considerable influence
over matters requiring approval by our stockholders, including the election of
directors, and may not always act in the best interests of other stockholders.
Such a concentration of ownership may have the effect of delaying or preventing
a change in control of us, including transactions in which our stockholders
might otherwise receive a premium for their shares over then current market
prices.
OUR STOCKHOLDERS MAY EXPERIENCE SUBSTANTIAL DILUTION AS A RESULT OF OUTSTANDING
OPTIONS AND WARRANTS TO PURCHASE OUR COMMON STOCK.
As of March 31, 2003, we have granted options outside of our stock option
plan to purchase 10,000 shares of our common stock and warrants to purchase
4,207,153 shares of our common stock. In addition, as of March 31, 2003, we have
reserved 3,000,000 shares of our common stock for issuance upon the exercise of
options granted pursuant to our stock option plan, 1,771,000 of which have been
granted and 1,229,000 of which may be granted in the future. The exercise of
these options and warrants will result in dilution to our existing stockholders
and could have a material adverse effect on our stock price.
SHARES ELIGIBLE FOR PUBLIC SALE.
As of March 31, 2003, we had 11,880,045 shares of our common stock issued
and outstanding, of which approximately 8,000,000 shares are registered pursuant
to a registration statement on Form S-3, which was deemed effective on June 28,
2002, and the remainder of which are in the public float. In addition, we have
registered 3,000,000 shares of our common stock underlying options granted or to
be granted under our stock option plan. Consequently, sales of substantial
amounts of our common stock in the public market, or the perception that such
sales could occur, may adversely affect the market price of our common stock.
OUR STOCK HAS A LIMITED TRADING MARKET.
Our common stock is quoted on the American Stock Exchange and currently has
a limited trading market. We cannot assure that an active trading market will
develop or, if developed, will be maintained. As a result, our stockholders may
find it difficult to dispose of shares of our common stock and, as a result, may
suffer a loss of all or a substantial portion of their investment.
-28-
OUR STOCK PRICE MAY FLUCTUATE.
The market price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control. These
factors include:
o quarterly variations in operating results;
o the progress or perceived progress of our research and development
efforts;
o changes in accounting treatments or principles;
o announcements by us or our competitors of new technology, product
and service offerings, significant contracts, acquisitions or
strategic relationships;
o additions or departures of key personnel;
o future offerings or resales of our common stock or other securities;
o stock market price and volume fluctuations of publicly-traded
companies in general and development companies in particular; and
o general political, economic and market conditions.
IF OUR COMMON STOCK IS DELISTED FROM THE AMERICAN STOCK EXCHANGE, IT MAY BE
SUBJECT TO THE "PENNY STOCK" REGULATIONS WHICH MAY AFFECT THE ABILITY OF OUR
STOCKHOLDERS TO SELL THEIR SHARES.
In general, regulations of the SEC define a "penny stock" to be an equity
security that is not listed on a national securities exchange or Nasdaq and that
has a market price of less than $5.00 per share or with an exercise price of
less than $5.00 per share, subject to certain exceptions. If the American Stock
Exchange delists our common stock, it could be deemed a penny stock, which
imposes additional sales practice requirements on broker-dealers that sell such
securities to persons other than certain qualified investors. For transactions
involving a penny stock, unless exempt, a broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
consent to the transaction prior to the sale. In addition, the rules on penny
stocks require delivery, prior to and after any penny stock transaction, of
disclosures required by the SEC.
If our common stock were subject to the rules on penny stocks, the market
liquidity for our common stock could be severely and adversely affected.
Accordingly, the ability of holders of our common stock to sell their shares in
the secondary market may also be adversely affected.
INCREASING POLITICAL AND SOCIAL TURMOIL, SUCH AS TERRORIST AND MILITARY ACTIONS,
INCREASE THE DIFFICULTY FOR US AND OUR STRATEGIC PARTNERS TO FORECAST ACCURATELY
AND PLAN FUTURE BUSINESS ACTIVITIES.
Recent political and social turmoil, including the terrorist attacks of
September 11, 2001, the conflict in Iraq, the current crisis in the Middle East
and the outbreak of SARS in China, can be expected to put further pressure on
economic conditions in the United States and worldwide. These political, social
and economic conditions may make it difficult for us to plan future business
activities. Specifically, if the current crisis in Israel continues to escalate,
the Rahan Joint Venture could be adversely affected. In addition, the SARS
crisis could continue to affect the pace of discussions related to the letter of
intent with the Tianjin Academy of Agricultural Sciences.
-29-
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
As of March 31, 2003, our cash balance and investments totaled $3,121,347,
and we had working capital of $2,864,609. As of March 31, 2003, we had a federal
tax loss carry-forward of approximately $7,012,000 and a state tax loss
carry-forward of approximately $3,053,000 to offset future taxable income. There
can be no assurance, however, that we will be able to take advantage of any or
all of such tax loss carry-forwards, if at all, in future fiscal years.
FINANCING NEEDS
We have research and development agreements with the University of
Waterloo, which provide for research and development services to be performed at
the direction of our company and Dr. Thompson. Effective September 1, 2002, we
extended our First Research and Development Agreement for an additional two-year
period, in the amount of Can $1,092,800, which represented approximately US
$744,000 as of March 31, 2003. Effective May 1, 2002, we entered into a Second
Research and Development for a one-year period, under which we are obligated to
pay Can $50,000, which represented approximately US $34,000 as of March 31,
2003.
In September 2002, we entered into the Anawah Agreement, which provides us
with a license to use their technology to develop and commercialize enhanced
species of produce. The agreement will continue until the expiration of the
patents set forth in the agreement, unless terminated earlier by either party
pursuant to the terms of the agreement. In connection with the execution of the
agreement, we incurred an initial fee of $200,000, which is being amortized over
the term of the research to be performed under the agreement. Upon the
completion of certain benchmarks, we will incur additional research and
development fees and will make certain royalty payments to Anawah.
We lease office space in New Brunswick, New Jersey for a monthly rental fee
of $2,838, subject to certain escalations for our proportionate share of
increases in the building's operating costs. The lease expires in May 2006.
We have employment agreements with certain employees, some of whom are also
our stockholders, which provide for a base compensation and additional amounts,
as set forth in each agreement. The agreements expire between January 2004 and
October 2004. As of March 31, 2003, future base compensation to be paid under
the agreements through October 2004 totals $355,021.
We have consulting agreements with each of Dr. Thompson and Dr. Bennett,
which provide for monthly payments in exchange for research and development
services. The agreement with Dr. Thompson provides for monthly payments of
$5,000 through June 2004, and is automatically renewable unless terminated by
either party within six months prior to the end of the term. The agreement with
Dr. Bennett provides for monthly payments of $2,400 until November 2003.
-30-
In February 2002, we entered into scientific advisory board agreements with
each of Dr. Russell A. Jones and Dr. Charles A. Dinarello, which provide for
payments of $10,000 per year, payable in quarterly installments, to each of Drs.
Jones and Dinarello, respectively, through February 28, 2005 and may be
terminated by either party within 90 days written notice.
In December 2002, we entered into a six-month financial consulting
agreement with Perrin, Holden & Davenport Capital Corp. The agreement was
effective on February 1, 2003 and provides for monthly payments of $5,000.
The following table lists our cash contractual obligations as of March 31,
2003:
-------------------------------------------------------------------------------------------------------------------
Payments Due by Period
-------------------------------------------------------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1 - 3 years 4 - 5 years 5 years
-------------------------------------------------------------------------------------------------------------------
Research and Development
Agreements (1) $ 491,417 $ 347,667 $ 143,750 $ -- $ --
-------------------------------------------------------------------------------------------------------------------
Facility, Rent and
Operating Leases (2) $ 105,006 $ 34,056 $ 68,112 $ 2,838 $ --
-------------------------------------------------------------------------------------------------------------------
Employment, Consulting
and Scientific Advisory Board
Agreements (3) $ 538,487 $ 390,154 $ 148,333 $ -- $ --
===================================================================================================================
Total Contractual
Cash Obligations $ 1,134,910 $ 771,877 $ 360,195 $ 2,838 $ --
===================================================================================================================
(1) Certain of our research and developments agreements disclosed herein
provide that payment is to be made in Canadian dollars and, therefore, the
contractual obligations are subject to fluctuations in the exchange rate.
(2) The lease for our office space in New Brunswick, New Jersey is subject to
certain escalations for our proportionate share of increases in the
building's operating costs.
(3) Certain of our employment and consulting agreements provide for automatic
renewal (which is not reflected in the table), unless terminated earlier by
the parties to the respective agreements.
We expect our capital requirements to increase significantly over the next
several years as we commence new research and development efforts, increase our
business and administrative infrastructure and embark on developing in-house
business capabilities and facilities. Our future liquidity and capital funding
requirements will depend on numerous factors, including, but not limited to, the
levels and costs of our research and development initiatives and the cost and
timing of the expansion of our sales and marketing efforts.
CAPITAL RESOURCES
Since inception, we have generated revenues of $210,000 in connection with
the initial fees received under the Harris Moran License, the ArborGen Agreement
and the Cal/West License, none of which was generated during the three months
ended March 31, 2003. We have not been profitable since inception, we will
continue to incur additional operating losses in the future, and we will require
additional financing to continue the development and subsequent
-31-
commercialization of our technology. While we do not expect to generate
significant revenues from the licensing of our technology in the near future, we
may enter into additional licensing or other agreements with marketing and
distribution partners that may result in additional license fees, receive
revenues from contract research, or other related revenue.
In November 2001, we entered into a worldwide exclusive development and
license agreement with Harris Moran Seed Company to commercialize our technology
in lettuce and certain melons for an indefinite term, unless terminated by
either party pursuant to the terms of the agreement. In connection with the
Harris Moran License, we received an initial license fee of $125,000 in November
2001. Upon the completion of certain marketing and development benchmarks set
forth in the Harris Moran License, we will receive an additional $3,875,000 in
development payments over a multi-year period along with certain royalties upon
commercial introduction.
In June 2002, we entered into a three-year worldwide exclusive development
and option agreement with ArborGen to develop our technology in certain species
of trees. In connection with the ArborGen Agreement, we received an initial
development fee of $75,000 in July 2002. Upon the completion of certain
development benchmarks set forth in the ArborGen Agreement, we will receive an
additional $225,000 in periodic development payments over the term of the
ArborGen Agreement. The ArborGen Agreement also grants ArborGen an option to
acquire an exclusive worldwide license to commercialize our technology in
various forestry products, and upon the execution of a license agreement, we
will receive a license fee and royalties from ArborGen.
In September 2002, we entered into an exclusive development and license
agreement with Cal/West to develop our technology in certain varieties of
alfalfa. The Cal/West License will continue until the expiration of the patents
set forth in the agreement, unless terminated earlier by either party pursuant
to the terms of the agreement. The Cal/West License also grants Cal/West an
exclusive option to develop our technology in various other forage crops. In
connection with the execution of the Cal/West License, we received an initial
fee of $10,000 in September 2002. Upon the completion of certain development
benchmarks, we will receive an additional $20,000 in periodic payments, and upon
the commercialization of certain products, we will receive royalty payments from
Cal/West.
In each of September 2002 and February 2003, we received a payment of
$11,089 from the BIRD Foundation for research and development expenses that we
have incurred in connection with the Rahan Joint Venture. We anticipate
receiving one additional payment from the BIRD Grant in the future to assist in
funding the Rahan Joint Venture, subject to the Rahan Joint Venture achieving
its stated research and development objectives.
In December 2002, pursuant to the New Jersey Technology Tax Credit Transfer
Program (the "Program"), we received approval from the New Jersey Economic
Development Authority (the "EDA") to sell our New Jersey net operating loss tax
benefit in the amount of $151,390 for the fiscal year ended June 30, 2001. In
December 2002, we sold our entire New Jersey net operating loss tax benefit and
received net proceeds of $130,952. We may apply to participate in the Program to
sell our New Jersey net operating loss tax benefit in the amount of
approximately $132,000 for the fiscal year ended June 30, 2002. An application
must be submitted to the EDA by June 30, 2003. However, there can be no
assurance that we will be approved to participate in
-32-
the Program for the fiscal year ended June 30, 2002 or if approved, that we will
be able to sell all or part of our New Jersey net operating loss tax benefit.
We anticipate that, based upon our current cash and investments, that we
will be able to fund operations for at least the next twelve months. Over the
next twelve months, we plan to fund our research and development and
commercialization activities by utilizing our current cash balance and
investments, achieving the milestones set forth in our current licensing
agreements, and through the consummation of additional licensing agreements for
our technology.
CHANGES TO CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates are set forth in our Annual
Report on Form 10-KSB for the fiscal year ended June 30, 2002, as updated by our
Quarterly Reports on Form 10-QSB for the quarterly periods ended September 30,
2002 and December 31, 2002. The following sets forth changes to such critical
accounting policies and estimates:
We are amortizing the cost of an initial $200,000 non-refundable payment
made under a research agreement over the estimated eighteen-month term of the
project. As of March 31, 2003, $133,333, which will be amortized over the
remaining estimated twelve months of the research project, is included in our
balance sheet as a prepaid expense.
As of March 31, 2003, we have determined that the estimated future
undiscounted cash flows related to our patent and patent applications will be
sufficient to recover their carrying value.
-33-
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 and Three Months Ended March 31, 2002
-----------------------------------------------------------------------
We are a development stage company. We had no revenue during the
three-month periods ended March 31, 2003 and March 31, 2002.
Operating expenses consist of general and administrative expenses, research
and development expenses and stock-based compensation. Operating expenses for
the three-month periods ended March 31, 2003 and March 31, 2002 were $532,090
and $495,495, respectively, an increase of $36,595, or 7.4%. This increase in
operating expenses was primarily the result of an increase in research and
development expenses, partially offset by a decrease in general and
administrative expenses and stock-based compensation.
General and administrative expenses consist primarily of payroll and
benefits, professional and consulting services, investor relations, office rent
and corporate insurance. General and administrative expenses for the three-month
periods ended March 31, 2003 and March 31, 2002 were $294,403 and $300,400,
respectively, a decrease of $5,997, or 2.0%. This decrease was primarily the
result of a decrease in payroll and professional fees, mostly offset by an
increase in investor relations fees and depreciation and amortization. Payroll
decreased during the three-month period ended March 31, 2003, primarily as a
result of an adjustment to the amount of compensation that had been accrued to a
former employee. Professional fees decreased during the three-month period ended
March 31, 2003, primarily as a result of a decrease in legal and accounting
fees. During the three-month period ended March 31, 2002, we incurred
additional professional fees related to our listing on the American Stock
Exchange. In connection with our strategy to increase our recognition in the
public market, expenses related to investor relations increased during the
three-month period ended March 31, 2003, primarily as a result of fees incurred
for our investor relations firm, listing fees for the American Stock Exchange,
financial consulting fees and costs associated with presentations to various
analysts, money managers and funds, all of which were not incurred during the
three months ended March 31, 2002. Also, in connection with our strategy to
increase our recognition in the public market, during the three months ended
March 31, 2003, we abandoned our original corporate website and initiated a new
and more user-friendly corporate website. As a result, we fully depreciated the
remaining cost of the original website during the three months ended March 31,
2003.
Research and development expenses consist primarily of fees associated with
the Research and Development Agreements, costs associated with the research
being performed at the University of Colorado, amortization of the initial fee
in connection with the Anawah Agreement and consulting fees to the Scientific
Advisory Board, Dr. Thompson and Dr. Bennett. Research and development expenses
for the three-month periods ended March 31, 2003 and March 31, 2002 were
$237,687 and $100,949, respectively, an increase of $136,738, or 135.5%. This
increase was primarily the result of an increase in the research and development
costs incurred in connection with the expanded research undertaken by the
University of Waterloo, the implementation of our mammalian cell research
programs and the implementation of new plant research being conducted in
connection with the Anawah Agreement.
Stock-based compensation consists of non-employee stock options and
warrants granted and vesting as consideration for certain professional,
consulting, legal and advertising services. Stock-based compensation for the
three-month periods ended March 31, 2003 and March 31, 2002 was $0 and $94,146,
respectively, a decrease of $94,146, or 100.0%. The decrease was
-34-
primarily the result of a decrease in stock options granted and becoming vested
to members of the Scientific Advisory Board and consultants and warrants granted
and becoming vested to certain financial advisors during the three-month period
ended March 31, 2003.
Nine Months Ended March 31, 2003 and Nine Months Ended March 31, 2002
---------------------------------------------------------------------
Revenue for the nine-month period ended March 31, 2003 was $10,000, which
represented the initial license fee in connection with the Cal/West License.
Revenue for the nine-month period ended March 31, 2002 was $125,000, which
represented the initial license fee in connection with the Harris Moran License.
Operating expenses consist of general and administrative expenses, research
and development expenses and stock-based compensation. Operating expenses for
the nine-month periods ended March 31, 2003 and March 31, 2002 were $1,791,367
and $1,869,639, respectively, a decrease of $78,272, or 4.2%. This decrease in
operating expenses was primarily the result of a decrease in stock-based
compensation which was mostly offset by an increase in general and
administrative and research and development expenses.
General and administrative expenses consist primarily of payroll and
benefits, professional and consulting services, investor relations, office rent
and corporate insurance. General and administrative expenses for the nine-month
periods ended March 31, 2003 and March 31, 2002 were $1,056,416 and $976,528,
respectively, an increase of $79,888, or 8.2%. This increase was primarily the
result of an increase in payroll and benefits and investor relations, partially
offset by a decrease in consulting services and recruiting costs. Consulting
services decreased during the nine-month period ended March 31, 2003, as a
result of the hiring of Mr. Galton on October 4, 2001, as our President and
Chief Executive Officer. From July 1, 2001 through October 4, 2001, the
positions of President and CEO were held by two non-employee board members and
accordingly, their compensation for those functions was categorized as
consulting services. The decrease in consulting services was partially offset by
an increase in employee payroll and benefits during the nine-month period ended
March 31, 2003 as a result of the President and CEO compensation being
classified as payroll instead of consulting services. In connection with our
strategy to increase our recognition in the public market, expenses related to
investor relations increased during the nine-month period ended March 31, 2003,
primarily as a result of fees incurred for our investor relations firm, listing
fees for the American Stock Exchange, financial consulting fees and costs
associated with presentations to various analysts, money managers and funds, all
of which were not incurred during the nine months ended March 31, 2002.
Research and development expenses consist primarily of fees associated with
the Research and Development Agreements, costs associated with the research
being performed at the University of Colorado, amortization of the initial fee
in connection with the Anawah Agreement and consulting fees to the Scientific
Advisory Board, Dr. Thompson and Dr. Bennett. Research and development expenses
for the nine-month periods ended March 31, 2003 and March 31, 2002 were $597,774
and $257,925, respectively, an increase of $339,849, or 131.8%. This increase
was primarily the result of an increase in the research and development costs
incurred in connection with the expanded research undertaken by the University
of Waterloo, the implementation of our mammalian cell research programs and the
implementation of new plant research being conducted in connection with the
Anawah Agreement.
-35-
Stock-based compensation consists of non-employee stock options and
warrants granted and vesting as consideration for certain professional,
consulting, legal and advertising services. Stock-based compensation for the
nine-month periods ended March 31, 2003 and March 31, 2002 was $137,177 and
$635,186, respectively, a decrease of $498,009, or 78.4%. The decrease was
primarily the result of a decrease in stock options granted and becoming vested
to members of the Scientific Advisory Board and consultants and warrants granted
and becoming vested to certain financial advisors during the nine-months ended
March 31, 2003.
Period From Inception on July 1, 1998 through March 31, 2003
------------------------------------------------------------
From inception of operations on July 1, 1998 through March 31, 2003, we had
revenues of $210,000, which consisted of the initial license fees in connection
with our various development and license agreements.
We have incurred losses each year since inception and have an accumulated
deficit of $9,023,046 at March 31, 2003. We expect to continue to incur losses
as a result of expenditures on research, product development and administrative
activities.
We do not expect to generate significant revenues from product sales for
approximately the next two to three years, during which time we will engage in
significant research and development efforts. However, we have entered into the
Harris Moran License, the ArborGen Agreement and the Cal/West License to develop
and commercialize our technology in certain varieties of lettuce, melons, trees
and alfalfa. These agreements provide that, upon the achievement of certain
benchmarks, we will receive an aggregate of $4,130,000 in development payments
over a multi-year period. The Harris Moran License and the Cal/West License also
provide for royalty payments to us upon commercial introduction. The ArborGen
Agreement contains an option for ArborGen to execute a license to commercialize
developed products, and upon the execution of a license agreement, we will
receive a license fee and royalties from ArborGen. The Cal/West License contains
an option for Cal/West to develop our technology in various other forage crops.
Consistent with our commercialization strategy, we intend to attract other
companies interested in strategic partnerships or licensing our technology that
may result in additional license fees, revenues from contract research and other
related revenues. Successful future operations will depend on our ability to
transform our research and development activities into commercializable
technology.
-36-
ITEM 3. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Based on their evaluation of our disclosure controls and procedures, as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as of a date within 90 days of the filing date of this Quarterly Report on
Form 10-QSB, our President and Chief Executive Officer, considered our principal
executive officer, and our Chief Financial Officer, considered our principal
financial and accounting officer, have concluded that our disclosure controls
and procedures are designed to ensure that information we are required to
disclose in the reports we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and are operating in an effective manner.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluation.
-37-
PART II. OTHER INFORMATION.
--------------------------
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
99.1 Certification of principal executive officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.
99.2 Certification of principal financial and accounting officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. 1350.
(b) Reports on Form 8-K.
None.
-38-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SENESCO TECHNOLOGIES, INC.
DATE: May 15, 2003 By: /s/ Bruce C. Galton
--------------------------------------------
Bruce C. Galton, President
and Chief Executive Officer
(Principal Executive Officer)
DATE: May 15, 2003 By: /s/ Joel Brooks
--------------------------------------------
Joel Brooks, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
-39-
CERTIFICATION
I, Bruce C. Galton, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Senesco
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures, as defined
in Exchange Act Rules 13a-14 and 15d-14, for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report; and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of a date within 90 days prior to the filing date of
this quarterly report;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors, or persons performing the
equivalent function:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Bruce C. Galton
-------------------------------------
Bruce C. Galton
President and Chief Executive Officer
(principal executive officer)
CERTIFICATION
I, Joel Brooks, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Senesco
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures, as defined
in Exchange Act Rules 13a-14 and 15d-14, for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report; and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of a date within 90 days prior to the filing date of
this quarterly report;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors, or persons performing the
equivalent function:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 /s/ Joel Brooks
--------------------------------------------
Joel Brooks
Chief Financial Officer and Treasurer
(principal financial and accounting officer)