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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
Commission file number 333-43529
--------------------------------
LJL BIOSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0360183
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
405 TASMAN DRIVE
SUNNYVALE, CA 94089
(Address of principal executive offices)
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(408) 541-8787
(Registrant's telephone number, including area code)
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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 October 31, 1998, 10,522,993 shares of the Registrant's Common Stock,
$0.001 par value, were issued and outstanding.
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LJL BIOSYSTEMS, INC.
INDEX
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Consolidated Condensed Financial Statements (Unaudited) . . . . . 3
Consolidated Condensed Balance Sheet as of September 30, 1998
and December 31, 1997 (Unaudited) . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statement of Operations for the Three and
Nine Month Periods Ended September 30, 1998 and 1997
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statement of Cash Flows for the Nine Month
Periods Ended September 30, 1998 and 1997 (Unaudited) . . . . . . 5
Notes to Consolidated Condensed Financial Statements
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . 20
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Securities Holders . . . . . . 20
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 21
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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LJL BIOSYSTEMS, INC
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,431,000 $ 5,525,000
Short-term investments 9,966,000 -
Accounts receivable 756,000 59,000
Inventories 1,373,000 283,000
Other current assets 352,000 484,000
Total current assets 13,878,000 6,351,000
Property and equipment, net 729,000 442,000
Other assets 190,000 -
------------ -----------
$ 14,797,000 $ 6,793,000
------------ -----------
------------ -----------
Liabilities, Mandatorily Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 293,000 $ 681,000
Accrued expenses 1,580,000 360,000
Customer deposits 29,000 153,000
Current portion of long-term debt 126,000 46,000
------------ -----------
Total current liabilities 2,028,000 1,240,000
Long-term debt, net of current portion 431,000 40,000
------------ -----------
Mandatorily redeemable convertible preferred
stock; $21,543,000 redemption value - 9,308,000
------------ -----------
Stockholders' equity (deficit):
Common stock 10,000 5,000
Additional paid-in capital 22,993,000 705,000
Deferred stock compensation (657,000) (755,000)
Accumulated deficit (10,008,000) (3,750,000)
------------ -----------
Total stockholders' equity (deficit) 12,338,000 (3,795,000)
------------ -----------
$ 14,797,000 $ 6,793,000
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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LJL BIOSYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 1,425,000 $ 346,000 $ 2,809,000 $ 4,233,000
Development agreements - 6,000 - 642,000
------------ ------------ ------------ ------------
Total revenues 1,425,000 352,000 2,809,000 4,875,000
------------ ------------ ------------ ------------
Costs and operating expenses:
Product sales 776,000 230,000 1,806,000 2,035,000
Research and development 1,426,000 942,000 4,208,000 2,426,000
Selling, general and administrative 1,623,000 647,000 3,541,000 1,541,000
------------ ------------ ------------ ------------
Total costs and operating expenses 3,825,000 1,819,000 9,555,000 6,002,000
------------ ------------ ------------ ------------
Loss from operations (2,400,000) (1,467,000) (6,746,000) (1,127,000)
Interest income, net 207,000 97,000 488,000 146,000
------------ ------------ ------------ ------------
Loss before provision for income taxes (2,193,000) (1,370,000) (6,258,000) (981,000)
Provision for income taxes - - - 12,000
------------ ------------ ------------ ------------
Net loss (2,193,000) (1,370,000) (6,258,000) (993,000)
Accretion of mandatorily redeemable
convertible preferred stock
redemption value - (249,000) (254,000) (317,000)
----------- ----------- ----------- -----------
Net loss available to common
stockholders $ (2,193,000) $ (1,619,000) $ (6,512,000) $ (1,310,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share available to common
stockholders:
Basic $ (0.21) $ (0.36) $ (0.73) $ (0.29)
------------ ------------ ------------ ------------
Diluted $ (0.21) $ (0.36) $ (0.73) $ (0.29)
------------ ------------ ------------ ------------
Pro forma (0.64)
------------
Shares used in computation of net loss per
share available to common stockholders:
Basic 10,420,246 4,500,500 8,866,504 4,500,500
------------ ------------ ------------ ------------
Diluted 10,420,246 4,500,500 8,866,504 4,500,500
------------ ------------ ------------ ------------
Pro forma 9,818,825
------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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LJL BIOSYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,258,000) $ (993,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 210,000 87,000
Stock compensation expense 132,000 1,000
Changes in assets and liabilities:
Accounts receivable (697,000) 228,000
Inventories (1,090,000) 536,000
Other current assets 132,000 22,000
Other assets (190,000) -
Accounts payable (388,000) (18,000)
Accrued expenses 1,220,000 359,000
Customer deposits (124,000) (1,579,000)
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Net cash used in operating activities (7,053,000) (1,357,000)
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Cash flows used in investing activities:
Purchase of property and equipment (497,000) (309,000)
Purchase of short-term investments (12,934,000) -
Sales/maturities of short-term investments 2,968,000 -
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Net cash used in investing activities (10,463,000) (309,000)
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Cash flows from financing activities:
Proceeds from debt borrowings, net of repayments 471,000 25,000
Proceeds from issuance of mandatorily redeemable
convertible preferred stock, net - 8,672,000
Proceeds from issuance of common stock, net 12,951,000 -
Payment of S corporation dividends - (1,075,000)
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Net cash provided by financing activities 13,422,000 7,622,000
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Net increase (decrease) in cash and cash equivalents (4,094,000) 5,956,000
Cash and cash equivalents at beginning of period 5,525,000 1,166,000
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Cash and cash equivalents at end of period $ 1,431,000 $ 7,122,000
------------ -----------
------------ -----------
Supplemental disclosure of noncash
financing activities:
Issuance of common stock upon
conversion of mandatorily
redeemable convertible preferred stock $ 9,562,000 $ -
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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LJL BIOSYSTEMS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
In the opinion of management of LJL BioSystems, Inc. (the "Company"), the
accompanying unaudited consolidated financial data contains all adjustments,
consisting only of normal recurring adjustments, which the Company considers
necessary to present fairly the financial information included herein. This
Quarterly Report on Form 10-Q should be read in conjunction with the audited
financial statements and notes thereto included in the Prospectus
constituting part of Form S-1 dated March 13, 1998 as filed with the
Securities and Exchange Commission. The interim results presented herein are
not necessarily indicative of the results of operations that may be expected
for the full fiscal year ending December 31, 1998, or any other future period.
NOTE 2 - INVENTORIES:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
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<S> <C> <C>
Raw materials $ 595,000 $ 278,000
Work-in-process 349,000 -
Finished goods 429,000 5,000
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$ 1,373,000 $ 283,000
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</TABLE>
NOTE 3 - INITIAL PUBLIC OFFERING:
On March 13, 1998, the Company completed its initial public offering ("IPO")
of 2,000,000 shares of Common Stock at $7.00 per share, with the Company
receiving proceeds, net of underwriting commissions and associated costs, of
$12.2 million. In April 1998, the Company sold an additional 88,000 shares of
Common Stock in connection with the exercise of an over-allotment option
granted to the underwriters and received proceeds, net of underwriting
commissions and associated costs, of approximately $0.6 million. Upon the
closing of the IPO, all the outstanding shares of Series A Mandatorily
Redeemable Convertible Preferred Stock (the "Preferred Stock") converted into
an equal number of shares of Common Stock.
NOTE 4 - BASIC AND DILUTED NET LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS:
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", during the fiscal year ended December 31, 1997 and
retroactively restated all prior periods. Basic earnings per share is
computed using the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed using the weighted
average number of common and potential common shares outstanding during the
period. Potential common shares consist of the incremental common shares
issuable upon conversion of outstanding convertible preferred stock (using
the if-converted method) and shares issuable upon the exercise of stock
options and warrants (using the treasury stock method). Potential common
shares are excluded from the computation if their effect is anti-dilutive, as
was the case for the three and nine month periods ended September 30, 1998
and 1997. For the nine-month periods ended September 30, 1998 and 1997, net
loss available to common stockholders includes accretion of the Preferred
Stock redemption value in the amount of $254,000 and $317,000, respectively.
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A reconciliation of basic and diluted net loss per share available to common
stockholders is as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net loss $ (2,193,000) $ (1,370,000) $ (6,258,000) $ (993,000)
Accretion of mandatorily redeemable
convertible preferred stock redemption value - (249,000) (254,000) (317,000)
------------ ------------ ------------ -----------
Net loss available to common stockholders $ (2,193,000) $ (1,619,000) $ (6,512,000) $(1,310,000)
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Shares calculation:
Weighted average common shares
outstanding - basic 10,420,246 4,500,500 8,866,504 4,500,500
Dilutive potential common shares - - - -
------------ ------------ ------------ -----------
Weighted average common shares
outstanding - diluted 10,420,246 4,500,500 8,866,504 4,500,500
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Net loss per share available to common
stockholders - basic $ (0.21) $ (0.36) $ (0.73) $ (0.29)
------------ ------------ ------------ -----------
Net loss per share available to common
stockholders - diluted $ (0.21) $ (0.36) $ (0.73) $ (0.29)
------------ ------------ ------------ -----------
</TABLE>
NOTE 5 - PRO FORMA NET LOSS PER SHARE:
Pro forma net loss per share for the nine month period ended September 30,
1998 was calculated using the weighted average number of common shares
outstanding during the period, adjusted for the assumed conversion as of
January 1, 1998 of all outstanding shares of Preferred Stock into 3,621,503
shares of Common Stock.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
------------------
<S> <C>
Net loss $(6,258,000)
-----------
-----------
Weighted average common shares outstanding 8,866,504
Assumed conversion of preferred stock 3,621,503
Less preferred stock included in weighted
average common share calculation (2,669,182)
-----------
Total shares 9,818,825
-----------
-----------
Net loss per share - pro forma $ (0.64)
-----------
</TABLE>
NOTE 6 - COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). The Company adopted SFAS 130 effective January 1, 1998.
SFAS No. 130 requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual statement that
is displayed with the same prominence as other annual financial statements.
SFAS 130 also requires that an entity classify items as other comprehensive
earnings by their nature in an annual financial statement. For example other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available for sale. Annual financial
statements for prior periods will be reclassified, as required. For all
periods presented, comprehensive loss approximated the net loss reported.
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PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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THE DISCUSSION BELOW CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT ARE
BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT, AS WELL AS ASSUMPTIONS MADE
BY, AND INFORMATION CURRENTLY AVAILABLE TO, THE COMPANY'S MANAGEMENT. THE
COMPANY'S FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY
FROM THOSE EXPRESSED IN, OR IMPLIED BY, ANY SUCH FORWARD-LOOKING STATEMENTS.
THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS, AMONG OTHERS, WHICH
COULD CAUSE OR CONTRIBUTE TO SUCH MATERIAL DIFFERENCES. THE FOLLOWING
PRESENTATION OF MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND NOTES THERETO AND OTHER FINANCIAL INFORMATION
INCLUDED THEREIN.
OVERVIEW
From inception in 1988 through 1991, the Company derived its revenues from
the development of clinical diagnostics and research instruments for
customers. Beginning in 1992, the Company began manufacturing and shipping
these clinical diagnostics and research instruments to customers either for
their internal use or for resale on an original equipment manufacturing
("OEM") basis.
In the second half of 1996, the Company implemented a new strategic business
model aimed at developing products for the emerging high throughput screening
("HTS") market, which enables accelerated drug discovery, by leveraging its
existing technology platform and product development and manufacturing
expertise. In connection with this change in strategy, the Company shifted
its focus from developing and manufacturing OEM clinical diagnostics and
research products to developing, manufacturing and marketing its own products
for HTS. As part of its shift in focus, the Company has de-emphasized its OEM
development activities and has phased out production of all but one of its
OEM instruments. However, the Company expects to support and may continue to
manufacture products under its agreement with Ventana Medical Systems, Inc.
("Ventana") through 1998 and possibly beyond.
RESULTS OF OPERATIONS
REVENUES
Total revenues were $1.4 million and $2.8 million for the three and nine
month periods ended September 30, 1998, respectively, as compared to $0.4
million and $4.9 million for the three and nine month periods ended September
30, 1997, respectively, representing an increase of $1.1 million or 305% and
a decrease of $2.1 million or 42%, respectively. No revenue was recognized
under development agreements for OEM products for the three and nine month
periods ended September 30, 1998. This compares with $0 and $0.6 million
recognized under development agreements for OEM products for the three and
nine month periods ended September 30, 1997, respectively. The increase in
revenues in the three month period ended September 30, 1998, as compared to
the same period in 1997, was due to the shipments of ANALYST-TM-, the
Company's first HTS product, offset by the receipt of no revenues from OEM and
development agreements, which made up all of the revenue reported in the
three months ended September 30, 1997. The decline in revenues for the nine
month periods ended September 30, 1998 and 1997, as well as the absence or
decrease in OEM and development agreement revenue for the three and nine
month periods ended September 30, 1998, respectively, as compared to the same
periods in 1997, was due to the Company's decision in 1996 to focus its
future efforts on development of a proprietary HTS product platform and not
to pursue additional development or manufacturing agreements for OEM
products. Therefore, the Company does not expect revenues from OEM
development agreements in future periods. Revenues from OEM product sales
were $0 and $0.4 million for the three and nine month periods ended September
30, 1998, respectively, as compared to $0.3 million and $4.2
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million for the three and nine month periods ended September 30, 1997,
respectively, representing decreases of $0.3 million and $3.8 million,
respectively. These decreases in OEM product revenues were due to the
Company's increasing focus on its HTS products and the phasing out of the
Luminometer (a microplate reader), the Q2000 (a clinical analyzer) and the
microplate heater products. The Company will likely make little or no OEM
product sales in future periods.
COST OF PRODUCT SALES
Cost of product sales were $0.8 million and $1.8 million for the three and
nine month periods ended September 30, 1998, respectively, as compared to
$0.2 million and $2.0 million for the three and nine month periods ended
September 30, 1997, respectively, representing an increase of $0.5 million or
237% and a decrease of $0.2 million or 11%, respectively. The fluctuations in
cost of product sales for the three and nine month periods ended September
30, 1998 as compared to the three and nine month periods ended September 30,
1997, respectively, were primarily due to the Company's transition in product
mix from OEM products to its new line of HTS products, as well as the fact
that a portion of costs remain fixed regardless of sales volume. Gross
profit, as a percentage of product sales, was 46% and 36% during the three
and nine month periods ended September 30, 1997, respectively, and was 35%
and 58% for the three and nine month periods ended September 30, 1998,
respectively. The increase for the three months ended September 1998 as
compared to the same period in 1997, was primarily due to increased
absorption of manufacturing overhead resulting from increased unit sales. The
decrease for the nine months ended September 1998 as compared to the same
period in 1997, was primarily the result of decreased absorption of
manufacturing overhead resulting from low HTS unit sales early in 1998. The
Company expects that gross profit as a percentage of product sales will
remain low for the next several years until sales volumes for the ANALYST,
ACQUEST-TM- and related products increase and the Company is able to spread
its manufacturing costs over higher production levels.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1.4 million and $4.2 million for the
three and nine month periods ended September 30, 1998, respectively, as
compared to $0.9 million and $2.4 million for the three and nine month
periods ended September 30, 1997, respectively, representing increases of
$0.5 million or 51% and $1.8 million or 74%, respectively. The increases for
the three and nine month periods ended September 30, 1998 as compared to the
three and nine month periods ended September 30, 1997, were primarily due to
increased costs associated with the development of the Company's HTS product
platform, partially offset by a decrease in the level of research and
development expenses incurred in connection with development agreements for
OEM customers. The Company expects research and development expenditures to
continue to increase in future periods to support the development of its HTS
product line.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs were $1.6 million and $3.5 million
for the three and nine month periods ended September 30, 1998, respectively,
as compared to $0.6 million and $1.5 million for the three and nine month
periods ended September 30, 1998, respectively, representing increases of
$1.0 million or 151% and $2.0 million or 130%, respectively. The increases
for the three and nine month periods ended September 30, 1998 as compared to
the three and nine month periods ended September 30, 1997, were primarily due
to increases in marketing and sales expenses associated with the addition of
sales and marketing personnel, as well as marketing expenses for the ANALYST
and ACQUEST and other increases in general and administrative expenses which
include the additional administrative costs of being a public company. The
Company expects selling, general and administrative expenses to increase in
future periods for the reasons described above.
INTEREST AND OTHER INCOME, NET
Net interest and other income was $207,000 and $488,000 for the three and
nine month periods ended September 30, 1998, respectively, as compared to
$97,000 and $146,000 for the three and nine month periods ended September 30,
1997, respectively, representing increases of $110,000 and $342,000,
respectively. The increases for the three and nine month periods ended
September 30, 1998 as compared to the three and nine month periods ended
September 30, 1997, were primarily due to interest earned on higher levels of
invested cash, cash equivalents and short-term
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<PAGE>
investments in the respective periods in 1998 as compared to the comparable
periods 1997 as a result of the receipt of the proceeds from the Company's
IPO.
YEAR 2000 COMPLIANCE
The Company is in the process of performing its assessment of the impact of
the Year 2000 issue on its operations. The issues involved include the
possibility that software which does not have the capacity to recognize four
digits in a date field may no longer function properly when use of that date
becomes necessary. Management is in the process of formalizing its assessment
procedures and developing a plan to address identified issues. The Company is
evaluating the software it provides to its customers, its financial and
accounting and inventory tracking systems and all other corporate-wide
computer applications, and its other systems and equipment. The extent, if
any, of the impact of the Year 2000 issue on these software, systems,
applications and equipment is unknown. The Company expects its review to be
completed by early 1999 after which the Company will attempt to remedy any
issues which may exist. The Company expects such issues will be resolved on a
timely basis, and presently believes that, with modifications to existing
software or converting to new software, the Year 2000 issue will not pose
significant operational problems for the Company's software and computer
systems or result in total costs material to the Company's financial
condition. The Company, therefore, has not to date made any contingency plans
to account for any Year 2000 issues. However, there can be no assurance there
will not be a delay in, or increased costs associated with, the
implementation of any Year 2000 changes, and the Company's inability to
implement such changes could have an adverse effect on future results of
operations. The Company has not fully determined the extent to which it may
be impacted by third parties' systems including those of its suppliers and
collaborative partners, which may not be Year 2000-compliant. While the
Company has begun efforts to seek reassurance from its significant suppliers,
partners and service providers, which the Company expects to complete by
mid-1999, there can be no assurance that the systems of other companies that
the Company deals with or on which the Company relies will be timely
converted, or that any such failure to convert by another company would not
have a material adverse effect on the Company. Any Year 2000 compliance
problems of either the Company, its suppliers, its collaborative partners or
its customers could have a material adverse effect on the Company's business,
operating results and financial condition.
INCOME TAXES
Prior to June 1997, the Company had been taxed as an S corporation for
federal and state income tax purposes. Under the Internal Revenue Code
provisions regarding S corporations, the Company had not been subject to
federal income taxes but had been subject to state income taxes at a reduced
rate. As an S corporation, the Company's stockholders paid taxes on their
share of the Company's taxable income in their individual tax returns. In
June 1997, in connection with the Company's Preferred Stock financing, the
Company became subject to the C corporation provisions of the Internal
Revenue Code pursuant to which the Company's earnings are taxed for federal
and state income tax purposes at the corporate level. Through June 1997, the
Company's profits were distributed to the Company's stockholders through a
combination of compensation, which was treated as an expense in the
Consolidated Statement of Operations, and dividends. Future distributions of
profits are not expected. No provision for income taxes has been recorded for
the three and nine month periods ended September 30, 1998 as the Company
incurred net operating losses and has no carryback potential.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash and cash equivalents of $1.4
million, short-term investments of $10.0 million, working capital of $11.9
million and an accumulated deficit of $10.0 million. The Company completed
its IPO of Common Stock in March 1998, raising approximately $12.2 million in
cash, net of underwriting discounts and associated costs. In April 1998, the
Company sold an additional 88,000 shares of Common Stock in connection with
the exercise of an over-allotment option granted to the underwriters and
received cash proceeds, net of underwriting commissions and associated costs,
of approximately $0.6 million. Prior to its IPO, the Company satisfied its
liquidity needs primarily through cash flows generated from operations,
private sales of preferred stock, and to a lesser extent, from bank loans for
equipment purchases and loans from stockholders.
Net cash used in operating activities totaled $7.1 million and $1.4 million
during the nine month periods ended September 30, 1998 and 1997,
respectively. The increase in net cash used in operating activities is
primarily due to
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the Company's net loss during the nine month period ended September 30, 1998
of $6.3 million, as compared to a net loss of $1.0 million during the nine
month period ended September 30, 1997.
Net cash used in investing activities totaled $10.5 million and $0.3 million
during the nine month periods ended September 30, 1998 and 1997,
respectively. The increase in cash used in investing activities is primarily
due to the Company's investment of $10.0 million in short-term, investment
grade, interest-bearing financial instruments. These financial instruments,
like all fixed income instruments, are subject to interest rate risk and may
fluctuate in value if market interest rates fluctuate. The Company attempts
to limit this exposure by investing in short-term investments.
Net cash provided by financing activities totaled $13.4 million and $7.6
million during the nine month periods ended September 30, 1998 and 1997,
respectively. The increase in cash provided by financing activities is
primarily due to the Company's IPO and the related exercise of an
over-allotment option granted to the underwriters, which raised approximately
$12.8 million in cash, net of underwriting discounts and associated costs.
In February 1998, the Company entered into an equipment financing agreement
that provides a $1.3 million line of credit that can be used to finance
purchases of equipment, computers and software necessary to support the
Company's HTS development effort and additions to the marketing, sales and
administrative infrastructure. As of September 30, 1998, the Company had
drawn down $0.6 million against this line of credit.
In June 1997, the Company entered into a development, license and sales
agreement with FluorRx, Inc. ("FluorRx") under which it obtained worldwide
rights to certain patented assay technologies. In August 1998, the Company
amended certain terms of this agreement. Future minimum royalty payments due
through 2003 under the agreement will amount to approximately $1.0 million.
The source of funds for these royalty payments is expected to be primarily
the proceeds from the sale of HTS products developed by the Company pursuant
to this agreement.
The Company may be required to raise substantial additional capital over a
period of several years in order to develop and commercialize its products.
The Company's future capital requirements will depend on numerous factors,
including the costs associated with developing and commercializing its
products, broadening its direct marketing and sales force, maintaining
existing or entering into future licensing and distribution agreements,
protecting intellectual property rights, building its reagents and assay kits
business, expanding facilities and consummating possible future acquisitions
of technologies, products or businesses. The Company believes that its cash,
cash equivalents and short-term investments, combined with cash to be
generated from operations, will be sufficient to fund operations for at least
the next twelve months. However, the Company may consume available resources
more rapidly than currently anticipated, resulting in the need for additional
funding. Accordingly, the Company may be required to raise additional capital
through a variety of sources, including the public equity market, private
equity financing, collaborative arrangements, and public or private debt.
There can be no assurance that additional capital will be available on
favorable terms, if at all. If adequate funds are not available, the Company
may be required to significantly reduce or refocus its operations or to
obtain funds through arrangements that may require the Company to relinquish
rights to certain of its products, technologies or potential markets, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. To the extent that additional capital is
raised through the sale of equity, the issuance of such securities would
result in ownership dilution to the Company's existing stockholders.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company desires to take advantage of the "Safe Harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and of Section 21E and Rule
3b-6 under the Securities Exchange Act of 1934. Specifically, the Company
wishes to alert readers that the following important factors, as well as
other factors including, without limitation, those described elsewhere in
this Report, could in the future affect, and in the past have affected, the
Company's actual results and could cause the Company's results for future
periods to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. The Company assumes no
obligation to update such forward-looking statements.
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NEW BUSINESS STRATEGY; NEW AND UNDEFINED MARKET FOR HTS PRODUCTS
In the second half of 1996, the Company implemented a new strategic business
model to develop products for the HTS market. In connection with this change
in strategy, the Company shifted its focus from developing and manufacturing
clinical diagnostic and research products on an OEM basis to developing,
manufacturing and marketing products for the HTS market. As a result, the
Company's historical operating and financial performance is generally not
indicative of future financial and business results. The Company incurred
operating losses for the three and nine month periods ended September 30,
1998 as a result of its change in business strategy and expects that
operating losses will continue in future quarters due to substantial
increases in expenditures necessary to develop and commercialize the
Company's HTS products. The Company anticipates that it may continue to
incur losses for at least the next several years. The Company only recently
began commercial shipments of its first HTS instrument, the ANALYST, in the
second quarter of 1998. Accordingly, the Company is subject to the risks
inherent in the operation of a new business, such as the failure to develop
an effective sales, marketing and distribution channel, failure to achieve
market acceptance and demand for its HTS products, failure to implement
commercial scale-up of developed HTS products, if any, and failure to attract
and retain key personnel. Furthermore, the HTS market is new and undefined,
and the use of HTS by pharmaceutical and biotechnology companies is limited.
Demand for the Company's HTS products will depend upon the extent to which
pharmaceutical and biotechnology companies adopt HTS as a drug discovery
tool. If HTS does not become a widely used method in drug discovery, demand
for the Company's products will not develop as the Company currently expects
or at all. The lack of demand for the Company's HTS products would have a
material adverse effect on the Company's business, financial condition and
results of operations.
EARLY STAGE OF INSTRUMENT DEVELOPMENT
The Company's success will depend on its ability to develop and commercialize
its HTS instruments. The Company began commercial shipments of its first HTS
instrument, the ANALYST, in the second quarter of 1998. The Company had not
previously developed or commercialized products for the HTS market. Much of
the instrumentation and software being incorporated into the Company's HTS
products has not previously been used in HTS applications. The successful
implementation and operation of the Company's HTS products is a complex
process requiring the integration of, among other technologies, advanced
optics, electronics, robotics, microfluidics, fluorescence detector
technologies and software and information systems. Even if ANALYST and the
Company's other HTS products appear promising at commercial launch, they may
not achieve market acceptance. In addition, the Company's HTS instruments may
be difficult or uneconomical to produce, fail to achieve expected performance
levels, have a price level that is unacceptable in the industry or be
precluded from commercialization by the proprietary rights of others or other
competitive forces. There can be no assurance that the Company will be able
to successfully develop, manufacture and market the ANALYST, ACQUEST or any
other HTS products on a timely basis, achieve anticipated performance levels
or throughputs, gain industry acceptance of the Company's products or develop
a profitable business. The failure to achieve any of these objectives would
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISKS ASSOCIATED WITH THE DEVELOPMENT AND COMMERCIALIZATION OF REAGENTS AND
ASSAY KITS
The Company expects that a substantial portion of its revenues will be derived
from the sale of reagents and assay kits. The Company has limited experience in
the development, manufacture and marketing of reagents or assay kits, only
recently introducing its first reagents, TKX-TM-, in July 1998. The Company
intends to continue to license assay technologies from third parties and to
develop reagents and assay kits internally. There can be no assurance that the
Company will succeed in licensing any additional assay technologies on
acceptable terms, if at all, or that it will successfully commercialize any
reagents that it licenses. In addition, the Company is internally developing
reagents and assay kits, but has limited experience in this area. There can be
no assurance that the Company will successfully develop additional reagents or
assay kits internally or that any reagents or assay kits will achieve market
acceptance. As sales volumes increase, the Company intends to outsource the
manufacture of reagents and assays kits. There can be no assurance that the
Company will be able to enter into agreements with third parties for the
manufacture of reagents and assay kits on terms commercially favorable to the
Company or at all. In addition, the Company intends to sell reagents and assay
kits to purchasers of HTS instruments, including the ANALYST and ACQUEST. There
can be no assurance that sales of the ANALYST and ACQUEST will be sufficient to
support this strategy. A failure
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to achieve commercial acceptance of its reagents and assay kits would have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The pharmaceutical and biotechnology instrumentation and reagents market is
characterized by rapid technological change and frequent new product
introductions. The Company's future success will depend on its ability to
enhance its current and planned HTS products and to develop and introduce, on
a timely basis, new products that address the evolving needs of its customers
including higher-density, ultra high throughput analyzers and microplates,
its fluorescence-based reagents and assay kits, as well as products based on
its FLARe-TM- technology. The Company anticipates that production units for
these new products may not be available for several months or years, if at
all. The production of ACQUEST and other analyzers and their associated
microplates, fluorescence-based reagents and assay kits may present
development and manufacturing challenges. The Company may experience
difficulties that could delay or prevent the successful development,
introduction and marketing of its new products or its product enhancements.
Any failure to develop and introduce products in a timely manner in response
to changing market demands or customer requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
LIMITED SALES AND MARKETING EXPERIENCE
The Company has limited experience in direct marketing, sales or distribution.
The Company's future profitability will depend on its ability to further develop
a direct sales force to sell its HTS products to pharmaceutical and
biotechnology companies. The Company's products are technical in nature and the
Company therefore believes it is necessary to develop a direct sales force
consisting of people with scientific backgrounds and expertise. Competition for
such employees is intense. There can be no assurance that the Company will be
able to attract and retain qualified salespeople or that the Company will be
able to build an efficient and effective sales and marketing organization.
Failure to attract or retain qualified salespeople or to build such a sales and
marketing organization would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company intends to market its HTS products in certain international markets
through distributors. The Company does not currently have distributors in any
international markets, and there can be no assurance that the Company will be
able to engage qualified distributors. Such distributors, if engaged, may fail
to satisfy financial or contractual obligations to the Company, fail to
adequately market the Company's products, cease operations with little or no
notice to the Company or offer, design, manufacture or promote competing product
lines. The failure to develop and maintain effective distribution channels
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
The market for HTS products is highly competitive. The Company expects that
competition will increase significantly as more biotechnology and pharmaceutical
companies adopt HTS instruments as a drug discovery tool and as new companies
enter the market with advanced technologies and products. The Company competes
in many areas, including HTS instruments, assay development and reagent sales.
The Company competes with companies which directly market HTS products. In
addition, pharmaceutical and biotechnology companies, academic institutions,
governmental agencies and other research organizations are conducting research
and developing products in various areas which compete with the Company's
technology platform, either on their own or in collaboration with others. Many
of these competitors have greater financial, operational and sales and marketing
resources, and more experience in research and development, than the Company.
Further, certain companies offer screening services on a contract or
collaborative basis, and these services could eliminate the need for a potential
customer to purchase the Company's products. The Company's technological
approaches may be rendered obsolete or uneconomical by advances in existing
technological approaches or the development of different approaches by one or
more of the Company's current or future competitors. Many of these competitors
have greater financial and personnel resources, and more experience in research
and development, sales and marketing and other areas than the Company.
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CONCENTRATION OF HTS MARKET
The market for HTS products is highly concentrated, with approximately 50 large
pharmaceutical companies operating a substantial portion of the Company's
targeted drug discovery laboratories. Accordingly, the Company expects a
relatively small number of customers will continue to account for a substantial
portion of its revenues. The Company faces risks associated with a highly
concentrated customer base as it sells its HTS products, including the failure
to establish or maintain relationships within a limited customer pool, or
substantial financial difficulties or decreased capital spending by its
customers, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Further, the Company
faces the risk that customers will negotiate price discounts or other
unfavorable terms, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
LENGTHY SALES CYCLES
The sale of HTS products typically involves a significant technical evaluation
and commitment of capital by customers. Accordingly, the sales cycle associated
with the Company's HTS products is expected to be lengthy and subject to a
number of significant risks, including customers' budgetary constraints and
internal acceptance reviews, that are beyond the Company's control. Due to this
lengthy and unpredictable sales cycle, the Company's operating results could
fluctuate significantly from quarter to quarter.
MANUFACTURING RISK
The Company is only producing ANALYST in limited quantities, and has not yet
manufactured ACQUEST and other HTS products in significant quantities.
Although the Company has started manufacturing and shipping its
second-generation HTS product, ACQUEST, the Company may encounter
difficulties in scaling up production of the ACQUEST and related products and
continuing to increase production of ANALYST due to, among other things,
quality control and assurance, component supply and availability of qualified
personnel. There can be no assurance that, even if successfully developed
and introduced to market, any of the Company's products can be manufactured
in sufficient quantities while meeting quality control standards or at
acceptable cost. Difficulties encountered by the Company in manufacturing
scale-up of ANALYST, ACQUEST and other HTS products could have a material
adverse effect on its business, financial condition and results of operations.
MANAGEMENT OF GROWTH
The Company's success will depend on the expansion of its operations and the
effective management of growth, which will place a significant strain on the
Company's management, operational and financial resources. To manage such
growth, the Company must expand its facilities, augment its operational,
financial and management systems and hire and train additional qualified
personnel. The Company's failure to manage growth effectively would have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's success will depend to a significant degree upon the continued
services of key management, technical, and scientific personnel, including Lev
J. Leytes, the Company's Chairman of the Board of Directors, President and Chief
Executive Officer. In addition, the Company's success will depend on its
ability to attract and retain other highly skilled personnel. Competition for
qualified personnel is intense, and the process of hiring such qualified
personnel is often lengthy. There can be no assurance that the Company can
recruit such personnel on a timely basis, if at all. The Company's management
and other employees may voluntarily terminate their employment with the Company
at any time. The loss of the services of key personnel, or the inability to
attract and retain additional qualified personnel, could have a material adverse
effect on the Company's business, financial condition and results of operations.
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DEPENDENCE ON SUPPLIERS AND CONTRACT MANUFACTURERS
Certain components used in the Company's HTS products are currently purchased
from a single or a limited number of outside sources. The reliance on a sole or
limited number of suppliers could result in time delays associated with
redesigning a product due to a failure to obtain a single source component, an
inability to obtain an adequate supply of required components and reduced
control over pricing, quality and timely delivery. The Company does not
maintain long-term agreements with any of its suppliers, and therefore the
supply of a particular component could be terminated at any time without penalty
to the supplier. Any interruption in the supply of single source components
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company intends to rely on contract
manufacturers, some of which may be single-source vendors, for the development,
manufacture and supply of certain of its reagents and assay kits. There can be
no assurance the Company will be able to enter into such manufacturing contracts
on commercially reasonable terms, if at all, or that the Company's current or
future contract manufacturers will meet the Company's requirements for quality,
quantity or timeliness. If the supply of any such components, reagents or assay
kits is interrupted, components, reagents and assay kits from alternative
suppliers and contract manufacturers may not be available in sufficient volumes
within required timeframes, if at all, to meet the Company's production needs.
ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY
As of September 30, 1998, the Company had an accumulated deficit of
approximately $10.0 million. The Company's expansion of its operations and
continued development of its HTS products will require a substantial increase
in sales, marketing and research and development expenditures for at least
the next several years. As a result, the Company expects to incur operating
losses for the next several years. The Company's profitability will depend
on its ability to successfully develop and commercialize its HTS products.
Accordingly, the extent of future losses and the time required to achieve
profitability, if achieved at all, is highly uncertain. Moreover, if
profitability is achieved, the level of such profitability cannot be
predicted and may vary significantly from quarter to quarter.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company may be required to raise substantial additional capital over a
period of several years in order to develop and commercialize its products. The
Company's future capital requirements will depend on numerous factors, including
the costs associated with developing and commercializing its products,
developing a direct marketing and sales force, maintaining existing, or entering
into future, licensing and distribution agreements, protecting intellectual
property rights, entering the reagents and assay kits business, expanding
facilities and consummating possible future acquisitions of technologies,
products or businesses. The Company may consume available resources more
rapidly than currently anticipated, resulting in the need for additional
funding. Accordingly, the Company may be required to raise additional capital
through a variety of sources, including the public equity market, private equity
financing, collaborative arrangements, and public or private debt. There can be
no assurance that additional capital will be available on favorable terms, if at
all. If adequate funds are not available, the Company may be required to
significantly reduce or refocus its operations or to obtain funds through
arrangements that may require the Company to relinquish rights to certain of its
products, technologies or potential markets, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
To the extent that additional capital is raised through the sale of equity, the
issuance of such securities would result in ownership dilution to the Company's
existing stockholders.
RISK OF INTERNATIONAL SALES AND OPERATIONS
The Company expects that international sales will account for a significant
portion of the Company's total revenues. International sales and operations are
subject to a number of risks, including the imposition of government controls,
export license requirements, restrictions on the export of critical technology,
political and economic instability or conflicts, trade restrictions, changes in
tariffs and taxes, difficulties in staffing and managing international
operations, problems in establishing or managing distributor relationships and
general economic conditions. In addition, as the Company expands its
international operations, it may be required to invoice its sales in local
currencies.
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Consequently, fluctuations in the value of foreign currencies relative to the
U.S. dollar may adversely affect the Company's business, financial condition
and results of operations.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS OF TECHNOLOGIES AND BUSINESSES
The Company may acquire certain technologies, products or businesses to broaden
the scope of its existing and planned product lines and technologies. Such
acquisitions would expose the Company to the risks associated with the
assimilation of new technologies, operations, sites and personnel, the diversion
of resources from the Company's existing business and technologies, the
inability to generate revenues to offset associated acquisition costs, the
maintenance of uniform standards, controls, and procedures and the impairment of
relationships with employees and customers as a result of any integration of new
management personnel. Acquisitions may also result in the issuance of dilutive
equity securities, the incurrence or assumption of debt or additional expenses
associated with amortization of acquired intangible assets or potential
businesses. The Company's failure to successfully address such risks could have
a material adverse effect on the Company's business, financial condition and
results of operations.
INTELLECTUAL PROPERTY RISKS
The Company's success will depend in part on its ability to obtain patents,
maintain trade secret protection and operate without infringing the
proprietary rights of others. The Company holds three U.S. patents. The
Company has pending eleven U.S. patent applications, two international patent
applications and nineteen provisional U.S. patent applications. To
supplement its proprietary technology, the Company has licensed ten patents
and one patent application from FluorRx pursuant to a June 1997 agreement, as
amended. Under this license, the Company obtained certain worldwide rights
relating to FluorRx's FLARe technology. Certain of these rights have been
licensed on an exclusive basis. Certain other rights have been licensed on a
non-exclusive basis, and therefore could be or are licensed to third parties.
In accordance with such agreement, the Company paid one-time fees as well as
agreeing to pay royalties based on sales of its products that incorporate
this technology. The license may be terminated in the event of a material
breach by the Company. Furthermore, FluorRx may elect to convert the
exclusive rights into non-exclusive rights in the event the Company fails to
make certain minimum royalty payments. If FluorRx were to terminate the
license due to a material breach of the license by the Company, the Company
would lose the right to incorporate FLARe technology into its HTS products.
In such event, the Company would be required to exclude FLARe technology from
the Company's existing and future products and either license or develop
internally alternative technologies. There can be no assurance that the
Company would be able to license alternative technologies on commercially
reasonable terms, or at all, or that the Company would be capable of
developing internally such technologies. Furthermore, there can be no
assurance that other companies may not independently develop technology with
functionality similar or superior to the FLARe technology that does not or is
claimed not to infringe the FLARe patents or that otherwise circumvents the
technology licensed to the Company.
The Company is aware of third party patents that contain issued claims that may
cover certain aspects of the Company's reagent technologies. There can be no
assurance that the Company would not be required to license any such patents to
produce certain reagents, assay kits and related products or that such licenses
would be available on commercially reasonable terms, if at all. Any action
against the Company claiming damages and seeking to enjoin commercial activities
relating to the affected technologies could subject the Company to potential
liability for damages. The Company could incur substantial costs in defending
patent infringement claims, obtaining patent licenses, engaging in interference
and opposition proceedings or other challenges to its patent rights or
intellectual property rights made by third parties, or in bringing such
proceedings or enforcing any patent rights against third parties. The Company's
inability to obtain necessary licenses or its involvement in proceedings
concerning patent rights could have a material adverse effect on the business,
financial condition and results of operations of the Company.
The patent positions of bioanalytical product companies, including the Company,
are uncertain and involve complex legal and factual questions. In addition, the
coverage claimed in a patent application can be significantly reduced before the
patent is issued. Consequently, there can be no assurance that the patent
applications of the Company or its licensor will result in patents being issued
or that any issued patents will provide protection against competitive
technologies or will be held valid if challenged or circumvented. Others may
independently develop products similar
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to those of the Company or design around or otherwise circumvent patents
issued to the Company. In the event that any relevant claims of third-party
patents are upheld as valid and enforceable, the Company could be prevented
from practicing the subject matter claimed in such patents, or would be
required to obtain licenses from the patent owners of each of such patents or
to redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be on
terms acceptable to the Company or that the Company would be successful in
any attempt to redesign its products or processes to avoid infringement. If
the Company does not obtain necessary licenses, it could be subject to
litigation and encounter delays in product introductions while it attempts to
design around such patents. Alternatively, the development, manufacture or
sale of such products could be prevented. Litigation would result in
significant cost to the Company as well as diversion of management time.
Adverse determinations in any such proceedings could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company also relies on trade secret and copyright law, and employee and
third-party nondisclosure agreements to protect its intellectual property rights
in its products and technology. There can be no assurance that these agreements
and measures will provide meaningful protection of the Company's trade secrets,
copyrights, know-how, or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure or that others will not
independently develop substantially equivalent proprietary technologies.
Litigation to protect the Company's trade secrets or copyrights would result in
significant cost to the Company as well as diversion of management time.
Adverse determinations in any such proceedings or unauthorized disclosure of the
Company's trade secrets could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the laws
of certain foreign countries do not protect the Company's intellectual property
rights to the same extent, as do the laws of the United States. There can be no
assurance that the Company will be able to protect its intellectual property in
these markets.
GOVERNMENT REGULATION
While the Company believes that none of the Company's HTS products will be
regulated as medical devices or otherwise subject to FDA regulation, the
Company's clinical diagnostics products, including Luminometer, Q2000,
Horizon and a microplate heater, are subject to FDA regulation as medical
devices, as well as similar foreign regulation. The process of obtaining and
maintaining required regulatory clearances and approvals and otherwise
remaining in regulatory compliance in the United States and certain other
countries is lengthy, expensive and uncertain. Although the Company has
phased out production of Luminometer, Q2000 and the microplate heater, the
Company may continue to manufacture the Horizon on an OEM basis. The Horizon
is used in research and clinical laboratories to perform in vitro diagnostic
("IVD") tests, which are exempt from investigational device exemption
("IDE") requirements, including the need to obtain the FDA's prior
approval, provided that, among other things, the testing is noninvasive, the
product is not used as a diagnostic procedure without confirmation by another
medically established test or procedure, and distribution controls are
established to assure that IVDs distributed for research are used only for
those purposes. To the Company's knowledge, its OEM customers have met these
conditions. There can be no assurance that the FDA would agree that the OEM
customers' distribution of the Company's clinical diagnostic products meet
and have met the requirements for IDE exemption. Failure by the Company, its
OEM customers or the recipients of the Company's clinical diagnostic products
to comply with the IDE exemption requirements could result in enforcement
action by the FDA, which could adversely affect the Company's or its OEM
customers' ability to gain marketing clearance or approval of these products
or could result in the recall of previously distributed products.
Applicable law requires that the Company comply with the FDA's current GMP
regulations for the manufacture of the Horizon. The FDA monitors compliance
with its GMP regulations by subjecting medical product manufacturers to
periodic FDA inspections of their manufacturing facilities. The FDA has
recently revised the GMP regulations. The new Quality System Regulation
imposes design controls and makes other significant changes in the
requirements applicable to manufacturers. The Company is also subject to
other regulatory requirements, and may need to submit reports to the FDA
including adverse event reporting. Failure to comply with GMP regulations or
other applicable legal requirements can lead to, among other things, warning
letters, seizure of violative products, suspension of manufacturing,
government injunctions and potential civil or criminal liability on the part
of the Company and the responsible officers and employees. In addition, the
government may halt or restrict continued sale of such
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instruments. Any such actions could have a material, adverse effect on the
business, financial condition and results of operations of the Company.
In order to export its clinical diagnostics instruments, the Company maintains
International Organization for Standardization ("ISO") 9001 certification and
applies the CE mark to certain products that are exported, which subjects the
Company's operations to periodic surveillance audits. While the Company
believes it is currently in compliance with GMP regulations and ISO standards,
there can be no assurance that the Company's operations will be found to comply
with GMP regulations, ISO standards or other applicable legal requirements in
the future or that the Company will not be required to incur substantial costs
to maintain its compliance with existing or future manufacturing regulations,
standards or other requirements. Any such noncompliance or increased cost of
compliance could have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company is also subject to numerous federal, state and local laws relating
to safe working conditions, manufacturing practices, environmental protection,
storage, use and disposal of hazardous or potentially hazardous substances. Any
material failure to comply with such laws could require the Company to incur
significant costs and would have a material, adverse effect upon the Company's
ability to do business. Changes in existing requirements or adoption of new
requirements or policies relating to government regulations could materially and
adversely affect the ability of the Company to comply with such requirements.
HAZARDOUS MATERIALS
The Company's research and development and manufacturing operations involve the
use of hazardous materials, biological samples, chemicals and various
radioactive compounds. In the future, the Company plans to manufacture certain
reagents, some of which likely will contain hazardous materials including
carcinogens. The Company is subject to federal, state and local laws and
regulations governing the storage, use, and disposal of such materials and
certain waste products. The risk of accidental contamination or injury from the
use of these materials cannot be completely eliminated. In the event of an
accident, the Company could be held liable for damages that result and any such
liability could exceed the resources of the Company, which would have a material
adverse effect on the Company. The Company may incur substantial costs to
comply with environmental regulations if the Company develops its own commercial
reagents manufacturing facility.
IMPACT OF YEAR 2000
The Company is in the process of performing its assessment of the impact of
the Year 2000 issue on its operations. The issues involved include the
possibility that software which does not have the capacity to recognize four
digits in a date field may no longer function properly when use of that date
becomes necessary. Management is in the process of formalizing its
assessment procedures and developing a plan to address identified issues.
The Company is evaluating the software it provides to its customers, its
financial and accounting and inventory tracking systems and all other
corporate-wide computer applications, and its other systems and equipment.
The extent, if any, of the impact of the Year 2000 issue on these software,
systems, applications and equipment is unknown. The Company expects its
review to be completed by early 1999 after which the Company will attempt to
remedy any issues which may exist. The Company expects such issues will be
resolved on a timely basis, and presently believes that, with modifications
to existing software or converting to new software, the Year 2000 issue will
not pose significant operational problems for the Company's software and
computer systems or result in total costs material to the Company's financial
condition. The Company, therefore, has not to date made any contingency
plans to account for any Year 2000 issues. However, there can be no assurance
there will not be a delay in, or increased costs associated with, the
implementation of any Year 2000 changes, and the Company's inability to
implement such changes could have an adverse effect on future results of
operations. The Company has not fully determined the extent to which it may
be impacted by third parties' systems including those of its suppliers and
collaborative partners, which may not be Year 2000-compliant. While the
Company has begun efforts to seek reassurance from its significant suppliers,
partners and service providers, which the Company expects to complete by
mid-1999, there can be no assurance that the systems of other companies that
the Company deals with or on which the Company relies will be timely
converted, or that any such failure to convert by another company would not
have a material adverse effect on the Company. Any Year 2000 compliance
problems of either the Company, its suppliers, its collaborative partners or
its customers could have a
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<PAGE>
material adverse effect on the Company's business, operating results and
financial condition.
FUTURE FLUCTUATIONS IN OPERATING RESULTS
The Company's future operating results are likely to fluctuate substantially
from quarter to quarter. The degree of fluctuation will depend on a number of
factors, including the timing and level of sales, the mix of products sold
through direct sales channels and third party distributors, and any change in
the product mix among the Company's existing and planned product lines. Such
fluctuations could have a material adverse effect on its business, financial
condition and results of operations. Because a significant portion of the
Company's business is expected to be derived from orders placed by a limited
number of large customers, variations in the timing of such orders could cause
significant fluctuations in the Company's operating results. Other factors that
may result in fluctuations in operating results include industry acceptance of
HTS as a drug discovery tool, market acceptance of the Company's products, the
timing of new product announcements and the introduction of new products and new
technologies by the Company or its competitors, delays in research and
development of new products, increased research and development expenses,
increased marketing and sales expenses associated with the implementation of the
Company's direct marketing of its products, availability and cost of component
parts from its suppliers, competitive pricing pressures, and developments with
respect to regulatory matters. In connection with future introductions of new
products, the Company may be required to establish or increase reserves or
record charges for inventory obsolescence in connection with unsold inventory,
if any, of older generations of products.
The Company's expenditures for research and development, selling and marketing
and general and administrative functions are based in part on future revenue
projections. The Company may be unable to adjust spending in a timely manner in
response to any unanticipated declines in revenues, which may have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company may be required to reduce prices in response to
competitive pressures or other factors or increase spending to pursue new market
opportunities. Any decline in average selling prices of a product which is not
offset by a reduction in product costs or by sales of other products with higher
gross margins would decrease the Company's overall gross profit and adversely
affect the Company's business, financial condition and results of operations.
In addition, the Company's operating results may vary from the expectations of
public market analysts and investors, and, as a result, the price of the Common
Stock would be materially and adversely affected.
-19-
<PAGE>
- -------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1: LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with its IPO in 1998, the Company filed a Registration Statement
on Form S-1, SEC File No. 333-43529 (the "Registration Statement"), which was
declared effective by the Commission on March 12, 1998. Pursuant to the
Registration Statement, the Company registered 2,300,000 shares of its Common
Stock, $0.001 par value per share, for its own account, of which 2,000,000
shares were sold in the Company's IPO and an additional 88,000 shares were sold
in April 1998 when the underwriters exercised their over-allotment option. The
offering commenced on March 13, 1998 and did not terminate until the 2,088,000
shares had been sold. The aggregate offering price of the registered shares was
$16.1 million and the aggregate offering price of the amount sold was $14.6
million. The managing underwriters of the offering were NationsBanc Montgomery
Securities LLC, Hambrecht & Quist LLC, and Volpe Brown Whelan & Company LLC.
From March 12, 1998 to September 30, 1998, the Company incurred the following
expenses in connection with the offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions $ 827,000
Other expenses 969,000
-----------
Total Expenses $ 1,796,000
-----------
-----------
</TABLE>
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company through September 30, 1998, after
deducting the total expenses above, were $12.8 million. From March 12, 1998 to
September 30, 1998, the Company used such net offering proceeds, in direct or
indirect payments to others, as follows:
<TABLE>
<S> <C>
Manufacturing, sales, marketing and administrative infrastructure $ 2,940,000
Research and development activities 3,024,000
Working capital temporary investments:
Inventories 820,000
Short-term, investment grade, interest-bearing
financial instruments 6,036,000
------------
Total $ 12,820,000
------------
------------
</TABLE>
Each of these amounts is a reasonable estimate of the application of the net
offering proceeds. This use of proceeds does not represent a material change in
the use of proceeds described in the prospectus of the Registration Statement.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable
-20-
<PAGE>
ITEM 5: OTHER INFORMATION
Not applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a: Exhibits
Exhibit 27.1 - Financial Data Schedule.
b: Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended September
30, 1998.
-21-
<PAGE>
- -------------------------------------------------------------------------------
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.
LJL BIOSYSTEMS, INC.
DATE: NOVEMBER 13, 1998 BY: /S/ ROBERT T. BEGGS
--------------------
ROBERT T. BEGGS, VICE PRESIDENT OF
FINANCE AND ADMINISTRATION (DULY
AUTHORIZED AND PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
-22-
<PAGE>
- -------------------------------------------------------------------------------
INDEX TO EXHIBITS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT PAGE
- ------- ----
<S> <C>
Exhibit 27.1 - Financial Data Schedule............................ 24
</TABLE>
-23-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,431,000
<SECURITIES> 9,966,000
<RECEIVABLES> 756,000
<ALLOWANCES> 0
<INVENTORY> 1,373,000
<CURRENT-ASSETS> 352,000
<PP&E> 1,569,000
<DEPRECIATION> 840,000
<TOTAL-ASSETS> 14,797,000
<CURRENT-LIABILITIES> 2,028,000
<BONDS> 0
0
0
<COMMON> 10,000
<OTHER-SE> 12,328,000
<TOTAL-LIABILITY-AND-EQUITY> 14,797,000
<SALES> 2,809,000
<TOTAL-REVENUES> 2,809,000
<CGS> 1,806,000
<TOTAL-COSTS> 9,555,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,000
<INCOME-PRETAX> (6,258,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,258,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,258,000)
<EPS-PRIMARY> $(0.73)
<EPS-DILUTED> $(0.73)
</TABLE>
