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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL PERIOD ENDED DECEMBER 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 546-7700
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
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The aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing sale price of the Common Stock on March 24,
1999, as reported on the Nasdaq National Market was approximately
$109,464,453. Shares of Common Stock held by each executive officer and
director and by each person who owns 10 percent or more of the outstanding
Common Stock have been excluded in such calculation as such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant's common stock was
18,834,207 as of March 24, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
REGISTRANT'S PROXY STATEMENT TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IN CONNECTION WITH THE SOLICITATION OF PROXIES FOR THE REGISTRANT'S
1999 ANNUAL STOCKHOLDER'S MEETING TO BE HELD ON JUNE 30, 1999 IS INCORPORATED BY
REFERENCE IN PART III, ITEM 10 (AS TO DIRECTORS), 11, 12 AND 13 OF THIS FORM
10-K.
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NANOGEN, INC.
FORM 10-K
INDEX
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PAGE
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PART I
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Item 1. Business.......................................................................... 1
Item 2. Properties........................................................................18
Item 3. Legal Proceedings.................................................................18
Item 4. Submission of Matters to a Vote of Security Holders...............................19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............19
Item 6. Selected Financial Data...........................................................20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................21
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.....................................................................24
Item 8. Financial Statements and Supplementary Data.......................................24
Item 9. Change in and Disagreements with Accountants on Accounting and
and Financial Disclosures.......................................................24
PART III
Item 10. Directors and Executive Officers of the Registrant................................25
Item 11. Executive Compensation............................................................25
Item 12. Security Ownership of Certain Beneficial Owners and Management....................25
Item 13. Certain Relationships and Related Transactions....................................25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................25
SIGNATURES..........................................................................................28
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PART I
ITEM 1. BUSINESS
OVERVIEW
We integrate advanced microelectronics and molecular biology into a
platform technology with potential commercial applications in the biological
fields of biomedical research, diagnostics, drug discovery, forensics,
agriculture, and environmental testing. Our technology may also have
applications in the electronics and telecommunications industries. We are
developing an automated system which incorporates a proprietary semiconductor
microchip and may provide a flexible tool for the rapid identification and
analysis of test samples containing charged molecules.
Through the use of microelectronics, our 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, our technology allows the simultaneous
analysis of multiple test results from a single sample.
The open architecture design of our system enables us to offer microchips
with arrays designed for specific applications or with arrays that can be
customized by the end user. We plan to introduce our first product to
selected customers in the biomedical research market in late 1999.
Because of the importance of the biomedical research market as a
beachhead, we anticipate being directly involved with marketing our first
product line to this segment of our business. For follow-on applications, we
anticipate partnering with companies which can bring infrastructure,
expertise and a customer base to a particular application, allowing us to
focus our resources on product development.
We have established corporate alliances in infectious disease
diagnostics, drug discovery and genomics. We are developing products to
expedite the diagnosis of infectious disease through our joint venture with
Becton, Dickinson and Company ("Becton Dickinson"). We have also entered into
a collaboration with Aventis Research and Technologies (an affiliate of
Hoechst AG) ("Aventis") to develop drug discovery tools, and a collaboration
with Elan Corporation, plc ("Elan"), for genomic applications. Our
collaborations permit integration of our technology with the resources and
technology of our partners, while allowing us to independently pursue
diagnostics, drug discovery and genomics opportunities outside the scope of
these collaborations.
OUR PLATFORM TECHNOLOGY
Our proprietary platform technology takes advantage of the fact that
most biological molecules are either positively or negatively charged.
Through the use of microelectronics, this technology enables the active
movement and concentration of electronically charged molecules to and from
designated test sites on a semiconductor microchip. These test sites are
arranged in an array on our proprietary microchips. In addition, the
technology allows for the simultaneous analysis of multiple test results, or
"multiplexing," from a single sample. We believe these attributes make our
technology well suited to unraveling complex genetic information.
We believe our proprietary technology has applications for the analysis
of any unknown charged biological molecule which is capable of binding
specifically to a known capture molecule on a microchip. We have initially
focused on DNA-based sample analysis in developing applications utilizing our
platform.
Our technology allows small sequences of DNA capture probes to be
electronically placed at, or "addressed" to, specific sites on the microchip.
A test sample can then be analyzed for the presence of target DNA molecules
by determining which of the DNA capture probes on the array bind, or
hybridize, with complementary DNA in the test sample. In contrast to
nonelectronic or passive hybridization with conventional arrays on paper or
glass "chips," the use of electronically mediated active hybridization to
move and concentrate target DNA molecules accelerates hybridization.
Electronically mediated hybridization occurs in minutes rather than the hours
required for passive hybridization techniques.
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In addition to DNA applications, we believe our technology may be
applicable to a number of other analyses, including antigen-antibody,
enzyme-substrate, cell-receptor, and cell separation techniques.
Our system can integrate in a single platform the following electronic
operational features:
ELECTRONIC ADDRESSING. Electronic addressing is the process by which we
place charged molecules at specific test sites. Since DNA has a strong
negative charge, it can be electronically moved to an area of positive
charge. A test site or a row of test sites on the microchip is electronically
activated with a positive charge. A solution of DNA probes is introduced onto
the microchip. The negatively charged probes rapidly move to the positively
charged sites, where they concentrate and are chemically bound to that site.
The microchip is then washed and another solution of distinct DNA probes can
be added. Site by site, row by row, an array of specifically bound DNA probes
can be addressed on the microchip. Multiplexed sites can be addressed
simultaneously allowing for speed and flexibility of array assembly. With the
ability to electronically address capture probes to specific sites, the
Nanogen system allows end users to build custom arrays through the placement
of specific capture probes on a microchip. These microchip arrays may provide
research professionals with a powerful and versatile tool to process and
analyze molecular information.
ELECTRONIC CONCENTRATION AND HYBRIDIZATION. Following electronic
addressing, we use electronics to move and concentrate target molecules to
one or more test sites on the microchip. The electronic concentration of
sample DNA at each test site promotes rapid hybridization of sample DNA with
complementary capture probes. In contrast to the passive hybridization
process, the electronic concentration process has the advantage of
significantly accelerating the rate of hybridization of a given target
molecule.
ELECTRONIC STRINGENCY CONTROL. Electronic stringency control provides a
means to quickly and easily remove non-complementary DNA as part of the
hybridization process. Electronic stringency provides quality control for the
hybridization process and ensures that any bound pairs of DNA are truly
complementary. The precision, control, and accuracy of our platform
technology, through the use of the controlled delivery of current in the
electronic stringency process may permit the detection of single point
mutations, single base pair mismatches or other genetic mutations which have
significant implications in a number of disease states. Electronic
manipulation allows rapid and selective stringency conditions to be applied
to individual test sites, which cannot be achieved with conventional methods.
In contrast to conventional approaches, our technology can also accommodate
both short and long single-stranded fragments of DNA on the same chip. This
flexibility reduces the required number of probes and related test sites on
the microchip. Currently marketed DNA arrays are difficult to control,
require more uniformity in the sample and require greater replication of
possible base pair mismatches.
ELECTRONIC MULTIPLEXING. Our electronic multiplexing feature allows the
simultaneous analysis of multiple tests from a single sample or multiple
samples to be queried for a limited number of tests. Electronic multiplexing
is facilitated by the ability to control individual test sites (for
addressing of capture probes and concentration of test sample molecules)
which allows for the simultaneous use of biochemically unrelated molecules on
the same microchip. Sites on a conventional DNA array cannot be individually
controlled, and therefore the same process steps must be performed on the
entire array. The use of electronics in our technology provides increased
versatility and flexibility over these conventional methods.
STRAND DISPLACEMENT AMPLIFICATION. Strand Displacement Amplification
("SDA") is a proprietary target amplification process whereby very low
numbers of diagnostic targets in a test sample are enzymatically amplified to
exponentially higher levels, greatly simplifying accurate detection of these
targets. Because this process does not require cycling of temperatures, it is
extremely fast, and complex instrumentation is not required. Our joint
venture with Becton Dickinson was granted non-exclusive rights to Becton
Dickinson's patents relating to SDA in infectious disease diagnostics. In
addition, we were granted nonexclusive rights to use SDA in the fields of IN
VITRO human genetic testing and cancer diagnostics. We believe that SDA may
be an important element in the development of sample-to-answer applications
for our technology platform.
OUR SYSTEM'S COMPONENTS
Our system consists of both a disposable cartridge containing a
proprietary semiconductor microchip and a fully automated instrument that
controls all aspects of microchip operations, processing, detection and
reporting. The
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system has been designed so that the operator inserts a disposable cartridge
containing a test sample into the instrument. All subsequent steps are
handled automatically under computer control. We have also developed a
benchtop microchip loader for those researchers wishing to electronically
address microchips with their own capture probes.
DISPOSABLE CARTRIDGE
The disposable cartridge consists of a proprietary semiconductor
microchip with electrical and fluidic connections to the instrument. We are
finalizing designs for manufacturing commercial cartridges based on
successful tests with a number of prototype cartridges. We expect that the
disposable cartridge and microchip can be manufactured in high volumes at a
low cost relative to current technologies.
SEMICONDUCTOR MICROCHIP. Our proprietary microchip capitalizes on
advances in the semiconductor industry and is designed and constructed using
microlithography and fabrication techniques. Our microchip is coated with a
proprietary permeation layer to which capture probes are attached and is
mounted on the disposable cartridge. We have developed arrays of various
sizes utilizing both passive and active CMOS microchips, as well as flip chip
assembly technologies. We expect our initial commercial cartridges to employ
100 different test sites.
We are aware of U.S. and corresponding foreign patents and applications
which are assigned to Affymax Technologies, N.V., and which relate to devices
having 1,000 or more groups of oligonucleotides occupying a total area of
less than 1 cm2 on a substrate. In the event that we proceed with the
development of arrays with more than 1,000 groups of oligonucleotides, we
expect to design our microchips through, among other things, the selection of
the physical dimensions and methods of binding so as to avoid infringing
these patents.
PERMEATION LAYER. Our proprietary permeation layer, which is critical to
the proper functioning of our system, is the interface between the surface of
the microchip and the biological test environment. The permeation layer
isolates the biological materials from the harsh electrochemical environment
near the electrode surface and provides the chemistry necessary for
attachment of capture probes.
CAPTURE PROBES. Capture probes or other capture molecules are
electronically addressed to the desired microlocations and chemically
attached to the permeation layer. Because independent control can be applied
at any test site on our microchip, different capture probes can be addressed
on the same microchip, allowing multiple tests to be processed
simultaneously. Our cartridges can be sold with preloaded sets of capture
probes or can be customized by the end user in "build-your-own-chip"
applications which will allow the customer to assemble specific probes onto a
microchip to perform individualized analyses.
OUR INSTRUMENT
Our fully integrated instrument system consists of four major subsystems:
(1) a highly sensitive, laser-based fluorescence scanner that detects
molecular binding, (2) a fluid handling subsystem that controls test sample
application and washing steps, (3) computer hardware and software that allow
the operator to select assays from a graphical user menu which controls all
microchip operations, tabulates test results and prints test reports, and (4)
a separate freestanding microchip loader to perform electronic addressing of
blank microchips.
FLUORESCENT ARRAY SCANNER. The fluorescent scanner uses pattern
recognition techniques and optoelectronic technology to reduce instrument
cost and size and eliminate the need for complicated array positioning
mechanics. In its present configuration, the scanner is able to perform high
sensitivity scans of 100 test site arrays in less than two minutes.
FLUIDICS STATION. The instrument automates the movement of the reagents
and test sample onto the disposable cartridge. The fluidic subassembly of the
instrument includes a panel of precision syringe pumps, a cartridge-mounted
sample assembly and fluidic connections between the instrument and the
disposable cartridge.
COMPUTER HARDWARE AND SOFTWARE SYSTEM. A multi-tasking operating system
and microprocessor control all aspects of machine operation, including
bar-coded assay selection, assay operation, fluorescent signal detection and
signal processing, calculation of assay results and report generation. Each
of the individual array locations is
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separately controlled by the microprocessor. Fluorescent signals emanating
from positive test sites are scanned, monitored and quantitated.
MICROCHIP LOADER. For biomedical research applications, our system will
include a cartridge/microchip loader that will allow the user to
electronically address their own probes to test sites on up to four chips
simultaneously. For the diagnostics market and most other applications, a
loader will not be required because we intend to provide preaddressed
microchips for specific panels of tests. Multiple loaders can operate
concurrently under system control.
COMMERCIAL STRATEGY
Our commercial strategy is to make our proprietary platform technology a
standard for molecular identification and analysis across a broad range of
applications. We expect our initial product to be a benchtop analysis system
for use in biomedical research applications. The capabilities that are
incorporated into this system will form the core technology platform that
will serve as the basis for expanding into other biological and nonbiological
areas.
We believe that the speed and flexibility of "build-your-own-chip"
features will be very attractive to researchers and will help drive further
application development. Over time, it is expected that additional features,
such as sample-to-answer capability and portability at reduced cost, may
broaden the market potential from the research market to markets many times
larger that include diagnostics, forensics, agriculture, drug discovery and
environmental applications.
We are seeking to use substantially the same core hardware and disposable
cartridge platform across a spectrum of applications. By doing this, we
believe we can establish our platform as an industry standard and also reduce
development costs for follow-on applications. This approach should also allow
us to achieve manufacturing economies of scale that may help reduce our cost
of goods sold over time.
Because of the importance of the research market as a beachhead, we
anticipate being directly involved with marketing our first product line to
this segment of our business. For follow-on applications, we anticipate
partnering with companies that can bring infrastructure, expertise and a
customer base to a particular application, allowing us to focus our resources
on product development.
Examples of this strategy are Nanogen's relationships with Becton
Dickinson in infectious disease diagnostics and Aventis in drug discovery. In
both of these relationships, we are partnering with recognized experts in
their fields in such a way that we receive development funding, sales and
marketing expertise, as well as a significant portion of the potential
downstream profits.
We may enter into similar arrangements with other companies for
additional applications, as well as continue using grant resources to help
offset further development expenditures.
PRODUCTS AND APPLICATIONS UNDER DEVELOPMENT
BIOMEDICAL RESEARCH APPLICATIONS
Worldwide genomics efforts, including the Human Genome Project and other
public and private genetic sequencing efforts, are actively identifying and
sequencing genes of many organisms. As these genes and their nucleotide
sequences are identified, additional research will focus on how the genome,
the genetic content of the cell, controls and influences biological function.
Gene expression studies are often used to elucidate which of the genes
contained within the genome are regulated during disease or in response to a
variety of stimuli. Such studies also determine how specific mutations in a
gene affect the normal expression and operation of that gene. This basic
understanding may allow the development of new diagnostic and therapeutic
approaches to a disease, according to its genetic profile.
We expect to complete development of our first commercial product, a
benchtop molecular analysis system, for use in the biomedical research
market. Unlike the high density arrays and sequencing technologies now in the
marketplace, our focus will be on targeted analysis of data from the genomics
revolution--helping researchers
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define the function of genes rather than discover new genes. We believe our
technology is well suited for this research, given the speed, user
programmability, multiplexing capability and sensitivity of our unique
platform. Our platform can also be used in conjunction with high throughput
technologies, such as high density arrays and sequencers.
Recent market research indicates that while researchers want to use high
throughput devices to discover genes and genetic mutations, they will want to
explore the function and impact of these genes and mutations with a more
targeted technology such as that being developed by us. Given that
researchers are just beginning to move beyond gene discovery into this
targeted analysis area called functional genomics, the timing of our
anticipated product introduction may be well suited to meet this evolving
market need. Independent market research in this area has indicated that the
market potential for targeted arrays like ours will grow rapidly from $80
million in 1998 to almost $500 million by 2002.
Our initial strategy for entering this market will be to focus on a small
number of sophisticated commercial and academic users and provide technical
support and applications specialists to assist this group of scientists in
applying the technology. With these initial users, which we anticipate
establishing in late 1999, we will conduct user group meetings to further
identify and develop appropriate applications in this rapidly changing
market. Our initial product offering is expected to include features such as
the ability to perform assays on single nucleotide polymorphisms (SNPs),
point mutations and genetic repeats in a multiplexed format using a variety
of different methods.
We plan to further define and develop additional capabilities, such as
gene expression, on-chip amplification and sample processing. As these
capabilities are added, we expect to start expanding our customer base to a
wider group that may ultimately encompass a significant percentage of the
biomedical research labs in the U.S. and other parts of the world.
DIAGNOSTICS APPLICATIONS
INFECTIOUS DISEASES
We are applying our technology in infectious disease diagnostics to
develop automated tests to replace the manual and time-intensive procedures
used in hospitals and reference laboratories. The role of the clinical
microbiology laboratory is to detect, identify and determine antibiotic
sensitivity of disease causing microorganisms. To accomplish this task,
colonies of microorganisms from patient specimens are grown, or cultured, in
various growth media. Following colony growth, various direct and indirect
techniques are utilized to determine the identity and, as required, the
sensitivity of the microorganism to specific antibiotics. Using currently
available technologies, the entire process may take days or weeks to complete
while the patient, requiring immediate therapy, must be treated by the
clinician based upon the best clinical facts available at that time. Upon
receipt of the diagnostic analysis from the laboratory, the initial patient
treatment protocol may need to be modified in order to treat the patient more
effectively.
Current culture-based methods detect a single microorganism at one time.
Because a particular infectious episode may be caused by one of many
microorganisms or several microorganisms together, multiple tests may be
required to determine the correct diagnosis. Our technology addresses these
shortcomings by allowing the simultaneous analysis of multiple microorganisms
from a single patient sample. We believe our technology and integrated system
may speed the time-to-result for diagnostic tests and patient treatment and
offer our customers the opportunity to lower their costs and improve
productivity by automating all or a significant portion of their
labor-intensive testing.
Through our joint venture with Becton Dickinson, we are developing a
platform which is applicable to a potentially broad range of products
relating to the detection of infectious disease and the analysis of
antibiotic resistance, each of which may incorporate Becton Dickinson's
proprietary SDA technology. To date, our joint venture with Becton Dickinson
has achieved all of its product development milestones. The joint venture
contemplates that Becton Dickinson will market any infectious disease
products developed by the joint venture and that profits will be split
equally by the parties once capital contributions have been reimbursed.
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PHARMACOGENOMICS
We believe that the ability of our technology to screen simultaneously
for various DNA sequences and the ability to differentiate between single
base pair mismatches has potentially wide applicability to the field of
genetic testing in general and pharmacogenomics in particular. The principle
behind pharmacogenomics is that patients with one kind of genetic profile
will react differently to a given drug than a different group of patients
with a slightly altered genetic makeup. The goal of pharmacogenomics would be
for physicians to be able to prescribe the appropriate medicine for a
particular patient that would maximize efficacy and minimize side effects
based on that patient's genetic profile.
With our technology, the opportunity exists for pharmaceutical and
biotechnology companies to use our initial benchtop system to identify
important genetic variations early in the drug development process, to use a
portable version of the system during clinical trials to help stratify
patients and identify those receiving the maximum benefit from treatment;
and, ultimately, to develop a small sample-to-answer, FDA-approved diagnostic
test that can be used in a doctor's office potentially while a patient is
waiting. We believe the potential to be able to provide this bridge from the
research environment through to a portable diagnostic system may be important
in the area of pharmacogenomics. We have active development programs underway
to develop both the benchtop and portable version of the system that would be
required for this market.
OTHER GENETIC TESTING APPLICATIONS
As the Human Genome Project and other public and private genetic
sequencing efforts yield increasing amounts of genetic information, the
demand for genetic predisposition testing will continue to grow. The
combination of novel therapeutic approaches, such as gene therapy, and the
discovery of new genes could lead to earlier and more precise diagnosis and
more refined therapeutic interventions.
Because many important genetic diseases are ideally suited to diagnosis
in multiplexed arrays, we believe that our technology platform could
contribute significantly to the expansion of testing in this area. For
example, in cancer diagnostics, certain mutations are indicative of a
predisposition to certain types of cancer. Because many diseases involve
multiple mutations, the ability to analyze all possible mutations has
previously been expensive and impracticable. Our electronic stringency
control feature potentially permits rapid and accurate testing for these
single point mutations. While our development efforts in this area with
respect to specific genetic tests are still at an early stage, our core
technology platform for other diagnostic applications may be well suited for
these opportunities.
DRUG DISCOVERY APPLICATIONS
We believe we have a powerful tool which will elucidate appropriate
pathways for therapeutic intervention, identify and evaluate lead compounds
and simultaneously assess the efficacy and toxicology of these compounds in
model systems. It is estimated that the preclinical drug discovery process
takes an average of six and one-half years. Consequently, we believe there is
a significant demand for improved tools which accelerate the drug discovery
process.
We believe the microelectronic array format and independent test site
control of our system are well suited for applications in drug discovery. Our
electronic technology is expected to enable the rapid manipulation of
potential drug molecules against targets such as bacteria, virus, tumor or
immune response cells addressed to the microchip to determine drug efficacy,
thus simplifying the drug discovery process. The combination of electronic
addressing and the electronic protection of specific areas of the microchip
allows the targeting of chemical building blocks to unique locations on the
array. We believe our system may provide an efficient automated method for
drug lead optimization.
To further advance our efforts in this area, we have entered into a
research and development collaboration with Aventis. As part of our
collaboration with Aventis, Nanogen is working on a novel electronic
combinatorial approach toward drug screening and discovery by combining
technologies from both companies. Nanogen and Aventis met all of the
milestones for the collaboration in 1998, agreed to extend the research
program from two to three years and are now in discussions about how to best
commercialize this product opportunity.
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EMERGING BIOLOGICAL MARKETS
The market potential for our semiconductor microchip technology beyond
these initial areas is significant. Such applications include biological
applications in the areas of forensics, agriculture, veterinary and
environmental testing. We believe the core technology platform we are
developing may be readily adaptable to these markets, and we have already
been approached by a number of companies active in these areas about
opportunities for collaboration.
NANOTRONICS: NONBIOLOGICAL APPLICATIONS
Rapid advances in the microelectronics industry in the last several
decades have led to the development of integrated circuits which are smaller
and far more complex than would have been envisioned twenty years ago. If
this pace of change is to continue, new manufacturing tools and processes
will need to be developed. These new techniques will need to be able to
direct the placement of micro and nanoscale components precisely onto
increasingly small and densely packed surfaces. We believe one of the
opportunities to do this is by combining what nature has already developed--a
molecular biology approach--with our knowledge of how to move and manipulate
materials and devices using electronic fields.
We acquired Nanotronics in January 1998 to apply our core
microelectronics biochip technology to potential applications in
nonbiological areas which include nanofabrication and molecular electronics.
Based on the intrinsic self-assembly and programmable qualities of DNA, the
Nanotronics technology uses DNA to direct the heterogeneous integration of a
number of molecular and nonmolecular components onto a microelectronic chip.
Presently, there are a number of academic groups, government research labs,
and electronics companies involved in the development of molecular electronic
components, but no one has successfully developed a way to integrate them
into useful devices. Our integrated "host substrate" or "motherboard" array
capability could serve to provide useful new tools with the ability to take
advantage of these valuable components.
Nanotronics' powerful electronic "pick and place" array technology has
several advantages compared to the more difficult conventional heterogeneous
integration processes. This Nanotronics technology could incorporate
components ranging in size from molecular scale to micron scale, something
traditional microelectronic methods cannot achieve. Also, using electric
field specificity control, we may have the ability to form novel integrated
devices in a more timely and cost-effective fashion. Nanotronics is working
to expand the capabilities of its technology base for application in a number
of areas.
For example, Nanotronics is evaluating the use of its platform technology
to facilitate the heterogeneous integration of various microfabricated
"lift-off" components like lasers and diodes, for the development of new
photonic or electronic devices. Other applications could include analog and
digital cell phone circuit improvements and development of new electronic
laboratory testing systems.
In addition, in 1998 we received several core patents for the use of our
technology in the area of optical memory. These patents have already led to
inquiries from third parties interested in significantly expanding the memory
storage capacity of optical memory devices.
COLLABORATIVE ALLIANCES
We have established collaborative alliances in the areas of infectious
disease diagnostics, drug discovery and genomics as part of our strategy to
expand the applications and accelerate the commercialization of products
derived from our technology. We are developing products to expedite the
diagnosis of infectious disease through our joint venture with Becton
Dickinson. We have also entered into a research and development collaboration
and are discussing the establishment of arrangements with Aventis to
commercialize drug discovery tools. We also have entered into a research and
development agreement with Elan for genomics applications.
BECTON DICKINSON
The Nanogen/Becton Dickinson Partnership, a Delaware general partnership
formed in October 1997 (the "Partnership") is seeking to develop and
commercialize products in the field of IN VITRO nucleic acid-based diagnostic
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and monitoring technologies in infectious diseases. The products will be
based on our proprietary semiconductor technology and Becton Dickinson's
proprietary SDA technology. NanoVenture LLC, a Delaware limited liability
company wholly-owned by Nanogen ("NanoVenture"), and Becton Dickinson Venture
LLC, a Delaware limited liability company wholly-owned by Becton Dickinson
("Becton Dickinson Venture"), are the general partners of the Partnership
with (1) losses generally allocated in proportion to cash funding, (2)
profits generally shared equally, and (3) distributions allocated 60 percent
to Becton Dickinson Venture and 40 percent to NanoVenture until unrecovered
partner cash contributions are equalized and thereafter distributions shared
equally. The Master Agreement also contemplates that each of the parties will
negotiate in good faith additional agreements with the Partnership in
furtherance of the Partnership's business, including license agreements,
manufacturing agreements, and marketing agreements. Pursuant to the Master
Agreement, we granted to Becton Dickinson Venture, acting on behalf of the
Partnership, a right of first offer to negotiate licenses in additional
fields.
Contributions for use in the research programs of approximately $4.6
million have been paid to the Partnership through December 31, 1998, of which
approximately $4.0 million was paid by Becton Dickinson and approximately
$600,000 was paid by us. The General Partnership Agreement also contemplates
additional research funding aggregating approximately $17.7 million during
the period from January 1, 1999 through April 1, 2001 conditioned upon the
achievement of milestones to be agreed upon by the partners. Of this amount,
$12.5 million is expected to be paid by Becton Dickinson and $5.2 million is
expected to be paid by us.
In addition to funding research and development, we and Becton Dickinson
have agreed to contribute additional amounts to fund marketing and
manufacturing of products commercialized by the Partnership. The success of
the Partnership will be dependent to a significant degree upon a mutuality of
interest between Nanogen and Becton Dickinson. Becton Dickinson is a large
company with other opportunities competing for its resources. Becton
Dickinson may not make further capital contributions or allocate sufficient
management or other resources to the Partnership to complete the development,
manufacturing and marketing of Partnership products.
The Partnership entered into a Collaborative Research and Development and
License Agreement with us and Becton Dickinson, under which each company
granted to the Partnership intellectual property and patent rights and
conducts research and development activities.
Concurrently with the execution of the joint venture, we entered into a
worldwide, royalty-bearing, nonexclusive License Agreement with Becton
Dickinson, relating to Becton Dickinson's proprietary SDA technology for use
by us outside the Partnership in the fields of IN VITRO human genetic testing
and IN VITRO cancer diagnostics.
Failure by the Partnership to agree on and achieve milestones could
result in termination of the Collaborative Agreement and the joint venture
and dissolution of the Partnership. Agreed upon milestones may not be
achieved in a timely fashion, if at all. The failure to agree on and achieve
these milestones could have a material adverse effect on our business,
financial condition and results of operations.
AVENTIS
In December 1997, we entered into a Letter Agreement with Aventis, for an
exclusive research and development collaboration relating to new drug
discovery tools and immunodiagnostics research and the establishment of a
joint venture. The arrangements for the commercialization of products, if
any, developed as a result of the collaboration will be negotiated by the
parties prior to completion of the research and development phase.
In connection with the Letter Agreement, the parties entered into a
definitive Collaborative Research and Development Agreement with an effective
date of January 1, 1998. This Research and Development agreement includes
three years of guaranteed research and development funding from the effective
date. Under the agreement each party performs aspects of the research, with
funding provided primarily by Aventis. The Letter Agreement and Research and
Development Agreement contemplate the formation of a joint venture or other
joint relationship to facilitate the commercialization of any products
resulting from the collaboration.
As part of our collaboration, we have agreed to issue a warrant for
approximately 120,000 shares of Common Stock to Aventis at an exercise price
of $8.75 per share. We have also agreed to issue to Aventis, upon the
achievement of certain milestones, warrants to purchase up to approximately
360,000 additional shares of Common
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Stock as follows: upon announcement by the parties of entry into the product
development phase of the research and development collaboration, a warrant
for the purchase of approximately 180,000 shares of Common Stock at a 50
percent premium to the market price on the date of such entry, and upon the
first commercial sale by the joint venture or other joint relationship, a
warrant to purchase an additional 180,000 shares of Common Stock at a 50
percent premium to the market price on the date of such sale. The warrants
will have five-year maximum terms, provided that with respect to each such
warrant issuance, if at any time subsequent to the issuance of the warrant
the price of our Common Stock exceeds the exercise price by 50 percent or
more, Aventis must exercise such warrant no later than the end of its next
fiscal year.
ELAN
In December 1997, we entered into a nonexclusive research and development
agreement with Elan for the development of genomics and gene expression
research tools. The agreement contemplates that we will develop products for
discrimination of sequence variations such as single nucleotide
polymorphisms, allelic variations, genotyping, and mutation detection. We may
also develop products for use in expression monitoring of RNA levels for use
in gene discovery, drug discovery, target validation, animal studies, and
toxicity studies. We are currently discussing with Elan the conversion of
this relationship into a Technology Development Program under which Elan and
potentially other companies would gain early access to our technology in
exchange for an up-front payment and additional payments to be made over time.
RESEARCH GRANTS
We have a number of active research grants and contracts administered by
various governmental agencies. In October 1998, we announced that we were
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 approximately $8 million over a five-year period. The contract award
which was made by SSC San Diego for the Defense Advance Research Projects
Agency, includes over $2 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 us up to an additional $4.8 million. The goal of the program is to create
an advanced miniaturized lab for biological warfare defense applications. We
were also awarded an NIJ grant of $500,000. This was our second grant awarded
under the U.S. Department of Justice, Office of Justice Programs to enable us
to continue our work in the development of a portable microchip array-based
genetic detector for rapid forensic DNA testing and identification at the
crime scene.
RESEARCH AND PRODUCT DEVELOPMENT
Our research and product development organization is dedicated to:
- Developing our DNA analysis platform,
- Using this basic technology in a number of different product areas,
- Planning system modifications for specific applications using a
common platform, and
- Enhancing chip design and capabilities to simplify instrument
design.
We have project teams focused on technology applications for the research
market, diagnostic applications for the Becton Dickinson collaboration, drug
discovery applications for the Aventis collaboration and a genomics group
supporting the Elan relationship. In addition, we have various groups
supporting activities related to government contracts and grants for both
biologic and nonbiologic applications.
PROPRIETARY TECHNOLOGY AND PATENTS
We have eight issued U.S. patents, three foreign issued patents and a
number of pending patent applications filed in the U.S. and abroad. Under a
licensing agreement with Syntro Corporation, we obtained an exclusive license
to U.S. Patent No. 4,787,963 relating to methods and means of annealing
complementary nucleic molecules in exchange for payment of an initial fee,
aggregate payments of $1 million during the agreement's first two years and
the potential payment of certain royalties. In addition to pursuing patents
and patent applications relating to our
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platform technology, we may enter into other license arrangements to obtain
rights to third-party intellectual property where appropriate.
Our or our licensors' patent applications may not issue. Issued patents
may not be found valid if challenged. In addition, intellectual property
rights licensed by us may not be successfully integrated into commercial
products. Others may independently develop similar technologies or duplicate
any technology developed by us. Because of the extensive time required for
development, testing, and regulatory review of a potential product, it is
possible that, before any of our products can be commercialized, any related
patent may expire or remain in existence for only a short period following
commercialization, thus reducing any advantage of the patent, which could
adversely affect our ability to protect future product development and,
consequently, our business, financial condition and results of operations.
All of our inventions have originated in the U.S. and all patent
applications were originally filed in the U.S. We also seek to protect these
inventions through foreign counterpart applications filed in selected other
countries. Because patent applications in the U.S. are maintained in secrecy
until patents issue and since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, we cannot be certain
that we were the first to make the inventions covered by each of our issued
or pending patent applications or that we were the first to file for
protection of inventions set forth in such patent applications. Our planned
or potential products may be covered by third-party patents or other
intellectual property rights, in which case continued development and
marketing of the products would require a license. Required licenses may not
be available to us on acceptable terms, if at all. If we do not obtain these
licenses, we could encounter delays in product introductions while we attempt
to design around the patents, or could find that the development, manufacture
or sale of products requiring these licenses is foreclosed.
We are aware of U.S. and corresponding foreign patents and applications
which are assigned to Affymax Technologies, N.V., and which relate to certain
devices having 1,000 or more groups of oligonucleotides occupying a total
area of less than 1 cm2 on a substrate. In the event that we proceed with the
development of arrays with more than 1,000 groups of oligonucleotides, we
expect to design our devices through, among other things, the selection of
the physical dimensions and methods of binding to avoid infringing these
patents. We are aware of U.S. and European patents and patent applications
owned by Isis Innovations Ltd. (E. M. Southern). We have opposed one allowed
European patent which had broad claims to array technology for analyzing a
predetermined polynucleotide sequence. Isis Innovations' position with
respect to the opposed patent is that the claims relate to what it terms the
"diagnostic mode." Those claims have now all been narrowed to the point that
if the claims are accepted by the European Patent Office, they would not be
infringed by our technology. On May 5, 1998, The Opposition Division of the
European Patent Office issued a provisional nonbinding opinion that the
claims should be revoked. If the claims of the original European patent
survive the opposition or if an application relating to arrays issues in
another country with claims as broad as the original European patent, we
would be subject to infringement claims that could delay or preclude sales of
some or all of our anticipated diagnostic products.
Litigation may be necessary to defend against or assert claims of
infringement, to enforce patents issued to us, to protect trade secrets or
know-how owned by us or to determine the scope and validity of the
proprietary rights of others. In addition, interference proceedings declared
by the USPTO may be necessary to determine the priority of inventions with
respect to our patent applications. Litigation or interference proceedings
could result in substantial costs to and diversion of our effort, and could
have a material adverse effect on our business, financial condition, and
results of operations. Any such efforts may not be successful.
We may rely on trade secrets to protect our technology. Trade secrets are
difficult to protect. We seek to protect our proprietary technology and
processes by confidentiality agreements with our employees and certain
consultants and contractors. These agreements may be breached, we may not
have adequate remedies for any breach and our trade secrets may otherwise
become known or be independently discovered by competitors. To the extent
that our employees or our consultants or contractors use intellectual
property owned by others in their work for us, disputes may also arise as to
the rights in related or resulting know-how and inventions.
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MANUFACTURING
We design and then outsource semiconductor microchip fabrication,
disposable cartridge components and instruments to third-party contract
manufacturers. For microchips and cartridges, we perform many of the
proprietary assembly steps in-house, including deposition of the permeation
layer, placement of DNA capture probes and final electronic assembly and
testing. We expect to enter into long-term manufacturing agreements with
experienced third-parties for some or all of our commercial manufacturing
needs for both instruments and cartridges. We believe our technology allows
for large scale microchip production at a relatively low cost. We believe
this scalability and low cost will help promote the rapid acceptance of our
proprietary semiconductor-based platform technology as an industry standard.
However, achieving these efficiencies will require substantial commercial
volumes and there can be no assurance we will be successful in generating
sufficient demand to scale up manufacturing capacity to levels that will
allow our products to be priced competitively.
We have limited experience in manufacturing as well as limited
manufacturing capacity for our products, and as described above, we will be
required to utilize third parties for some or all of our needs. There can be
no assurance that we will be able to find third-party manufacturers with the
skills required to manufacture our products successfully or on acceptable
terms, if at all.
If we or any of our contract manufacturers encounter future manufacturing
difficulties, including problems involving the ability to scale up
manufacturing capacity, production yields, quality control and quality
assurance, or shortages of components or qualified personnel, it could have a
material adverse effect on our business, financial condition and results of
operations.
Our and/or our third-party manufacturers will be required to comply with
QSR requirements in order to produce products for sale in the United States
and with applicable quality system standards and directives in order to
produce products for sale in the European Union. Any failure by us or our
contractors to comply with the QSR requirements or applicable European Union
standards and directives may result in us or our contractors being required
to take corrective actions, such as modification of our policies and
procedures. Pending such corrective actions, we or our contractors could be
unable to manufacture or ship any products, which could have a material
adverse effect on our business, financial condition, and results of
operation. Furthermore, our manufacturing facilities, and those of our
third-party manufacturers, are subject to periodic inspection by regulatory
authorities, and our operations must undergo QSR compliance inspections
conducted by the FDA and corresponding state agencies. Additionally, prior to
approval of a PMA, we and our third-party manufacturers' facilities,
procedures, and practices will be subject to preapproval QSR inspection.
Failure to pass such inspections may have a material adverse effect on our
business, financial condition and results of operations.
COMPETITION
As we develop applications of our technology, we expect to encounter
intense competition from a number of companies that offer products competing
in our targeted applications. We anticipate that our 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 we are
successful in developing products in these areas, we will face competition
from established companies and development-stage companies that continue to
enter these markets.
In many instances, our competitors have substantially greater financial,
technical, research, and other resources and larger, more established
marketing, sales, distribution, and service organizations than us. Moreover,
competitors may offer broader product lines and have greater name recognition
than us, and may offer discounts as a competitive tactic. In addition,
several development stage companies are making or developing products that
compete with or will compete with any potential products of ours. There can
be no assurance that our competitors will not succeed in developing or
marketing technologies or products that are more effective or commercially
attractive than our potential products, or that would render our technologies
and products obsolete. Also, we may not have the financial resources,
technical expertise or marketing, distribution or support capabilities to
compete successfully in the future. Our success will depend in large part on
our ability to maintain a competitive position with respect to our
technologies. Rapid technological development by others may also result in
competing products or technologies.
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GOVERNMENT REGULATION
We have not applied for FDA or other regulatory approvals with respect to
any of our products under development. We anticipate the manufacturing,
labeling, distribution and marketing of some or all of our diagnostic
products will be subject to regulation in the U.S. and in other countries. In
addition to clinical diagnostic markets, we also may pursue research,
forensic, agricultural, environmental, laboratory and industrial applications
for our products which may be subject to different government regulation.
Aspects of our manufacturing and marketing activities may also be subject to
federal, state and local regulation by various governmental authorities.
In the U.S., the 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 manufacture, labeling, distribution and promotion of medical
devices. We will not be able to commence marketing or commercial sales in the
U.S. of new medical devices under development that fall within the FDA's
jurisdiction until we receive clearance or approval from the FDA, which can
be a lengthy, expensive, and uncertain process. Noncompliance with applicable
requirements can result in, among other things, administrative 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, or criminal prosecution.
In the U.S., medical devices are generally classified into one of three
classes (I.E., Class I, II or III) on the basis of the controls deemed
necessary by the FDA to reasonably ensure their safety and effectiveness.
Class I devices are subject to general controls (E.G., labeling, premarket
notification, and adherence to QSR). Class II devices are subject to general
and special controls (E.G., performance standards, postmarket surveillance,
patient registries and FDA guidelines). Generally, Class III devices are
those which must receive premarket approval by the FDA to ensure their safety
and effectiveness (E.G., life-sustaining, life-supporting, and implantable
devices or new devices which have been found not to be substantially
equivalent to a legally marketed devices). Before a new device can be
introduced in the market, the manufacturer must generally obtain FDA
clearance of a 510(k) notification or approval of a PMA application. Our
products will vary significantly in the degree of regulatory approvals
required. We believe that certain of our products for research, genomics,
drug discovery and industrial applications will not require regulatory
approvals or clearance. Some diagnostic products will require 510(k)
approvals while other diagnostic and genetic testing products will require
PMA approvals.
A 510(k) clearance will generally only be granted if the information
submitted to the FDA establishes that the device is "substantially
equivalent" to a legally marketed predicate device. For any devices that are
cleared through the 510(k) process, significant modifications or enhancements
in the design or intended use that could significantly affect safety or
effectiveness will require new 510(k) submissions. It generally takes from
four to twelve months from submission to obtain 510(k) premarket clearance
but the process may take longer.
The PMA approval process is more expensive, uncertain, and lengthy than
the 510(k) clearance process. A PMA must prove the safety and effectiveness
of the device to the FDA's satisfaction, which typically requires extensive
data, including but not limited to, technical, preclinical, clinical trials,
manufacturing and labeling to demonstrate the safety and effectiveness of the
device. Although clinical investigations of most devices are subject to the
investigational device exemption requirements, clinical investigations of IN
VITRO diagnostic tests, such as our products and products under development,
are exempt from the investigational device exemption requirements, including
the need to obtain the FDA's prior approval, provided the testing is
noninvasive, does not require an invasive sampling procedure that presents a
significant risk, does not intentionally introduce energy into the subject,
and is not used as a diagnostic procedure without confirmation by another
medically established test or procedure. In addition, the IN VITRO diagnostic
tests must be labeled for research use only or investigational use only, and
distribution controls must be established to assure that IVDs distributed for
research or clinical investigation are used only for those purposes.
The FDA may determine that we must adhere to the more costly, lengthy,
and uncertain PMA approval process for our potential products. Significant
modifications to the design, labeling or manufacturing process of an approved
device may require approval by the FDA of a PMA supplement or a new PMA
application.
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After a PMA is accepted for filing, the FDA begins its review of the
submitted information, which generally takes between one and two years, but
may take significantly longer. During this review period, the FDA may request
additional information or clarification of information already provided. Also
during the review period, an advisory panel of experts from outside the FDA
will be convened to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the device. We may not
be able to obtain necessary approvals on a timely basis, if at all, and
delays in obtaining or failure to obtain such approvals, the loss of
previously obtained approvals, or failure to comply with existing or future
regulatory requirements could have a material adverse effect on our business,
financial condition and results of operations.
Manufacturers of medical devices for marketing in the U.S. are required
to adhere to the QSR requirements (formerly Good Manufacturing Practices),
which include testing, control and documentation requirements. Manufacturers
must also comply with Medical Device Reporting requirements that a
manufacturer report to the FDA any incident in which its product may have
caused or contributed to a death or serious injury, or in which its product
malfunctioned and would be likely to cause or contribute to a death or
serious injury upon recurrence. Labeling and promotional activities are
subject to scrutiny by the FDA and, in certain circumstances, by the Federal
Trade Commission. FDA enforcement policy prohibits the marketing of approved
medical devices for unapproved uses.
We are subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, medical device reporting
requirements and other applicable regulations. The recently finalized QSR
requirements include design controls that will likely increase the cost of
compliance. We may incur significant costs to comply with laws and
regulations in the future and these laws and regulations may have a material
adverse effect upon our business, financial condition and results of
operation.
Any of our customers using our diagnostic devices for clinical use in the
U.S. may be regulated under the Clinical Laboratory Improvement Amendments of
1988 ("CLIA"). CLIA is intended to ensure the quality and reliability of
clinical laboratories in the U.S. by mandating specific standards in the
areas of personnel qualification, administration, participation in
proficiency testing, patient test management, quality control, quality
assurance and inspections. The regulations promulgated under CLIA establish
three levels of diagnostic tests ("waived," "moderately complex" and "highly
complex"), and the standards applicable to a clinical laboratory depend on
the level of the tests it performs. CLIA requirements may prevent some
clinical laboratories from using our diagnostic products. Therefore, CLIA
regulations and future administrative interpretations of CLIA may have a
material adverse impact on us by limiting the potential market for our
products.
The Food and Drug Administration Modernization Act of 1997 makes changes
to the device provisions of the FD&C Act (the "Act") and other provisions in
the Act affecting the regulation of devices. Among other things, the changes
will affect the IDE, 510(k) and PMA processes, and also will affect device
standards and data requirements, procedures relating to humanitarian and
breakthrough devices, tracking and postmarket surveillance, accredited
third-party review, and the dissemination of off-label information. We cannot
predict how or when these changes will be implemented or what effect the
changes will have on the regulation of our products. There can be no
assurance that the new legislation will not impose additional costs or
lengthen review times for our products.
Additionally, our food pathogen products will be subject to the
regulations of various domestic and foreign government agencies which
regulate food safety and food adulteration, including the U.S. Department of
Agriculture.
EMPLOYEES
As of December 31, 1998, we had 132 full-time employees, of whom 49 hold
Ph.D. or M.D. degrees and 14 hold other advanced degrees. None of our
employees is covered by a collective bargaining agreement, and management
considers relations with its employees to be good.
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FACTORS THAT MAY AFFECT RESULTS
OUR PRODUCTS MAY NOT BE SUCCESSFULLY DEVELOPED, WHICH WOULD ADVERSELY AFFECT US
All of our products are under development. Our products may not be
successfully developed or commercialized on a timely basis, or at all. If we
are unable, for technological or other reasons, to complete the development,
introduction or scale-up of manufacturing of our new products, or if our
products do not achieve a significant level of market acceptance, we would be
adversely affected.
Our success will depend upon our ability to overcome significant
technological challenges and successfully introduce products into the
marketplace. A number of applications envisioned by us will require
significant enhancements in our basic technology platform.
LACK OF MARKET ACCEPTANCE OF OUR TECHNOLOGY WOULD ADVERSELY AFFECT US
We may not be able to develop commercially viable products. Even if a
product is developed it may not be accepted in the marketplace. If we are
unable to achieve market acceptance, we would be adversely affected. Market
acceptance will depend on many factors, including demonstrating to customers
that our technology platform is a viable alternative to currently available
technologies. In addition, our technology platform could be adversely
affected by limited funding available for capital acquisitions by our
customers, as well as internal obstacles to customer approvals of purchases
of our products.
OUR DEPENDENCE ON COLLABORATIVE ALLIANCES COULD ADVERSELY AFFECT US
The development and commercialization of our products in a number of
applications depends on the formation of alliances and licensing
arrangements. We may not be successful in entering into or maintaining
collaborations to develop these commercial applications. Failure to do so
could have an adverse impact on us. We may have limited or no control over
the time, effort or financial resources that any partner may devote to the
development or marketing of our products.
We may be materially and adversely affected if:
- A partner develops competitive technologies;
- We are precluded from entering into competitive arrangements with
other potential partners;
- Disputes arise over ownership rights to any intellectual property,
know-how or technologies developed with a partner; or
- An agreement is terminated early, or by a failure by a partner to
devote sufficient resources to the development and commercialization
of our products.
We currently have agreements with Becton Dickinson, Hoechst (through a
subsidiary) and Elan that contemplate the commercialization of products
resulting from research and development collaboration agreements between the
parties. These collaborations may not be successful.
OUR HISTORY OF LOSSES AND OUR ANTICIPATION OF FUTURE LOSSES MAY ADVERSELY
AFFECT US
At December 31, 1998, we had an accumulated deficit of approximately $47
million. We anticipate that we will continue to incur operating losses for at
least the next several years. We may never attain profitability or become
profitable on a quarterly or annual basis in the future. We currently have no
products available for sale and to date no revenues have been generated from
commercialization of products arising out of our technology.
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To develop and sell our products successfully, we will need to increase
our spending levels in research and development, as well as in selling,
marketing, and administration. We will have to incur these increased spending
levels before knowing whether our products can be sold successfully.
Our anticipated increases in operating expenses may adversely affect our
financial prospects.
FAILURE TO RAISE ADDITIONAL CAPITAL MAY ADVERSELY AFFECT US
We have incurred negative cash flow from operations since inception. We
do not expect to generate positive cash flow to fund our operations for at
least the next several years. We may need to raise additional capital to fund
our research and development programs, to scale up manufacturing activities
and establish our sales and marketing capability. Our current collaborations
will, and future collaborations may, require us to commit substantial amounts
of capital. We may not be able to make these capital contributions.
If adequate funds are not available, we may be required to curtail our
operations significantly or to obtain funds by entering into collaborative
agreements or other arrangements on less favorable terms. Our failure to
raise capital on acceptable terms when needed could have a material adverse
effect on us. Our liquidity and capital funding requirements will depend on
numerous factors, including:
- The extent to which our products under development are successfully
developed and gain market acceptance;
- The timing of regulatory actions regarding our potential products;
- The costs and timing of expansion of sales, marketing and
manufacturing activities;
- Prosecution and enforcement of patents important to our business;
- The results of clinical trials, competitive developments, and our
ability to enter into additional collaborative arrangements.
Additional capital may not be available on terms acceptable to us, or at
all. Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may include restrictive covenants.
COMPETING TECHNOLOGIES MAY ADVERSELY AFFECT US
We expect to encounter intense competition from a number of companies that
offer products in our targeted application areas. We anticipate that our
competitors in these areas will include:
- Health care companies that manufacture laboratory-based tests and
analyzers,
- Diagnostic and pharmaceutical companies, and
- Companies developing drug discovery technologies.
To the extent we are successful in developing products in these areas, we
will face competition from established companies and numerous development-stage
companies that continually enter these markets.
In many instances, our competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than us. Moreover, these
competitors may offer broader product lines and have greater name recognition
than us, 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 our potential
products. Our competitors may succeed in developing or marketing
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technologies or products that are more effective or commercially attractive
than our potential products, or that render our technologies and potential
products obsolete.
Also, we may not have the financial resources, technical expertise or
marketing, distribution or support capabilities to compete successfully in
the future.
THE UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION AND OUR
POTENTIAL INABILITY TO LICENSE TECHNOLOGY FROM THIRD PARTIES MAY ADVERSELY
AFFECT US
Our success will depend in part on obtaining and maintaining meaningful
patent protection on our inventions, technologies and discoveries. Our
ability to compete effectively will depend on our ability to develop and
maintain proprietary aspects of our technology, and to operate without
infringing the proprietary rights of others, or to obtain rights to
third-party proprietary rights, if necessary. Our pending patent applications
may not result in the issuance of patents. Our patent applications may not
have priority over others' applications, and even if issued, any of our
patents may not offer protection against competitors with similar
technologies. Any patents issued to us may be challenged, invalidated or
circumvented and the rights created thereunder may not afford us a
competitive advantage.
Our commercial success also depends in part on us neither infringing
valid, enforceable patents or proprietary rights of third parties, nor
breaching any licenses that may relate to our technologies and products. We
are aware of third-party patents that may relate to our technology. We may
infringe these patents or other patents or proprietary rights of third
parties. We have 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 us or our collaborative
partners claiming damages and seeking to enjoin commercial activities
relating to our products and processes affected by third-party rights, may
require us or our collaborative partners to obtain licenses in order to
continue to manufacture or market the affected products and processes. In
addition, these actions may subject us to potential liability for damages. We
or our collaborative partners may not prevail in an action and any license
required under a 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 our areas of interest, and we believe
that there may be significant litigation in the industry regarding patent and
other intellectual property rights. If we become involved in litigation, it
could consume a substantial portion of our managerial and financial
resources, which could have a material adverse effect on us. Additionally,
the defense and prosecution of interference proceedings before the U.S.
Patent and Trademark Office ("USPTO") and related administrative proceedings
would result in substantial expense to us and significant diversion of effort
by our technical and management personnel. We may in the future become
subject to USPTO interference proceedings to determine the priority of
inventions. In addition, laws of some foreign countries do not protect
intellectual property to the same extent as do laws in the U.S., which may
subject us to additional difficulties in protecting our intellectual property
in those countries.
We also rely upon trade secrets, technical know-how and continuing
inventions to develop and maintain our competitive position. Others may
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose our
technology and we may not be able to meaningfully protect our trade secrets,
or be capable of protecting our rights to our trade secrets. We seek to
protect our technology and patents, in part, by confidentiality agreements
with our employees and contractors. Our employees may breach their existing
Proprietary Information, Inventions, and Dispute Resolution Agreements and
these agreements may not protect our intellectual property. This could have a
material adverse effect on us.
FAILURE TO OBTAIN REGULATORY APPROVALS WOULD ADVERSELY AFFECT US
We anticipate that the manufacturing, labeling, distribution and
marketing of a number of our diagnostic products will be subject to
regulation in the U.S. and other countries. We may not be able to obtain
necessary regulatory approvals or clearances for our products on a timely
basis, or at all. Delays in receipt of or failure to receive approvals or
clearances, the loss of previously received approvals or clearances,
limitations on intended uses imposed as a condition of approvals or
clearances, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on us.
16
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In the U.S., the Food and 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, the FDA regulates the preclinical and clinical
testing, design, efficacy, safety, manufacture, labeling, distribution and
promotion of medical devices. We will not be able to commence marketing or
commercial sales in the U.S. of these products until we receive clearance or
approval from the FDA, which can be a lengthy, expensive and uncertain
process. We have not applied for FDA or other regulatory approvals with
respect to any of our products under development. We 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.
Noncompliance with applicable FDA requirements can result in:
- 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 us. Any
devices manufactured or distributed by us pursuant to FDA clearance or
approvals are subject to pervasive and continuing regulation by the FDA and
certain state agencies.
OUR DEPENDENCE ON SUPPLIERS MAY ADVERSELY AFFECT US
Key components and raw materials used in the manufacture of our products
are provided from limited sources or in some cases by single-source vendors.
Although we believe that alternative sources for these components and raw
materials are available, any supply interruption in a sole-sourced component
of raw material would have a material adverse effect on our ability to
manufacture our products until a new source of supply is qualified and, as a
result, could have a material adverse effect on us. In addition, an
uncorrected impurity or supplier's variation in a raw material, either
unknown to us or incompatible with our manufacturing process, could have a
material adverse effect on our ability to manufacture products. We 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 our future products, if any,
could have a material adverse effect on us.
OUR LIMITED MANUFACTURING EXPERIENCE AND POTENTIAL INABILITY TO SCALE UP
MANUFACTURING COULD ADVERSELY AFFECT US
We have no experience manufacturing products for commercial purposes. We
rely on subcontractors to manufacture the limited quantities of semiconductor
microchips and other components we require for internal and collaborative
purposes, as well as for use in clinical trials and prototype products.
Manufacturing, supply and quality control problems may arise as we either
alone or with subcontractors attempt to scale up manufacturing procedures.
Scale-up may not be achieved in a timely manner or at a commercially
reasonable cost. Any failure to surmount problems could lead to delays or
pose a threat to the ultimate commercialization of our products and result in
a material adverse effect on us.
17
<PAGE>
If we or any of our contract manufacturers encounter manufacturing
difficulties, including:
- 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 us.
Our manufacturing facilities and those of our contract manufacturers are
or will be subject to periodic regulatory inspections by the FDA and other
federal and state regulatory agencies and these facilities are subject to
Quality System Regulation ("QSR") requirements of the FDA. Failure by us or
our third-party manufacturers to maintain its facilities in accordance with
QSR regulations, other international quality standards or other regulatory
requirements would have a material adverse effect on us.
OUR LIMITED MARKETING AND SALES CAPABILITY COULD ADVERSELY AFFECT US
We have limited product marketing and sales capabilities. In attracting,
establishing and maintaining a marketing and sales force, or entering into
third-party marketing or distribution arrangements with other companies, we
expect to incur significant additional expenses. We may not be able to
successfully establish a sales and marketing capability or enter into
third-party marketing or distribution arrangements or be successful in
achieving marketplace acceptance for our products. This failure would have a
material adverse affect on us.
A FAILURE TO MANAGE OUR GROWTH MAY ADVERSELY AFFECT US
We expect to continue to experience growth in the number of our employees
and the scope of our operating and financial systems. This growth has
resulted in an increase in responsibilities for both existing and new
management personnel. Our ability to manage growth effectively will require
us to continue to implement and improve our operational, financial and
management information systems and to recruit, train, motivate and manage our
employees. We may not be able to manage our growth and expansion, and a
failure to do so could have a material adverse effect on us.
OUR PRODUCT LIABILITY EXPOSURE AND THE INADEQUACY OR UNAVAILABILITY OF
INSURANCE COVERAGE COULD ADVERSELY AFFECT US
The testing, manufacturing and marketing of our products entails an
inherent risk of product liability claims. Any claims against us could have a
material adverse effect on us. We may not be able to obtain insurance on
acceptable terms with adequate coverage, or at reasonable costs. Potential
product liability claims may exceed the amount of our insurance coverage or
may be excluded from coverage under the terms of the policy. Our insurance
once obtained may not be renewed at a cost and level of coverage comparable
to that then in effect.
ITEM 2. PROPERTIES
We currently lease an approximately 45,000 square foot facility in San
Diego, California, under a lease expiring in 2005. We have an option to renew
the lease on this facility for two additional five-year terms. The facility
currently houses our administrative offices and research and development
laboratories, and is expected to be sufficient to meet our currently
anticipated facilities needs at least through 1999.
ITEM 3. LEGAL PROCEEDINGS
There is no material litigation pending against us.
18
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PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1998.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Changes in Securities
On November 17, 1998, our Board of Directors adopted a Stockholder Rights
Plan ("Rights Plan"). Under the terms of the Rights Plan, stockholders of
record as of November 30, 1998 received a dividend of one Preferred Stock
Purchase Right ("Right") for each share of common stock held on that date. If
not earlier terminated or redeemed, the Rights will expire on November 17,
2008 and will be exercisable only if a person or group becomes the beneficial
owner of 15% or more of the Company's common stock (such person or group, a
"15% holder") or commences a tender or exchange offer which would result in
the offeror beneficially owning 15% or more of the Company's common stock,
which is not approved by our Board of Directors. Each Right will entitle
stockholders to buy one one-thousandth of a share of Series A Participating
Preferred Stock of the Company at an exercise price of $50.00, subject to
antidilution adjustments.
If a person or group accumulates 15% or more of the Company's common
stock, each Right (other than Rights held by the 15% holder) will be adjusted
so that upon exercise the holder will have the right to receive that number
of shares of common stock (or in some circumstances, a combination of
securities and/or assets) having a value of twice the exercise price of the
Right. In addition, if following a 15% acquisition the Company is involved in
certain mergers or other business combinations, each Right (other than Rights
held by a 15% holder) will permit each holder to purchase shares of common
stock of the acquiring entity with a market value of twice the exercise price
of each Right. The Board of Directors will also have the right, following a
15% acquisition, to cause each Right (other than rights held by the 15%
holder) to be exchanged for one share of common stock.
The Board of Directors is entitled to redeem the Rights at $.01 per Right
at any time prior to a 15% acquisition and in certain other specified
situations.
(b) Use of Proceeds
On April 13, 1998, our 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 us (the "Offering") upon the termination of the Offering in April
1998. The underwriting of the offering was led by a group consisting of
Morgan Stanley Dean Witter, Lehman Brothers and SBC Warburg Dillon Read Inc.
The shares sold by us were sold at an aggregate offering price of $42.9
million, netting proceeds of approximately $38.7 million to us after
underwriting fees of approximately $3.0 million and other offering expenses
of approximately $1.2 million. None of these fees and expenses was paid to
any director, officer, or 10% or greater stockholder of us or an affiliate of
any of these 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:
<TABLE>
<CAPTION>
<S> <C>
Repayment of indebtedness $ 1,279,000
Working capital $ 14,836,000
Temporary investments $ 22,585,000
</TABLE>
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 us or an
affiliate of these persons.
19
<PAGE>
(c) Market Information
Our common stock began trading on the National Association of Securities
Dealers Automated Quotation ("Nasdaq") National Market on April 14, 1998,
under the symbol "NGEN." Prior to that date, there was no established trading
market for our common stock. The following table sets forth the range of high
and low sales prices as reported for our common stock by Nasdaq for the
periods indicated:
<TABLE>
<CAPTION>
High Low
Year Ended December 31, 1998: ---- ---
-----------------------------
<S> <C> <C>
2nd Quarter (from April 14, 1998) $ 11.250 $ 5.375
3rd Quarter $ 8.375 $ 3.000
4th Quarter $ 5.750 $ 2.875
</TABLE>
As of March 5, 1999, there were approximately 262 shareholders of record of
our common stock. We have not paid any cash dividends to date and do not
anticipate any being paid in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to our consolidated
financial statements has been derived from the audited financial statements. The
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our financial
statements and notes thereto appearing elsewhere herein:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Sponsored research $ 5,461 $ 1,243 $ -- $ -- $ --
Contract and grant revenue 2,172 2,123 1,644 318 --
-------- -------- ------- ------- -------
Total revenues 7,633 3,366 1,644 318 --
Operating expenses:
Research and development 23,002 11,769 6,931 3,356 1,345
General and administrative 6,420 3,910 2,427 1,646 1,065
Acquired in-process technology 1,193 -- -- -- --
-------- -------- ------- ------- -------
Total operating expenses 30,615 15,679 9,358 5,002 2,410
Equity in loss of joint venture (610) -- -- -- --
Interest income (expense), net 2,650 975 (64) 96 34
-------- -------- ------- ------- -------
Net loss $(20,942) $(11,338) $(7,778) $(4,588) $(2,376)
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Net loss per share--basic and diluted $ (1.60) $ (8.42) $ (8.08)
-------- -------- -------
-------- -------- -------
Number of shares used in computing net
loss per share--basic and diluted 13,097 1,347 963
-------- -------- -------
-------- -------- -------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 62,245 $ 19,498 $ 16,775 $ 4,318 $ 206
Working capital 57,701 16,775 14,853 3,931 (22)
Total assets 72,704 23,215 19,090 6,339 1,622
Capital lease obligations, less current portion 4,176 1,193 935 631 347
Accumulated deficit (47,431) (26,489) (15,151) (7,372) (2,784)
Total stockholders' equity 61,051 18,599 15,680 4,950 865
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K includes forward-looking statements about our business and
results of operations that are subject to risks and uncertainties that could
cause our actual results to vary materially from those reflected in the
forward-looking statements. Words such as "believes," "anticipates," "plans,"
"estimates," "future," "could," variations of such words and similar
expressions are intended to identify such forward-looking statements. Factors
that could cause or contribute to these differences include those discussed
previously under the caption "Factors that May Affect Results" and elsewhere
in this Form 10-K. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. We
disclaim any intent or obligation to update these forward-looking statements.
OVERVIEW
Since commencing operations in 1993, we have applied substantially all of
our resources to our research and development programs. We have incurred
losses since inception and, as of December 31, 1998, had an accumulated
deficit of approximately $47.4 million. We expect to incur significant losses
over at least the next several years as we expand our research and product
development efforts and attempt to commercialize our products.
We currently have no products available for sale and no revenues have
been generated from the sale of products arising out of our technology. We
anticipate our main sources of revenues during at least 1999 will be payments
from contracts, grants and sponsored research. We believe our future
operating results may be subject to quarterly fluctuations due to a variety
of factors, including the achievement of milestones under our collaborative
agreements, whether and when new products are successfully developed and
introduced by us or our competitors, and market acceptance of products under
development. Payments under sponsored research agreements will be subject to
significant fluctuations in both timing and amount and therefore our results
of operations for any period may not be comparable to the results of
operations for any other period.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
REVENUES. For the year ended December 31, 1998, revenue from sponsored
research totaled approximately $5.5 million compared to approximately $1.2
million and none for the years ended December 31, 1997 and 1996,
respectively. Revenues are recorded under these arrangements as expenses are
incurred. Payments received in advance under these arrangements are recorded
as deferred revenue until the expenses are incurred. Sponsored research
revenue recognized during the year ended December 31, 1998 was earned in
connection with a joint venture collaboration with Becton Dickinson entered
into in October 1997, a research and development agreement with Aventis
Research and Technology (an affiliate of Hoechst AG), entered into in
December 1997, and a nonexclusive research and development agreement with
Elan entered into in December 1997. Sponsored research revenue recognized
during the year ended December 31, 1997 was earned in connection with a
research agreement with Becton Dickinson effective in May 1997 which was
subsequently superceded by the joint venture collaboration entered into in
October 1997.
Revenue from contracts and grants totaled approximately $2.2 million for
the year ended December 31, 1998 compared to approximately $2.1 million and
approximately $1.6 million for the years ended December 31, 1997 and 1996,
respectively. The increase in contract and grant revenue was due to an
increase in the number of active contracts to seven during the year ended
December 31, 1998 from six and three during the years ended December 31, 1997
and 1996, respectively. During 1998, we were awarded a contract by the Space
and Naval Warfare Systems Center San Diego for the Defense Advance Research
Projects Agency which could total in excess of $7 million over the next five
years. In conjunction with the acquisition of Nanotronics, Inc. in January
1998, we assumed two contracts with the Department of the Air Force,
Information Directorate of the Air Force Research Laboratory, Rome, New York.
In 1997, we received funding from The National Institute of Standards and
Technology --Advanced Technology Program under a $2.0 million two-year award
initiated in May 1997. In 1996, we received funding from The National
Institute of Standards and Technology -- Advanced Technology Program under a
$2.0 million two-year award initiated in August 1995.
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<PAGE>
Continuation of sponsored research agreements, contracts and grants is
dependent upon us achieving specific contractual milestones. The recognition
of revenue under sponsored research agreements, contracts and grants 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 $23.0 million during the year ended December 31,
1998 from approximately $11.8 million and $6.9 million for the years ended
December 31, 1997 and 1996, respectively. Research and development expenses
include salaries, lab supplies, consulting, travel, facilities and other
expenditures relating to research and product development. The increases from
year to year are attributable to the continued growth of research and product
development efforts, including hiring of additional scientific, engineering
and operations personnel, increased purchases of laboratory supplies,
equipment and services to support the sponsored research programs with Becton
Dickinson, Aventis and Elan, development of engineering prototypes for our
lead product, expansion of research and development facilities, and increases
in license and research fees incurred in further exploring and developing our
core technologies. We expect research and development spending to increase
over the next several years as our research and product development efforts
continue to expand.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled approximately $6.4 million in 1998 compared to approximately $3.9
million in 1997 and approximately $2.4 million in 1996. This increase is
principally due to increased legal costs associated with enhancing and
maintaining our intellectual property portfolio, the expansion of activities
related to marketing our potential products, and to deferred compensation
expense recognized during the year ended December 31, 1998 in excess of what
was recorded during the year ended December 31, 1997. Deferred compensation
represents the excess of the 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 we expand our sales and marketing and general and
administrative organizations and as we continue to enhance and maintain our
intellectual property portfolio.
ACQUIRED IN-PROCESS TECHNOLOGY. During the first quarter of 1998, we
issued 200,000 shares of our 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 our initial public offering. The in-process technology acquired relates
generally to nanotechnology and molecular electronics. Nanotronics' research
is currently partially funded through government contracts from the
Information Directorate of the United States Air Force Research Laboratory.
We recorded $1.2 million in expenses relating to acquired in-process
technology during the year ended December 31, 1998.
INTEREST INCOME (EXPENSE), NET. We had net interest income of
approximately $2.6 million in 1998 compared to net interest income of
approximately $975,000 in 1997 and net interest expense of $64,000 in 1996.
The significant increase in 1998 was primarily attributable to larger cash
balances resulting from net proceeds received upon the completion of our
initial public offering and concurrent private placement of equity securities
in April 1998. Proceeds from private placements between December 1996 and May
1997 resulted in increased interest income during 1997 compared to 1996. The
increase in interest income was partially offset by higher interest expense
during 1998, compared to 1997 and 1996, due to greater amounts of equipment
under capital leases in 1998 than in 1997 and 1996.
EQUITY IN LOSS OF JOINT VENTURE. We recognized a loss of approximately
$610,000 for the year ended December 31, 1998 from the joint venture formed
in 1997 with Becton Dickinson, based on the loss allocation described in the
joint venture agreement which states that losses will be allocated in
proportion to and not to exceed cash contributions. There was no loss during
1997 as no cash contributions were made by us to the joint venture during the
year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
In April 1998, we completed our initial public offering of common stock
generating net proceeds of approximately $38.7 million. Concurrent with the
initial public offering, we completed a private placement of our equity
securities with Becton Dickinson, Hoechst (through a subsidiary) and Elan for
net proceeds of $6.0 million, $10.0 million and $5.0 million, respectively.
Prior to our initial public offering, we had financed our operations
22
<PAGE>
primarily through the net proceeds received from private placements of
preferred equity securities totaling approximately $44.1 million.
We fund most of our equipment acquisitions and leasehold improvements
through capital leasing facilities. During 1998, we received proceeds from
equipment and leasehold improvement financing of approximately $5.7 million
compared to $1.2 million and $404,000 of proceeds received during 1997 and
1996, respectively. We anticipate that we will continue to use capital
equipment leasing or debt facilities to fund most of our equipment
acquisitions and leasehold improvements.
Net cash used in operating activities was approximately $15.1 million,
$9.6 million and $6.1 million for 1998, 1997 and 1996, respectively. Cash
used for operations was primarily related to the costs associated with the
support of our expanding operations, including higher personnel costs,
product development costs, license fees and legal fees relating to
establishing and maintaining our intellectual property rights.
At December 31, 1998, we had approximately $62.2 million in cash and cash
equivalents. We expect that our existing capital resources, combined with
anticipated revenues from potential product sales, sponsored research
agreements, contracts and grants will be sufficient to support our planned
operations through at least the next 24 months. This estimate of the period
for which we expect our available sources of liquidity to be sufficient to
meet our capital requirements is a forward-looking statement that involves
risks and uncertainties, and actual results may differ materially. Our future
liquidity and capital funding requirements will depend on numerous factors
including, but not limited to, the extent to which our products under
development are successfully developed and gain market acceptance, the timing
of regulatory actions regarding our potential products, the costs and timing
of expansion of sales, marketing and manufacturing activities, prosecution
and enforcement of patents important to our business, the results of clinical
trials, competitive developments, and our ability to maintain existing
collaborations and to enter into additional collaborative arrangements. We
have incurred negative cash flow from operations since inception and do not
expect to generate positive cash flow to fund our operations for at least the
next several years. We may need to raise additional capital to fund our
research and development programs, to scale up manufacturing activities and
expand our sales and marketing efforts to support the commercialization of
our products under development. Additional capital may not be available on
terms acceptable to us, or at all. If adequate funds are not available, we
may be required to curtail our operations significantly or to obtain funds
through entering into collaborative agreements or other arrangements on
unfavorable terms. Our failure to raise capital on acceptable terms when
needed could have a material adverse effect on our business, financial
condition or results of operations.
In January 1998, we acquired all of the outstanding capital stock of
Nanotronics, Inc. ("Nanotronics"). Nanotronics' research, which is currently
funded in part through government grants with the Department of the Air
Force, is exploratory in nature and at a very early stage. The in-process
technology, which was acquired as a result of our purchase of Nanotronics,
relates generally to nanotechnology and molecular electronics. Potential
applications of the technology include high-density optical storage systems
for electronics applications and self-assembly applications relating to
microfabrication and nanofabrication. We anticipate that funding for
Nanotronics will continue primarily through government grant sources until
feasibility is demonstrated. If technological feasibility is demonstrated, we
expect to pursue corporate partnership opportunities. Given the early stage
of the technology, we have not yet determined which applications may be
developed and the extent of our resources to be committed to each such
application.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1998, we had federal and California net operating loss
("NOL") carryforwards of approximately $41.4 million and $6.3 million,
respectively, and approximately $1.7 million and $990,000 of research and
development ("R&D") tax credits available to offset future federal and state
income taxes, respectively. The federal and California NOL carryforwards are
subject to alternative minimum tax limitations and to examination by the tax
authorities. The federal tax loss carryforwards will begin expiring in 2006,
unless previously utilized, and the California tax loss carryforwards will
continue to expire in 1999, unless previously utilized. The federal and
California R&D tax credit carryforwards will begin expiring in 2007 unless
previously utilized. We believe that our initial public offering combined
with the concurrent private placement, which occurred in April 1998, may
constitute a "change of ownership" under federal income tax regulations. As
such, we may be limited in the amount of NOLs incurred prior to our initial
public offering, which may be utilized to offset future taxable
23
<PAGE>
income. Similar limitations may also apply to utilization of R&D tax credits
to offset taxes payable. However, we do not believe such limitations will
have a material impact on our ability to utilize the NOLs. See Note 9 of
Notes to Financial Statements.
YEAR 2000 COMPLIANCE
The Year 2000 issue arises from the fact that many existing computer
software programs use only the last two digits to refer to a specific year,
instead of all four digits. As a result, computer programs that have
date-sensitive software, or operate with date-sensitive data, may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculation causing disruptions in operations,
including, among other things, the temporary inability to process
transactions or engage in normal business activities.
We have assembled a Year 2000 task force to ensure that we are Year 2000
compliant by December 31, 1999. Our task force, assisted by third parties, is
conducting an assessment of our computer systems, software applications,
equipment and outside vendors and suppliers to identify which systems may be
impacted by Year 2000 issues. We are making appropriate modifications and
updates to internal information systems, some of which have been or are being
done in the ordinary course of business. Our goal is to ensure, to the extent
possible, that the transition from the year 1999 to the year 2000 will not
have a materially adverse impact on operational, research or administrative
capabilities. After completing the assessment process, we will develop a
corporate-wide comprehensive strategy to address the problems associated with
the Year 2000 transition. It is expected that this strategy will continually
evolve as new issues arise and old ones disappear.
We are in the process of assessing and initiating formal communications
with our current partners and third party suppliers of products and services,
including third parties with whom we have material relationships, in an
effort to obtain written certification of their compliance to the Year 2000
issue. We intend to develop an action list, as well as contingency plans
based on the assessment of each third party's response to the Year 2000
issue. In the event any such third party cannot timely provide us with
products, services, or continue collaborations with us, our results of
operations could be adversely affected. For example, our research and
development efforts could be interrupted resulting in delays in meeting our
obligations to existing collaborations, delays in progress of our product
development and, consequently, delays in attracting new collaborative
partners.
Based upon a preliminary review of our systems, we estimate that the
total cost of achieving Year 2000 readiness for our internal systems and
equipment will be less than $150,000.
Since no significant issues have arisen based on our preliminary
assessments, we have not yet developed a contingency plan to address any
material Year 2000 issues. A contingency plan, if required, will be developed
immediately upon completion of our assessment. While we continue to believe
that the Year 2000 matters discussed above will not have a materially adverse
impact on our business, financial condition or results of operations, it is
not possible to determine with certainty whether or to what extent we may be
affected. We have not developed a reasonably likely worst case scenario with
respect to Year 2000 problems we may encounter.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index on Page F-1 of the Financial Report included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors is incorporated by reference to the
section entitled "Election of Directors" in the Nanogen, Inc. definitive
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the Annual Meeting of Stockholders to be held on June 30,
1999 (the "Proxy Statement"). Information regarding Executive Officers is
incorporated by reference to the Proxy Statement under the heading "Executive
Officers of the Registrant." Information regarding Section 16 reporting
compliance is incorporated by reference to the Proxy Statement under the
heading "Section 16 Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
Our financial statements are included herein as required under Item 8 of
this Annual Report on Form 10-K. See Index on page F-1.
(2) Financial Statement Schedules
Financial statement schedules have been omitted since they are
either not required, not applicable, or the information is otherwise included.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
2.1* Agreement and Plan of Merger among the Registrant,
Nanotronics, Inc. ("Nanotronics") and the
shareholders of Nanotronics, dated as of December 18,
1997.
3.(i)1 Restated Certificate of Incorporation.
3.(i)2 Certificate of Designation, as filed with the
Delaware Secretary of State on November 23, 1998.
3.(ii)* Amended and Restated Bylaws of the Registrant.
(3.(ii)2)
4.1* Form of Common Stock Certificate.
10.1*(A) 1997 Stock Incentive Plan of Nanogen, Inc. ("1997
Plan"). (10.3)
10.2*(A) Form of Incentive Stock Option Agreement under the
1997 Plan. (10.4)
10.3*(A) Form of Nonqualified Stock Option Agreement under the
1997 Plan. (10.5)
10.4*(A) Nanogen, Inc. Employee Stock Purchase Plan. (10.6)
25
<PAGE>
10.5*(A) Form of Indemnification Agreement between the
Registrant and its directors and executive officers.
(10.7)
10.6*(+) Agreement between the Registrant and Elan
Corporation, plc, dated December 19, 1997. (10.8)
10.7*(+) Agreement between the Registrant and Hoechst AG,
dated December 4, 1997. (10.9)
10.8*(+) Agreement between the Registrant and Syntro
Corporation, dated of November 24, 1997. (10.10)
10.9*(+) Master Agreement between the Registrant and Becton,
Dickinson and Company, dated as of October 1, 1997,
with related attachments. (10.11)
10.10*(+) Exclusive Option Agreement between the Registrant and
Billups-Rothenberg, Inc., dated as of September 12,
1997. (10.12)
10.11*(+) Sponsored Research Agreement between the Registrant
and Prolinx, Inc., dated as of December 18, 1996.
(10.13)
10.12*(+) Collaborative Research Agreement between the
Registrant and the University of Texas Southwestern
Medical Center at Dallas, dated as of August 1, 1995.
(10.14)
10.13*(+) License Agreement between the Registrant and The Salk
Institute for Biological Studies, dated as of April
1, 1993. (10.15)
10.14* Form of Series B Preferred Stock Purchase Warrant,
between the Registrant and certain purchasers of its
Series B Preferred Stock, dated April 11, 1995.
(10.17)
10.15* Amended and Restated Investors' Rights Agreement
between the Registrant and certain securityholders
set forth therein, dated as of May 5, 1997, as
amended. (10.18)
10.16* Master Lease Agreement between the Registrant and
Mellon US Leasing, dated September 11, 1997. (10.19)
10.17* Lease Agreement between the Registrant and LMP
Properties, Ltd., dated June 29, 1994. (10.20)
10.18* Lease Agreement between the Registrant and Lease
Management Services, Inc., dated April 26, 1994, as
amended on December 13, 1994 and June 13, 1996.
(10.21)
10.19*(A) Form of Nanogen, Inc. Restricted Stock Issuance
Agreement between the Registrant and certain of its
directors and executive officers, dated as of
November 7, 1997. (10.22)
10.20*(A) Form of Promissory Note between the Registrant and
certain of its executive officers, dated August 22,
1996. (10.23)
10.21*(A) Form of Promissory Note between the Registrant and
certain of its executive officers, dated June 30,
1995. (10.24)
10.22*(A) Form of Common Stock Purchase Agreement. (10.25)
10.23*(A) Form of Performance Stock Option Agreement. (10.26)
10.24*(A) Agreement between the Registrant and Tina S. Nova,
Ph.D., dated January 5, 1994. (10.27)
10.25*(A) Agreement between the Registrant and W. J. Kitchen,
dated October 28, 1997. (10.28)
10.26*(A) Agreement between the Registrant and James P.
O'Connell, Ph.D., dated November 15, 1994. (10.29)
10.27*(A) Agreement between the Registrant and Harry J.
Leonhardt, dated May 24, 1996. (10.30)
10.28*(A) Agreement between the Registrant and Kieran T.
Gallahue, dated December 18, 1997. (10.31)
10.29*(A) Secured Promissory Note and Deed of Trust, between
the Registrant and W. J. Kitchen, dated March 16,
1998. (10.32)
10.30* Series D. Preferred Stock Purchase Warrant between
the Registrant and Dominion Fund II, dated January
26, 1998. (10.33)
10.31*(+) License Agreement between the Registrant and
Billups-Rothenberg, Inc., dated as of March 18, 1998.
(10.34)
26
<PAGE>
10.32*** Rights Agreement dated as of November 17, 1998,
between the Company and BankBoston, N.A.
10.33**(A) Agreement between the Registrant and Daniel D.
Burgess, dated July 6, 1998. (10.35)
10.34(++) Collaborative Research and Development Agreement
between the Company and Hoechst Research and
Technology, dated December 3, 1998.
23.1 Consent of Ernst & Young LLP, independent auditors.
27.1 Financial Data Schedule.
</TABLE>
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-42791). Parenthetical references following the
description of each document relate to the exhibit number under which
such exhibit was initially filed.
** Incorporated by reference to Exhibit 10.35 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
*** Incorporated by reference to Exhibit 4.1 of the Company's Registration
Statement on Form 8-A, filed on November 24, 1998.
(A) Indicates management compensatory plan on arrangement.
(+) Confidential treatment has been granted for certain portions of these
agreements.
(++)Confidential treatment has been requested for certain portions of this
agreement.
(b) Reports on Form 8-K
On November 24, 1998, we filed a report on Form 8-K to disclose the
Shareholder Rights Plan approved by the Board of Directors on November 17, 1998.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NANOGEN, INC.
Date: March 24, 1999 By:/s/ HOWARD C. BIRNDORF
-------------------------------
Howard C. Birndorf
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements to the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ HOWARD C. BIRNDORF Chairman of the Board and March 24, 1999
- ------------------------------------ Chief Executive Officer
Howard C. Birndorf (Principal Executive Officer)
/s/ TINA S. NOVA, PH.D. Director, President and March 24, 1999
- ------------------------------------ Chief Operating Officer
Tina S. Nova, Ph.D.
/s/ DANIEL D. BURGESS Vice President, Chief Financial March 24, 1999
- ------------------------------------ Officer (Principal Financial and
Daniel D. Burgess Accounting Officer)
/s/ BROOK H. BYERS Director March 24, 1999
- ------------------------------------
Brook H. Byers
/s/ CAM L. GARNER Director March 24, 1999
- ------------------------------------
Cam L. Garner
/s/ DAVID G. LUDVIGSON Director March 24, 1999
- ------------------------------------
David G. Ludvigson
/s/ THOMAS G. LYNCH Director March 24, 1999
- ------------------------------------
Thomas G. Lynch
</TABLE>
28
<PAGE>
NANOGEN, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................... F-2
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Operations................................ F-4
Consolidated Statements of Cash Flows................................ F-5
Consolidated Statements of Stockholders' Equity...................... F-6
Notes to Consolidated Financial Statements........................... F-7-F-15
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Nanogen, Inc.
We have audited the accompanying consolidated balance sheets of Nanogen, Inc.,
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Nanogen, Inc. at
December 31, 1998 and 1997 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 22, 1999
F-2
<PAGE>
NANOGEN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 62,245 $ 19,498
Receivables and other current assets 2,933 700
--------- ---------
Total current assets 65,178 20,198
Property and equipment, net 6,980 2,440
Restricted cash 270 359
Other assets 276 218
--------- ---------
$ 72,704 $ 23,215
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,066 $ 597
Accrued liabilities 1,433 1,009
Deferred revenue 3,065 1,012
Current portion of capital lease obligations 1,913 805
--------- ---------
Total current liabilities 7,477 3,423
Capital lease obligations, less current portion 4,176 1,193
Commitments -- --
Stockholders' equity:
Convertible preferred stock, $.001 par value, 5,000,000 and
15,500,000 shares authorized at December 31, 1998 and 1997,
respectively; no shares and 13,683,865
shares issued and outstanding at December 31, -- 14
1998 and 1997, respectively
Common stock, $.001 par value, 50,000,000 and 40,000,000 shares
authorized at December 31, 1998 and 1997, respectively;
18,835,461 and 3,183,523 shares
issued and outstanding at December 31, 1998 and 19 3
1997, respectively
Additional paid-in capital 111,489 48,523
Deferred compensation (1,512) (2,323)
Notes receivable from officers (1,514) (1,129)
Accumulated deficit (47,431) (26,489)
--------- ---------
Total stockholders' equity 61,051 18,599
--------- ---------
$ 72,704 $ 23,215
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-3
<PAGE>
NANOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Revenues:
Sponsored research $ 5,461 $ 1,243 $ --
Contract and grant revenue 2,172 2,123 1,644
--------- --------- --------
Total revenues 7,633 3,366 1,644
Operating expenses:
Research and development 23,002 11,769 6,931
General and administrative 6,420 3,910 2,427
Acquired in-process technology 1,193 -- --
--------- --------- --------
Total operating expenses 30,615 15,679 9,358
--------- --------- --------
Loss from operations (22,982) (12,313) (7,714)
Equity in loss of joint venture (610) -- --
Interest income (expense), net 2,650 975 (64)
--------- --------- ---------
Net loss $ (20,942) $ (11,338) $ (7,778)
--------- --------- ---------
--------- --------- ---------
Net loss per share-- basic and diluted $ (1.60) $ (8.42) $ (8.08)
--------- --------- ---------
--------- --------- ---------
Number of shares used in computing net loss
per share-- basic and diluted 13,097 1,347 963
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-4
<PAGE>
NANOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(20,942) $(11,338) $ (7,778)
Adjustments to reconcile net loss to net cash used in
operating activities:
Acquisition of in-process technology 1,193 -- --
Equity in loss of joint venture 610 -- --
Net (gain)/loss from sale of property, plant & (13) -- --
equipment
Depreciation and amortization 1,168 527 351
Interest expense converted into convertible -- -- 20
preferred stock
Amortization of deferred compensation 2,181 611 --
Changes in operating assets and liabilities:
Accounts payable 469 117 276
Accrued liabilities 424 (414) 1,175
Deferred revenue 2,053 1,012 --
Receivables and other current assets (2,233) (145) (182)
-------- -------- --------
Net cash used in operating activities (15,090) (9,630) (6,138)
INVESTING ACTIVITIES:
Purchase of equipment (72) (492) (114)
Proceeds from sale of assets 29 -- --
Investment in joint venture (610) -- --
-------- -------- --------
Net cash used in investing activities (653) (492) (114)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash 89 50 56
Principal payments on capital lease obligations (1,561) (670) (427)
Proceeds from capital lease financing -- -- 593
Issuance of notes payable to stockholders -- -- 2,000
Issuance of common stock 60,052 125 41
Issuance of convertible preferred stock, net of 43 13,525 16,448
issuance costs
Interest on notes receivable from officers (75) (4) (2)
Other assets (58) (181) --
-------- -------- --------
Net cash provided by financing activities 58,490 12,845 18,709
-------- -------- --------
Increase in cash and cash equivalents 42,747 2,723 12,457
Cash and cash equivalents at beginning of year 19,498 16,775 4,318
-------- -------- --------
Cash and cash equivalents at end of year $ 62,245 $ 19,498 $ 16,775
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 466 $ 225 $ 188
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Equipment acquired under capital leases $ 5,652 $ 1,159 $ 404
-------- -------- --------
-------- -------- --------
Issuance of convertible preferred stock in exchange for
cancellation of debt and related accrued interest $ -- $ -- $ 2,021
-------- -------- --------
-------- -------- --------
Common stock issued in exchange for notes receivables
from officers $ 310 $ 1,057 $ --
-------- -------- --------
-------- -------- --------
Issuance of convertible preferred stock and warrants in
exchange for in-process technology $ 1,193 $ -- $ --
-------- -------- --------
-------- -------- --------
Deferred compensation related to stock options $ 1,370 $ 2,934 $ --
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
F-5
<PAGE>
NANOGEN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------- ------ ------- ------ ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 5,814 $ 6 1,331 $ 1 $ 12,347
Issuance of common stock -- -- 284 1 42
Repurchase of common stock -- -- (16) -- (2)
Issuance of convertible preferred stock 4,971 5 -- -- 18,464
Exercise of stock option in exchange for
notes receivable and accrued interest -- -- 233 -- 35
Net loss -- -- -- -- --
------- ----- ------ ---- ---------
Balance at December 31, 1996 10,785 11 1,832 2 30,886
Issuance of common stock -- -- 207 -- 129
Repurchase of common stock -- -- (30) -- (4)
Issuance of convertible preferred stock 2,899 3 -- -- 13,522
Deferred compensation related to stock -- -- -- -- 2,934
options
Amortization of deferred compensation -- -- -- -- --
Exercise of stock options in exchange for
notes receivable and accrued interest -- -- 1,175 1 1,056
Net loss -- -- -- -- --
------- ----- ------ ---- ---------
Balance at December 31, 1997 13,684 14 3,184 3 48,523
Repurchase of common stock -- -- (123) -- (103)
Exercise of stock options -- -- 115 -- 91
Sale of stock under employee stock purchase -- -- 27 -- 108
plan
Issuance of common stock pursuant to
exercise
of warrants -- -- 413 1 130
Issuance of convertible preferred stock 232 -- -- -- 1,236
Sale of common stock under initial public
offering, net of expenses -- -- 3,900 4 38,731
Sale of common stock in private placement in
conjunction with initial public offering -- -- 1,909 2 20,998
Conversion of preferred stock upon the
the completion of initial public offering (13,916) (14) 9,277 9 5
Deferred compensation related to stock -- -- -- -- 1,370
options
Amortization of deferred compensation -- -- -- -- --
Exercise of stock options in exchange for
notes receivable and accrued interest -- -- 133 -- 400
Net loss -- -- -- -- --
------- ----- ------ ---- ---------
Balance at December 31, 1998 -- $ -- 18,835 $ 19 $ 111,489
======= ===== ====== ==== =========
</TABLE>
<TABLE>
<CAPTION>
NOTES TOTAL
RECEIVABLE STOCKHOLDERS'
DEFERRED FROM ACCUMULATED EQUITY
COMPENSATION OFFICERS DEFICIT (DEFICIT)
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- $ (31) $ (7,373) $ 4,950
Issuance of common stock -- -- -- 43
Repurchase of common stock -- -- -- (2)
Issuance of convertible preferred stock -- -- -- 18,469
Exercise of stock option in exchange for
notes receivable and accrued interest -- (37) -- (2)
Net loss -- -- (7,778) (7,778)
------- ------- -------- --------
Balance at December 31, 1996 -- (68) (15,151) 15,680
Issuance of common stock -- -- -- 129
Repurchase of common stock -- -- -- (4)
Issuance of convertible preferred stock -- -- -- 13,525
Deferred compensation related to stock (2,934) -- -- --
options
Amortization of deferred compensation 611 -- -- 611
Exercise of stock options in exchange for
notes receivable and accrued interest -- (1,061) -- (4)
Net loss -- -- (11,338) (11,338)
------- ------- -------- --------
Balance at December 31, 1997 (2,323) (1,129) (26,489) 18,599
Repurchase of common stock -- 90 -- (13)
Exercise of stock options -- -- -- 91
Sale of stock under employee stock purchase -- -- -- 108
plan
Issuance of common stock pursuant to
exercise
of warrants -- -- -- 131
Issuance of convertible preferred stock -- -- -- 1,236
Sale of common stock under initial public
offering, net of expenses -- -- -- 38,735
Sale of common stock in private placement in
conjunction with initial public offering -- -- -- 21,000
Conversion of preferred stock upon the
the completion of initial public offering -- -- -- --
Deferred compensation related to stock (1,370) -- -- --
options
Amortization of deferred compensation 2,181 -- -- 2,181
Exercise of stock options in exchange for
notes receivable and accrued interest -- (475) -- (75)
Net loss -- -- (20,942) (20,942)
------- ------- -------- --------
Balance at December 31, 1998 $(1,512) $(1,514) $(47,431) $ 61,051
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
See accompanying notes.
F-6
<PAGE>
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Nanogen, Inc. ("Nanogen" or the "Company") was incorporated in California on
November 6, 1991 as Nanophore, Inc. ("Nanophore"), a wholly-owned subsidiary of
Nanotronics, Inc. ("Nanotronics"), and pursuant to a Plan of Corporate
Separation and Reorganization, Nanophore issued shares of its common stock to
the Nanotronics shareholders and commenced operations as Nanogen, Inc. on
September 1, 1993. In November 1997, the Company reincorporated in Delaware. The
Company was established to develop products in the area of medical diagnostics,
biomedical research, genomics, genetic testing and drug discovery by combining
advanced microelectronics with molecular biology.
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, but have been consolidated in the
Company's financial statements since the date of acquisition. 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.
The following unaudited table shows the pro forma amounts as if the
acquisition had occurred on January 1, 1997:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenue $ 7,667 $ 3,699
Net loss $ (19,753) $ (12,667)
Net loss per share - basic and $ (1.51) $ (9.40)
diluted
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
which include debt securities with remaining maturities of three months or less
when acquired.
CONCENTRATION OF CREDIT RISK
Cash and cash equivalents are financial instruments, which potentially
subject the Company to concentration of credit risk. The Company invests its
excess cash primarily in U.S. government securities and marketable debt
securities of financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to diversification and
maturities to maintain safety and liquidity. These guidelines are reviewed
periodically and modified to take advantage of trends in yields and interest
rates. The Company has not experienced any material losses on its investments.
All of the Company's investments are with financial institutions and
organizations with strong credit ratings with maturities of ninety days or less
when acquired.
F-7
<PAGE>
RESTRICTED CASH
During 1994, the Company obtained an irrevocable standby letter of credit
in the amount of $463,775 to secure its building lease. The letter of credit
is secured by a certificate of deposit, which is shown as restricted cash in
the accompanying balance sheet. The letter of credit is reduced by
approximately $50,000 annually, and had a balance of approximately $263,775
at December 31, 1998.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the
estimated useful lives of the assets (5 years) using the straight-line
method. Leasehold improvements are stated at cost and amortized on a
straight-line basis over the shorter of the estimated useful lives of the
assets or the lease term.
REVENUE RECOGNITION
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 contracts, grants, and
research agreements are dependent upon the company achieving specific
contractual milestones.
Contract and grant revenue from one customer amounted to approximately
10%, 45% and 70% of total revenues in 1998, 1997 and 1996, respectively.
Contract and grant revenue from a second customer amounted to 7%, 13% and 23%
in 1998, 1997 and 1996, respectively. Additionally, sponsored research (see
Note 10) was 72% and 37% of total revenue in 1998 and 1997, respectively.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, REPORTING COMPREHENSIVE INCOME, and SFAS No. 131, SEGMENT INFORMATION.
Both of these standards are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 requires that all components of comprehensive
income, including net income, be reported in the financial statements in the
period in which they are recognized. Comprehensive income is defined as the
change in equity during a period from transactions and other events and
circumstances from non-owner sources. Net income and other comprehensive
income, including foreign currency translation adjustments, and unrealized
gains and losses on investments, shall be reported, net of their related tax
effect, to arrive at comprehensive income. Comprehensive loss was not
different than net loss. SFAS No. 131 amends the requirements for public
enterprises to report financial and descriptive information about its
reportable operating segments. Operating segments, as defined in SFAS No.
131, are components of an enterprise for which separate financial information
is available and is evaluated regularly by the Company in deciding how to
allocate resources and in assessing performance. The financial information is
required to be reported on the basis that is used internally for evaluating
the segment performance. The Company operates in one business and operating
segment and the adoption of SFAS No. 131 did not have an impact on the
Company's financial statements.
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
convertible 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 convertible
preferred shares.
F-8
<PAGE>
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations ("APB
25"), in accounting for its employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options is not less than the
fair value of the underlying stock on the date of grant, no compensation
expense is recognized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
related disclosures at the date of the financial statements, and the amounts
of revenues and expenses reported during the period. Actual results could
differ from those estimates.
STOCKHOLDERS' EQUITY
In November 1997, the Company reincorporated in Delaware and established
$.001 par value common and preferred stock. The accompanying financial
statements have been retroactively reclassified to reflect the effects of the
reincorporation.
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 $38.7 million. All outstanding shares of
convertible preferred stock outstanding at April 13, 1998 automatically
converted into 9,277,275 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.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
---------- -----------
<S> <C> <C>
Scientific equipment $ 3,130 $ 2,059
Office furniture and equipment 2,030 946
Leasehold improvements 4,141 646
---------- -----------
9,301 3,651
Less accumulated depreciation and amortization (2,321) (1,211)
---------- -----------
$ 6,980 $ 2,440
---------- -----------
---------- -----------
</TABLE>
3. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
---------- -----------
<S> <C> <C>
Accrued compensation $ 754 $ 608
Other 679 401
---------- -----------
$ 1,433 $ 1,009
---------- -----------
---------- -----------
</TABLE>
F-9
<PAGE>
4. COMMITMENTS
LICENSING AND RESEARCH AGREEMENTS
The Company is a party to licensing and research agreements with various
entities whereby the Company is obligated to pay certain license fees and
research funding. None of these agreements individually are considered material.
Under some of these agreements, the Company may be required to pay royalties on
future sales in the event that the Company incorporates the licensed technology
in one or more of its potential commercial products.
LEASES
The Company leases its facilities and certain equipment under operating
lease agreements that expire at various dates through 2005. The minimum annual
rents are subject to specified annual rental increases. Rent expense was
approximately $532,000, $461,000 and $443,000 in 1998, 1997, and 1996,
respectively.
The Company leases certain equipment under capital lease obligations. Cost
and accumulated amortization of equipment under capital lease were approximately
$9,045,000 and $2,199,000 at December 31, 1998 and $3,365,000 and $1,142,000 at
December 31, 1997, respectively.
Annual future minimum obligations for operating and capital leases as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL
OPERATING LEASE
LEASES OBLIGATIONS
---------- ------------
<S> <C> <C>
1999 $ 599 $ 2,506
2000 612 2,284
2001 626 1,837
2002 651 419
2003 677 --
Thereafter 882 --
---------- ----------
Total minimum lease payments $ 4,047 7,046
----------
----------
Less amount representing interest 957
----------
Present value of future minimum capital lease obligations 6,089
Less amounts due in one year 1,913
----------
Long term portion of capital lease obligations $ 4,176
----------
----------
</TABLE>
As of December 31, 1998, the Company has approximately $1.4 million of
available funding under equipment lease lines.
5. RELATED PARTY TRANSACTIONS
In November 1998 the Company entered into a Standstill Agreement and Right
of First Negotiation (the "Agreement") with Graviton, Inc. ("Graviton"),
granting the Company an exclusive period of time to negotiate a license to
certain technologies licensed to and/or developed by Graviton. In exchange for
the Agreement, the Company advanced to Graviton through a secured loan the sum
of $500,000. If a license agreement is negotiated, the $500,000 loan will be
creditable against any license fees due thereunder. Messrs. Birndorf and Byers,
both directors of the Company, are also directors of and investors in Graviton.
Additionally, Dr. Tina Nova, the Company's President and Chief Operating
Officer, is the spouse of the president of Graviton, Dr. Michael Nova. Together,
Messrs. Birndorf, Byers and Nova hold a controlling ownership interest in
Graviton. Given the interrelationship among the parties, the Company's Board
appointed a committee of disinterested Board members to evaluate this
opportunity. After full disclosure of the above-referenced interrelationships,
the Committee determined that it was in the best interests of the Company to
proceed as outlined.
F-10
<PAGE>
6. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In December 1997, the Board of Directors authorized, following the
offering, 5,000,000 shares of undesignated preferred stock at a par value of
$.001. The Board of Directors has the authority, without further action by
the stockholders, to issue from time to time the preferred stock in one or
more series and to fix the number of shares, designations, preferences,
powers, and relative, participating, optional or other special rights and the
qualifications or restrictions thereof. At December 31, 1998, there was no
preferred stock outstanding.
WARRANTS
At December 31, 1998, there were outstanding warrants to purchase an
aggregate of 26,084 shares of common stock at exercise prices ranging from
$.02 to $5.12 per share which expire at various dates through April 2000.
Pursuant to the research and development collaboration agreement with Aventis
Research and Technologies, an affiliate of Hoechst AG ("Aventis"), (see note
10), the Company will be issuing to Aventis a warrant to purchase 120,238
shares of common stock exercisable through March 2004 at an exercise price of
$8.75 per share.
STOCK OPTION PLANS
Under the Company's 1993 Stock Option Plan, as amended in April 1995,
654,671 shares of common stock were reserved for issuance upon exercise of
stock options granted by the Company. In April 1995, the Board of Directors
adopted the 1995 Stock Option/Stock Issuance Plan under which 333,333 shares
of common stock were reserved for issuance. In April 1996, an additional
650,000 shares of common stock were reserved for issuance under the 1995
Plan. The plans provide for the grant of stock options to officers,
directors, and employees of, and consultants and advisors to, the Company.
In August 1997, the Board of Directors adopted the 1997 Stock Incentive
Plan, under which 1,641,341 shares of common stock were reserved for issuance
upon exercise of stock options granted by the Company. In November 1997, an
additional 600,000 shares were reserved for issuance under the 1997 Plan.
The exercise price of incentive stock options to be granted under the
stock option plans shall not be less than 100% of the fair value of such
shares on the date of grant. The exercise price of nonqualified stock options
to be granted under the plans shall not be less than 85% of the fair value of
such shares on the date of grant. Options granted prior to April 13, 1998
(the date of the initial public offering) are generally exercisable
immediately; however, options granted subsequent to the initial public
offering are generally exercisable only as they vest. All shares granted
under the Stock Option Plans generally vest at the rate of one fourth after
one year and the remainder ratably over the remaining three years. Options
granted have a term of up to ten years.
As of December 31, 1998, 278,316 shares are available for future grant
under the stock option plans. The following table summarizes stock option
activity through December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
--------- -------------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1995 114,532 $ .02 to $ .15 $ .15
Granted 665,146 $ .15 $ .15
Exercised (516,830) $ .15 $ .15
Cancelled (28,973) $ .15 $ .15
----------
Outstanding at December 31, 1996 233,875 $ .02 to $ .15 $ .15
Granted 1,586,223 $ .38 to $ .90 $ .89
Exercised (1,381,766) $ .15 to $ .90 $ .86
Cancelled (21,616) $ .15 to $ .90 $ .53
----------
Outstanding at December 31, 1997 416,716 $ .02 to $ .90 $ .60
Granted 1,344,874 $ 3.00 to $10.00 $ 4.48
Exercised (248,479) $ .15 to $ 3.00 $ 1.98
Cancelled (406,910) $ .15 to $10.00 $ 6.23
----------
Outstanding at December 31, 1998 1,106,201 $ .02 to $ 5.00 $ 2.94
----------
----------
</TABLE>
F-11
<PAGE>
As of December 31, 1998, 1,516,712 shares issued pursuant to early exercises
of options or issuable under outstanding options were vested. The Company has
the option to repurchase, at the original issue price, the unvested shares
issued pursuant to early exercise of options in the event of termination of
employment or engagement. At December 31, 1998, 1,089,707 shares issued under
the stock option plans were subject to repurchase by the Company.
On September 25, 1998, the Compensation Committee of the Board of Directors
authorized a plan for certain option holders whereby each holder could have
exchanged all of his or her current vested and unvested options on a one-for-one
basis for new options priced at the market value as of September 25, 1998. An
aggregate of 365,463 options at an average price of $6.69 were exchanged for
options with an exercise price of $3.8125 per share. All of these replacement
options vest based on the original grant date. None of the replacement options
are exercisable until September 26, 1999, or under certain circumstances at an
earlier date.
All replacement options are included in grants and cancellations in the
above summary of stock activity.
The Company recognized an aggregate of $4,304,437 through April 13, 1998 as
deferred compensation for the excess of the fair value for financial statement
presentation purposes of the common stock issuable on exercise of such options
over the exercise price. The deferred compensation expense is being recognized
over the vesting period of the options. Compensation expense related to these
options was $2,181,363 and $610,924 for the years ended December 31, 1998 and
1997, respectively.
Following is a further breakdown of the options outstanding as of December
31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE WEIGHTED EXERCISE
RANGE OF REMAINING AVERAGE PRICE OF
EXERCISE OPTIONS LIFE IN EXERCISE OPTIONS OPTIONS
PRICES OUTSTANDING YEARS PRICE EXERCISABLE EXERCISABLE
------------- ----------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ .02 - $ .15 119,213 5.75 $ .15 119,213 $ .15
$ .38 - $ .90 156,327 8.62 $ .83 156,327 $ .83
$3.00 - $3.99 723,657 9.51 $3.65 168,811 $3.03
$4.00 - $5.00 107,004 9.95 $4.32 - $ -
$ .02 - $5.00 1,106,201 9.02 $2.94 444,351 $1.48
</TABLE>
Adjusted pro forma information regarding net loss is required by SFAS 123
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using the Black-Scholes valuation
model for option pricing with the following assumptions for 1998, 1997 and 1996:
a risk-free interest rate of 5.75%, 6.5% and 6.5%, respectively, a dividend
yield of zero; volatility factors of the expected market price of the Company's
common stock of 65%, and a weighted average expected life of the option of five
years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the vesting period. The Company's
adjusted pro forma information is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------- ------------ ----------
<S> <C> <C> <C>
Adjusted pro forma net loss $ (21,379) $ (11,383) $ (7,781)
Adjusted pro forma net loss per $ (1.63) $ (8.45) $ (8.08)
share
</TABLE>
The weighted average fair value of options granted during 1998, 1997 and
1996 was $2.68, $.24 and $.01 per share, respectively.
F-12
<PAGE>
The pro forma effect on net loss for 1998, 1997 and 1996 is not necessarily
indicative of potential pro forma effects on results for future years.
EMPLOYEE STOCK PURCHASE PLAN
In November 1997, the Board of Directors approved the Employee Stock
Purchase Plan (the "Purchase Plan") A total of 300,000 shares of common stock
have been authorized for issuance under the Purchase Plan. The Purchase Plan
permits eligible employees of the Company to purchase shares of common stock, at
semi-annual intervals, through periodic payroll deductions. Payroll deductions
may not exceed 15% of the participant's base salary subject to certain
limitations, and the purchase price will not be less than 85% of the lower of
the fair market value of the stock at either the beginning of the applicable
"offering period" or the last day of the accumulation period. Each offering
period is 24 months long, with new offering periods commencing every six months,
and an accumulation period is six months in duration. During the year ended
December 31, 1998, 26,783 shares were issued under the Purchase Plan.
SHARES RESERVED FOR FUTURE ISSUANCE
The following shares of common stock are reserved for future issuance at
December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Stock options 1,384,517
Employee stock purchase plan 273,217
Warrants 26,084
----------
1,683,818
----------
----------
</TABLE>
SHAREHOLDER RIGHTS PLAN
In November 1998, the Company's Board of Directors adopted a Stockholder
Rights plan which provides for a dividend of one Preferred Stock Purchase Right
for each share of common stock to stockholders of record on November 30, 1998.
Each Right will entitle stockholders to buy one one-thousandth of a share of
Series A Participating Preferred Stock of the Company at an exercise price of
$50.00, subject to antidilution adjustments. The Rights will become exercisable
only if a person or group becomes the beneficial owner of 15% or more of the
common stock, or commences a tender or exchange offer which would result in the
offeror beneficially owning 15% or more of common stock, which is not approved
by the Company's Board of Directors. The Board of Directors is entitled to
redeem the Rights at $0.01 per Right at any time prior to the public
announcement of the existence of a 15% holder.
7. 401(K) PLAN
The Company has a 401(k) defined contribution savings and retirement plan
(the "Plan"). The Plan is for the benefit of all qualifying employees and
permits employees voluntary contributions up to a maximum of 20% of base salary
(as defined), subject to annual limits. The Board of Directors may, at its sole
discretion, approve Company contributions. No such contributions have been made
as of December 31, 1998.
8. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES
The Company has advanced funds to certain officers in connection with
various employment agreements with an outstanding balance of approximately
$240,000 at December 31, 1998, which is included in other assets. These
agreements provide for forgiveness of the advances over four-year periods. If an
individual terminates the relationship with the Company, the unforgiven portion
of the advances and any accrued interest are due and payable upon termination.
These advances are secured by second trust deeds on the personal residence of
the respective officer. In addition, there are notes receivable from certain
officers totaling approximately $1.5 million related to stock purchase
agreements. These notes are secured by shares of the Company's common stock
owned by the individual.
F-13
<PAGE>
9. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1998 and 1997 are shown below. A valuation allowance of
$19,250,000, of which $7,971,000 relates to 1998, as of December 31, 1998 has
been recognized to offset the deferred tax assets, as realization of such assets
is uncertain.
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 14,846 $ 9,120
Research and development credits 2,350 1,146
Capitalized research expenses 1,981 1,050
Other 308 114
----------- ------------
Total deferred tax assets 19,485 11,430
Valuation allowance for deferred tax assets (19,250) (11,279)
----------- ------------
Net deferred tax assets 235 151
Deferred tax liabilities:
Depreciation (235) (151)
----------- ------------
Net deferred tax assets $ -- $ --
----------- ------------
----------- ------------
</TABLE>
At December 31, 1998, the Company has federal and California net
operating loss carryforwards of approximately $41,383,000 and $6,298,000,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California tax purposes and the fifty percent
limitation on California loss carryforwards. The federal tax loss
carryforwards will begin expiring in 2006 unless previously utilized. The
California tax loss carryforwards will continue to expire in 1999, unless
previously utilized. The Company also has federal and California research and
development tax credit carryforwards of approximately $1,706,000 and
$990,000, respectively, which will begin expiring in 2007 unless previously
utilized.
Under Sections 382 and 383 of the Internal Revenue Code, the annual use
of the Company's net operating loss and credit carryforwards may be limited
because of cumulative changes in ownership of more than 50% which occurred
during 1995 and 1997. However, the Company does not believe such limitations
will have a material impact upon the ultimate utilization of these
carryforwards.
10. SPONSORED RESEARCH AGREEMENTS
BECTON, DICKINSON AND COMPANY
In May 1997, Becton, Dickinson and Company and Nanogen entered into a
Collaborative Research and Development Agreement to develop products
utilizing Nanogen's technology to detect microbial agents causing infectious
disease and to determine their antibiotic susceptibility or resistance (the
"Prior R&D Agreement"). In connection with the Prior R&D Agreement, Nanogen
entered into a Series D Preferred Stock Purchase Agreement with Becton
Dickinson pursuant to which Becton Dickinson purchased 1,000,000 shares of
Nanogen's Series D Preferred Stock for $6.0 million. In addition, Becton
Dickinson agreed, pursuant to the stock purchase agreement, to purchase
common stock worth an aggregate of $6.0 million, at the initial public
offering price, upon the completion of the offering. This purchase was made
as part of a private placement concurrent with the offering.
As of October 1, 1997, Becton Dickinson and Nanogen entered into new
agreements which superseded the Prior R&D Agreement. Pursuant to a Master
Agreement entered into between the parties (the "Master Agreement"), Becton
Dickinson and Nanogen agreed to form The Nanogen/Becton Dickinson
Partnership, a Delaware general partnership (the "Partnership") to develop
and commercialize certain products in the field of IN VITRO nucleic
acid-based diagnostic and monitoring technologies. NanoVenture LLC, a
Delaware limited liability company wholly-owned by Nanogen ("NanoVenture")
and Becton Dickinson Venture LLC, a Delaware limited liability company
wholly-owned by Becton Dickinson ("Becton Dickinson Venture"), are the
general partners of the Partnership with (a) losses allocated in proportion
to cash funding, (b) profits shared equally, and (c) distributions allocated
60% to Becton Dickinson Venture and 40% to NanoVenture until partner
contributions are equalized and thereafter distributions shared equally.
Pursuant to a General Partnership Agreement between NanoVenture and Becton
Dickinson Venture, Becton Dickinson and Nanogen have contributed to the
Partnership their respective rights under the Prior R&D Agreement, certain
Intellectual Property Licenses and, as of December 31, 1998, cash in the
aggregate of approximately $4.6 million, of which approximately $4.0 million
was paid by Becton Dickinson and
F-14
<PAGE>
approximately $600,000 was paid by Nanogen. The amounts paid by Nanogen have
been recorded as Nanogen's share of the joint venture's loss for the year
ended December 31, 1998. The General Partnership Agreement also contemplates
additional research funding aggregating approximately $17.7 million, of which
$5.2 million is to be paid by Nanogen, during the period from January 1, 1999
through April 1, 2001, conditioned upon the achievement of certain milestones
to be mutually agreed upon by the partners. There can be no assurances that
the parties will agree to such milestones, and if agreed upon, there can be
no assurances that these milestones will be achieved in a timely fashion, if
at all. In addition to the above-described payments, Becton Dickinson and
Nanogen have agreed to contribute certain additional amounts to fund
marketing and manufacturing startup.
Revenues are recognized under the agreements as expenses are incurred,
and totaled approximately $2.5 million and $1.2 million for the years ended
December 31, 1998 and 1997, respectively.
HOECHST AG
In December 1997, the Company entered into an agreement with Aventis
Research and Technologies, an affiliate of Hoechst AG ("Aventis"), for an
exclusive research and development collaboration and the establishment of a
joint venture relating to new tools in molecular recognition and Nanogen's
technology. Aventis also purchased common stock worth an aggregate of $10.0
million, at the offering price, in the private placement in April 1998.
Revenue is recognized under the agreement as expenses are incurred, and
totaled approximately $2.1 million for the year ended December 31, 1998.
Funding received in advance of incurred expenses is recorded as deferred
revenue until the expenses are incurred, and totaled $2.9 million at December
31, 1998.
In December 1998, the Company entered into a Collaborative Research and
Development Agreement which, among other things, extended the guaranteed term
of the research program from two to three years. As a result of the signing
of this agreement, the Company will be issuing to Aventis a warrant to
purchase 120,238 shares of common stock exercisable through March 2004 at an
exercise price of $8.75 per share.
ELAN CORPORATION, PLC
In December 1997, the Company entered into an agreement with Elan
Corporation, plc ("Elan") for a non-exclusive research and development
agreement for the development of genomics and gene expression research tools.
Pursuant to the agreement, Elan purchased Company common stock worth an
aggregate of $5.0 million, at the initial public offering price, in the
private placement in April 1998.
Revenue is recognized under the agreement as expenses are incurred, and
totaled approximately $929,000 for the year ended December 31, 1998.
11. CONTRACT AND GRANT REVENUE
In September 1998, the Company was awarded a contract by the Space and
Naval Warfare Systems Center San Diego ("SSC San Diego") for the Defense
Advance Research Projects Agency in an amount that could total in excess of
$7 million over the next five years. The contract award which was made by SSC
San Diego for the Defense Advance Research Projects Agency includes over $2
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.
In July 1998, the Company received a grant of $500,000 from the National
Institute of Justice. This grant 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.
F-15
<PAGE>
EXHIBIT 3(i)1
RESTATED CERTIFICATE OF INCORPORATION
OF
NANOGEN, INC.
NANOGEN, INC., a corporation organized and existing under the laws
of the State of Delaware, hereby certifies as follows:
FIRST: The name of this corporation is Nanogen, Inc.
SECOND: The original Certificate of Incorporation of the
corporation was filed with the Secretary of State of the State of
Delaware on September 10, 1997 and the original name of the corporation
was Nanogen (Delaware), Inc. A Restated Certificate of Incorporation of
the corporation was filed with the Secretary of State of the State of
Delaware on November 7, 1997. A Certificate of Merger whereby Nanogen,
Inc., a California corporation, was merged with and into this
corporation and this corporation's name was changed to Nanogen, Inc.
was filed with the Secretary of State of the State of Delaware on
November 10, 1997. Certificate of Amendments were filed with the
Secretary of State of the State of Delaware on January 28, 1998 and
April 6, 1998.
THIRD: The Restated Certificate of Incorporation of said
corporation shall be amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is NANOGEN, INC..
ARTICLE II
The registered office of the corporation within the State of Delaware
is located at 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE III
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
<PAGE>
ARTICLE IV
A. AUTHORIZED STOCK. The total number of shares of all classes of
capital stock which the corporation shall have authority to issue is
fifty-five million (55,000,000), of which fifty million (50,000,000) shares
of the par value of one tenth of one cent ($.001) each shall be Common Stock
(the "Common Stock") and five million (5,000,000) shares of the par value of
one tenth of one cent ($.001) each shall be Preferred Stock (the "Preferred
Stock"). The number of authorized shares of Common Stock or Preferred Stock
may be increased or decreased (but not below the number of shares thereof
then outstanding) by the affirmative vote of the holders of a majority of the
then outstanding shares of Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such
Preferred Stock holders is required pursuant to the provisions established by
the Board of Directors of this corporation (the "Board of Directors") in the
resolution or resolutions providing for the issue of such Preferred Stock,
and if such holders of such Preferred Stock are so entitled to vote thereon,
then, except as may otherwise be set forth in this Restated Certificate of
Incorporation, the only stockholder approval required shall be the
affirmative vote of a majority of the combined voting power of the Common
Stock and the Preferred Stock so entitled to vote.
B. PREFERRED STOCK. The Preferred Stock may be issued in any
number of series, as determined by the Board of Directors. The Board of
Directors may by resolution fix the designation and number of shares of any
such series, and may determine, alter, or revoke the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series. The Board of Directors may thereafter in the same manner, within the
limits and restrictions stated in any resolution or resolutions of the Board
of Directors originally fixing the number of shares constituting any series,
increase or decrease the number of shares of any such series (but not below
the number of shares of that series then outstanding). In case the number of
shares of any series shall be decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
C. COMMON STOCK.
1. RELATIVE RIGHTS OF PREFERRED STOCK AND COMMON STOCK. All
preferences, voting powers, relative, participating, optional or other
special rights and privileges, and qualifications, limitations or
restrictions of the Common Stock are expressly made subject and
subordinate to those that may be fixed with respect to any shares of
the Preferred Stock.
2. VOTING RIGHTS. Except as otherwise required by law or this
Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held by such
holder of record on the books of the corporation for the election of
directors and on all matters submitted to a vote of stockholders of the
corporation.
3. DIVIDENDS. Subject to the preferential rights of the
Preferred Stock, if any, the holders of shares of Common Stock shall be
entitled to receive, when and if declared by the Board of Directors,
out of the assets of the corporation which are by law available
therefor, dividends payable either in cash, in property or in shares
-2-
<PAGE>
of capital stock.
4. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any
dissolution, liquidation or winding up of the affairs of the
corporation, after distribution in full of the preferential amounts, if
any, to be distributed to the holders of shares of the Preferred Stock,
holders of Common Stock shall be entitled, unless otherwise provided by
law or this Restated Certificate of Incorporation, to receive all of
the remaining assets of the corporation of whatever kind available for
distribution to stockholders ratably in proportion to the number of
shares of Common Stock held by them respectively.
ARTICLE V
The corporation is to have perpetual existence.
ARTICLE VI
A. CLASSIFIED BOARD. The Board of Directors shall be divided into
three classes, designated Class I, Class II and Class III, as nearly equal in
number as possible, and the term of office of directors of one class shall
expire at each annual meeting of stockholders, and in all cases as to each
director when such director's successor shall be elected and shall qualify or
upon such director's earlier resignation, removal from office, death or
incapacity. Additional directorships resulting from an increase in number of
directors shall be apportioned among the classes as equally as possible. At
each annual meeting of stockholders the number of directors equal to the
number of directors of the class whose term expires at the time of such
meeting (or, if less, the number of directors properly nominated and
qualified for election) shall be elected to hold office until the third
succeeding annual meeting of stockholders after their election.
B. CHANGES. The Board of Directors of this corporation, by
amendment to the corporation's bylaws, is expressly authorized to change the
number of directors in any or all of the classes of directors without the
consent of the stockholders.
C. ELECTIONS. Elections of directors need not be by written ballot
unless the Bylaws of the corporation shall so provide.
-3-
<PAGE>
ARTICLE VII
A. POWER OF STOCKHOLDER TO ACT BY WRITTEN CONSENT. No action
required or permitted to be taken at any annual or special meeting of the
stockholders may be taken without a meeting and the power of stockholders to
consent in writing, without a meeting, to the taking of any action is
specifically denied.
B. SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of the
stockholders of the corporation may be called for any purpose or purposes,
unless otherwise prescribed by statute or by this Restated Certificate of
Incorporation, only at the request of the Chairman of the Board of Directors,
the Chief Executive Officer or President of the corporation or by a
resolution duly adopted by the affirmative vote of a majority of the Board of
Directors.
ARTICLE VIII
The Board of Directors is expressly empowered to adopt, amend or
repeal the Bylaws of the corporation; provided, however, that any adoption,
amendment or repeal of the Bylaws of the corporation by the Board of
Directors shall require the approval of at least sixty-six and two-thirds
percent (66 2/3%) of the total number of authorized directors (whether or not
there exist any vacancies in previously authorized directorships at the time
any resolution providing for adoption, amendment or repeal is presented to
the Board of Directors). The stockholders shall also have the power to adopt,
amend or repeal the Bylaws of the corporation, provided, however, that in
addition to any vote of the holders of any class or series of stock of the
corporation required by law or by this Restated Certificate of Incorporation,
the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66 2/3%) of the voting power of all of the then outstanding shares
of the stock of the corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required for such
adoption, amendment or repeal by the stockholders of any provisions of the
Bylaws of the corporation.
ARTICLE IX
The books of the corporation may be kept at such place within or
without the State of Delaware as the bylaws of the corporation may provide or
as may be designated from time to time by the board of directors of the
corporation.
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ARTICLE X
Whenever a compromise or arrangement is proposed between the
corporation and its creditors or any class of them and/or between the
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a
summary way of the corporation or of any creditor or stockholder thereof or
on the application of any receivers appointed for the corporation under the
provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for the corporation under the provisions of section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or the stockholders or class of stockholders of the corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority, in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of
the corporation, as the case may be, agree to any compromise or arrangement
and to any reorganization of this corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or
on all the stockholders or class of stockholders, of the corporation, as the
case may be, and also on the corporation.
ARTICLE XI
A. LIMITATION ON LIABILITY. A director of the corporation shall
not be personally liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (1)
for any breach of the director's duty of loyalty to the corporation or its
stockholders; (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (3) under Section 174
of the Delaware General Corporation Law; or (4) for any transaction from
which the director derived an improper personal benefit.
If the Delaware General Corporation Law hereafter is amended to
further eliminate or limit the liability of directors, then the liability of
a director of the corporation, in addition to the limitation on personal
liability provided herein, shall be limited to the fullest extent permitted
by the amended Delaware General Corporation Law.
B. INDEMNIFICATION. Each person who is or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director or
officer of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits
the corporation to provide broader indemnification rights than said law
permitted the corporation to provide prior to such amendment), against all
expense, liability and loss (including attorneys' fees,
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judgments, fines, ERISA excise taxes or penalties and amounts paid or to be
paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure
to the benefit of his or her heirs, executors and administrators; provided,
however, that, except as provided in the second paragraph hereof, the
corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only
if such proceeding (or part thereof) was authorized by the Board of Directors
of the corporation. The right to indemnification conferred in this section
shall be a contract right and shall include the right to be paid by the
corporation for any expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the Delaware
General Corporation Law requires, the payment of such expenses incurred by a
director or officer in his or her capacity as a director or officer (and not
in any other capacity in which service was or is rendered by such person
while a director or officer, including, without limitation, service to an
employee benefit plan) in advance of the final disposition of a proceeding,
shall be made only upon delivery to the corporation of an undertaking, by or
on behalf of such director or officer, to repay all amounts so advanced if it
shall ultimately be determined that such director or officer is not entitled
to be indemnified under this section or otherwise. The corporation may, by
action of its Board of Directors, provide indemnification to employees and
agents of the corporation with the same scope and effect as the foregoing
indemnification of directors and officers.
If a claim under the first paragraph of this section is not paid in
full by the corporation within thirty (30) days after a written claim has
been received by the corporation, the claimant may at any time thereafter
bring suit against the corporation to recover the unpaid amount of the claim
and, if successful in whole or in part, the claimant shall be entitled to be
paid also the expense of prosecuting such claim. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition
where the required undertaking, if any is required, has been tendered to the
corporation) that the claimant has not met the standards of conduct which
make it permissible under the Delaware General Corporation Law for the
corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the corporation. Neither the failure of
the corporation (including its Board of Directors, independent legal counsel,
or its stockholders) to have made a determination prior to the commencement
of such action that indemnification of the claimant is proper in the
circumstances because he or she has met the applicable standard of conduct
set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
section shall not be exclusive of any other right which any person may have
or hereafter acquire under any statute, provision of the Restated Certificate
of Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
C. INSURANCE. The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of
the corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not
the
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corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
D. REPEAL AND MODIFICATION. Any repeal or modification of the
foregoing provisions of this Article XI shall not adversely affect any right
or protection of any director, officer, employee or agent of the corporation
existing at the time of such repeal or modification.
ARTICLE XII
The corporation reserves the right to amend or repeal any provision
contained in this Restated Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon a stockholder
herein are granted subject to this reservation.
ARTICLE XIII
Notwithstanding any other provision of this Restated Certificate of
Incorporation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all of the then
outstanding shares of the stock of the corporation entitled to vote generally
in the election of directors, voting together as a single class, shall be
required to amend in any respect or repeal this Article XIII, or Articles VI,
VII, VIII and XI.
* * * * *
Four: This Restated Certificate of Incorporation was duly
adopted by the Board of Directors of this corporation.
Five: This Restated Certificate of Incorporation was duly
adopted by written consent of the stockholders of the corporation in
accordance with Sections 228, 242 and 245 of the General Corporation
Law of the State of Delaware and written notice of such action has been
given as provided in Section 228.
IN WITNESS WHEREOF, Nanogen, Inc. has caused this certificate to be
signed by the undersigned officer, thereunto duly authorized, this 17th day
of April 1998.
By: /s/ Harry J. Leonhardt, Esq
----------------------------------
Harry J. Leonhardt, Esq.
Vice President, General Counsel
and Secretary
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EXHIBIT 3.(i)2
CERTIFICATE OF DESIGNATION
OF SERIES A PARTICIPATING PREFERRED STOCK
OF
NANOGEN, INC.
We, Howard C. Birndorf, the Chief Executive Officer, and Harry J.
Leonhardt, the Secretary, of Nanogen, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware, DO
HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors
by the Certificate of Incorporation of the Corporation, the said Board of
Directors on November 17, 1998, adopted the following resolution creating a
series of 100,000 shares of Preferred Stock designated as Series A
Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of its
Certificate of Incorporation, a series of Preferred Stock of the Corporation
be and it hereby is created, and that the designation and amount thereof and
the powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Participating Preferred Stock," $0.001 par value per
share, and the number of shares constituting such series shall be 100,000.
Such number of shares may be increased or decreased by resolution of the
Board of Directors; provided, that no decrease shall reduce the number of
shares of Series A Participating Preferred Stock to a number less than that
of the shares then outstanding plus the number of shares issuable upon
exercise of outstanding rights, options or warrants or upon conversion of
outstanding securities issued by the Corporation.
2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Participating Preferred Stock with respect to dividends,
the holders of shares of Series A Participating Preferred Stock in preference
to the holders of shares of Common Stock, par value $0.001 per share (the
"Common Stock"), of the Corporation and any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of Directors out
of funds legally available for the purpose, quarterly dividends payable in
cash on the first day of March, June, September and December in each year
(each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share or fraction of a share of Series A Participating
Preferred Stock in an amount per share (rounded to the nearest cent) equal to
the greater of (a) $100.00, or (b) subject to the provision for adjustment
hereinafter set forth, 1,000 times the aggregate per share amount of all cash
dividends, and 1,000 times the aggregate per share amount (payable in kind)
of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares
of Common Stock (by reclassification or otherwise), declared on the Common
Stock, since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first
<PAGE>
Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Participating Preferred Stock. In the event
the Corporation shall at any time after the close of business on November 17,
1998 (the "Rights Declaration Date") (i) declare any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common
Stock, or (iii) combine the outstanding Common Stock into a smaller number of
shares, by reclassification or otherwise, then in each such case the amount
to which holders of shares of Series A Participating Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in
the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $100 per share
on the Series A Participating Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Participating Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Participating Preferred Stock unless the date of issue of such shares is
prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of
issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of
holders of shares of Series A Participating Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date
in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Participating Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated
pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Participating Preferred Stock
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be no more than 30 days prior to the date fixed for
the payment thereof.
3. VOTING RIGHTS. The holders of shares of Series A Participating
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Participating Preferred Stock shall
entitle the holder thereof to 1,000 votes on all matters submitted to a
vote of the stockholders of the Corporation. In the event the
Corporation shall at any time after the Rights Declaration Date (i)
declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock into a greater number of
shares, or (iii) combine the outstanding Common Stock into a smaller
number of shares, by reclassification or otherwise, then in each such
case the number of votes per share to which holders of shares of Series
A Participating Preferred Stock were entitled immediately prior to such
event shall be adjusted by multiplying such number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number
of shares of Common Stock outstanding immediately prior to such event.
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(B) Except as otherwise provided herein or by law, the holders
of shares of Series A Participating Preferred Stock and the holders of
shares of Common Stock and any other capital stock of the Corporation
having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Participating
Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (herein called a "default period") which shall
extend until such time when all accrued and unpaid dividends for all
previous quarterly dividend periods and for the current quarterly
dividend period on all shares of Series A Participating Preferred Stock
then outstanding shall have been declared and paid or set apart for
payment. During each default period, all holders of Preferred Stock
(including holders of the Series A Participating Preferred Stock) with
dividends in arrears in an amount equal to six quarterly dividends
thereon, voting as a class, irrespective of series, shall have the
right to elect two directors.
(ii) During any default period, such voting right of the
holders of Series A Participating Preferred Stock may be exercised
initially at a special meeting called pursuant to subparagraph (iii) of
this Section 3(C) or at any annual meeting of stockholders, and
thereafter at annual meetings of stockholders, provided that neither
such voting right nor the right of the holders of any other series of
Preferred Stock, if any, to increase, in certain cases, the authorized
number of directors shall be exercised unless the holders of ten
percent (10%) in number of shares of Preferred Stock outstanding shall
be present in person or by proxy. The absence of a quorum of the
holders of Common Stock shall not affect the exercise by the holders of
Preferred Stock of such voting right. At any meeting at which the
holders of Preferred Stock shall exercise such voting right initially
during an existing default period, they shall have the right, voting as
a class, to elect directors to fill such vacancies, if any, in the
Board of Directors as may then exist up to two directors or, if such
right is exercised at an annual meeting, to elect two directors. If the
number which may be so elected at any special meeting does not amount
to the required number, the holders of the Preferred Stock shall have
the right to make such increase in the number of directors as shall be
necessary to permit the election by them of the required number. After
the holders of the Preferred Stock shall have exercised their right to
elect directors in any default period and during the continuance of
such period, the number of directors shall not be increased or
decreased except by vote of the holders of Preferred Stock as herein
provided or pursuant to the rights of any equity securities ranking
senior to or pari passu with the Series A Participating Preferred
Stock.
(iii) Unless the holders of Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
directors, the Board of Directors may order, or any stockholder or
stockholders owning in the aggregate not less than ten percent (10%) of
the total number of shares of Preferred Stock outstanding, irrespective
of series, may request, the calling of a special meeting of the holders
of Preferred Stock, which meeting shall thereupon be called by the
President, a Vice President or the Secretary of the Corporation. Notice
of such meeting and of any annual meeting at which holders of Preferred
Stock are entitled to vote pursuant to this paragraph (C)(iii) shall be
given to each holder of record of Preferred Stock by mailing a copy of
such notice to such holder at such holder's last address as the same
appears on the books of the Corporation. Such meeting shall be called
for a time not earlier than ten days and not later than 60 days after
such order or request or in default of the calling of such
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meeting within 60 days after such order or request, such meeting may
be called on similar notice by any stockholder or stockholders owning
in the aggregate not less than ten percent (10%) of the total number
of shares of Preferred Stock outstanding. Notwithstanding the
provisions of this paragraph (C)(iii), no such special meeting shall
be called during the period within 60 days immediately preceding the
date fixed for the next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and
other classes of stock of the Corporation, if applicable, shall
continue to be entitled to elect the whole number of directors until
the holders of Preferred Stock shall have exercised their right to
elect two directors voting as a class, after the exercise of which
right (x) the directors so elected by the holders of Preferred Stock
shall continue in office until their successors shall have been elected
by such holders or until the expiration of the default period, and (y)
any vacancy in the Board of Directors may (except as provided in
paragraph (C)(ii) of this Section 3) be filled by vote of a majority of
the remaining directors theretofore elected by the holders of the class
of stock which elected the director whose office shall have become
vacant. References in this paragraph (C) to directors elected by the
holders of a particular class of stock shall include directors elected
by such directors to fill vacancies as provided in clause (y) of the
foregoing sentence.
(v) Immediately upon the expiration of a default period, (x)
the right of the holders of Preferred Stock as a class to elect
directors shall cease, (y) the term of any directors elected by the
holders of Preferred Stock as a class shall terminate, and (z) the
number of directors shall be such number as may be provided for in, or
pursuant to, the Certificate of Incorporation or Bylaws irrespective of
any increase made pursuant to the provisions of paragraph (C)(ii) of
this Section 3 (such number being subject, however, to change
thereafter in any manner provided by law or in the Certificate of
Incorporation or Bylaws). Any vacancies in the Board of Directors
effected by the provisions of clauses (y) and (z) in the preceding
sentence may be filled by a majority of the remaining directors, even
though less than a quorum.
(D) Except as set forth herein, holders of Series A
Participating Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Participating Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Participating
Preferred Stock outstanding shall have been paid in full, the Corporation shall
not
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Participating
Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Participating Preferred Stock except dividends paid ratably on
the Series A Participating Preferred Stock and all such parity stock on
which
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dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Participating Preferred Stock provided that the Corporation
may at any time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Participating Preferred
Stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Series A Participating Preferred Stock or any shares of stock
ranking on a parity with the Series A Participating Preferred Stock
except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. REACQUIRED SHARES. Any shares of Series A Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and cancelled promptly after the
acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of Preferred Stock and may be reissued as part
of a new series of Preferred Stock to be created by resolution or resolutions
of the Board of Directors, subject to the conditions and restrictions on
issuance set forth herein.
6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders
of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Participating
Preferred Stock unless, prior thereto, the holders of shares of Series A
Participating Preferred Stock shall have received per share, the greater of
1,000 times $1.00 or 1,000 times the payment made per share of Common Stock,
plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment (the "Series A
Liquidation Preference"). Following the payment of the full amount of the
Series A Liquidation Preference, no additional distributions shall be made to
the holders of shares of Series A Participating Preferred Stock unless, prior
thereto, the holders of shares of Common Stock shall have received an amount
per share (the "Common Adjustment") equal to the quotient obtained by
dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as
appropriately adjusted as set forth in subparagraph (C) below to reflect such
events as stock splits, stock dividends and recapitalization with respect to
the Common Stock) (such number in clause (ii), the "Adjustment Number").
Following the payment of the full amount of the Series A Liquidation
Preference and the Common Adjustment in respect of all outstanding shares of
Series A Participating Preferred Stock and Common Stock, respectively,
holders of Series A Participating Preferred Stock and holders of shares of
Common Stock shall receive their ratable and proportionate share of the
remaining assets to be distributed in the ratio of the Adjustment Number to 1
with respect to such Preferred Stock and Common
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Stock, on a per share basis, respectively.
(B) In the event there are not sufficient assets available to permit
payment in full of the Series A Liquidation Preference and the liquidation
preferences of all other series of Preferred Stock, if any, which rank on a
parity with the Series A Participating Preferred Stock then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences. In the event there
are not sufficient assets available to permit payment in full of the Common
Adjustment, then such remaining assets shall be distributed ratably to the
holders of Common Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, by
reclassification or otherwise, then in each such case the Adjustment Number
in effect immediately prior to such event shall be adjusted by multiplying
such Adjustment Number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares
of Series A Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 1,000 times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as
the case may be, into which or for which each share of Common Stock is
changed or exchanged. In the event the Corporation shall at any time after
the Rights Declaration Date (i) declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount set forth in the preceding sentence with
respect to the exchange or change of shares of Series A Participating
Preferred Stock shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that are outstanding immediately prior to such event.
8. REDEMPTION. The shares of Series A Participating Preferred
Stock shall not be redeemable.
9. RANKING. The Series A Participating Preferred Stock shall rank
junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
10. AMENDMENT. The Certificate of Incorporation and the Bylaws of
the Corporation shall not be further amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Participating Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of at least 66-2/3% of the outstanding
shares of Series A Participating Preferred Stock voting separately as a class.
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11. FRACTIONAL SHARES. Series A Participating Preferred Stock may
be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of
all other rights of holders of Series A Participating Preferred Stock.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate
and do affirm the foregoing as true under the penalties of perjury this 17th
day of November, 1998.
/s/ Howard C. Birndorf
------------------------------------
Howard C. Birndorf,
Chief Executive Officer
Attest:
/s/ Harry J. Leonhardt
------------------------------------
Harry J. Leonhardt, Secretary
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EXHIBIT 10.34
[CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS AGREEMENT HAVE
BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION]
COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT
By and Between
HOECHST RESEARCH & TECHNOLOGY DEUTSCHLAND GMBH & CO KG
and
NANOGEN, INC.
December 3, 1998
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TABLE OF CONTENTS
<TABLE>
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Page
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1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. Research Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3. Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
4. Reports and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5. Confidentiality and Non-disclosure. . . . . . . . . . . . . . . . . . . . . . 10
6. Intellectual Property Licenses. . . . . . . . . . . . . . . . . . . . . . . . 10
7. Intellectual Property and Patent Rights . . . . . . . . . . . . . . . . . . . 11
8. Term and Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
9. Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . . . 14
10. Disclaimers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
12. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
13. Dispute Resolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
14. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
EXHIBITS
Exhibit A HR&T Patent Applications
Exhibit B Nanogen Patent Applications
Exhibit C Annual Budget
Exhibit D Program Inventions
Exhibit E Research Program
Exhibit F CPR Procedures
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COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT
THIS COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT is dated as of
December 3, 1998 by and between HOECHST RESEARCH & TECHNOLOGY DEUTSCHLAND
GMBH & CO KG, a German company, having a place of business at D-65926
Frankfurt am Main, Germany (hereinafter, "HR&T"), and NANOGEN, INC., a
Delaware corporation, having its principal office and place of business at
10398 Pacific Center Court, San Diego, California 92121 (hereinafter,
"Nanogen").
W I T N E S S E T H :
WHEREAS, Nanogen has developed certain technology related to
electronically addressable microchip oligonucleotide arrays ("Arrays"),
including Nanogen's Automated Programmable Electronic Matrix ("APEX")
technology; and
WHEREAS, HR&T has developed certain technology related to combinatorial
and/or modular nanotechnology, including its Exponential Library by
Association of Sublibraries ("ELIAS") and its pRNA (and related
oligonucleotide analog) technology; and
WHEREAS, HR&T and Nanogen have previously entered into a Letter
Agreement dated December 4, 1997 (the "Letter Agreement"); and
WHEREAS, in accordance with the terms of the Letter Agreement (including
the paragraphs under the headings "Purpose of Collaboration" and "Agreement
Field"), HR&T and Nanogen wish to perform certain research and development
activities as contemplated therein.
NOW THEREFORE, in consideration of the mutual covenants and undertakings
contained herein, the parties hereby agree as follows:
1. DEFINITIONS. As used in this Agreement:
1.1 "Agreement" shall mean this Agreement and any exhibits,
appendices, attachments or addenda hereto, and any renewals or extensions of
this Agreement.
1.2 "HR&T Intellectual Property" shall mean and include all
patentable and unpatentable inventions, ideas, discoveries, improvements,
design rights, semiconductor mask works, works of authorship, trade secrets,
know-how and any equivalents thereof which are in existence as of the
Effective Date or thereafter, as are necessary to make, have made, use or
sell a Product and are owned by HR&T, including, but not limited to, HR&T's
ELIAS and pRNA technologies disclosed in the HR&T patent applications set
forth in Exhibit A hereto (amended with each new HR&T patent application
necessary to make, have made, use or sell a Product).
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1.3 "HR&T Patent Rights" shall mean all patents and patent
applications owned by HR&T which are in existence as of the Effective Date or
thereafter, including the patent applications set forth in Exhibit A hereto
(amended with each new HR&T patent application necessary to make, have made,
use or sell a Product), and which contain a claim necessary to make, have
made, use or sell a Product, including all divisionals, continuations,
continuations-in-part, re-examinations, reissues, and all foreign equivalents
of any of the foregoing in whole or in part.
1.4 "HR&T Program Inventions" shall mean all Program Inventions made
or conceived by employees or others acting solely on behalf of HR&T;
PROVIDED, however, that HR&T Program Inventions shall not include Program
Inventions which utilize both APEX and ELIAS and/or pRNA technology.
1.5 "Effective Date" shall mean January 1, 1998.
1.6 "Executive Committee" shall mean a committee which shall (i) be
responsible for overseeing the Research Management Committee, (ii) set
strategic goals under this Agreement and the Letter Agreement, (iii) approve
annual budgets for the Research Program (the annual budget for the first year
and a proposed annual budget for the second year of the Research Program are
set forth in Exhibit C hereto), (iv) set research milestones and (v) decide
when milestones have been completed. The Executive Committee shall consist
of three (3) members appointed by Nanogen and three (3) members appointed by
HR&T. All decisions of the Executive Committee must be by unanimous consent
of all members of the Executive Committee.
1.7 "Joint Program Inventions" shall mean (i) all Program Inventions
made or conceived by employees or others acting on behalf of HR&T jointly
with employees or others acting on behalf of Nanogen and (ii) all Program
Inventions which utilize both APEX and ELIAS and/or pRNA technology.
1.8 "Nanogen Intellectual Property" shall mean and include all
patentable and unpatentable inventions, ideas, discoveries, improvements,
design rights, semiconductor mask works, works of authorship, trade secrets,
know-how and any equivalents thereof which are in existence as of the
Effective Date or thereafter, are necessary to make, have made, use or sell a
Product and are owned by Nanogen, including, but not limited to, Nanogen's
APEX technology disclosed in the Nanogen patents and patent applications set
forth in Exhibit B hereto (amended with each new patent application necessary
to make, have made, use or sell a Product).
1.9 "Nanogen Patent Rights" shall mean all patents and patent
applications owned by Nanogen which are in existence as of the Effective Date
or thereafter, including the patents and patent applications set forth in
Exhibit B hereto (amended with each new patent application necessary to make,
have made, use or sell a Product), and which contain a claim necessary to
make, have made, use or sell a Product, including all divisionals,
continuations, continuations-in-part, re-examinations, reissues, and all
foreign equivalents of any of the foregoing in whole or in part.
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1.10 "Nanogen Program Inventions" shall mean all Program Inventions
made or conceived by employees or others acting solely on behalf of Nanogen;
PROVIDED, however, that Nanogen Program Inventions shall not include Program
Inventions which utilize both APEX and ELIAS and/or pRNA technology.
1.11 "Primary Filing Countries" shall mean the United States, Canada,
European Community Countries and Japan.
1.12 "Products" shall mean products or applications utilizing jointly
developed technology and incorporating both Nanogen's APEX technology as
disclosed in Exhibit B hereto and HR&T's ELIAS and/or pRNA technology as
disclosed in Exhibit A hereto.
1.13 "Program Inventions" shall mean and include all patentable and
unpatentable inventions, ideas, discoveries, improvements, design rights,
semiconductor mask works, works of authorship, trade secrets, know-how and
any equivalents thereof, and any patent applications or patents based
thereon, made or conceived during and as a result of the Research Program,
all of which shall be identified in Exhibit D to this Agreement, which
Exhibit shall be amended from time to time as warranted.
1.14(a) "Reimbursable Costs" shall mean all direct and indirect costs
incurred by Nanogen in performing its obligations under this Agreement, which
may include without limitation, as applicable:
(i) salaries and wages,
(ii) payroll taxes,
(iii) contract labor,
(iv) fringe benefits,
(v) expenses incurred in occupying facilities (including
leasehold improvements) and equipment-related expenses, excluding
depreciation and amortization expenses,
(vi) recruitment and relocation,
(vii) communications expense,
(viii) supplies,
(ix) development and prototype materials,
(x) freight and transportation,
(xi) training and education,
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(xii) travel expenses,
(xiii) data processing costs,
(xiv) patent, trademark and license fees and filing,
prosecution and maintenance expenses for Nanogen Intellectual Property
as set forth in Exhibit B,
(xv) insurance,
(xvi) professional services,
(xvii) depreciation and amortization of facilities (including
leasehold improvements) and equipment,
(xviii) a financing charge for capital acquisitions made by
Nanogen for use in performing work under this Agreement,
(xix) outside purchased services,
(xx) sales and use taxes (including such taxes applicable to
the acquisition, use, transfer or deemed transfer of property),
(xxi) periodic lease and rental payments under capital or
financing leases,
(xxii) costs of applying for regulatory approvals on Products
approved by the Executive Committee, and fees payable to governmental
agencies, including the United States Food and Drug Administration
(the "FDA") and comparable foreign regulatory authorities, including
expenses resulting from generation of chemical, toxicological,
microbiological and pharmacological data and techniques, clinical data
and product formulations and specifications, and
(xxiii) periodic and special reports, including reports to
the Research Management Committee.
(b) In determining Reimbursable Costs, Nanogen will employ the
following accounting policies:
(i) General use capital equipment, facilities and leasehold
improvements will be assigned an estimated economic useful life and
salvage value, if any, and depreciation and amortization will be
computed using the straight-line method. Depreciation and
amortization will be allocated to Reimbursable Costs under this
Agreement directly or through overhead rates applied to direct head
count.
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(ii) Such capital equipment purchased pursuant to agreement
between both parties for use in connection with this Agreement will be
charged directly against the budget in the quarter the expense was
incurred.
(iii) Total facilities expenses of Nanogen, excluding
leasehold improvement amortization allocated to specific functional
areas and net of any sublease revenues, will be allocated to
Reimbursable Costs under this Agreement based on the ratio of direct
personnel engaged in work under this Agreement to the total Nanogen
head count.
(iv) General and administrative expenses of Nanogen will be
allocated to this Agreement directly or based on the ratio of total
Reimbursable Costs to total operating expenses of Nanogen, excluding
(in both instances) general and administrative expenses subject to
such allocation, as agreed between the Controllers of both parties.
(v) All other indirect expenses not covered in Paragraphs (i)
through (iv) of this Paragraph 1.14(b) which are in support of the
Research Program will be allocated to Reimbursable Costs under this
Agreement through overhead rates applied to Nanogen direct head count,
as agreed between the Controllers of both parties.
(vi) Notwithstanding the foregoing, for purposes of this
Agreement, Reimbursable Costs shall not include direct and indirect
costs for start-up of commercial manufacturing, installation of
commercial production lines and commercial product manufacturing
operations. These costs shall be addressed in connection with the
contemplated joint venture agreement between the parties.
(c) The term "capital acquisition" as used herein shall mean that
portion of capital equipment, facilities, leasehold improvements or other
property, whenever acquired by Nanogen, which are capitalized on Nanogen's
accounting records and which are either: (i) purchased directly by Nanogen;
(ii) financed by Nanogen under a conditional sale contract; (iii) financed by
Nanogen through a secured loan; or (iv) assets constructed in-house by
Nanogen. Assets acquired under capital or financing leases will not be
considered capital acquisitions for purposes of this Paragraph.
(d) With respect to capital acquisitions financed by Nanogen with
specific borrowing, the financing charge referred to above will be in the
amount and at the time of the actual financing costs incurred by Nanogen.
With respect to capital acquisitions not financed by Nanogen with specific
borrowing, the financing charge will be based on the prime lending rate in
effect from time to time at Citibank N.A., New York, New York, plus two (2)
percentage points, to the extent permitted by applicable law, applied to
Nanogen's net book value. "Net book value" is defined as the gross capital
acquisition value excluding capital acquisitions financed by Nanogen with
specific borrowing, less related accumulated depreciation and amortization.
The financing charge for each billing period will be prorated
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to the extent depreciation or amortization of the capital acquisitions has
been allocated to work other than work under this Agreement during such
period. The financing charge will be calculated monthly based on the net
book value at the end of the preceding fiscal month.
1.15 "Research Management Committee" shall mean a committee which
shall be responsible for preparing the Research Program and supervising,
managing and monitoring the progress of the Research Program, for conducting
marketing studies and for facilitating the open exchange of information
between the parties. The Research Management Committee shall consist of two
(2) employees of HR&T and two (2) employees of Nanogen, at least one of whom
from each company shall be at the research director level (or equivalent) or
higher. Decisions that are not taken unanimously by the Research Management
Committee are to be referred to the Executive Committee for resolution.
1.16 "Research Program" shall mean the cumulative endeavors of the
parties to produce Products in accordance with the specifications,
timetables, milestones, reports and deliverables, as set forth in Exhibit E
hereto, as it may be amended from time to time. The Research Program shall
be divided into two phases, the "Research Phase", which shall mean all
research activities up to and including the development of a prototype and
the "Product Development Phase, which shall mean all post-prototype
development activities relating to the development of Products, for
commercialization."
2. RESEARCH PROGRAM.
2.1 Each of HR&T and Nanogen shall use reasonable efforts to perform
their respective activities in accordance with the Research Program. Subject
to the terms and conditions of this Agreement, HR&T and Nanogen are free to
independently develop, market and sell any products other than Products.
2.2 Each of HR&T and Nanogen shall promptly notify the other party,
in writing, through the Research Management Committee, of the existence of
any new Program Inventions.
2.3 The Research Management Committee shall meet from time to time,
but at least once every three (3) months during the term of this Agreement,
alternating between the headquarters of HR&T and Nanogen or at a mutually
agreed location, to: (a) review progress and ongoing resource allocation and
budgeting matters of the Research Program; (b) amend the Research Program as
agreed by the parties; (c) disclose Program Inventions which have not
previously been disclosed in accordance with Paragraph 2.2; and (d) review
the status of patent filings with respect to Program Inventions and, if
necessary in view of such review, propose amendments to Appendix A of this
Agreement. All decisions taken by the Research Management Committee must be
by unanimous consent of all the members of the Research Management Committee.
In order to facilitate the disclosure of Program Inventions and the review
of the status of patent filings with respect to Program Inventions, patent
attorneys for HR&T and Nanogen may participate in all such meetings.
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2.4 Within five (5) business days following each meeting pursuant to
Paragraph 2.3, the Research Management Committee shall cause to be prepared a
written summary of such meeting, which summary shall include, at a minimum:
(a) a list of all Program Inventions which have come into existence since the
Effective Date or since the previous meeting, whichever is applicable; (b)
all patent filings with respect to Program Inventions since the Effective
Date or since the previous meeting, whichever is applicable; and (c) a report
regarding the progress of the Research Program, which shall include the
tracking of the Research Program to budget and a report on any material
budgetary implications for changes to the Research Program. Such written
summary shall be provided to the Executive Committee.
2.5 The Executive Committee shall meet from time to time, but at
least once every three (3) months during the term of this Agreement,
alternating between the headquarters of HR&T and Nanogen, a mutually agreed
location or by telephonic or video conference, to: (a) receive a report on
the progress of the Research Program by the Research Management Committee;
(b) review the strategic goals pursuant to the Letter Agreement and this
Agreement; (c) approve annual budgets under the Research Program and review
the progress of the Research Program against the budget; (d) establish,
review and revise milestones where appropriate, and (e) determine the level
of progress toward achievement of milestones and determine milestone
completion. Within five (5) business days after each meeting, the Executive
Committee shall cause minutes to be prepared and distributed to each party
accurately documenting such meeting.
2.6 Nanogen and HR&T may, upon reasonable notice during normal
business hours, (a) consult informally, during such visits and by telephone,
with personnel of the other party performing work on the Research Program,
and (b) with the other party's prior approval, which approval shall not be
unreasonably withheld, visit the sites of any tests or experiments being
conducted by such other party in connection with the Research Program, but
only to the extent in each case as such trials or other experiments relate to
the Research Program. On such visits an employee of the host company
conducting the research or development activities shall accompany the
employee(s) of the visiting party. If requested by the visiting party, the
other party shall cause appropriate individuals working on the Research
Program to be available for meetings at the location of the facilities where
such individuals are employed at times reasonably convenient to the party
responding to such request. All information revealed to representatives of
the HR&T and Nanogen during the visits and consultations provided for in this
Paragraph 2.5 shall be treated as confidential information in accordance with
Paragraph 5 of this Agreement.
3. PAYMENT.
3.1 HR&T shall pay *** of its own research and development costs and
shall pay *** of Nanogen's Reimbursable Costs incurred in performing its
obligations under this Agreement (the "Fee"). Nanogen's Reimbursable Costs
shall not exceed *** per year per full time equivalent researchers and staff
assigned to the Research Program. Neither party makes any warranty that these
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*** Confidential material redacted and separately filed with the Commission.
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costs and fees will be sufficient to complete the Research Program. The Fee
shall be payable by HR&T to Nanogen as follows:
(a) The initial annual budget and a proposed budget for the second year
of the Research Program are attached as Exhibit C. Annually thereafter
during the term hereof, the Research Management Committee shall develop a
budget for the Research Program, including anticipated quarterly expenditures
by each party. The Research Management Committee shall submit each such
subsequent budget to the Executive Committee for its review and approval at
least forty-five (45) days prior to commencement of the next annual period.
The Executive Committee shall review such budget and inform the Research
Management Committee of its determination with respect to same within thirty
(30) days following its receipt of same. If the budget is not approved, the
Research Management Committee shall confer with the Executive Committee to
attempt to develop a mutually acceptable budget. If the Executive Committee
cannot resolve the dispute, then such dispute shall be resolved in accordance
with the provisions of Paragraph 13 hereof.
(b) The Fee shall be payable to Nanogen in quarterly installments
commencing on January 1, 1998. Each quarterly installment shall be due not
later than five (5) business days following the first day of each quarter.
Should a major positive balance arise due to underuse of the budget, this
will be balanced with the fourth quarter payment in each year. All
installments shall be based upon an estimate of the Reimbursable Costs
expected to be incurred by Nanogen during its next quarterly period beginning
on such date, up to a maximum of Nanogen's budgeted amount for such quarter.
Such estimate shall be set forth in an invoice prepared by Nanogen in
reasonable detail, signed by a duly authorized officer of Nanogen and
submitted to the Research Management Committee at least twenty (20) days
prior to the beginning of the quarterly period with respect to which such
payment is to be made. Each such invoice shall be due and payable in full by
HR&T prior to the beginning of such quarterly period. Beginning with the
second invoice under this Agreement, such invoice shall include a
reconciliation and adjustment for the period covered by the preceding invoice
to reflect any difference between actual Reimbursable Costs incurred by
Nanogen and estimated Reimbursable Costs for such period, up to a maximum of
Nanogen's budgeted amount for such quarter. Any amounts in excess of the
budgeted amount shall be subject to the review and approval of the Executive
Committee.
3.2 If HR&T fails to make prompt and timely payment, Nanogen may give
written notice thereof, and unless HR&T within fifteen (15) days following
receipt of such notice makes such payment, Nanogen may at any time thereafter
until HR&T makes such payment suspend the research and development services
under this Agreement on written notice to HR&T.
3.3 In the event Nanogen, in course of its research under this
Agreement, is required to lease equipment which Nanogen would ordinarily not
otherwise be required to lease, and HR&T agrees to such lease, HR&T will be
responsible for such lease payments.
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4. REPORTS AND RECORDS.
4.1 Nanogen and HR&T shall provide to the Research Management Committee
within forty-five (45) days following the end of each quarterly period
beginning with the end of the first period on March 31, 1998, a report in
such reasonable detail as the Research Management Committee may request
setting forth:
(a) the Reimbursable Costs incurred by Nanogen and the costs incurred
by HR&T in performing its obligations under the Research Program during such
period;
(b) the work performed by such party during such period; and
(c) the status of the research and development of the Products at the
end of the period.
4.2 Nanogen shall keep and maintain, in accordance with generally
accepted accounting principles and practices, proper and complete records and
books of account documenting all Reimbursable Costs. Each party agrees to
permit either nationally recognized certified public accountants or
Controllers from the other party to verify on a once annually basis the
Reimbursable Costs or costs billed or incurred pursuant to this Agreement;
and Nanogen shall provide annually a certification by nationally recognized
certified public accountants or its internal Controller as to Reimbursable
Costs billed to HR&T in that year. HR&T will keep confidential, and will not
disclose to any third party, except such disclosures as may be required by
law, without the prior written consent of Nanogen, information in statements
delivered to HR&T or obtained by HR&T through access of its independent
certified public accounting firm or Controller to the books and records of
Nanogen. HR&T shall provide similar access and similar certifications to
Nanogen regarding its costs incurred under the Research Program and Nanogen
shall similarly keep such information confidential.
5. CONFIDENTIALITY AND NON-DISCLOSURE. That certain Mutual
Confidential Disclosure Agreement effective as of February 20, 1997 between
HR&T and Nanogen, as amended (the "Confidentiality Agreement"), shall remain
in full force and effect.
6. INTELLECTUAL PROPERTY LICENSES.
6.1 (a) HR&T hereby grants solely during the term of this Agreement to
Nanogen, a worldwide, royalty-free, nonexclusive license in and to HR&T
Intellectual Property and HR&T Patent Rights, solely to use in research and
development activities pursuant to the Research Program under this Agreement.
(b) HR&T recognizes that Nanogen has conducted considerable research
and development activities in connection with its permeation layer technology
and has protected certain of its advancements with intellectual property.
HR&T is willing, as part of this Agreement, to conduct additional research
activities directed toward Nanogen's permeation layer. To the extent HR&T
invents any new inventions or any improvements to Nanogen's inventions
relating to permeation layers with utility on Nanogen's Arrays which would
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constitute HR&T Intellectual Property or HR&T Patent Rights or HR&T Program
Inventions, HR&T will grant to Nanogen a worldwide, royalty-free license to
practice such intellectual property (without the right to sublicense unless
it applies to a Nanogen product). Nanogen will be licensed to practice such
intellectual property in connection with any of its other joint venture
arrangements or corporate collaborations subject to a 2% of net sales royalty
payable to any joint venture or other joint relationship involving Nanogen
and HR&T.
(c) Nanogen hereby grants solely during the term of this Agreement, to
HR&T, a worldwide, royalty-free, nonexclusive license in and to Nanogen
Intellectual Property and Nanogen Patent Rights, solely to use in research
and development activities pursuant to the Research Program under this
Agreement.
6.2 Except as provided therein, the licenses granted in accordance with
Paragraphs 6.1(a) and (b) do not include a right to grant sublicenses.
6.3 In the event that any substantial and continuing infringement of
any of the HR&T Patent Rights or Nanogen Patent Rights licensed hereunder
comes to the attention of either party hereto, such party shall promptly
notify the Executive Committee, which Committee will determine an appropriate
action in accordance with its authority.
7. INTELLECTUAL PROPERTY AND PATENT RIGHTS.
7.1 During the term of this Agreement, the entire right, title and
interest in all Program Inventions shall be owned jointly by HR&T and Nanogen
and may be used only as they mutually agree.
7.2 Each party hereto promptly shall disclose to the other party the
making, conception or reduction to practice of Program Inventions by
employees or others acting on behalf of such party. Each of Nanogen and HR&T
hereby represents and warrants that all employees and others acting on its
respective behalf in performing its obligations under this Agreement shall be
obligated under a binding written agreement to assign to it, or as it shall
direct, all Program Inventions made or developed by such employees or others.
7.3 Promptly following any disclosure of Program Inventions pursuant to
Paragraph 2.2 and Paragraph 7.2, the Research Management Committee, in
consultation with patent attorneys for HR&T and Nanogen, shall discuss and
determine, in good faith, whether patent applications should be prepared and
filed for such disclosed Program Inventions.
7.4 If patent applications are to be prepared and filed pursuant to
Paragraph 7.3, then the Research Management Committee shall discuss and
determine, in good faith, for each of such Program Inventions, which of the
parties shall be responsible for the preparation, filing, prosecution and
maintenance of such patent applications in the Primary Filing Countries.
Each of such patent applications shall become part of the Program Inventions,
and Exhibit D shall be amended accordingly to evidence such Program
Inventions.
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7.5 (a) If the Research Management Committee determines that a
particular patent application be filed in a country or countries in addition
to the Primary Filing Countries, then the Research Management Committee shall
determine which party shall be responsible for the filing, prosecution and
maintenance of such patent application, and such patent application shall be
part of the Program Inventions.
(b) If the Research Management Committee determines not to file a
particular patent application in a country or countries in addition to the
Primary Filing Countries, either party, alone, after written waiver by the
other party, may file such particular patent application in such country or
countries and shall pay, without right to reimbursement thereof, all costs
and expenses for filing, prosecution and maintenance of patent application
filed in such country or countries, and notwithstanding the provisions of
Paragraph 6.1, that party shall own, exclusively, all right, title and
interest in such patent application.
(c) If the other party of Paragraph 7.5(b) does not provide such
written waiver, then any such particular patent application shall be treated
as if the Research Management Committee had made a declaration to file the
particular patent application in a country or countries in addition to the
Primary Filing Countries in accordance with Paragraph 7.5(a).
7.6 Each party shall keep the Research Management Committee currently
informed of the filing and progress of all material aspects of the
prosecution of all such patent applications and of the issuance of patents,
and shall consult with the Research Management Committee concerning any
decisions which would affect the scope of any issued claims and other
prosecutorial details, including the potential abandonment of any application.
7.7 Upon request, each party shall execute and deliver to the other
party all descriptions, applications, assignments and other documents and
instruments as are necessary or proper to carry out the provisions of
Paragraphs 7.1, 7.2, 7.3, 7.4, 7.5 and 7.6 without further compensation,
except as otherwise provided in Paragraph 1.15, and the parties shall
cooperate with and assist each other or their nominees in all reasonable ways
and at all reasonable times, including, but not limited to, testifying in all
legal proceedings, signing all lawful papers and in general performing all
lawful acts reasonable, necessary or proper, to aid the other party in
obtaining, maintaining, defending and enforcing all lawful patent, copyright,
trade secret, know-how and the like in the Primary Filing Countries and
elsewhere.
7.8 Except as otherwise provided in this Agreement, under no
circumstances shall either party, as a result of this Agreement, obtain any
ownership interest or other right in any technology, know-how, trade secrets,
patents, pending patent applications or products of the other party,
including items owned, controlled or developed by the other, or transferred
by the other to such party at any time pursuant to this Agreement. Upon
termination of this Agreement unless otherwise provided in another agreement
between HR&T and Nanogen, (i) all HR&T Program Inventions, Nanogen Program
Inventions and Joint Program Inventions, which consist solely of improvements
to HR&T Intellectual Property, shall be the sole property of HR&T, (ii) all
Nanogen Program Inventions, HR&T Program Inventions and Joint Program
Inventions, which consist solely of improvements to Nanogen Intellectual
Property, shall be the sole property of Nanogen, and (iii) Nanogen, at its
option, shall have the right for
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<PAGE>
120 days after the date of termination of this Agreement to negotiate with
HR&T to enter into a license for HR&T's rights to any Program Invention not
included within the provisions of clause (i) or (ii) above. If Nanogen
chooses to exercise such option, HR&T and Nanogen shall negotiate in good
faith to enter into a license for such Program Invention or Inventions. Any
such license shall provide that Nanogen will pay a reasonable royalty to HR&T
for the license rights to such Program Invention or Inventions. In
determining what is a reasonable royalty rate, HR&T's relative contribution
to such Program Invention or Inventions shall be taken into account. It is
understood and agreed by the parties hereto that this Agreement does not
grant to either party any license or other right, other than the licenses
granted in Paragraph 6.1, the assignments granted in Paragraph 7.1 and the
licenses granted in this Paragraph 7.8.
7.9 (a) During the term of this Agreement, Nanogen and HR&T each
acknowledge each other's interest in publishing certain of its results to
obtain recognition within the scientific community and to advance the state
of scientific knowledge. Each party also recognizes the mutual interest in
obtaining valid patent protection and protecting business interests.
Consequently, each party, its employees or consultants wishing to make a
publication (including any oral disclosure made without obligation of
confidentiality) relating to work performed by such party as part of the
Research Program (the "Publishing Party") shall transmit to the Research
Management Committee a copy of the proposed written publication at least
forty-five (45) days prior to submission for publication, or an outline of
such oral disclosure at least fifteen (15) days prior to presentation. The
Research Management Committee shall have the right (i) to propose
modifications to the publication for patent reasons and (ii) to request a
reasonable delay in publication in order to protect patentable information.
(b) If the Research Management Committee requests such a delay, the
Publishing Party shall delay submission or presentation of the publication
for a period of ninety (90) days to enable patent applications protecting
each party's rights in such information to be filed in accordance with this
Article 7. Upon the expiration of forty-five (45) days, in the case of
proposed written disclosures, or fifteen (15) days, in the case of proposed
oral disclosures, from transmission to the Research Management Committee, the
Publishing Party shall be free to proceed with the written publication or the
presentation, respectively, unless the Research Management Committee has
requested the delay described above.
8. TERM AND TERMINATION.
8.1 The Research and Development Collaboration between Nanogen and HR&T
shall continue on its terms for a guaranteed period of three (3) years from
its effective date of January 1, 1998.
-12-
<PAGE>
8.2 All records required to be maintained pursuant to Paragraph 4.2
shall be retained for a period of at least five (5) years following the
termination of this Agreement.
9. REPRESENTATIONS AND WARRANTIES.
9.1 HR&T hereby represents and warrants to Nanogen that it has full
authority and power to enter into this Agreement, that it has secured any and
all necessary approvals, permits or consents deemed necessary or advisable
for the consummation of the transactions contemplated hereby and that, upon
execution by HR&T and Nanogen, this Agreement shall immediately be a valid
and binding obligation of HR&T, enforceable in accordance with its terms.
9.2 Nanogen hereby represents and warrants to HR&T that it has full
authority and power to enter into this Agreement, that it has secured any and
all necessary approvals, permits or consents deemed necessary or advisable
for the consummation of the transactions contemplated hereby and that, upon
execution by HR&T and Nanogen, this Agreement shall immediately be a valid
and binding obligation of Nanogen enforceable in accordance with its
-13-
<PAGE>
terms and that the execution, delivery and performance of its obligations
under this Agreement will not cause Nanogen to breach or violate any
agreement between Nanogen and Becton, Dickinson and Company and its
affiliated entities.
9.3 HR&T hereby represents and warrants to Nanogen that: (a) it is the
owner of the entire right, title and interest to the HR&T Intellectual
Property and HR&T Patent Rights, and (b) to HR&T's knowledge, the HR&T Patent
Rights or the HR&T Intellectual Property has not infringed, and is not now
infringing, any valid third party rights and HR&T has not received any notice
of infringement from any third party respecting the HR&T Patent Rights or the
HR&T Intellectual Property.
9.4 Nanogen hereby represents and warrants to HR&T that: (a) it is the
owner of the entire right, title and interest to the Nanogen Intellectual
Property and the Nanogen Patent Rights and (b) to Nanogen's knowledge, the
Nanogen Patent Rights or the Nanogen Intellectual Property has not infringed,
and is not now infringing, any valid third party rights and Nanogen has not
received any notice of infringement from any third party respecting the
Nanogen Patent Rights or the Nanogen Intellectual Property.
10. DISCLAIMERS. THE PARTIES EACH HEREBY DISCLAIM ANY AND ALL
REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THEIR
RESPECTIVE RESEARCH AND DEVELOPMENT EFFORTS HEREUNDER, INCLUDING, WITHOUT
LIMITATION, (A) WHETHER ANY PRODUCT CAN BE SUCCESSFULLY DEVELOPED BY EITHER
OF THE PARTIES, (B) WHETHER THE PRODUCTS AS DEVELOPED BY EITHER OF THE
PARTIES HEREUNDER CAN BE COMMERCIALLY MARKETED, (C) THE ACCURACY,
PERFORMANCE, UTILITY, RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE,
COMPREHENSIVENESS, MERCHANTABILITY OR SUITABILITY FOR ANY PARTICULAR PURPOSE
WHATSOEVER OF ANY PRODUCT, AND (D) WHETHER ANY PRODUCTS MANUFACTURED WILL NOT
INFRINGE ANY THIRD-PARTY PATENT, COPYRIGHT OR SIMILAR RIGHT.
11. INSURANCE. The parties shall each, at all times during the term of
this Agreement, carry and maintain such insurance as each believes to be
commercially reasonable against risks from actions contemplated under this
Agreement. Such insurance shall be with insurers of recognized
responsibility and may be carried under blanket policies maintained by each
of the parties.
12. NOTICES. Any notice, request, demand, waiver, consent, approval,
or other communication which is required or permitted hereunder shall be in
writing and shall be deemed given only if delivered personally, by facsimile
(upon receipt of appropriate written confirmation) or sent by registered or
certified mail, return receipt requested, or by overnight courier service,
postage prepaid as follows:
-14-
<PAGE>
If to Nanogen:
Nanogen, Inc.
10398 Pacific Center Court
San Diego, California 92121
Attn: Chief Executive Officer
Facsimile - (619) 546-7717
with a copy to:
Nanogen, Inc.
10398 Pacific Center Court
San Diego, California 92121
Attn: General Counsel
Facsimile - (619) 546-7717
and if to HR&T:
Hoechst Research & Technology Deutschland GmbH & Co KG
D-65926 Frankfurt am Main
Attn: President
Facsimile - 001-49-69-309-588
with a copy to:
or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notice, request, demand,
waiver, consent, approval or other communication will be deemed to have been
given as of the date so received (in case of personal delivery, facsimile or
overnight courier service delivery) or upon refusal to accept delivery
thereof.
13. DISPUTE RESOLUTION. Every reasonable effort will be made by the
parties hereto to resolve disputes arising hereunder with litigation as a
last resort. Any dispute arising out of or relating to this Agreement which
is not resolved by the Executive Committee or is not within the purview of
the Executive Committee shall be submitted to the Chief Executive Officer of
Nanogen and the President of HR&T for resolution. If those officers cannot
resolve the dispute with twenty (20) days of submission of such dispute, then
within ten (10) days thereafter, either party may, but shall not be obligated
to, initiate nonbinding mediation of the controversy or claim under the
Center for Public Resources Model ADR Procedures for Mediation of Business
Disputes attached hereto as Exhibit F (the "CPR Procedures"). Once the
mediation is initiated by one party, the other party agrees to participate in
and conduct mediation in accordance with the CPR Procedures in good faith and
not to pursue other remedies while such mediation is proceeding. If neither
party initiates mediation within ten (10) days of the officers referenced
above failing to resolve the dispute, or if the dispute has not been resolved
by such mediation within sixty (60) days following initiation of mediation,
-15-
<PAGE>
either party may pursue all available remedies. All applicable statutes of
limitations and defenses based upon the passage of time shall be tolled while
the negotiation and mediation procedures set forth in this Paragraph 13 are
pending. The parties will take such action, if any, as may be reasonably be
required to effectuate such tolling. Notwithstanding the foregoing, the
remedy at law for any breach of the provisions of this Agreement may be
inadequate, and, accordingly, an aggrieved party seeking equitable relief or
remedies for such a breach shall have the right and is hereby granted the
privilege, in addition to all other remedies at law or in equity, to proceed
directly in a court of competent jurisdiction to seek temporary or
preliminary equitable relief. Each party shall pay its own costs incurred in
attempting to resolve a dispute pursuant to the mediation procedures set
forth in this Paragraph 13 without the right to recover such costs from the
other party and shall share equally the cost of mediation.
14. MISCELLANEOUS.
14.1 This Agreement and the Confidentiality Agreement together
constitute the entire understanding among the parties with respect to the
subject matter hereof and supersede and replace all prior agreements,
understandings, writings and discussions between the parties relating to said
subject matter. However, it is the understanding of both parties that the
terms laid down for a joint venture or other joint arrangement in the Letter
Agreement shall survive until a definitive agreement for such an arrangement
has been reached.
14.2 This Agreement may be amended only by a written instrument executed
by the parties hereto. The failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect its
rights at a later time to enforce the same. No waiver by any party of any
condition or term in any one or more instances shall be construed as a
further or continuing waiver of such condition or term or any other condition
or term.
14.3 The terms and provisions contained in this Agreement are for the
sole benefit of the parties and their successors and assigns, and they shall
not be construed as conferring and are not intended to confer any rights on
any other persons.
14.4 Any delays in or failure of performance by any party under this
Agreement shall not be considered a breach of this Agreement if and to the
extent caused by occurrences beyond the reasonable control of the party
affected, including but not limited to acts of God; acts, regulations, or
laws of any government; strikes or other considered acts of workers; fires;
floods; explosions; riots; wars; rebellion; and sabotage; and any time for
performance hereunder shall be extended by the actual time of delay caused by
such occurrence.
14.5 This Agreement shall not be assignable by either party, nor shall
any of its obligations hereunder be delegated to a third party, without the
prior written consent of the other party, which consent shall not be
unreasonably withheld or delayed. In the event that the other party does not
respond to a request from a party for consent to an assignment or delegation
within fifteen (15) days following written notice requesting such consent,
such party's shall be deemed to be granted. In addition, a condition to any
assignment or delegation hereunder shall be that the successor in interest
expressly agrees in writing to
-16-
<PAGE>
assume the assigning or delegating party's obligations hereunder. All of the
terms and provisions of this Agreement shall be binding upon and inure to the
benefit of and be enforceable by the respective permitted successors and
assigns. No such assignment shall release the assigning party from its
obligations hereunder. Notwithstanding the foregoing, the consent of the
other party shall not be required in connection with a merger involving
either HR&T or Nanogen or with respect to an assignment of this Agreement in
connection with, as the case may be, the acquisition, sale of all or
substantially all of the assets of HR&T or Nanogen, or a change of control or
similar transaction.
14.6 If any provision(s) of this Agreement are or become invalid, or are
ruled illegal by any court of competent jurisdiction, or are deemed
unenforceable under then current applicable law from time to time in effect
during the term hereof, it is the intention of the parties hereto that the
remainder of this Agreement shall not be affected thereby. It is further the
intention of the parties that in lieu of each such provision which is
invalid, illegal, or unenforceable, there be substituted or added as part of
this Agreement, a provision which shall be as similar as possible in economic
and business objectives as intended by the parties to such invalid, illegal,
or unenforceable provision, but which shall be valid, legal, and enforceable,
and shall be mutually agreed by the parties.
14.7 This Agreement shall be governed by and construed in accordance
with the laws of the State of California without regard to its choice of laws
principles. This Agreement shall be construed and interpreted without
application of any principle or rule to the effect that ambiguities are to be
construed against the party responsible for drafting the agreement. The
headings contained herein are for reference purposes only and shall not in
any way affect the meaning of this Agreement.
14.8 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement through
duly authorized representatives as of the Effective Date.
NANOGEN, INC. HOECHST RESEARCH & TECHNOLOGY
DEUTSCHLAND GMBH & CO KG
By /s/ Howard C. Birndorf By /s/ Dr. Reiner Henning
------------------------------------ ---------------------------------
Howard C. Birndorf President
Chairman and Chief Executive Officer
By /s/ Dr. Hans-Ullrich Hoppe
---------------------------------
Research Operations Director
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<PAGE>
EXHIBIT A
NANOGEN'S "APEX" PATENTS AND PATENT APPLICATIONS
<TABLE>
<CAPTION>
TITLE APPLICATION NO. DATE
----- --------------- ----
<S> <C> <C>
Active Programmable Electronic
Devices for Molecular Biological
Analysis and Diagnostics (203/218) USP 5,605,662 Issued: 02/25/97
*** *** ***
Molecular Biological Diagnostic
Systems Including Electrodes (209/062) USP 5,632,957 Issued: 05/27/97
Apparatus and Methods for Active
Programmable Matrix Devices (216/054) USP 5,849,486 Issued: 12/15/98
*** *** ***
</TABLE>
- ----------------------------------------
*** Confidential material redacted and separately filed with the Commission.
-18-
<PAGE>
EXHIBIT B
C.R. & T'S "ELIAS" AND "PRNA" PATENT APPLICATIONS
<TABLE>
<CAPTION>
TITLE APPLICATION NO. DATE
----- --------------- ----
<S> <C> <C>
*** *** ***
</TABLE>
- ----------------------------------------
*** Confidential material redacted and separately filed with the Commission.
-19-
<PAGE>
EXHIBIT C
TOTAL PROGRAM (YEAR 1)
Personnel of Hoechst *** Nanogen ***
Materials of Hoechst *** Nanogen ***
- ----------------------------------------
*** Confidential material redacted and separately filed with the Commission.
-20-
<PAGE>
MATERIAL COSTS
<TABLE>
<S> <C> <C>
TDM/PROJECT YEAR:
SYNTHESIS
Equipment (Synthesizer. . .) *** (Depreciation over *** Years)
Analytics ***
Chemicals ***
---
Total ***
PERMEATION LAYER
Equipment (Spin Coater. . .) *** (Depreciation over *** Years)
Materials (Chemicals) ***
---
Total ***
DIRECT READ-OUT
Equipment ***
---
TOTAL *** (*** TUS$)
</TABLE>
- ----------------------------------------
*** Confidential material redacted and separately filed with the Commission.
-21-
<PAGE>
EXHIBIT C (CR&T)
PERSONNEL
<TABLE>
<CAPTION>
TASK HEADCOUNT
- ---- ---------
<S> <C>
SYNTHESIS
PhD, Organic Chemists ***
Postdocs, Lab Technicians ***
PERMEATION LAYER
PhD's Organic Chemist,
Physicist ***
PhD (Japan) ***
Postdocs, Lab Technicians ***
DIRECT ELECTRONIC READ-OUT
PhD's (Japan) ***
Lab Technicians ***
PhD Biophysical-Chemist ***
PROGRAM MANAGEMENT ***
Total Headcount ***
</TABLE>
- -------------------------------------
*** Confidential material redacted and separately filed with the Commission.
-22-
<PAGE>
SHEET 1
EXHIBIT C (NANOGEN)
PERSONNEL/NANOGEN
<TABLE>
<CAPTION>
TASK YEAR 1 YEAR 2
---- -------- --------
<S> <C> <C>
CHIP
Process engineer *** ***
Software engineer *** ***
Test engineer *** ***
Test Tech *** ***
Packaging Engineer *** ***
Packaging Tech *** ***
INSTRUMENT
Electrical engineer *** ***
Software engineer *** ***
Mechanical engineer *** ***
PERMEATION LAYER
Chemical engineer *** ***
ASSAY DEVELOPMENT
Physical chemist *** ***
Biochemist *** ***
PROGRAM MANAGEMENT
Program Manager *** ***
TOTAL HEADCOUNT *** ***
</TABLE>
- ------------------------------------
*** Confidential material redacted and separately filed with the Commission.
-23-
<PAGE>
SHEET 1
MATERIALS COSTS/NANOGEN
<TABLE>
<CAPTION>
TASK YEAR 1 YEAR 2
---- ------ ------
<S> <C> <C>
CHIP
Design $*** $***
Masks $*** $***
Wafer fab $*** $***
Test $*** $***
Packaging $*** $***
TOTAL $*** $***
INSTRUMENTS
Read-out $***
Probe placement $***
TOTAL $*** $***
PERMEATION LAYER/CHEMISTRY
Perm Layer $***
Attachment Chem. $***
TOTAL $*** $***
ASSAY
Reagents $*** $***
TOTAL PROGRAM $*** $***
</TABLE>
- -----------------------------------
*** Confidential material redacted and separately filed with the Commission.
-24-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 333-50217 and No. 333-50381) pertaining to the Employee Stock
Purchase Plan and the 1993 Stock Option Plan, 1995 Stock Option/Issuance Plan,
and 1997 Stock Incentive Plan of Nanogen, Inc., of our report dated January 22,
1999, with respect to the consolidated financial statements of Nanogen, Inc.,
included in the Annual Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
San Diego, California
March 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 62,245
<SECURITIES> 0
<RECEIVABLES> 2,933
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 65,178
<PP&E> 9,301
<DEPRECIATION> 2,321
<TOTAL-ASSETS> 72,704
<CURRENT-LIABILITIES> 7,477
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 61,032
<TOTAL-LIABILITY-AND-EQUITY> 72,704
<SALES> 0
<TOTAL-REVENUES> 7,633
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 31,225
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,650)
<INCOME-PRETAX> (20,942)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,942)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,942)
<EPS-PRIMARY> (1.60)
<EPS-DILUTED> (1.60)
</TABLE>
