<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 NOVEMBER 11, 2000, 20,931,962 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
<PAGE>
NANOGEN, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 2000
and December 31, 1999...........................................................3
Consolidated Statements of Operations for the Three and
Nine Months ended September 30, 2000 and 1999...................................4
Consolidated Statements of Cash Flows for the Nine
Months ended September 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...............................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.................................................................23
Item 2. Changes in Securities and Use of Proceeds.........................................23
Item 6. Exhibits and Reports on Form 8-K..................................................23
SIGNATURES..........................................................................................25
EXHIBIT INDEX.......................................................................................26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANOGEN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 89,618 $ 41,021
Short-term investments 8,954 -
Receivables 2,650 1,641
Inventory 2,070 -
Other current assets 814 679
-------------- -------------
Total current assets 104,106 43,341
Property and equipment, net 5,450 6,154
Acquired technology rights 5,480 1,005
Restricted cash 164 219
Other assets 63 66
-------------- -------------
$ 115,263 $ 50,785
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 874 $ 598
Accrued liabilities 3,979 3,726
Deferred revenue 580 3,373
Current portion of capital lease obligations 2,298 2,136
-------------- -------------
Total current liabilities 7,731 9,833
Capital lease obligations, less current portion 1,690 2,831
Stockholders' equity:
Convertible preferred stock, $.001 par value, 5,000,000 shares
authorized; no shares issued and outstanding at September 30, 2000
and December 31, 1999 - -
Common stock, $.001 par value, 50,000,000 shares authorized;
20,785,910 and 18,990,799 shares issued and outstanding
at September 30, 2000 and December 31, 1999, respectively 21 19
Additional paid-in capital 192,576 113,574
Accumulated other comprehensive income 8 -
Deferred compensation (558) (1,473)
Notes receivable from officers (1,205) (1,369)
Accumulated deficit (85,000) (72,630)
-------------- -------------
Total stockholders' equity 105,842 38,121
-------------- -------------
$ 115,263 $ 50,785
============== =============
</TABLE>
See accompanying notes.
3
<PAGE>
NANOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 545 $ - $ 709 $ -
Sponsored research 2,565 1,234 6,132 4,153
Contract and grant revenue 436 712 1,370 1,928
-------------- -------------- -------------- --------------
Total revenues 3,546 1,946 8,211 6,081
Operating expenses:
Cost of sales 437 - 450 -
Research and development 5,445 5,406 14,202 19,042
General and administrative 4,026 2,161 9,651 6,158
-------------- -------------- -------------- --------------
Total operating expenses 9,908 7,567 24,303 25,200
-------------- -------------- -------------- --------------
Loss from operations (6,362) (5,621) (16,092) (19,119)
Interest income, net 1,783 480 3,722 1,551
Loss on disposition of fixed assets - - - (30)
Equity in loss of joint venture - (78) - (1,013)
-------------- -------------- -------------- --------------
Net loss $ (4,579) $ (5,219) $ (12,370) $ (18,611)
============== ============== ============== ==============
Net loss per share -
Basic and diluted $ (0.22) $ (0.29) $ (0.62) $ (1.03)
============== ============== ============== ==============
Number of shares used in computing
net loss per share - basic and diluted 20,360 18,244 19,797 17,991
============== ============== ============== ==============
</TABLE>
See accompanying notes.
4
<PAGE>
NANOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (12,370) $ (18,611)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of joint venture - 1,013
Depreciation and amortization 1,851 1,246
Stock based compensation expense 915 1,120
Loss on disposition of fixed assets, net - 30
Interest capitalized on notes receivables from officers (44) (58)
Changes in operating assets and liabilities:
Receivables and other assets (1,140) (590)
Inventory (2,070) -
Accounts payable 276 (304)
Accrued liabilities 253 835
Deferred revenue (2,793) (36)
Due to joint venture - 78
-------------- -------------
Net cash used in operating activities (15,122) (15,277)
Cash flows from investing activities:
Purchase of equipment - (34)
Purchase of short-term investments (8,946) -
Acquired technology rights (5,000) -
Investment in joint venture - (1,013)
-------------- -------------
Net cash used in investing activities (13,946) (1,047)
Cash flows from financing activities:
Decrease in restricted cash 55 56
Principal payments on capital lease obligations (1,602) (1,497)
Issuance of common stock, net of repurchases 79,028 99
Note receivable payments from officers 184 -
-------------- -------------
Net cash provided by (used in) financing activities 77,665 (1,342)
Increase (decrease) in cash and cash equivalents 48,597 (17,666)
Cash and cash equivalents at beginning of period 41,021 62,245
-------------- -------------
Cash and cash equivalents at end of period $ 89,618 $ 44,579
============== =============
Supplemental disclosure of cash flow information:
Interest paid $ 311 $ 445
============== =============
Supplemental schedule of noncash investing and
Financing activities:
Equipment acquired under capital leases $ 622 $ 859
============== =============
Deferred compensation related to stock options and awards $ - $ 1,820
============== =============
</TABLE>
See accompanying notes.
5
<PAGE>
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States of America 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 accounting principles generally accepted in the United
States of America for complete financial statements. The consolidated
balance sheet as of September 30, 2000, consolidated statements of
operations for the three and nine months ended September 30, 2000 and
1999, and the consolidated statements of cash flows for the nine months
ended September 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 nine months
ended September 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.
INVESTMENTS
Investments are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting For Certain Investments
In Debt And Equity Securities, which requires that the Company
determine the appropriate classification of investments at the time of
purchase and reevaluate such designation as of each balance sheet date.
At September 30, 2000, the Company considered all investments as
available for use in its current operations, and therefore classified
them as short-term, available-for-sale investments. Available-for-sale
investments are stated at fair value, with unrealized gains and losses,
if any, net of tax, reported as a separate component of stockholders'
equity. The cost of securities sold is based on the specific
identification method. There were no realized gains or losses for the
three and nine months ended September 30, 2000.
COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, Reporting Comprehensive Income ("SFAS 130") requires
reporting and displaying comprehensive income (loss) and its components
which, for Nanogen, includes unrealized gains and losses on investments
and foreign currency translation gains and losses. In accordance with
SFAS 130, the accumulated balance of other comprehensive income (loss)
is disclosed as a separate component of stockholders' equity.
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 nine months ended September 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.
6
<PAGE>
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
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 issued to Aventis a
warrant to purchase 120,238 shares of common stock exercisable through
December 2003, which was exercised by Aventis at an agreed-upon
exercise price of $6.17 per share subsequent to the quarter ended
September 30, 2000. 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 which 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 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 $2.1 million and $5.7 million for the three and
nine months ended September 30, 2000, respectively, and $588,000 and
$2.0 million for the three and nine months ended September 30, 1999,
respectively. Funding received in advance of incurred expenses is
recorded as deferred revenue until the expenses are incurred, and
totaled $166,000 and $3.4 million at September 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 $78,000 and $1.0 million for the
three and nine months ended September 30, 1999, respectively.
Concurrent with the execution of the joint venture agreement in 1997,
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.
In September 2000, the Company and Becton Dickinson modified the joint
venture to permit the partners the opportunity to commercialize certain
of the Partnership's technology and allow them to collaborate with
third parties to develop and commercialize certain products in the
field of infectious diseases. Pursuant to amendments to the Master
Agreement, the General Partnership Agreement and the Collaborative
Research and
7
<PAGE>
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
Development and License Agreement, the Partnership exclusively licensed
other Partnership technology developed up to that date to Becton
Dickinson and Becton Dickinson exclusively sublicensed the Partnership
technology to the Company to commercialize products in the field of
infectious diseases. Becton Dickinson also agreed to non-exclusively
license SDA technology to the Company for its use and for sublicensing
purposes in the field of infectious diseases. Becton Dickinson also
expanded the field of use for the Company's SDA license outside of the
Partnership to not only include IN VITRO human genetic testing and IN
VITRO cancer diagnostics, but also IN VITRO testing of environmental,
agricultural and veterinary samples. Pursuant to the amendments, Becton
Dickinson agreed to pay the Company $300,000, which was received
subsequent to the quarter ended September 30, 2000. The Company does
not expect to receive any additional funding from Becton Dickinson.
Revenue was recognized under the agreements as expenses were incurred,
and totaled $300,000 for the three and nine months ended September 30,
2000, and $436,000 and $1.6 million for the three and nine months ended
September 30, 1999, respectively.
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 $211,000 and $568,000 for the three and nine months ended
September 30, 1999, respectively. No revenue was recognized under the
agreement during the three and nine months ended September 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 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.
In July 2000, the Company executed a ten-year agreement with Hitachi,
Ltd., Nissei Sangyo Co. Ltd. and Hitachi Instruments Service Co. Ltd.
of Japan (collectively, "Hitachi") to develop, manufacture and
distribute products based on the parties' proprietary technologies,
potentially including, among other things, reduced-size instruments for
genetic testing, integrated amplification and point of care detection.
The agreement provides that the parties will jointly determine which
projects to prioritize over the term of the agreement. The agreement
may be terminated before its expiration by either party, subject to
certain restrictions. Pursuant to the terms of the agreement, Hitachi
and the Company each may contribute up to $28.5 million in cash over
the ten-year period. In addition, Hitachi made an equity investment in
the Company by purchasing 74,590 shares of the
8
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NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
Company's common stock worth approximately $2.0 million pursuant to a
private sale by the Company based on a per share price of $26.813 (the
fair market value as of the signing date of the Hitachi agreement). The
agreement expands on the agreement executed by the Company and Hitachi
in January 2000. Hitachi has the right to be the exclusive distributor
of collaboration products in Japan and, based upon the attainment of
minimum sales targets to be mutually agreed upon, in other Asian
countries. The Company retains the exclusive right to distribute
collaboration products outside of these countries. The agreement is
non-exclusive and excludes some clinical markets.
3. NANOGEN EUROPE B.V.
In August 2000, Nanogen Europe B.V. was incorporated as a company with
limited liability in The Netherlands. In conjunction with the
incorporation, the Company was issued all of the outstanding shares of
Nanogen Europe B.V. This wholly-owned subsidiary will operate as the
primary European sales and marketing office for the Company. The
Company's consolidated financial statements include $178,000 in cash
and no operating income or loss at September 30, 2000 related to
Nanogen Europe B.V.
4. PENDING LITIGATION
In April 2000, the Company filed a complaint for declaratory judgment
against Motorola, Inc. ("Motorola"), Beckman Coulter, Inc. ("Beckman")
and Massachusetts Institute of Technology ("MIT") 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.
In May 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. Motorola filed a
counterclaim against the Company in May 2000, 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. In October 2000, the Company's motion for
leave to amend the complaint to add Genometrix as a defendant was
granted. Discovery has commenced. The pretrial conference is currently
scheduled for October 2001. 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, MIT's and
Genometrix's affirmative defenses. The Company may not prevail in the
action, which could have a material adverse effect on the Company.
9
<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, which
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 September 30, 2000, had an accumulated
deficit of $85 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 in the second
quarter of 2000. While we recognized revenue from product sales during the three
and nine months ended September 30, 2000, we anticipate our main sources of
revenues during fiscal 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, a portion of our revenue for fiscal
2000 will be from sales or other types of acquisition programs 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. Total revenues for the three and nine months ended September 30,
2000, include $545,000 and $709,000, respectively, from the sale of our
NanoChip-TM- molecular biology workstations and NanoChip-TM- cartridges. During
the three and nine months ended September 30, 2000, all revenue recorded related
to sales of our NanoChip-TM- molecular biology workstation resulted from
outright sales transactions where title of the instrument passed to the
customer. We offer our products to customers under several different types of
acquisition programs, some of which pass title of the instrument to the customer
and some of which do not pass title to the customer. Our sales revenue may vary
from quarter to quarter due to, among other things, the types of acquisition
programs our potential customers may choose.
For the three and nine months ended September 30, 2000, revenue from
sponsored research totaled $2.6 million and $6.1 million, respectively, compared
to $1.2 million and $4.2 million for the three and nine months ended
10
<PAGE>
September 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 nine months ended
September 30, 2000, was earned in connection with the research and development
agreements entered into in December 1998 and September 1999 with Aventis, the
joint venture agreement with Becton Dickinson as amended in September 2000, and
the development program entered into in July 2000 with Hitachi. Sponsored
research revenue recognized during the three and nine months ended September 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. In September 2000, the Company and Becton Dickinson modified the joint
venture to, among other things, permit the partners the opportunity to
commercialize certain of the Partnership's technology and to allow them to
collaborate with third parties in developing and commercializing certain
products and technologies. The Company does not expect to 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.
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.
COST OF SALES. For the three and nine months ended September 30, 2000, cost
of sales were $437,000 and $450,000, respectively. There were no cost of sales
recorded for the three and nine months ended September 30, 1999 as we had not
recorded any product sales during these periods.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$5.4 million and $14.2 million for the three and nine months ended September 30,
2000, respectively, compared to $5.4 million and $19.0 million for the three and
nine months ended September 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 changes 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 nine months ended September 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 nine months ended September 30, 2000, many costs associated
with the manufacturing of the workstation were absorbed by our manufacturing
partner, Hitachi Ltd. 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
increased to $4.0 million and $9.7 million for the three and nine months ended
September 30, 2000, respectively, compared to $2.2 million and $6.2 million for
the three and nine months ended September 30, 1999, respectively. These
increases were primarily due to increased legal fees associated with enhancing
and maintaining our intellectual property portfolio, costs related to patent
litigation, and costs associated with the expansion of our administrative and
sales and marketing organizations. General and administrative expenses are
expected to continue to increase as we continue to expand our sales and
marketing organization and continue to enhance our intellectual property
portfolio.
INTEREST INCOME, NET. Net interest income was $1.8 million and $3.7 million
for the three and nine months ended September 30, 2000, respectively, compared
to $480,000 and $1.6 million for the three and nine months ended September 30,
1999, respectively. The increases in net interest income can be primarily
attributed to higher average cash balances during the three and nine months
ended September 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.
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EQUITY IN LOSS OF JOINT VENTURE. We recognized a loss of $78,000 and $1.0
million during the three and nine months ended September 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 nine months ended September 30, 2000 as no cash contributions were
required to be made by us to the joint venture during those periods. In
September 2000, we and Becton Dickinson modified the joint venture to, among
other things, permit the partners the opportunity to commercialize certain of
the Partnership's technology and to allow them to collaborate with third parties
in developing and commercializing certain products and technologies. We do not
anticipate any additional funding to the joint venture.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had $89.6 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 secondary public offering of common stock in March 2000
generating net proceeds of $76.5 million, offset by net cash used in operations
and for the acquisition of technology rights and for the purchase of short-term
investments during the nine months ended September 30, 2000.
Net cash used in operating activities was $15.1 and $15.3 million for the
nine months ended September 30, 2000 and 1999, respectively. Cash used for
operations was primarily related to costs associated with entering the
commercialization stage of our initial products including the procurement of
$2.1 million of inventory pursuant to our manufacturing arrangement with
Hitachi, Ltd., supporting our continued research and development efforts, and
legal fees relating to establishing and maintaining our intellectual property
portfolio.
During the nine months ended September 30, 2000, we paid $5.1 million to
acquire rights to technologies in order to enable us to further develop and
commercialize our products. In addition, we paid $8.9 million to invest in
short-term securities in an effort to maximize our return while preserving our
cash balance.
We fund most of our equipment acquisitions and leasehold improvements
through capital leasing facilities. During the first nine months of 2000, we
received proceeds from equipment financing of $622,000, compared to $859,000 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 two 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
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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 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 and a
developer and manufactuer of instrumentation products. 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, Elan and
Hitachi, Ltd. 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. During the three months ended September
30, 2000, Becton Dickinson agreed to pay $300,000 related to amendments of
existing Partnership agreements. We do not expect to 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.
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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, but
do not expect to sell significant quantities of our first products during fiscal
2000. From our inception to September 30, 2000, we have incurred cumulative net
losses totaling approximately $85.0 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.
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;
- meeting regulatory requirements, including obtaining necessary
regulatory clearances or 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 and other companies that manufacture laboratory-based tests
and analyzers;
- diagnostic and pharmaceutical companies; and
- companies developing drug discovery technologies.
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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.
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, MIT and Genometrix 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
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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 cm(2), 400 different oligonucleotides
per cm(2) on a substrate, and for gene expression, more than 100 different
oligonucleotides at a density greater than about 60 different
oligonucleotides per 1 cm(2). 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 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.
In April 2000, we filed a complaint for declaratory judgment against
Motorola, Beckman and MIT 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.
In May 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. Motorola filed a counterclaim
against us in May 2000, 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. In October 2000, our
motion for leave to amend the complaint to add Genometrix as a defendant was
granted. Discovery has commenced. The pretrial conference is currently scheduled
for October 2001. 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, MIT's, and Genometrix'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.
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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 test systems, kits, and IN VITRO reagents that are marketed for
human diagnostic use. Pursuant to the Federal Food, Drug, and Cosmetic Act, the
FDA regulates the preclinical and clinical testing, design, safety,
effectiveness, 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 proposed products.
Regulatory clearance or approval 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:
- criminal prosecution, civil penalties, other administrative sanctions, or
judicially imposed sanctions such as injunctions;
- recall or seizure of products;
- total or partial suspension of production;
- failure of the government to grant premarket clearance or premarket
approval for devices or withdrawal of marketing clearances or approvals
once granted.
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, including the California Department of Health Services.
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.
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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 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.
During the three months ended September 30, 2000, we increased the number of
employees in our sales and marketing group from nine at June 30, 2000 to 17 at
September 30, 2000. In addition, we incorporated a subsidiary, Nanogen Europe
B.V. in The Netherlands as our European sales office. At September 30, 2000 this
office employed two European sales executives based in the United Kingdom and
Denmark.
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.
FAILURE TO EXPAND OUR INTERNATIONAL SALES AS WE INTEND WOULD REDUCE OUR ABILITY
TO BECOME PROFITABLE.
We expect that a portion of our sales will be made outside the United States. A
successful international effort will require us to develop relationships with
international customers and partners. We may not be able to identify, attract or
retain suitable international customers and partners. As a result, we may be
unsuccessful in our international expansion efforts. Furthermore, expansion into
international markets will require us to continue to establish and expand
foreign sales and marketing efforts, hire additional sales and marketing
personnel and maintain good relations with our foreign customers and partners.
International operations involve a number of risks not typically present in
domestic operations, including:
- currency fluctuation risks;
- changes in regulatory requirements;
- costs and risks of deploying the NanoChip-TM- System in foreign countries;
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- licenses, tariffs and other trade barriers;
- political and economic instability;
- difficulties in staffing and managing foreign offices;
- potentially adverse tax consequences;
- and the burden of complying with a wide variety of complex foreign laws
and treaties.
Our international sales and marketing efforts will also be subject to the risks
associated with the imposition of legislation and regulations relating to the
import or export of high technology products. We cannot predict whether tariffs
or restrictions upon the importation or exportation of our products will be
implemented by the United States or other countries.
We may lose money when we exchange foreign currency received from international
sales into US dollars. A portion of our business is expected to be conducted in
currencies other than the US dollar. We recognize foreign currency gains or
losses arising from our operations in the period incurred. As a result, currency
fluctuations between the US dollar and the currencies in which we do business
will cause foreign currency translation gains and losses. We cannot predict the
effects of exchange rate fluctuations upon our future operating results because
of the number of currencies involved, the variability of currency exposure and
the potential volatility of currency exchange rates. We do not currently engage
in foreign exchange hedging transactions to manage our foreign currency
exposure.
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:
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- 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
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;
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- 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,
MIT and Genometrix;
- 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 or the failure to gain necessary
clearances or approvals;
- changes or announcements in reimbursement policies;
- developments with our collaborators;
- changes in or announcements relating to acquisition programs for our
products;
- period-to-period fluctuations in sales and 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.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in short-term, interest-bearing
investment-grade securities that are held for the duration of the term of the
respective instrument. 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.
The functional currency for our Netherlands subsidiary is the Euro. The
subsidiary's accounts are translated from the Euro to the U.S. dollar using the
current exchange rate in effect at the balance sheet date for balance sheet
accounts, and using the average exchange rate during the period for revenues and
expense accounts. The effects of translation are recorded as a separate
component of stockholders' equity. Our subsidiary conducts its business with
customers in local European currencies. Exchange gains and losses arising from
these transactions are recorded using the actual exchange rate differences on
the date of the transaction. We have not taken any action to reduce our exposure
to changes in foreign currency exchange rates, such as options or futures
contracts, with respect to transactions with our subsidiary or transactions with
our European customers. The net tangible assets of our subsidiary, excluding
intercompany balances, is $178,000 at September 30, 2000.
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<PAGE>
NANOGEN, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please see discussion of legal proceedings at note 4 in the Notes to the
Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) In August 2000, we sold 74,590 shares of our common stock to Hitachi
at a per share price of $26.813. We relied on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 in making the sale, based
in part on the institutional nature of the purchasers and representations and
warranties of the purchasers.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment of Master Agreement between Registrant and
BD, dated as of September 25, 2000
10.2 First Amendment of Collaborative Research and Development
and License Agreement between Registrant and BD, dated as of
September 25, 2000+
10.3 First Amendment of General Partnership Agreement between
Registrant and BD, dated as of September 25, 2000+
10.4 First Amendment of License Agreement between Registrant and
BD, dated as of September 25, 2000+
10.5 Partnership Product Commercialization License Agreement,
dated as of September 25, 2000+
10.6 Collaboration Agreement between Registrant and Hitachi,
Ltd., Nissei Sangyo Co. Ltd. and Hitachi Instruments Service
Co. Ltd., (collectively the "Hitachi Parties"), dated July
26, 2000+
10.7 First Amendment to Reader, Loader and Cassette Low Cost
Engineering and Manufacturing Agreement between Registrant
and Hitachi, Ltd., dated July 26, 2000+
10.8 Common Stock Purchase Agreement between Registrant and the
Hitachi Parties, dated July 26, 2000
10.9 Warrant to Purchase Common Stock between Registrant and
Aventis Research and Technologies Verwaltungs, GmbH, dated
September 22, 2000
10.10 First Amendment to Employment Agreement between Registrant
and Howard C. Birndorf, dated as of July 28, 2000
10.11 First Amendment to Employment Agreement between Registrant
and Kieran T. Gallahue, dated as of July 28, 2000
10.12 First Amendment to Employment Agreement between Registrant
and Michael D. Moore, dated as of July 28, 2000
10.13 First Amendment to Employment Agreement between Registrant
and James P. O'Connell, dated as of July 28, 2000
10.14 First Amendment to Employment Agreement between Registrant
and George E. Bers, dated as of July 28, 2000
10.15 First Amendment to Employment Agreement between Registrant
and Michael J. Heller, dated as of July 28, 2000
10.16 Letter Agreement between Registrant and Hoechst AG
("Hoecht"), dated December 4, 1997+
10.17 Sponsored Research Agreement between Registrant and Prolinx,
Inc., dated as of December 18, 1996+
10.18 Collaborative Research and Development Agreement between
Registrant and Hoechst, dated December 3, 1998+
27.1 Financial Data Schedule
------------
+ Confidential treatment has been requested with respect to certain
portions of this agreement.
23
<PAGE>
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three months
ended September 30, 2000.
24
<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 NOVEMBER 13, 2000 /s/ HOWARD C. BIRNDORF
------------------------ ----------------------------------
HOWARD C. BIRNDORF
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
DATE NOVEMBER 13, 2000 /s/ KIERAN T. GALLAHUE
------------------------ ----------------------------------
KIERAN T. GALLAHUE
PRESIDENT, CHIEF FINANCIAL
OFFICER AND TREASURER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
<PAGE>
NANOGEN, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 First Amendment of Master Agreement between Registrant and BD,
dated as of September 25, 2000
10.2 First Amendment of Collaborative Research and Development and
License Agreement between Registrant and BD, dated as of
September 25, 2000+
10.3 First Amendment of General Partnership Agreement between
Registrant and BD, dated as of September 25, 2000+
10.4 First Amendment of License Agreement between Registrant and
BD, dated as of September 25, 2000+
10.5 Partnership Product Commercialization License Agreement, dated
as of September 25, 2000+
10.6 Collaboration Agreement between Registrant and Hitachi, Ltd.,
Nissei Sangyo Co. Ltd. and Hitachi Instruments Service Co.
Ltd., (collectively the "Hitachi Parties"), dated July 26,
2000+
10.7 First Amendment to Reader, Loader and Cassette Low Cost
Engineering and Manufacturing Agreement between Registrant and
Hitachi, Ltd., dated July 26, 2000+
10.8 Common Stock Purchase Agreement between Registrant and the
Hitachi Parties, dated July 26, 2000
10.9 Warrant to Purchase Common Stock between Registrant and
Aventis Research and Technologies Verwaltungs, GmbH, dated
September 22, 2000
10.10 First Amendment to Employment Agreement between Registrant and
Howard C. Birndorf, dated as of July 28, 2000
10.11 First Amendment to Employment Agreement between Registrant and
Kieran T. Gallahue, dated as of July 28, 2000
10.12 First Amendment to Employment Agreement between Registrant and
Michael D. Moore, dated as of July 28, 2000
10.13 First Amendment to Employment Agreement between Registrant and
James P. O'Connell, dated as of July 28, 2000
10.14 First Amendment to Employment Agreement between Registrant and
George E. Bers, dated as of July 28, 2000
10.15 First Amendment to Employment Agreement between Registrant and
Michael J. Heller, dated as of July 28, 2000
10.16 Letter Agreement between Registrant and Hoechst AG ("Hoecht"),
dated December 4, 1997+
10.17 Sponsored Research Agreement between Registrant and Prolinx,
Inc., dated as of December 18, 1996+
10.18 Collaborative Research and Development Agreement between
Registrant and Hoechst, dated December 3, 1998
27.1 Financial Data Schedule
------------
+ Confidential treatment has been requested with respect
to certain portions of this agreement.
26
