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WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000.
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: 0-29975
ACLARA BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3222727
(State of Incorporation) (I.R.S. Employer Identification No.)
1288 PEAR AVENUE
MOUNTAIN VIEW, CALIFORNIA 94034
(Address of principal executive offices and zip code)
(650) 210-1200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of November
9, 2000 was 34,430,055.
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ACLARA BIOSCIENCES, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART 1: Financial Information
Item 1. Financial Statements (unaudited):
Condensed Balance Sheets as of September 30, 2000 and
December 31, 1999. 3
Condensed Statements of Operations for the three months
and nine months ended September 30, 2000 and
September 30, 1999 4
Condensed Statements of Cash Flows for the nine months
ended September 30, 2000 and September 30, 1999 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
PART II: Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds. 22
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K. 23
SIGNATURES 24
EXHIBIT INDEX 25
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACLARA BIOSCIENCES, INC.
(A Company in the Development Stage)
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 95,039 $ 10,250
Restricted cash 1,250 --
Short-term marketable investments 63,536 3,479
Accounts receivable 817 615
Prepaid expenses and
other current assets 1,943 434
--------- ---------
Total current assets 162,585 14,778
Property and equipment, net 5,804 5,171
Long-term marketable investments 39,998 --
Restricted cash 625 625
Other assets, net 82 --
--------- ---------
Total assets $ 209,094 $ 20,574
========= =========
LIABILITIES,MANDATORILY REDEEMABLE CONVERTIBLE
STOCK & STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,518 $ 412
Accrued payroll and related expenses 874 114
Accrued expenses 3,914 1,090
Current portion of capital lease obligations -- 286
Current portion of loans payable 49 820
--------- ---------
Total current liabilities 6,355 2,722
Capital lease obligations, less current portion -- 284
Loans payable, less current portion 575 3,087
Deferred rent 161 --
--------- ---------
Total liabilities 7,091 6,093
--------- ---------
Mandatorily redeemable convertible preferred stock -- 40,973
--------- ---------
Stockholders' Equity (Deficit)
Common stock 34 2
Additional paid-in capital 256,696 2,589
Deferred stock-based compensation (11,210) (6,508)
Notes receivable for common stock (599) (7)
Accumulated other comprehensive income 11 4
Deficit accumulated during development stage (42,929) (22,572)
--------- ---------
Total stockholders' equity (deficit) 202,003 (26,492)
--------- ---------
Total liabilities, mandatorily redeemable
convertible stock and stockholders'
equity (deficit) $ 209,094 $ 20,574
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ACLARA BIOSCIENCES, INC.
(A Company in the Development Stage)
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Grant and collaboration $ 946 $ 935 $ 2,736 $ 2,080
-------- -------- -------- --------
Total revenue 946 935 2,736 2,080
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 6,029 1,842 15,757 4,701
General and administrative 4,995 1,067 11,169 2,645
Settlement of litigation 1,750 -- 1,750 --
-------- -------- -------- --------
Total operating expenses 12,774 2,909 28,676 7,346
-------- -------- -------- --------
Loss from operations (11,828) (1,974) (25,940) (5,266)
Interest income 3,450 96 7,173 298
Interest expense (93) (61) (487) (182)
-------- -------- -------- --------
Net loss before extraordinary loss (8,471) (1,939) (19,254) (5,150)
Extraordinary loss on early
retirement of debt (1,103) -- (1,103) --
Net loss $ (9,574) $ (1,939) $(20,357) $ (5,150)
======== ======== ======== ========
Net loss per common share before
extraordinary loss -- basic and diluted $ (0.25) $ (1.25) $ (0.58) $ (3.39)
Extraordinary loss per share on
retirement of debt $ (0.03) -- $ (0.03) --
Net loss per common share -- basic
and diluted $ (0.28) $ (1.25) $ (0.61) $ (3.39)
Shares used in net loss per common
share calculation - basic and diluted 33,783 1,550 33,554 1,517
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ACLARA BIOSCIENCES, INC.
(A Company in the Development Stage)
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,357) $ (5,150)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 788 392
Amortization of (discount)/premium of marketable investments (1,588) 8
Amortization of long-term debt discount 438 2
Amortization of deferred compensation 6,616 619
Preferred stock issued for interest expense -- 115
Loss on write down of property plant and equipment 213 --
Changes in assets and liabilities:
Accounts receivable (202) (223)
Prepaid expenses and other current assets (1,509) (140)
Accounts payable 1,106 946
Accrued payroll and related expenses 760 163
Accrued expenses and other liabilities 2,824 (195)
Deferred revenue -- (185)
Long term liabilities 161 73
--------- ---------
Net cash used in operating activities (10,750) (3,575)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,617) (4,240)
Investment in restricted cash (1,250) --
Purchase of investments (709,029) (6,691)
Maturities of investments 610,569 3,150
Change in other assets (100) 30
--------- ---------
Net cash used in investing activities (101,427) (7,751)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments for capital lease obligations (570) (269)
Principal payments for loans payable (3,720) --
Repayment of notes payable to related parties -- (106)
Proceeds from issuance of loans payable -- 3,335
Proceeds from issuance of preferred stock, net of issuance costs 58 17,163
Repurchase of Series A preferred stock and one share of common stock -- (2,713)
Proceeds from initial public offering, net of issuance costs 201,003 --
Proceeds from notes receivable from stockholders 42 15
Proceeds from issuance of common stock 153 18
--------- ---------
Net cash provided by financing activities 196,966 17,443
--------- ---------
Net increase (decrease) in cash and cash equivalents 84,789 6,117
Cash and cash equivalents, beginning of period 10,250 1,746
--------- ---------
Cash and cash equivalents, end of period $ 95,039 $ 7,863
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ACLARA BIOSCIENCES, INC.
(A Company in the Development Stage)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position, results of
operations and cash flows of ACLARA BioSciences, Inc. ("ACLARA", "we", "us" or
"our") for the periods indicated. Interim results of operations are not
necessarily indicative of the results to be expected for the full year or any
other interim periods. The notes to the financial statements contained in our
Registration Statement on Form S-1 for the year ended December 31, 1999 should
be read in conjunction with these condensed financial statements. The balance
sheet at December 31, 1999 was derived from audited financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments, embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. In July 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS
137 deferred the effective date of SFAS 133 until the first fiscal year
beginning after June 15, 2000. We will adopt the standard during January 2001.
To date, we have not engaged in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. ACLARA'S
revenue recognition policy is in compliance with the provisions of SAB 101.
In March 2000, the Financial Accounting Standards Board issued
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Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). This
interpretation clarifies the definition of employee for purposes of applying
Accounting Practice Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), the criteria for determining whether a plan qualifies as
a noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. FIN 44 did not have a material effect on the financial
position or results of operation of ACLARA.
NET LOSS PER SHARE
Basic net loss per share is calculated based on the weighted-average number
of common shares outstanding during the period. Diluted net loss per share would
give effect to the dilutive effect of common stock equivalents consisting of
stock options and warrants (calculated using the treasury stock method).
Potentially dilutive securities have been excluded from the diluted net loss per
share computations as they have an antidilutive effect due to our net loss.
A reconciliation of shares used in the calculations is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic and diluted:
Net loss $ (9,574) $ (1,939) $(20,357) $ (5,150)
Net loss per common share before extraordinary loss $ (0.25) $ (1.25) $ (0.58) $ (3.39)
Extraordinary loss per share on retirement of debt $ (0.03) -- $ (0.03) --
Net loss per common share - basic and diluted $ (0.28) $ (1.25) $ (0.61) $ (3.39)
Weighted average common shares outstanding 34,489 1,633 34,217 1,624
Less: weighted average shares subject to repurchase (706) (83) (663) (107)
-------- -------- -------- --------
Weighted average shares used in basic and diluted net loss
per share calculations 33,783 1,550 33,554 1,517
</TABLE>
The following outstanding options and warrants, and convertible preferred stock
(on an as-converted basis), were excluded from the computation of diluted net
loss per share as they had an anti-dilutive effect:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Options and warrants 2,944,923 3,374,851 2,848,825 2,893,180
Convertible preferred stock -- 19,228,025 -- 18,877,098
</TABLE>
INVESTMENTS IN MARKETABLE SECURITIES
We account for investments in marketable securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
Debt and equity securities are classified as available-for-sale securities and
are reported at fair market value with any unrealized holding gains and losses
excluded from current earnings and reported in stockholders' equity.
3. LEGAL MATTERS:
On October 27, 2000, a jury awarded Caliper Technologies ("Caliper") $52.5
million in the trade secret lawsuit brought against ACLARA by Caliper. We expect
the
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Court to reduce this amount by between $12 and $17 million to eliminate
redundancies, which we believe will reduce our potential monetary liability to
between $35.5 and $40.5 million. The jury denied Caliper's request for punitive
damages. Caliper's arguments in this lawsuit centered around an alleged dual
representation by Dr. Bertram Rowland of both ACLARA and Caliper in December of
1995 and early 1996. Dr. Rowland represented ACLARA as an outside patent lawyer
from late 1994 through late 1996. Unbeknownst to ACLARA, in December of 1995 and
early 1996, Dr. Rowland performed legal services for Caliper. Subsequent to
this, Dr. Rowland became ACLARA's general counsel. In this trial, Caliper argued
that Dr. Rowland misused Caliper trade secrets, and that ACLARA is liable for
Dr. Rowland's actions. No judgment has been entered on the verdict, and it is
not certain when a judgment will be entered. Once a judgment has been entered,
ACLARA intends to appeal the judgment to the California Court of Appeal for the
Sixth Appelate District and will post a bond for what is likely to be at least
1.5 times the eventual amount of the judgment. ACLARA believes that any judgment
will be stayed until the appeal is resolved. At the beginning of the trade
secret trial, the Court indicated that it would consider equitable remedies
following the jury's verdict. On November 2, Caliper filed a brief requesting
that the Court require ACLARA to assign our U.S. Patent No. 5,750,015 ("the `015
patent"), as the corpus of a constructive trust, to Caliper, with a
non-exclusive, royalty-free license back to ACLARA. The license back to ACLARA
would include the right to grant sublicenses to ACLARA's partners, contractors
and customers. The Court is expected to hold a hearing on November 22 regarding
this issue, and to issue a ruling sometime after the hearing. In the event that
the court orders some form of equitable relief, the court could require ACLARA
to post an additional bond to proceed with the appeal. While the ultimate
outcome of this matter cannot be determined with certainty, we believe that
errors were committed by the trial court that should result in the judgment
being reversed on appeal and a new trial being granted. Because we are currently
unable to predict the final outcome of this case, we have not accrued for any
liability for this matter in our financial statements for the period ended
September 30, 2000.
On April 26, 1999, we filed a patent infringement action against Caliper in the
U.S. District Court in Northern California alleging infringement of the '015
patent, which concerns methods and devices for moving molecules by the
application of electrical fields. On July 19, 2000 we announced that the U.S.
District Court for the Northern District of California issued a Markman order
interpreting the claims of the `015 patent. Among its rulings, the Court refused
to limit the claims to devices that employed electrophoretic, but not
electroosmotic, movement as Caliper had asserted. The Court held that, in the
context of ACLARA's patent, the term "plurality of electrodes" defines
electrodes that are positioned along the axis of trenches in microfluidic
devices, but not necessarily within the trenches themselves. The Court also
determined that the word "trench" as it appears in the claims of the `015 is
defined as an open structure which does not include a structure that has been
permanently covered. In addition, the Court held that eight of forty-seven
claims in the `015 were indefinite and, therefore, invalid. On October 31, 2000,
the Court issued an order denying a summary judgment motion by Caliper to
dismiss ACLARA's patent infringement suit against Caliper. Based on the claim
interpretation made by the Court in July, the Court ruled that Caliper does not
literally infringe ACLARA's `015 patent. However, the Court denied Caliper's
motion for summary judgment as to ACLARA's claim of infringement under the
doctrine of equivalents. The Court also "denied in its entirety" Caliper's
motion for summary judgment that ACLARA's patent is invalid. As a result of this
ruling, a trial in this action is scheduled to begin on December 4, 2000. We are
currently unable to predict the final outcome of this matter and the ultimate
effect, if any, on ACLARA's financial condition, cash flows and results of
operations.
In January 2000, Caliper filed a complaint against us in the U. S. District
Court of Northern California, alleging infringement of four patents that they
claim to have licensed exclusively. On March 10, 2000, Caliper amended its
lawsuit to include a fifth patent. We are currently unable to predict at this
time the final outcome of this matter and the ultimate effect, if any, on
ACLARA's financial condition, cash flows and results of operations.
Earlier this year we received correspondence from an attorney representing
certain minority shareholders of 2C Optics (our former parent company), alleging
violations of corporate and securities laws by ACLARA and one or more of its
directors, in connection with a repurchase of our Series A preferred stock from
2C Optics in March 1999. The attorney threatened litigation to force us to sell
to his clients shares of ACLARA stock, at $0.60 per share (the price at which
they were re-purchased), equal to each clients' pro rated portion of the shares
repurchased. In order to avoid the expense and disruption of potential
litigation, we signed a settlement agreement with 2C Optics (now named
Rodenstock, N.A.) on August 17, 2000, pursuant to which Rodenstock has agreed to
drop all its claims against us in exchange for receipt of two payments totaling
$1.75 million. The settlement agreement was approved by the board of directors
of Rodenstock and a majority of Rodenstock's
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outstanding shares entitled to vote on the matter. The entire $1.75 million
litigation settlement has been recorded in the September 30, 2000 financial
statements as an operating expense. At September 30, 2000, $1.25 million of the
settlement was held in escrow and remained outstanding. The escrow balance has
been recorded as restricted cash at September 30, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations which express that ACLARA ("ACLARA", "we,"
"us" or "our") "believes," "anticipates," "expects," "intends," or "plans to",
as well as other statements which are not historical fact, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Actual events or results may differ materially as a result of the risks
and uncertainties described herein and elsewhere including, in particular, those
factors described under "Additional Factors That Might Affect Future Results"
set forth below.
The following discussion of the financial condition and results of
operations should be read in conjunction with our financial statements and the
accompanying notes to those statements.
OVERVIEW
We are a developer of microfluidic lab-on-a-chip technology, having access
to a wide range of technology and intellectual property required to broadly
address the genomics and pharmaceutical drug screening markets. We are
developing advanced tools for drug discovery and genomics using our proprietary
microfluidic array technology and assay chemistries. By performing integrated
sample processing and analysis on plastic microfluidic array LabCard chips,
these tools would enable the rapid, parallel processing of large numbers of
samples while requiring only minute volumes of expensive or rare reagents.
We were formed by a spin-off transaction from Soane Technologies, Inc. and
incorporated in Delaware in 1995 under the name Soane BioSciences, Inc. In 1998,
we changed our name to ACLARA BioSciences, Inc. Since our inception, we have
engaged primarily in organization and research and development efforts related
to the application of microfluidics technology to genomics and pharmaceutical
drug screening. To date, we have generated most of our revenues from research
partnerships and collaborations and from government grants. Our partners and
collaborators include Applied Biosystems Group (formerly, PE Biosystems),
Packard Bioscience Company, the R.W. Johnson Pharmaceutical Research Institute,
a subsidiary of Johnson & Johnson, and Cellomics, Inc. We have also received
government grants from the National Institutes of Health (NIH), the National
Institute of Standards and Technology Advanced Technology Program (NIST ATP) and
the Defense Advance Research Projects Agency (DARPA).
On March 24, 2000 ACLARA completed its initial public offering, selling
10,350,000 shares of common stock.
We have invested substantial amounts in establishing our microfluidics
technologies. Since our inception we have spent over $35 million on our research
and development efforts. Over 85% of our 104 employees at September 30, 2000
were engaged in research and development.
We have incurred significant losses since our inception. As of September 30,
2000, our accumulated deficit was $42.9 million and total stockholders' equity
was $202.0 million. We expect to incur additional operating losses over at least
the next two years as we continue to expand our research and development efforts
and infrastructure.
Our sources of potential revenue for the next several years are likely to be
payments under existing and possible future collaborative arrangements,
government research grants, product revenue from the sale of LabCard chips and
proprietary assay chemistries, and royalties from our collaborators based on
revenue received from the sale of equipment and reagents utilizing our
technology.
We recognize grant and collaboration revenue based on meeting certain
requirements, completing milestones as specified in the grants or contracts,
straight line over the period of certain contracts or as work is performed and
evidenced by time sheets and expense reports for certain grants. Revenue on
product sales will be recognized upon shipment of product to the customer.
Revenue on
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license agreements will be recognized on a straight line basis over the life of
services to be rendered under the license agreements.
We account for equity instruments issued to non-employees in accordance with
the provisions of SFAS 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
We account for stock-based employee compensation arrangements in accordance
with provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and comply with the disclosure
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123").
Under APB No. 25, compensation expense is based on the difference, if any on
the date of the grant, between the fair value of our stock and the exercise
price. SFAS No. 123 defines a "fair value" based method of accounting for an
employee stock option or similar equity instrument. We recorded amortization of
deferred compensation of approximately $3.0 million for the three months ended
September 30, 2000 and approximately $6.6 million for the nine months ended
September 30, 2000 to the appropriate operating expense categories. The
amortization expense relates to options awarded to employees in all operating
expense categories.
RESULTS OF OPERATIONS
Revenue. Our revenue for the three months ended September 30, 2000 was
$946,000, an increase of $11,000 or 1% from $935,000 for the prior year period.
Our revenue for the nine months ended September 30, 2000 was $2.7 million, an
increase of $656,000 or 24% from $2.1 million for the prior year period. The
increase resulted entirely from revenue from the collaboration agreement with
Applied Biosystems Group (formerly,PE Biosystems) and Johnson & Johnson, our
agreement with Cellomics, and our grant from NIST ATP to develop LabCard systems
for nucleic acid sample processing, offset by decreased revenue from an existing
research and development contract with DARPA which was completed in the third
quarter of 2000.
Research and Development. Research and development expenses were $6.0
million for the three months ended September 30, 2000 and $1.8 million for the
prior year period. Of the $4.2 million increase, $2.5 million was related to
non-cash stock-based compensation expense. Research and development expenses
were $15.8 million for the nine months ended September 30, 2000 and $4.7 million
for the prior year period. Of the $11.1 million increase, $5.5 million was
related to non-cash stock-based compensation expense. The remaining increases
were due to increased staffing in R&D and pilot manufacturing, and other project
and personnel related costs. We expect to continue to devote substantial
resources to research and product development, and we expect that research and
development expenses will continue to increase on an absolute dollar value
basis.
General and Administrative. General and administrative expenses were
$5.0 million for the three months ended September 30, 2000, as compared to $1.1
million during the same period of the previous year. Of the $3.9 million
increase, $144,000 was related to non-cash stock-based compensation expense.
General and administrative expenses were $11.2 million for the nine months ended
September 30, 2000 and $2.6 million for the prior year period. Of the $8.6
million increase, $461,000 was related to non-cash stock-based compensation
expense. The remaining increase was due to $6.4 million in increased litigation
expense, administrative costs associated with R&D growth, and general corporate
expenses associated with becoming a public company. We expect that general and
administrative expenses will increase in absolute dollar amounts as we expand
our administrative staff, move into office space vacated by sublessees and incur
additional costs related to being a public company, including directors' and
officers' insurance, investor relations programs and increased professional
fees.
Settlement of Litigation. Settlement of litigation expenses were $1.75
million for the three months and the nine months ended September 30, 2000,
compared to $0 during the same period of the previous year. This one-time charge
was recorded in connection with the settlement of a dispute with 2C
Optics/Rodenstock, concerning the repurchase of our Series A preferred stock in
March 1999. In order to avoid the expense and disruption of potential
litigation, we signed a settlement agreement with 2C Optics (now named
Rodenstock, N.A.) on August 17, 2000, pursuant to which Rodenstock has agreed to
drop all its claims against us in exchange for receipt of two payments totaling
$1.75 million. The entire $1.75 million litigation settlement has been recorded
in the September 30, 2000 financial statements as an operating expense.
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Interest Income (Expense). Interest income represents income earned on
our cash and cash equivalents and short term and long term investments; interest
expense represents interest paid on loans and capital leases. Interest income
was $3.5 million for the three months period ending September 30, 2000, and
$96,000 for the prior year period. Interest income was $7.2 million for the nine
months ended September 30, 2000, and $298,000 for the prior year period. The
increase was due to higher average cash balances as a result of our initial
public offering. Interest expense was $93,000 for the three months ended
September 30, 2000, and $61,000 for the prior year period. Interest expense was
$487,000 for the nine months period ended September 30, 2000, and $182,000 for
the prior year period. The increase was due to interest incurred on loans for
tenant improvements and related equipment at our new Mountain View facility.
Extraordinary Loss. Extraordinary loss was $1.1 million for the three
months and nine months ended September 30, 2000, compared to $0 during the same
period of the previous year. This one-time charge was recorded in connection
with the early payoff of all capital leases and equipment financing loans.
Net Loss. Net loss was $9.6 million for the three months ended September
30, 2000 compared to a loss of $1.9 million for the period ended September 30,
1999. Net loss was $20.4 million for the nine months ended September 30, 2000
compared to a loss of $5.2 million for the nine months ended September 30, 1999.
Net loss for the current period reflects an increase in collaboration and grant
revenue, which was more than offset by increased operating expenses in research
and product development activities, amortization of non-cash stock-based
compensation, on-going intellectual property matters, and general corporate
activities.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2000, we had $198.6 million in cash, cash equivalents,
short-term investments and long-term investments. On September 1, 2000, all
capital lease agreements and equipment financing loan agreements were paid off
with a cash payment totaling $4.1 million.
Net cash used in operating activities for the nine months ended
September 30, 2000 was $10.8 million. Cash used in operating activities for the
nine months ended September 30, 1999 was $3.6 million. The increase in cash used
by operating activities year-over-year was primarily due to the net loss of
$20.4 million for 2000 compared to a net loss in 1999 of $5.2 million, partially
offset by an increase in the amortization of deferred compensation amounts
period-over-period.
Net cash used in investing activities for the nine months ended
September 30, 2000 was $101.4 million, compared with $7.8 million for the nine
months ended September 30, 1999. The proceeds from the sale of the 10,350,000
shares of common stock we offered during our initial public offering in March
2000 were approximately $201.0 million after deducting the underwriting
discounts and commissions and other offering expenses. These proceeds were used
to purchase short-term investments and long-term investments or were held as
cash and cash equivalents. We believe that our current cash balances, cash
equivalents, short-term investments, long-term investments and cash generated
from our collaborative arrangements and product sales will be sufficient to meet
our operating and capital requirements through the end of 2001. Our capital
commitments for the next 12 months, loan payments, planned tenant improvements,
and planned equipment purchases are estimated to be $2.5 million. Our future
liquidity and capital requirements will depend on numerous factors, including
our success in commercializing our products, our ability to successfully appeal
the judgment in the Caliper trade secrets case and reduce or avoid any cash
payment to Caliper, the ability of our outside manufacturers to meet our demands
at currently estimated prices, obtaining and enforcing patents important to our
business, and possible technology acquisitions. We intend to appeal the judgment
in the Caliper trade secrets case and we will be required to post a bond for
what is likely to be at least 1.5 times the eventual amount of the judgment in
order to begin the appeal process.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments, embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the
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statement of financial position and measure those instruments at fair value. In
July 1999, the FASB issued Statement of Financial Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS 137 deferred
the effective date of SFAS 133 until the first fiscal year beginning after June
15, 2000. We will adopt the standard during January 2001. To date, we do not
engage in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. ACLARA's
revenue recognition policy is in compliance with the provisions of SAB 101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). This
interpretation clarifies the definition of employee for purposes of applying
Accounting Practice Board Opinion No. 25, "Accounting for Stock Issued for
Employees" ("APB 25"), the criteria for determining whether a plan qualifies as
a noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. FIN 44 did not have a material effect on the financial
position or results of operation of ACLARA.
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
The following risk factors outline certain risks and uncertainties
concerning future results and should be read in conjunction with the information
contained in this Quarterly Report on Form 10-Q. Any of these risk factors could
materially and adversely affect our business results of operations, financial
condition and future growth prospects. Additional risks and uncertainties that
we do not currently know about or that we currently deem immaterial may also
impair our business, financial condition, results of operations and future
growth prospects.
WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT, AND WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE.
Since we were founded in May 1995, we have engaged primarily in research and
development efforts. We have incurred operating losses every year, and we may
never achieve profitability. Net loss for the nine months ended September 30,
2000 was $20.4 million. Net losses for the years ended December 31, 1997, 1998
and 1999 were $2.0 million, $5.5 million, and $8.2 million, respectively. As of
September 30, 2000, we had an accumulated deficit of $42.9 million. Our losses
have resulted principally from costs incurred in connection with our research
and development activities and from general and administration costs associated
with our operations.
We have not commercially launched any LabCard products to date and do not
expect to do so until late 2000. Our ability to generate revenues from product
sales or to achieve profitability is dependent on our ability, alone or with our
collaborative partners, to successfully design, develop, manufacture and
commercialize our microfluidic LabCard products and systems and our proprietary
assay chemistries in a timely manner. Our revenue to date has been generated
principally from collaborative research and development agreements and
government grants. We expect that our costs will continue to exceed our revenues
on an annual basis for at least the next two years. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our operating results have fluctuated in the past and are likely to do so in
the future. These fluctuations could cause our stock price to decline. Some of
the factors that could cause our operating results to fluctuate include:
- expiration or termination of contracts with collaborators or government
research grants, which may not be renewed or replaced;
- outcome of litigation proceedings to which we are currently a party or
pending or threatened claims against us;
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- the timing and willingness of collaborators to commercialize our
products;
- the timing, release and competitiveness of our products; and
- general and industry-specific economic conditions, which may affect our
customers' research and development expenditures and use of our
products.
If revenue declines in a quarter, whether due to a delay in recognizing
expected revenue or otherwise, our earnings will decline because many of our
expenses are relatively fixed in the short-term. In particular, research and
development and general and administrative expenses are not affected directly by
variations in revenue.
Due to fluctuations in our revenue and operating expenses, we believe that
period-to-period comparisons to results of historical operations are not a good
indication of our future performance. It is possible that in some future quarter
or quarters, our operating results will be below the expectations of securities
analysts or investors. In that case, our stock price could fluctuate
significantly or decline.
OUR PRODUCTS ARE IN THE DEVELOPMENT STAGE AND MAY NOT SUCCESSFULLY BE BROUGHT TO
COMMERCIALIZATION.
We currently have no commercially available products and we have never
developed, manufactured, distributed or sold LabCard products or commercial
systems using our microfluidics technology. We are developing products that are
in many cases part of complex systems that also have not been fully developed,
tested, manufactured or commercially introduced by our major collaborative
partner. We may not be able to perfect the design of our products due to the
complexity of the systems they are part of and/or the demands of the scientific
processes that they address. For instance, we have not yet established the high
degrees of accuracy, reliability and ease of use required for commercial
introduction of our products. Even though we have designed products that
function in a prototype system or on a limited volume basis, we cannot assure
you that we will be able to adapt the design to allow for large-scale
manufacturing and commercialization. Although we have projected launch periods
for certain of our products, we cannot assure you that we will complete
development of the systems by those launch dates, or at all. If we are unable to
design commercially viable LabCard products or systems, either independently or
with our collaborative partners, we may be unable to remain in business.
COMMERCIALIZATION OF OUR PRODUCTS DEPENDS ON MARKET ACCEPTANCE OF OUR LABCARD
CHIPS AND RELATED SYSTEMS. IF THEY DO NOT ACHIEVE ACCEPTANCE, OUR ABILITY TO
GENERATE SALES WILL BE LIMITED AND OUR LOSSES WOULD INCREASE.
Demand for our LabCard products is substantially dependent upon widespread
market acceptance of systems utilizing our LabCard chips as tools for genomics
and pharmaceutical drug screening. Because most of our LabCard chip products
will be part of larger analytical systems marketed by our collaborative
partners, our ability to sell LabCard chips in these cases depends on adoption
by researchers of entirely new analytical equipment. We cannot assure you that
LabCard chips and related instrument systems using our technology will achieve
substantial acceptance in our target markets. Market acceptance will depend on
many factors, including:
- our ability and the ability of our collaborative partners to demonstrate
to potential customers the benefits and cost-effectiveness of our
LabCard chips and systems, relative to products available at the time
these systems are introduced; and
- the extent and success of our partners' efforts to market, sell and
distribute the LabCard chips and systems.
Further, if our initial LabCard systems are not favorably received by the
market, it could undermine our ability to successfully introduce subsequent
LabCard chips or systems as well. If our LabCard chips and systems do not gain
market acceptance, our losses would increase and we may be unable to remain in
business.
WE PREDOMINANTLY DEPEND ON COLLABORATIVE PARTNERS TO DEVELOP AND MARKET SYSTEMS
THAT UTILIZE OUR LABCARD CHIPS TO END USERS. IF OUR COLLABORATIVE PARTNERS DO
NOT PERFORM AS EXPECTED, WE MAY BE UNABLE TO DEVELOP AND MARKET OUR PRODUCTS.
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Because the majority of our products are components of larger systems, our
success depends on our ability to establish relationships with collaborative
partners to create products to address market needs. For example, our
collaborative relationship with Applied Biosystems Group (formerly,PE
Biosystems) provides for the joint development of systems for genomics research
and pharmaceutical drug screening. In this relationship, we provide LabCard
chips as one component of systems used by researchers for genomics analysis and
pharmaceutical drug screening applications. Our ability to expand the
applications for our technology will largely depend on our ability to broaden
our relationship with existing partners and identify and enter into similar
relationships with new collaborative partners to address additional customer
needs. If we are unable to broaden our existing collaborative relationships or
enter into relationships with additional collaborative partners our business may
suffer.
Our ability to sell products will also depend on the ability of our
collaborative partners to develop instrument systems that can utilize our
LabCard chips. If the development efforts of our collaborative partners fail or
are significantly delayed, our losses would increase. We cannot assure you that
our collaborative partners will be able to develop products as planned.
We also intend to rely upon our current and future collaborative partners to
market, sell, distribute and promote our LabCard chips. We do not presently
intend to develop a large internal marketing and sales organization.
Accordingly, we will be substantially relying on our collaborative partners to
fulfill these tasks. If our collaborative partners do not perform these
functions satisfactorily, our ability to market, sell and distribute our
products could be severely limited.
We generally do not have control over the resources or degree of effort that
any of our existing collaborative partners may devote to our collaborations. If
our collaborators breach or terminate their agreements with us or otherwise fail
to conduct their collaborative activities successfully and in accordance with
agreed upon schedules, our business would be harmed. In addition, our
collaborative partners could cease operations, eliminate relevant product lines,
or offer, design, manufacture or promote competing lines of products. Any of
those occurrences would increase our losses.
WE RELY HEAVILY ON APPLIED BIOSYSTEMS GROUP (FORMERLY, PE BIOSYSTEMS) TO
DEVELOP, MANUFACTURE AND COMMERCIALIZE SYSTEMS TO BE USED IN CONNECTION WITH OUR
LABCARD CHIPS AND TO COMMERCIALIZE MOST OF OUR LABCARD PRODUCTS. APPLIED
BIOSYSTEMS GROUP'S FAILURE TO DO SO SUCCESSFULLY COULD DELAY OR PREVENT THE
COMMERCIALIZATION OF OUR PRODUCTS IN THE GENOMICS AND PHARMACEUTICAL DRUG
SCREENING MARKETS, AND RESULT IN INCREASED LOSSES.
As part of our business strategy, we are focusing on the development of our
LabCard chips and related chemistries for genomics and pharmaceutical drug
screening systems. In most cases we are relying on Applied Biosystems Group to
manufacture and commercialize the systems, including commercializing our LabCard
chips. We have collaboration agreements with Applied Biosystems Group to jointly
develop microfluidic systems for genomics and pharmaceutical drug screening. In
addition to developing or co-developing the instrumentation, software and
reagents, Applied Biosystems Group will have the exclusive right to market and
sell those products worldwide. We cannot assure you that Applied Biosystems
Group will perform its obligations under the agreements, or that Applied
Biosystems Group will successfully commercialize any products resulting from our
joint efforts. Moreover, Applied Biosystems Group has the discretion, under
certain circumstances, to elect not to proceed with the commercialization of
products jointly developed under the agreement. Applied Biosystems Group's
failure to perform under the agreement or to successfully commercialize our
LabCard products and systems could delay or prevent the commercialization of our
products and result in increased losses.
IF WE ARE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY, WE WOULD BE
UNABLE TO PREVENT THIRD PARTIES FROM USING OUR TECHNOLOGY, WHICH COULD IMPAIR
OUR ABILITY TO COMPETE IN THE MARKET. THE COST OF ENFORCING OUR PROPRIETARY
RIGHTS MAY BE EXPENSIVE AND RESULT IN INCREASED LOSSES.
Our success will depend in part on our ability to obtain and maintain
meaningful patent protection for our products, both in the United States and in
other countries, and our inability to do so could harm our competitive position.
We rely on our portfolio of over 120 issued and pending patent applications in
the United States and in other countries to protect a large part of our
intellectual property and our competitive position. We cannot assure you that
any of the currently pending or future patent applications will issue as
patents, or that any patents issued to us will not be challenged, invalidated,
held unenforceable or circumvented. Further,
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we cannot assure you that our intellectual property rights will be sufficiently
broad to prevent third parties from producing competing products similar in
design to our products.
In addition to patent protection, we also rely on protection of trade
secrets, know-how and confidential and proprietary information. We generally
enter into confidentiality agreements with our employees, consultants and our
collaborative partners upon commencement of a relationship with us. However, we
cannot assure you that these agreements will provide meaningful protection
against the unauthorized use or disclosure of our trade secrets or other
confidential information or that adequate remedies would exist if unauthorized
use or disclosure were to occur. The exposure of our trade secrets and other
proprietary information would impair our competitive advantages and could have a
material adverse effect on our operating results, financial condition and future
growth prospects. Further, we cannot assure you that others have not or will not
independently develop substantially equivalent know-how and technology.
Our commercial success also depends in part on avoiding the infringement of
other parties' patents or proprietary rights and the breach of any licenses that
may relate to our technologies and products. We are aware of various third-party
patents that may relate to our technology. We believe that we do not infringe
these patents but cannot assure you that we will not be found in the future to
infringe these or other patents or proprietary rights of third parties, either
with products we are currently developing or with new products that we may seek
to develop in the future. If third parties assert infringement claims against
us, we may be forced to enter into license arrangements with them. We cannot
assure you that we could enter into the required licenses on commercially
reasonably terms, if at all. The failure to obtain necessary licenses or to
implement alternative approaches may prevent us from commercializing products
under development and would impair our ability to be commercially competitive.
We may also become subject to interference proceedings conducted in the U.S.
Patent and Trademark Office to determine the priority of inventions.
The defense and prosecution, if necessary, of intellectual property suits,
USPTO interference proceedings and related legal and administrative proceedings
will result in substantial expense to us, and significant diversion of effort by
our technical and management personnel. An adverse determination in litigation
or interference proceedings to which we may become a party could subject us to
significant liabilities to third parties, could put our patents at risk of being
invalidated or interpreted narrowly and could put our patent applications at
risk of not issuing.
Further, there is a risk that some of our confidential information could
be compromised during the discovery process of any litigation. During the course
of any lawsuit, there may be public announcements of the results of hearings,
motions and other interim proceedings or developments in the litigation. If
securities analysts or investors perceive these results to be negative, it could
have a substantial negative effect on the trading price of our stock.
WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION WITH CALIPER TECHNOLOGIES
CORP. THAT WILL BE EXPENSIVE, MAY HURT OUR COMPETITIVE POSITION, MAY AFFECT OUR
ABILITY TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS AND MAY PREVENT US FROM
SELLING CERTAIN OF OUR PRODUCTS.
In March 1999, Caliper sued our former patent law firm, an attorney who was
our general counsel until October 30, 2000, and us alleging misappropriation of
Caliper's trade secrets. Caliper claims the attorney and the law firm, who were
of counsel to ACLARA both before and after the alleged events, and who were
briefly of counsel to Caliper during that period, used Caliper's confidential
information in preparing an application for one of our key patents. The attorney
joined us as internal general counsel approximately three years after the
alleged events. The patent in question covers technology used in most of the
LabCard chips we are currently developing. We believe that Caliper's suit lacks
factual and legal merit and have defended the case vigorously. However, on
October 27, 2000, a jury awarded Caliper $52.5 million in the case. No judgment
has been entered on the verdict, and it is not certain when a judgment will be
entered. Once a judgment has been entered, ACLARA intends to appeal the judgment
to the California Court of Appeal for the Sixth Appelate District. We may not be
successful in this appeal. If the appeal is successful, we may be granted a new
trial. Litigation is unpredictable, and we may not prevail in the new trial, if
granted. If we do not prevail, we could owe Caliper a significant amount of
monetary damages. The court could also grant Caliper various forms of equitable
relief including preventing us from enforcing some of our intellectual property
rights against Caliper. As a result, an outcome adverse to us
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could cause our business to suffer materially. For more information about this
matter, see Note 3 to the condensed financial statements contained in Part I
herein.
We sued Caliper in April 1999 for infringement of U.S. Patent No.
5,750,015, or the `015 patent, which covers technology used in most of our
current LabCard chip designs. We believe our case has merit and are pursuing it
aggressively. The court could decide, however, that Caliper does not infringe
the `015 patent, or could find the `015 patent to be invalid or unenforceable.
In either case, we would not be able to prevent Caliper and other third parties
from using product designs that we view as protected by the `015 patent. These
outcomes would reduce the value of our intellectual property rights, weaken our
competitive position and significantly hurt our financial results.
On July 19 we announced that the U.S. District Court for the Northern
District of California issued a Markman order interpreting the claims of the
`015 patent. Among its rulings, the Court refused to limit the claims to devices
that employed electrophoretic, but not electroosmotic, movement as Caliper had
asserted. The Court held that, in the context of ACLARA's patent, the term
"plurality of electrodes" defines electrodes that are positioned along the axis
of trenches in microfluidic devices, but not necessarily within the trenches
themselves. The Court also determined that the word "trench" as it appears in
the claims of the `015 is defined as an open structure which does not include a
structure that has been permanently covered. In addition, the Court held that
eight of forty-seven claims in the `015 were indefinite and, therefore, invalid.
On October 31, 2000, the Court issued an order denying a summary judgment motion
by Caliper to dismiss ACLARA's patent infringement suit against Caliper. Based
on the claim interpretation made by the Court in July, the Court ruled that
Caliper does not literally infringe ACLARA's `015 patent. However, the Court
denied Caliper's motion for summary judgment as to ACLARA's claim of
infringement under the doctrine of equivalents. The Court also "denied in its
entirety" Caliper's motion for summary judgment that ACLARA's patent is invalid.
As a result of this ruling, a trial in this action is scheduled to begin on
December 4, 2000. Litigation is unpredictable and we may not prevail in this
case. If we do not prevail, our competitive advantages could be impaired and
this could have a material adverse effect on our operating results, financial
condition and future growth prospects.
In January 2000, Caliper sued us alleging infringement of four patents (U.S.
Patent Nos. 5,858,195, 6,001,229, 6,010,607 and 6,010,608) that they claim to
have licensed exclusively. On March 10, 2000, Caliper amended its lawsuit to
include a fifth patent, U.S. Patent No. 6,033,546. We believe our products,
which are still under development, do not infringe any claims of these patents
and are defending our position vigorously. In our Answer and Counter-Claim filed
on April 6, 2000, we have denied that we infringe any of these patents and have
further asserted that these patents are invalid and unenforceable. However, the
outcome of any litigation is uncertain, and we may not prevail. Should we be
found to infringe any of these patents, we may be liable for potential monetary
damages, and could be required to obtain a license from Caliper to commercialize
our products or redesign our products so they do not infringe any of these
patents. If we were unable to obtain a license or adopt a non-infringing product
design, we may not be able to proceed with development, manufacture and sale of
some of our products. In this case our business may not develop as planned, and
our results could materially suffer.
Litigation results are unpredictable. If Caliper prevails on its trade
secret or patent claims or on some or all of its affirmative defenses of
invalidity and unenforceability in the federal action, it could impair our
ability to enforce our intellectual property rights, not just against Caliper
but against other competitors or others using the technology claimed in the `015
and related patents, which could adversely affect our business.
WE HAVE LIMITED MANUFACTURING EXPERIENCE, AND WILL BE SUBJECT TO THE RISK OF
FINALIZING CONTRACTUAL ARRANGEMENTS, TRANSFERRING TECHNOLOGY AND MAINTAINING
RELATIONSHIPS WITH THIRD-PARTY MANUFACTURERS TO MANUFACTURE OUR LABCARD CHIPS.
We have no experience manufacturing our products in the volumes that will be
necessary for us to achieve significant commercial sales. To date, we have
limited our manufacturing activities to the manufacturing of prototype LabCard
chips for testing purposes and for internal use by our collaborative partners.
The nature of our products requires the use of sophisticated injection molding
and other manufacturing processes that are not widely available. For this reason
only a limited number of vendors currently have the expertise to manufacture our
products. We have relationships with outside suppliers who are currently
manufacturing limited quantities of our LabCard chips for research and
development purposes. We will need to enter into contractual relationships with
these or other manufacturers for commercial scale production of LabCard chips
and we cannot assure you that we will be able to do so on a timely basis, for
sufficient quantities of chips or on
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commercially reasonable terms. Accordingly, we cannot assure you that we can
establish or maintain reliable, high-volume manufacturing at commercially
reasonable costs. In addition, the loss of any of these suppliers may result in
a delay or interruption of our supply of LabCard chips. Any significant delay or
interruption would have a material adverse effect on our ability to supply
adequate quantities of our products and would result in lost revenues.
WE DEPEND ON OUR KEY PERSONNEL, THE LOSS OF WHOM WOULD IMPAIR OUR ABILITY TO
COMPETE.
Our performance is substantially dependent on the performance of our senior
management and key scientific and technical personnel. We carry key person life
insurance on only two of our senior management personnel. The loss of the
services of any member of our senior management, scientific or technical staff
may significantly delay or prevent the achievement of product development and
other business objectives and could have a material adverse effect on our
business, operating results and financial condition. Our future success will
also depend on ability to identify, recruit and retain additional qualified
scientific, technical and managerial personnel. There is currently a shortage of
skilled executives and intense competition for such personnel in the areas of
our activities, and we cannot assure you that we will be able to continue to
attract and retain personnel with the advanced qualifications necessary for the
development of our business. The inability to attract and retain the necessary
scientific, technical and managerial personnel could have a material adverse
effect upon our research and development activities, sales revenue, operating
costs and future growth prospects.
WE EXPECT INTENSE COMPETITION IN OUR TARGET MARKETS.
We compete with companies that design, manufacture and market analytical
instruments for genomics and pharmaceutical drug screening using technologies
such as gel electrophoresis, capillary electrophoresis, microwell plates and
robotic liquid handling systems. In addition, a number of companies are
developing new technologies for miniaturizing various laboratory procedures, for
genomics and drug screening markets targeted by us, using methods such as
hybridization chips and high density microwell plates. Furthermore, we are aware
of other companies that are developing microfluidics technology, including
Caliper Technologies Corp. and Orchid BioSciences, Inc., for potential use in
certain of the markets that we are targeting.
We anticipate that we will face increased competition in the future as new
companies enter the market with new technologies. Rapidly changing technology,
evolving industry standards, changes in customer needs, emerging competition and
new product introductions characterize the markets for our products. One or more
of our competitors may render our technology obsolete or uneconomical by
advances in existing technological approaches or the development of different
approaches. Many of these competitors have greater financial and personnel
resources and more experience in research and development than we have.
Furthermore, we cannot assure you that the pharmaceutical and biotechnology
companies which are our potential customers or our strategic partners will not
develop competing products.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN
ADEQUATE INSURANCE, WHICH WOULD INCREASE OUR LOSSES IF SUCH CLAIMS OCCURRED.
Once we have commercially launched our LabCard products, we will face
exposure to product liability claims. Any product liability claims arising in
the future, regardless of their merit or eventual outcome, could increase our
losses. We have secured product liability insurance coverage, but we cannot
assure you that we will continue to be able to obtain such insurance on
acceptable terms with adequate coverage, or at reasonable costs. In addition,
potential product liability claims may exceed the amount of our insurance or may
be excluded from coverage under the terms of the policy.
WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL WHEN NEEDED OR GENERATE THE CAPITAL
NECESSARY TO EXPAND OUR OPERATIONS AND INVEST IN NEW PRODUCTS, WHICH COULD HURT
OUR ABILITY TO COMPETE OR ACHIEVE PROFITABILITY.
It might be necessary for us to raise additional capital over the next few
years to continue our research and development efforts and to commercialize our
products. We believe that the proceeds from our initial public offering and
projected revenue from collaborations should be sufficient to fund our
anticipated levels of operations through at least the end of 2001. However, we
cannot assure you that our business or operations will not change in a manner
that would consume available
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resources more rapidly than anticipated. We also cannot assure you that we will
continue to receive funding under existing collaborative arrangements or that
existing or potential future collaborations or sales revenue will be adequate to
fund our operations. We may need additional funds sooner than planned to meet
operational needs, capital requirements for product development and
commercialization and payment of monetary damages in any on-going or future
litigation. We cannot assure you that additional funds will be available when
needed, or on terms acceptable to us, or that sufficient revenue will be
generated from sales. If adequate funds are not available, we may have to reduce
substantially or eliminate expenditures for the development and production of
certain of our proposed products or obtain funds through arrangements with
collaboration partners that require us to relinquish rights to certain of our
technologies or products. Either of these alternatives could have a material
adverse effect on our business, operating results, financial condition and
future growth prospects.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING EXECUTIVE OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS.
Our executive officers, directors and largest stockholders and their
affiliates presently beneficially own or control approximately 27% of the
outstanding shares of common stock. Accordingly, our current executive officers,
directors and their affiliates, if acting together, would have the ability to
control the outcome of corporate actions requiring stockholder approval,
including the election of directors, any merger, consolidation or sale of all or
substantially all of our assets and any other significant corporate
transactions. The concentration of ownership could also delay or prevent a
change of control of our company at a premium price if these stockholders oppose
it.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE HIGHLY VOLATILE.
There has only been a public market for our common stock since March 21,
2000, and since then our common stock has traded in a range between $13.75 and
$66.00 per share.
The trading price of our common stock may continue to be highly volatile and
could be subject to wide fluctuations in price in response to various factors,
many of which are beyond our control including: outcome of litigation
proceedings or threatened claims to which we are currently a party; quarterly
fluctuations in results of operations; the company's ability to successfully
commercialize our products; technological innovations or new commercial products
by us or our competitors; developments concerning government regulations or
proprietary rights which could affect the potential growth of our customers; the
execution of new collaborative agreements and material changes in the
relationships with business partners; market reaction to trends in revenues and
expenses, especially research and development; changes in earnings estimates by
analysts; sales of common stock by existing stockholders; and economic and
political conditions.
The market price for our common stock may also be affected by our ability to
meet analysts' expectations. Any failure to meet such expectations, even
slightly, could have an adverse effect on the market price of the common stock.
In addition, the stock market, and the Nasdaq National Market and the market for
technology companies in particular, is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of these companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against the company. If similar litigation were
instituted against us, it could result in substantial costs and a diversion of
our management's attention and resources, which could have an adverse effect on
our business, results of operations and financial condition.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW LIMIT THE
ABILITY OF ANOTHER PARTY TO ACQUIRE US, WHICH COULD CAUSE OUR STOCK PRICE TO
DECLINE.
Certain provisions of our certificate of incorporation and our bylaws could
delay or prevent a third party from acquiring us, even if doing so might be
beneficial to our stockholders. For example, we have a classified board of
directors whose members serve staggered three-year terms and are removable only
for cause. In addition, because we are incorporated in Delaware, we are governed
by the provisions of Section 203 of the Delaware General Corporation Law, which
may prohibit large stockholders from consummating a merger or combination with
us. These provisions
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could also limit the price that investors might be willing to pay in the future
for our common stock.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is currently confined to our cash and cash
equivalents which have maturities of less than three months, our short-term
investments which have average maturities of less than one year and our
long-term investments which have average maturities of more than one year. We
maintain an investment portfolio of commercial paper and U.S. government agency
bonds. The securities in our investment portfolio are not leveraged, are
classified as available-for-sale and are, due to their short-term nature,
subject to minimal interest rate risk. We currently do not hedge interest rate
exposure. Because of the short-term maturities of our investments, we do not
believe that an increase in market rates would have any significant negative
impact on the realized value of our investment portfolio.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information with respect to this item is incorporated by reference to Note 3
to the condensed financial statements contained in Part I herein.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 20, 2000, a registration statement on Form S-1 (No. 333-95107) was
declared effective by the Securities and Exchange Commission. We have continued
to use the net proceeds of the offering to fund our ongoing research and
development activities and for working capital and other general corporate
purposes.
As of September 30, 2000, we had applied the net proceeds of the offering as
follows:
Repayment of indebtedness
Working capital
Temporary investments
Purchase and installation of machinery and equipment
The foregoing amounts represent our best estimate of our use of proceeds for
the period indicated.
Options to purchase 42,199 shares of our common stock were exercised in the
third quarter of fiscal 2000 for aggregate proceeds to us of $19,623. We relied
on Rule 701 and Section 4(2) of the Securities Act of 1933 in issuing shares
upon the exercise of options.
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ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The exhibits listed in the accompanying Exhibit Index are
filed with or incorporated by reference as part of this Report.
(b) Current Reports on Form 8-K. We did not file any reports on Form 8-K
during the quarter ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACLARA BioSciences, Inc.
By: /s/ Joseph M. Limber
-----------------------------------------
Name: Joseph M. Limber
Title: President and Chief Executive Officer
(Duly Authorized Officer and Acting
Principal Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Title Number
------- --------------- ------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of ACLARA
BioSciences, Inc. (1)
3.2 Certificate of Amendment to Amended and Restated
Certificate of Incorporation of ACLARA BioSciences, Inc.
(2)
3.3 Amended and Restated Bylaws of ACLARA BioSciences, Inc. (3)
27.1 Financial Data Schedule
</TABLE>
(1) Previously filed as Exhibit 3.3 to our Registration Statement
on Form S-1 filed with the Securities and Exchange Commission,
File No. 333-95107 (our "Form S-1").
(2) Previously filed as Exhibit 3.6 to our Form S-1.
(3) Previously filed as Exhibit 3.4 to our Form S-1.
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