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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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)
(858) 410-4600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
------- -------
AS OF AUGUST 10, 2000, 20,697,722 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
<PAGE>
NANOGEN, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at June 30, 2000
and December 31, 1999..........................................................3
Consolidated Statements of Operations for the Three and
Six Months ended June 30, 2000 and 1999........................................4
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2000 and 1999............................................5
Notes to Consolidated Financial Statements.......................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................19
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..............................20
Item 6. Exhibits and Reports on Form 8-K.................................................20
SIGNATURES.........................................................................................21
EXHIBIT INDEX......................................................................................22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANOGEN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 100,475 $ 41,021
Receivables and other current assets 3,714 2,320
--------- ---------
Total current assets 104,189 43,341
Property and equipment, net 5,650 6,154
Acquired technology rights 5,780 1,005
Restricted cash 219 219
Other assets 63 66
--------- ---------
$ 115,901 $ 50,785
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 764 $ 598
Accrued liabilities 2,004 3,726
Deferred revenue 818 3,373
Current portion of capital lease obligations 2,131 2,136
--------- ---------
Total current liabilities 5,717 9,833
Capital lease obligations, less current portion 2,149 2,831
Stockholders' equity:
Convertible preferred stock, $.001 par value, 5,000,000 shares
authorized; no shares issued and outstanding at June 30, 2000
and December 31, 1999 - -
Common stock, $.001 par value, 50,000,000 shares authorized;
20,682,506 and 18,990,799 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 21 19
Additional paid-in capital 190,429 113,574
Deferred compensation (803) (1,473)
Notes receivable from officers (1,191) (1,369)
Accumulated deficit (80,421) (72,630)
--------- ---------
Total stockholders' equity 108,035 38,121
========= =========
$ 115,901 $ 50,785
========= =========
</TABLE>
See accompanying notes.
3
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NANOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 152 $ - $ 152 $ -
Sponsored research 1,704 1,566 3,566 2,919
Contract and grant revenue 484 639 934 1,216
-------------- -------------- -------------- --------------
Total revenues 2,340 2,205 4,652 4,135
Operating expenses:
Research and development 4,515 6,776 8,758 13,636
General and administrative 3,344 2,160 5,625 3,997
-------------- -------------- -------------- --------------
Total operating expenses 7,859 8,936 14,383 17,633
-------------- -------------- -------------- --------------
Loss from operations (5,519) (6,731) (9,731) (13,498)
Interest income, net 1,406 503 1,940 1,071
Loss on disposition of fixed assets - (30) - (30)
Equity in loss of joint venture - (275) - (935)
-------------- -------------- -------------- --------------
Net loss $ (4,113) $ (6,533) $ (7,791) $ (13,392)
============== ============== ============== ==============
Net loss per share -
basic and diluted $ (0.20) $ (0.36) $ (0.40) $ (0.75)
============== ============== ============== ==============
Number of shares used in computing
net loss per share - basic and diluted 20,208 18,073 19,513 17,960
============== ============== ============== ==============
</TABLE>
See accompanying notes.
4
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NANOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,791) $ (13,392)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of joint venture - 935
Depreciation and amortization 1,121 833
Stock based compensation expense 670 561
Loss on disposition of fixed assets, net - 30
Interest capitalized on notes receivables from officers (31) (45)
Deferred revenue (2,555) (1,012)
Changes in operating assets and liabilities:
Accounts payable 166 5
Accrued liabilities (1,722) 395
Receivables and other assets (1,391) (423)
-------------- -------------
Net cash used in operating activities (11,533) (12,113)
Cash flows from investing activities:
Purchase of equipment - (34)
Acquired technology rights (5,000) -
Investment in joint venture - (935)
-------------- -------------
Net cash used in investing activities (5,000) (969)
Cash flows from financing activities:
Decrease in restricted cash - (7)
Principal payments on capital lease obligations (1,078) (966)
Issuance of common stock, net of repurchases 76,882 114
Note receivable payments from officers 185 -
Other (2) -
-------------- -------------
Net cash provided by (used in) financing activities 75,987 (859)
Increase (decrease) in cash and cash equivalents 59,454 (13,941)
Cash and cash equivalents at beginning of period 41,021 62,245
-------------- -------------
Cash and cash equivalents at end of period $ 100,475 $ 48,304
============== =============
Supplemental disclosure of cash flow information:
Interest paid $ 222 $ 306
============== =============
Supplemental schedule of noncash investing and financing activities:
Equipment acquired under capital leases $ 391 $ 760
============== =============
</TABLE>
See accompanying notes.
5
<PAGE>
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
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 June 30, 2000, consolidated statements of operations for the
three and six months ended June 30, 2000 and 1999, and the consolidated
statements of cash flows for the six months ended June 30, 2000 and 1999
are unaudited, but include all adjustments (consisting of normal recurring
adjustments) which the Company considers necessary for a fair presentation
of the financial position, results of operations and cash flows for the
periods presented. The results of operations for the three and six months
ended June 30, 2000 shown herein are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
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, 1999 included in the
Nanogen, Inc. Form 10-K, as amended, 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." Under the provisions of SFAS No. 128, basic net
income per share is computed by dividing the net income (loss) available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per share
is computed by dividing the net income (loss) for the period by the
weighted average number of common shares outstanding during the period and
dilutive potential common shares outstanding. Weighted average common
shares outstanding during the period does not include shares issued
pursuant to the exercise of stock options prior to vesting. Due to the
losses incurred by the Company during the three and six months ended June
30, 2000 and 1999, 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.
2. COLLABORATIVE ALLIANCES
AVENTIS RESEARCH AND TECHNOLOGIES
In December 1997, the Company entered into an agreement with Aventis
Research and Technologies, an affiliate of Hoechst AG ("Aventis"), for,
among other things, an exclusive research and development collaboration
relating to the development of molecular recognition arrays. In December
1998, the Company and Aventis 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. In conjunction with
this agreement, the Company agreed to issue 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. The Company has also agreed to issue
to Aventis, upon the achievement of certain milestones, warrants to
purchase up to approximately 360,000 additional shares of common stock at a
50 percent premium to the market price on the date the milestone is
achieved. These warrants will have five-year maximum terms.
In September 1999, the Company added two new technology development
programs to the current program with Aventis that focus on the development
of gene expression tools utilizing electronic bioarrays and the development
of high throughput screening tools for kinase analyses. In total, the two
new programs may
6
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NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
provide a maximum of $12.0 million in additional funding to the Company
through December 31, 2001, including an up-front initiation fee of $2.0
million which was received in the fourth quarter of 1999.
Revenue is primarily recognized under these agreements as expenses are
incurred, and totaled $1.7 million and $3.6 million for the three and six
months ended June 30, 2000, respectively, and $776,000 and $1.4 million for
the three and six months ended June 30, 1999, respectively. Funding
received in advance of incurred expenses is recorded as deferred revenue
until the expenses are incurred, and totaled $818,000 and $3.4 million at
June 30, 2000 and December 31, 1999, respectively.
BECTON, DICKINSON AND COMPANY
The Company entered into a Master Agreement with Becton, Dickinson and
Company ("Becton Dickinson") in October 1997 to develop and commercialize
products in the field of IN VITRO nucleic acid-based diagnostic and
monitoring technologies in the field of infectious diseases. Pursuant to
this Master Agreement, Becton Dickinson and the Company agreed to form The
Nanogen/Becton Dickinson Partnership (the "Partnership"). Pursuant to a
General Partnership Agreement, Becton Dickinson and the Company contributed
to the Partnership their respective rights under a Collaborative Research
and Development Agreement established in May 1997, certain Intellectual
Property Licenses and cash in the amount of approximately $8.6 million
through December 31, 1999, of which approximately $7.0 million was paid by
Becton Dickinson and approximately $1.6 million was paid by the Company.
The amounts paid or due to the Partnership by the Company have been
recorded as the Company's share of the joint venture's loss in the period
paid or accrued, and totaled $275,000 and $935,000 for the three and six
months ended June 30, 1999, respectively. The partners are considering
modifications to the joint venture to take advantage of potential third
party opportunities on technology developed to date. The partners are also
considering field changes which would allow the joint venture access to
additional technologies or content in areas more strategically aligned with
business opportunities. Further joint venture funding will be determined
based upon a final decision regarding such modifications and field changes.
The Company has received no research funding from Becton Dickinson since
the third quarter of 1999, and it is uncertain whether the Company will
receive any additional funding from Becton Dickinson. Concurrent with the
execution of the joint venture agreement, the Company entered into a
worldwide, royalty-bearing, nonexclusive license agreement with Becton
Dickinson, relating to Becton Dickinson's proprietary SDA technology for
use by the Company outside the Partnership in the fields of IN VITRO human
genetic testing and IN VITRO cancer diagnostics.
Revenue is recognized under the agreements as expenses are incurred, and
totaled $592,000 and $1.1 million for the three and six months ended June
30, 1999, respectively. No revenue was recognized under the agreements
during the three and six months ended June 30, 2000.
ELAN CORPORATION, PLC
In December 1997, the Company entered into a non-exclusive research and
development agreement with Elan Corporation, plc ("Elan") for the
development of genomics and gene expression research tools. The Company and
Elan have not yet agreed upon specific program objectives with respect to
the nonexclusive research and development program. The Company is uncertain
as to whether the Company will receive any additional funding from Elan.
Revenue is recognized under the agreement as expenses are incurred, and
totaled $198,000 and $357,000 for the three and six months ended June 30,
1999, respectively. No revenue was recognized under the agreement during
the three and six months ended June 30, 2000.
7
<PAGE>
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
HITACHI, LTD.
In January 2000, the Company executed an agreement with Hitachi, Ltd.,
effective as of December 15, 1999, for the full-scale commercial
manufacturing and distribution of the NanoChip-TM- molecular biology
workstation in specified research markets. Hitachi, Ltd.'s Instrument Group
provides technology and technical support to aid in the manufacturing
scale-up of the NanoChip-TM- molecular biology workstation's components.
Hitachi, Ltd. has the right to be the sole distributor of Hitachi,
Ltd.-produced NanoChip-TM- molecular biology workstation instruments in
Japan. Hitachi, Ltd. also has the non-exclusive right to distribute
NanoChip-TM- cartridges in Japan. The Company retains the right to
distribute, directly or through others, Hitachi, Ltd. produced NanoChip-TM-
molecular biology workstations outside of Japan. In addition, the Company
seeks to develop and manufacture the NanoChip-TM- cartridges for
distribution worldwide. Except for Hitachi, Ltd.'s exclusive distribution
rights of Hitachi, Ltd.-produced workstations in Japan, the agreement is
non-exclusive and excludes certain clinical markets. The Company also
retains the right to form other manufacturing and distribution agreements.
3. PENDING LITIGATION
On April 28, 2000, the Company filed a complaint for declaratory judgment
against Motorola, Inc. ("Motorola"), Beckman Coulter, Inc. ("Beckman") and
Massachusetts Institute of Technology ("MIT"). The action was filed in the
United States District Court for the Southern District of California. Prior
to the filing of the complaint, the parties had been involved in licensing
discussions concerning U.S. Patent No. 5,693,939 entitled "Optical and
Electrical Methods and Apparatus For Molecule Detection" (the "'939
patent") which was licensed by MIT to Beckman in 1993 and to Genometrix,
Inc. ("Genometrix") in 1994. Genometrix subsequently granted its
sublicensing rights to Motorola in 1999. The inventions claimed in the `939
patent were made with United States government funding through a grant from
the Department of the Air Force. The complaint seeks, among other things, a
declaration that the Company is entitled to a license to the government
funded `939 patent and, in the event the Company proceeds to take a
license, that it is not required to obtain a license from both Motorola and
Beckman. Alternatively, the complaint seeks a declaratory judgment that the
claims of the `939 patent are invalid and not infringed by the Company.
On May 22, 2000, the Company reached a settlement with Beckman and
dismissed Beckman from the lawsuit without prejudice. In connection with
the settlement, the Company secured a license to the `939 patent from
Beckman.
The action continues against Motorola and MIT. On May 30, 2000, Motorola
filed an answer, asserted various affirmative defenses, and filed a
counterclaim against the Company claiming infringement of the `939 patent
and seeking monetary damages and injunctive relief. Motorola's counterclaim
asserts that it has exclusive rights to certain claims in the `939 patent.
MIT filed an answer and affirmative defenses to the Company's complaint on
June 26, 2000. No assurance can be given that a license to the `939 patent
will be available from Motorola on commercially acceptable terms, or at
all, or that the Company will prevail in the lawsuit. The Company may have
to expend considerable financial resources and managerial efforts
prosecuting the lawsuit and defending against Motorola's counterclaim, and
against Motorola's and MIT's affirmative defenses. The Company may not
prevail in the action, which could have a material adverse effect on the
Company.
8
<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
We integrate advanced microelectronics and molecular biology into a core
technology platform with potentially broad and diverse commercial
applications in the fields of genomics, biomedical research, medical
diagnostics, drug discovery, forensics, agriculture, environmental testing
and potentially the electronics and telecommunications industries. The first
application we have developed, the NanoChip-TM- System, is an integrated
bioassay system consisting of, the NanoChip-TM- molecular biology workstation
and the NanoChip-TM- cartridge. The NanoChip-TM- workstation is comprised of
two automated instruments and the NanoChip-TM- cartridge, a consumable
cartridge, incorporates a proprietary microchip. The NanoChip-TM- System
provides a flexible tool for the rapid identification and precision analysis
of biological test samples containing charged molecules.
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 June 30, 2000, had an accumulated deficit
of $80.4 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 further commercialize our products.
We introduced our first two products into the marketplace during the
three months ended June 30, 2000. While we recognized revenue from product
sales during the three months ended June 30, 2000, we anticipate our main
sources of revenues during at least 2000 will continue to be payments under
our sponsored research agreements, contracts and grants. As we attempt to
further commercialize our first two products, the NanoChip-TM- molecular
biology workstation and the NanoChip-TM- cartridge, we anticipate that a
portion of our revenue in the second half of 2000 may be from sales or other
types of acquisitions of the NanoChip-TM- System.
We believe our future operating results may be subject to quarterly
fluctuations due to a variety of factors, including, but not limited to, the
achievement of milestones under our collaborative agreements, whether and
when new products are successfully developed and introduced by us or our
competitors, market acceptance of the NanoChip-TM- System and potential
products under development, and the type of acquisition program our potential
customers choose. 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 and six months ended June 30, 2000, revenue from
sponsored research totaled $1.7 million and $3.6 million, respectively,
compared to $1.6 million and $2.9 million for the three and six months ended
June 30, 1999, respectively. Revenues are primarily 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 and six
months ended June 30, 2000, was earned in connection with our three
technology development programs under our research and development agreements
entered into in December 1998 and September 1999 with Aventis. Sponsored
research revenue recognized during the three and six months ended June 30,
1999, was earned in connection with our research and development agreement
with Aventis entered into in December 1998, our joint venture collaboration
with Becton Dickinson, and our nonexclusive research and development
agreement with Elan. We and Becton Dickinson are considering modifications to
the joint venture to take advantage of potential third party opportunities on
technology developed to date, as well as field changes which would
9
<PAGE>
allow the joint venture access to additional technologies or content in areas
more strategically aligned with business opportunities. Further joint venture
funding will be determined based upon a final decision regarding such
modifications and field changes. We have received no research funding from
Becton Dickinson since the third quarter of 1999, and it is uncertain whether
we will receive any additional funding from Becton Dickinson. We and Elan
have not yet agreed upon specific program objectives with respect to the
nonexclusive research and development program, and are uncertain as to
whether we will receive any additional funding from Elan.
We fund some of our research and development efforts through contracts
and grants awarded by various federal and state agencies. Revenues are
recognized under these contracts and grants as expenses are incurred.
Total revenue for the three and six months ended June 30, 2000, included
$152,000 from the sale of our first NanoChip-TM- molecular biology
workstation as well as our first sales of NanoChip-TM- cartridges.
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
decreased to $4.5 million and $8.8 million for the three and six months ended
June 30, 2000, respectively, compared to $6.8 million and $13.6 million for
the three and six months ended June 30, 1999, respectively. During these
periods, research and development expenses included salaries for scientific,
engineering and operations personnel, product design and prototype
development costs, lab supplies, consulting, travel, facilities, and other
expenditures associated with our research and product development activities.
The decreases in research and development expenses resulted primarily from
the different development stages of our NanoChip-TM- molecular biology
workstation from period to period. During the three and six months ended June
30, 1999, our NanoChip-TM- molecular biology workstation was in an advanced
stage of prototype design and development. During this stage, we incurred
significant expenditures both internally and with outside vendors related to
engineering prototypes, as well as other costs associated with testing and
refining the product. In comparison, during the three and six months ended
June 30, 2000, many costs associated with the manufacturing of the
workstation were absorbed by our manufacturing partner. Research and
development spending may increase over the next several years as our research
and product development efforts continue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled $3.3 million and $5.6 million for the three and six months ended June
30, 2000, respectively, compared to $2.2 million and $4.0 million for the
three and six months ended June 30, 1999, respectively. These increases were
primarily due to increased legal fees associated with enhancing and
maintaining our intellectual property portfolio and costs related to patent
litigation. General and administrative expenses are expected to continue to
increase as we continue to expand our sales and marketing organizations and
as we continue to enhance our intellectual property portfolio. In addition,
we may have to expend considerable financial resources related to the
Motorola and MIT litigation.
INTEREST INCOME, NET. Net interest income was $1.4 million and $1.9
million for the three and six months ended June 30, 2000, respectively,
compared to $503,000 and $1.1 million for the three and six months ended June
30, 1999, respectively. The increases in net interest income can be primarily
attributed to higher average cash balances during the three and six months
ended June 30, 2000 compared to the same periods in 1999 as a result of cash
proceeds received in conjunction with our secondary public offering of common
stock in March 2000.
EQUITY IN LOSS OF JOINT VENTURE. We recognized a loss of $275,000 and
$935,000 during the three and six months ended June 30, 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 recognized
during the three and six months ended June 30, 2000, as the sponsored
research program with Becton Dickinson is currently being modified and no
joint venture funding occurred during these periods.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had $100.5 million in cash and cash equivalents,
compared to $41.0 million at December 31, 1999. This increase is primarily
due to the completion of our public offering of common stock in March 2000
10
<PAGE>
generating net proceeds of $76.5 million, offset by net cash used in
operations and for the acquisition of technology rights during the six months
ended June 30, 2000.
Net cash used in operating activities was $11.5 and $12.1 million for the
six months ended June 30, 2000 and 1999, respectively. Cash used for
operations was primarily related to costs associated with entering the
commercialization stage of our initial products, supporting our continued
research and development efforts, and legal fees relating to establishing and
maintaining our intellectual property portfolio.
During the six months ended June 30, 2000, we paid $5.1 million to
acquire rights to technologies in order to enable us to further develop and
commercialize our products.
We fund most of our equipment acquisitions and leasehold improvements
through capital leasing facilities. During the first six months of 2000, we
received proceeds from equipment financing of $391,000, compared to $760,000
of proceeds received during the same period in 1999. We anticipate that we
will continue to use capital equipment leasing or debt facilities to fund
most of our equipment acquisitions and leasehold improvements.
We expect that our existing capital resources, combined with anticipated
revenues from potential product sales, reagent rentals, leases or other types
of acquisition programs for the NanoChip-TM- System, sponsored research
agreements, contracts and grants will be sufficient to support our planned
operations through at least the next two years. 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 and any litigation
related thereto, 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.
FACTORS THAT MAY AFFECT RESULTS
OUR PRODUCTS MAY NOT BE SUCCESSFULLY DEVELOPED, WHICH WOULD HARM US AND FORCE
US TO CURTAIL OR CEASE OPERATIONS.
We are at an early stage of development. We currently have only two
products for sale, our NanoChip-TM- molecular biology workstation and our
NanoChip-TM- cartridge. All of our other products are under development. Our
NanoChip-TM- System or our other 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 forced to
curtail or cease operations.
Our success will depend upon our ability to overcome significant
technological challenges and successfully introduce our products into the
marketplace. A number of applications envisioned by us will require
significant enhancements to our basic technology platform.
LACK OF MARKET ACCEPTANCE OF OUR TECHNOLOGY WOULD HARM US.
We may not be able to develop commercially viable products. Even if we
develop a product it may not be accepted in the marketplace. If we are unable
to achieve market acceptance, we will not be able to generate
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<PAGE>
sufficient product revenue to become profitable. Market acceptance will
depend on many factors, including our ability to:
- convince prospective strategic partners and customers that our technology
is an attractive alternative to other technologies;
- manufacture products in sufficient quantities with acceptable quality and
at an acceptable cost; and
- place and service sufficient quantities of our products.
In addition, our technology platform could be harmed by limited funding
available for product and technology acquisitions by our customers, as well
as internal obstacles to customer approvals of purchases of our products.
COMMERCIALIZATION OF SOME OF OUR POTENTIAL PRODUCTS DEPENDS ON COLLABORATIONS
WITH OTHERS. IF OUR COLLABORATORS ARE NOT SUCCESSFUL OR IF WE ARE UNABLE TO
FIND COLLABORATORS IN THE FUTURE, WE MAY NOT BE ABLE TO DEVELOP THESE
PRODUCTS.
Our strategy for the research, development and commercialization of some
of our products requires us to enter into contractual arrangements with
corporate collaborators, licensors, licensees and others. Our success depends
in part upon the performance by these collaborators of their responsibilities
under these arrangements. Some collaborators may not perform their
obligations as we expect or we may not derive any revenue from these
arrangements.
We have collaborative agreements with several health care companies. We
do not know whether these companies will successfully develop and market any
products under our respective agreements. Moreover, some of our collaborators
are also researching competing technologies targeted by our collaborative
programs. We may be unsuccessful in entering into other collaborative
arrangements to develop and commercialize our products. In addition, disputes
may arise over ownership rights to intellectual property, know-how or
technologies developed with our collaborators.
We currently have agreements with Aventis, Becton Dickinson and Elan that
contemplate the commercialization of products resulting from research and
development collaboration agreements between the parties. In addition, we
have a manufacturing and distribution agreement with Hitachi. These
collaborations may not be successful. We have received no funding under our
collaboration with Becton Dickinson since the third quarter 1999 and we may
never receive any additional funds from Becton Dickinson. We have not yet
agreed upon specific program objectives with respect to our research and
development agreement with Elan, and we may never receive any additional
funds from Elan.
WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES
AND WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We began selling our first two products in the second quarter of 2000 and
do not expect to sell significant quantities of our first products during
fiscal 2000. From our inception to June 30, 2000, we have incurred cumulative
net losses totaling approximately $80.4 million. Moreover, our negative cash
flow and losses from operations will continue to increase for the foreseeable
future. We may never generate sufficient product revenue to become
profitable. We also expect to have quarter-to-quarter fluctuations in
revenues, expenses and losses, some of which could be significant. The amount
and timing of product revenue recognition may depend on whether potential
customers for the NanoChip(TM) System choose to buy, lease or enter into
reagent rental or other acquisition programs.
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.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE. IF ADDITIONAL CAPITAL IS NOT
AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OPERATIONS.
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<PAGE>
We may need to raise more money to continue the research and development
necessary to bring our products to market and to establish manufacturing and
marketing capabilities. We may seek additional funds through public and
private stock offerings, arrangements with corporate partners, borrowings
under lease lines of credit or other sources. If we cannot raise more money
we will have to reduce our capital expenditures, scale back our development
of new products, reduce our workforce and license to others products or
technologies that we otherwise would seek to commercialize ourselves. The
amount of money we will need will depend on many factors, including among
others:
- the progress of our research and development programs;
- the commercial arrangements we may establish;
- the time and costs involved in:
- scaling up our manufacturing capabilities;
- obtaining necessary regulatory approvals; and
- filing, prosecuting, defending and enforcing patent claims and litigation;
and
- the scope and results of our future preclinical studies and clinical
trials, if any.
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.
If 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, obtaining FDA approval
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. As these companies develop their technologies,
they may develop proprietary positions which may prevent us from successfully
commercializing products.
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 MAY ADVERSELY
AFFECT US.
13
<PAGE>
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, 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.
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.
OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
WHICH MAY SUBJECT US TO FUTURE LITIGATION AND CAUSE US TO BE UNABLE TO
LICENSE TECHNOLOGY FROM THIRD PARTIES.
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.
Besides the `939 patent described below, we are aware of other third-party
patents that may relate to our technology. It is possible that we may
unintentionally infringe these patents or other patents or proprietary rights
of third parties. We 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 many U.S. and foreign patents and patent applications held by
third parties in our areas of interest, and we believe that, besides our
litigation with Motorola and MIT described below, there may be significant
other litigation in the industry regarding patent and other intellectual
property rights. Additional litigation could result in substantial costs and
the diversion of management's efforts regardless of the result of the
litigation. Additionally, the defense and prosecution of interference
proceedings before the U.S. Patent and Trademark Office, or 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 are aware of U.S. and corresponding foreign patents and applications
which are assigned to Affymax Technologies, N.V., and Affymetrix, Inc. which
relate to certain devices having 1,000 or more groups of oligonucleotides
occupying a total area of less than 1 cm2, 400 different oligonucleotides per
cm2 on a substrate, and for gene expression, more than 100 different
oligonucleotides at a density greater than about 60 different
oligonucleotides per 1 cm2. In the event that we proceed with the development
of arrays with more than 400 groups of oligonucleotides, or for gene
expression, with more than 100 different oligonucleotides, we expect to
design our devices through, among other things, the selection of the physical
dimensions, methods of binding, selection of support materials and intended
uses of the device to avoid infringing these patents. We may not be able to
design around these patents. We are aware of U.S. and European patents and
patent applications owned by Isis Innovations Ltd. or Isis Innovations (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
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<PAGE>
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.
WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION THAT MAY BE COSTLY,
TIME-CONSUMING AND MAY IMPACT OUR COMPETITIVE POSITION.
On April 28, 2000, we filed a complaint for declaratory judgment against
Motorola, Inc. or Motorola, Beckman Coulter, Inc. or Beckman and
Massachusetts Institute of Technology or MIT. The action was filed in the
United States District Court for the Southern District of California. Prior
to the filing of the complaint, the parties had been involved in licensing
discussions concerning U.S. Patent No. 5,693,939 entitled "Optical and
Electrical Methods and Apparatus For Molecule Detection" (the "'939 patent")
which was licensed by MIT to Beckman in 1993 and to Genometrix, Inc. or
Genometrix in 1994. Genometrix subsequently granted its sublicensing rights
to Motorola in 1999. The inventions claimed in the `939 patent were made with
United States government funding through a grant from the Department of the
Air Force. The complaint seeks, among other things, a declaration that we are
entitled to a license to the government funded `939 patent and, in the event
we proceed to take a license, that we are not required to obtain a license
from both Motorola and Beckman. Alternatively, the complaint seeks a
declaratory judgment that the claims of the `939 patent are invalid and not
infringed by us.
On May 22, 2000, we reached a settlement with Beckman and dismissed
Beckman from the lawsuit without prejudice. In connection with the
settlement, we secured a license to the `939 patent from Beckman.
The action continues against Motorola and MIT. On May 30, 2000, Motorola
filed an answer, asserted various affirmative defenses, and filed a
counterclaim against us claiming infringement of the `939 patent and seeking
monetary damages and injunctive relief. Motorola's counterclaim asserts that
it has exclusive rights to certain claims in the `939 patent. MIT filed an
answer and affirmative defenses to our complaint on June 26, 2000. No
assurance can be given that a license to the `939 patent will be available
from Motorola on commercially acceptable terms, or at all, or that we will
prevail in the lawsuit. We may have to expend considerable financial
resources and managerial efforts prosecuting the lawsuit and defending
against Motorola's counterclaim, and against Motorola's and MIT's affirmative
defenses. We may not prevail in the action, which could have a material
adverse effect on us.
THE REGULATORY APPROVAL PROCESS IS EXPENSIVE, TIME CONSUMING, UNCERTAIN AND
MAY PREVENT US FROM OBTAINING REQUIRED APPROVALS FOR THE COMMERCIALIZATION OF
OUR PRODUCTS.
We anticipate that the manufacturing, labeling, distribution and
marketing of a number of any diagnostic products will be subject to
regulation in the U.S. and other countries. These regulations could subject
us to several problems such as:
- failure 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.
In the U.S., the Food and Drug Administration, or 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
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<PAGE>
development, introduction and marketing of proposed products. Regulatory
clearance or approval or clearance of any proposed 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 the recall, repair,
replacement or refund of the cost of any regulated device manufactured or
distributed by us. Any devices manufactured or distributed by us pursuant to
FDA clearance or approvals are subject to thorough and continuing regulation
by the FDA and certain state agencies.
WE DEPEND ON SUPPLIERS FOR MATERIALS WHICH COULD IMPAIR OUR ABILITY TO
MANUFACTURE OUR PRODUCTS.
Outside vendors provide key components and raw materials used by us and
Hitachi in the manufacture of our products. Although we believe that
alternative sources for these components and raw materials are available, any
supply interruption in a limited or sole source component or raw material
would harm our and Hitachi's ability to manufacture our products until a new
source of supply is identified and qualified. In addition, an uncorrected
defect or supplier's variation in a component or raw material, either unknown
to us or Hitachi or incompatible with our or Hitachi's manufacturing
processes, could harm our or Hitachi's ability to manufacture products. We or
Hitachi may not be able to find a sufficient alternative supplier in a
reasonable time period, or on commercially reasonable terms, if at all. If we
or Hitachi fail to obtain a supplier for the manufacture of components of our
potential products, we may be forced to curtail or cease operations.
WE MAY NOT BE ABLE TO MANUFACTURE PRODUCTS ON A COMMERCIAL SCALE.
We rely on subcontractors to manufacture the limited quantities of
microchips and other components we require for internal and collaborative
purposes, as well as for use in prototype products.
Manufacturing, supply and quality control problems may arise as we or
Hitachi either alone, together or with subcontractors, attempt to scale up
manufacturing procedures. We or Hitachi may not be able to scale-up in a
timely manner or at a commercially reasonable cost. Problems could lead to
delays or pose a threat to the ultimate commercialization of our products and
cause us to fail.
We or Hitachi or any of our contract manufacturers could encounter
manufacturing difficulties, including:
- the ability to scale up manufacturing capacity;
- production yields;
- quality control and assurance; or
- shortages of components or qualified personnel.
Our manufacturing facilities and those of Hitachi and any other of our
contract manufacturers are or will be subject to periodic regulatory
inspections by the FDA and other federal, state and international regulatory
agencies and these facilities are subject to Quality System Regulation, or
QSR, requirements of the FDA. If we, Hitachi or our third-party manufacturers
fail to maintain facilities in accordance with QSR regulations, other
international
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<PAGE>
quality standards or other regulatory requirements then the manufacture
process could be suspended or terminated which would harm us.
WE HAVE LITTLE MARKETING OR SALES EXPERIENCE, AND IF WE ARE UNABLE TO DEVELOP
OUR OWN SALES AND MARKETING CAPABILITY, WE MAY NOT BE SUCCESSFUL IN
COMMERCIALIZING OUR PRODUCTS.
In order to market and sell our proprietary products, we will need to
develop a sales force and a marketing group with relevant experience, or make
appropriate arrangements with strategic partners to market and sell these
products. Developing a marketing and sales force is expensive and time
consuming and could delay any product launch or limit sales of our products.
Our inability to successfully employ qualified marketing and sales personnel
and develop our sales and marketing capabilities will harm our business.
IF WE FAIL TO MANAGE OUR GROWTH, OUR BUSINESS COULD BE IMPAIRED.
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, which would
impair our business.
WE MAY HAVE SIGNIFICANT PRODUCT LIABILITY EXPOSURE.
We face an inherent business risk of exposure to product liability and
other claims in the event that our technologies or products are alleged to
have caused harm. These risks are inherent in the testing, manufacturing and
marketing of our products. We may not be able to obtain insurance for such
potential liability on acceptable terms with adequate coverage, or at
reasonable costs. Any potential product liability claims could 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.
IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY NOT BE ABLE TO PURSUE COLLABORATIONS OR DEVELOP OUR OWN
PRODUCTS.
We are highly dependent on the principal members of our scientific,
manufacturing, marketing and management personnel, the loss of whose services
might significantly delay or prevent the achievement of our objectives. We
face competition from other companies, academic institutions, government
entities and other organizations in attracting and retaining personnel.
HEALTH CARE REFORM AND RESTRICTIONS ON REIMBURSEMENT MAY LIMIT OUR RETURNS ON
POTENTIAL PRODUCTS.
Our ability to earn sufficient returns on our products will depend in
part on the extent to which reimbursement for our products and related
treatments will be available from:
- government health administration authorities;
- private health coverage insurers;
- managed care organizations; and
- other organizations.
If appropriate reimbursement cannot be obtained, we could be prevented
from successfully commercializing our potential products.
There are efforts by governmental and third party payors to contain or
reduce the costs of health care through various means. We expect that there
will continue to be a number of legislative proposals to implement government
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<PAGE>
controls. The announcement of proposals or reforms could impair our ability
to raise capital. The adoption of proposals or reforms could impair our
business.
Additionally, third party payors are increasingly challenging the price
of medical products and services. If purchasers or users of our products are
not able to obtain adequate reimbursement for the cost of using our products,
they may forego or reduce their use. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and whether
adequate third party coverage will be available.
IF ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC INFORMATION
BECOME WIDESPREAD, WE MAY HAVE LESS DEMAND FOR OUR PRODUCTS.
Genetic testing has raised ethical issues regarding confidentiality and
the appropriate uses of the resulting information. For these reasons,
governmental authorities may call for limits on or regulation of the use of
genetic testing or prohibit testing for genetic predisposition to certain
conditions, particularly for those that have no known cure. Any of these
scenarios could reduce the potential markets for our products, which could
seriously harm our business, financial condition and results of operations.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER
HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND
COSTLY.
Our research and development processes involve the controlled storage,
use and disposal of hazardous materials including biological hazardous
materials and radioactive compounds. We are subject to federal, state and
local regulations governing the use, manufacture, storage, handling and
disposal of materials and waste products. Although we believe that our safety
procedures for handling and disposing of these hazardous materials comply
with the standards prescribed by law and regulation, the risk of accidental
contamination or injury from hazardous materials cannot be completely
eliminated. In the event of an accident, we could be held liable for any
damages that result, and any liability could exceed the limits or fall
outside the coverage of our insurance. We may not be able to maintain
insurance on acceptable terms, or at all. We could be required to incur
significant costs to comply with current or future environmental laws and
regulations.
OUR STOCK PRICE COULD CONTINUE TO BE HIGHLY VOLATILE AND OUR STOCKHOLDERS MAY
NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID FOR THEM.
The market price of our common stock, like that of many other life
sciences companies, has been highly volatile and is likely to continue to be
highly volatile. The following factors, among others, could have a
significant impact on the market price of our common stock:
- the results of our premarket studies and clinical trials or those of our
collaborators or competitors or for DNA testing in general;
- evidence of the safety or efficacy of our potential products or the
products of our competitors;
- the announcement by us or our competitors of technological innovations or
new products;
- the announcement by us of acquisitions by customers of our
NanoChip(TM)System or our other products;
- announcements or developments relating to our litigation against Motorola
and MIT;
- developments concerning our patents or other proprietary rights or those of
our competitors, including other litigation or patent office proceedings;
- loss of key personnel;
- governmental regulatory actions;
- changes or announcements in reimbursement policies;
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- developments with our collaborators;
- changes in or announcements relating to acquisition programs for our
products;
- period-to-period fluctuations in our operating results;
- market conditions for life science stocks in general; and
- changes in estimates of our performance by securities analysts.
OUR ANTI-TAKEOVER PROVISIONS COULD DISCOURAGE POTENTIAL TAKEOVER ATTEMPTS AND
MAKE ATTEMPTS BY STOCKHOLDERS TO CHANGE MANAGEMENT MORE DIFFICULT.
The approval of two-thirds of our voting stock is required to approve
some transactions and to take some stockholder actions, including the calling
of a special meeting of stockholders and the amendment of any of the
anti-takeover provisions contained in our certificate of incorporation.
Further, pursuant to the terms of our stockholder rights plan adopted in
November 1998, we have distributed a dividend of one right for each
outstanding share of common stock. These rights will cause substantial
dilution to the ownership of a person or group that attempts to acquire us on
terms not approved by our board of directors and may have the effect of
deterring hostile takeover attempts.
IF WE MAKE ANY ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER
REALIZE THE ANTICIPATED BENEFITS.
If appropriate opportunities become available, we may attempt to acquire
businesses, technologies, services or products that we believe are a
strategic fit with our business. We currently have no commitments or
agreements with respect to any material acquisitions. If we do undertake any
transaction of this sort, the process of integrating an acquired business,
technology, service or product may result in operating difficulties and
expenditures and may absorb significant management attention that would
otherwise be available for ongoing development of our business. Moreover, we
may never realize the anticipated benefits of any acquisition. Future
acquisitions could result in potentially dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities and/or
amortization expenses related to goodwill and other intangible assets, which
could adversely affect our results of operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our 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 three months 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
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.
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NANOGEN, INC.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 6, 2000, the Registrant held its Annual Meeting of
Stockholders.
(b) As listed below, all of management's nominees for directors were
elected at the meeting:
<TABLE>
<CAPTION>
Name of Nominee No. of Votes For No. of Votes Withheld No. of Votes Abstain
--------------- ---------------- --------------------- --------------------
<S> <C> <C> <C>
Stelios B. Papadopoulos 15,775,626 138,439 0
</TABLE>
In addition, directors whose term of office continue after the Annual
Meeting are: Howard C. Birndorf, Val Buonaiuto, Cam L. Garner, David
G. Ludvigson, and Thomas G. Lynch.
(c) (1) The proposal to amend the Company's 1997 Stock Incentive Plan to
increase the number of shares reserved for issuance thereunder by
1,000,000 was approved with 13,777,625 shares voting in favor,
2,098,802 voting against, 37,638 shares abstaining.
(2) The appointment of Ernst & Young LLP as independent auditors of
the Company for the fiscal year ending December 31, 2000 was
ratified with 15,885,518 shares voting in favor, 12,858 voting
against, 15,689 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(d) Exhibits
10.1 License Agreement between the Registrant and Beckman Coulter,
Inc. dated May 19, 2000.+
10.2 Employment Agreement between the Registrant and Michael D. Moore,
dated June 15, 2000.
10.3 Employment Agreement between the Registrant and George E. Bers,
dated June 5, 2000.
10.4 Letter Agreement between the Registrant and Vera P. Pardee, dated
June 8, 2000.
27.1 Financial Data Schedule.
-------------
+ Confidential treatment has been requested with respect to certain
portions of this agreement.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three months ended June 30, 2000.
20
<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 AUGUST 11, 2000 /S/ HOWARD C. BIRNDORF
------------------------ ----------------------------------
HOWARD C. BIRNDORF
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE AUGUST 11, 2000 /S/ KIERAN T. GALLAHUE
------------------------ ----------------------------------
KIERAN T. GALLAHUE
SENIOR VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND TREASURER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
21
<PAGE>
NANOGEN, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
10.1 License Agreement between the Registrant and Beckman Coulter, Inc. dated May 19,
2000.+
10.2 Employment Agreement between the Registrant and Michael D. Moore, dated June 15,
2000.
10.3 Employment Agreement between the Registrant and George E. Bers, dated June 5, 2000.
10.4 Letter Agreement between the Registrant and Vera P. Pardee, dated June 8, 2000.
27.1 Financial Data Schedule
------------
+ Confidential treatment has been requested with respect
to certain portions of this agreement.
</TABLE>
22
