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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 March 31, 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] as to (1) NO [X] as to (2)
As of May 15, 1998, 18,824,907 shares of the Registrant's Common Stock were
outstanding.
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NANOGEN, INC.
FORM 10-Q
For the Three Months ended March 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I: FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets at March 31, 1998 3
and December 31, 1997
Consolidated Statements of Operations for the Three 4
Months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Three 5
Months ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings Not applicable
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities Not applicable
Item 4. Submission of Matters to a Vote of Security Holders 16-17
Item 5. Other Information Not applicable
Item 6. Exhibits and Reports on Form 8 - K 17
SIGNATURES 18
EXHIBIT INDEX 19
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NANOGEN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
------------ ------------
(unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,579,897 $ 19,498,293
Grant receivables and other current assets 872,992 699,595
------------ ------------
Total current assets 16,452,889 20,197,888
Property and equipment, net 3,908,861 2,439,941
Restricted cash 363,747 358,858
Other assets 702,577 218,376
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$ 21,428,074 $ 23,215,063
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 434,804 $ 597,211
Accrued liabilities 873,488 1,008,951
Unearned revenue 1,805,412 1,012,186
Current portion of capital lease obligations 1,091,931 804,495
------------ ------------
Total current liabilities 4,205,635 3,422,843
Capital lease obligations, less current portion 2,251,835 1,193,221
Stockholders' equity:
Convertible preferred stock, $.001 par value, 15,500,000
shares authorized; 13,882,374 and 13,683,865 shares
issued and outstanding at March 31, 1998 and December
31, 1997, respectively 13,882 13,684
Common stock, $.001 par value, 40,000,000 shares
authorized; 3,317,279 and 3,183,523 shares issued and
outstanding at March 31, 1998 and December 31, 1997,
respectively 3,317 3,184
Additional paid-in capital 51,422,035 48,523,140
Deferred compensation (2,821,295) (2,322,850)
Notes receivable from officers (1,440,494) (1,129,509)
Accumulated deficit (32,206,841) (26,488,650)
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Total stockholders' equity 14,970,604 18,598,999
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$ 21,428,074 $ 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
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NANOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------
1998 1997
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<S> <C> <C>
Revenues:
Contract and grant revenue $ 546,816 $ 340,788
Sponsored research 884,928 --
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Total revenues 1,431,744 340,788
Operating expenses:
Research and development 4,646,059 1,819,287
General and administrative 1,470,021 722,251
Acquired in-process technology 1,192,842 --
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Total operating expenses 7,308,922 2,541,538
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Loss from operations (5,877,178) (2,200,750)
Interest income (expense), net 158,987 218,042
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Net loss $ (5,718,191) $ (1,982,708)
============ ============
Pro forma net loss per share - basic and diluted $ (.52) $ (.22)
============ ============
Number of shares used in computing pro forma
net loss per share - basic and diluted 10,973,896 9,218,816
============ ============
</TABLE>
See accompanying notes.
4
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NANOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities
Net loss $ (5,718,191) $ (1,982,708)
Adjustments to reconcile net loss to net cash
used in operating activities:
Acquisition of in-process technology 1,192,842 --
Depreciation and amortization 174,334 102,037
Amortization of deferred compensation 823,048 --
Changes in operating assets and liabilities:
Accounts payable (162,407) (80,592)
Accrued liabilities (135,463) (58,785)
Unearned revenue 793,226 --
Grant receivables and other current assets (173,397) (350,224)
------------ ------------
Net cash used in operating activities (3,206,008) (2,370,272)
Cash flows from investing activities
Purchase of equipment -- (179,122)
------------ ------------
Net cash used in investing activities -- (179,122)
Cash flows from financing activities
Restricted cash (4,889) (5,574)
Principal payments on capital lease obligations (297,206) (140,466)
Issuance of common stock, net of repurchases 75,093 (1,044)
Issuance of convertible preferred stock, net of issuance costs -- 6,233,561
Interest on notes receivable from officers (1,185) (1,113)
Other (484,201) --
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Net cash provided by (used in) financing activities (712,388) 6,085,364
Increase (decrease) in cash and cash equivalents (3,918,396) 3,535,970
Cash and cash equivalents at beginning of period 19,498,293 16,775,228
------------ ------------
Cash and cash equivalents at end of period $ 15,579,897 $ 20,311,198
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 75,922 $ 53,164
============ ============
Supplemental schedule of noncash investing and financing activities:
Equipment acquired under capital leases $ 1,643,254 $ 142,673
============ ============
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 $ --
============ ============
</TABLE>
See accompanying notes.
5
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NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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 March 31, 1998, consolidated statements of operations and
consolidated statements of cash flows for the three months ended March
31, 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 months ended March 31, 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
Pro forma net loss per share has been computed using the weighted
average number of common shares outstanding during the periods
presented, and gives effect to the conversion of the convertible
preferred stock, which converted to common stock upon completion of the
Company's initial public offering, using the as if-converted method from
the original date of issuance. Common equivalent shares resulting from
options to purchase common stock and warrants to purchase convertible
preferred stock are excluded from the computation.
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. 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.
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 a material impact on the Company's financial statements.
4. SUBSEQUENT EVENTS
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 $39.0 million. All outstanding shares
of convertible preferred stock outstanding at March 31, 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.
6
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NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
4. SUBSEQUENT EVENTS (CONTINUED)
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.
7
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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 products will accelerate
the development of products that capitalize on the increasing availability of
genetic information, and whether the Company's platform technology will shift
the paradigm from current manual and mechanical methods to microelectronic
systems, 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. The Company further believes its semiconductor based platform
technology provides a low cost, highly efficient, accurate and versatile
integrated system that will shift the paradigm from current manual and
mechanical methods to microelectronic systems, thereby significantly improving
the quality of healthcare.
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 for genomic applications.
RESULTS OF OPERATIONS
Revenues. Revenue from contracts and grants totaled approximately $547,000 for
the three months ended March 31, 1998 compared to approximately $341,000 for the
same period in 1997. Revenue from sponsored research totaled approximately
$885,000 for the three months ended March 31, 1998; no sponsored research
revenue was recognized during the three months ended March 31, 1997. Contract
and grant revenue recognized during the three months ended March 31, 1998 was
earned from five active contracts, compared to three active contracts during the
same period in 1997. Sponsored research revenue recognized during the three
months ended March 31, 1998 was earned under the Company's joint venture
collaboration with Becton Dickinson entered into in October 1997 and under the
Company's research and development agreement with Hoechst Corporate Research and
Technology, an affiliate of Hoechst, 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 deferred revenue until the expenses are incurred.
Continuation of certain contract, grant, and sponsored research agreements are
dependent 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 $4.6 million for the three months ended March 31, 1998 from
approximately $1.8 million for the same period in 1997. This
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increase is primarily attributable to the expansion of research efforts
including the hiring of additional research and development personnel and the
increase in associated costs such as laboratory supplies, equipment and other
related expenses. The Company expects research and development spending to
increase significantly over the next several years as research and product
development efforts continue to expand.
General and Administrative Expenses. General and administrative expenses totaled
approximately $1.5 million for the three months ended March 31, 1998 compared to
approximately $722,000 for the same period in 1997. This increase is principally
due to increased legal costs associated with enhancing and maintaining the
Company's intellectual property portfolio and to deferred compensation expense
recognized in the first three months of 1998 which was not 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.
Acquired In-Process Technology. In January 1998, 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,
Inc. The in-process technology which was acquired relates generally to
nanotechnology and molecular electronics. Nanotronics, Inc.'s research is
currently funded through government contracts from the Information Directorate
of the United States Air Force Research Laboratory located in Rome, New York.
Interest Income (Expense), Net. The Company had net interest income of
approximately $159,000 for the three months ended March 31, 1998 compared to net
interest income of approximately $218,000 for the same period in 1997. Interest
income was greater during the three months ended March 31, 1997 compared with
the same period in 1998 due to larger cash balances resulting from the Company's
private placement of equity securities during December 1996 and January 1997.
Additionally, interest expense was higher during the three months ended March
31, 1998 compared with the same period in 1997 due to greater amounts of
equipment under capital leases in the first three months of 1998 than in the
first three months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had $15.6 million in cash and cash equivalents
compared to $19.5 million at December 31, 1997. This decrease was primarily due
to the funding of expanding research and development activities as well as
general and administrative activities as the Company continues to grow.
Net cash used in operating activities increased to $3.2 million for the three
months ended March 31, 1998 compared to $2.4 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, laboratory
expenses, license fees and legal fees relating to filing and maintaining the
Company's patents.
The Company funds certain of its equipment acquisitions and leasehold
improvements through capital equipment leasing facilities. During the three
months ended March 31, 1998, the Company received proceeds from equipment and
leasehold improvement financing of approximately $1.6 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 $39.0 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 the net proceeds from the initial public offering and
the private placement completed in April 1998, together with existing capital
resources, 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 enter into additional collaborative arrangements. The Company has incurred
negative cash flow from operations since inception and does not expect to
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generate positive cash flow to fund its operations for at least the next several
years. In the event the Company's capital requirements are greater than
estimated, 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. There can be no assurance that such additional capital will
be available on terms acceptable to the Company, if 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
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 platform and is developing products in the fields of
medical diagnostics, biomedical research, genomics, genetic testing and drug
discovery. There can be no assurances that the Company will be able to
successfully complete the development of products in any or all of these fields.
All of the Company's products are currently under development, and there can be
no assurance that such products will be successfully developed or commercialized
on a timely basis, if 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 no 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 there can be no assurance that the Company will be able to
develop commercially viable products in any or all of these fields or that any
such products will be accepted in the marketplace. Additionally, there can be no
assurance that the Company will 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.
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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 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.
There can be no assurance that the Company will be successful in entering into
or maintaining such 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. There can be no assurance that any of the
Company's collaborative partners will perform their obligations as expected or
will 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 by June 30, 1998,
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 such
arrangement will be a significant source of funding for the Company's research
and development activities. In addition, certain milestones will need to be
agreed upon in the future. There can be no assurance that the parties will agree
to such milestones, and if agreed upon, there can be no assurances that such
milestones will be achieved. The Company will rely in part on Becton Dickinson
to manufacture certain 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 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.
There can be no assurance that such agreements will result in commercially
viable collaborations between the parties, or that any resulting collaborations
will 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 March 31, 1998,
had an accumulated deficit of approximately $32.2 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. There can be no assurance that the Company
will ever attain profitability or will remain 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. There can be no assurance that the Company will
ever attain profitability or will remain profitable on a quarterly or annual
basis in the future. 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. There can be no assurance that the Company will sell a
sufficient number of instruments and disposable cartridges at a gross margin
sufficient to achieve profitability. The Company intends to significantly
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
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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. There can be no assurance that the
Company will be able to make such scheduled 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. There can be no assurance that such
additional capital will be available on terms acceptable to the Company, if 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.
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.
There can be no assurance that the Company's competitors will not succeed in
developing or marketing technologies or products that are more effective or
commercially attractive than the Company's current or future products, or that
would render the Company's technologies and products obsolete. Also, there can
be no assurance that the Company will 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 four U.S. and
one foreign issued
12
<PAGE> 13
patents and is currently prosecuting additional patent applications in the U.S.
and with certain foreign patent offices, there can be no assurance that any of
the Company's pending patent applications will result in the issuance of any
patents, that the Company's patent applications will have priority over others'
applications, or that, if issued, any of the Company's patents will offer
protection against competitors with similar technologies. There can be no
assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented in the future or that the rights created thereunder
will 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. There can be no assurance that the Company or
its collaborative partners would prevail in any such action or that any license
(including licenses proposed by third parties) required under any such patent
would be made available on commercially acceptable terms, if 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 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. There can be no assurance
that the Company will not 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. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such technology, that the Company can meaningfully
protect its trade secrets, or that the Company will 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. There can be no assurance that the Company's
own employees will not breach their existing Proprietary Information,
Inventions, and Dispute Resolution Agreements or that such agreements will
otherwise protect the Company's intellectual property, each of which 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. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products, that
regulatory clearance or approval or clearance of any new products will be
granted by the FDA or foreign regulatory authorities on a timely basis, if at
all, or that the new products will 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,
13
<PAGE> 14
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. There can be no assurance that the Company will be able
to obtain necessary regulatory approvals or clearances for its products on a
timely basis, if at all, and 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 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. There can be no assurance that manufacturing,
supply and quality control problems will not arise as the Company either alone
or with subcontractors attempts to scale up manufacturing procedures or that
such scale-up can 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. There can be no assurance
that any efforts to establish such strategic alliances or distribution
arrangements will 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. No assurance can be given that the Company will be able to
successfully establish such a sales and marketing capability or enter into
third-party marketing or distribution arrangements or that it will be successful
in achieving marketplace acceptance for its products.
14
<PAGE> 15
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. There can be no assurance that the Company
will 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 there can be no
assurance that the Company will be able to obtain such insurance on acceptable
terms with adequate coverage, or at reasonable costs. Potential 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. There can be no
assurance that the Company's insurance once obtained can 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 medical device 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.
15
<PAGE> 16
NANOGEN, INC.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Note: All information included in this "Changes in Securities and Use of
Proceeds" section reflects a two-for-three reverse split of the Company's common
stock effected in April 1998 (Preferred Stock share amounts have been similarly
adjusted).
(a) Not applicable.
(b) Not applicable.
(c) In January of 1998 in connection with the acquisition of all of
the outstanding stock of Nanotronics, Inc., a California
corporation ("Nanotronics"), the Company issued an aggregate of
132,334 shares of its Series D Preferred Stock and a warrant for
the purchase of 993 shares of its Series D Preferred Stock to
the shareholders and creditors of Nanotronics. The Company
relied upon the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended ("Securities Act"), in
issuing these shares and warrants.
On various dates from January 1, 1998 through March 31, 1998,
the Company issued 237,509 shares of its common stock to various
employees pursuant to the exercise of options granted under its
1995 Stock Option/Stock Issuance Plan and its 1997 Stock
Incentive Plan. The exercise prices per share ranged from $0.15
to $3.00, for an aggregate consideration of approximately
$475,313. The Company relied on the exemption provided by Rule
701 promulgated under the Securities Act in issuing these
shares.
In March 1998 the Company issued 466 shares of its common stock
to an existing Company stockholder in connection with the
exercise of a common stock warrant originally issued in June of
1995. The exercise price per share was $0.375 per share for
aggregate consideration of $175.00. The Company relied upon the
exemption provided by Section 4(2) of the Securities Act in
issuing these shares.
In connection with a licensing agreement entered into between
the Company and Billups-Rothenberg, Inc. ("BRI") as of March 18,
1998, as partial payment for an initial license fee, the Company
issued 1,333 shares of its common stock to BRI. The Company
relied upon the exemption provided by Section 4(2) of the
Securities Act in issuing these shares to BRI.
(d) On April 14, 1998 the Company offered for sale 3,900,000 shares
of its common stock priced at $11.00 per share for an aggregate
offering price of $42.9 million in an initial public offering
("IPO") led by an underwritting group consisting of Morgan
Stanley Dean Witter, Lehman Brothers and SBC Warburg Dillon Read
Inc. The proceeds of the IPO to the Company, net of underwriting
fees and IPO expenses, were approximately $39 million. The
effective date of the registration statement filed by the
Company with the Securities and Exchange Commission in
connection with the IPO (file No. 333-42791) was April 13, 1998.
Because all of the proceeds from the IPO were generated after
March 31, 1998, none of these proceeds were used during the
three month period covered by this Report on Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As of March 25, 1998, a majority of the Company's stockholders, by
written consent, approved: (i) an amendment and restatement to the
Company's Certificate of Incorporation, providing for, among other
things, a two-for-three reverse split of the Company's common stock in
connection with the Company's IPO; (ii) conditioned upon the
consummation of the IPO, an amendment and restatement of the Company's
Certificate of Incorporation to, among other things, set the authorized
"blank check" preferred stock at 5,000,000 shares, provide for a
classified Board of Directors, eliminate the right of stockholders to
act by written consent and provide for certain supermajority voting
provisions; (iii) conditioned upon the consummation of the IPO, an
amendment and restatement of the Company's by-laws, to, among other
things, provide for a classified Board of Directors, eliminate the right
of stockholders to act by written consent and provide for certain
supermajority
16
<PAGE> 17
NANOGEN, INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
voting provisions; (iv) an amendment to the Company's 1997 Stock
Incentive Plan to increase the number of shares authorized thereunder by
900,000; (v) the adoption of the Company's Employee Stock Purchase Plan;
and (vi) the adoption of a unified form of indemnity agreement providing
for indemnification for the Company's officers and directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.32(1) Secured Promissory Note and Deed of Trust between the
Company and W.J. Kitchen, dated March 16, 1998
10.33(1) Series D Preferred Stock Purchase Warrant between the
Company and Dominion Fund II, dated January 26, 1998
10.34(1) License Agreement between the Company and
Billups-Rothenberg, Inc. dated as of March 18, 1998
27.1 Financial Data Schedule
(1) - Incorporated by reference to exhibits of the same number to
the Company's Registration Statement on Form S-1 (No. 333-42791).
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three months ended
March 31, 1998.
17
<PAGE> 18
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: May 27, 1998 /s/ Howard C. Birndorf
---------------------- -------------------------------
Howard C. Birndorf
Chairman of the Board, Chief
Executive Officer and Chief Financial
Officer (Principal Executive Officer and
Principal Financial Officer)
Date: May 27, 1998 /s/ Dana A. Krzyston
---------------------- -------------------------------
Dana A. Krzyston
Controller (Principal Accounting
Officer )
18
<PAGE> 19
NANOGEN, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------ ----------- ----
<S> <C> <C>
10.32(1) Secured Promissory Notes and Deed of Trust between the
Company and W.J. Kitchen, dated March 16, 1998
10.33(1) Series D Preferred Stock Purchase Warrant between the
Company and Dominion Fund II, dated January 26, 1998
10.34(1) License Agreement between the Company and Billups-
Rothenberg, Inc. dated as of March 31, 1998
27.1 Financial Data Schedule 20
</TABLE>
(1) - Incorporated by reference to exhibits of the same number to the Company's
Registration Statement on Form S-1 (No. 333-42791).
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 15,579,897
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,452,889
<PP&E> 5,293,975
<DEPRECIATION> 1,385,114
<TOTAL-ASSETS> 21,428,074
<CURRENT-LIABILITIES> 4,205,635
<BONDS> 3,343,766
0
13,882
<COMMON> 3,317
<OTHER-SE> 14,953,405
<TOTAL-LIABILITY-AND-EQUITY> 21,428,074
<SALES> 0
<TOTAL-REVENUES> 1,431,744
<CGS> 0
<TOTAL-COSTS> 6,116,080
<OTHER-EXPENSES> 1,192,842
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (158,987)
<INCOME-PRETAX> (5,718,191)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,718,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,718,191)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> 0
</TABLE>
