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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------- ----------
COMMISSION FILE NUMBER 000-23541
NANOGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0489621
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10398 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(Address of principal executive offices) (Zip code)
(619) 546-7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
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AS OF MAY 10, 1999, 18,836,341 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
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NANOGEN, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998...........................................3
Consolidated Statements of Operations for the Three
Months ended March 31, 1999 and 1998............................4
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 1999 and 1998............................5
Notes to Consolidated Financial Statements........................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........15
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.........................17
Item 6. Exhibits and Reports on Form 8-K..................................17
SIGNATURES....................................................................18
EXHIBIT INDEX.................................................................19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANOGEN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 55,817 $ 62,245
Receivables and other current assets 3,088 2,933
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Total current assets 58,905 65,178
Property and equipment, net 6,986 6,980
Restricted cash 273 270
Other assets 226 276
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$ 66,390 $ 72,704
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,436 $ 1,066
Accrued liabilities 1,444 1,433
Deferred revenue 2,306 3,065
Due to joint venture 660 -
Current portion of capital lease obligations 2,092 1,913
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Total current liabilities 7,938 7,477
Capital lease obligations, less current portion 3,954 4,176
Stockholders' equity:
Convertible preferred stock, $.001 par value, 5,000,000
shares authorized; no shares issued and outstanding at
March 31, 1999 and December 31, 1998 - -
Common stock, $.001 par value, 50,000,000 shares authorized;
18,833,539 and 18,835,461 shares issued and outstanding
at March 31, 1999 and December 31, 1998, respectively 19 19
Additional paid-in capital 111,503 111,489
Deferred compensation (1,208) (1,512)
Notes receivable from officers (1,526) (1,514)
Accumulated deficit (54,290) (47,431)
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Total stockholders' equity 54,498 61,051
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$ 66,390 $ 72,704
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</TABLE>
See accompanying notes.
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NANOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1999 1998
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<S> <C> <C>
Revenues:
Sponsored research $ 1,353 $ 885
Contract and grant revenue 577 547
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Total revenues 1,930 1,432
Operating expenses:
Research and development 6,860 4,646
General and administrative 1,837 1,470
Acquired in-process technology - 1,193
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Total operating expenses 8,697 7,309
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Loss from operations (6,767) (5,877)
Interest income (expense), net 568 159
Equity in income (loss) of joint venture (660) -
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Net loss $ (6,859) $ (5,718)
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Net loss per share -
basic and diluted $ (0.38) $ (3.25)
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Number of shares used in computing
net loss per share - basic and diluted 17,846 1,762
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</TABLE>
See accompanying notes.
4
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NANOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,859) $ (5,718)
Adjustments to reconcile net loss to net cash
used in operating activities:
Acquisition of in-process technology - 1,193
Depreciation and amortization 419 174
Amortization of deferred compensation 304 823
Equity in loss of joint venture 660 -
Changes in operating assets and liabilities:
Accounts payable 370 (162)
Accrued liabilities 11 (136)
Deferred revenue (759) 793
Receivables and other current assets (69) (173)
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Net cash used in operating activities (5,923) (3,206)
Cash flows from investing activities:
Purchase of equipment (30) -
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Net cash used in investing activities (30) -
Cash flows from financing activities:
Restricted cash (3) (5)
Principal payments on capital lease obligations (474) (297)
Issuance of common stock 14 75
Interest on notes receivable from officers (12) (1)
Other assets - (484)
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Net cash used in financing activities (475) (712)
Decrease in cash and cash equivalents (6,428) (3,918)
Cash and cash equivalents at beginning of period 62,245 19,498
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Cash and cash equivalents at end of period $ 55,817 $ 15,580
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Supplemental disclosure of cash flow information:
Interest paid $ 150 $ 76
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Supplemental schedule of noncash investing and financing activities:
Equipment acquired under capital leases $ 395 $ 1,643
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Common stock issued in exchange for notes
receivable from officers $ - $ 310
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Issuance of convertible preferred stock and
warrants in exchange for in-process technology $ - $ 1,193
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</TABLE>
See accompanying notes.
5
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NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The consolidated balance sheet
as of March 31, 1999, consolidated statements of operations for the three
months ended March 31, 1999 and 1998, and the consolidated statements of
cash flows for the three months ended March 31, 1999 and 1998 are unaudited,
but include all adjustments (consisting of normal recurring adjustments)
which the Company considers necessary for a fair presentation of the
financial position, results of operations and cash flows for the periods
presented. The results of operations for the three months ended March 31,
1999 shown herein are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999.
For more complete financial information, these financial statements, and
notes thereto, should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 1998 included in the
Nanogen, Inc. Form 10-K filed with the Securities and Exchange Commission.
NET LOSS PER SHARE
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic net income per share
is computed by dividing the net income available to common stockholders for
the period by the weighted average number of common shares outstanding
during the period. Diluted net income per share is computed by dividing the
net income for the period by the weighted average number of common shares
outstanding during the period and dilutive potential common shares
outstanding. Due to the losses incurred by the Company during the three
months ended March 31, 1999 and 1998, common stock equivalents resulting
from the assumed exercise of outstanding stock options and warrants have
been excluded from the computation of diluted net loss per share as their
effect would be anti-dilutive. In addition, based on interpretations by the
Securities and Exchange Commission with respect to the treatment of
preferred stock in computing certain earnings-per-share data, the Company
has excluded preferred stock and preferred stock equivalents from the common
stock equivalents calculation for the three months ended March 31, 1998.
2. BECTON, DICKINSON AND COMPANY PARTNERSHIP
The Company is collaborating with Becton, Dickinson and Company ("Becton
Dickinson") to develop and commercialize products in the field of IN VITRO
nucleic acid-based diagnostic and monitoring technologies. Pursuant to a
Master Agreement entered into between the two parties, Becton Dickinson and
Nanogen agreed to form The Nanogen/Becton Dickinson Partnership (the
"Partnership"). Pursuant to a General Partnership Agreement, Becton
Dickinson and Nanogen have contributed to the Partnership their respective
rights under a Collaborative Research and Development Agreement established
in May 1997, certain Intellectual Property Licenses and, as of March 31,
1999 cash in the amount in aggregate of approximately $4.6 million, of which
approximately $4.0 million was paid by Becton Dickinson and approximately
$600,000 was paid by Nanogen. In addition, at March 31, 1999, approximately
$2.6 million was due to the Partnership, of which approximately $2.0 million
was due from Becton Dickinson and $660,000 was due from Nanogen. The amount
due to the Partnership by Nanogen has been recorded as Nanogen's share of
the joint venture's loss for the three months ended March 31, 1999. The
General Partnership Agreement also contemplates additional research funding
aggregating approximately $14.0 million, of which $4.3 million is to be paid
by Nanogen, during the period from April 1, 1999 through April 1, 2001,
conditioned upon the achievement of 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
6
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addition to the above-described payments, Becton Dickinson and Nanogen have
agreed to contribute additional amounts to fund marketing and manufacturing
startup.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report 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," "may," "should," "expect," "envision,"
"potentially," 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 below under the
caption "Factors that May Affect Results" and elsewhere in this Form 10-Q.
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 March 31, 1999, had an accumulated deficit
of approximately $54.3 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 contracts, grants and 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
REVENUES. For the three months ended March 31, 1999, revenue from
sponsored research totaled approximately $1.4 million, compared to
approximately $885,000 for the three months ended March 31, 1998. 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 three months ended March 31, 1999 was earned in connection with our joint
venture collaboration with Becton Dickinson, our research and development
agreement with Aventis Research and Technology ("Aventis," an affiliate of
Hoechst AG), and our nonexclusive research and development agreement with
Elan Corporation, plc. For the three months ended March 31, 1998, sponsored
research revenue was recognized in connection with our joint venture with
Becton Dickinson and our research and development agreement with Aventis.
Revenue from contracts and grants totaled approximately $577,000 for the
three months ended March 31, 1999, compared to approximately $547,000 for the
three months ended March 31, 1998. The Company funds some of its research and
development efforts through contracts and grants awarded by various federal
and state agencies. Revenue was recognized under six such contracts and
grants for the three months ended March 31, 1999 as compared to five such
contracts and grants for the same period in 1998. Revenues are recognized
under these contracts and grants as expenses are incurred.
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 $6.9 million for the three months ended March 31,
1999, from approximately $4.6 million for the three months ended March 31,
1998. Research and development expenses include salaries, lab supplies,
consulting, travel, facilities,
8
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product design and prototype development, and other expenditures relating to
research and product development. The increase in research and development
expenditures in the first quarter of 1999, compared to the first quarter of
1998, can be primarily attributed to costs associated with the development of
engineering prototypes as we move toward commercialization of our first
product. Additionally, 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, and
expansion of research and development facilities. 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 $1.8 million for the three months ended March 31, 1999,
compared to approximately $1.5 million for the three months ended March 31,
1998. This increase was principally due to increased legal costs associated
with enhancing and maintaining the Company's intellectual property portfolio,
the expansion of activities related to marketing the Company's potential
products, and to increased costs associated with operating as a public
company. The increase was partially offset by a decrease in deferred
compensation expense recognized in the first three months of 1999 compared to
what was recorded during the same period in 1998. 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 continue to expand our sales and marketing and general and
administrative organizations and as we continue to enhance our intellectual
property portfolio.
ACQUIRED IN-PROCESS TECHNOLOGY. During the first quarter of 1998, the
Company issued 200,000 shares of its Series D Convertible Preferred Stock at
$6.00 per share in exchange for all of the outstanding shares of Nanotronics,
Inc.. This Series D Preferred Stock converted into 132,334 shares of common
stock at the Company's initial public offering. The in-process technology
which was acquired relates generally to nanotechnology and molecular
electronics. Nanotronics' 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 quarter ended March 31, 1998,
INTEREST INCOME (EXPENSE), NET. The Company had net interest income of
approximately $568,000 for the three months ended March 31, 1999, compared to
net interest income of approximately $159,000 for the three months ended
March 31, 1998. The significant increase in interest income can be attributed
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. The increase in interest income was
partially offset by higher interest expense during the three months ended
March 31, 1999, due to greater amounts of equipment under capital leases in
1999 than in 1998.
EQUITY IN LOSS OF JOINT VENTURE. The Company recognized a loss of
approximately $660,000 for the three months ended March 31, 1999 from the
joint venture with Becton Dickinson, based on the loss allocation described
in the Partnership Agreement stating that losses will be allocated in
proportion to and not to exceed required cash contributions. There was no
loss recorded for the three months ended March 31, 1998, as no cash
contributions were required to be made by us to the joint venture during that
period.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through private
placements of equity securities totaling approximately $65.1 million , as
well as through our initial public offering in April 1998 which generated net
proceeds of approximately $38.7 million.
To date we have funded most of our equipment acquisitions and leasehold
improvements through capital leasing facilities. During the first quarter of
1999, we received proceeds from equipment financing of approximately
$395,000. This compares to $1.6 million received for equipment acquisitions
and leasehold improvements during the same period in 1998 which was primarily
related to the expansion of our research and administrative facility.
9
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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 $5.3 million and
$3.2 million for the three months ended March 31, 1999 and 1998,
respectively. Cash used for operations was primarily related to costs
associated with the support of our expanding operations, including higher
personnel costs, product development costs, and legal fees relating to
establishing and maintaining our intellectual property rights.
At March 31, 1999, we had approximately $55.8 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 into the year 2001. 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.
YEAR 2000 ISSUES
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.
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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 yet developed a reasonably likely worst case scenario
with respect to Year 2000 problems we may encounter.
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.
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OUR HISTORY OF LOSSES AND OUR ANTICIPATION OF FUTURE LOSSES MAY ADVERSELY
AFFECT US
At March 31, 1999, we had an accumulated deficit of approximately $54.3
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.
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.
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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 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.
13
<PAGE>
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.
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.
14
<PAGE>
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.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 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. These instruments have maturities of ninety days
or less when acquired. We do not utilize derivative financial instruments,
derivative commodity instruments or other market risk sensitive instruments,
positions or transactions in any material fashion. Accordingly, we believe
15
<PAGE>
that, while the instruments we hold are subject to changes in the financial
standing of the issuer of such securities, we are not subject to any material
risks arising from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices or other market changes that affect
market risk sensitive instruments.
16
<PAGE>
NANOGEN, INC.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On April 13, 1998, 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 Offering was led by a
group consisting of Morgan Stanley Dean Witter, Lehman Brothers and
SBC Warburg Dillion 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 the Company
or an affiliate 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>
<S> <C>
Repayment of indebtedness $ 1,753,000
Working capital $ 20,550,000
Temporary investments $ 16,397,000
</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 the Company or an affiliate of these
persons.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three months ended
March 31, 1999.
17
<PAGE>
NANOGEN, INC.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
NANOGEN, INC.
DATE MAY 13, 1999 /s/ HOWARD C. BIRNDORF
------------------------ ----------------------------------
HOWARD C. BIRNDORF
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
DATE MAY 13, 1999 /s/ DANIEL D. BURGESS
------------------------ ----------------------------------
DANIEL D. BURGESS
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL OFFICER)
<PAGE>
NANOGEN, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
<S> <C> <C>
27.1 Financial Data Schedule.............................................20
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 55,817
<SECURITIES> 0
<RECEIVABLES> 3,088
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 58,905
<PP&E> 9,726
<DEPRECIATION> 2,740
<TOTAL-ASSETS> 66,390
<CURRENT-LIABILITIES> 7,938
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 54,479
<TOTAL-LIABILITY-AND-EQUITY> 66,390
<SALES> 0
<TOTAL-REVENUES> 1,930
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,357
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (568)
<INCOME-PRETAX> (6,859)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,859)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,859)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
