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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 MARCH 31, 1999.
Commission file number 333-43529
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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
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As of April 30, 1999, 12,613,706 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>
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ITEM NO. PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited)............... 3
Consolidated Condensed Balance Sheet as of March 31, 1999
and December 31, 1998 (Unaudited)..................................... 3
Consolidated Condensed Statement of Operations for the Three Month
Periods Ended March 31, 1999 and 1998 (Unaudited)..................... 4
Consolidated Condensed Statement of Cash Flows for the Three Month
Periods Ended March 31, 1999 and 1998 (Unaudited)..................... 5
Notes to Consolidated Condensed Financial Statements (Unaudited)...... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 19
Item 2. Changes in Securities and Use of Proceeds............................. 19
Item 3. Defaults Upon Senior Securities....................................... 20
Item 4. Submission of Matters to a Vote of Securities Holders................. 20
Item 5. Other Information..................................................... 20
Item 6. Exhibits and Reports on Form 8-K...................................... 21
Signatures............................................................ 22
Exhibits.............................................................. 23
</TABLE>
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PART I: FINANCIAL INFORMATION
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ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
LJL BIOSYSTEMS, INC
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 3,152,000 $ 1,831,000
Short-term investments.................................................. 7,017,000 5,510,000
Accounts receivable .................................................... 878,000 840,000
Inventories............................................................. 1,724,000 1,173,000
Other current assets.................................................... 277,000 262,000
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Total current assets.................................................. 13,048,000 9,616,000
Property and equipment, net................................................ 859,000 789,000
Investments................................................................ 4,667,000 2,863,000
Loan receivable from related party......................................... 207,000 190,000
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$ 18,781,000 $ 13,458,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 1,058,000 $ 508,000
Accrued expenses........................................................ 1,742,000 1,801,000
Customer deposits....................................................... 302,000 19,000
Current portion of long-term debt....................................... 195,000 168,000
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Total current liabilities............................................. 3,297,000 2,496,000
Long-term debt, net of current portion..................................... 575,000 542,000
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Total liabilities..................................................... 3,872,000 3,038,000
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Stockholders' equity:
Common stock............................................................ 13,000 11,000
Additional paid-in capital.............................................. 30,088,000 23,258,000
Deferred stock compensation............................................. (569,000) (614,000)
Accumulated other comprehensive income.................................. (31,000) 6,000
Accumulated deficit..................................................... (14,592,000) (12,241,000)
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Total stockholders' equity............................................ 14,909,000 10,420,000
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$ 18,781,000 $ 13,458,000
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</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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LJL BIOSYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
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Net sales............................................................. $ 1,359,000 $ 320,000
Cost of sales......................................................... 698,000 289,000
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Gross profit.......................................................... 661,000 31,000
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Operating Expenses:
Research and development........................................... 1,483,000 1,417,000
Selling, general and administrative................................ 1,689,000 716,000
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Total operating expenses......................................... 3,172,000 2,133,000
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Loss from operations.................................................. (2,511,000) (2,102,000)
Interest and other income, net........................................ 180,000 71,000
Interest expense...................................................... (20,000) (3,000)
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Loss before provision for income taxes................................ (2,351,000) (2,034,000)
Provision for income taxes............................................ - -
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Net loss.............................................................. (2,351,000) (2,034,000)
Accretion of mandatorily redeemable convertible
preferred stock redemption value................................... - (254,000)
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Net loss available to common stockholders............................. $(2,351,000) $(2,288,000)
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Basic and diluted net loss per share available to
common stockholders................................................ $ (0.20) $ (0.39)
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Shares used in computation of basic and diluted net loss
per share available to common stockholders......................... 11,968,738 5,815,952
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</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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LJL BIOSYSTEMS, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
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Cash flows from operating activities:
Net loss.............................................................. $(2,351,000) $(2,034,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................................... 92,000 58,000
Stock compensation expense.......................................... 45,000 43,000
Changes in assets and liabilities:
Accounts receivable............................................... (38,000) (127,000)
Inventories....................................................... (551,000) (270,000)
Other current assets.............................................. (15,000) 417,000
Accounts payable.................................................. 550,000 (3,000)
Accrued expenses.................................................. (59,000) 154,000
Customer deposits................................................. 283,000 27,000
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Net cash used in operating activities........................... (2,044,000) (1,735,000)
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Cash flows from investing activities:
Purchases of property and equipment................................... (162,000) (130,000)
Purchases of investments.............................................. (5,809,000) (6,978,000)
Proceeds from sales and maturities of investments..................... 2,469,000 -
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Net cash used in investing activities........................... (3,502,000) (7,108,000)
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Cash flows from financing activities:
Proceeds from borrowings.............................................. 102,000 -
Repayments of borrowings.............................................. (42,000) (86,000)
Issuance of long-term note receivable from related party.............. (17,000) -
Proceeds from issuance of common stock, net........................... 6,832,000 12,290,000
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Net cash provided by financing activities....................... 6,875,000 12,204,000
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Effect of exchange rate changes on cash and cash equivalents............. (8,000) -
Net increase in cash and cash equivalents................................ 1,321,000 3,361,000
Cash and cash equivalents at beginning of period......................... 1,831,000 5,525,000
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Cash and cash equivalents at end of period............................... $ 3,152,000 $ 8,886,000
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for interest.............................. $ 20,000 $ 3,000
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SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Issuance of common stock upon conversion of mandatorily
redeemable convertible preferred stock.............................. $ - $ 9,562,000
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</TABLE>
The accompanying notes are an integral part of these 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 condensed 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 Annual Report on Form 10-K dated March 26, 1999 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, 1999, or any other future period.
NOTE 2 - INVENTORIES:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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Raw materials......................................... $ 892,000 $ 476,000
Finished goods........................................ 832,000 697,000
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$1,724,000 $1,173,000
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</TABLE>
NOTE 3 - INITIAL PUBLIC OFFERING AND PRIVATE PLACEMENT:
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 $600,000.
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.
On January 27, 1999, the Company raised net cash proceeds of $6.7
million, net of issuance costs of $270,000, in connection with a private
placement of 2.0 million shares of unregistered restricted Common Stock. The
terms of the sale require that the Company file a registration statement
covering such shares.
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 year ended December 31, 1997. 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 month periods ended March 31,
1999 and 1998. For the three-month period ended March 31, 1998, net loss
available to common stockholders includes accretion of the Preferred Stock
redemption value in the amount of $254,000.
NOTE 5 - COMPREHENSIVE INCOME:
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130") "Reporting Comprehensive Income" during 1998. Under SFAS 130,
the Company is required to display comprehensive income and its components as
part of the Company's consolidated financial statements. The measurement and
presentation of net loss did not change. Comprehensive income is comprised
of net loss and other items of comprehensive income (loss). Other
comprehensive income includes certain changes in the equity of the Company
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that are excluded from net loss. Specifically, SFAS 130 requires unrealized
gains and losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which otherwise would have been reported
separately in stockholders' equity, to be included in accumulated other
comprehensive income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS" 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. The Company will continue to manufacture
this OEM product during 1999 but does not expect to manufacture this OEM
product in periods after 1999.
RESULTS OF OPERATIONS
REVENUES. Total revenues were $1,359,000 for the three months ended March
31, 1999, as compared to $320,000 for the three months ended March 31, 1998,
representing an increase of $1,039,000. This increase in revenues was due to
the fact that all of the revenue reported for the three months ended March
31, 1999 was derived from sales of the Company's HTS and Ultra HTS-TM-
products, while all of the revenue reported for the three months ended March
31, 1998 was derived from OEM and development agreements. The Company was in
the process of transitioning its focus from developing and manufacturing OEM
clinical diagnostics and research products to developing, manufacturing and
marketing its own products for HTS during the first quarter of 1998, which
resulted in much lower revenues for that period. The Company did not begin
shipping and recognizing revenue on its first HTS product, Analyst-TM- HT,
until the second quarter of 1998, or on its follow-on Ultra HTS product,
Acquest-TM- until the fourth quarter of 1998. The Company expects a small
amount of revenue from OEM product sales through 1999 but expects little or
no OEM product sales in periods after 1999.
COST OF SALES. Cost of sales were $698,000 for the three months ended March
31, 1999, as compared to $289,000 for the three months ended March 31, 1998,
representing an increase of $409,000. This increase was primarily due to the
increase in sales volume during in the first quarter of 1999 compared to the
first quarter in 1998, as the Company transitioned its focus from OEM
products to its line of HTS and Ultra HTS products. Gross profit, as a
percentage of sales, was 49% for the three months ended March 31, 1999, as
compared to 10% for the three months ended March 31, 1998. This increase was
primarily the result of increased absorption of manufacturing overhead
resulting from higher sales volumes for the first quarter of 1999, as
compared to the first quarter of 1998 in which the Company had limited
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sales revenue. The Company expects that gross profit, as a percentage of
sales, may vary for the next several years, due to product mix variances and
until the Company is able to spread its manufacturing costs over higher
production levels for Analyst HT, Analyst AD, Acquest and related products.
RESEARCH AND DEVELOPMENT. Research and development expenses were $1,483,000
for three months ended March 31, 1999, as compared to $1,417,000 for the
three months ended March 31, 1998, representing an increase of $66,000. This
increase was primarily due to increased costs associated with the development
of the Company's HTS and Ultra HTS product platform. The Company expects
research and development expenditures to continue to increase in absolute
dollars and as a percentage of revenues in future periods to support the
development of its HTS and Ultra HTS product line.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
costs were $1,689,000 for the three months ended March 31, 1999, as compared
to $716,000 for the three months ended March 31, 1998, representing an
increase of $973,000. This increase was primarily due to increases in sales
and marketing expenses associated with the addition of sales and marketing
personnel. Additionally, the Company incurred higher marketing expenses for
Analyst HT, Analyst AD 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 absolute dollars and as a percentage
of revenues in future periods for the reasons described above.
INTEREST AND OTHER INCOME, NET. Net interest and other income was $180,000
for the three months ended March 31, 1999, as compared to $71,000 for the
three months ended March 31, 1998, representing an increase of $109,000. This
increase was primarily due to interest earned on higher levels of invested
cash, cash equivalents and investments in the first quarter of 1999 as
compared to the first quarter of 1998, as a result of the receipt of the
proceeds from the Company's IPO and the Company's private placement of 2.0
million shares of Common Stock in January 1999.
INTEREST EXPENSE. Interest expense was $20,000 for the three months ended
March 31, 1999, as compared to $3,000 for the three months ended March 31,
1998, representing an increase of $17,000. This increase was primarily due to
interest paid on the Company's line of credit, on which the amount borrowed
was at a higher level in the first quarter of 1999, as compared to the debt
obligations outstanding during the first quarter of 1998.
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 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 Statement of
Operations, and dividends. Future distributions are not expected. No
provision for income taxes has been recorded for the three month periods
ended March 31, 1999 and 1998 as the Company incurred net operating losses
and has no carryback potential.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash, cash equivalents and
investments of $14.8 million, working capital of $9.8 million and an
accumulated deficit of $14.6 million. The Company completed its initial
public offering of its 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 $600,000. In January 1999, the Company
raised net cash proceeds of approximately $6.7 million, net of issuance
costs, in connection with a private placement of 2.0 million shares of
unregistered restricted Common Stock. The terms of the sale require that the
Company file a registration statement covering such shares. 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.
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Net cash from operating activities has historically fluctuated based on
the timing of receipt of customer deposits, working capital changes resulting
from varying levels of manufacturing activities and fluctuations in the
Company's net loss. Net cash used in operating activities totaled $2.0
million and $1.7 million during the three months ended March 31, 1999 and
1998, respectively. Net cash used in operations was primarily due to the
Company's net losses for the three months ended March 31, 1999 and 1998 of
$2.4 million and $2.0 million, respectively. The increase in net cash used in
operations was also attributable to the Company's change in strategic
business model, which focuses on the Company's HTS and Ultra HTS products,
from the Company's previous OEM-based business model. This change resulted
in certain increases in the use of working capital, including increased
inventory related to production of the Company's HTS and Ultra HTS line of
products. It also resulted in increased accrual balances which consist
primarily of accrued employee costs, warranty accruals, accrued public
company related expenses and accrued professional services expenses, all of
which are related to the Company being a public company, introducing its new
HTS and Ultra HTS product line and increasing its headcount during 1998 and
the first quarter of 1999. The increase in net cash used in operations was
offset by increased accounts payable in the first quarter of 1999, which was
primarily comprised of balances owed on inventory purchased during the
period, as well as increased customer deposits during the quarter for
products to be shipped in the second quarter of 1999.
Net cash from investing activities totaled $3.5 million and $7.1 million
for the three months ended March 31, 1999 and 1998, respectively. This
decrease in the first quarter of 1999 was primarily due to the Company's
lower net investment of $3.3 million in investment grade, interest-bearing
financial instruments in the first quarter of 1999, as compared to $7.0
million in the first quarter of 1998. 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 primarily investing in short-term investments.
Net cash from financing activities totaled $6.9 million and $12.2
million for the three months ended March 31, 1999 and 1998, respectively. The
change in net cash from financing activities for the first quarter of 1999,
as compared to the first quarter of 1998, was primarily due to the Company's
private placement during the first quarter of 1999, which raised
approximately $6.7 million, net of issuance costs; as compared to the
Company's IPO, which raised approximately $12.2 million in cash, net of
underwriting discounts and associated costs, during the first quarter of
1998.
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 the purchases of equipment, computers and software necessary to
support the Company's HTS and Ultra HTS development effort and additions to
the marketing, sales and administrative infrastructure. At March 31, 1999,
the Company had borrowed $770,000 under this agreement.
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 in
aggregate. The source of funds for these royalty payments is expected to be
primarily the proceeds from the sale of HTS and Ultra HTS products developed
by the Company pursuant to this agreement.
On January 27, 1999, the Company raised net cash proceeds of $6.7
million in connection with a private placement of 2.0 million shares of
unregistered restricted Common Stock. The terms of the sale require that the
Company file a registration statement covering such shares.
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 investments, combined with cash to be generated from
operations, will be sufficient to fund operations for at least the next
twelve months. The Company, however, 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
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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.
IMPACT OF YEAR 2000
The Company has established a Year 2000 Program to address certain Year
2000 issues. This program focuses on four key areas of readiness: 1) Internal
Infrastructure Readiness, addressing internal hardware and software,
including both information and non-information technology systems; 2)
Supplier Readiness, addressing the preparedness of suppliers providing
material incorporated into the Company's products; 3) Product Readiness,
addressing product functionality; and 4) Customer Readiness, addressing
customer support and transactional activity. For each readiness area, the
Company is systematically performing risk assessment, conducting testing,
repairing Year 2000 issues, developing contingency plans to mitigate unknown
risks, and communicating Year 2000 information to employees, suppliers,
customers and other third parties.
INTERNAL INFRASTRUCTURE READINESS. The Company has completed an assessment
of its internal software applications and information technology hardware and
has commenced work on testing and repairs. Readiness activities are intended
to encompass all major categories of software applications in use by the
Company, including those used for manufacturing, engineering, sales, finance,
and human resources; as well as hardware, including hubs, routers,
telecommunication equipment, workstations and other items; and
non-information technology systems, including embedded systems, facilities
and other operations, such as financial, banking, security and utility
systems. At March 31, 1999, approximately 80 percent of the Company's mission
critical internal infrastructure has either been tested and determined to be
Year 2000 ready or is undergoing testing but is believed to be Year 2000
ready based on representations by the supplier. Testing and repair activity
is scheduled for completion by July 31, 1999. Although the Company has not
yet found any significant mission critical software applications which
require repair, any repairs that may yet be found to be required are expected
to be completed by July 31, 1999.
SUPPLIER READINESS. This area focuses on minimizing two components of risk
associated with suppliers: 1) a supplier's product integrity; and 2) a
supplier's business capability to continue providing products and services.
The Company has identified and contacted key suppliers regarding their
relative risks in these two components. To date, the Company has received
responses from approximately 75 percent of its key suppliers, who indicate
that the products provided to the Company are Year 2000 compliant. In
addition, the key suppliers have indicated they are in the process of
developing or executing repair plans to address Year 2000 issues which may
affect their ability to continue providing products and services to the
Company. The Company's assessment of its key suppliers Year 2000 readiness,
and testing and repair of any Year 2000 compliance issues, are scheduled to
be completed by July 31, 1999.
PRODUCT READINESS. This area focuses on identifying and resolving Year 2000
issues existing in the Company's products. This area encompasses a number of
activities, including testing, evaluation, engineering and manufacturing
implementation. The Company has completed a Year 2000 readiness assessment
for its current generation of released products based upon a series of
industry-recognized testing parameters and has determined that these products
are Year 2000 ready.
CUSTOMER READINESS. This area focuses on customer readiness as it relates to
the Company's responsibility to provide customer support, including
retrofitting products as well as providing other services to the Company's
customers. Primarily due to the Company's product readiness efforts regarding
its current generation of released products, the Company has completed its
assessment of Year 2000 risk in this area and has determined there are no
issues to address.
SUMMARY. If required, the Company will formulate contingency plans by
September 30, 1999, for those software applications, hardware and
non-information technology systems found to not be Year 2000 ready. It is not
anticipated that contingency plans will be needed for the Company's mission
critical software applications, hardware and non-information technology
systems, nor does the Company expect that contingency plans will be needed
for its current generation of released products. It is not known at this
point if contingency plans will be needed for its key suppliers who have not
yet responded to the Company's request regarding their Year 2000 readiness.
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The Company believes the overall cost to address Year 2000 issues will
not be material; however, since the Company is continually testing and making
necessary repairs, it may be necessary to reassess this estimate over time.
Due to the inherent uncertainty surrounding the Year 2000 issue, the
Company cannot anticipate all of the possible problems that may occur.
Adverse consequences from Year 2000 issues may materially affect the
Company's warranty liability, the value of capitalized software applications,
hardware and non-information technology systems, the carrying value of its
inventory, as well as the Company's financial condition, results of operation
and cash flows. Year 2000 readiness problems could also subject the Company
to litigation, which may include consequential damages.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
NEW BUSINESS STRATEGY; NEW AND UNDEFINED MARKET FOR HTS AND ULTRA 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 months ended March 31, 1999
and the years ended December 31, 1998 and 1997, as a result of its change in
business strategy and anticipates that it may continue to incur losses for at
least the next several years, due to the substantial increases in
expenditures necessary to develop and commercialize the Company's HTS and
Ultra HTS products. The Company began commercial shipments of its first HTS
instrument, Analyst HT, 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 and
Ultra HTS products, failure to implement commercial scale-up of developed HTS
and Ultra HTS products 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 and Ultra 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 and Ultra 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 and Ultra HTS instruments. The Company began commercial
shipments of its first HTS instrument, Analyst HT, in the second quarter of
1998. The Company had not previously developed or commercialized products for
the HTS market. The successful implementation and operation of the Company's
HTS and Ultra 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 HT, Analyst AD, Acquest and the
Company's other HTS and Ultra HTS products appear promising at commercial
launch, they may not achieve market acceptance. In addition, the Company's
HTS or Ultra 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 manufacture and
market Analyst HT, Analyst AD, Acquest or any of the Company's other 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.
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RISKS ASSOCIATED WITH THE DEVELOPMENT AND COMMERCIALIZATION OF REAGENTS,
ASSAY KITS AND MICROPLATES
The Company expects in the future that a substantial portion of its
revenues may be derived from the sale of reagents, assay kits and
microplates. The Company has limited experience in the development,
manufacture and marketing of reagents, assay kits and microplates. The
Company only recently introduced its first assay kits, TKX-TM- and TKXtra-TM-
and its first microplate, HE-TM-(High Efficiency). The Company intends to
continue to license assay technologies from third parties and to develop
reagents, assay kits and microplates 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, assay kits and microplates, but has limited experience
in this area. There can be no assurance that the Company will successfully
develop additional reagents, assay kits or microplates internally or that any
reagents, assay kits or microplates will achieve market acceptance. The
Company intends to outsource the manufacture of microplates and, as sales
volumes increase, 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, assay kits or
microplates on terms commercially favorable to the Company or at all. In
addition, the Company intends to sell reagents, assay kits and microplates to
purchasers of HTS and Ultra HTS instruments, including Analyst HT, Analyst AD
and Acquest. There can be no assurance that sales of Analyst HT, Analyst AD
and Acquest will be sufficient to support this strategy. A failure to achieve
commercial acceptance of its reagents, assay kits and microplates 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 and Ultra HTS products and to develop and
introduce, on a timely basis, new products that address the evolving needs of
its customers including fluorescence-based reagents and assay kits, as well
as products based on its FLARe-TM- and SmartOptics-TM- technologies. 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 new HTS
and Ultra HTS products, 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 and Ultra 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 and Ultra HTS products in certain
international markets through distributors. Other than Japan, 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 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.
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COMPETITION
The market for HTS and Ultra HTS products is highly competitive. The
Company expects that competition will increase significantly as more
biotechnology and pharmaceutical companies adopt HTS and Ultra 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 and Ultra HTS products, microplates, assay development and
reagent sales. The Company competes with companies which directly market HTS
and Ultra 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. 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 the Company's competitors have greater
financial, operational and personnel resources, and more experience in
research and development, sales and marketing and other areas than the
Company.
CONCENTRATION OF HTS AND ULTRA HTS MARKET
The market for HTS and Ultra 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 and
Ultra 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.
LENGTHY SALES CYCLES
The sale of HTS and Ultra HTS products typically involves a significant
technical evaluation and commitment of capital by customers. Accordingly, the
sales cycle associated with the Company's 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 HT, Acquest, reagents and assay
kits in limited quantities, and has not yet manufactured other products in
significant quantities. The Company may encounter difficulties in scaling up
production of its HTS and Ultra HTS products 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. The Company intends to outsource the manufacture of
microplates and, as sales volumes increase, to outsource the manufacture of
reagents and assays kits. Difficulties encountered by the Company in the
manufacturing scale-up of Analyst HT, Analyst AD, Acquest and other HTS and
Ultra 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.
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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.
DEPENDENCE ON SUPPLIERS AND CONTRACT MANUFACTURERS
Certain components used in the Company's HTS and Ultra 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, assay kits and microplates. 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, assay kits or microplates 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 March 31, 1999, the Company had an accumulated deficit of
approximately $14.6 million. The Company's expansion of its operations and
continued development of its HTS and Ultra 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 and Ultra 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.
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RISK OF INTERNATIONAL SALES AND OPERATIONS
The Company expects that international sales will account for a
significant portion of the Company's total revenues in the future.
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. 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 the 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 four U.S. patents. The
Company has ten pending U.S. patent applications, six international patent
applications and 23 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. In
October 1998, the Company exercised its option under this agreement on three
more patent applications. 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
and Ultra 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 internally develop 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 internally developing 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 will 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.
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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 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 the 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 costs 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 costs 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 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 and Ultra HTS
products will be regulated as medical devices or otherwise subject to FDA
regulation, the Company's clinical diagnostics products, including the
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 the Luminometer, Q2000 and
the microplate heater, the Company will continue to manufacture the Horizon
on an OEM basis during 1999 but does not expect to manufacture the Horizon in
periods after 1999. 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
Good Manufacturing Practices ("cGMP") regulations for the manufacture of the
Horizon. The FDA monitors compliance with its cGMP regulations by subjecting
medical product manufacturers to periodic FDA inspections of their
manufacturing facilities. The FDA has recently revised the cGMP 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
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comply with cGMP 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 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 cGMP
regulations and ISO standards, there can be no assurance that the Company's
operations will be found to comply with cGMP 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 and chemicals. 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 has established a Year 2000 Program to address certain Year
2000 issues. This program focuses on four key areas of readiness: 1) Internal
Infrastructure Readiness, addressing internal hardware and software,
including both information and non-information technology systems; 2)
Supplier Readiness, addressing the preparedness of suppliers providing
material incorporated into the Company's products; 3) Product Readiness,
addressing product functionality; and 4) Customer Readiness, addressing
customer support and transactional activity. For each readiness area, the
Company is systematically performing risk assessment, conducting testing,
repairing Year 2000 issues, developing contingency plans to mitigate unknown
risks, and communicating Year 2000 information to employees, suppliers,
customers and other third parties.
INTERNAL INFRASTRUCTURE READINESS. The Company has completed an assessment
of its internal software applications and information technology hardware and
has commenced work on testing and repairs. Readiness activities are intended
to encompass all major categories of software applications in use by the
Company, including those used for manufacturing, engineering, sales, finance,
and human resources; as well as hardware, including hubs, routers,
telecommunication equipment, workstations and other items; and
non-information technology systems, including embedded systems, facilities
and other operations, such as financial, banking, security and utility
systems. At March 31, 1999, approximately 80 percent of the Company's mission
critical internal infrastructure has either been tested and determined to be
Year 2000 ready or is undergoing testing but is believed to be Year 2000
ready based on representations by the supplier. Testing and repair activity
is scheduled for completion by July 31, 1999. Although the Company has not
yet found any significant mission critical software applications which
require repair, any repairs that may yet be found to be required are expected
to be completed by July 31, 1999.
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SUPPLIER READINESS. This area focuses on minimizing two components of risk
associated with suppliers: 1) a supplier's product integrity; and 2) a
supplier's business capability to continue providing products and services.
The Company has identified and contacted key suppliers regarding their
relative risks in these two components. To date, the Company has received
responses from approximately 75 percent of its key suppliers, who indicate
that the products provided to the Company are Year 2000 compliant. In
addition, the key suppliers have indicated they are in the process of
developing or executing repair plans, if needed, to address Year 2000 issues
which may affect their ability to continue providing products and services to
the Company. The Company's assessment of its key suppliers Year 2000
readiness, and testing and repair of any Year 2000 compliance issues, are
scheduled to be completed by July 31, 1999.
PRODUCT READINESS. This area focuses on identifying and resolving Year 2000
issues existing in the Company's products. This area encompasses a number of
activities, including testing, evaluation, engineering and manufacturing
implementation. The Company has completed a Year 2000 readiness assessment
for its current generation of released products based upon a series of
industry-recognized testing parameters and has determined that these products
are Year 2000 ready.
CUSTOMER READINESS. This area focuses on customer readiness as it relates to
the Company's responsibility to provide customer support, including
retrofitting products as well as providing other services to the Company's
customers. Primarily due to the Company's product readiness efforts regarding
its current generation of released products, the Company has completed its
assessment of Year 2000 risk in this area and has determined there are no
issues to address.
SUMMARY. If required, the Company will formulate contingency plans by
September 30, 1999, for those software applications, hardware and
non-information technology systems found to not be Year 2000 ready. It is not
anticipated that contingency plans will be needed for the Company's mission
critical software applications, hardware and non-information technology
systems, nor does the Company expect that contingency plans will be needed
for its current generation of released products. It is not known at this
point if contingency plans will be needed for key suppliers.
The Company believes the overall cost to address Year 2000 issues will
not be material; however, since the Company is continually testing and making
necessary repairs, it may be necessary to reassess this estimate over time.
Due to the inherent uncertainty surrounding the Year 2000 issue, the
Company cannot anticipate all of the possible problems that may occur.
Adverse consequences from Year 2000 issues may materially affect the
Company's warranty liability, the value of capitalized software applications,
hardware and non-information technology systems, the carrying value of its
inventory, as well as the Company's financial condition, results of operation
and cash flows. Year 2000 readiness problems could also subject the Company
to litigation which may include consequential damages.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between each of their existing sovereign
currencies and the Single European Currency ("Euro"). The participating
countries adopted the Euro as their common legal currency on that date, with
a transition period through January 1, 2002 regarding certain elements of the
Euro change. The Company does not expect the transition to, or use of, the
Euro to materially or adversely affect its business, financial condition or
results of operation.
FUTURE FLUCTUATIONS IN OPERATING RESULTS
The Company's future operating results are likely to fluctuate
substantially from year to year and 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 the Company's 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 and Ultra 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 efforts,
availability and cost of component parts from its suppliers,
-18-
<PAGE>
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 the average
selling price 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
contains forward-looking statements. Actual results could differ materially
from those projected in the forward-looking statements. The Company is
exposed to market risk related to changes in interest rates and foreign
currency exchange rates. The Company does not use derivative financial
instruments for speculative or trading purposes.
INTEREST RATE SENSITIVITY. The fair value of the Company's investments
in marketable securities at March 31, 1999 was $11.7 million. The Company's
strategy to reduce investment risk is to invest primarily in short-term
marketable securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source
of funds. The remainder of the Company's marketable securities portfolio is
invested in marketable securities with maturity dates of 24 months or less.
The Company diversifies its marketable securities portfolio by investing in
multiple types of investment grade securities. Although changes in interest
rates may affect the fair value of the marketable securities portfolio and
cause unrealized gains or losses, such gains or losses would not be realized
unless the investments are sold.
FOREIGN CURRENCY EXCHANGE RISK. The Company has a wholly owned UK
subsidiary, which exposes the Company to foreign currency exchange risk. In
order to reduce the risk from fluctuation in foreign currency exchange rates,
the Company's UK subsidiary uses the U.S. dollar as its functional currency;
however, its UK subsidiary does bill its customers in the currency of the
customer's country. Foreign currency assets and liabilities are translated
into U.S. dollars at the end-of-period exchange rates except for property and
equipment, which is translated at historical exchange rates. Revenue and
expenses are translated at average exchange rates in effect during each
period, except for those expenses related to balance sheet amounts, which are
translated at historical exchange rates. Gains or losses from foreign
currency transactions are included in net income (loss). The Company has not
entered into any currency hedging activities.
- --------------------------------------------------------------------------------
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 initial public offering 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
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<PAGE>
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 March 31, 1999, 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 March 31, 1999, after
deducting the total expenses above, were $12.8 million. From March 12, 1998
to March 31, 1999, 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 $ 5,687,000
Research and development activities 6,480,000
Working capital temporary investments:
Inventories 653,000
Short-term, investment grade,
interest-bearing financial instruments -
-----------
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.
On January 27, 1999, The Bay City Capital Fund I, L.P., Skyline Venture
Partners, L.P. and The Kaufmann Fund, Inc., purchased an aggregate of 2.0
million shares of the Company's Common Stock at a price per share of $3.50 in
a private placement transaction. The issuance of securities in the private
placement was deemed exempt from registration under the Securities Act of
1933, as amended (the "Act"), in reliance on Section 4(2) of the Act as a
transaction by an issuer not involving any public offering. The recipients
of the securities in such transaction represented their intention to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the securities issued in such transaction. The recipients were given
adequate access to information about the Company.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
-20-
<PAGE>
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 March 31,
1999.
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<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: May 14, 1999 BY: /s/ LEV J. LEYTES
-----------------
Lev J. Leytes
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
(DULY AUTHORIZED AND PRINCIPAL EXECUTIVE OFFICER)
BY: /s/ LARRY TANNENBAUM
--------------------
Larry Tannenbaum
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED AND PRINCIPAL FINANCIAL OFFICER)
BY: /s/ ROBERT T. BEGGS
-------------------
Robert T. Beggs
VICE PRESIDENT OF FINANCE AND ADMINISTRATION
(DULY AUTHORIZED AND PRINCIPAL 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,152,000
<SECURITIES> 11,684,000
<RECEIVABLES> 878,000
<ALLOWANCES> 0
<INVENTORY> 1,724,000
<CURRENT-ASSETS> 277,000
<PP&E> 1,877,000
<DEPRECIATION> 1,018,000
<TOTAL-ASSETS> 18,781,000
<CURRENT-LIABILITIES> 3,297,000
<BONDS> 0
0
0
<COMMON> 13,000
<OTHER-SE> 14,896,000
<TOTAL-LIABILITY-AND-EQUITY> 18,781,000
<SALES> 1,359,000
<TOTAL-REVENUES> 1,359,000
<CGS> 698,000
<TOTAL-COSTS> 3,870,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,000
<INCOME-PRETAX> (2,351,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,351,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,351,000)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>