<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___
COMMISSION FILE NUMBER 000-23541
NANOGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0489621
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10398 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(Address of principal executive offices) (Zip code)
(619) 546-7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
AS OF NOVEMBER 6, 1998, 18,812,810 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
<PAGE> 2
NANOGEN, INC.
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997...........................................3
Consolidated Statements of Operations for the Three
and Nine Months ended September 30, 1998 and 1997...............4
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1998 and 1997........................5
Notes to Consolidated Financial Statements........................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................8
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.........................17
Item 4. Submission of Matters to a Vote of Security Holders...............17
Item 6. Exhibits and Reports on Form 8-K..................................18
SIGNATURES..................................................................19
EXHIBIT INDEX...............................................................20
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANOGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
(unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 68,280,238 $ 19,498,293
Grant receivables and other current assets 1,770,613 699,595
------------- -------------
Total current assets 70,050,851 20,197,888
Property and equipment, net 7,138,447 2,439,941
Restricted cash 266,425 358,858
Other assets 276,225 218,376
============= =============
$ 77,731,948 $ 23,215,063
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,509,850 $ 597,211
Accrued liabilities 1,081,985 1,008,951
Unearned revenue 1,914,723 1,012,186
Current portion of capital lease obligations 2,253,681 804,495
------------- -------------
Total current liabilities 6,760,239 3,422,843
Capital lease obligations, less current portion 4,157,400 1,193,221
Stockholders' equity:
Convertible preferred stock, $.001 par value,
15,500,000 shares
authorized; none and 13,683,865 shares issued and
outstanding
at September 30, 1998 and December 31, 1997, -- 13,684
respectively
Common stock, $.001 par value, 40,000,000 shares
authorized;
18,812,810 and 3,183,523 shares issued and outstanding
at September 30, 1998 and December 31, 1997,
respectively 18,813 3,184
Additional paid-in capital 111,423,872 48,523,140
Deferred compensation (1,875,348) (2,322,850)
Notes receivable from officers (1,483,100) (1,129,509)
Accumulated deficit (41,269,928) (26,488,650)
------------- -------------
Total stockholders' equity 66,814,309 18,598,999
============= =============
$ 77,731,948 $ 23,215,063
============= =============
</TABLE>
Note: The consolidated balance sheet at December 31, 1997 has been derived from
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
<PAGE> 4
NANOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Contract and grant revenue $ 498,110 $ 605,855 $ 1,594,893 $ 1,580,996
Sponsored research 1,366,114 471,429 3,638,482 785,715
------------ ------------ ------------ ------------
Total revenues 1,864,224 1,077,284 5,233,375 2,366,711
Operating expenses:
Research and development 5,721,627 3,320,198 15,433,599 7,364,625
General and administrative 1,733,267 1,261,289 4,685,521 2,929,843
Acquired in-process technology -- -- 1,192,842 --
------------ ------------ ------------ ------------
Total operating expenses 7,454,894 4,581,487 21,311,962 10,294,468
------------ ------------ ------------ ------------
Loss from operations (5,590,670) (3,504,203) (16,078,587) (7,927,757)
Interest income (expense), net 943,491 269,113 1,907,367 750,212
Equity in income (loss) of joint
venture (610,058) -- (610,058) --
============ ============ ============ ============
Net loss $ (5,257,237) $ (3,235,090) $(14,781,278) $ (7,177,545)
============ ============ ============ ============
Net loss per share -
basic and diluted $ (0.30) $ (2.17) $ (1.27) $ (5.47)
============ ============ ============ ============
Number of shares used in computing
net loss per share - basic and
diluted 17,534,285 1,493,069 11,604,804 1,312,245
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
NANOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(14,781,278) $ (7,177,545)
Adjustments to reconcile net loss to net cash used in operating activities:
Acquisition of in-process technology 1,192,842 --
Depreciation and amortization 776,444 366,973
Amortization of deferred compensation 1,818,167 105,004
Equity in loss of joint venture 610,058 --
Changes in operating assets and liabilities:
Accounts payable 912,639 47,586
Accrued liabilities 73,034 484,642
Unearned revenue 902,537 --
Grant receivables and other current assets (1,071,018) (339,514)
------------ ------------
Net cash used in operating activities (9,566,575) (6,512,854)
Cash flows from investing activities:
Investment in joint venture (610,058) --
Purchase of equipment -- (461,660)
------------ ------------
Net cash used in investing activities (610,058) (461,660)
Cash flows from financing activities:
Restricted cash 92,433 55,316
Principal payments on capital lease obligations (1,061,585) (473,033)
Issuance of common stock, net of repurchases 60,029,370 27,685
Issuance of convertible preferred stock, net of issuance costs -- 12,580,810
Interest on notes receivable from officers (43,791) (3,374)
Other assets (57,849) --
------------ ------------
Net cash provided by financing activities 58,958,578 12,187,404
Increase in cash and cash equivalents 48,781,945 5,212,890
Cash and cash equivalents at beginning of period 19,498,293 16,775,228
------------ ------------
Cash and cash equivalents at end of period $ 68,280,238 $ 21,988,118
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 318,747 $ 164,241
============ ============
Supplemental schedule of noncash investing and financing activities:
Equipment acquired under capital leases $ 5,474,950 $ 732,041
============ ============
Common stock issued in exchange for notes
receivable from officers $ 309,800 $ --
============ ============
Issuance of convertible preferred stock and
warrants in exchange for in-process technology $ 1,192,842 $ --
============ ============
Deferred compensation related to stock options $ 1,370,665 $ --
============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The consolidated balance sheet
as of September 30, 1998, consolidated statements of operations for the three
and nine months ended September 30, 1998 and 1997, and the consolidated
statements of cash flows for the nine months ended September 30, 1998 and
1997 are unaudited, but include all adjustments (consisting of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position, results of operations and cash flows
for the periods presented. The results of operations for the three and nine
months ended September 30, 1998 shown herein are not necessarily indicative
of the results that may be expected for the year ended December 31, 1998.
The accompanying consolidated financial statements should be read in
conjunction with the financial statements contained in the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission in the form in which it became effective on April 13, 1998.
Net Loss per Share
Basic net loss per share has been computed using the weighted average number
of common shares outstanding during the periods presented. Common equivalent
shares resulting from outstanding preferred stock, options to purchase common
stock and warrants to purchase convertible preferred stock are excluded from
the computation of diluted net loss per share as their effect is
antidilutive.
Recent interpretations by the Securities and Exchange Commission have altered
the treatment of preferred stock previously included in computing certain
earnings-per-share data. The Company previously considered preferred stock as
outstanding in pre-IPO periods from the date of the original issuance in
computing earnings per share. To conform with the recent interpretations, the
Company has revised its calculation of earnings per share for all pre-IPO
periods to exclude the impact of preferred shares.
2. ACQUISITION OF NANOTRONICS, INC.
In January 1998, the Company consummated an Agreement and Plan of Merger with
Nanotronics, Inc. ("Nanotronics"), pursuant to which a wholly-owned
California subsidiary of the Company merged with and into Nanotronics. Upon
the consummation of the merger, the Company issued approximately 200,000
shares of its Series D Convertible Preferred Stock at $6.00 per share in
exchange for all of the outstanding shares of Nanotronics. This Series D
Preferred Stock converted into 132,334 shares of common stock at the
Company's initial public offering. The transaction has been accounted for
using the purchase method. The operations and net assets of Nanotronics are
not material to the Company's financial position or results of operations.
The technological feasibility of the acquired technology has not been
established nor have alternative uses been identified, therefore, the
purchase price of approximately $1.2 million has been allocated to acquired
in-process technology and has been reflected as a charge in the Company's
statement of operations.
6
<PAGE> 7
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NEW ACCOUNTING STANDARDS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income, and SFAS No. 131,
Segment Information. The adoption of these standards did not have an impact
on the Company's financial statements.
4. INITIAL PUBLIC OFFERING
In April 1998, the Company completed an initial public offering ("the
Offering") of 3,900,000 shares of common stock, providing the Company with
net proceeds of approximately $38.8 million. All outstanding shares of
convertible preferred stock outstanding at April 13, 1998 automatically
converted into 9,254,876 common shares upon the closing of the Offering.
Prior to the closing of the Offering, the Company effected a 2-for-3 reverse
stock split. All common stock share numbers have been retroactively adjusted
to reflect this 2-for-3 stock split.
Concurrently with the Offering, the Company completed a private placement of
1,909,089 shares of its common stock to Becton, Dickinson and Company,
Hoechst AG (through a subsidiary) and Elan Corporation, plc, resulting in net
proceeds to the Company of $6.0 million, $10.0 million and $5.0 million,
respectively.
5. SPONSORED RESEARCH AGREEMENTS
The Company is currently collaborating with Becton Dickinson to develop and
commercialize products in the field of in vitro nucleic acid-based diagnostic
and monitoring technologies. Pursuant to a Master Agreement entered into
between the two parties, Becton Dickinson and Nanogen agreed to form The
Nanogen/Becton Dickinson Partnership (the "Partnership"). Contributions for
use in the research programs aggregating approximately $6.7 million will be
made to the Partnership through April 1, 1999 of which $5.0 million is to be
paid by Becton Dickinson and $1.7 million is to be paid by Nanogen. The
General Partnership Agreement also contemplates additional research funding
aggregating approximately $14.3 million during the period from July 1, 1999
through April 1, 2001, conditioned upon the achievement of certain milestones
to be mutually agreed upon by the partners. The milestones may not be agreed
upon, or if agreed upon, achieved in a timely fashion, or at all. To date,
the Company has recognized a loss of approximately $610,000 from the
Partnership, based on the loss allocation described in the Partnership
agreement stating that all losses will be allocated in proportion to and not
to exceed cash contributions.
6. SUBSEQUENT EVENTS
In October 1998, the Company announced that it was awarded a contract by the
Space and Naval Warfare Systems Center San Diego ("SSC San Diego") for the
Defense Advance Research Projects Agency and a grant from the National
Institute of Justice ("NIJ") in amounts that could total over $8.0 million
during the next five years. The contract award which was made by SSC San
Diego for the Defense Advance Research Projects Agency, includes $2.8 million
to be paid during the first two years, and options to extend the program for
up to an additional three years that would pay the Company up to an
additional $4.8 million. The goal of the program is to create an advanced
miniaturized lab for biological warfare defense applications. The NIJ grant
of $500,000 was the Company's second grant awarded under the U.S. Department
of Justice, Office of Justice Programs to enable the Company to continue its
work in the development of a portable microchip array-based genetic detector
for rapid forensic DNA testing and identification at the crime scene.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report includes certain forward-looking statements about the Company's
business and results of operations, including, but not limited to, statements
relating to how long the Company's existing capital resources will suffice to
support the Company's operations, whether the Company's technology will
accelerate the development of products that capitalize on the increasing
availability of genetic information, that are subject to risks and uncertainties
that could cause the Company's actual results to vary materially from those
reflected in such forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below under "Factors that
May Affect Results," as well as those discussed throughout the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission in the form in which it became effective on April 13, 1998
("Registration Statement"). The risks discussed below under "Factors that May
Affect Results" should be read in conjunction with the risk factors discussed in
the Registration Statement, which are incorporated herein by reference. These
forward-looking statements speak only as of the date hereof. The Company
disclaims any intent or obligation to update these forward-looking statements.
OVERVIEW
Nanogen, Inc. ("Nanogen" or the "Company") integrates advanced microelectronics
and molecular biology into a platform technology with broad commercial
applications in the fields of medical diagnostics, biomedical research,
genomics, genetic testing and drug discovery. Nanogen's fully automated system,
which incorporates a proprietary semiconductor microchip, provides a flexible
tool for the rapid identification and analysis of any test sample containing
charged molecules. Through the use of microelectronics, the Company's technology
enables the active movement and concentration of charged molecules to and from
designated microlocations, or test sites, on the semiconductor microchip. This
electronic concentration of molecules greatly accelerates molecular binding at
each microlocation. In addition, Nanogen's technology allows the simultaneous
analysis of multiple test results, or multiplexing, from a single sample. The
open architecture design of the Nanogen system enables the Company to offer
microchips with arrays designed and built by Nanogen for specific applications
or with arrays that can be customized by the end user. The Company believes its
technology will accelerate the development of products that capitalize on the
increasing availability of genetic information and its relationship to human
disease. To date, the Company has not generated product revenue and there can be
no assurance that the Company will generate revenues from its products.
The Company has established collaborations with Becton, Dickinson and Company
("Becton Dickinson") in the area of infectious disease diagnostics, Hoechst AG
("Hoechst") (through a subsidiary) to develop drug discovery tools and Elan
Corporation, plc ("Elan") for genomic applications.
RESULTS OF OPERATIONS
Revenues. Revenue from contracts and grants totaled approximately $498,000 and
$1.6 million for the three and nine months ended September 30, 1998,
respectively, compared to approximately $606,000 and $1.6 million for the three
and nine months ended September 30, 1997, respectively. Revenue from sponsored
research totaled $1.4 and $3.6 million for the three and nine months ended
September 30, 1998, respectively, compared to approximately $471,000 and
$786,000 for the three and nine months ended September 30, 1997. Contract and
grant revenue recognized during the three and nine months ended September 30,
1998 was earned from a total of seven active contracts, compared to five active
contracts during the three and nine months ended September 30, 1997. Revenue
from these contracts and grants fluctuates from quarter to quarter depending
upon grant activity as well as the total value of the grant award. Sponsored
research revenue recognized during the three and nine months ended September 30,
1998 was earned in connection with a joint venture collaboration with Becton
Dickinson entered into in October 1997, a research and development agreement
with Hoechst Research and Technology, entered into in December 1997, and a
nonexclusive research and development agreement with Elan entered into in
December 1997. Contract, grant and sponsored research revenue are recorded as
the costs and expenses to perform the research are incurred. Payments received
in advance under these arrangements are recorded as unearned revenue until the
expenses are incurred. Continuation of certain contract, grant, and sponsored
research agreements are dependent
8
<PAGE> 9
upon the Company achieving specific contractual milestones. The recognition of
revenue under contracts, grants and sponsored research may vary from quarter to
quarter and may result in significant fluctuations in operating results from
year to year.
Research and Development Expenses. Research and development expenses increased
to approximately $5.7 and $15.4 million for the three and nine months ended
September 30, 1998, respectively, from approximately $3.3 and $7.4 million for
the three and nine months ended September 30, 1997, respectively. This increase
is primarily attributable to the expansion of research and product development
efforts including the hiring of additional scientific, engineering and
operations personnel and the increase in costs associated with further
development of the Company's products. The Company expects research and
development spending to increase over the next several years as research and
product development efforts continue to expand.
General and Administrative Expenses. General and administrative expenses totaled
approximately $1.7 and $4.7 million for the three and nine months ended
September 30, 1998, respectively, compared to approximately $1.3 and $2.9
million for the three and nine months ended September 30, 1997, respectively.
This increase is principally due to increased legal costs associated with
enhancing and maintaining the Company's intellectual property portfolio, the
expansion of activities related to marketing the Company's potential products,
and to deferred compensation expense recognized in the first nine months of 1998
in excess of what was recorded during the same period in 1997. Deferred
compensation represents the excess of the deemed fair value for financial
statement presentation purposes over the exercise price for common stock
issuable on exercise of stock options. General and administrative expenses are
expected to continue to increase as the Company expands its sales and marketing
and general and administrative organizations.
Acquired In-Process Technology. During the first quarter of 1998, the Company
issued 200,000 shares of its Series D Convertible Preferred Stock at $6.00 per
share in exchange for all of the outstanding shares of Nanotronics, Inc. This
Series D Preferred Stock converted into 132,334 shares of common stock at the
Company's initial public offering. The in-process technology which was acquired
relates generally to nanotechnology and molecular electronics. Nanotronics,
Inc.'s research is currently partially funded through government contracts from
the Information Directorate of the United States Air Force Research Laboratory.
Interest Income (Expense), Net. The Company had net interest income of
approximately $943,000 and $1.9 million for the three and nine months ended
September 30, 1998, respectively, compared to net interest income of
approximately $269,000 and $750,000 for the three and nine months ended
September 30, 1997. Interest income was greater during the three and nine months
ended September 30, 1998 compared to 1997 due to larger cash balances resulting
from net proceeds received upon the completion of the Company's initial public
offering and concurrent private placement of equity securities in April 1998.
The increase in interest income was partially offset by higher interest expense
during the three and nine months ended September 30, 1998 compared to 1997 due
to greater amounts of equipment under capital leases in 1998 than in 1997.
Equity in Loss of Joint Venture. The Company recognized a loss of approximately
$610,000 for the three and nine months ended September 30, 1998 from the
Partnership with Becton Dickinson, based on the loss allocation described in the
Partnership agreement stating that losses will be allocated in proportion to and
not to exceed cash contributions. There was no such loss for the same period in
1997 as the joint venture had not yet been formed.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had $68.3 million in cash and cash
equivalents compared to $19.5 million at December 31, 1997. This increase can be
attributed to the net proceeds received upon the completion of the Company's
initial public offering and the concurrent private placement during April 1998,
partially offset by ongoing operating losses.
Net cash used in operating activities increased to $9.6 million for the nine
months ended September 30, 1998 compared to $6.5 million for the comparable
period of 1997. This increase was primarily due to increased costs to support
the Company's expanding operations, including higher personnel costs, product
development costs, license
9
<PAGE> 10
fees and legal fees relating to establishing and maintaining the Company's
intellectual property rights.
The Company funds certain of its equipment acquisitions and leasehold
improvements through capital equipment leasing facilities. During the nine
months ended September 30, 1998, the Company received proceeds from equipment
and leasehold improvement financing of approximately $5.5 million, primarily
related to the expansion of the Company's leased research and administrative
facility which had not previously been fully occupied.
In April 1998, the Company completed an initial public offering of its common
stock generating net proceeds of approximately $38.8 million. Concurrent with
the initial public offering, the Company completed a private placement of its
equity securities with Becton Dickinson, Hoechst (through a subsidiary) and Elan
Corporation, plc, for net proceeds of $6.0 million, $10.0 million and $5.0
million, respectively.
The Company expects that its existing capital resources, combined with
anticipated revenues from contracts, grants and sponsored research agreements,
will be sufficient to support the planned operations of the Company through at
least the next 24 months. This estimate of the period for which the Company
expects its available sources of liquidity to be sufficient to meet its capital
requirements is a forward-looking statement that involves risks and
uncertainties, and actual results may differ materially. The Company's future
liquidity and capital funding requirements will depend on numerous factors
including, but not limited to, the extent to which the Company's products under
development are successfully developed and gain market acceptance, the timing of
regulatory actions regarding the Company's potential products, the costs and
timing of expansion of sales, marketing and manufacturing activities,
prosecution and enforcement of patents important to the Company's business, the
results of clinical trials, competitive developments, and the Company's ability
to maintain existing collaborations and to enter into additional collaborative
arrangements. The Company has incurred negative cash flow from operations since
inception and does not expect to generate positive cash flow to fund its
operations for at least the next several years. The Company may need to raise
additional capital to fund its research and development programs, to scale up
manufacturing activities and expand its sales and marketing efforts to support
the commercialization of its products under development. Additional capital may
not be available on terms acceptable to the Company, or at all.
YEAR 2000 ISSUES
The Company is currently developing a plan to ensure that its systems and
software infrastructure are Year 2000 compliant. Key financial, information and
operational systems will be assessed and plans will be developed to address
required systems modifications. Given the relatively small size of the Company's
systems and the predominantly new hardware, software and operating systems, the
Company does not presently anticipate any significant delays in becoming Year
2000 compliant. However, the Company is unable to control whether its current
and future partners' systems are Year 2000 compliant. To the extent that
partners would be unable to order products or pay invoices or suppliers would be
unable to manufacture and ship product, the Company's operations could be
adversely affected. However, the Company does not presently believe that Year
2000 changes will have a material impact on the Company's business, financial
condition or results of operations.
FACTORS THAT MAY AFFECT RESULTS
(For a discussion of additional risk factors applicable to the Company, see the
Company's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission in the form in which it became effective on April 13, 1998.)
Early Stage of Development, Technological Uncertainty Whether Products can be
Successfully Developed
Nanogen is at an early stage of development. The Company has completed the
initial development of its technology platform and is developing products in the
fields of medical diagnostics, biomedical research, genomics, genetic testing
and drug discovery. All of the Company's products are currently under
development, and such products may not be successfully developed or
commercialized on a timely basis, or at all. Since the Company's commencement of
operations in 1993, substantially all of the Company's resources have been
dedicated to the research and development of potential products based on its
proprietary semiconductor microchip technology, and to date no
10
<PAGE> 11
revenues have been generated from product sales. The Company believes that its
revenue growth and profitability will depend substantially upon its ability to
overcome significant technological challenges and successfully introduce these
new products into the marketplace. In addition, the successful development of
some of these new products will depend on the development and incorporation of
new technologies developed through the Company's current and future
collaborations. A number of applications envisioned by the Company will require
significant enhancements in the basic technology platform including complete
sample-to-answer capabilities. If the Company is unable, for technological or
other reasons, to complete the development, introduction or scale-up of
manufacturing of any new product, or if such product does not achieve a
significant level of market acceptance, the Company's business, financial
condition and results of operations would be materially and adversely affected.
Lack of Market Acceptance
The Company's strategy of using its proprietary semiconductor microchip
technology for the purposes of developing products in the fields of medical
diagnostics, biomedical research, genomics, genetic testing and drug discovery
is unproven and the Company may not be able to develop commercially viable
products in any of these fields, and even if such a product is developed it may
not be accepted in the marketplace. Additionally, the Company may not be
successful in achieving adoption of its system. Market acceptance will depend on
many factors, including demonstrating to customers that the Company's technology
platform is a viable alternative to currently available technologies. In
addition, the Company's technology platform could be adversely affected by
limited funding available for capital acquisitions by the Company's customers,
as well as internal obstacles to customer approvals of purchases of the
Company's products. If the Company is unable to achieve market acceptance, the
Company's business, financial condition and results of operations would be
materially and adversely affected.
Dependence on Collaborative Alliances; Reliance on Collaborators
The Company's strategy for development and commercialization of its proprietary
semiconductor microchip technology and related products includes and depends on
the formation of various strategic alliances and licensing arrangements with
collaborative partners. The Company's strategy is to enter into collaborative
arrangements with select companies to partially fund development of, assist in
obtaining regulatory approval and clearances for, and commercialize certain of
its products. As a result, the Company's strategy for development and
commercialization of such products depends on the feasibility and continuity of
arrangements with existing and future collaborative partners and licensees. The
Company may not be successful in entering into or maintaining collaborations to
develop commercial applications of its semiconductor microchip products. Failure
to do so would have a material adverse impact on the Company. The Company may
have limited or no control over the time, effort or financial resources that any
partner may devote to the development or marketing of the Company's products.
The Company's collaborative partners may not perform their obligations as
expected and may not devote sufficient resources to the development, clinical
testing or marketing of the Company's potential products. Any concomitant
development by a partner of competitive technologies, preclusion from entering
into competitive arrangements with other potential partners, disputes over
ownership rights to any intellectual property, know-how or technologies
developed with a partner, failure to obtain timely regulatory approvals or
clearances, premature termination of an agreement, or failure by a partner to
devote sufficient resources to the development and commercialization of the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations of the Company.
Under the terms of the Company's joint venture arrangement with Becton
Dickinson, if the Company fails to achieve certain milestones, the joint venture
arrangement may be terminated, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
anticipates that the revenues derived from its joint venture arrangement with
Becton Dickinson will be a significant source of funding for the Company's
research and development activities. Milestones will need to be agreed upon in
the future. The parties may not agree to milestones, and if agreed upon,
milestones may not be achieved. The Company expects to rely in part on Becton
Dickinson to manufacture components of its infectious disease products. Any
failure on the part of either the Company or Becton Dickinson to meet the
expected timelines could adversely affect the ability of the parties to achieve
timely submission of products for regulatory approval or to successfully
introduce the products in
11
<PAGE> 12
the commercial marketplace. Such delays in either the regulatory process or the
commercial introduction of such products would have a material adverse effect on
the Company's business, financial condition, and results of operations.
Additionally, the Company will rely on Becton Dickinson's distribution
capabilities to market the joint venture products. Any interruption in this
distribution channel or failure of Becton Dickinson to adequately fund the
marketing and sales commitments of the joint venture would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also has agreements with Hoechst (through a subsidiary) and Elan
Corporation, plc that contemplate the commercialization of products resulting
from research and development collaboration agreements between the parties.
These agreements may not result in commercially viable collaborations between
the parties, and any resulting collaborations may not be successful.
History of Losses and Accumulated Deficit; Uncertainty of Future Profitability;
Quarterly Fluctuations
The Company has incurred net losses since its inception, and at September 30,
1998, had an accumulated deficit of approximately $41.3 million. The Company
anticipates that it will continue to incur additional operating losses for at
least the next several years. The estimates above as to the minimum period
during which the Company expects to incur losses are forward-looking statements
that involve risks and uncertainties. The Company may never attain profitability
or become profitable on a quarterly or annual basis in the future. At this time,
the Company has no products available for sale and no revenues have been
generated from commercialization of products arising out of its technology. The
Company expects that its revenues will be generated principally from the sale of
its instrument system and the recurring sale of its disposable cartridges. The
Company may never sell a sufficient number of instruments and disposable
cartridges at a gross margin sufficient to achieve profitability.
The Company intends to increase its investments in research and development,
sales and marketing, manufacturing, clinical trials, regulatory approvals and
related infrastructure. As a result of the anticipated increases in the
Company's operating expenses, the Company's financial prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by early stage development companies, particularly companies in new
and rapidly evolving markets. The Company believes that future operating results
will be subject to quarterly fluctuations due to a variety of factors, including
the timing of payments from collaborators, whether and when new products are
successfully developed and introduced by the Company or its competitors, market
acceptance of future products, regulatory delays, product recalls, manufacturing
delays, shipment problems, product seasonality and changes in the mix of
products sold.
Future Capital Requirements; Uncertainty of Additional Funding
The Company has incurred negative cash flow from operations since inception and
does not expect to generate positive cash flow to fund its operations for at
least the next several years. Thus, the Company may need to raise additional
capital to fund its research and development programs, to scale up manufacturing
activities and establish its sales and marketing capability. The Company's
current collaborations will, and future collaborations may, require the Company
to commit substantial amounts of capital. The Company may not be able to make
such capital contributions. The Company's future liquidity and capital funding
requirements will depend on numerous factors, including the extent to which the
Company's products under development are successfully developed and gain market
acceptance, the timing of regulatory actions regarding the Company's potential
products, the costs and timing of expansion of sales, marketing and
manufacturing activities, prosecution and enforcement of patents important to
the Company's business, the results of clinical trials, competitive
developments, and the Company's ability to enter into additional collaborative
arrangements. Additional capital may not be available on terms acceptable to the
Company, or at all. Furthermore, any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may include restrictive
covenants. If adequate funds are not available, the Company may be required to
curtail its operations significantly or to obtain funds through entering into
collaborative agreements or other arrangements on less favorable terms. The
failure by the Company to raise capital on acceptable terms when needed could
have a material adverse effect on the Company's business, financial condition or
results of operations.
12
<PAGE> 13
Intense Competition; Competing Technologies
As the Company develops applications for its technology, it expects to encounter
intense competition from a number of companies that offer products in its
targeted application areas. The Company anticipates that its competitors in
these areas will include health care companies that manufacture laboratory-based
tests and analyzers, diagnostic and pharmaceutical companies, as well as
companies developing drug discovery technologies. To the extent the Company is
successful in developing products in these areas, the Company will face
competition from established companies and numerous development-stage companies
that continually enter these markets.
In many instances, the Company's competitors have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than the Company.
Moreover, such competitors may offer broader product lines and have greater name
recognition than the Company, and may offer discounts as a competitive tactic.
In addition, several development stage companies are currently making or
developing products that compete with or will compete with those of the Company.
The Company's competitors may succeed in developing or marketing technologies or
products that are more effective or commercially attractive than the Company's
potential products, or that render the Company's technologies and potential
products obsolete. Also, the Company may not have the financial resources,
technical expertise or marketing, distribution or support capabilities to
compete successfully in the future. The Company's future success will depend in
large part on its ability to maintain a competitive position with respect to the
technologies in which it competes. Rapid technological development by the
Company or others may result in competing products or technology.
Uncertainty of Patent and Proprietary Technology Protection; Potential Inability
to License Technology from Third Parties
The Company's commercial success will depend in part on obtaining and
maintaining meaningful patent protection on its inventions, technologies and
discoveries. The Company's strategy is to actively pursue patent protection in
the U.S. and foreign jurisdictions for technology it believes to be proprietary
and that offers competitive advantages for its products. The Company's ability
to compete effectively will therefore depend in part on its ability to develop
and maintain proprietary aspects of its technology, and to operate without
infringing the proprietary rights of others, or to obtain rights to such
third-party proprietary rights, if necessary. While Nanogen has six U.S. and
three foreign issued patents and is currently prosecuting additional patent
applications in the U.S. and with certain foreign patent offices, the Company's
pending patent applications may not result in the issuance of patents. The
Company's patent applications may not have priority over others' applications,
and even if issued, any of the Company's patents may not offer protection
against competitors with similar technologies. Any patents issued to the Company
may be challenged, invalidated or circumvented in the future and the rights
created thereunder may not afford the Company a competitive advantage.
The commercial success of the Company also depends in part on the Company
neither infringing valid, enforceable patents or proprietary rights of third
parties, nor breaching any licenses that may relate to the Company's
technologies and products. The Company is aware of certain third-party patents
that may relate to the Company's technology. There can be no assurance that the
Company does not or will not infringe these patents or other patents or
proprietary rights of third parties. In addition, the Company has received and
may in the future receive notices claiming infringement from third parties as
well as invitations to take licenses under third-party patents. Any legal action
against the Company or its collaborative partners claiming damages and seeking
to enjoin commercial activities relating to the Company's products and processes
affected by third-party rights, in addition to subjecting the Company to
potential liability for damages, may require the Company or its collaborative
partners to obtain licenses in order to continue to manufacture or market the
affected products and processes. The Company or its collaborative partners may
not prevail in any such action and any license (including licenses proposed by
third parties) required under any such patent may not be made available on
commercially acceptable terms, or at all. There are a significant number of U.S.
and foreign patents and patent applications held by third parties in the
Company's areas of interest, and the Company believes that there may be
significant litigation in the industry regarding patent and other intellectual
property rights. If the Company becomes involved in such litigation, it could
consume a substantial portion of the Company's managerial and financial
resources, which could have a material
13
<PAGE> 14
adverse effect on the Company's business, financial condition and results of
operations. Additionally, the defense and prosecution of interference
proceedings before the U.S. Patent and Trademark Office ("USPTO") and related
administrative proceedings will result in substantial expense to the Company and
significant diversion of effort by the Company's technical and management
personnel. The Company may in the future become subject to USPTO interference
proceedings to determine the priority of inventions. In addition, laws of
certain foreign countries do not protect intellectual property to the same
extent as do laws in the U.S., which may subject the Company to additional
difficulties in protecting its intellectual property in those countries.
The Company also relies upon trade secrets, technical know-how and continuing
inventions to develop and maintain its competitive position. Others may
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology and the Company may not be able to meaningfully protect its
trade secrets, or be capable of protecting its rights to its trade secrets. The
Company seeks to protect its proprietary technology and patents, in part, by
confidentiality agreements with its employees and certain contractors. The
Company's own employees may breach their existing Proprietary Information,
Inventions, and Dispute Resolution Agreements and such agreements may not
protect the Company's intellectual property. This could have a material adverse
effect on the Company's business, financial condition and results of operations.
No Assurance of Obtaining Regulatory Approvals; Government Regulatory Process
The Company anticipates that the manufacturing, labeling, distribution and
marketing of a number of its diagnostic products will be subject to regulation
in the U.S. and in certain other countries. In the U.S., the Federal Drug
Administration ("FDA") regulates, as medical devices, most diagnostic tests and
in vitro reagents that are marketed as finished test kits and equipment.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the preclinical and clinical testing,
design, efficacy, safety, manufacture, labeling, distribution and promotion of
medical devices. The Company will not be able to commence marketing or
commercial sales in the U.S. of such products until it receives clearance or
approval from the FDA, which can be a lengthy, expensive and uncertain process.
The Company has not applied for FDA or other regulatory approvals with respect
to any of its products under development. The Company may experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new products, regulatory clearance or approval or
clearance of any new products may not be granted by the FDA or foreign
regulatory authorities on a timely basis, if at all, and the new products may
not be successfully commercialized. Noncompliance with applicable FDA
requirements can result in, among other things, administrative sanctions or
judicially imposed sanctions such as injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals, and criminal prosecution. The
FDA also has the authority to request recall, repair, replacement or refund of
the cost of any device manufactured or distributed by the Company. Any devices
manufactured or distributed by the Company pursuant to FDA clearance or
approvals are subject to pervasive and continuing regulation by the FDA and
certain state agencies. The Company may not be able to obtain necessary
regulatory approvals or clearances for its products on a timely basis, or at
all. Delays in receipt of or failure to receive such approvals or clearances,
the loss of previously received approvals or clearances, limitations on intended
uses imposed as a condition of such approvals or clearances, or failure to
comply with existing or future regulatory requirements would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Suppliers
Certain key components and raw materials used in the manufacture of the
Company's products are currently provided from limited sources or in some cases
by single-source vendors. Although the Company believes that alternative sources
for such components and raw materials are available, any supply interruption in
a sole-sourced component of raw material would have a material adverse effect on
the Company's ability to manufacture its products until a new source of supply
is qualified and, as a result, could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
an uncorrected impurity or supplier's variation in a raw material, either
unknown to the Company or incompatible with the Company's manufacturing process,
could have a material adverse effect on the Company's ability to manufacture
products. The Company may
14
<PAGE> 15
be unable to find a sufficient alternative supply channel in a reasonable time
period, or on commercially reasonable terms, if at all. Failure to obtain a
supplier for the manufacture of components of its future products, if any, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Limited Manufacturing Experience; Potential Inability to Scale Up Manufacturing
The Company has no experience manufacturing products for commercial purposes.
The Company presently relies on subcontractors to manufacture the limited
quantities of semiconductor microchips and other components it currently
requires for internal and collaborative purposes, as well as for use in clinical
trials and prototype products. The Company is currently qualifying new contract
manufacturers for large scale wafer fabrication, and there can be no assurance
that the Company will qualify and secure sufficient capacity on satisfactory
terms for commercial production. Manufacturing, supply and quality control
problems may arise as the Company either alone or with subcontractors attempts
to scale up manufacturing procedures and such scale-up may not be achieved in a
timely manner or at a commercially reasonable cost. Any such failure to surmount
such problems could lead to delays or pose a threat to the ultimate
commercialization of the Company's products and result in a material adverse
effect on the Company. If the Company or any of its contract manufacturers
encounter future manufacturing difficulties, including problems involving the
ability to scale up manufacturing capacity, production yields, quality control
and assurance, or shortages of components or qualified personnel, it could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's manufacturing facilities and those of its
contract manufacturers are or will be subject to periodic regulatory inspections
by the FDA and other federal and state regulatory agencies and such facilities
are subject to Quality System Regulation ("QSR") requirements of the FDA.
Failure by the Company or its third-party manufacturer to maintain its
facilities in accordance with QSR regulations, other international quality
standards or other regulatory requirements would have a material adverse effect
on the Company's business, financial condition and results of operations.
Limited Marketing and Sales Capability
Nanogen intends to market and sell its products, if successfully developed,
directly and through strategic alliances and distribution arrangements with
third parties, including its collaborative partners. Any efforts to establish
such strategic alliances or distribution arrangements may not be successful. The
Company currently has limited product marketing and sales capabilities, although
it intends to recruit experienced marketing and sales personnel as the Company
grows closer to product commercialization. In attracting, establishing and
maintaining a marketing and sales force, or entering into third-party marketing
or distribution arrangements with other companies, the Company expects to incur
significant additional expenses. The Company may not be able to successfully
establish such a sales and marketing capability or enter into third-party
marketing or distribution arrangements or be successful in achieving marketplace
acceptance for its products.
Management of Growth
The Company has recently experienced, and expects to continue to experience
growth in the number of its employees and the scope of its operating and
financial systems. This growth has resulted in an increase in responsibilities
for both existing and new management personnel. The Company's ability to manage
growth effectively will require it to continue to implement and improve its
operational, financial and management information systems and to recruit, train,
motivate and manage its employees. The Company may not be able to manage its
growth and expansion, and a failure to do so could have a material adverse
effect on the Company's business, financial condition and results of operations.
Product Liability Exposure; Inadequacy or Unavailability of Insurance Coverage
The testing, manufacturing and marketing of the Company's products entails an
inherent risk of product liability claims. To date, the Company has not
experienced any product liability claims, but any such claims arising in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company intends to secure limited
product liability/clinical liability insurance coverage, but the Company may not
be able to obtain such insurance on acceptable terms with adequate coverage, or
at reasonable costs. Potential
15
<PAGE> 16
product liability claims may exceed the amount of the Company's insurance
coverage or may be excluded from coverage under the terms of the policy. The
Company's insurance once obtained may not be renewed at a cost and level of
coverage comparable to that then in effect. Any claims against the Company,
regardless of their merit or eventual outcome, could have a material adverse
effect upon the Company's business, financial condition, and results of
operations.
Possible Volatility of Stock Price
The securities markets have from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. The market prices of the common stock of many publicly
held emerging medical technology companies have in the past been, and can in the
future be, especially volatile. Announcements of technological innovations or
new products by the Company or its competitors, clinical investigation results,
release of reports by securities analysts, developments or disputes concerning
patents or proprietary rights, regulatory developments, changes in regulatory or
medical reimbursement policies, economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results, may have a
significant impact on the market price of the Company's common stock. In the
past, securities class action litigation has often been instituted following
periods of volatility in the market price for a company's securities. Such
litigation could result in substantial costs and a diversion of management
attention and resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
16
<PAGE> 17
NANOGEN, INC.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On April 13, 1998, the Company's Registration Statement on Form S-1
(File No. 333-42791) was declared effective by the Securities and
Exchange Commission (the "IPO Registration Statement"). The IPO
Registration Statement registered a total of 3,900,000 shares of common
stock, all of which were issued and sold by the Company (the "Offering")
upon the termination of the Offering in April 1998. The Offering was led
by an underwriting group consisting of Morgan Stanley Dean Witter,
Lehman Brothers and SBC Warburg Dillion Read Inc. The shares sold by the
Company were sold at an aggregate offering price of $42.9 million,
netting proceeds of approximately $38.8 million to the Company after
underwriting fees of approximately $3.0 million and other offering
expenses of approximately $1.1 million. None of such fees and expenses
were paid to any director, officer, or 10% or greater stockholder of the
Company or an affiliate of any such persons.
Since the effective date of the IPO Registration Statement, the net
offering proceeds have been applied to the following uses in the
following approximate amounts:
Repayment of indebtedness $ 779,000
Working capital $ 8,358,000
Temporary investments $ 29,663,000
The temporary investments specified above consist primarily of highly
liquid investments which include marketable debt securities of financial
institutions and corporations with strong credit ratings with maturities
of ninety days or less when acquired. None of the payments noted above
have been paid to any director, officer, or 10% or greater stockholder
of the Company or an affiliate of any such persons.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
If a stockholder wishes to have a stockholder proposal considered at the
Company's next annual meeting, the stockholder must have given timely notice of
the proposal in writing to the Secretary of the Company. To be timely, a
stockholder's notice of the proposal must be delivered to or mailed and received
at the executive offices of the Company no less than 60 days nor more than 75
days prior to the date of the annual meeting; provided, however that if less
than 65 days' notice or prior public disclosure of the date of the annual
meeting is given or made to stockholders, notice of the proposal to be timely
must be received no later than the close of business on the 15th day following
the day on which such notice of the date of the annual meeting was mailed or
public disclosure of the meeting date was given.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.35 Agreement between the Registrant and Daniel D. Burgess, dated
July 6, 1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three months ended
September 30, 1998.
18
<PAGE> 19
NANOGEN, INC.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
NANOGEN, INC.
DATE NOVEMBER 12, 1998 /S/ HOWARD C. BIRNDORF
------------------- ----------------------------
HOWARD C. BIRNDORF
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE
OFFICER)
DATE NOVEMBER 12, 1998 /S/ DANIEL D. BURGESS
------------------- ----------------------------
DANIEL D. BURGESS
VICE PRESIDENT, CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
19
<PAGE> 20
NANOGEN, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.35 Agreement between the Registrant and Daniel D. Burgess,
dated July 6, 1998.
27.1 Financial Data Schedule
20
<PAGE> 1
EXHIBIT 10.35
July 6, 1998
Daniel A. Burgess
P. O. Box 675567
Rancho Santa Fe, CA 92067
Fax # 619/622-5556
Dear Dan:
Nanogen Incorporated ("Nanogen") is pleased to offer you the position of Vice
President and Chief Financial Officer (VP/CFO) with Nanogen Inc., and the
following terms encompass our offer. The effective date of this position will be
as soon as possible, but not later than August 3, 1998. If you accept this
offer, you will be an exempt employee reporting to me, Nanogen's CEO.
You will be located in our San Diego office, and as VP/CFO, will be responsible
for directing the financial operations for Nanogen and its related entities. You
will be expected to devote your full-time efforts to these responsibilities and
you will be compensated at an annual base rate of $190,000 per annum payable in
equal, semi-monthly increments. It is understood that you have certain
responsibilities to assist in the windup of your former employer, and Nanogen
agrees to make reasonable accommodation to allow you to do so.
You will be a participant in Nanogen's Executive Incentive Compensation Plan. As
part of this plan, you will be eligible for a pro rata share of up to a $40,000
bonus for 1998. All bonuses are based on annual milestones which would be
mutually agreed upon between you and me, and subject to Board of Directors'
approval.
Upon your acceptance of this proposal, you will be entitled to purchase 150,000
shares of Nanogen common stock at fair market value, as determined by Nanogen's
Board. The purchase will be made through the signing of Nanogen's current form
of Stock Purchase Agreement or Stock Options Plan. Of such shares, 125,000 will
vest ratably on a monthly basis over the four-year period starting on your first
day of employment, except that you will not be vested in the initial 25% of such
shares until your first anniversary of employment. The remaining 25,000 of such
shares ("Milestone Shares") will vest in equal annual installments over six
years as predetermined annual milestones are attained. Such milestones will be
mutually agreed upon, subject to Board approval. If the milestones for the year
have been attained, then the Milestone Shares that vest for such year thereafter
shall not be subject to repurchase by Nanogen
<PAGE> 2
Dan Burgess
July 6, 1998
Page 2
at the original purchase price. If you resign during the first 12 month period
of your employment, no Milestone Shares will vest. Thereafter, if you resign
during the first half of a calendar year, no Milestone Shares will vest for such
year. If you resign during the second half of a calendar year, you will vest in
a pro rata portion of the Milestone Shares that otherwise would have vested
during such year (based on attainment of the applicable milestones). Such
portion shall be a fraction equal to the number of completed months of work
during such year divided by 12.
You will automatically be vested in 100% of any remaining unvested shares upon
the transfer or sale of all or substantially all of Nanogen's business or a
merger with an unaffiliated company.
You will be eligible to participate in all Company-sponsored benefits upon your
date of hire. At present, these include full medical, dental and vision
insurance coverage for yourself, with the option to include your family with a
minimal contribution. In addition, you will be eligible to participate in our
life and long-term disability insurance as well as our 401(k) plans
(non-employer contributing) and our 125 Flexible Benefits Program. A benefits
summary is included for your review.
The Company also agrees to provide you with a six-month severance package,
should your employment be terminated without cause. For the purpose of this
letter, the phrase "termination without cause" shall mean a termination of your
employment by Nanogen for any reason other than: 1) the repeated and willful
failure by you to perform your reasonably assigned duties on behalf of Nanogen;
2) the repeated gross negligence by you in carrying out your duties; 3) illegal
conduct by you in carrying out your duties; 4) the repeated refusal by you to
comply with the reasonable and lawful instructions of the Board; or 5) repeated
and willful actions by you contrary to Nanogen's best interests.
Employment with Nanogen will not be for a specific term and can be terminated by
you or by the Company at any time for any reason, with or without cause and with
or without notice. Any contrary representations, agreements, or promises of any
kind, whether written, oral, expressed or implied which may have been made or
which may be made to you are/will be superseded by this offer. We request that
all Nanogen employees, to the extent possible, give advance notice if they
intend to resign. If you accept the offer, the terms described in this letter
will be the terms of your employment. Any additions or modifications of these
terms must be in writing and signed by you and Nanogen's Chief Executive
Officer.
As an obligation consistent with the offer of employment, you will be required
to sign the enclosed Blood Consent Form, and the Proprietary Information and
Inventions
<PAGE> 3
Dan Burgess
July 6, 1998
Page 3
Agreement; and on your first day of employment, to provide the Company with the
legally required proof of your identity and authorization to work in the United
States.
Assuming this letter is acceptable to you, please sign a copy and return it to
me. This offer will terminate unless accepted by July 17, 1998. We are very
excited that you will be joining Nanogen. Myself, Tina, our Board Members and
employees look forward to announcing your appointment.
Sincerely yours,
Howard C. Birndorf
Enclosures
I accept this offer under the terms and conditions set forth in this letter.
/s/ Daniel D. Burgess July 10, 1998
- -----------------------------------------------------------------------------
Daniel D. Burgess Date
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