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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 JUNE 30, 1999
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)
----------------------------------------
(408) 541-8787
(Registrant's telephone number, including area code)
----------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
As of July 31, 1999, 12,668,923 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
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited)................ 3
Consolidated Condensed Balance Sheet as of June 30, 1999
and December 31, 1998 (Unaudited)...................................... 3
Consolidated Condensed Statement of Operations for the Three- and
Six-Month Periods Ended June 30, 1999 and 1998 (Unaudited)............. 4
Consolidated Condensed Statement of Cash Flows for the Six-Month
Periods Ended June 30, 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............. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 23
Item 2. Changes in Securities and Use of Proceeds.............................. 23
Item 3. Defaults Upon Senior Securities........................................ 23
Item 4. Submission of Matters to a Vote of Security Holders.................... 23
Item 5. Other Information...................................................... 23
Item 6. Exhibits and Reports on Form 8-K....................................... 23
Signatures............................................................. 24
Exhibits............................................................... 25
</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>
June 30, December 31,
1999 1998
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ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 843,000 $ 1,831,000
Short-term investments..................................... 6,996,000 5,510,000
Accounts receivable........................................ 767,000 840,000
Inventories................................................ 2,027,000 1,173,000
Other current assets....................................... 417,000 262,000
-------------- ------------
Total current assets..................................... 11,050,000 9,616,000
Property and equipment, net................................... 830,000 789,000
Investments................................................... 4,660,000 2,863,000
Loan receivable from related party............................ 223,000 190,000
-------------- ------------
$ 16,763,000 $ 13,458,000
-------------- ------------
-------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 1,380,000 $ 508,000
Accrued expenses........................................... 1,913,000 1,801,000
Customer deposits.......................................... 340,000 19,000
Current portion of long-term debt.......................... 202,000 168,000
-------------- ------------
Total current liabilities................................ 3,835,000 2,496,000
Long-term debt, net of current portion........................ 521,000 542,000
-------------- ------------
Total liabilities........................................ 4,356,000 3,038,000
-------------- ------------
Stockholders' equity:
Common stock............................................... 13,000 11,000
Additional paid-in capital................................. 30,148,000 23,258,000
Deferred stock compensation................................ (524,000) (614,000)
Accumulated other comprehensive income..................... (62,000) 6,000
Accumulated deficit........................................ (17,168,000) (12,241,000)
-------------- ------------
Total stockholders' equity............................... 12,407,000 10,420,000
-------------- ------------
$ 16,763,000 $ 13,458,000
-------------- ------------
-------------- ------------
</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 June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales................................... $ 2,018,000 $ 1,064,000 $ 3,377,000 $ 1,384,000
Cost of sales............................... 882,000 741,000 1,580,000 1,030,000
------------ ------------- ------------- -------------
Gross profit................................ 1,136,000 323,000 1,797,000 354,000
------------ ------------- ------------- -------------
Operating expenses:
Research and development................. 1,775,000 1,365,000 3,258,000 2,782,000
Selling, general and administrative...... 2,093,000 1,201,000 3,782,000 1,917,000
------------ ------------- ------------- -------------
Total operating expenses............... 3,868,000 2,566,000 7,040,000 4,699,000
------------ ------------- ------------- -------------
Loss from operations........................ (2,732,000) (2,243,000) (5,243,000) (4,345,000)
Interest and other income, net.............. 178,000 213,000 358,000 284,000
Interest expense............................ (22,000) - (42,000) (3,000)
------------ ------------- ------------- -------------
Net loss.................................... (2,576,000) (2,030,000) (4,927,000) (4,064,000)
Accretion of mandatorily redeemable
convertible preferred stock redemption
value.................................... - - - (254,000)
------------ ------------- ------------- -------------
Net loss available to common stockholders... $ (2,576,000) $ (2,030,000) $ (4,927,000) $ (4,318,000)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Basic and diluted net loss per share available
to common stockholders................... $ (0.20) $ (0.20) $ (0.40) $ (0.53)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Shares used in computation of basic and
diluted net loss per share available
to common stockholders................... 12,627,249 10,370,623 12,309,107 8,088,555
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</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>
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Six Months Ended June 30,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (4,927,000) $ (4,064,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................................... 189,000 128,000
Stock compensation expense...................................... 89,000 86,000
Changes in assets and liabilities:
Accounts receivable........................................... 73,000 (578,000)
Inventories................................................... (854,000) (772,000)
Other current assets.......................................... (155,000) 232,000
Accounts payable.............................................. 872,000 67,000
Accrued expenses.............................................. 112,000 528,000
Customer deposits............................................. 321,000 (113,000)
------------- -------------
Net cash used in operating activities....................... (4,280,000) (4,486,000)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment............................... (230,000) (338,000)
Purchases of investments.......................................... (5,809,000) (10,924,000)
Proceeds from sales and maturities of investments................. 2,469,000 -
------------- -------------
Net cash used in investing activities....................... (3,570,000) (11,262,000)
-------------- -------------
Cash flows from financing activities:
Proceeds from borrowings.......................................... 102,000 445,000
Repayments of borrowings.......................................... (89,000) (94,000)
Issuance of long-term notes receivable from related party......... (33,000) (190,000)
Proceeds from issuance of common stock, net....................... 6,892,000 12,875,000
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Net cash provided by financing activities................... 6,872,000 13,036,000
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Effect of exchange rate changes on cash and cash equivalents......... (10,000) -
Net increase in cash and cash equivalents............................ (988,000) (2,712,000)
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........................... $ 843,000 $ 2,813,000
------------- -------------
------------- -------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest............................................ $ 42,000 $ 3,000
------------- -------------
------------- -------------
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 the management of LJL BioSystems, Inc. ("we" or 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 30, 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>
June 30, December 31,
1999 1998
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<S> <C> <C>
Raw materials..................................... $ 743,000 $ 476,000
Work-in-process................................... 344,000 -
Finished goods.................................... 940,000 697,000
------------ ------------
$ 2,027,000 $ 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 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 initial public offering, all the outstanding shares of Series A
preferred stock converted into an equal number of shares of common stock.
On January 27, 1999, the Company received 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 required that the Company file a registration statement
covering such shares, which became effective on July 21, 1999.
NOTE 4 - BASIC AND DILUTED NET LOSS PER SHARE AVAILABLE TO COMMON
STOCKHOLDERS:
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 six-month periods ended
June 30, 1999 and 1998. For the six-month period ended June 30, 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 factors 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
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 $2,018,000 for the three months ended June 30,
1999, as compared to $1,064,000 for the three months ended June 30, 1998,
representing an increase of $954,000. This increase in revenues was due to
increased sales of the Company's HTS products, particularly higher unit sales
volume of the Company's Analyst-TM- HT instrument and some OEM revenue. The
Company did not begin shipping and recognizing revenue on its first HTS
product, Analyst 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's
marketing focus continues to be directed at penetrating large pharmaceutical
accounts; therefore, revenue generated from multiple sales to these large
pharmaceutical customers continues to be a significant percentage of
revenues. For the three-month period ended June 30, 1999, 49% of revenues was
generated from instrument sales to two large pharmaceutical customers. The
Company's revenues from the sale of its OEM product, Horizon, were $423,000
or 21% of its total revenues for the three months ended June 30, 1999, all of
which was sold to one customer. The Company expects less than 10% of its
total revenues to be derived from OEM product sales through 1999 and expects
little or no OEM product sales in periods after 1999.
COST OF SALES. Cost of sales was $882,000 for the three months ended June 30,
1999, as compared to $741,000 for the three months ended June 30, 1998,
representing an increase of $141,000. This increase was primarily due to the
increase in sales volume during in the second quarter of 1999 compared to the
second quarter in 1998, as the Company began shipping its line of HTS
products in the second quarter of 1998. Gross profit, as a percentage of
sales, was 56% for the three months ended June 30, 1999, as compared to 30%
for the three months ended June 30, 1998. This increase was primarily the
result of increased absorption of manufacturing overhead by higher sales
volumes for the second quarter of 1999, as compared to the second quarter of
1998. 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 $1,775,000
for three months ended June 30, 1999, as compared to $1,365,000 for the three
months ended June 30, 1998, representing an increase of $410,000. This
increase was primarily due to increased costs associated with the continued
development of the Company's HTS and Ultra HTS product platform, including
the addition of research and development personnel since the second quarter
of
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1998. 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 $2,093,000 for the three months ended June 30, 1999, as compared
to $1,201,000 for the three months ended June 30, 1998, representing an
increase of $892,000. 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, as well as other increases in general and
administrative expenses including the additional administrative
infrastructure necessary as 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 as the Company continues to expand
its sales, marketing and administrative infrastructure.
INTEREST AND OTHER INCOME, NET. Net interest and other income was $178,000
for the three months ended June 30, 1999, as compared to $213,000 for the
three months ended June 30, 1998, representing a decrease of $35,000. This
decrease was primarily due to lower interest earned on lower levels of cash,
cash equivalents and investments in the second quarter of 1999 when compared
to the second quarter of 1998.
INTEREST EXPENSE. Interest expense was $22,000 for the three months ended
June 30, 1999, as compared to $0 for the three months ended June 30, 1998.
This increase was primarily due to interest paid on the Company's line of
credit under which outstanding borrowings began in June 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 a 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 June 30, 1999 and
1998 as the Company incurred net operating losses and has no carryback
potential.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash, cash equivalents and
investments of $12.5 million, working capital of $7.2 million and an
accumulated deficit of $17.2 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
received 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 required that the
Company file a registration statement covering such shares, which became
effective on July 21, 1999. Prior to its initial public offering, 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 from operating activities has historically fluctuated based on
the timing of payment of accounts payable balances, receipts of customer
deposits, receipt of payments of accounts receivable balances, changes in
inventory balances resulting from varying levels of manufacturing activities
and fluctuations in the Company's net loss. Net cash used in operating
activities totaled $4.3 million and $4.5 million during the six months ended
June 30, 1999 and 1998, respectively. Net cash used in operations was
primarily due to the Company's net losses for the six months ended June 30,
1999 and 1998 of $4.9 million and $4.1 million, respectively. The decrease in
net cash used in operations was partially attributable to an increase in
accounts payable and customer deposits and a decrease in accounts receivable.
The decrease in net cash used in operations was partially offset by an
increase in net loss and changes in other asset and accrued liability
balances.
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Net cash used in investing activities totaled $3.6 million and
$11.3 million for the six months ended June 30, 1999 and 1998, respectively.
This decrease in the first six months of 1999 was primarily due to the
Company's lower net investment of $3.3 million in investment grade,
interest-bearing financial instruments, as compared to $10.9 million in the
first half 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 provided by financing activities totaled $6.9 million and $13.0
million for the six months ended June 30, 1999 and 1998, respectively. The
decrease in net cash from financing activities for the first half of 1999, as
compared to the first half of 1998, was primarily due to the Company's
private placement of common stock during the first quarter of 1999, which
raised approximately $6.7 million, net of issuance costs, as compared to the
Company's initial public offering, which raised approximately $12.8 million
in cash, net of underwriting discounts and associated costs, during the first
six months of 1998. The lower net cash from financing activities for the
first half of 1999 also resulted from a decrease in the amount drawn from the
Company's line of credit in the first half of 1999, as compared to the first
half 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 June 30, 1999, the
Company had an obligation to repay $723,000 under this agreement.
In June 1997, the Company entered into a development, license and sales
agreement with FluorRx, Inc. 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 sales 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 required that the
Company file a registration statement covering such shares, which became
effective on July 21, 1999.
The Company may be required to raise substantial additional capital over
a period of several years in order to continue 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 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 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
We have established a year 2000 Program to address certain year 2000
issues. This program focuses on four key areas of readiness:
- Internal Infrastructure Readiness, addressing internal hardware
and software, including both information and non-information
technology systems;
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- Supplier Readiness, addressing the preparedness of suppliers
providing material incorporated into our products;
- Product Readiness, addressing product functionality; and
- Customer Readiness, addressing customer support and
transactional activity.
For each readiness area, we are in the process of 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. We have completed an assessment of our
internal software applications and information technology hardware and have
commenced work on testing and repairs. Readiness activities are intended to
encompass all major categories of software applications we use, including:
- those used for manufacturing, engineering, sales, finance, and
human resources;
- 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.
We have completed the evaluation of our mission critical internal
infrastructure and have also tested approximately 90% of our mission critical
internal infrastructure and determined it to be year 2000 ready. The
remainder is currently undergoing testing but is believed to be year 2000
ready based on representations by the suppliers. Testing and repair activity
is mostly completed with the remainder scheduled for completion by August 31,
1999. Although we have not yet found any significant mission critical
software applications which require repair, any repairs that may be found to
be required are expected to be completed by August 31, 1999. Evaluation,
testing and repair will be made on an on-going basis for any internal
infrastructure components we newly acquire through December 31, 1999.
SUPPLIER READINESS. This area focuses on minimizing two components of risk
associated with suppliers:
- a supplier's product integrity; and
- a supplier's business capability to continue providing products
and services.
We have identified and contacted key suppliers regarding their relative
risks in these two components. To date, we have received responses from
approximately 90 percent of our key suppliers, who indicate that the products
provided to us are year 2000 compliant or 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 us, which
they intend to have completed before January 1, 2000. Our assessment of our
key suppliers' year 2000 readiness, and testing and repair of any year 2000
compliance issues, is scheduled to be completed by August 31, 1999. We will
continue this evaluation and communication process on an on-going basis for
any new suppliers who begin providing products and services to us through
December 31, 1999.
PRODUCT READINESS. This area focuses on identifying and resolving year 2000
issues existing in our products. This area encompasses a number of
activities, including testing, evaluation, engineering and manufacturing
implementation. We have completed a year 2000 readiness assessment for our
current generation of released high throughput screening products based upon
a series of industry-recognized testing parameters and have determined that
these products are year 2000 ready.
CUSTOMER READINESS. This area focuses on customer readiness as it relates to
our responsibility to provide customer support, including retrofitting
products as well as providing other services to our customers. Primarily due
to our product readiness efforts regarding our current generation of released
products, we have completed our assessment of year 2000 risk in this area and
have determined there are no issues to address.
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SUMMARY. If required, we 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. We may also formulate
contingency plans by September 30, 1999 for key suppliers that do not plan on
being year 2000 compliant until the last quarter of 1999. We do not
anticipate that we will need contingency plans for our mission critical
software applications, hardware and non-information technology systems, nor
do we expect to need contingency plans for our current generation of released
products.
We believe the overall cost to address year 2000 issues will not be
material; however, we are continually testing and making necessary repairs
and we may need to reassess this estimate over time.
Due to the inherent uncertainty surrounding the year 2000 issue, we
cannot anticipate all of the possible problems that may occur. Adverse
consequences from year 2000 issues may materially affect our warranty
liability, the value of capitalized software applications, hardware and
non-information technology systems, the carrying value of our inventory, as
well as our financial condition, results of operation and cash flows. Year
2000 readiness problems could also subject us to litigation, which may
include consequential damages.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
We desire 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, we wish to
alert readers that the following important factors, as well as other factors
including, without limitation, those described elsewhere in reports we have
filed with the SEC and incorporated into this quarterly report on Form 10-Q by
reference, could in the future affect, and in the past have affected, our
actual results and could cause our results for future periods to differ
materially from those expressed in any forward-looking statements made by or
on behalf of us. We assume no obligation to update these forward-looking
statements.
WE RECENTLY ADOPTED A NEW BUSINESS STRATEGY AND HAVE HAD OPERATING LOSSES
EVER SINCE; THE MARKET FOR OUR HIGH THROUGHPUT SCREENING PRODUCTS IS NEW AND
UNDEFINED, AND WE MAY NEVER ACHIEVE PROFITABILITY
In the second half of 1996, we implemented a new strategic business
model to develop products for the high throughput screening market. In
connection with this change in strategy, we shifted our focus from developing
and manufacturing clinical diagnostic and research products on an OEM basis
to developing, manufacturing and marketing products for the high throughput
screening market. As a result, our historical operating and financial
performance is generally not indicative of future financial and business
results. We incurred operating losses for the six months ended June 30, 1999
and the years ended December 31, 1998 and 1997 as a result of our change in
business strategy and anticipate that we may continue to incur losses for at
least the next several years, due to the substantial increases in
expenditures necessary to continue to develop and commercialize our high
throughput screening and ultra-high throughput screening products. We began
commercial shipments of our first high throughput screening instrument, the
Analyst HT, in the second quarter of 1998. Accordingly, we are 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 our high
throughput screening and ultra-high throughput screening
products;
- failure to implement commercial scale-up of developed high
throughput screening and ultra-high throughput screening
products; and
- failure to attract and retain key personnel.
Furthermore, the high throughput screening market is new and undefined,
and the use of high throughput screening by pharmaceutical and biotechnology
companies is limited. Demand for our high throughput screening and ultra-high
throughput screening products will depend upon the extent to which
pharmaceutical and biotechnology companies adopt high throughput screening as
a drug discovery tool. If high throughput screening does not become a widely
used method in drug discovery, demand for our products will not develop as we
currently
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expect or at all. The lack of demand for our high throughput screening and
ultra-high throughput screening products would have a material adverse effect
on our business, financial condition and results of operations.
BECAUSE WE ARE IN THE EARLY STAGE OF INSTRUMENT DEVELOPMENT, OUR ABILITY TO
DEVELOP HIGH THROUGHPUT SCREENING AND ULTRA-HIGH THROUGHPUT SCREENING
INSTRUMENTS IS UNCERTAIN
Our success will depend on our ability to develop and commercialize our
high throughput screening and ultra-high throughput screening instruments. We
began commercial shipments of our first high throughput screening instrument,
Analyst HT, in the second quarter of 1998. We had not previously developed or
commercialized products for the high throughput screening market before this
time. The successful implementation and operation of our high throughput
screening and ultra-high throughput screening 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 our other high throughput
screening and ultra-high throughput screening products appear promising at
commercial launch, they may not achieve market acceptance at a level
necessary to enable production at a reasonable cost, to support the required
sales and marketing effort, and to support continuing research and
development costs. In addition, our high throughput screening or ultra-high
throughput screening instruments may:
- be difficult or overly expensive to produce;
- fail to achieve performance levels expected by customers;
- have a price level that is unacceptable in our targeted industries;
or
- be precluded from commercialization by the proprietary rights of
others or other competitive forces.
There can be no assurance that we will be able to successfully
manufacture and market the Analyst HT, Analyst AD, Acquest or any of our
other products on a timely basis, achieve anticipated performance levels or
throughputs, gain industry acceptance of our products or develop a profitable
business. The failure to achieve any of these objectives would have a
material adverse effect on our business, financial condition and results of
operations.
BECAUSE WE ARE IN THE EARLY STAGE IN DEVELOPMENT, OUR ABILITY TO DEVELOP
REAGENTS AND ASSAY KITS IS UNCERTAIN
We expect in the future that a substantial portion of our revenues may
be derived from the sale of reagents, assay kits and microplates. We have
limited experience in the development, manufacture and marketing of reagents,
assay kits and microplates, having only recently introduced our first assay
kits, TKX-TM- and TKXtra-TM- and LJL designed microplates, HE-TM- (High
Efficiency). We intend to continue to license assay technologies from third
parties and to develop reagents, assay kits and microplates internally. We
may not succeed in licensing any additional assay technologies on acceptable
terms, if at all, and we may not successfully commercialize any reagents that
we license. In addition, we are internally developing reagents, assay kits
and microplates, but have limited experience in this area. We may not
successfully develop additional reagents, assay kits or microplates
internally, and any reagents, assay kits or microplates we do develop may not
achieve market acceptance. We intend to
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outsource the manufacture of microplates and, as sales volumes increase, to
also outsource the manufacture of reagents and assay kits. We may not be able
to enter into agreements with third parties for the manufacture of reagents,
assay kits or microplates on terms commercially acceptable to us or at all.
In addition, we intend to sell reagents, assay kits and microplates to
purchasers of high throughput screening and ultra-high throughput screening
instruments, including the Analyst HT, Analyst AD and Acquest. Sales of the
Analyst HT, Analyst AD and Acquest may not be sufficient to support this
strategy. A failure to achieve commercial acceptance of our reagents, assay
kits and microplates would have a material adverse effect on our business,
financial condition and results of operations.
BECAUSE WE DEPEND ON NEW PRODUCTS AND OUR MARKETS ARE SUBJECT TO RAPID
TECHNOLOGICAL CHANGE, WE MAY NOT BE ABLE TO COMMERCIALIZE PRODUCTS WE DEVELOP
The pharmaceutical and biotechnology instrumentation and reagents
markets are characterized by rapid technological change and frequent new
product introductions. Our future success will depend on our ability to
enhance our current and planned high throughput screening and ultra-high
throughput screening products and to develop and introduce, on a timely
basis, new products that address the evolving needs of our customers,
including fluorescence-based reagents and assay kits, as well as products
based on our FLARe-TM- and SmartOptics-TM- technologies. We anticipate that
production units for these new products may not be available for several
months or years, if at all. The production of new high throughput screening
and ultra-high throughput screening products, microplates, fluorescence-based
reagents and assay kits may present development and manufacturing challenges.
We may experience difficulties that could delay or prevent the successful
development, introduction and marketing of our new products or our 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 our business, financial condition and
results of operations.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE AND MAY NOT BE ABLE TO
DEVELOP A DIRECT SALES FORCE OR DISTRIBUTION CHANNELS THAT CAN MEET OUR
CUSTOMERS NEEDS, AND OUR FAILURE TO DO SO WILL HURT OUR FINANCIAL RESULTS
We have limited experience in direct marketing, sales and distribution.
Our future profitability will depend on our ability to further develop a
direct sales force to sell our high throughput screening and ultra-high
throughput screening products to pharmaceutical and biotechnology companies.
Our products are technical in nature and we therefore believe it is necessary
to develop a direct sales force consisting of people with scientific
backgrounds and expertise. Competition for such employees is intense. We may
not be able to attract and retain qualified salespeople or 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 our business,
financial condition and results of operations.
We intend to market our high throughput screening and ultra-high
throughput screening products in certain international markets through
distributors. Other than Japan, we do not currently have distributors in any
international markets, and there can be no assurance that we will be able to
engage qualified distributors. Such distributors may:
- fail to satisfy financial or contractual obligations to us;
- fail to adequately market our products;
- cease operations with little or no notice to us; 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 our business, financial condition and
results of operations.
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WE PARTICIPATE IN A HIGHLY COMPETITIVE MARKET AND OUR PRODUCTS MAY NOT BE
ACCEPTED IN THE MARKET
The market for high throughput screening and ultra-high throughput
screening products is highly competitive. We expect that competition will
increase significantly as more biotechnology and pharmaceutical companies
adopt high throughput screening and ultra-high throughput screening
instruments as a drug discovery tool and as new companies enter the market
with advanced technologies and products. We compete in many areas, including
high throughput screening and ultra-high throughput screening products,
microplates, assay development and reagent sales. We compete with companies
which directly market high throughput and ultra-high throughput screening
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 our 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 a potential
customer's need to purchase our products. Our 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 our
current or future competitors. Many of our competitors have greater
financial, operational and personnel resources, and more experience in
research and development, sales and marketing and other areas than we do.
THE HIGH THROUGHPUT SCREENING AND ULTRA-HIGH THROUGHPUT SCREENING MARKET IS
CONCENTRATED, WHICH LIMITS THE NUMBER OF OUR POTENTIAL CUSTOMERS
The market for high throughput screening and ultra-high throughput
screening products is highly concentrated, with approximately 50 large
pharmaceutical companies operating a substantial portion of our targeted drug
discovery laboratories. Accordingly, we expect a relatively small number of
customers will continue to account for a substantial portion of our revenues.
We face risks associated with a highly concentrated customer base to which we
sell our high throughput screening and ultra-high throughput screening
products, including the failure to establish or maintain relationships within
a limited customer pool, or substantial financial difficulties or decreased
capital spending by our customers, any of which could have a material adverse
effect on our business, financial condition and results of operations.
OUR PRODUCTS HAVE LENGTHY SALES CYCLES, WHICH COULD CAUSE OUR OPERATING
RESULTS TO FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER
The sale of high throughput screening and ultra-high throughput
screening products typically involves a significant technical evaluation and
commitment of capital by customers. Accordingly, the sales cycle associated
with our 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 our control. Due to this lengthy and
unpredictable sales cycle, our operating results could fluctuate
significantly from quarter to quarter.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY NOT BE ABLE TO SCALE-UP OUR
MANUFACTURING OPERATIONS TO COMMERCIAL LEVELS
We are only producing Analyst HT, Acquest, Analyst AD, reagents and
assay kits in limited quantities, and have not yet manufactured other
products in significant quantities. We may encounter difficulties in scaling
up production of our high throughput screening and ultra-high throughput
screening products due to, among other things, quality control and assurance,
component supply and availability of qualified personnel. Even if we
successfully develop and introduce our products to market, we may not be able
to manufacture them in sufficient quantities at acceptable cost while meeting
quality control standards. We intend to outsource the manufacture of
microplates and, as sales volumes increase, to outsource the manufacture of
reagents and assay kits. Difficulties encountered in the manufacturing
scale-up of Analyst HT, Analyst AD, Acquest and other high throughput
screening and ultra-high throughput screening products could have a material
adverse effect on our business, financial condition and results of operations.
WE MAY NOT SUCCESSFULLY MANAGE OUR GROWTH
Our success will depend on the expansion of our operations and the
effective management of growth, which will place a significant strain on our
management, operational and financial resources. To manage such
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growth, we must expand our facilities, augment our operational, financial and
management systems and hire and train additional qualified personnel. Our
failure to manage growth effectively would have a material adverse effect on
our business, financial condition and results of operations.
WE DEPEND UPON KEY PERSONNEL WHO MAY TERMINATE THEIR EMPLOYMENT WITH US AT
ANY TIME; WE NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
Our success will depend to a significant degree upon the continued
services of key management, technical, and scientific personnel, including
Lev J. Leytes, the Chairman of our Board of Directors, President and Chief
Executive Officer. In addition, our success will depend on our 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 we can recruit such personnel
on a timely basis, if at all. Our management and other employees may
voluntarily terminate their employment with us 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 our business,
financial condition and results of operations.
BECAUSE WE DEPEND ON SUPPLIERS AND CONTRACT MANUFACTURERS, WE ARE SUBJECT TO
RISKS BEYOND OUR CONTROL
Certain components used in our high throughput screening and ultra-high
throughput screening 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:
- 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.
We do not maintain long-term agreements with any of our 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 our
business, financial condition and results of operations. We intend to rely on
contract manufacturers, some of which may be single source vendors, for the
development, manufacture and supply of certain of our reagents, assay kits
and microplates. There can be no assurance that we will be able to enter into
such manufacturing contracts on commercially reasonable terms, if at all, or
that our current or future contract manufacturers will meet our requirements
for quality, quantity or timeliness. If the supply of any components,
reagents, assay kits or microplates is interrupted, components, reagents,
assay kits and microplates from alternative suppliers and contract
manufacturers may not be available in sufficient volumes within required
timeframes, if at all, to meet our production needs.
WE HAVE AN ACCUMULATED DEFICIT AND OUR FUTURE PROFITABILITY IS UNCERTAIN
As of June 30, 1999, we had an accumulated deficit of approximately
$17.2 million. The expansion of our operations and continued development of
our high throughput screening and ultra-high throughput screening products
will require a substantial increase in sales, marketing and research and
development expenditures for at least the next several years. As a result, we
expect to incur operating losses for the next several years. Our
profitability will depend on our ability to successfully develop and
commercialize our high throughput screening and ultra-high throughput
screening 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.
WE MAY NEED TO RAISE CAPITAL IN THE FUTURE AND ADDITIONAL FUNDING IS UNCERTAIN
We may be required to raise substantial additional capital over a period
of several years in order to develop and commercialize our products. Our
future capital requirements will depend on numerous factors, including the
costs associated with:
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- developing and commercializing our products;
- developing a direct marketing and sales force;
- maintaining existing, or entering into future, licensing and
distribution agreements;
- protecting intellectual property rights;
- expanding our reagents and assay kits business;
- expanding facilities; and
- consummating possible future acquisitions of technologies, products
or businesses.
We may consume available resources more rapidly than currently
anticipated, resulting in the need for additional funding. Accordingly, we
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. Additional capital may not be
available on acceptable terms, if at all. If adequate funds are not
available, we may be required to significantly reduce or refocus our
operations or to obtain funds through arrangements that may require us to
relinquish rights to certain of our products, technologies or potential
markets, which would have a material adverse effect on our business,
financial condition and results of operations. To the extent that additional
capital is raised through the sale of equity or convertible securities, the
issuance of such securities would result in ownership dilution to our
existing stockholders.
WE HAVE INTERNATIONAL SALES AND OPERATIONS, WHICH SUBJECT US TO RISKS RELATED
TO FOREIGN CURRENCY EXCHANGE RATES, TARIFFS, FOREIGN REGULATIONS, IMPORT AND
EXPORT RESTRICTIONS AND DIFFICULTIES MANAGING AND STAFFING INTERNATIONAL
OPERATIONS.
We sell products in foreign countries in local currencies, which exposes
us to foreign currency exchange risk. In order to reduce the risk from
fluctuation in foreign currency exchange rates, our UK subsidiary uses the
U.S. dollar as its functional currency; however, our UK subsidiary bills its
customers in the customer's local currency. Foreign currency assets and
liabilities are translated into U.S. dollars at 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. Gains or losses from foreign currency transactions
are included in net income (loss) and to date have not been material. We have
not entered into any currency hedging activities.
We expect that international sales could account for a significant
portion of our 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
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- general economic conditions.
In addition, as we expand our international operations and the amount of
revenue invoiced in local currencies becomes a larger portion of our
business, fluctuations in the value of foreign currencies relative to the
U.S. dollar may adversely affect our business, financial condition and
results of operations.
WE MAY ACQUIRE TECHNOLOGIES AND BUSINESSES, WHICH COULD EXPOSE US TO
ADDITIONAL RISKS AND BE DILUTIVE TO EXISTING STOCKHOLDERS
We may acquire certain technologies, products or businesses to broaden
the scope of our existing and planned product lines and technologies. Such
acquisitions would expose us to:
- the risks associated with the assimilation of new technologies,
operations, sites and personnel;
- the diversion of resources from our existing business and
technologies;
- the inability to generate revenues to offset associated acquisition
costs;
- the requirement to maintain 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. Our failure to successfully address such risks could have a
material adverse effect on our business, financial condition and results of
operations.
THIRD PARTY INTELLECTUAL PROPERTY RIGHTS MAY LIMIT OUR ABILITY TO DEVELOP AND
SELL OUR PRODUCTS; WE HAVE LICENSED TECHNOLOGY THAT WE USE IN OUR PRODUCTS,
BUT WE COULD LOSE RIGHTS TO THIS TECHNOLOGY AND THE ABILITY TO SELL OUR
PRODUCTS IF WE MATERIALLY BREACH THIS LICENSE
Our success will depend in part on our ability to obtain patents,
maintain trade secret protection and operate without infringing the
proprietary rights of others. We hold four U.S. patents. We have 11 pending
U.S. patent applications, one pending European patent application, five
international patent applications and 26 provisional U.S. patent
applications. To supplement our proprietary technology, we have licensed ten
patents and one patent application from FluorRx pursuant to a June 1997
agreement, as amended. In October 1998, we exercised our option under this
agreement to license three more patents that are expected to result from
patent applications that FluorRx has in process. Under this license, we
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 this agreement, we
paid one-time fees as well as agreed to pay royalties based on sales of our
products that incorporate this technology. The license may be terminated in
the event of a material breach by us. Furthermore, FluorRx may elect to
convert the exclusive rights into non-exclusive rights in the event that we
fail to make certain minimum royalty payments. If FluorRx were to terminate
the license due to a material breach of the license by us, we would lose the
right to incorporate FLARe technology into our high throughput screening and
ultra-high throughput screening products, which would require us to exclude
FLARe technology from our existing and future products and either license or
internally develop alternative technologies. There can be no assurance that
we would be able to license alternative technologies on commercially
acceptable terms, or at all, or that we would be capable of internally
developing such technologies. Furthermore, other companies may 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 we have licensed.
We are aware of third party patents that contain issued claims that may
cover certain aspects of our reagent technologies. In the future we may be
required to license third-party patents to produce certain reagents, assay
kits and related products. Licenses for such patents may not be available on
commercially acceptable terms, if at all.
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Any action against us claiming damages and seeking to enjoin commercial
activities relating to the affected technologies could subject us to
potential liability for damages. We could incur substantial costs in
defending patent infringement claims, obtaining patent licenses, engaging in
interference and opposition proceedings or other challenges to our patent
rights or intellectual property rights made by third parties, or in bringing
such proceedings or enforcing any patent rights against third parties. Our
inability to obtain necessary licenses or our involvement in proceedings
concerning patent rights could have a material adverse effect on our
business, financial condition and results of operations.
The patent positions of bioanalytical product companies, including ours,
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 our
patent applications or those of our 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 ours or design around or otherwise
circumvent patents issued to us. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, we 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 our 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 us or that we would be successful in any
attempt to redesign our products or processes to avoid infringement. If we do
not obtain the necessary licenses, we could be subject to litigation and
encounter delays in product introductions while we attempt to design around
such patents. Alternatively, the development, manufacture or sale of such
products could be prevented. Litigation would result in significant costs to
us as well as diversion of management time. Adverse determinations in any
such proceedings could have a material adverse effect on our business,
financial condition and results of operations.
We also rely on trade secret and copyright law, as well as employee and
third-party nondisclosure agreements to protect our intellectual property
rights in our products and technology. There can be no assurance that these
agreements and measures will provide meaningful protection of our trade
secrets, copyrights, know-how, or other proprietary information in the event
of any unauthorized use, misappropriation or disclosure. In addition, others
may independently develop substantially equivalent proprietary technologies.
Litigation to protect our trade secrets or copyrights would result in
significant costs to us as well as diversion of management time. Adverse
determinations in any such proceedings or unauthorized disclosure of our
trade secrets could have a material adverse effect on our business, financial
condition and results of operations. In addition, the laws of certain foreign
countries do not protect our intellectual property rights to the same extent
as U.S. laws. There can be no assurance that we will be able to protect our
intellectual property in these markets.
SOME OF OUR PRODUCTS ARE SUBJECT TO GOVERNMENT REGULATION, AND THE FAILURE BY
US OR OUR OEM CUSTOMERS TO COMPLY WITH GOVERNMENT REGULATIONS COULD LIMIT OUR
SALES OF THESE PRODUCTS
While we believe that none of our high throughput screening and
ultra-high throughput screening products will be regulated as medical devices
or otherwise subject to FDA regulation, our 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 U.S. and certain other countries is lengthy, expensive and uncertain.
Although we have phased out production of the Luminometer, Q2000 and the
microplate heater, we will continue to manufacture the Horizon on an OEM
basis during 1999 but do not expect to manufacture the Horizon after 1999.
The Horizon is used in research and clinical laboratories to perform in vitro
diagnostic tests, which are exempt from investigational device exemption
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 in vitro
diagnostic products distributed for research are used only for those
purposes.
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To our knowledge, our OEM customers have met these conditions. However,
the FDA may not agree that our OEM customers' distribution of our clinical
diagnostic products meet and have met the requirements for investigational
device exemption. Failure by us, our OEM customers or the recipients of our
clinical diagnostic products to comply with the investigational device
exemption requirements could result in enforcement action by the FDA, which
could adversely affect us or our 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 we comply with the FDA's regulations for
the manufacture of the Horizon. The FDA monitors compliance with its
regulations by subjecting medical product manufacturers to periodic FDA
inspections of their manufacturing facilities. The FDA has recently revised
its regulations, and the new regulations impose design controls and make
other significant changes in the requirements applicable to manufacturers. We
are also subject to other regulatory requirements, and may need to submit
reports to the FDA, including adverse event reporting. Failure to comply with
current FDA 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 our part and the part of 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 our
business, financial condition and results of operations.
In conjunction with the export of our clinical diagnostics instruments,
we maintain International Organization for Standardization ("ISO") 9001
certification and apply the CE mark to certain products that are exported,
which subjects our operations to periodic surveillance audits. While we
believe we are currently in compliance with all applicable regulations and
standards, there can be no assurance that our operations will be found to
comply with these regulations or standards or other applicable legal
requirements in the future or that we will not be required to incur
substantial costs to maintain our 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 our business, results of operations and financial condition.
We are 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 us to
incur significant costs and would have a material, adverse effect upon our
ability to do business. Changes in existing requirements or adoption of new
requirements or policies relating to government regulations could materially
and adversely affect our ability to comply with such requirements.
WE USE HAZARDOUS MATERIALS AND IMPROPER HANDLING OF THESE MATERIALS BY OUR
EMPLOYEES OR AGENTS COULD EXPOSE US TO SIGNIFICANT FINANCIAL PENALTIES
Our research and development and manufacturing operations involve the
use of hazardous materials, biological samples and chemicals. In the future,
we plan to manufacture certain reagents, some of which likely will contain
hazardous materials, including carcinogens. We are 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, we could be held liable for damages
that result and any such liability could exceed our resources, which would
have a material adverse effect on us. We may incur substantial costs to
comply with environmental and safety regulations if we develop our own
commercial reagents manufacturing facility.
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YEAR 2000 PROBLEMS COULD ADVERSELY IMPACT OUR BUSINESS
We have established a year 2000 Program to address certain year 2000
issues. This program focuses on four key areas of readiness:
- Internal Infrastructure Readiness, addressing internal hardware and
software, including both information and non-information technology
systems;
- Supplier Readiness, addressing the preparedness of suppliers
providing material incorporated into our products;
- Product Readiness, addressing product functionality; and
- Customer Readiness, addressing customer support and transactional
activity.
For each readiness area, we are in the process of 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. We have completed an assessment of our
internal software applications and information technology hardware and have
commenced work on testing and repairs. Readiness activities are intended to
encompass all major categories of software applications we use, including:
- those used for manufacturing, engineering, sales, finance, and human
resources;
- 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.
We have completed the evaluation of our mission critical internal
infrastructure and have also tested approximately 90% of our mission critical
internal infrastructure and determined it to be year 2000 ready. The
remainder is currently undergoing testing but is believed to be year 2000
ready based on representations by the supplier. Testing and repair activity
is mostly completed with the remainder scheduled for completion by August 31,
1999. Although we have 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 August 31, 1999. Evaluation,
testing and repair will be made on an on-going basis for any internal
infrastructure components we newly acquire through December 31, 1999.
SUPPLIER READINESS. This area focuses on minimizing two components of risk
associated with suppliers:
- a supplier's product integrity; and
- a supplier's business capability to continue providing products and
services.
We have identified and contacted key suppliers regarding their relative
risks in these two components. To date, we have received responses from
approximately 90 percent of our key suppliers, who indicate that the products
provided to us are year 2000 compliant or 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 us, which
they intend to have completed before January 1, 2000. Our assessment of our
key suppliers' year 2000 readiness, and testing and repair of any year 2000
compliance issues, is scheduled to be completed by August 31, 1999. We will
continue this evaluation and communication process on an on-going basis for
any new suppliers who begin providing products and services to us through
December 31, 1999.
PRODUCT READINESS. This area focuses on identifying and resolving year 2000
issues existing in our products. This area encompasses a number of
activities, including testing, evaluation, engineering and manufacturing
implementation. We
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have completed a year 2000 readiness assessment for our current generation of
released high throughput screening products based upon a series of
industry-recognized testing parameters and have determined that these
products are year 2000 ready.
CUSTOMER READINESS. This area focuses on customer readiness as it relates to
our responsibility to provide customer support, including retrofitting
products as well as providing other services to our customers. Primarily due
to our product readiness efforts regarding our current generation of released
products, we have completed our assessment of year 2000 risk in this area and
have determined there are no issues to address.
SUMMARY. If required, we 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. We may also formulate
contingency plans by September 30, 1999 for key suppliers that do not plan on
being year 2000 compliant until the last quarter of 1999. We do not
anticipate that we will need contingency plans for our mission critical
software applications, hardware and non-information technology systems, nor
do we expect to need contingency plans for our current generation of released
products.
We believe the overall cost to address year 2000 issues will not be
material; however, we are continually testing and making necessary repairs
and we may need to reassess this estimate over time.
Due to the inherent uncertainty surrounding the year 2000 issue, we
cannot anticipate all of the possible problems that may occur. Adverse
consequences from year 2000 issues may materially affect our warranty
liability, the value of capitalized software applications, hardware and
non-information technology systems, the carrying value of our inventory, as
well as our financial condition, results of operation and cash flows. Year
2000 readiness problems could also subject us to litigation, which may
include consequential damages. problems could also subject us 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. We do not expect the transition to, or use of, the Euro to
materially or adversely affect our business, financial condition or results
of operation.
OUR FUTURE OPERATING RESULTS ARE LIKELY TO FLUCTUATE
Our 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 our existing and planned
product lines.
Fluctuations of these factors could have a material adverse effect on
our business, financial condition and results of operations. Because a
significant portion of our 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 our operating results.
Other factors that may result in fluctuations in operating results include:
- industry acceptance of high throughput screening and ultra-high
throughput screening as a drug discovery tool;
- market acceptance of our products;
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- the timing of new product announcements and the introduction of new
products and new technologies by us or our competitors;
- delays in research and development of new products;
- increased research and development expenses;
- increased marketing and sales expenses associated with the
implementation of our direct marketing efforts;
- availability and cost of component parts from our suppliers;
- competitive pricing pressures; and
- developments with respect to regulatory matters.
In connection with future introductions of new products, we may be
required to record charges for inventory obsolescence in connection with
unsold inventory, if any, of older generations of products.
Our expenditures for research and development, selling and marketing and
general and administrative functions are based in part on future revenue
projections. We 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 our business, financial condition and results of
operations. We 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 our overall gross profit and adversely
affect our business, financial condition and results of operations. In
addition, our operating results may vary from the expectations of public
market analysts and investors, and, as a result, the price of our common
stock could 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 assumes
no obligation to update these 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 June 30, 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 RATE RISK. The Company has a wholly owned UK
subsidiary, which exposes the Company to foreign currency exchange rate 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.
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- -------------------------------------------------------------------------------
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
Not applicable.
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.
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 June 30,
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: August 16, 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)
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<PAGE>
- -------------------------------------------------------------------------------
INDEX TO EXHIBITS
- -------------------------------------------------------------------------------
EXHIBIT PAGE
Exhibit 27.1 - Financial Data Schedule..........................
-25-
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 843,000
<SECURITIES> 11,656,000
<RECEIVABLES> 767,000
<ALLOWANCES> 0
<INVENTORY> 2,027,000
<CURRENT-ASSETS> 417,000
<PP&E> 1,945,000
<DEPRECIATION> 1,115,000
<TOTAL-ASSETS> 16,763,000
<CURRENT-LIABILITIES> 3,835,000
<BONDS> 0
0
0
<COMMON> 13,000
<OTHER-SE> 12,394,000
<TOTAL-LIABILITY-AND-EQUITY> 16,763,000
<SALES> 3,377,000
<TOTAL-REVENUES> 3,377,000
<CGS> 1,580,000
<TOTAL-COSTS> 8,620,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,000
<INCOME-PRETAX> (4,927,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,927,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (4,927,000)
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<EPS-DILUTED> (0.40)
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