<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________ to _________
Commission file number: 0-26811
_______________________________
CHEMDEX CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0465469
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
_______________________________
3950 Fabian Way
Palo Alto, California 94303
(650) 813-0300
(Address, including zip code, and telephone
number, including area code, of Registrant's principal
executive offices)
_______________________________
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 [_] No [X]
The number of shares outstanding of the Registrant's Common Stock, $.0002 par
value per share, outstanding as of July 31, 1999 was 31,796,546.
<PAGE>
CHEMDEX CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1999
INDEX
-----
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998....................... 3
Condensed Statements of Operations for the Three Months Ended
June 30, 1999 and June 30, 1998; and the Six Months Ended
June 30, 1999 and June 30, 1998.......................................................... 4
Condensed Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998................................................................... 5
Notes to Condensed Financial Statements.................................................. 6
Item 2. Management's Discussion and Analysis of Results of Financial
Condition and Results of Operations...................................................... 11
Item 3. Qualitative and Quantitative Disclosure about Market Risk................................ 31
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................................ 31
Item 4. Submission of Matters to a Vote of Security Holders...................................... 32
Item 6. Exhibits and Reports on Form 8-K......................................................... 33
SIGNATURE.......................................................................................... 36
</TABLE>
2
<PAGE>
CHEMDEX CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(Unaudited) (1)
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,425,435 $ 5,990,188
Accounts receivable, net of allowances of $304,000 at 2,411,490 32,259
June 30, 1999, and $2,000 at December 31, 1998
Other current assets 990,873 286,991
------------ -----------
Total current assets 22,827,798 6,309,438
Property and equipment, net 4,623,343 1,558,245
Intangible and other assets 16,281,923 300,472
------------ -----------
Total assets $ 43,733,064 $ 8,168,155
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 3,855,388 $ 543,141
Accrued compensation 1,315,275 511,578
Other accrued liabilities 2,868,064 759,654
Current obligations under capital lease -- 5,425
Current portion of notes payable 346,095 --
------------ -----------
Total current liabilities 8,384,822 1,819,798
Notes payable, less current portion 683,436 --
Stockholders' equity:
Convertible preferred stock 3,349 2,289
Common stock 1,515 784
Additional paid-in capital 71,407,675 18,378,907
Deferred compensation (7,472,996) (2,992,099)
Notes receivable from stockholders (1,069,221) (149,717)
Accumulated deficit (28,205,516) (8,891,807)
------------ -----------
Total stockholders' equity 34,664,806 6,348,357
Total liabilities and stockholders' equity $ 43,733,064 $ 8,168,155
============ ===========
</TABLE>
(1) Derived from audited financial statements
See accompanying notes to the Condensed Financial Statements
3
<PAGE>
CHEMDEX CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------- --------
1999 1998 1999 1998
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 2,905,511 $ 3,500 $ 3,071,063 $ 3,500
Cost of revenues 2,752,545 -- 2,908,505 --
------------ ----------- ------------ -----------
Gross profit 152,966 3,500 162,558 3,500
Operating expenses:
Research and development 3,461,660 415,622 5,754,971 779,367
Sales and marketing 5,224,414 296,862 8,412,472 515,948
General and administrative 3,611,493 422,090 4,626,241 611,986
Amortization of deferred compensation 546,507 43,584 898,798 66,018
------------ ----------- ------------ -----------
Total operating expenses 12,844,074 1,178,158 19,692,482 1,973,319
------------ ----------- ------------ -----------
Operating loss (12,691,108) (1,174,658) (19,529,924) (1,969,819)
Interest expense (22,706) (493) (47,634) (1,247)
Interest income and other, net 208,951 69,957 263,849 73,276
------------ ----------- ------------ -----------
Net loss $(12,504,863) $(1,105,194) $(19,313,709) $(1,897,790)
============ =========== ============ ===========
Basic and diluted net loss per share $ (2.86) $ (.67) $ (6.05) $ (1.13)
============ =========== ============ ===========
Weighted average shares of common
stock outstanding used in
computing basic and diluted
net loss per share 4,365,636 1,649,535 3,190,906 1,676,974
</TABLE>
See accompanying notes to the Condensed Financial Statements
4
<PAGE>
CHEMDEX CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
June 30,
1999 1998
------------ -----------
<S> <C> <C>
Operating Activities
- --------------------
Net loss $(19,313,709) $(1,897,790)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 604,172 75,359
Amortization of deferred compensation 898,798 66,018
Amortization of intangible asset 780,165 --
Interest expense related to warrants 57,079 --
Issuance of common stock for services 262,641 --
Changes in operating assets and liabilities:
Accounts receivable (2,379,231) (7,265)
Other current assets (731,343) (228,507)
Other assets (538,725) (57,783)
Accounts payable 3,312,247 (121,278)
Accrued compensation 803,697 97,834
Other accrued liabilities 2,106,418 71,558
------------ -----------
Net cash used in operating activities (14,137,791) (2,001,854)
------------ -----------
Investing Activities
- --------------------
Sales of short-term investments -- --
Purchases of short-term investments -- (6,593,495)
Purchases of property and equipment (2,537,409) (525,908)
------------ -----------
Net cash used in investing activities (2,537,409) (7,119,403)
------------ -----------
Financing Activities
- --------------------
Principal payments on capital lease obligations (5,425) (2,827)
Principal payments on notes payable (102,330) --
Net proceeds from issuance of preferred stock 30,197,844 12,975,424
Proceeds from issuance of common stock 14,451 8,388
Repurchase of common stock (788) --
Payments of stockholders' notes receivable 6,695 --
------------ -----------
Net cash provided by financing activities 30,110,447 12,980,985
------------ -----------
Net increase (decrease) in cash and cash equivalents 13,435,247 3,859,728
Cash and cash equivalents at beginning of period 5,990,188 1,346,478
------------ -----------
Cash and cash equivalents at end of period $ 19,425,435 $ 5,206,206
============ ===========
Supplemental Disclosure of noncash activities:
Issuance of shares in exchange for stockholders' notes
receivable $ 956,964 $ 69,749
Repurchase of common stock issued in exchange for
stockholders' notes receivable $ (30,765) $ --
Equipment purchased under notes payable $ 1,131,861 $ --
Issuance of common stock for intangible asset $ 13,910,459 $ --
Issuance of shares for services provided $ 1,781,250 $ --
Issuance of warrants for services $ 526,427 $ --
</TABLE>
See accompanying notes to the Condensed Financial Statements
5
<PAGE>
CHEMDEX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Unaudited
Note 1. Description of Business
Chemdex Corporation is a provider of e-commerce solutions to the
life sciences research products market. Chemdex enables life sciences
enterprises, researchers, and suppliers to efficiently buy and sell research
products through the Chemdex Marketplace, a secure, Internet-based purchasing
solution.
Chemdex was incorporated in Delaware on September 4, 1997. During the
period from inception through November 1998, Chemdex was a development stage
company and did not have significant sales. During this period, operating
activities related primarily to the design and development of the Chemdex online
Marketplace, building our corporate infrastructure and the establishment of
relationships with suppliers and customers. In November 1998, the Company
released its on-line marketplace to certain customers and recently, the Company
has entered into an agreement with VWR under which Chemdex recognizes revenue
related to certain sales from their joint web site. These sales, combined with
increased sales from the Chemdex online marketplace have led to a significant
increase in sales in fiscal year 1999. Chemdex has incurred operating losses to
date and had an accumulated deficit of approximately $28.2 million at June 30,
1999. Prior to the Company's initial public offering in July 1999, Chemdex's
activities had been primarily financed through sales of equity securities.
Chemdex is no longer in the development stage.
Note 2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with general
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition
Net revenues consist primarily of product sales to customers and
charges to customers for outbound freight. Under most supplier agreements,
Chemdex acts as a principal when purchasing products from suppliers and
reselling them to customers. Products are shipped directly to customers by
suppliers based on customer delivery date specifications. Under principal-based
agreements, Chemdex is responsible for selling products, collecting payment from
customers, ensuring that the shipment reaches the customers and processing
returns. In addition, Chemdex takes title to products upon shipment and bears
the risk of loss for collection, delivery, and product returns from customers.
Chemdex provides an allowance for sales returns, which has been insignificant to
date, at the time of sale. Chemdex recognizes revenues from product sales when
products are shipped to customers.
To date, an insignificant amount of revenue is from agreements with
suppliers for which Chemdex is acting as an agent. Under agency-based supplier
agreements, Chemdex recognizes a percentage share of revenues generated by
suppliers when products are shipped to customers.
Note 3. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, considered
necessary for a fair presentation, have been included in the accompanying
unaudited financial statements. Operating results for the six months ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the full year ending December 31, 1999. For further information, refer to the
financial statements and notes thereto, included in the Company's Registration
Statement on Form S-1 (File Number 333-78505), as amended, and the Company's
final prospectus filed July 28, 1999.
6
<PAGE>
Note 4. Net Loss Per Share
Net loss per share is presented in accordance with the requirements of
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (FAS
128) which requires dual presentation of basic earnings per share ("EPS") and
diluted EPS.
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 shares and potentially
dilutive shares outstanding during the period. If Chemdex had reported net
income, diluted earnings per share would have included the shares used in the
computation of basic net loss per share as well as an additional 2.1 million
common equivalent shares related to the outstanding options and warrants
(determined using the treasury stock method) for the three months ended June 30,
1999. These options and warrants could potentially dilute basic earnings per
share in the future but have not been included in the computation of diluted net
loss per share as the impact would have been antidilutive for the periods
presented. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued for nominal consideration, prior to the
anticipated effective date of an initial public offering, are required to be
included in the calculation of basic and diluted net loss per share as if they
were outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.
Pro forma net loss per share is computed using the weighted average
number of shares of common stock outstanding, including common equivalent shares
from the convertible preferred stock (using the if-converted method), which
automatically converted into common stock upon the completion of the initial
public offering as if converted at the original date of issuance, for both basic
and diluted net loss per share, even though inclusion is antidilutive.
The following table sets forth the computation of loss per share:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Basic and Diluted net loss per share
Numerator: Net loss $(12,504,863) $(1,105,194) $(19,313,709) $(1,897,790)
Denominator:
Weighted-average shares outstanding
basic and diluted 4,365,636 1,649,535 3,190,906 1,676,974
Basic and diluted net loss per share $ (2.86) $ (.67) $ (6.05) $ (1.13)
============ =========== ============ ===========
Pro forma net loss per share
Numerator: Net loss $(12,504,863) $(1,105,194) $(19,313,709) $(1,897,790)
Denominator:
Weighted-average shares outstanding
basic and diluted 21,043,288 8,745,159 17,660,915 6,593,415
Basic and diluted pro forma net loss
per share $ (.59) $ (.13) $ (1.09) $ (.29)
============ =========== ============ ===========
</TABLE>
7
<PAGE>
Note 5. Agreement with VWR
In March 1999, Chemdex entered into a strategic relationship agreement
with VWR, which was consummated in April 1999, pursuant to which Chemdex and VWR
agreed to market jointly VWR laboratory products using the Chemdex Marketplace.
The term of the agreement is four years.
The agreement gives Chemdex the right to offer approximately 350,000
VWR-distributed products to Chemdex customers and both parties agreed to jointly
develop an online purchasing solution for VWR's existing customers. In
connection with the strategic relationship agreement, VWR transferred to Chemdex
information concerning VWR customers who purchased products from third party
suppliers outside VWR's primary product offering and Chemdex issued 2,538,405
shares of common stock valued at $13.9 million to VWR. The Company intends to
use this information to expand sales of its purchasing solution to these
customers and facilitate adoption of the Chemdex Marketplace by these
customers and suppliers. The fair value of the common stock of $13.9 million
was allocated to the customer list and is being amortized into sales and
marketing expense over four years, the estimated useful life of the intangible
asset.
Note 6. Intangible and Other Assets
Intangible and other assets are comprised of the following:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Deposits and other $ 1,258,879 $300,472
VWR related intangible, net
of amortization 13,330,857 --
BIO related intangible, net
of amortization 1,692,187 --
----------- -----------------
Total intangible and other
assets $16,281,923 $300,472
=========== =================
</TABLE>
Note 7. Agreement with Biotechnology Industry Organization
In May 1999, the Biotechnology Industry Organization (BIO) selected
Chemdex as its preferred supplier of e-commerce purchasing solutions. As a
result, the Company entered into a five-year, exclusive joint marketing
agreement with BIO. As part of the joint marketing agreement, Chemdex will
discount the fees it charges to BIO members for its solution and will contribute
cash payments to a joint marketing fund, to be used in conjunction with both
parties' obligations under the joint marketing agreement. In addition, the
Company sold 187,500 shares of its common stock to BIO for a nominal amount in
consideration for BIO's participation in these joint marketing activities. BIO
has the right to use a portion of the cash payments and any proceeds it receives
from the sale of the common stock for the benefit of its members and the
biotechnology industry. The charge for BIO marketing activities will be expensed
to sales and marketing as they are incurred. The Company recorded the difference
between the nominal amount per share price paid by BIO for the purchase of our
common stock and the fair value as of May 11, 1999, which is approximately $1.8
million as an intangible asset, which is being amortized ratably over the five-
year term of the joint agreement.
8
<PAGE>
Note 8. Stockholders' Equity
Sale of Convertible Series C Preferred Stock
In April 1999, Chemdex issued an additional 399,892 shares of Series C
preferred stock to investors, resulting in net proceeds of $2,286,063. All of
these shares were converted to common shares upon the closing of the Chemdex
initial public offering of common stock.
1998 Stock Plan
On April 27, 1999, Chemdex's Board of Directors approved an increase in
the number of shares reserved for issuance under the Company's 1998 Stock Plan
of 1,500,000 shares and, on May 11, 1999 an additional increase of 1,250,000
shares. Both increases were subsequently approved by written consent of the
Company's stockholders. The 1998 Plan was also amended to provide for automatic
annual increases on the first day of each fiscal year beginning in 2000, 2001,
2002, 2003, and 2004 equal to the lesser of 1,250,000 shares, 3% of Chemdex's
outstanding common stock on the last day of the immediately preceding fiscal
year or a lesser number of shares as determined by the Board of Directors.
Authorization of Shares
On May 11, 1999, Chemdex's Board of Directors authorized 175,000,000
shares of common stock and 2,500,000 shares of preferred stock, each with a par
value of $.0002 per share, effective in connection with the initial public
offering. The preferred stock may be issued from time to time in one or more
series. The Board of Directors has the authority, within the limitations and
restrictions in the certificate of incorporation, to provide by resolution for
the issuance of shares of preferred stock in one or more series and to fix the
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders.
1999 Employee Stock Purchase Plan
On May 11, 1999, Chemdex's Board of Directors approved, and the
stockholders subsequently approved, the adoption of the 1999 Employee Stock
Purchase Plan ( the "Purchase Plan"). A total of 750,000 shares of common stock
has been reserved for issuance under the 1999 Purchase Plan, as well as an
automatic annual increase on the first day of each of Chemdex's fiscal years
beginning in 2000, 2001, 2002, 2003, and 2004 equal to the lesser of 200,000
shares, 1/2% of Chemdex's outstanding common stock on the last day of the
immediately preceding fiscal year, or a lesser number of shares determined by
the Board of Directors. Each offering period will consist of four consecutive
purchase periods of six months' duration. The initial offering period began on
July 27, 1999, and ends on July 31, 2001. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed 20% of an employee's compensation, at a price equal to the lower of 85%
of the fair market value of Chemdex's common stock at the beginning of each
offering period or at the end of each purchase period. If not terminated
earlier, the Purchase Plan has a term of 20 years.
1999 Directors' Plan
On May 11, 1999, Chemdex's Board of Directors approved, and the
stockholders subsequently approved, the 1999 Directors' Stock Plan (the
"Directors' Plan"). A total of 250,000 shares of common stock has been reserved
under the Directors' Plan.
Reverse Stock Split
On July 23, 1999, the Company executed a one-for-two reverse stock split
of the Company's common and preferred stock. In addition, the par value of the
stock was changed from $.0001 to $.0002 per share. All share and per share
amounts in the accompanying financial statements have been adjusted
retroactively.
9
<PAGE>
Deferred Compensation
We have recorded deferred compensation for options granted in fiscal
year 1998 and the six months ended June 30, 1999. As of June 30, 1999 we had
recorded aggregate deferred stock compensation of $8.7 million. The deferred
stock compensation is being amortized over the vesting periods of the stock
options. We recognized a total of $372,285 and $898,798 in stock compensation
expense during fiscal year 1998 and the six months ended June 30, 1999,
respectively. The total charges to be recognized in future periods from
amortization of deferred stock compensation as of June 30, 1999 are anticipated
to be approximately $1.1 million, $2.2 million, $2.2 million, $1.8 million and
$.1 million for the remaining six months of 1999 and for 2000, 2001, 2002 and
2003, respectively.
Note 9. Related Party Transactions
VWR's former president and Chief Executive Officer is a director of the
Company. In addition, VWR owns 2,538,405 shares of our common stock. VWR and
Chemdex jointly market VWR core products and Chemdex core products to VWR's
existing and new customers and jointly solicit several key existing VWR
suppliers to distribute, market and sell their products through the Chemdex
Marketplace. VWR currently performs some of the billing and cash collection
functions for the sale of jointly marketed products until these functions can be
transitioned to Chemdex. With respect to sales of VWR core products, we act as
an intermediary and forward orders received through the Chemdex Marketplace to
VWR for fulfillment and customer service. We receive no fee for orders for VWR
core products from VWR's 40 largest customers and we receive a minimal fee for
all other orders for VWR core products forwarded to VWR. We are responsible
for fulfillment and customer service for all Chemdex core product and orders
for third party products received from VWR customers through the Chemdex
Marketplace. Under the terms of the agreement, VWR provides support for the
purchase of third party products in return for a fee which approximates VWR's
costs incurred.
Note 10. Recent Accounting Pronouncements
In June 1998, the FASB issued FAS 133, Accounting for Derivative
Instruments and Hedging Activities, which we will be required to adopt for the
year ending December 31, 2001. FAS 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because we currently hold no
derivative financial instruments and do not currently engage in hedging
activities, adoption of FAS 133 is not expected to have a material impact on our
financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accounts
(AICPA) issued Statement of Position (SOP) No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize some of the costs related to internal-use software once
the applicable criteria have been met. We expect that the adoption of SOP No.
98-1 will not have a material impact on our financial position or results of
operations.
Note 11. Subsequent Events
On July 27, 1999, the Company completed an initial public offering, in
which it sold 7,500,000 shares of its common stock at a price of $15.00 per
share, raising $112.5 million in gross proceeds. Offering proceeds to Chemdex,
net of approximately $ 7.9 million in aggregate underwriters discounts and
commissions and $1.0 million in estimated related expenses, were approximately
$103.6 million. On the closing of the initial public offering, each outstanding
share of the Company's Series A, Series B, and Series C convertible preferred
stock was converted into one share of common stock.
10
<PAGE>
Item 2: Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following "Management's Discussion and Analysis of Results of
Operations and Financial Condition" contains forward-looking statements. In
some cases, readers can identify forward-looking statements by terminology such
as "may," "will," "should," "could," "expects," "plans," "anticipates",
"believes", "estimates," "predicts," "potential," or "continue." These
statements involve known and unknown risks, uncertainties and other factors that
may cause Chemdex's actual results, performance, or achievements to be
materially different from those stated herein. Although management of Chemdex
believes that the expectations reflected in the forward-looking statements are
reasonable; the Company cannot guarantee future results, performance, or
achievements. For further information, refer to Management's Discussion and
Analysis and the Risk Factors section of Chemdex's Registration Statement on
Form S-1 (File Number 333-78505), as amended.
Overview
Chemdex ("we" or "the Company") is a leading provider of e-commerce
solutions to the life sciences research products market. The Chemdex
Marketplace is a secure, Internet-based purchasing solution that enables
enterprises, researchers and suppliers to efficiently buy and sell life sciences
research products.
We were formed in September 1997 and began offering products for sale
on the Chemdex Marketplace in November 1998. During the period from September
1998 through November 1998, we were a development state enterprise and did not
have significant sales. Our operating activities during this period were related
primarily to the design and development of the Chemdex Marketplace, building our
corporate infrastructure, establishing relationships with suppliers and
customers and raising capital. To date, revenues have been derived from sales of
life sciences research products through the Chemdex Marketplace and through our
strategic relationship with VWR. We have grown our organization by hiring
personnel in key areas, particularly sales, research and development and
marketing.
We have incurred significant losses since inception, including $12.5
million in the second quarter of 1999, and, as of June 30, 1999, we had an
accumulated deficit of approximately $28.2 million. We currently expect our
losses to increase in the future and we cannot assure you that we will ever
achieve or sustain profitability. We believe our success depends on establishing
additional key strategic supplier and customer relationships, enhancing the
features and functionality of the Chemdex Marketplace and enterprise purchasing
solution, and accelerating market awareness and demand for the Chemdex
Marketplace. From inception, we have increased our level of spending to build
our infrastructure and to develop our Chemdex Marketplace. We intend to continue
to invest heavily in sales, marketing and research and development and
administrative activities and to increase other operating expenses as required
to integrate the operations and technologies of any future acquisitions. We
anticipate that these expenses could significantly precede any revenues
generated by this increased spending. We have limited operating history upon
which to base an evaluation of our business and we cannot assure you that our
revenues will increase in future periods. Our business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in early states of development, particularly companies
in new and rapidly evolving markets such as electronic commerce.
Our gross margin for the three months ended June 30, 1999 was
approximately 5.3%. Distributors in general operate on very low margins. This is
especially true in the life sciences research products market. Our gross margins
on sales of life sciences research products are small relative to the margins
earned by traditional distributors of life sciences research products. If we are
unable to increase our revenues at a greater rate than our related costs, our
margins may be reduced further, or possibly eliminated, which would have a
significant negative impact on our financial results. We are dependent on the
discounts we receive from our suppliers, and thus we are vulnerable to any
potential decrease in these discount rates. Any such decrease would have a
significant negative impact on our financial results. If we do not increase
these discounts, and substantially increase our revenues and scale our business
in a manner that generates significant operating efficiencies, including further
automation of our purchasing solution, we may not be able to achieve
profitability.
11
<PAGE>
Sales to two significant customers accounted for approximately 28%,
and 69% respectively, of our revenues in the quarter ended June 30, 1999, and we
currently expect to continue to derive a significant portion of our revenues
from these customers for the foreseeable future. Our agreement with one
customer, in connection with its role as our initial test location for our
purchasing solution provides that Chemdex will not receive price discounts on
products of some suppliers purchased by that customer if that customer purchases
specified minimum quantities of product through the Chemdex Marketplace. As a
result, we receive little or no gross margins on sales of these supplier
products to that customer. The loss of revenues from either customer would have
a significant negative effect on our business, revenues, results of operations
and financial condition.
A key element of our strategy is to market our solution directly to
life sciences organizations, and to succeed we must satisfy the purchasing
departments, information technology groups and the individual researchers who
are the users of our Internet-based purchasing solution. The time it takes to
sell and implement our solution is long and we devote significant sales,
marketing and management resources to the sales process without any assurance
that the customer will use the Chemdex Marketplace. We are generally required to
provide a significant level of education regarding the use and benefits of our
Internet-based purchasing solution, due in part to the significant departure
from traditional means of commerce and communications entailed by its adoption
and use. Further, potential enterprise customers and a number of their
departments typically engage in extensive internal reviews and analyses before
making purchase decisions. The sale and implementation of our solution are
subject to delays due to our customers' internal budgets and procedures for
approving capital expenditures and deploying new technologies within their
networks. These delays also impair our ability to generate revenue and could
negatively affect our results of operations. Once an enterprise customer adopts
our Internet-based purchasing solution, it takes time for researchers and other
users within the enterprise to become aware of, learn to use and begin using our
Chemdex Marketplace. The long sales cycle and the time it takes for researchers
to begin using our Internet-based purchasing solution, could negatively affect
our revenue growth, and makes it difficult to predict our results of operations.
During the prior quarter, we entered into an agreement with VWR
Scientific Products Corporation to jointly market VWR laboratory products using
the Chemdex e-commerce platform. The agreement gives us the right to offer
approximately 350,000 VWR-distributed products to our customers through the
Chemdex Marketplace. VWR and Chemdex are jointly developing an Internet
purchasing solution for VWR's existing and future customers that will provide
access to three categories of products:
. products distributed by VWR (VWR core products),
. products distributed by Chemdex (Chemdex core products), and
. products that are not distributed by either VWR or Chemdex but are
purchased from third parties (third party products).
We act as an intermediary under this agreement and forward orders for
VWR core products received through the Chemdex Marketplace to VWR for
fulfillment and customer service. We receive no fee for orders from VWR's 40
largest customers and we receive a minimal fee for all other orders forwarded to
VWR. We are responsible for fulfillment and customer service for all Chemdex
core product orders and orders for third party products from VWR customers
received through the Chemdex Marketplace on similar terms and conditions as our
other enterprise customers. VWR provides services in connection with purchasing
third party products for a processing fee paid by Chemdex. VWR and Chemdex
jointly market the co-branded version of the Chemdex Marketplace to VWR's
existing and new customers, and jointly solicit several key existing VWR
suppliers to distribute, market and sell their products through the co-branded
purchasing solution.
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In connection with the strategic relationship with VWR, Chemdex issued
2,538,405 shares of common stock valued at $13.9 million. The fair value of the
stock is being amortized, on a straight-line basis, into sales and marketing
expense over four years, the estimated useful life of this intangible asset.
We also entered into a five-year, exclusive joint marketing agreement
with the Biotechnology Industry Organization (BIO), and sold 187,500 shares of
our common stock to BIO for a nominal amount of consideration. We recorded the
difference between the nominal amount per share price paid by BIO and the fair
value as of the date of issuance, which is approximately $1.8 million as an
intangible asset which is being amortized over the five-year term of the joint
marketing agreement as a sales and marketing expense. Amortization related to
the VWR and BIO agreements for the three and six months ended June 30, 1999 was
$669,000.
Results of Operations for the Three and Six Months Ended June 30, 1999
Net revenues
Net revenues increased from $3,500 in the second quarter of 1998 to
$2.9 million in the second quarter of 1999. For the six months ended June 30,
1999, net revenues increased by $3.1 million from the same period in the prior
year. The significant growth in product sales was due to the launch of the
Chemdex Marketplace in the fourth quarter of 1998, and sales generated as a
result of the VWR agreement. Net revenues consist primarily of product sales to
customers and charges to customers for outbound freight. Under most of our
supplier agreements we are acting as a principal in purchasing products from our
suppliers and reselling them to our customers so that we recognize revenues
equal to the amount paid by our customers and cost of revenues equal to the
amount we pay to our suppliers for these products. Under our principal-based
agreements, we are responsible for selling the products, collecting payment from
customers, ensuring that the shipment reaches customers and processing returns.
In addition, we take title to products upon shipment and bear the risk of loss
for collection, delivery and merchandise returns from customers. Some of our
agreements with our suppliers treat us as an agent of the supplier, in which
case we receive a percentage fee on product sales. We recognize revenue from
product sales, net of any discounts, and from fees under our agency-based
supplier agreements, when the products are shipped to customers. Products are
shipped directly to customers by suppliers based on customer delivery date
specifications.
Cost of Revenues and Gross Profit
Cost of revenues increased from zero in the second quarter of 1998 to
$2.8 million in the second quarter of 1999. For the six months ended June 30,
1999, cost of revenues increased by $2.9 million from the same period in the
prior year. Cost of revenues consists primarily of the costs of acquiring
products from our suppliers for sale to our customers. During the three and six
months ended June 30, 1999, cost of revenues, in absolute dollars, increased
consistent with the significant increases in revenues. Our gross margin for the
quarter ended June 30, 1999 was approximately 5.3%. The low gross margin on
product sales, primarily all of which were recognized under principal-based
agreements, was due to our accepting low margins in order to increase early
sales volume, customer adoption, and awareness of the Chemdex brand. While
margins on recently signed supplier agreements have improved, we expect margins
to remain low until we are able to renegotiate higher discounts on earlier
supplier agreements, and increase volumes of revenues through more recently
signed suppliers with higher discount rates.
Operating Expenses
Research and Development. Research and development expenses
increased from $.4 million in the second quarter of 1998 to $3.5 million in the
second quarter of 1999. For the six month period ended June 30, 1999, research
and development costs increased by $5.0 million from the same period in the
prior year. Research and development expenses consist of personnel and other
expenses associated with developing, updating, and enhancing software in support
of the Chemdex Marketplace. Our research and development expenses have increased
each quarter since inception primarily due to increased staffing and associated
costs related to the design and development and maintenance of the Chemdex
Marketplace, and content and design expenses. We believe that our success is
dependent in large part on continued enhancement and development of the Chemdex
Marketplace. Accordingly, we expect research and development expenses to
increase in future periods.
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Sales and Marketing. Sales and marketing costs increased from $.3
million in the second quarter of 1998 to $5.2 million in the second quarter of
1999. For the six month period ended June 30, 1999, sales and marketing expenses
increased $7.9 million over the same period in the prior year. Sales and
marketing expenses consist primarily of advertising and promotion in support of
the development of our marketing strategy, payroll and related expenses for
personnel engaged in supplier relations, enterprise sales activities, enterprise
account management, and amortization expenses related to our VWR and BIO
agreements. Sales and marketing expenses have increased since inception as we
have continued to expand our sales and marketing efforts. We intend to
aggressively expand our supplier and customer relationships and to expand our
brand awareness. We expect sales and marketing expenses to increase in future
periods.
General and Administrative. General and administrative costs increased
from $.4 million in the second quarter of 1998 to $3.6 million in the second
quarter of 1999. For the six months ended June 30, 1999, general and
administrative costs increased by $4.0 million from the same period in the prior
year. General and administrative expenses consist primarily of salaries, fees
for professional services and lease expenses. General and administrative
expenses have increased primarily as a result of the addition of finance and
administrative personnel, costs of leasing additional office space to support
our growth, and expenses related to increased professional service fees. We
expect general and administrative expenses to increase in future periods to
support our expanded operations and the expenses of being a public company.
Amortization of Deferred Compensation. We have recorded aggregate
deferred compensation charges of $8.7 million in connection with some of the
stock options we granted through June 30, 1999. For the quarter ended June 30,
1998 and 1999, we expensed $44,000 and $547,000, respectively, related to the
amortization of deferred compensation. Further, for the six months ended June
30,1999 and 1998, we expensed $899,000 and $66,000 respectively, related to the
amortization of deferred compensation. The deferred compensation amounts are
being amortized over the vesting period of the stock options which is generally
four years.
Interest and other Income, Net
Interest and other income, net increased from $69,000 in the second
quarter of 1998 to $186,000 in the second quarter of 1999. Further, for the six
month period ended June 30, 1999, interest and other income, net increased
$144,000 from the same period in the prior year. Interest and other income, net
and has been derived primarily from earnings on cash investments, offset by
interest expense associated with our capitalized lease obligations for equipment
purchases during the current year.
Income Taxes
We incurred operating losses and accordingly did not record a
provision for income taxes for any of the periods presented. At December 31,
1998, we had net operating loss carryforwards and federal tax credits for
federal income tax purposes of $7.5 million and $100,000, respectively. In
addition, we had state net operating loss and research and development credit
carryforwards of approximately $7.4 million and $100,000, respectively. These
net operating losses and credits will expire in the years 2002 through 2018 if
not utilized. Certain future changes in our share ownership, as defined in the
Tax Reform Act of 1986 and similar state provisions, may restrict the
utilization of carryforwards. A valuation allowance has been recorded for the
entire deferred tax asset as a result of uncertainties regarding the realization
of the assets due to our lack of earnings history.
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Liquidity and Capital Resources for the Six Months Ended June 30, 1999
We have funded our operations primarily through the sale of our equity
securities, through which we have raised net proceeds of approximately $73.1
million through the quarter ended June 30, 1999. We have also financed our
operations through equipment lease financing. As of June 30, 1999, our
principal sources of liquidity included approximately $19.4 million of cash and
cash equivalents and $4.1 million in equipment financing arrangements. The
arrangements include an agreement for $1.1 million that provides for 12 equal
quarterly payments of the financed amount commencing May 1, 1999, with interest
of approximately 13% per year, and a $3.0 million equipment lease line agreement
with a financial institution for a term of 48 months, with interest of
approximately 13% per year. At June 30, 1999 there was $1.0 million in
borrowings outstanding under the equipment financing arrangements.
Net cash used in operating activities totaled $14.1 million and $2.0
million in the first six months of 1999 and 1998, respectively. The net cash
used in operating activities in the first six months of 1999 was primarily due
to our net losses, which were partially offset by non-cash charges of
depreciation and amortization of deferred compensation, amortization of
intangible assets, and increases in accounts payable and accrued expenses.
Net cash used in investing activities totaled $2.5 million in the
first six months of 1999. We have made substantial investments in computer
equipment, computer software, office furniture and leasehold improvements during
the current year.
Net cash provided by financing activities was $13.0 million in the
first six months of 1998 and $30.1 million for the first six months of 1999. Net
cash from financing activities during both periods resulted primarily from the
sale of preferred stock. Subsequent to June 30, 1999, the Company received
approximately $112.5 million in gross proceeds related to the Company's Initial
Public Offering.
We currently anticipate that the net proceeds from the initial public
offering, together with our current cash, cash equivalents, and equipment lease
line, will be sufficient to meet our anticipated cash needs for working capital
and capital expenditures for at least the next 12 months. However, we may need
to raise additional funds in future periods through public or private financing,
or other arrangements to fund our operations and potential acquisitions, if any,
over a long-term basis until we achieve profitability, if ever. Any additional
financing, if needed, might not be available on reasonable terms or at all.
Failure to raise capital when needed could seriously harm our business and
results of operations. If additional funds are raised through the issuance of
equity securities, the percentage of ownership of our stockholders would be
reduced. Furthermore, these equity securities might have rights, preferences or
privileges senior to our common stock.
Year 2000 Compliance
Many currently installed computer systems and software products are
unable to distinguish year 2000 dates. This situation could result in system
failures or miscalculations causing disruptions in the operations of any
business. As a result, many companies' software and computer systems may need to
be upgraded or replaced to comply with year 2000 requirements. Our ability to
operate is dependent upon delivery of accurate, electronic information via the
Internet. To the extent year 2000 issues result in the long-term inoperability
of the Internet or the Chemdex Marketplace, our business, results of operations
and financial condition could be seriously harmed.
We completed an assessment of our information technology systems for
year 2000 problems in April 1999. We have not replaced any of our systems based
on the results of our assessment. However, we have made modifications to some
systems based on our assessment of year 2000 problems.
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Representations and Warranties to Our Customers
We generally represent and warrant to our customers that the
occurrence of the date January 1, 2000 and any related leap-year issues will not
cause the Chemdex Marketplace application software to fail to operate properly.
Our warranty generally applies only to our software and excludes failures
resulting from the combination of our software and other software or hardware,
unauthorized changes to the software or network connectivity problems,
including, without limitation, problems connecting to the Internet or problems
relating to Internet service providers. If we breach this warranty, the recourse
that our customers may seek is limited to the prompt correction by us at our own
expense of any failure of our software to the reasonable satisfaction of the
customer.
Our Testing of Our Online Marketplace Application Software
We have internally reviewed the Chemdex Marketplace application
software. We have performed industry-standard procedures to test our internally
developed applications for year 2000 compliance. Based on our testing, we
believe that our internally developed applications and systems are designed to
be year 2000 compliant. In addition, we hired a consultant to perform additional
testing, including a year 2000 readiness audit of our internally developed
online application software. The consultant's audit report concluded that our
online application software is year 2000 compliant.
Assessment of Third-Party Equipment and Software. We utilize third-
party equipment and software that may not be year 2000 compliant. Failure of
third party equipment or software, or the interface of our applications with
this equipment or software, could result in a material adverse effect on our
business, results of operations and financial condition. We are currently
assessing the year 2000 risks of our third-party desktop systems that are
unrelated to the Chemdex Marketplace. We have contacted the vendors of most of
our third-party software and equipment to assess the year 2000 risks of our
third-party systems that are unrelated to the Chemdex Marketplace. We have
received year 2000 compliance letters from some of these vendors. We are also in
the process of contacting the few remaining vendors with whom we have not yet
spoken in order to assess their year 2000 compliance. Based on these vendors'
representations, we believe that there are a number of third-party hardware and
software systems, some of which are material to our operations, that require
some upgrade in order to be year 2000 compliant. The failure of these vendors to
address Year 2000 issues may require us to seek alternative vendors or, if
possible, to develop our own solutions. The time and resources required to find
alternative vendors and to transition our systems could increase our costs of
doing business, require to find alternative vendors and to transition our
systems could increase our costs of doing business, require us to allocate our
own resources away from our core business, and delay development of our own
technology and operations. We plan to complete our assessment of the risk posed
by these third-party systems to our operations by the end of September 1999.
Interaction of Our Marketplace with Supplier and Customer Systems.
Furthermore, the success of our efforts may depend on the success of our
suppliers, customers and strategic partners in dealing with their year 2000
issues. Many of these organizations' systems may not yet be year 2000 compliant
and the impact of failure of these systems on the Chemdex Marketplace is
difficult to determine. The availability of products from our suppliers and the
purchasing patterns of our customers or potential customers may be affected by
year 2000 issues.
In addition, until some of the billing and cash collection functions
for the sale of third party products are transitioned to us, we are dependent
upon VWR's systems, which may not be year 2000 compliant, for receiving payment
for third party products. If the systems of any of our suppliers or customers,
and particularly, if VWR's billing and cash collection systems, are not year
2000 compliant, our business, revenues, results of operations and financial
condition could be severely harmed.
According to its public filings, VWR is implementing enhancements to
its computer systems to satisfy its future requirements. During 1998, VWR
purchased an enterprise-wide computer system package that is replacing many of
VWR's systems, including order entry, purchasing, and financial systems. VWR
completed the initial rollout of the new systems during the fourth quarter of
1998. VWR had an external review conducted by an independent information
technology-consulting firm to identify legacy computer systems that could be
affected by the year 2000 issue, when they would be affected, and how the year
2000 issues may be remedied. The extent of Year 2000 remediation performed by
VWR was coordinated with the new systems implementation timetable, VWR is
transitioning to the new system on a regional basis and expects to be completed
in the third quarter of 1999. VWR's new system, together with other planned
system changes, is intended to address its year 2000 issues.
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Our Contingency Planning Effort
We are engaged in an ongoing year 2000 assessment and are gathering
information for the development of contingency plans. We are in the process of
contacting our strategic partners and major customers to gauge their year 2000
compliance and request year 2000 compliance information and letters. We expect
to receive responses from our critical suppliers, strategic partners and major
customers by the end of September 1999. The nature and extent of our
contingency plans will depend on the responses received from our critical
suppliers, strategic partners and major customers. We have not yet identified
our worst-case scenario resulting from a year 2000 failure. Without a worst-
case scenario contingency plan we may not have enough time to implement
contingency planning and complete remedial measures. We do not have any
contingency plans to date and intend to develop and complete contingency plans
in the fourth quarter 1999.
Costs of Addressing Year 2000 Compliance
To date, our costs to address year 2000 compliance have been
approximately $600,000 and are included in operating expenses funded from
working capital. We anticipate the additional costs to address year 2000
compliance will be approximately $700,000. We currently have not deferred other
information technology projects due to our year 2000 efforts. Significant
uncertainty exists concerning the potential costs and effects associated with
year 2000 compliance. Any year 2000 compliance problem experienced by us, our
customers, suppliers or strategic partners could decrease the demand for or
availability of products, which could seriously harm our business, operating
results and financial condition.
Factors Affecting our Business Condition
In addition to the other information included in this Report, the
following factors should be considered in evaluating our business and future
prospects:
Our limited operating history makes it difficult for you to evaluate our
business and our prospects
We were founded in September 1997 and have a limited operating
history. Prior to investing in our common stock, you should consider the risks
and difficulties that we face as an early stage company in a new and rapidly
evolving market. Some of these specific risks and difficulties include:
. we may be unable to significantly increase and maintain customer
adoption and use of our Internet-based purchasing solution;
. we depend substantially on a purchasing solution that has been present
in the market for a limited time and may not be successful;
. we may be unable to develop and enhance the Chemdex brand;
. we may be unable to maintain existing or establish new relationships
with suppliers of life sciences research products;
. we depend substantially on revenues from product sales and we may be
unable to significantly increase revenues from product sales or
generate revenues from other sources;
. we may be unable to adapt to rapidly changing technologies and
developing markets;
. we may be unable to effectively manage our rapidly expanding
operations and the increasing use of our services;
. we may be unable to attract, retain and motivate qualified personnel,
particularly people who understand specialized life sciences research
products or the life sciences industry in general;
. we may be unable to compete in a highly competitive market dominated
by larger, more established companies with substantial financial
resources and significant customer relationships; and
. we may be unable to comply with applicable laws and regulations to
economically compete in a highly competitive market.
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In 1998, we generated revenues of $29,000 and in the six months ended
June 30, 1999 we generated revenues of $3.1 million. Due to our limited
operating history, we believe that period-to-period comparisons of our revenues
and results of operation are not meaningful. As a result, you should not rely on
our revenues or results of operations for any prior period as an indication of
future performance or prospects.
We have a history of losses and anticipate continued losses for the foreseeable
future
We have had substantial losses since our inception. We currently
expect our losses to increase in the future and we cannot assure you that we
will ever achieve or sustain profitability. As of June 30, 1999, we had an
accumulated deficit of approximately $28.2 million. The extent of these losses
will be contingent, in part, on the amount of growth in our revenue. The extent
of these losses will also be contingent, in part, on the amount of growth in our
operating expenses, which we plan to increase. If our revenues fail to grow at
anticipated rates or our operating expenses increase without a commensurate
increase in our revenues, or we fail to adjust operating expense levels
accordingly, the imbalance between revenues and operating expenses will
negatively affect our business, revenues, results of operations and financial
condition.
To date we have derived our revenues primarily from product sales. In
order to increase our revenues, we must, among other things:
. attract new enterprise customers and retain existing enterprise
customers;
. encourage researchers employed by our enterprise customers to adopt
our Internet-based purchasing solution and to use it frequently;
. increase our product offering by adding and maintaining supplier
relationships; and
. develop new sources of revenues beyond our existing revenue sources.
If we are unable to accomplish one or more of these objectives, our
revenues may not grow as we anticipate, if at all, and our business, revenues,
financial condition and results of operations will be negatively affected. We
may not be able to build on our current sources of revenues by adding additional
products or services. Even if we do add additional products or services, there
are economic, legal, regulatory and other risks associated with adding these new
revenue sources. For example, we may post advertisements on our web site to
generate advertising revenue. However, our supplier relationships may be harmed
if our suppliers associate advertisements posted on our web site with a bias in
our offering of life sciences research products.
Our business model is not proven and may not be successful
Our business-to-business e-commerce model is based on the development
of the Chemdex Marketplace for the purchase and sale of life sciences research
products. This business model is new and not proven and depends upon our ability
to, among other things:
. sell our purchasing solution to pharmaceutical and biotechnology
companies and academic and research institutions;
. achieve high rates of adoption by researchers within enterprise
customers;
. maintain our current suppliers and enter into agreements with
additional suppliers;
. generate significant revenues from the use of our Internet-based
purchasing solution; and
. obtain higher transaction volumes and increase productivity.
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We cannot be certain that our business model will be successful or
that we can achieve or sustain revenue growth or generate any profits. The
success of this business model will require, among other things, that we develop
and market solutions with broad market acceptance by our customers, suppliers,
users and strategic partners. We cannot be certain that business-to-business
commerce on the Internet generally, or our purchasing solution, services and
brand in particular, will achieve broad market acceptance. For example,
purchasers may continue purchasing products through their existing methods and
may not adopt an Internet-based purchasing solution because of their comfort
with existing purchasing habits and direct supplier relationships, the costs and
resources required to switch purchasing methods, the need for products not
offered through the Chemdex Marketplace, security and privacy concerns, or
general reticence about technology or the Internet.
Our gross margins are low and we will have to increase productivity in our
business to be profitable
Our gross margin for the six months ended June 30, 1999 was
approximately 5.3%. We are dependent on the price discounts we receive from our
suppliers, and thus we are vulnerable to any decrease in these discount rates.
Any decrease would have a significant negative impact on our financial results.
Our gross margins on sales of life sciences research products are small relative
to the margins earned by traditional distributors of life sciences research
products. If we do not increase these discounts, substantially increase our
revenues, and scale our business in a manner that generates increased
productivity, including further automation of our purchasing solution, we may
never achieve profitability. Distributors, in general, operate with low margins.
This is especially true in the life sciences research products market.
In addition, due to our low gross margins, unexpected costs or
expenses we incur would substantially affect our ability to achieve or maintain
operating profits. For example, we generally bear the risks of the loss of
products upon shipment by our suppliers to our customers, of product returns and
refunds to our customers, and of non-collection of accounts receivable. Although
we maintain insurance for claims for damages to our customers or others caused
by our products we do not have insurance coverage for the costs of products lost
during shipment, product returns or uncollectable accounts receivable.
We are subject to government regulation that exposes us to potential liability
and negative publicity
We currently rely upon our suppliers to meet all packaging,
distribution, labeling, hazard and health information notices to purchasers,
record keeping and licensing requirements applicable to our business during the
entire transaction. Our reliance on suppliers' regulatory due diligence
assessment of purchasers and the compliance by suppliers and purchasers with
applicable governmental regulations may not be sufficient if we are held to need
our own licenses. For example, if we are held to be seller or a distributor of
regulated products because we did take legal title, we may have inadvertently
violated some governmental regulations by not having the appropriate license or
permit and may be subject to potentially severe civil or criminal penalties and
fines for each offense. We are aware that some of our prior sales may have been
made in the absence of us having the requisite local, state, or federal license
or permit. We may be subject to potentially severe civil and criminal penalties
and fines for each of these sales, which could have a material adverse impact on
our business, revenues, results of operations and financial condition. In
addition to these prior sales, we are unable to verify that our suppliers have
in the past complied, or will in the future comply, with the applicable
governmental regulatory requirements, or that their actions are adequate or
sufficient to satisfy all governmental or other legal requirements that may be
applicable to our sales. We could be fined or exposed to civil or criminal
liability, including monetary fines and injunctions, and we could receive
potential negative publicity, if the applicable governmental regulatory
requirements have not been, or are not being, fully met by our suppliers or by
us directly. Negative publicity, fines and liabilities could also occur if an
unqualified person, or even a qualified customer, lacks the appropriate license
or permits to sell, use or ship, or improperly receives a dangerous or
unlicensed product through the Chemdex Marketplace. We do not maintain any
reserve for potential liabilities resulting from government regulation. It is
also possible that a number of laws and regulations may be adopted or
interpreted in the United States and abroad with particular applicability to the
Internet.
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We rely on a limited number of enterprise customers, and any loss of an
enterprise customer could have a negative effect on us
We expect that for the foreseeable future we will generate a
significant portion of our revenues from a limited number of enterprise
customers. Further, our enterprise customers are not obligated to use our
purchasing solution exclusively or for any minimum number of transactions or
dollar amounts. We currently do not offer all of the life science research
products required by our customers, and we expect that our customers will
continue to use multiple sources to meet their needs. In addition, our contracts
with our customers are for limited terms and our customers may discontinue use
of our Chemdex Marketplace at any time upon short notice and without penalty. If
we lose any of our enterprise customers, or if we are unable to add new
enterprise customers, our revenues will not increase as expected, we will lose
access to the researchers employed by these enterprises, we could lose a number
of our product suppliers, and our brand name and customer and supplier
perceptions of our purchasing solution would be harmed.
We will be very dependent on our strategic relationship with VWR for the
foreseeable future
We recently entered into a strategic relationship agreement with VWR
Scientific Products Corporation to jointly market VWR laboratory products using
the Chemdex Marketplace. The agreement gives us the right to offer approximately
350,000 VWR-distributed products to our customers through the Chemdex
Marketplace. VWR and Chemdex are also jointly developing an Internet purchasing
solution for VWR's existing and future customers that will provide access to
three categories of products:
. products distributed by VWR (VWR core products),
. products distributed by Chemdex (Chemdex core products), and
. products that are not distributed by either VWR or Chemdex but
are purchased from third parties (third party products).
The extent to which our operations are integrated with VWR and the
potential financial impact on us of this strategic relationship makes us very
dependent on VWR for the foreseeable future. We may experience technical or
logistical difficulties in integrating VWR's suppliers, products and services
with the Chemdex Marketplace. If we are unable to do so in a timely manner, our
business, revenues, financial condition and results of operations could be
negatively affected. In addition, our agreement with VWR is nonexclusive except
as to the purchase of third party products by VWR and some other provisions and
has a limited term. We cannot be certain that VWR will not enter into a similar
relationship with one of our competitors, or that VWR will renew our agreement
at the end of its term.
We receive no fee for orders for VWR core products through the Chemdex
Marketplace from VWR's 40 largest customers and we receive a minimal fee for all
other orders for VWR core products forwarded to VWR. Under the terms of the
agreement, VWR provides some support services for purchasing third party
products in exchange for a fee which approximates VWR's costs incurred.
Since we receive minimal gross margins for sales of third party
products, our gross profit margins on these sales are lower than our margins on
sales of Chemdex core products. To the extent sales of VWR core products or
third party products increase relative to, or displace our sales of Chemdex core
products, our revenues and gross margins will likely decline, which would make
it more difficult for us to achieve profitability.
Our strategic relationship with VWR may lead to conflicts that could be
detrimental to us
Our strategic relationship with VWR may lead to conflicts that could
be detrimental to us. For example, we plan to provide the greatest number and
variety of products from the greatest number of suppliers possible; however, our
strategic relationship with VWR may deter other suppliers, particularly those
that compete directly with VWR products, from entering into agreements with us.
In addition, as noted above, our agreement with VWR is nonexclusive, and it is
possible that VWR could enter into similar relationships with one or more of our
competitors, or develop its own purchasing solution that would compete with
ours.
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The former Chief Executive Officer of VWR is a member of our Board of Directors,
which may lead to conflicts of interest that could be detrimental to us
Jerrold Harris, the former Chief Executive Officer of VWR, is a member
of our board of directors. This may lead to conflicts of interest, as VWR is one
of the laboratory supply industry's largest distributors and is a potential
competitor of ours. In addition, VWR has entered into and may in the future
enter into relationships with our competitors, other suppliers or our customers.
Although we intend to have Mr. Harris excuse himself from Board discussions that
involve potential conflicts of interest, we cannot be sure that this will
minimize these conflicts of interests or that Mr. Harris' position as a member
of our Board of Directors will not operate to our detriment.
If we cannot build a critical mass of suppliers and customers, we will not be
able to increase our product offering and draw more customers
Our business model depends in large part on our ability to build a
critical mass of products and suppliers. To attract and maintain suppliers, we
must build a critical mass of customers. However, customers must perceive value
in our purchasing solution which, in part, depends upon the breadth of our
product offerings from our suppliers. If we are unable to increase the number of
suppliers and draw more customers to the Chemdex Marketplace, we will not be
able to benefit from any network effect, where the value to each participant in
the Chemdex Marketplace increases with the addition of each new participant. As
a result, the overall value of the Chemdex Marketplace and our purchasing
solution would be harmed, which would negatively affect our business, revenues,
financial condition and results of operations.
The time it takes to sell and implement our solution is long, which could
negatively affect our revenue growth, if any, and make it difficult to predict
our revenues and results of operations
A key element of our strategy is to market our solution directly to
life sciences organizations, and to succeed we must satisfy the enterprise
purchasing departments, the information technology groups and the individual
researchers who are the users of our Internet-based purchasing solution. The
time it takes to sell and implement our solution is long and we devote
significant sales, marketing and management resources to the sales process
without any assurance that the customer will use the Chemdex Marketplace. We are
generally required to provide a significant level of education to our customers
and potential customers regarding the use and benefits of our Internet-based
purchasing solution. Furthermore, potential enterprise customers and a number of
their departments typically engage in extensive internal reviews and analyses
before making purchase decisions. The sale and implementation of our solution
are subject to delays due to our customers' internal budgeting and procedures
for approving capital expenditures and deploying new technologies within their
networks. These delays also could impair our ability to generate revenue.
Even if enterprise customers adopt our purchasing solution, we may not increase
our revenues if researchers within these enterprises do not use the Chemdex
Marketplace
Our revenues are primarily derived from purchases of life sciences
research products by researchers, research assistants and other users within our
enterprise customers. These persons may or may not use our Chemdex Marketplace
to purchase their research products. Even if we successfully maintain existing
enterprise customers and add new enterprise customers, we may not be able to
increase revenues if researchers within our enterprise customers do not adopt
and use the Chemdex Marketplace. Once an enterprise customer adopts our
Internet-based purchasing solution, it takes time for researchers and other
users within the enterprise to become aware of, learn to use and begin using our
Chemdex Marketplace. The long sales cycle and the time it takes for researchers
to begin using our Internet-based purchasing solution could negatively affect
our revenue growth, if any, and makes it difficult to predict our results of
operations. Also, our efforts to attract researchers to adopt and to increase
their use of our solution may not be successful, which would limit our ability
to generate revenues from these customers.
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Reductions in the research and development budgets and government research
funding of our customers will negatively affect our revenues
Our purchasing solution is used by researchers and their assistants
and staff at pharmaceutical and biotechnology companies, and academic and
research institutions. Changes in the research and development budgets of these
companies and institutions and the timing of spending under these budgets can
have a significant effect on the demand for life sciences research products.
These budgets are based on a wide variety of factors including the resources
available to make these expenditures, the spending priorities among various
types of research, and the policies regarding these expenditures during
recessionary periods. Any decrease in life sciences research and development
expenditures by these companies and institutions could have a negative effect on
our revenues.
A significant portion of our sales are expected to be to research
scientists and entities whose funding is dependent on grants from government
agencies such as the U.S. National Institutes of Health (NIH) and similar
domestic and international agencies. The funding associated with approved NIH
grants generally becomes available at particular times of the year, as
determined by the federal government, and may result in fluctuations in our
revenues and results of operations. Although NIH research funding has increased
during the past several years, grants have, in the past, been frozen for
extended periods or have otherwise become unavailable to various institutions,
sometimes without advance notice. Furthermore, recent government proposals
designed to reduce or eliminate budgetary deficits have included reduced
allocations to the NIH and other government agencies that fund research and
development activities. If government funding, especially NIH grants, were to
become unavailable to researchers for any extended period of time, or if overall
research funding were to decrease, there could be a negative effect on our
business, revenues, results of operations and financial condition.
The success of our business depends on maintaining and expanding our supplier
base
Our future success depends in large part upon our ability to offer and
deliver a broad and deep life sciences research product offering to our
customers. We rely on independent suppliers and manufacturers for products
offered through our Chemdex Marketplace. To increase the breadth of our product
offering, including related products that we do not currently offer such as
laboratory equipment and supplies, we must establish relationships with
additional suppliers. Some potential suppliers may view us as detrimental to
their business, since suppliers compete with one another and with us for sales
and customers. Our agreements with suppliers are typically for one-year terms
and we cannot assure you that these agreements will be renewed beyond the
initial term. In addition, these suppliers are not required to accept purchase
orders from us. If we fail to secure products from our suppliers or if a
significant number of suppliers do not renew their agreements with us, the
breadth and depth of products that we can offer users would be decreased. In
addition, there are significant costs, difficulties and risks associated with
adding new products in related markets, such as the difficulty of signing up new
suppliers, obtaining necessary permits, complying with governmental regulation,
pressures on margins, new competition and integration of these new products into
the Chemdex Marketplace. These events could result in decreased adoption and use
of our purchasing solution and decreased revenues, which could have a negative
effect on our business, results of operations and financial condition.
Our cost of revenues includes cost of goods payable to suppliers. We
cannot assure you that our suppliers will enter into or renew agreements with us
on the same or similar terms as those currently in effect or that the cost of
goods payable to our suppliers will remain the same. Less favorable terms will
make it difficult for us to achieve profitable operations. Any decreases in our
already low gross margins will have a significant negative effect on our results
of operations and financial condition.
Our supplier agreements are nonexclusive and many of our suppliers
sell their products directly to our customers. In addition, the growing reach
and use of the Internet has further intensified competition in this industry.
Some suppliers provide customers with direct access to products, and if
suppliers, including our current suppliers, provide products to enterprise
customers and their researchers at a cost lower than ours, our revenues, results
of operations and financial condition could be negatively affected.
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If we cannot timely and accurately add supplier product data to our purchasing
solution database we may lose sales and customers, which would adversely affect
our revenues
Currently, we are responsible for loading supplier product information
into our database and categorizing the information for search purposes. This
process entails a number of risks, including dependence on our suppliers to
provide us in a timely manner with accurate, complete and current information
about their products, and to promptly update this information when it changes.
We will not derive revenue from these products until these data are loaded in
our system. The time period in which we estimate loading these supplier product
data is a forward-looking statement that is subject to risks and uncertainties
and actual results may differ materially from those described in these forward-
looking statements. Timely loading of these products in our database depends
upon a number of factors, including the file formats of the data provided to us
by suppliers and our ability to further automate and expand our operations to
accurately load these data in our product database, any of which could delay the
actual loading of these products beyond the dates estimated by us.
In addition, we are generally obligated under our supplier agreements
to load updated product data onto our database for access through the Chemdex
Marketplace within a specified period of time following their delivery from the
supplier. Our current supplier data backlog could make it difficult for us to
meet these data update obligations to our suppliers. While we intend to further
automate the loading and updating of supplier data on our system, we cannot
assure you that we will be able to do so in a timely manner, in part because
achieving the highest level of this automation is dependent upon our suppliers'
automating their delivery of product data to us. If our suppliers do not provide
us in a timely manner with accurate, complete and current information about the
products we offer, our database may be less useful to our customers and users
and may expose us to liability. Although we screen our suppliers' information
before we make it available to our customers and users, we cannot guarantee that
the product information available in our Chemdex Marketplace will always be
accurate, complete and current, or comply with governmental regulations. This
could expose us to liability or result in decreased adoption and use of our
Internet-based purchasing solution, which could reduce our revenues and
therefore have a negative effect on our results of operations and financial
condition.
If our suppliers do not provide timely and professional delivery of products to
our customers our business will be harmed
We also rely on our suppliers and manufacturers to deliver life
sciences research products to our customers in a professional, safe and timely
manner. If our suppliers do not deliver the products to our customers in a
professional, safe and timely manner, then our service will not meet customer
expectations and our reputation and brand will be damaged. In addition,
deliveries that are nonconforming, late or are not accompanied by information
required by applicable law or regulations, could expose us to liability or
result in decreased adoption and use of our Internet-based purchasing solution,
which could have a negative effect on our business, results of operations and
financial condition. Further we, and not our suppliers, typically bear the
responsibility for product refunds and returns and the risk of non-
collectibility of accounts receivable from our customers.
To attract customers and suppliers to our Chemdex Marketplace, we must not favor
one supplier over another
The life sciences research products market consists of a complex set
of relationships among manufacturers, suppliers, distributors and customers.
Adoption of our solution by suppliers and customers is dependent on their
perception that we provide a neutral, unbiased marketplace to purchase and sell
life sciences research products. To the extent that we are perceived by our
customers or suppliers as favoring one supplier over another, customers and
suppliers may lose confidence in the Chemdex Marketplace as a fair and neutral
marketplace and choose alternative solutions. Our relationship with VWR,
including the fact that VWR is a stockholder and is represented on our Board of
Directors, may compromise the perception that we provide a neutral and unbiased
marketplace for life sciences research products. Any bias, whether perceived or
actual, could have a negative impact on our ability to maintain or increase our
supplier base, which in turn may limit our ability to maintain or increase our
customer base. This would reduce revenues and therefore have a negative impact
on our business, results of operations and financial condition.
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We face intense competition that could limit our ability to expand our base of
customers and users
The market for business-to-business e-commerce and Internet ordering
and purchasing is new and rapidly evolving, and competition is intense and is
expected to increase significantly in the future. We face competition from four
main areas: other companies with e-commerce offerings, traditional suppliers and
distributors of life sciences research products, life sciences companies that
have developed their own purchasing solutions and enterprise software companies
that offer, or may develop, alternative purchasing solutions. We may not be able
to compete successfully against our current or future competitors and
competition could have a material adverse effect on our business, results of
operations and financial condition. Our competitors and potential competitors
may develop superior Internet purchasing solutions that achieve greater market
acceptance than our solution. In addition, substantially all of our prospective
customers have established long-standing relationships with some of our
competitors or potential competitors, including most of our suppliers.
Accordingly, we cannot be certain that we will be able to expand our customer
list and user base, or retain our current customers or suppliers.
Our solution and services are new and face rapid technological changes and if we
do not respond appropriately, we may lose customers
The market for our solution is characterized by rapid technological
advances, evolving standards in the Internet and software markets, changes in
customer requirements and frequent new product and service introductions and
enhancements. As a result, our future success depends upon our ability to
enhance our current Internet-based purchasing solution and services, to develop
and introduce new solutions and services that will achieve market acceptance,
and where necessary to integrate our Internet-based purchasing solution with our
customers' enterprise resource planning systems. If we do not adequately respond
to the need to develop and introduce new solutions or services, or to integrate
with our customers' enterprise resource planning systems, then our business,
revenues, results of operations and financial condition will be negatively
affected. For example, we may lose market share and ultimately revenue as our
customers switch to our competitors' offerings if:
. we are unable to develop technology that is a success in the
marketplace;
. our technology does not integrate with our customers' systems; and
. our technology is surpassed by the superior technology of a
competitor.
Further, we may incur significant expense to integrate our purchasing
solution with our customers' enterprise resource planning systems and business
rules, and to maintain this integration as our customers' enterprise resource
planning systems evolve. Failure to provide this integration may delay or
altogether dissuade the market or a particular customer from adopting our
Internet-based purchasing solution, which could negatively affect our revenues
and therefore have a material adverse effect on our business, results of
operations and financial condition.
If we do not successfully develop and timely introduce new versions of our
purchasing solution in the next several months our business will be harmed
We are currently in the process of developing and integrating new
technology into our Internet-based purchasing solution as part of our planned
release of several enhanced versions of the Chemdex Marketplace over the next
few months. These new releases are planned to include significant enhancements
to the user interfaces, database management and search technology, and security
controls, and will allow us to offer VWR's products to our customers. The
planned timing of introduction of new releases of our purchasing solution is a
forward-looking statement that is subject to risks and uncertainties, and actual
timing may differ materially from that set forth in these forward-looking
statements as a result of a number of factors. Enhancing and introducing new
technology into our purchasing solution involves numerous technical challenges
and substantial personnel resources, and often takes many months to complete. We
cannot be certain that we will be successful at enhancing or integrating this
technology into our Internet-based purchasing solution on a timely basis, or in
accordance with our milestones or our product release objectives. In addition,
we cannot be certain that, once integrated, this technology or our Internet-
based purchasing solution will function as expected. If we are unable to enhance
and integrate this new technology into our purchasing solution on a timely
basis, we may lose customers or experience difficulty obtaining new customers,
which could adversely affect our business, revenues, financial condition and
results of operations.
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Major enhancements and new solutions and services often require long development
and testing periods. In addition, our Internet-based purchasing solution is
complex and, despite vigorous testing and quality control procedures, may
contain undetected errors or "bugs" when first introduced or updated. Any
inability to timely deliver a quality solution and services could have a
negative effect on our business, revenues, financial condition and results of
operations.
We may not be able to determine or design the features and functionality that
our enterprise customers and researchers require or prefer
Our success depends upon our ability to accurately determine the
features and functionality that our enterprise and research customers require or
prefer in an e-commerce solution, and our ability to successfully design and
implement purchasing solutions that include these features and functionality. If
we are unable to determine or design in the features and functionality that
enterprise and research customers require or prefer in an e-commerce solution,
our business will be negatively affected. We have designed the Chemdex
Marketplace based upon internal development efforts and feedback from a
relatively limited number of enterprise and research customers. We cannot be
certain, however, that the features and functionality that we currently offer in
the Chemdex Marketplace, or those that we may offer in future releases of our
solution, will satisfy the requirements or preferences of our current or
potential enterprise and research customers.
We will need to manage our expanding business effectively in order to meet
customer and investor expectations
We have rapidly and significantly expanded our operations and expect
to continue to do so. This growth has placed, and is expected to continue to
place, a significant demand on our sales, marketing, managerial, operational,
financial and other resources. If we cannot manage our growth effectively, it is
likely that our revenues and results of operations will not meet customer and
investor expectations. As of June 30, 1999, we had grown to 160 employees. We
expect to hire a significant number of new employees to support our business.
Our current information systems, procedures and controls may not
continue to support our operations and may hinder our ability to exploit the
market for selling products to the life sciences industry. We are in the process
of implementing a new enterprise resource planning system that will replace our
existing accounting and management information systems and allow for future
scalability and enhancements. In addition, we anticipate requiring additional
space to accommodate our growth in the next six months. We could experience
interruptions to our business when we transition to the new enterprise resource
planning system and when we relocate to new facilities. Even after we implement
our new system and relocate to new facilities, our personnel, systems,
procedures, controls and facilities may be inadequate to support our future
operations.
We depend on our key personnel to manage our business effectively in a rapidly
changing market
Our performance is substantially dependent on the performance of our
executive officers and other key employees. We do not have any employment
agreements with our executive officers and key employees, although some of them
have severance arrangements. Our failure to successfully manage our personnel
requirements would have a negative effect on our business, revenues, financial
condition and results of operations. We have experienced difficulty from time to
time in hiring the personnel necessary to support the growth of our business,
and we may experience similar difficulty in hiring and retaining personnel in
the future. Six of our ten executive officers have only been employed by us
since January 1999 or later. Competition for senior management, experienced
sales and marketing personnel, software developers, qualified engineers and
other employees is intense, and we cannot be certain that we will be successful
in attracting and retaining our personnel. The loss of the services of any of
our executive officers or other key employees could have a negative effect on
our business. In particular, the loss of services of David Perry, our President
and Chief Executive Officer, and Pierre Samec, our Chief Information Officer,
would have a detrimental effect on our business. Mr. Perry is one of the co-
founders and is primarily responsible for our vision and future direction, and
Mr. Samec is responsible for all of our technology systems and software.
25
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The unpredictability of our quarterly results may negatively affect the trading
price of our common stock
Our revenues and results of operations may fluctuate significantly in
the future as a result of a variety of factors, many of which are outside of our
control. As a result, you should not rely on period-to-period comparisons of
revenues and results of operations as an indication of our future performance.
Some of the factors that may affect our revenues and results of operations
include:
. demand for and market acceptance of our Internet-based purchasing
solution and services;
. introduction of new and enhanced purchasing solutions and services by
us or our competitors;
. budgeting cycles of customers and users;
. loss of one or more of our key suppliers, customers or strategic
relationships;
. changes in our pricing policy or those of our competitors or
suppliers;
. amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
. timing and number of new hires;
. ability to comply with applicable laws and regulations or obtain
necessary permits and licenses to sell or ship products to customers;
. technical difficulties with our web site or Internet-based purchasing
solution;
. level of activity and funding in the life sciences industry; and
. general economic conditions.
We may from time to time make pricing, service or marketing decisions
or enter into strategic business combinations that could have a negative effect
on our business, revenues, financial condition or results of operations for any
number of quarterly periods. For example, we intend to significantly expand our
development and engineering expenses to improve our Internet-based purchasing
solution. In addition, in order to accelerate the promotion of the Chemdex
brand, we intend to increase our marketing budget significantly. These increases
in expenses may negatively affect our results of operations for a number of
quarterly periods and we cannot assure that these measures will increase our
revenues.
Due to our relatively short operating history we have limited
meaningful historical financial data upon which to base our planned operating
expenses. Accordingly, our expense levels are based in part on our expectations
as to future revenues from new customers and are relatively fixed in the short
term. We cannot be certain that we will be able to accurately predict our
revenues, particularly in light of our limited operating history, the intense
competition in the life sciences industry, and the resulting uncertainty as to
the success of our business model. If we fail to accurately predict revenues in
relation to fixed expense levels and we are unable to adjust our operating
expenses in a timely manner in response to lower-than-expected revenues, our
results of operations and financial condition could be negatively affected.
26
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There has been no prior market for our common stock and we expect the price of
our common stock to be volatile
Prior to the initial public offering, you could not buy or sell our
common stock publicly. An active public market for our common stock may not
develop or be sustained. Although the initial public offering price was
determined based on several factors, the market price after the offering may
vary from the initial offering price. The market price of the common stock may
fluctuate significantly in response to a number of factors, some which are
beyond our control, including:
. quarterly variations in our operating results;
. changes in estimates of our financial performance by securities
analysts;
. changes in market valuation of Internet commerce companies
generally;
. announcements by us of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;
. loss of a major customer, supplier or strategic partner, or
failure to complete a sale of our purchasing solution to a
significant customer;
. additions or departures of any of our key personnel;
. future sales of our common stock; and
. stock market price and volume fluctuations, which are
particularly common among highly volatile securities of Internet
companies.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could have a negative effect on our business, results of
operations and financial condition.
Our business will suffer if the life sciences industry does not accept Internet
solutions
Business-to-business e-commerce is a new and emerging business
practice that remains largely untested in the marketplace. Growth in the demand
for our Internet-based purchasing solution and services depends on the adoption
of e-commerce and Internet solutions by life sciences industry participants,
which requires the acceptance of a new way of conducting business and purchasing
supplies. Our business could suffer dramatically if e-commerce and Internet
solutions are not accepted or not perceived to be effective.
The Internet may not prove to be a viable commercial marketplace for
the life sciences industry for a number of reasons, including:
. inadequate development of the necessary infrastructure for
Internet-based communications within life sciences organizations;
. security and confidentiality concerns of customers and suppliers;
. lack of development of complementary products, such as high-speed
modems and high-speed communication lines;
. implementation of competing purchasing solutions;
. lack of human contact that current, traditional suppliers
provide; and
. governmental regulation.
27
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The accelerated growth and increasing volume of Internet traffic may cause
performance problems that may slow adoption of our Internet-based purchasing
solution and the Chemdex Marketplace
The growth of Internet traffic to very high volumes of use over a
relatively short period of time has caused frequent periods of decreased
Internet performance, delays and, in some cases, system outages. This decreased
performance is caused by limitations inherent in the technology infrastructure
supporting the Internet and the internal networks of Internet users. If Internet
usage continues to grow rapidly, the infrastructure of the Internet and its
users may be unable to support the demands of growing e-commerce usage, and the
Internet's performance and reliability may decline. If our existing or potential
enterprise and research customers experience frequent outages or delays on the
Internet, the adoption or use of our Internet-based, e-commerce purchasing
solution may grow more slowly than we expect or even decline. Our ability to
increase the speed and reliability of our Internet-based purchasing solution is
limited by and depends upon the reliability of both the Internet and the
internal networks of our existing and potential customers. As a result, if
improvements in the infrastructure supporting both the Internet and the internal
networks of our enterprise customers and their researchers are not made in a
timely fashion, we may have difficulty obtaining new customers, or maintaining
our existing customers, either of which could reduce our potential revenues and
have a negative impact on our business, results of operations and financial
condition.
Security and disruption problems with the Internet or transacting business over
the Internet may inhibit the growth of our Internet-based purchasing solution
The secure transmission of confidential information over the Internet
is essential to maintaining customer and supplier confidence in our Chemdex
Marketplace. Customers generally are concerned with security and privacy on the
Internet and any publicized security problems could inhibit the growth of the
Internet, and therefore our purchasing solution, as a means of conducting
transactions. Substantial security breaches on our system could significantly
harm our business. A party that is able to circumvent our security systems could
misappropriate proprietary information or cause interruptions in our operations.
We incur substantial expense to protect against and remedy security breaches and
their consequences. Despite the implementation of security measures, our
networks may be vulnerable to unauthorized and illegal access, computer viruses
and other disruptive problems. Eliminating computer viruses and alleviating
other security problems may require interruptions, delays or cessation of
service to users accessing our solution.
Internet service providers and on-line service providers have in the
past experienced, and may in the future experience, interruptions in service as
a result of the accidental or intentional actions of Internet users, current and
former employees or others. We may be required to expend significant capital or
other resources to protect against the threat of security breaches or to
alleviate problems caused by these breaches. Although we intend to continue to
implement industry-standard security measures, we cannot be certain that
measures implemented by us will not be circumvented in the future.
If we experience a security breach that results in the
misappropriation of proprietary information maintained in our systems or if we
experience interruptions in our service, our reputation and brand may be damaged
and we may be exposed to a risk of loss or litigation and possible liability.
Damage to our reputation and brand could cause us to lose suppliers and
customers and negatively affect our business, results of operations and
financial condition. Our insurance policies may not be adequate to reimburse us
for losses caused by security breaches or service disruption.
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System failure may cause interruption of our services
The performance of our server and networking hardware and software
infrastructure is critical to our business and reputation and our ability to
process transactions, provide high quality customer service, and attract and
retain customers, suppliers, users and strategic partners. Currently our
infrastructure and systems are located at one site at Exodus Communications in
Sunnyvale, California. We anticipate adding a mirror site at a different,
distant location. Until then, we depend on our single-site infrastructure and
any disruption to this infrastructure resulting from a natural disaster or other
event could result in an interruption in our service, fewer transactions and, if
sustained or repeated, could impair our reputation and the attractiveness of our
services.
Our systems and operations are vulnerable to damage or interruption
from human error, natural disasters, power loss, telecommunications failures,
break-ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. We do not have a formal disaster recovery plan or alternative provider
of hosting services. In addition, we do not carry sufficient business
interruption insurance to compensate us for losses that could occur. Any failure
on our part to expand our system or Internet infrastructure to keep up with the
demands of our customers and users, or any system failure that causes an
interruption in service or a decrease in responsiveness of our Internet-based
purchasing solution or web site, could result in fewer transactions and, if
sustained or repeated, could impair our reputation and the attractiveness of our
brand name, which would adversely affect our business, revenues, financial
condition and results of operations.
We face year 2000 risks associated with our own systems and those of our
customers, suppliers and the Internet
Significant uncertainty exists concerning the potential costs and
effects associated with any year 2000 compliance problems. Any year 2000
compliance problems faced by us, our customers, suppliers and strategic partners
could have a negative effect on our business, revenues, and results of
operations and financial condition. In addition, our ability to operate is
dependent upon delivery of accurate, electronic information via the Internet. To
the extent year 2000 issues result in the long-term inoperability of the
Internet, the Chemdex Marketplace or the systems of VWR, our business, revenues,
financial condition and results of operations could be seriously harmed.
Although we believe that our internally developed applications and
systems are designed to be year 2000 compliant, we use third party equipment and
software that may not be year 2000 compliant. In addition, until some of the
billing and cash collection functions for spot buying services are transitioned
to Chemdex, we are dependent upon VWR's systems for receiving payment for
products purchased using the spot buying services. Failure of our applications
and services, VWR's billing and collection system, or third party equipment and
software that we use, to be year 2000 compliant could result in the Chemdex
Marketplace not being used for purchasing life sciences research products, the
termination of our customer agreements or in liability for damages, any of which
could have a material adverse effect on our business, results of operations and
financial condition. Many of our customers' systems with which the Chemdex
Marketplace integrates may not yet be year 2000 compliant. In addition, our
suppliers' systems may not be year 2000 compliant. Any negative effects on our
customers' or suppliers' systems as a result of the year 2000 problem, or
unknown, non-compliance of our own systems, could have a negative effect on our
business, results of operations and financial condition and we do not have a
formal contingency plan to address year 2000 issues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."
We may require additional capital for our operations that could have a negative
effect on your investment
We currently anticipate that the net proceeds from the intial public
offering, together with our existing borrowing arrangements and available
funds will be sufficient to meet our anticipated needs for working capital and
capital expenditures for at least the next 12 months. This is a forward-
looking statement that is subject to risks and uncertainties and actual
results may differ materially from those described in this forward-looking
statement. We may need to raise additional funds in the future in order to
fund rapid expansion, to pursue customer sales and implementation, to develop
new or enhanced solutions and services, to respond to competitive pressures or
to acquire complementary businesses, technologies or services.
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If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced, stockholders may experience additional dilution and these securities
may have powers, preferences and rights that are senior to those of the rights
of our common stock. We cannot be certain that additional financing will be
available on terms favorable to us, if at all. If adequate funds are not
available or not available on acceptable terms, we may be unable to fund our
expansion, promote our brand identity, take advantage of unanticipated
acquisition opportunities, develop or enhance services or respond to competitive
pressures. Any inability to do so could have a negative effect on our business,
revenues, financial condition and results of operations.
Our planned international expansion may make it more difficult to manage our
business
We expect to enter the international market. To do so, we plan to
establish international operations, hire additional personnel and establish
relationships with additional suppliers and partners. This expansion will
require significant management attention and financial resources and could have
a negative effect on our business, revenues, financial condition and results of
operations. We cannot assure you that we will be able to create or sustain
international demand for our Internet-based purchasing solution and services. In
addition, our international business may be subject to a variety of risks,
including applicable government regulation, difficulties in collecting
international accounts receivable, longer payment cycles, increased costs
associated with maintaining international marketing efforts, the introduction of
non-tariff barriers and higher duty rates and difficulties in enforcement of
contractual obligations and intellectual property rights. We cannot assure you
that these factors will not have a negative effect on any future international
sales and, consequently, on our business, results of operations and financial
condition.
We may be exposed to product liability claims
We face potential liability for claims based on the type and adequacy
of the information and data that we obtain from suppliers and make available,
and the nature of the products that we sell and distribute utilizing the
Internet, including claims for breach of warranty, product liability,
misrepresentation, violation of governmental regulations and other commercial
claims. In particular, we bear the risk of liability for product loss, spill, or
release, and resulting damages to persons and property during delivery by the
supplier to the customer and return by the customer to the supplier. We do not
pass through the manufacturers' warranties on the products we distribute.
However, we bear the risk of loss of revenue from the product sale if a
purchaser does not pay for a defective product. Although we maintain general
liability insurance, our insurance may not cover some claims, penalties, or
spills, is subject to policy limits and exclusions, and may not be adequate to
fully indemnify us or our employees for any civil, governmental or criminal
liability that may be imposed. Furthermore, this insurance may not be available
at commercially reasonable rates in the future. Any liability not covered by our
insurance or in excess of our insurance coverage could have a negative effect on
our business, results of operations and financial condition. Our liability is
potentially greater with respect to sales to researchers and others that are not
affiliated with an enterprise customer.
We also seek to obtain indemnification from our suppliers against some
of these claims. However, the scope of the indemnification is limited, a few of
our suppliers have not agreed to indemnify us and some suppliers may be unable
or unwilling to indemnify us in the future. In addition, we are not in a
position to monitor our suppliers' activities. Therefore, we are exposed to
liability and risk for these claims.
We depend on our intellectual property rights and are subject to the risk of
infringement
Our intellectual property is important to our business, and we seek to
protect our intellectual property through copyrights, trademarks, trade secrets,
confidentiality provisions in our customer, supplier and strategic relationship
agreements, nondisclosure agreements with third parties, and invention
assignment agreements with our employees and contractors. We cannot assure that
measures we take to protect our intellectual property will be successful or that
third parties will not develop alternative purchasing solutions that do not
infringe upon our intellectual property. In addition, we could be subject to
intellectual property infringement claims by others. Our failure to protect
against misappropriation of our intellectual property, or claims that we are
infringing the intellectual property of third parties could have a negative
effect on our business, revenues, financial condition and results of operations.
30
<PAGE>
Regulation or taxation of the Internet or transacting business over the Internet
may inhibit the growth of our Internet-based purchasing solution
Due to the increasing popularity and use of the Internet and of e-
commerce, it is possible that a number of taxes, laws and regulations may be
adopted in the U.S. and abroad with particular applicability to the Internet and
e-commerce transactions. It is possible that governments will adopt taxes and
enact legislation that may be applicable to us in areas such as content, product
distribution, network security, encryption and the use of key escrow, data and
privacy protection, electronic authentication or "digital" signatures, illegal
and harmful content, access charges and re-transmission activities. Moreover,
the applicability to the Internet of existing laws governing issues such as
property ownership, content, taxation, defamation and personal privacy is
uncertain. Taxes, laws or regulations may limit the growth of the Internet,
dampen e-commerce and reduce the number of transactions, increase our cost of
doing business or increase our legal exposure. Any of these factors could have a
negative effect on our business, revenues, and results of operations and
financial condition.
Item 3. Qualitative and Quantitative Disclosure about Market Risk
Our sales from inception to date have been made to U.S. Customers and,
as a result, we have not had any exposure to factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. However,
in future periods, we expect to sell in foreign markets. As our sales are made
in U.S. dollars, a strengthening of the U.S. dollar could make our products less
competitive in foreign markets. At June 30, 1999, our cash and cash equivalents
consisted primarily of money market funds and commercial paper held by large
institutions in the U.S.
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
In April 1999, Chemdex issued 2,538,405 shares of Common Stock valued
at $13.9 million to VWR in consideration for the Strategic Relationship
Agreement and the transfer to Chemdex of information concerning VWR customers.
The issuance of the securities was deemed to be exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving any public offering. Based on
representations made to Chemdex by the investor, information supplied by Chemdex
to the investor and the relationship between Chemdex and the investor, the
investor had adequate access to information about Chemdex. In addition, based on
representations made to Chemdex by the investor, the investor is an accredited
investor within the meaning of Rule 501 of Regulation D under the Securities Act
and was able to bear the financial risk of its investment. The investor
represented its intentions to acquire the securities for investment only and not
with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities. Chemdex did not make any
offer to sell the securities by means of any general solicitation or general
advertising within the meaning of Rule 502 of Regulation D under the Securities
Act.
On April 30, 1999, Chemdex issued and sold an additional 399,892
shares of its Series C Preferred Stock at a price of $5.716 per share. All of
these shares were converted to common shares upon the closing of the Company's
initial public offering of common stock. The issuance of the securities was
deemed to be exempt from registration under the Securities Act in reliance on
Rule 506 promulgated under Regulation D of the Securities Act as transactions by
an issuer not involving any public offering within the meaning of Section 4(2).
Based on representations made to Chemdex by the investors, information supplied
by Chemdex to the investors and the relationship between Chemdex and the
investors, all investors had adequate access to information about Chemdex.
Chemdex did not make any offer to sell the securities by means of any general
solicitation or general advertising within the meaning of Rule 502 of Regulation
D under the Securities Act. The investors represented their intentions to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the securities. Based on representations made to Chemdex by the investors, the
investors were accredited investors within the meaning of Rule 506 of Regulation
D under the Securities Act. There were no more than 35 purchasers of securities,
as the number is calculated in Rule 501(e) of Regulation D. Based on
representations made to Chemdex by the investors, the investors were able to
bear the financial risk of their investment.
31
<PAGE>
On May 11, 1999, Chemdex entered into a Common Stock Purchase Agreement
with Biotechnology Industry Organization, pursuant to which Biotechnology
Industry Organization purchased 187,500 shares of Common Stock at a price per
share of $0.0002. The issuance of the securities was deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as a transaction by an issuer not involving any public offering.
Based on representations made to Chemdex by the investor, information supplied
by Chemdex to the investor and the relationship between Chemdex and the
investor, the investor had adequate access to information about Chemdex. In
addition, based on representations made to Chemdex by the investor, the investor
is an accredited investor within the meaning of Rule 501 of Regulation D under
the Securities Act and was able to bear the financial risk of its investment.
The investor represented its intention to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the securities. Chemdex did not
make any offer to sell the securities by means of any general solicitation or
general advertising within the meaning of Rule 502 of Regulation D under the
Securities Act.
During the three months ended June 30, 1999, Chemdex granted stock options
to purchase 1,576,680 shares of common stock at prices ranging from $5.00 to
$10.00 per share to approximately 144 employees, consultants and directors
pursuant to its 1998 Stock Plan. As of June 30, 1999, Chemdex had granted stock
options to purchase a total of 4,565,617 shares of common stock at exercise
prices ranging from $0.10 to $10.00 per share to a total of approximately 180
employees, consultants and directors pursuant to its 1998 Stock Plan. The
issuances described were deemed exempt from registration under the Securities
Act in reliance upon Rule 701 promulgated under the Securities Act.
Item 4. Submission of Matters to Vote of Security Holders.
On April 29, 1999 the shareholders constituting at least a) a majority
of the outstanding Common and Preferred Stock of the Company, voting together as
a single class, and b) a majority of the Series A, Series B, and Series C
Preferred Stock, voting together as a single class, adopted the following
resolutions by written consent:
. that the Certificate of Incorporation of the Company be amended to allow up
to 187,500 shares issued related to a strategic relationship be exempt from
triggering price-based anti-dilution and also to increase the number of
shares issuable to employees, consultants or directors by 1,500,000 shares
to be exempt from triggering price-based anti-dilution;
. that the number of shares available for grant under the Company's 1998
Stock Plan be increased by 1,500,000 shares;
The number of votes cast for, and withheld (not solicited) from the
approval of each matter is set forth below:
For Withheld
--- --------
14,769,328 8,934,413
32
<PAGE>
On July 6, 1999 the shareholders constituting a) a majority of the
shares of the outstanding Common Stock, b) a majority of the shares of the
outstanding Series A Preferred Stock, c) 66-2/3% of the shares of the
outstanding Series B Preferred Stock, and d) 60% of the outstanding Series C
Preferred Stock of the Company adopted the following resolutions by written
consent:
. that the Certificate of Incorporation of the Company be amended to effect a
reverse split of the Company's capital stock at a ratio of 2 to 1;
. that the Certificate of Incorporation of the Company be amended and
restated substantially in the form filed as Exhibit 3.2 hereto;
. that the Bylaws of the Company be amended and restated substantially in the
form filed as Exhibit 3.4 hereto;
. that the Employee Stock Purchase Plan, which provides for the issuance and
sale of 750,000, plus annual increases, shares of common stock, be adopted
and approved;
. that the 1999 Directors' Stock Option Plan, which provides for the issuance
of 250,000 shares be adopted and approved;
. that the 1998 Stock plan be amended to increase the number of shares of
Common Stock reserved for issuance under the Plan by 1,250,000 to
6,125,000;
The number of votes cast for, and withheld (not solicited) from the
approval of each matter is set forth below:
For Withheld
--- --------
18,398,202 5,877,312
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
The following is a list of exhibits filed as part of this Report on
Form 10-Q. Where indicated by footnote, exhibits that were previously
filed are incorporated by reference.
Exhibit
Number Description
------ -----------
3.2 Amended and Restated Certificate of Incorporation of
Chemdex (1)
3.4 Amended and Restated Bylaws of Chemdex (1)
4.1 Specimen Stock Certificate (1)
4.2 Third Amended and Restated Investors' Rights Agreement
dated March 24, 1999 (1)
4.3 Amendment dated May 12, 1999 to Third Amended and
Restated Investors' Rights Agreement (1)
4.4 Common Stock Purchase Warrant dated July 27, 1999 to
purchase 25,000 shares of Chemdex common stock issued
to Alza Corporation *
10.1 Form of Indemnification Agreement between Chemdex and
each of its officers and directors (1)
33
<PAGE>
Exhibit
Number Description
------ -----------
10.2 Form of Change of Control Agreement between Chemdex, each of
its officers and certain employees (1)
10.3 Change of Control Agreement between Chemdex and Robert A.
Swanson. (1)
10.4 Change of Control Agreement between Chemdex and Charles R.
Burke (1)
10.5 1998 Stock Plan, as amended, and form of option agreement
(1)
10.6 1999 Employee Stock Purchase Plan and form of subscription
agreement (1)
10.7 1999 Directors' Stock Plan (1)
10.8 Standard Office Lease dated June 11, 1998 between Chemdex
and Fabian Partners II, a California General Partnership, as
amended. (1)
10.9 Master Lease Agreement dated January 20, 1999, as amended,
between Chemdex and Comdisco, Inc. (1)
10.10 Starter Kit Loan and Security Agreement dated February 18,
1998 between Chemdex and Imperial Bank (1)
10.11 Warrant Agreement to Purchase Shares of Series B Preferred
Stock of Chemdex dated January 20, 1999 between Chemdex and
Comdisco, Inc. (1)
10.12 Common Stock Purchase Warrant to Purchase Shares of Common
Stock of Chemdex dated March 24, 1999 between Chemdex and
Galen Partners III, L.P. (1)
10.13 Common Stock Purchase Warrant to Purchase Shares of Common
Stock of Chemdex dated March 24, 1999 between Chemdex and
Galen Partners International III, L.P. (1)
10.14 Common Stock Purchase Warrant to Purchase Shares of Common
Stock of Chemdex dated March 24, 1999 between Chemdex and
Galen Employee Fund III, L.P. (1)
10.15 Electronic Commerce Agreement dated January 5, 1998 between
Chemdex and Genentech, Inc. (1) (2)
10.16 Standstill Agreement dated April 23, 1999 between Chemdex
and VWR Scientific Products Corporation (1) (2)
10.17 Strategic Relationship Agreement dated April 30, 1999
between Chemdex and VWR Scientific Products Corporation (1)
(2)
10.18 Joint Marketing Agreement dated May 11, 1999 between Chemdex
and Biotechnology Industry Organization (1) (2)
10.19 Payment Plan Agreement dated February 22, 1999 and related
agreements between Chemdex and Oracle Credit Corporation (1)
10.20 Warrant Purchase Agreement dated July 27, 199 between
Chemdex and Alza Corporation *
27.1 Financial Data Schedule *
34
<PAGE>
* Filed herewith.
(1) Filed as an exhibit to the Registrant's Registration Statement of
Form S-1 (Registration No. 333-78505) filed with the Commission
on May 14, 1999, as amended, and incorporated herein by
reference.
(2) Portions of this Exhibit have been omitted and filed separately
with the Secretary of the Commission pursuant to the Registrant's
Application Requesting Confidential Treatment under Rule 406
under the Act.
b) Reports on Form 8-K
None.
35
<PAGE>
Signature
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 on August 16, 1999.
Chemdex Corporation
By /s/ James G. Stewart
---------------------------
James G. Stewart
Chief Financial Officer
(Principal Financial Officer)
36
<PAGE>
Exhibit 4.4
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE
OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
- --------------------------------------------------------------------------------
Warrant No. CS-4 Number of Shares: 25,000
Date of Issuance: July 27, 1999 (subject to adjustment)
Chemdex Corporation
Common Stock Purchase Warrant
-----------------------------
Chemdex Corporation (the "Company"), for value received, hereby certifies
-------
that ALZA Corporation, or its registered assigns (the "Registered Holder"), is
-----------------
entitled, subject to the terms set forth below, to purchase from the Company, at
any time after the date hereof and on or before the Expiration Date (as defined
in Section 5 below), up to 25,000 shares (as adjusted from time to time pursuant
to the provisions of this Warrant) of Common Stock of the Company, at a purchase
price of $15.00 per share. The shares purchasable upon exercise of this Warrant
and the purchase price per share, as adjusted from time to time pursuant to the
provisions of this Warrant, are sometimes hereinafter referred to as the
"Warrant Stock" and the "Purchase Price," respectively.
------------- --------------
This Warrant is non-forfeitable and issued pursuant to a Warrant Purchase
Agreement dated July 27, 1999 between the Company and the Registered Holder (the
"Purchase Agreement") and is subject to the terms and conditions of the Purchase
------------------
Agreement.
1. Exercise.
--------
(a) Manner of Exercise. Subject to the provisions of subsection 1(e)
------------------
below, this Warrant may be exercised by the Registered Holder at any time after
the issuance of this Warrant, in whole or in part, by surrendering this Warrant,
with the purchase form appended hereto as Exhibit A duly executed by such
---------
Registered Holder or by such Registered Holder's duly authorized attorney, at
the principal office of the Company, or at such other office or agency as the
Company may designate, accompanied by payment in full of the Purchase Price
payable in respect of the number of shares of Warrant Stock purchased upon such
exercise. The Purchase Price may be paid by cash, check, wire transfer or by
the surrender of promissory notes or other instruments representing indebtedness
of the Company to the Registered Holder.
(b) Effective Time of Exercise. Each exercise of this Warrant shall
--------------------------
be deemed to have been effected immediately prior to the close of business on
the day on which this Warrant shall have been surrendered to the Company as
provided in Section 1(a) above. At such time, the person or persons in whose
name or names any certificates for Warrant Stock shall be issuable upon such
exercise as provided in Section 1(d) below shall be deemed to have become the
holder or holders of record of the Warrant Stock represented by such
certificates.
<PAGE>
(c) Net Issue Exercise.
------------------
(i) In lieu of exercising this Warrant in the manner provided
above in Section 1(a), the Registered Holder may elect to receive shares equal
to the value of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the principal office of the Company together with
notice of such election in which event the Company shall issue to holder a
number of shares of Common Stock computed using the following formula:
X = Y (A - B)
---------
A
Where X = The number of shares of Common Stock to be issued to the
Registered Holder.
Y = The number of shares of Common Stock purchasable under this
Warrant (at the date of such calculation).
A = The fair market value of one share of Common Stock (at the date of
such calculation).
B = The Purchase Price (as adjusted to the date of such calculation).
(ii) For purposes of this Section 1(c), the fair market value
of one share of Common Stock on the date of calculation shall mean:
(A) if the Company's Common Stock is traded on a
securities exchange or The Nasdaq Stock Market or actively traded over-the-
counter:
(1) if the Company's Common Stock is traded on a
securities exchange or The Nasdaq Stock Market, the fair market value shall be
deemed to be the average of the closing prices over the three (3) trading-day
period ending the trading day before date of calculation; or
(2) if the Company's Common Stock is actively traded
over-the-counter, the fair market value shall be deemed to be the average of
the closing bid or sales price (whichever is applicable) over the three (3)
trading-day period ending the trading day before the date of calculation; or
(B) if (A) is not applicable, the fair market value shall
be at the highest price per share which the Company could obtain on the date
of calculation from a willing buyer (not a current employee or director) for
shares of Common Stock sold by the Company, from authorized but unissued
shares, as determined in good faith by the Board of Directors, unless the
Company is at such time subject to an acquisition as described in Section 6(b)
below, in which case the fair market value per share of Common Stock shall be
deemed to be the value of the consideration per share received by the holders
of such stock pursuant to such acquisition.
(d) Delivery to Holder. As soon as practicable after the exercise of
------------------
this Warrant in whole or in part, and in any event within ten (10) days
thereafter, the Company at its expense will cause to be issued in the name of,
and delivered to, the Registered Holder, or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct:
-2-
<PAGE>
(i) a certificate or certificates for the number of shares of
Warrant Stock to which such Registered Holder shall be entitled, and
(ii) in case such exercise is in part only, a new warrant or
warrants (dated the date hereof) of like tenor, calling in the aggregate on
the face or faces thereof for the number of shares of Warrant Stock equal
(without giving effect to any adjustment therein) to the number of such shares
called for on the face of this Warrant minus the number of such shares
purchased by the Registered Holder upon such exercise as provided in Section
1(a) above.
2. Adjustments.
-----------
(a) Stock Splits and Dividends. If outstanding shares of the
--------------------------
Company's Common Stock shall be subdivided into a greater number of shares or a
dividend in Common Stock shall be paid in respect of Common Stock, the Purchase
Price in effect immediately prior to such subdivision or at the record date of
such dividend shall simultaneously with the effectiveness of such subdivision or
immediately after the record date of such dividend be proportionately reduced.
If outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Purchase Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased. When any adjustment is required to be made in the
Purchase Price, the number of shares of Warrant Stock purchasable upon the
exercise of this Warrant shall be changed to the number determined by dividing
(i) an amount equal to the number of shares issuable upon the exercise of this
Warrant immediately prior to such adjustment, multiplied by the Purchase Price
in effect immediately prior to such adjustment, by (ii) the Purchase Price in
effect immediately after such adjustment.
(b) Reclassification, Etc. In case of any reclassification or change
----------------------
of the outstanding securities of the Company or of any reorganization of the
Company (or any other corporation the stock or securities of which are at the
time receivable upon the exercise of this Warrant) or any consolidation or
merger by the Company with another entity or the conveyance of all or
substantially all of the Company's assets, or any similar corporate
reorganization on or after the date hereof, then and in each such case the
holder of this Warrant, upon the exercise hereof at any time after the
consummation of such reclassification, change, reorganization, merger or
conveyance, shall be entitled to receive, in lieu of the stock or other
securities and property receivable upon the exercise hereof prior to such
consummation, the stock or other securities or property to which such holder
would have been entitled upon such consummation if such holder had exercised
this Warrant immediately prior thereto, all subject to further adjustment as
provided in Section 2(a); and in each such case, the terms of this Section 2
shall be applicable to the shares of stock or other securities properly
receivable upon the exercise of this Warrant after such consummation.
(c) Adjustment Certificate. When any adjustment is required to be made
----------------------
in the Warrant Stock or the Purchase Price pursuant to this Section 2, the
Company shall promptly mail to the Registered Holder a certificate setting forth
(i) a brief statement of the facts requiring such adjustment, (ii) the Purchase
Price after such adjustment and (iii) the kind and amount of stock or other
securities or property into which this Warrant shall be exercisable after such
adjustment.
3. Limitations on Transfer. In addition to any other limitation on
-----------------------
transfer created by applicable securities laws, the Registered Holder shall
not assign, encumber or dispose of any interest except in compliance with the
provisions below and applicable securities laws.
-3-
<PAGE>
(a) Unregistered Security. Each holder of this Warrant acknowledges
---------------------
that this Warrant and the Warrant Stock have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and agrees not to
--------------
sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this
Warrant or any Warrant Stock issued upon its exercise in the absence of (i) an
effective registration statement under the Act as to this Warrant or such
Warrant Stock and registration or qualification of this Warrant or such Warrant
Stock under any applicable U.S. federal or state securities law then in effect
or (ii) an opinion of counsel, satisfactory to the Company, that such
registration and qualification are not required. Each certificate or other
instrument for Warrant Stock issued upon the exercise of this Warrant shall bear
a legend substantially to the foregoing effect.
(b) Transferability. Subject to the provisions of Section 3(a) hereof,
---------------
this Warrant and all rights hereunder are transferable, in whole or in part,
upon surrender of the Warrant with a properly executed assignment (in the form
of Exhibit B hereto) at the principal office of the Company; provided, however,
--------- -------- -------
that this Warrant may not be transferred in part unless the transferee acquires
the right to purchase at least 10,000 shares (as adjusted pursuant to Section 2)
of Warrant Stock hereunder.
(d) Warrant Register. The Company will maintain a register
----------------
containing the names and addresses of the Registered Holders of this Warrant.
Until any transfer of this Warrant is made in the warrant register, the Company
may treat the Registered Holder of this Warrant as the absolute owner hereof for
all purposes; provided, however, that if this Warrant is properly assigned in
-------- -------
blank, the Company may (but shall not be required to) treat the bearer hereof as
the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary. Any Registered Holder may change such Registered Holder's address as
shown on the warrant register by written notice to the Company requesting such
change.
4. No Impairment. The Company will not, by amendment of its charter or
-------------
through reorganization, consolidation, merger, dissolution, sale of assets or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but will (subject to Section 13 below) at
all times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the holder of this Warrant against impairment.
5. Termination. This Warrant (and the right to purchase securities upon
-----------
exercise hereof) shall terminate upon the fifth anniversary of the date of this
Warrant (the "Expiration Date").
---------------
6. Notices of Certain Transactions. In case:
-------------------------------
(a) the Company shall take a record of the holders of its Common Stock
(or other stock or securities at the time deliverable upon the exercise of this
Warrant) for the purpose of entitling or enabling them to receive any dividend
or other distribution, or to receive any right to subscribe for or purchase any
shares of stock of any class or any other securities, or to receive any other
right, to subscribe for or purchase any shares of stock of any class or any
other securities, or to receive any other right, or
(b) of any capital reorganization of the Company, any reclassification
of the capital stock of the Company, any consolidation or merger of the Company,
any consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the surviving
entity), or any transfer of all or substantially all of the assets of the
Company, or
-4-
<PAGE>
(c) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or such other stock or securities at the
time deliverable upon such reorganization, reclassification, consolidation,
merger, transfer, dissolution, liquidation or winding-up) are to be determined.
Such notice shall be mailed at least ten (10) days prior to the record date or
effective date for the event specified in such notice.
7. Reservation of Stock. The Company will at all times reserve and keep
--------------------
available, solely for the issuance and delivery upon the exercise of this
Warrant, such shares of Warrant Stock and other stock, securities and property,
as from time to time shall be issuable upon the exercise of this Warrant.
8. Exchange of Warrants. Upon the surrender by the Registered Holder of
--------------------
the Warrant, properly endorsed, to the Company at the principal office of the
Company, the Company will, subject to the provisions of Section 3 hereof, issue
and deliver to or upon the order of such Holder, at the Company's expense, a new
Warrant of like tenor, in the name of such Registered Holder or as such
Registered Holder (upon payment by such Registered Holder of any applicable
transfer taxes) may direct, calling in the aggregate on the face or faces
thereof for the number of shares of Common Stock called for on the face of the
Warrant so surrendered.
9. Replacement of Warrants. Upon receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
10. Notices. Any notice required or permitted by this Warrant shall be in
-------
writing and shall be deemed sufficient upon receipt, when delivered personally
or by courier, overnight delivery service or confirmed facsimile, or forty-eight
(48) hours after being deposited in the regular mail as certified or registered
mail (airmail if sent internationally) with postage prepaid, addressed (a) if to
the Registered Holder, to the address of the Registered Holder most recently
furnished in writing to the Company and (b) if to the Company, to the address
set forth below or subsequently modified by written notice to the Registered
Holder.
11. No Rights as Stockholder. Until the exercise of this Warrant, the
------------------------
Registered Holder of this Warrant shall not have or exercise any rights by
virtue hereof as a stockholder of the Company.
12. No Fractional Shares. No fractional shares of Common Stock will be
--------------------
issued in connection with any exercise hereunder. In lieu of any fractional
shares which would otherwise be issuable, the Company shall pay cash equal to
the product of such fraction multiplied by the fair market value of one share of
Common Stock on the date of exercise, as determined in good faith by the
Company's Board of Directors.
-5-
<PAGE>
13. Amendment or Waiver. Any term of this Warrant may be amended or
-------------------
waived only by an instrument in writing signed by the party against which
enforcement of the amendment or waiver is sought.
14. Headings. The headings in this Warrant are for purposes of reference
--------
only and shall not limit or otherwise affect the meaning of any provision of
this Warrant.
15. Governing Law. This Warrant shall be governed, construed and
-------------
interpreted in accordance with the laws of the State of California, without
giving effect to principles of conflicts of law.
-6-
<PAGE>
Chemdex Corporation
By:
----------------------------------------
David P. Perry
President and Chief Executive Officer
Address: 3950 Fabian Way
Palo Alto, CA 94303
Fax Number: (650) 813-0304
AGREED AND ACCEPTED:
ALZA CORPORATION
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Address:
Fax Number:
SIGNATURE PAGE TO COMMON STOCK PURCHASE WARRANT
<PAGE>
EXHIBIT A
---------
PURCHASE FORM
-------------
To: Chemdex Corporation Dated:
The undersigned, pursuant to the provisions set forth in the attached
Warrant No. CS-4, hereby irrevocably elects to purchase _______ shares of the
Common Stock covered by such Warrant and herewith makes payment of $_________,
representing the full purchase price for such shares at the price per share
provided for in such Warrant.
The undersigned acknowledges that it has reviewed the representations and
warranties contained in subsections 3(b)-(f) of the Purchase Agreement (as
defined in the Warrant) and by its signature below hereby makes such
representations and warranties to the Company. Defined terms contained in such
representations and warranties shall have the meanings assigned to them in the
Purchase Agreement, provided that the term "Purchaser" shall refer to the
--------
undersigned and the term "Securities" shall refer to the Warrant Stock.
The undersigned further acknowledges that it has reviewed the market
standoff provisions set forth in Section 6 of the Purchase Agreement and agrees
to be bound by such provisions.
Signature:
-------------------------------
Name (print):
----------------------------
Title (if applic.)
-----------------------
Company (if applic.):
--------------------
<PAGE>
EXHIBIT B
---------
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, _________________________________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrant with respect to the number of shares of Common Stock covered thereby set
forth below, unto:
<TABLE>
<CAPTION>
Name of Assignee Address/Fax Number No. of Shares
---------------- ------------------ -------------
<S> <C> <C>
</TABLE>
Dated: Signature:
-------------- -------------------------
-------------------------
Witness:
-------------------------
<PAGE>
Exhibit 10.20
CHEMDEX CORPORATION
WARRANT PURCHASE AGREEMENT
--------------------------
This Warrant Purchase Agreement (the "Agreement") is made as of July 27,
---------
1999, by and between Chemdex Corporation, a Delaware corporation (the "Company")
-------
and ALZA Corporation (the "Purchaser").
---------
RECITALS
--------
The Company and Purchaser are negotiating a lease agreement (the "Lease
-----
Agreement") with respect to properties in Mountain View, California located at
- ---------
1500 & 1550 Plymouth and 1010 Joaquin (the "Properties"). In consideration for
----------
the continued good faith negotiation of the Lease Agreement and the right to
negotiate exclusively granted herein, the Company desires to issue and the
Purchaser desires to receive a warrant to purchase Common Stock of the Company
in substantially the form attached to this Agreement as Exhibit A (the
---------
"Warrant"). The Warrant and the equity securities issuable upon exercise of the
-------
Warrant are collectively referred to herein as the "Securities."
----------
AGREEMENT
---------
In consideration of the mutual promises contained herein and other good and
valuable consideration, receipt of which is hereby acknowledged, the parties to
this Agreement agree as follows:
1. Purchase and Sale of Warrant.
----------------------------
(a) Sale and Issuance of Warrant. Subject to the terms and conditions
----------------------------
of this Agreement, the Purchaser agrees to receive at the Closing and the
Company agrees to issue to the Purchaser a Warrant to purchase 25,000 shares of
Common Stock.
(b) Closing; Delivery. The purchase and sale of the Warrant shall
-----------------
take place at the offices of Venture Law Group, 2775 Sand Hill Road, Menlo Park,
California, at 6:00 a.m., on July 27, 1999, or at such other time and place as
the Company and the Purchaser mutually agree upon, orally or in writing (which
time and place are designated as the "Closing"). At the Closing, the Company
-------
shall deliver to the Purchaser the Warrant.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Purchaser that:
(a) Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted.
(b) Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement and the authorization, sale, issuance
and delivery of the Warrant, the shares of the Company's capital stock issuable
upon exercise of the Warrant, and the performance of all obligations of the
Company hereunder
<PAGE>
and thereunder has been taken or will be taken prior to the Closing. The
Agreement and the Warrant, when executed and delivered by the Company, shall
constitute valid and legally binding obligations of the Company, enforceable
against the Company in accordance with their terms except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and other laws of general application affecting enforcement of
creditors' rights generally, as limited by laws relating to the availability
of specific performance, injunctive relief, or other equitable remedies.
3. Representations and Warranties of the Purchaser. The Purchaser hereby
-----------------------------------------------
represents and warrants to the Company that:
(a) Purchase Entirely for Own Account. The Securities to be acquired
---------------------------------
by the Purchaser will be acquired for investment for the Purchaser's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and the Purchaser has no present intention of
selling, granting any participation in, or otherwise distributing the same. The
Purchaser has not been formed for the specific purpose of acquiring any of the
Securities.
(b) Disclosure of Information. The Purchaser is aware of the
-------------------------
Company's business affairs and financial condition and has acquired sufficient
information about the Company to reach an informed and knowledgeable decision to
acquire the securities.
(c) Restricted Securities. The Purchaser understands that the
---------------------
Securities have not been, and will not be, registered under the Securities Act,
by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Purchaser's representations as
expressed herein. The Purchaser understands that the Securities are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, the Purchaser must hold the Securities indefinitely
unless they are registered with the Securities and Exchange Commission and
qualified by state authorities, or an exemption from such registration and
qualification requirements is available. The Purchaser acknowledges that the
Company has no obligation to register or qualify the Securities for resale. The
Purchaser further acknowledges that if an exemption from registration or
qualification is available, it may be conditioned on various requirements
including, but not limited to, the time and manner of sale, the holding period
for the Securities, and on requirements relating to the Company which are
outside of the Purchaser's control, and which the Company is under no obligation
and may not be able to satisfy.
(d) Legends. The Purchaser understands that the Securities, and any
-------
securities issued in respect thereof or exchange therefor, may bear one or all
of the following legends:
(i) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
-2-
<PAGE>
(ii) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
(e) Accredited Investor. The Purchaser is an accredited investor as
-------------------
defined in Rule 501(a) of Regulation D promulgated under the Act.
(f) Foreign Investors. If the Purchaser is not a United States person
-----------------
(as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as
amended), the Purchaser hereby represents that it has satisfied itself as to the
full observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Securities or any use of this Agreement,
including (i) the legal requirements within its jurisdiction for the purchase of
the Securities, (ii) any foreign exchange restrictions applicable to such
purchase, (iii) any governmental or other consents that may need to be obtained
and (iv) the income tax and other tax consequences, if any, that may be relevant
to the purchase, holding, redemption, sale or transfer of the Securities. The
Purchaser's subscription and payment for, and his or her continued beneficial
ownership of the Securities, will not violate any applicable securities or other
laws of Purchaser's jurisdiction.
4. Conditions of the Purchaser's Obligations at Closing. The obligations
----------------------------------------------------
of the Purchaser to the Company under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of the Closing.
(b) Qualifications. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Securities pursuant to this Agreement shall be obtained and effective as of the
Closing.
5. Conditions of the Company's Obligations at Closing. The obligations of
--------------------------------------------------
the Company to the Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
(a) Representations and Warranties. The representations and
------------------------------
warranties of the Purchaser contained in Section 3 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the Closing.
(b) Qualifications. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Securities pursuant to this Agreement shall be obtained and effective as of the
Closing.
6. Lockup Agreement. The Purchaser agrees in connection with the
----------------
Company's initial public offering of securities that it shall execute the form
of Lockup agreement attached hereto as Exhibit B.
-3-
<PAGE>
7. Good Faith Negotiation. The parties agree that they will, in good
----------------------
faith, work together to negotiate and execute the Lease Agreement on
substantially the terms and conditions set forth in the letter of intent
previously executed by the parties as promptly as possible. The parties agree
that they shall negotiate exclusively with each other with respect to the lease
of the Properties at least until August 10, 1999.
8. Registration Rights. The Company agrees that, promptly after the
-------------------
Closing and in any event prior to 180 days after the Closing, it will use its
reasonable best efforts to grant "piggyback" registration rights with respect to
the shares issuable upon exercise of the Warrant to the Purchaser and shall (1)
recommend to the current holders of registration rights that such holders
execute documents necessary to grant such "piggyback" registration rights and
(2) upon receipt of the required consents of the current holders of registration
rights, grant "piggyback" registration rights in form reasonably satisfactory to
the parties hereto.
9. Miscellaneous.
-------------
(a) Successors and Assigns. The terms and conditions of this
----------------------
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
(b) Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
(c) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(d) Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
(e) Notices. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient upon receipt, when delivered
personally or by courier, overnight delivery service or confirmed facsimile, or
forty-eight (48) hours after being deposited in the U.S. mail as certified or
registered mail with postage prepaid, if such notice is addressed to the party
to be notified at such party's address or facsimile number as set forth below or
as subsequently modified by written notice.
(f) Finder's Fee. Each party represents that it neither is nor will
------------
be obligated for any finder's fee or commission in connection with this
transaction. The Purchaser agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Purchaser or any of its officers, employees,
or representatives is responsible. The Company agrees to indemnify and hold
harmless the Purchaser from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such
-4-
<PAGE>
liability or asserted liability) for which the Company or any of its officers,
employees or representatives is responsible.
(g) Amendments and Waivers. Any term of this Agreement may be amended
----------------------
or waived only with the written consent of the Company and the Purchaser. Any
amendment or waiver effected in accordance with this Section 9(g) shall be
binding upon the Purchaser and each transferee of the Securities, each future
holder of all such Securities, and the Company.
(h) Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith, in order to maintain the economic position enjoyed
by each party as close as possible to that under the provision rendered
unenforceable. In the event that the parties cannot reach a mutually agreeable
and enforceable replacement for such provision, then (i) such provision shall be
excluded from this Agreement, (ii) the balance of the Agreement shall be
interpreted as if such provision were so excluded and (iii) the balance of the
Agreement shall be enforceable in accordance with its terms.
(i) Entire Agreement. This Agreement, and the documents referred to
----------------
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof, and any and all other written or oral agreements
existing between the parties hereto are expressly canceled.
(j) Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE
------------------------
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED
UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
-5-
<PAGE>
The parties have executed this Warrant Purchase Agreement as of the date
first written above.
COMPANY:
CHEMDEX CORPORATION
By:
------------------------------------
David P. Perry, President and Chief
Executive Officer
Address: 3950 Fabian Way
Palo Alto, CA 94303
Facsimile Number: (650) 813-0304
PURCHASER:
ALZA CORPORATION
By:
------------------------------------
Name:
----------------------------------
(print)
Title:
---------------------------------
SIGNATURE PAGE TO WARRANT PURCHASE AGREEMENT
<PAGE>
EXHIBIT A
---------
FORM OF WARRANT
<PAGE>
EXHIBIT B
---------
FORM OF LOCKUP AGREEMENT
<PAGE>
Exhibit A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE
OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
- --------------------------------------------------------------------------------
Warrant No. CS-4 Number of Shares: 25,000
Date of Issuance: July 27, 1999 (subject to adjustment)
Chemdex Corporation
Common Stock Purchase Warrant
-----------------------------
Chemdex Corporation (the "Company"), for value received, hereby certifies
-------
that ALZA Corporation, or its registered assigns (the "Registered Holder"), is
-----------------
entitled, subject to the terms set forth below, to purchase from the Company, at
any time after the date hereof and on or before the Expiration Date (as defined
in Section 5 below), up to 25,000 shares (as adjusted from time to time pursuant
to the provisions of this Warrant) of Common Stock of the Company, at a purchase
price of $15.00 per share. The shares purchasable upon exercise of this Warrant
and the purchase price per share, as adjusted from time to time pursuant to the
provisions of this Warrant, are sometimes hereinafter referred to as the
"Warrant Stock" and the "Purchase Price," respectively.
------------- --------------
This Warrant is non-forfeitable and issued pursuant to a Warrant Purchase
Agreement dated July 27, 1999 between the Company and the Registered Holder (the
"Purchase Agreement") and is subject to the terms and conditions of the Purchase
------------------
Agreement.
1. Exercise.
--------
(a) Manner of Exercise. Subject to the provisions of subsection 1(e)
------------------
below, this Warrant may be exercised by the Registered Holder at any time after
the issuance of this Warrant, in whole or in part, by surrendering this Warrant,
with the purchase form appended hereto as Exhibit A duly executed by such
---------
Registered Holder or by such Registered Holder's duly authorized attorney, at
the principal office of the Company, or at such other office or agency as the
Company may designate, accompanied by payment in full of the Purchase Price
payable in respect of the number of shares of Warrant Stock purchased upon such
exercise. The Purchase Price may be paid by cash, check, wire transfer or by
the surrender of promissory notes or other instruments representing indebtedness
of the Company to the Registered Holder.
(b) Effective Time of Exercise. Each exercise of this Warrant shall
--------------------------
be deemed to have been effected immediately prior to the close of business on
the day on which this Warrant shall have been surrendered to the Company as
provided in Section 1(a) above. At such time, the person or persons in whose
name or names any certificates for Warrant Stock shall be issuable upon such
exercise as provided in Section 1(d) below shall be deemed to have become the
holder or holders of record of the Warrant Stock represented by such
certificates.
<PAGE>
(c) Net Issue Exercise.
------------------
(i) In lieu of exercising this Warrant in the manner provided
above in Section 1(a), the Registered Holder may elect to receive shares equal
to the value of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the principal office of the Company together with
notice of such election in which event the Company shall issue to holder a
number of shares of Common Stock computed using the following formula:
X = Y (A - B)
---------
A
Where X = The number of shares of Common Stock to be issued to the
Registered Holder.
Y = The number of shares of Common Stock purchasable under this
Warrant (at the date of such calculation).
A = The fair market value of one share of Common Stock (at the date of
such calculation).
B = The Purchase Price (as adjusted to the date of such calculation).
(ii) For purposes of this Section 1(c), the fair market value
of one share of Common Stock on the date of calculation shall mean:
(A) if the Company's Common Stock is traded on a
securities exchange or The Nasdaq Stock Market or actively traded over-the-
counter:
(1) if the Company's Common Stock is traded on a
securities exchange or The Nasdaq Stock Market, the fair market value shall be
deemed to be the average of the closing prices over the three (3) trading-day
period ending the trading day before date of calculation; or
(2) if the Company's Common Stock is actively traded
over-the-counter, the fair market value shall be deemed to be the average of
the closing bid or sales price (whichever is applicable) over the three (3)
trading-day period ending the trading day before the date of calculation; or
(B) if (A) is not applicable, the fair market value shall
be at the highest price per share which the Company could obtain on the date
of calculation from a willing buyer (not a current employee or director) for
shares of Common Stock sold by the Company, from authorized but unissued
shares, as determined in good faith by the Board of Directors, unless the
Company is at such time subject to an acquisition as described in Section 6(b)
below, in which case the fair market value per share of Common Stock shall be
deemed to be the value of the consideration per share received by the holders
of such stock pursuant to such acquisition.
(d) Delivery to Holder. As soon as practicable after the exercise of
------------------
this Warrant in whole or in part, and in any event within ten (10) days
thereafter, the Company at its expense will cause to be issued in the name of,
and delivered to, the Registered Holder, or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct:
-2-
<PAGE>
(i) a certificate or certificates for the number of shares of
Warrant Stock to which such Registered Holder shall be entitled, and
(ii) in case such exercise is in part only, a new warrant or
warrants (dated the date hereof) of like tenor, calling in the aggregate on
the face or faces thereof for the number of shares of Warrant Stock equal
(without giving effect to any adjustment therein) to the number of such shares
called for on the face of this Warrant minus the number of such shares
purchased by the Registered Holder upon such exercise as provided in Section
1(a) above.
2. Adjustments.
-----------
(a) Stock Splits and Dividends. If outstanding shares of the
--------------------------
Company's Common Stock shall be subdivided into a greater number of shares or a
dividend in Common Stock shall be paid in respect of Common Stock, the Purchase
Price in effect immediately prior to such subdivision or at the record date of
such dividend shall simultaneously with the effectiveness of such subdivision or
immediately after the record date of such dividend be proportionately reduced.
If outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Purchase Price in effect immediately prior to such combination
shall, simultaneously with the effectiveness of such combination, be
proportionately increased. When any adjustment is required to be made in the
Purchase Price, the number of shares of Warrant Stock purchasable upon the
exercise of this Warrant shall be changed to the number determined by dividing
(i) an amount equal to the number of shares issuable upon the exercise of this
Warrant immediately prior to such adjustment, multiplied by the Purchase Price
in effect immediately prior to such adjustment, by (ii) the Purchase Price in
effect immediately after such adjustment.
(b) Reclassification, Etc. In case of any reclassification or change
----------------------
of the outstanding securities of the Company or of any reorganization of the
Company (or any other corporation the stock or securities of which are at the
time receivable upon the exercise of this Warrant) or any consolidation or
merger by the Company with another entity or the conveyance of all or
substantially all of the Company's assets, or any similar corporate
reorganization on or after the date hereof, then and in each such case the
holder of this Warrant, upon the exercise hereof at any time after the
consummation of such reclassification, change, reorganization, merger or
conveyance, shall be entitled to receive, in lieu of the stock or other
securities and property receivable upon the exercise hereof prior to such
consummation, the stock or other securities or property to which such holder
would have been entitled upon such consummation if such holder had exercised
this Warrant immediately prior thereto, all subject to further adjustment as
provided in Section 2(a); and in each such case, the terms of this Section 2
shall be applicable to the shares of stock or other securities properly
receivable upon the exercise of this Warrant after such consummation.
(c) Adjustment Certificate. When any adjustment is required to be made
----------------------
in the Warrant Stock or the Purchase Price pursuant to this Section 2, the
Company shall promptly mail to the Registered Holder a certificate setting forth
(i) a brief statement of the facts requiring such adjustment, (ii) the Purchase
Price after such adjustment and (iii) the kind and amount of stock or other
securities or property into which this Warrant shall be exercisable after such
adjustment.
3. Limitations on Transfer. In addition to any other limitation on
-----------------------
transfer created by applicable securities laws, the Registered Holder shall
not assign, encumber or dispose of any interest except in compliance with the
provisions below and applicable securities laws.
-3-
<PAGE>
(a) Unregistered Security. Each holder of this Warrant acknowledges
---------------------
that this Warrant and the Warrant Stock have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and agrees not to
--------------
sell, pledge, distribute, offer for sale, transfer or otherwise dispose of this
Warrant or any Warrant Stock issued upon its exercise in the absence of (i) an
effective registration statement under the Act as to this Warrant or such
Warrant Stock and registration or qualification of this Warrant or such Warrant
Stock under any applicable U.S. federal or state securities law then in effect
or (ii) an opinion of counsel, satisfactory to the Company, that such
registration and qualification are not required. Each certificate or other
instrument for Warrant Stock issued upon the exercise of this Warrant shall bear
a legend substantially to the foregoing effect.
(b) Transferability. Subject to the provisions of Section 3(a) hereof,
---------------
this Warrant and all rights hereunder are transferable, in whole or in part,
upon surrender of the Warrant with a properly executed assignment (in the form
of Exhibit B hereto) at the principal office of the Company; provided, however,
--------- -------- -------
that this Warrant may not be transferred in part unless the transferee acquires
the right to purchase at least 10,000 shares (as adjusted pursuant to Section 2)
of Warrant Stock hereunder.
(d) Warrant Register. The Company will maintain a register
----------------
containing the names and addresses of the Registered Holders of this Warrant.
Until any transfer of this Warrant is made in the warrant register, the Company
may treat the Registered Holder of this Warrant as the absolute owner hereof for
all purposes; provided, however, that if this Warrant is properly assigned in
-------- -------
blank, the Company may (but shall not be required to) treat the bearer hereof as
the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary. Any Registered Holder may change such Registered Holder's address as
shown on the warrant register by written notice to the Company requesting such
change.
4. No Impairment. The Company will not, by amendment of its charter or
-------------
through reorganization, consolidation, merger, dissolution, sale of assets or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Warrant, but will (subject to Section 13 below) at
all times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the holder of this Warrant against impairment.
5. Termination. This Warrant (and the right to purchase securities upon
-----------
exercise hereof) shall terminate upon the fifth anniversary of the date of this
Warrant (the "Expiration Date").
---------------
6. Notices of Certain Transactions. In case:
-------------------------------
(a) the Company shall take a record of the holders of its Common Stock
(or other stock or securities at the time deliverable upon the exercise of this
Warrant) for the purpose of entitling or enabling them to receive any dividend
or other distribution, or to receive any right to subscribe for or purchase any
shares of stock of any class or any other securities, or to receive any other
right, to subscribe for or purchase any shares of stock of any class or any
other securities, or to receive any other right, or
(b) of any capital reorganization of the Company, any reclassification
of the capital stock of the Company, any consolidation or merger of the Company,
any consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the surviving
entity), or any transfer of all or substantially all of the assets of the
Company, or
-4-
<PAGE>
(c) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or such other stock or securities at the
time deliverable upon such reorganization, reclassification, consolidation,
merger, transfer, dissolution, liquidation or winding-up) are to be determined.
Such notice shall be mailed at least ten (10) days prior to the record date or
effective date for the event specified in such notice.
7. Reservation of Stock. The Company will at all times reserve and keep
--------------------
available, solely for the issuance and delivery upon the exercise of this
Warrant, such shares of Warrant Stock and other stock, securities and property,
as from time to time shall be issuable upon the exercise of this Warrant.
8. Exchange of Warrants. Upon the surrender by the Registered Holder of
--------------------
the Warrant, properly endorsed, to the Company at the principal office of the
Company, the Company will, subject to the provisions of Section 3 hereof, issue
and deliver to or upon the order of such Holder, at the Company's expense, a new
Warrant of like tenor, in the name of such Registered Holder or as such
Registered Holder (upon payment by such Registered Holder of any applicable
transfer taxes) may direct, calling in the aggregate on the face or faces
thereof for the number of shares of Common Stock called for on the face of the
Warrant so surrendered.
9. Replacement of Warrants. Upon receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
10. Notices. Any notice required or permitted by this Warrant shall be in
-------
writing and shall be deemed sufficient upon receipt, when delivered personally
or by courier, overnight delivery service or confirmed facsimile, or forty-eight
(48) hours after being deposited in the regular mail as certified or registered
mail (airmail if sent internationally) with postage prepaid, addressed (a) if to
the Registered Holder, to the address of the Registered Holder most recently
furnished in writing to the Company and (b) if to the Company, to the address
set forth below or subsequently modified by written notice to the Registered
Holder.
11. No Rights as Stockholder. Until the exercise of this Warrant, the
------------------------
Registered Holder of this Warrant shall not have or exercise any rights by
virtue hereof as a stockholder of the Company.
12. No Fractional Shares. No fractional shares of Common Stock will be
--------------------
issued in connection with any exercise hereunder. In lieu of any fractional
shares which would otherwise be issuable, the Company shall pay cash equal to
the product of such fraction multiplied by the fair market value of one share of
Common Stock on the date of exercise, as determined in good faith by the
Company's Board of Directors.
-5-
<PAGE>
13. Amendment or Waiver. Any term of this Warrant may be amended or
-------------------
waived only by an instrument in writing signed by the party against which
enforcement of the amendment or waiver is sought.
14. Headings. The headings in this Warrant are for purposes of reference
--------
only and shall not limit or otherwise affect the meaning of any provision of
this Warrant.
15. Governing Law. This Warrant shall be governed, construed and
-------------
interpreted in accordance with the laws of the State of California, without
giving effect to principles of conflicts of law.
-6-
<PAGE>
Chemdex Corporation
By:
----------------------------------------
David P. Perry
President and Chief Executive Officer
Address: 3950 Fabian Way
Palo Alto, CA 94303
Fax Number: (650) 813-0304
AGREED AND ACCEPTED:
ALZA CORPORATION
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Address:
Fax Number:
SIGNATURE PAGE TO COMMON STOCK PURCHASE WARRANT
<PAGE>
EXHIBIT A
---------
PURCHASE FORM
-------------
To: Chemdex Corporation Dated:
The undersigned, pursuant to the provisions set forth in the attached
Warrant No. CS-4, hereby irrevocably elects to purchase _______ shares of the
Common Stock covered by such Warrant and herewith makes payment of $_________,
representing the full purchase price for such shares at the price per share
provided for in such Warrant.
The undersigned acknowledges that it has reviewed the representations and
warranties contained in subsections 3(b)-(f) of the Purchase Agreement (as
defined in the Warrant) and by its signature below hereby makes such
representations and warranties to the Company. Defined terms contained in such
representations and warranties shall have the meanings assigned to them in the
Purchase Agreement, provided that the term "Purchaser" shall refer to the
--------
undersigned and the term "Securities" shall refer to the Warrant Stock.
The undersigned further acknowledges that it has reviewed the market
standoff provisions set forth in Section 6 of the Purchase Agreement and agrees
to be bound by such provisions.
Signature:
-------------------------------
Name (print):
----------------------------
Title (if applic.)
-----------------------
Company (if applic.):
--------------------
<PAGE>
EXHIBIT B
---------
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, _________________________________________ hereby sells,
assigns and transfers all of the rights of the undersigned under the attached
Warrant with respect to the number of shares of Common Stock covered thereby set
forth below, unto:
<TABLE>
<CAPTION>
Name of Assignee Address/Fax Number No. of Shares
---------------- ------------------ -------------
<S> <C> <C>
</TABLE>
Dated: Signature:
-------------- -------------------------
-------------------------
Witness:
-------------------------
<PAGE>
Exhibit B
CHEMDEX CORPORATION
LOCK-UP AGREEMENT
July 27, 1999
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
Volpe Brown Whelan & Company, LLC
Ladies and Gentlemen:
The undersigned understands that you, as representatives (the
"Representatives") of the several underwriters (the "Underwriters"), have
entered into an Underwriting Agreement with Chemdex Corporation (the "Company")
providing for the public offering (the "Public Offering") by the several
Underwriters, including yourselves, of common stock of the Company (the "Common
Stock").
In consideration of the Underwriters' agreement to purchase and make the
Public Offering of the Company's Common Stock, and for other good and valuable
consideration receipt of which is hereby acknowledged, the undersigned hereby
agrees, during the period ending one hundred eighty (180) days after the date of
the final Prospectus for the Public Offering (the "Lock-up Period"), not to (1)
offer, pledge, sell, contract to sell, engage in any short sale, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock, or (2) enter into any swap
or similar agreement that transfers, in whole or in part, the economic risk of
ownership of the Common Stock, whether any such transaction described in clause
(1) or (2) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, without the prior written consent of Morgan
Stanley & Co. Incorporated. In addition, the undersigned agrees that, without
the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, it will not, during the Lock-up Period, make any demand for or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
The undersigned confirms that the agreements of the undersigned are
irrevocable and shall be binding upon the undersigned's legal representatives,
successors and assigns. The undersigned agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of securities of the Company held by the undersigned except in
compliance with the terms and conditions of this Agreement.
Very truly yours,
-----------------------------
(Signature)
-----------------------------
(Print Name)
-----------------------------
(Print Title if an Entity)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 19,425,435
<SECURITIES> 0
<RECEIVABLES> 2,411,490
<ALLOWANCES> 304,000
<INVENTORY> 0
<CURRENT-ASSETS> 10,281,923
<PP&E> 0
<DEPRECIATION> 889,208
<TOTAL-ASSETS> 43,733,064
<CURRENT-LIABILITIES> 8,384,822
<BONDS> 0
0
3,349
<COMMON> 1,515
<OTHER-SE> 34,659,942
<TOTAL-LIABILITY-AND-EQUITY> 43,733,064
<SALES> 2,905,511
<TOTAL-REVENUES> 2,905,511
<CGS> 2,752,545
<TOTAL-COSTS> 2,752,545
<OTHER-EXPENSES> 12,844,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,706
<INCOME-PRETAX> (12,504,863)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,504,863)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,504,863)
<EPS-BASIC> (2.86)
<EPS-DILUTED> (2.86)
</TABLE>
