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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 October 31, 1999, 12,730,041 shares of the Registrant's Common Stock,
$0.001 par value, were issued and outstanding.
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LJL BIOSYSTEMS, INC.
INDEX
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<TABLE>
<CAPTION>
Item No. Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements (Unaudited)..................... 3
Consolidated Condensed Balance Sheet as of September 30, 1999
and December 31, 1998 (Unaudited)........................................... 3
Consolidated Condensed Statement of Operations for the Three- and
Nine-Month Periods Ended September 30, 1999 and 1998 (Unaudited)............ 4
Consolidated Condensed Statement of Cash Flows for the Nine-Month
Periods Ended September 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>
September 30, December 31,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............ $ 1,832,000 $ 1,831,000
Short-term investments ............... 4,683,000 5,510,000
Accounts receivable .................. 1,273,000 840,000
Inventories .......................... 2,665,000 1,173,000
Other current assets ................. 315,000 262,000
------------ ------------
Total current assets ............... 10,768,000 9,616,000
Property and equipment, net ............. 817,000 789,000
Investments ............................. 2,974,000 2,863,000
Loan receivable from related parties .... 223,000 190,000
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$ 14,782,000 $ 13,458,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................... $ 1,194,000 $ 508,000
Accrued expenses ..................... 2,055,000 1,801,000
Customer deposits .................... 180,000 19,000
Current portion of long-term debt .... 234,000 168,000
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Total current liabilities .......... 3,663,000 2,496,000
Long-term debt, net of current portion .. 556,000 542,000
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Total liabilities .................. 4,219,000 3,038,000
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Stockholders' equity:
Common stock ......................... 13,000 11,000
Additional paid-in capital ........... 30,244,000 23,258,000
Deferred stock compensation .......... (480,000) (614,000)
Accumulated other comprehensive income (50,000) 6,000
Accumulated deficit .................. (19,164,000) (12,241,000)
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Total stockholders' equity ......... 10,563,000 10,420,000
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$ 14,782,000 $ 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 September 30, Nine Months Ended September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .................................... $ 2,583,000 $ 1,425,000 $ 5,960,000 $ 2,809,000
Cost of sales ................................ 807,000 776,000 2,387,000 1,806,000
------------ ------------ ------------ ------------
Gross profit ................................. 1,776,000 649,000 3,573,000 1,003,000
------------ ------------ ------------ ------------
Operating expenses:
Research and development .................. 1,672,000 1,426,000 4,931,000 4,208,000
Selling, general and administrative ....... 2,207,000 1,623,000 5,989,000 3,541,000
------------ ------------ ------------ ------------
Total operating expenses ................ 3,879,000 3,049,000 10,920,000 7,749,000
------------ ------------ ------------ ------------
Loss from operations ......................... (2,103,000) (2,400,000) (7,347,000) (6,746,000)
Interest and other income, net ............... 130,000 221,000 489,000 505,000
Interest expense ............................. (23,000) (14,000) (65,000) (17,000)
------------ ------------ ------------ ------------
Net loss ..................................... (1,996,000) (2,193,000) (6,923,000) (6,258,000)
Accretion of mandatorily redeemable
convertible preferred stock redemption
value ..................................... - - - (254,000)
------------ ------------ ------------ ------------
Net loss available to common stockholders .... $ (1,996,000) $ (2,193,000) $ (6,923,000) $ (6,512,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic and diluted net loss per share available
to common stockholders .................... $ (0.16) $ (0.21) $ (0.56) $ (0.73)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in computation of basic and
diluted net loss per share available
to common stockholders .................... 12,687,089 10,420,246 12,450,623 8,866,504
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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>
Nine Months Ended September 30,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................................... $ (6,923,000) $ (6,258,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .............................. 290,000 210,000
Stock compensation expense ................................. 134,000 132,000
Changes in assets and liabilities:
Accounts receivable ...................................... (433,000) (697,000)
Inventories .............................................. (1,492,000) (1,090,000)
Other current assets ..................................... (53,000) 132,000
Accounts payable ......................................... 686,000 (388,000)
Accrued expenses ......................................... 254,000 1,220,000
Customer deposits ........................................ 161,000 (124,000)
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Net cash used in operating activities .................. (7,376,000) (6,863,000)
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Cash flows from investing activities:
Purchases of property and equipment .......................... (318,000) (497,000)
Purchases of investments ..................................... (5,809,000) (12,934,000)
Proceeds from sales and maturities of investments ............ 6,465,000 2,968,000
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Net cash used in (provided by) investing activities .... 338,000 (10,463,000)
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Cash flows from financing activities:
Proceeds from borrowings ..................................... 223,000 596,000
Repayments of borrowings ..................................... (143,000) (125,000)
Issuance of long-term notes receivable from related parties .. (33,000) (190,000)
Proceeds from issuance of common stock, net .................. 6,988,000 12,951,000
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Net cash provided by financing activities .............. 7,035,000 13,232,000
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Effect of exchange rate changes on cash and cash equivalents .... 4,000 -
Net increase (decrease) in cash and cash equivalents ............ 1,000 (4,094,000)
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 ...................... $ 1,832,000 $ 1,431,000
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest ....................................... $ 65,000 $ 17,000
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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 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>
September 30, December 31,
1999 1998
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<S> <C> <C>
Raw materials ..................... $1,210,000 $ 476,000
Work-in-process ................... 398,000 -
Finished goods .................... 1,057,000 697,000
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$2,665,000 $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 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 nine-month periods ended
September 30, 1999 and 1998. For the nine-month period ended September 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 as a result of adopting SFAS 130.
Comprehensive income is comprised of
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net loss and other items of comprehensive income (loss). Other comprehensive
income includes certain changes in the equity of the Company 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
consolidated 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 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 high
throughput screening. 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 has continued 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 $2,583,000 for the three months ended September
30, 1999, compared to $1,425,000 for the three months ended September 30, 1998,
representing an increase of $1,158,000. This increase in revenues was due to
increased sales of the Company's high throughput screening products,
particularly higher unit sales volume of the Company's Acquest-TM- instrument,
higher international sales and some OEM revenue. The Company began shipping and
recognizing revenue on its ultra high throughput screening product, Acquest, in
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
September 30, 1999, 30% 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 $339,000 or 13% of its total revenues for the three
months ended September 30, 1999, compared to $27,000 or 2% of its total revenues
for the three months ended September 30, 1998. The Company expects less than 10%
of its total revenues to be derived from OEM product sales during 1999 and
expects little or no OEM product sales after 1999.
COST OF SALES. Cost of sales was $807,000 for the three months ended September
30, 1999, compared to $776,000 for the three months ended September 30, 1998,
representing an increase of $31,000. This increase was primarily due to the
increase in sales volume in the third quarter of 1999 compared to the third
quarter in 1998, including higher sales volumes of Acquest which the Company
began shipping in the fourth quarter of 1998. Gross profit, as a percentage of
net sales, was 69% for the three months ended September 30, 1999, compared to
46% for the three months ended September 30, 1998. This increase was the result
of increased absorption of manufacturing overhead by higher sales volumes for
the third quarter of 1999, as compared to the third quarter of 1998. This
increase was also attributable to sales of the Company's Acquest, during the
third quarter of 1999, which is sold at a higher gross margin than the Company's
other products. The Company expects that gross profit, as a percentage of sales,
may vary from quarter to quarter 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-TM- HT, Analyst AD, Acquest and related
products.
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RESEARCH AND DEVELOPMENT. Research and development expenses were $1,672,000 for
three months ended September 30, 1999, compared to $1,426,000 for the three
months ended September 30, 1998, representing an increase of $246,000. This
increase was primarily due to increased costs associated with the continued
development of the Company's high throughput screening and ultra high throughput
screening product platform, including the addition of research and development
personnel since the third quarter of 1998. Although the Company expects research
and development expenditures to continue to fluctuate from quarter to quarter,
the Company expects research and development expenditures to continue to
increase in absolute dollars in future periods to support the development of its
high throughput screening and ultra high throughput screening product lines.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs
were $2,207,000 for the three months ended September 30, 1999, compared to
$1,623,000 for the three months ended September 30, 1998, representing an
increase of $584,000. This increase was primarily due to increases in sales and
marketing expenses associated with the addition of sales and marketing personnel
since the third quarter of 1998. 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 increase is
also due to higher trade show and travel expenses for the Society for
BioMolecular Screening Conference, one of the Company's most significant annual
marketing events, that was held in Scotland in the third quarter of 1999,
whereas the Society for BioMolecular Screening Conference was held in Boston, MA
in the third quarter of 1998. The Company expects selling, general and
administrative expenses to increase in absolute dollars 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 $130,000 for
the three months ended September 30, 1999, compared to $221,000 for the three
months ended September 30, 1998, representing a decrease of $91,000. This
decrease was primarily due to lower interest earned on lower levels of cash,
cash equivalents and investments in the third quarter of 1999, compared to the
third quarter of 1998.
INTEREST EXPENSE. Interest expense was $23,000 for the three months ended
September 30, 1999, compared to $14,000 for the three months ended September 30,
1998. This increase was primarily due to interest paid on the Company's line of
credit, under which borrowings began in June 1998.
INCOME TAXES
No provision for income taxes was recorded for the three- and
nine-month periods ended September 30, 1999 or 1998, as the Company incurred net
operating losses and had no carryback potential. Utilization of net operating
loss carryforwards, which begin to expire in 2013, may be subject to limitations
as set forth in applicable federal and state laws. Due to uncertainties
regarding realizability of the deferred tax assets, the Company has provided a
full valuation allowance on all deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash, cash equivalents, and
investments of $9.5 million, working capital of $7.1 million, and an accumulated
deficit of approximately $19.2 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 cash proceeds of
approximately $6.7 million, net of issuance costs, in connection with a private
placement of two 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 payments of accounts payable balances, receipts of customer
deposits, 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 $7.4 million and $6.9 million during the nine months ended September 30,
1999 and 1998, respectively, and was primarily due to the Company's net losses
for the corresponding periods of $6.9 million and
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$6.3 million, respectively. The increase in net cash used in operations during
1999 was partially attributable to changes in inventories, other assets and
accrued expenses. The increase in net cash used in operations was partially
offset by changes in accounts payable, customer deposits and accounts receivable
balances.
Net cash provided by (used in) investing activities totaled $338,000
and $(10.5) million for the nine months ended September 30, 1999 and 1998,
respectively. Net cash provided by investing activities in the first nine months
of 1999 was primarily due to proceeds from sales and maturities of investments,
net of purchases of investments. Net cash used in investing activities in the
first nine months of 1998 was primarily due to a net investment of $10.0 million
in investment grade, interest-bearing financial instruments. These financial
instruments, like all fixed income instruments, are subject to interest rate
risk and may fluctuate in value if market interest rates fluctuate. The Company
attempts to limit this exposure by primarily investing in short-term
investments.
Net cash provided by financing activities totaled $7.0 million and
$13.2 million for the nine months ended September 30, 1999 and 1998,
respectively. The decrease in net cash from financing activities for the
nine-month period ended September 30, 1999, compared to the nine-month period
ended September 30, 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, 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 nine months of 1998. The lower
net cash from financing activities for the nine-month period ending September
30, 1999 also resulted from a decrease in the amount drawn from the Company's
line of credit, compared to the nine-month period ending September 30, 1998.
In February 1998, the Company entered into an equipment financing
agreement that provides a $1.3 million line of credit which can be used to
finance the purchases of equipment, computers and software necessary to support
the Company's high throughput screening and ultra high throughput screening
development effort and additions to the marketing, sales and administrative
infrastructure. This equipment financing agreement expired as of July 31, 1999.
At September 30, 1999, the Company had an obligation to repay $790,000 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 high throughput screening and ultra high throughput screening
related products developed by the Company pursuant to this agreement.
The Company may be required to raise substantial additional capital
over a period of several years in order to 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 through
approximately mid-year 2000. The Company is currently considering financing
alternatives and expects to secure additional funds before mid-year 2000.
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.
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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;
- 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 performed risk assessment, tested and
repaired year 2000 issues as needed, developed contingency plans as considered
necessary to mitigate unknown risks, and communicated 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 and testing of our mission critical
internal infrastructure and have determined it to be year 2000 ready.
Evaluation, testing and repair will be made on an on-going basis for any
internal infrastructure components we 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 95% 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. Our key suppliers
intend to have their repair plans completed before January 1, 2000. We will
continue our assessment of the remaining 5% of our key suppliers' year 2000
readiness throughout the remainder of 1999. Since we have no way of testing or
validating what third party suppliers represent to us and given the fact that we
have not received responses from 100% of our key suppliers, as a contingency
plan we plan to have enough material on hand at year end to satisfy our
production needs through the first quarter of 2000. We will also 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
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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 that
there are no issues to address.
SUMMARY. As of October 31, 1999, we have completed our year 2000 readiness
program for internal infrastructure, product and customer readiness. Regarding
supplier readiness, we have developed the following contingency plan:
- since we have no way of testing or validating what third party
suppliers represent to us and given the fact that we have not
received responses from 100% of our key suppliers, we plan to
have enough material on hand at year end to satisfy our
production needs through the first quarter of 2000.
Our overall cost to address year 2000 issues was not material, but we
will continue to reassess this estimate. 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 HAVE 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 nine months ended September 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 and we began shipments of our ultra high throughput screening
product, Acquest, in the fourth 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
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- 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 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,
the Analyst HT, in the second quarter of 1998 and we began shipments of our
ultra high throughput screening product, Acquest, in the fourth 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.
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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 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. While we currently have two distributors in international markets,
one in Japan and another with the territory of Belgium, Netherlands and
Luxembourg, 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;
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- 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.
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 pharmaceutical and biotechnology 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
We currently market our high throughput screening and ultra-high
throughput screening products to both pharmaceutical and biotechnology
companies, however our primary marketing efforts and the majority of our sales
are to pharmaceutical companies. Our 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 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
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quantities at acceptable cost while meeting quality control standards. We intend
to outsource the manufacture of microplates and, as sales volumes increase, to
evaluate outsourcing the manufacture of reagents and assay kits. Difficulties
encountered in the manufacturing scale-up of 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 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 September 30, 1999, we had an accumulated deficit of
approximately $19.2 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
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<PAGE>
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:
- 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;
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- 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 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 12 pending U.S. patent
applications, one pending European patent application, ten pending international
patent applications and 22 pending 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
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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. 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
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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.
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 meets 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. 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
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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.
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 performed risk assessment, tested and
repaired year 2000 issues as needed, developed contingency plans as considered
necessary to mitigate unknown risks, and communicated 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 and testing of our mission critical
internal infrastructure and have determined it to be year 2000 ready.
Evaluation, testing and repair will be made on an on-going basis for any
internal infrastructure components we 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 95% 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. Our key suppliers
intend to have their repair plans completed before January 1, 2000. We will
continue our assessment of the remaining 5% of our key suppliers' year 2000
readiness throughout the remainder of 1999. Since we have no way of testing or
validating what third party suppliers represent to us and given the fact that we
have not received responses from 100% of our key suppliers, as a contingency
plan we plan to have enough material on hand at year end to satisfy our
production needs through the first quarter of 2000. We will also continue this
evaluation and
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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 that
there are no issues to address.
SUMMARY. As of October 31, 1999, we have completed our year 2000 readiness
program for internal infrastructure, product and customer readiness. Regarding
supplier readiness, we have developed the following contingency plan:
- since we have no way of testing or validating what third party
suppliers represent to us and given the fact that we have not
received responses from 100% of our key suppliers, we plan to
have enough material on hand at year end to satisfy our
production needs through the first quarter of 2000.
Our overall cost to address year 2000 issues was not material, but we
will continue to reassess this estimate. 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.
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;
- 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;
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<PAGE>
- 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 September 30, 1999 was $7.7 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.
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1: LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
-22-
<PAGE>
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
The Company filed two reports on Form 8-K during the quarter ended
September 30, 1999. One report was filed on July 30, 1999 and reported the news
release dated July 28, 1999 regarding the Company's second quarter of 1999
earnings. The second report was filed on September 1, 1999 and reported the news
release dated August 31, 1999 regarding LJL's formation of the Genomics Research
Group, as well as the news release also dated August 31, 1999 regarding a
general company update of its business.
-23-
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LJL BIOSYSTEMS, INC.
Date: November 15, 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.............................. 26
-25-
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