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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 000-29101
SEQUENOM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0365889
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OR INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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11555 SORRENTO VALLEY ROAD
SAN DIEGO, CALIFORNIA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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Registrant's telephone number, including area code: (858) 350-0345
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock $.001
par value
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) Yes [X] No [_] and (2) has
been subject to such filing requirements for the past 90 days. Yes [_]
No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on February
29, 2000 as reported on the Nasdaq National Market, was approximately
$1,823,000,000. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 29, 2000, there were 23,897,050 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain Exhibits filed with the Registrant's Registration Statement on Form S-
1 (No. 333-91665), as amended, are incorporated herein by reference into Part
IV of this Report.
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SEQUENOM, INC.
FORM 10-K
INDEX
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PAGE
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PART I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 25
Item 3. Legal Proceedings............................................. 25
Item 4. Submission of Matters to a Vote of Security Holders........... 25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 26
Item 6. Selected Financial Data....................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 29
Item 7a. Quantitative and Qualitative Disclosure of Market Risk........ 32
Item 8. Financial Statements and Supplementary Data................... 33
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant............ 34
Item 11. Executive Compensation........................................ 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 41
Item 13. Certain Relationships and Related Transactions................ 42
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 43
PART IV
SIGNATURES.................................................... 44
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Sequenom, MassARRAY, Industrial Genomics, SpectroCHIP, SpectroJET, MassEXTEND,
BioMASS and SpectroTYPER are trademarks of Sequenom, Inc. This Form 10-K also
refers to trade names and trademarks of other organizations.
PART I
ITEM 1. BUSINESS
BACKGROUND
DNA, GENES AND THE HUMAN GENOME PROJECT
Deoxyribonucleic acid, or DNA, is present in all living cells and is
responsible for determining the inherited characteristics of all living
organisms. Each DNA molecule contains two complementary strands comprised of
four different types of nucleotide bases, commonly known as G, C, A and T. The
order of these letters is called the DNA sequence. Each G on one strand pairs
with a C on the complementary strand, and similarly each A pairs with a T. The
entire DNA content of an organism is called its genome.
The human genome is organized into 46 chromosomes, or two sets of 23
chromosomes, one set inherited from each parent. Each chromosome is one
continuous double-stranded DNA molecule. The DNA contributed by one parent is
called the haploid genome. The DNA content of one haploid genome is
approximately 4 billion bases, which is organized into more than 100,000
distinct genes. Genes are segments of DNA located throughout the chromosomes.
Since parents are not identical, each individual has two similar but slightly
different copies of each chromosome and therefore two copies of each gene.
Genes comprise approximately 5% of the DNA in a human cell. Some additional
amount is used to regulate DNA function. More than 90% of the DNA has no known
function.
All cells contain a full copy of DNA, but each cell type expresses only those
genes necessary for its specific function. When a gene is expressed, a copy of
its DNA sequence, called messenger RNA, is used as a template to direct the
synthesis of a protein. Proteins are composed of 20 different constituents
called amino acids. Three adjacent letters of DNA, known as a codon, direct
the position and identity of one amino acid in a protein. Cells use proteins
to carry out their functions. For example, blood cells use the protein
hemoglobin to transport oxygen and muscle cells use the protein myoglobin to
store oxygen. Likewise, pancreatic islet cells secrete the protein insulin to
regulate blood sugar levels. DNA sequences referred to as regulatory elements
help to determine where a protein is made and in what quantities. For an
individual to be healthy, the correct proteins must be produced at the right
time in the appropriate amounts in the correct cells. DNA variations can
change the properties of a protein, or where, when or how much of a protein is
produced.
In order to develop new medical treatments and diagnostics based on genetic
information, efforts to sequence human DNA began in the mid-1980s when the
technology for sequencing became available. Efforts funded by governments and
foundations began in earnest by the end of the 1980s. These efforts came to be
known as the Human Genome Project. This project is expected to produce a rough
draft of the human DNA sequence this year, with a complete draft expected in
several years. The overall public sector expenditure is expected to approach
$3 billion. In parallel with the public sector effort, a large private sector
effort emerged in the early 1990s. Unlike the public effort that targets the
entire genome, commercial efforts have focused on sequencing the genes
themselves. This private effort claims to have identified many human genes
some of which have been made available for a variety of biological and
biomedical studies.
GENETIC VARIATIONS AND SINGLE NUCLEOTIDE POLYMORPHISMS, OR SNPS
Each individual has two identical copies of many genes, but some genes
inherited from the mother will be different from their counterpart inherited
from the father. A difference in one or more letters of a DNA sequence,
referred to as a genetic variation, can modify the way a gene functions.
Genetic variations lead to a spectrum of observable differences, such as eye
and hair color. Genetic variations are also a major component of nearly all
diseases, including cancer, diabetes and cardiovascular disease. Many chronic
diseases are affected by multiple genetic variations.
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Single nucleotide polymorphisms, or SNPs, are the most common type of genetic
variation. SNPs are a change in a single letter of DNA text, such as replacing
a G with a T in one location and on the complementary DNA strand replacing a C
with an A. Another common variation is the insertion or deletion of one or
several letters. A third common variation is an increase or decrease in the
length of simple repeating DNA sequences. Nearly every person carries numerous
examples of each of these three kinds of variations, some of which can result
in disease.
GENETIC ANALYSIS OR GENOTYPING
The process of determining the SNPs present in an individual is called
genotyping. It is estimated that there are 3 million to 10 million SNPs
inherited from each parent. Some SNPs are a major cause of inherited diseases
and are responsible for most individual differences in drug responsiveness;
however, most SNPs are of no medical consequence. For example, if the third
letter of a codon varies, the result is usually to produce the same amino acid
or one with similar properties. However, to date, thousands of SNPs have been
identified as medically relevant. Many genes exist in highly redundant sets so
that even if one is totally removed, there are no functional consequences. We
believe that only one SNP in a thousand may be medically relevant to disease
susceptibility or responsiveness to disease therapy. To capture this
information, tens of thousands of SNPs will have to be measured in each
individual.
Existing DNA sequence databases with samples from multiple individuals contain
many clues about potential sites in the human genome where SNPs occur.
Sequence variation between these individuals may suggest the presence of a
SNP. Ongoing sequencing efforts promise to increase the amount of available
sequence data tremendously and should discover most human SNPs within the next
few years.
After a SNP is discovered, its potential relevance for human health must be
validated by determining how common the variation is in different segments of
the population. To identify the small subset of SNPs that occur with the
greatest frequency in human disease or are responsible for variations in drug
responsiveness, hundreds of millions of SNP measurements must be made and
correlated with health and other physical and mental features of interest.
SNPs with a validated medical relevance may be used for drug development and
human medical diagnostics. Identification of these SNPs will require a highly
accurate, high throughput DNA analysis technology at a competitive cost.
PERSONALIZED MEDICINE OR PHARMACOGENOMICS
It has long been known that people respond differently to the same drug. The
field of pharmacogenomics studies these variations in drug response based on
genetic differences. The emerging ability to correlate drug responses with
SNPs promises to enable doctors to prescribe appropriate drugs to patients
with the goal of maximizing drug response and minimizing side effects. For
example, a test that could distinguish poor responders from good responders to
drugs in which more than one therapeutic alternative exists could
significantly reduce health care costs. In addition, pharmacogenomics may
allow pharmaceutical companies to include a genetic component in the design of
clinical trials so that the candidate drug is targeted to individuals with a
specific genotype. Genetic variations shown to correlate with poor efficacy
could be used as a basis for excluding non-responders from clinical trials
thereby potentially improving results and reducing the costs of clinical
trials.
SNPS IN AGRICULTURE AND LIVESTOCK
As living organisms, plants and animals are composed of cells that contain
DNA. As with humans, genetic variations in plants and animals result in
differences in species characteristics. For example, plants may have SNPs
responsible for differences in resistance to insects and herbicides or
agricultural yields. Likewise, animals may have SNPs responsible for traits
such as variations in milk production, fat content of meat or fertility. Plant
and animal SNPs can be exploited through selective breeding to develop plants
and animals with desired quality traits.
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SNP MARKET
The SNP genotyping market represents a significant portion of both the biochip
market and the DNA sequencing market. The SNP genotyping market can be divided
into three segments:
. confirmation of new sites of genetic variation in DNA, which typically
requires the analysis of a SNP in up to a hundred people;
. determination of the medical importance of SNPs, which typically requires
the analysis of a SNP in a few thousand diseased and healthy people; and
. utilization of SNPs in genomics-based drug development, disease
predisposition determination and diagnostic test development, which may
require the analysis of multiple SNPs in millions of people.
Several companies claim to have identified, in the aggregate, more than 50,000
SNPs, and The SNP Consortium, comprised of drug companies and public entities,
has announced a group effort to discover 300,000 more. If The SNP Consortium
successfully identifies 300,000 SNPs and seeks to discover the associated
disease genes, they would have to conduct a case study involving several
thousand people, which would require the analysis of hundreds of millions of
SNPs.
CURRENT GENOMICS ANALYSIS TOOLS AND LIMITATIONS
Current DNA analysis technologies have been developed primarily to conduct DNA
research including DNA sequencing and expression profiling. Presently, the two
leading methods are gel electrophoresis and hybridization.
Gel electrophoresis measures how far a DNA fragment migrates through the pores
of gels in response to an applied electrical field over a fixed time interval.
DNA can be sequenced by using enzymes to copy a DNA sequence. The enzymes
begin at a fixed point and then terminate at all positions where an A occurs.
Gel electrophoresis is then used to measure the lengths of the terminated
sequences and thereby the location of all As. When this process is repeated
three more times for C, T and G, the resulting information can be lined up to
generate a complete sequence. In order to make this method totally accurate,
the same experiment must be repeated multiple times. In a single run,
commercial DNA sequencers using this gel-based method can measure up to 600
bases with a statistically significant error-rate.
Hybridization arrays, or biochips, use single stranded DNA fragments
immobilized on a flat surface in known positions. These are powerful tools for
the analysis of gene expression, but can also be used for gene sequencing.
When used for gene sequencing, DNA fragments of varying lengths labeled with a
fluorescent tag are washed over the surface of the biochip. These DNA
fragments then specifically interact, or hybridize, with a complementary
sequence immobilized on the biochip and can be detected using a fluorescent
microscope. Because the position of the complementary sequence on the biochip
is known, the sequence of the target DNA fragment can be determined by reading
the biochip. However, because DNA fragments sometimes bind to strands that are
not fully complementary, hybridization arrays do not correctly detect all of
the sequence information in a target sample.
Gel electrophoresis and hybridization play an interim role in determining SNP
function and analysis as these methods are well accepted and established for
research applications. However, neither of these two methods is ideally suited
to the analysis of sequence variations. In both cases, the analytical process
examines many nucleotides of a sequence even though the target variation may
occur at a single site. This increases the cost, complexity and time involved
in the analytical process. In order to be able to measure thousands of SNPs in
thousands of samples, one must focus on the SNPs themselves with methods that
are cost-effective, accurate and fully automated.
At the site of any SNP, one must analyze simultaneously the variant inherited
from each parent. If each parent has a different SNP at the same position, the
difficulty of detecting those variations is magnified because only one-half of
the DNA from each parent is available to generate a signal. In addition, in
practice, one SNP variant
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may be present at a lower concentration than the other and therefore may be
undetectable or generate an ambiguous signal using conventional methods. Using
gel electrophoresis and hybridization, the detection of these multiple SNP
variants is therefore often unreliable.
To reduce costs, many users of SNP assays are trying to perform two or more
assays in a single tube and read the results simultaneously. This may involve
different SNPs in the same individual or the same SNP in different
individuals. Current gel technology limits this process to four available
dyes, and simultaneous assays involving multiple individuals are impossible on
biochips. However, biochips are theoretically capable of simultaneously
analyzing many SNPs for a single individual, but their utility is limited by
low accuracy. The large quantity of reagents and labor-intensive data
processing needed to achieve useable results are also cost limitations when
using current technologies for large-scale genotyping. Reagent costs represent
most of the sample preparation costs. Data analysis costs associated with
current gel or hybridization-based assays using fluorescent detection are
estimated to be most of the overall costs.
Errors in SNP analysis have serious consequences. In studies to correlate
identified SNPs with disease conditions, it has been estimated that to
compensate for a 1% error rate in individual measurements, the study
population would have to increase by a factor of three. This significantly
increases the cost of a SNP study. In addition, in order to accurately
identify a real SNP from a sequencing error when the sequencing error occurs
with a frequency of 1%, a suspected SNP has to be verified through repetitive
sequencing. When identifying 10,000 SNPs in an individual, 100 SNPs may be
incorrectly determined using gel electrophoresis, with no ability to determine
where the errors occurred. Therefore, the value of using gel electrophoresis
as a SNP analysis tool is dramatically reduced unless the test is repeated
several times. As a result, when genotyping SNPs on an industrial scale, a 1%
error rate becomes cost-prohibitive.
THE SEQUENOM SOLUTION - INDUSTRIAL GENOMICS
We are a pioneer in the new field of industrial genomics. To draw conclusions
from huge data sets associated with genotyping, we have developed a highly
accurate, high throughput and cost-effective technology that addresses the
demand for large-scale SNP analysis. Our MassARRAY system represents a novel
approach to genotyping by combining our proprietary enzymology and software
processing of biological data, or bioinformatics, in a miniaturized chip-based
format with the proven technology of mass spectrometry. The accuracy, high
throughput, miniaturization and automation to minimize labor represent major
cost savings potentials.
ACCURACY
The MassARRAY system analyzes molecules directly and accurately by determining
their molecular weight, an intrinsic property. Our technology eliminates the
use of labels, such as fluorescent labels, which is an indirect way of
analyzing molecules and is a common source of ambiguous results. Therefore,
because we capture direct information about molecules, we are able to obtain a
high level of accuracy and eliminate the need to do repetitive testing of each
sample.
THROUGHPUT
Our MassARRAY system can analyze a sample in three seconds, which is
significantly faster than currently available gel electrophoresis and
hybridization processes. These processes can require minutes to hours to
analyze a sample. In addition, our system eliminates the need for repetitive
testing of every sample, thereby increasing throughput, or the number of
different samples that can be analyzed in a given time period. Throughput
using the MassARRAY system can be further enhanced by full automation and also
by running more than one experiment simultaneously.
FLEXIBILITY
MassARRAY can be rapidly reconfigured for new analyses. A test to analyze a
newly discovered SNP can be designed in several days. In addition to SNPs,
simple sequence repeats, short DNA sequencing reads, and the analysis of
proteins and metabolites can all be carried out using the same MassARRAY
technology.
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COST
Our MassARRAY system significantly reduces the costs associated with SNP
analysis by reducing reaction volume and reagent requirements, enhancing data
processing and eliminating repetitive testing of every sample to verify
results. Our proprietary SpectroCHIP is capable of working with nanoliters,
which is one thousandth of the sample volume generally used with other
technologies. This ability to miniaturize the sample volume significantly
reduces reagent costs. Our proprietary bioinformatics reduce expensive data
interpretation time and labor by rendering raw data points directly
interpretable without extensive data processing and allowing for significant
data compression.
SEQUENOM STRATEGY
Our goal is to become the leader in the emerging markets of industrial
genomics and diagnostics by making our MassARRAY system the market standard
for industrial scale SNP analysis. Our strategy is to capitalize on the
quickly emerging demand for genotyping in the areas of drug target discovery,
drug development, DNA diagnostics, patient stratification by genetic traits,
clinical trials and agricultural biotechnology. Key elements of our strategy
consist of the following:
DEVELOP RECURRING REVENUE STREAM THROUGH DISPOSABLE PRODUCT SALES
We seek to establish an installed base of instruments that require the use of
various disposables, including our MassEXTEND kits and single-use
SpectroCHIPs. As our installed base of MassARRAY systems grows, we expect the
majority of our ongoing revenue stream will consist of sales of these
disposables.
FOCUS ON KEY ACCOUNTS AND PRODUCT AREAS
We are seeking to penetrate the genotyping market by establishing commercial
relationships with opinion leaders and identifying areas of potential
widespread interest. We initiated this effort in late 1999 by selecting highly
visible academic, government and commercial centers to validate our MassARRAY
system in beta site testing. Three of our six original beta site users have
now purchased their MassARRAY systems. We continue to seek new commercial
customers that have large-scale genotyping demands and can continue to
demonstrate the utility of the MassARRAY technology. In addition, we intend to
develop proprietary disposable assays and software products that are useful
for popular areas of scientific investigation--first as research tools to
confirm the association of particular SNPs with particular diseases and
subsequently as diagnostic kits that can be sold for basic SNP profiling.
RETAIN COMMERCIAL RIGHTS
We will seek to retain commercial rights to tests that we develop on behalf of
or together with third parties in exchange for providing our assay development
capacity and expertise. By obtaining commercial rights to assays that we
initially develop for key accounts, we will seek to develop a broad product
offering that will appeal to a large group of potential customers. We intend
to identify in collaboration with these customers SNP sets for which genetic
function has been determined and validated to enable the multi-dimensional
understanding of the medical and environmental components of disease. Together
with our customers, we intend to develop knowledge-based genomic products that
combine pharmaceutical, medical and genetic information, such as validated SNP
sets for specific diseases.
ADDRESS MULTIPLE MARKET SEGMENTS
We are introducing our technology into existing markets that have an immediate
need for SNP validation and high throughput genotyping. We will seek to expand
our marketing efforts as additional SNP analysis becomes necessary for genomic
drug development, clinical DNA diagnostics, pharmacogenomics and agricultural
genomics.
EXPAND APPLICATIONS FOR MASSARRAY TECHNOLOGY
Because molecular weight is an intrinsic property of all molecules, our
MassARRAY technology can serve as a platform for the analysis of many
biomolecules, such as proteins, carbohydrates and metabolites. This leads to
the understanding of the multidimensional aspects of genetic diversity,
including how DNA, RNA, proteins and
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resulting metabolites contribute to traits, such as drug response and disease
susceptibility. We intend to use this flexibility to develop new products for
applications in areas other than DNA and SNP analysis.
MASSARRAY TECHNOLOGY
The starting point for SNP analysis using the MassARRAY system is genomic DNA
that is easily accessed in a sample of biological material such as blood. A
small amount of blood provides sufficient material to allow tens of thousands
of SNPs to be analyzed in one individual. DNA is prepared by standard
procedures that break open the blood cells, release the DNA and discard other
material. Next, specific DNA regions, about 200 base pairs in length, are
amplified by enzymatic reactions into multiple copies to produce more
concentrated samples for easier analysis. The amplified fragments are then
attached by one strand to a solid surface and the non-immobilized strands are
removed by standard denaturation conditions. The immobilized single strand
then serves as a template for additional automated enzymatic reactions that
produce the analytical samples. The products of these reactions are removed
from the solid surface prior to mass spectrometry. All these steps are
performed in the same reaction tube lending the entire process to full
automation. Very small quantities of the products, typically five to ten
nanoliters, are transferred with the SpectroJET nanoliter dispensing system
onto the SpectroCHIP for subsequent automatic analysis with the SpectroREADER
mass spectrometer. Because the four different text letters have different
weights, measuring the weights reveals the identity of the letters. The
SpectroTYPER software then calculates, records, compares and reports the
genotypes at the rate of three seconds per sample.
Our fundamental proprietary technology is based on the integration of four
components:
. mass spectrometry;
. chips as miniaturized launching pads;
. MassARRAY applications and assays; and
. bioinformatics.
MASS SPECTROMETRY
Our MassARRAY system has enabled the use of mass spectrometry for high
throughput automated SNP analysis. Using mass spectrometry to measure
relatively small molecules is a proven technology because it directly and
accurately determines molecular weight. While mass spectrometry has existed in
many variations for several decades, it could not be used for larger
biomolecules because they were fragmented during the process and therefore
could not be measured as whole molecules.
Our MassARRAY system uses technology called MALDI-TOF, or Matrix-Assisted-
Laser-Desorption/ Ionization-Time-of-Flight, mass spectrometry. Through the
combination of MALDI-TOF and our proprietary SpectroCHIP and enzymology, we
are now capable of effectively analyzing biomolecules in an automated mode. In
the MALDI-TOF process, the target molecules are mixed with light-absorbing
molecules to form a crystalline matrix on the surface of our SpectroCHIP. In a
process known as desorption, this matrix is hit with a pulse of laser beam.
The laser energy vaporizes the matrix molecules that then carry the target
molecules aloft. During the process, some of the molecules acquire a charge,
or become ionized. Next an electrical field pulse launches the charged
molecules down a flight tube toward a detector. The time between the
electrical field pulse and collision with the detector is measured, and is
referred to as time-of-flight. Time-of-flight is directly correlated to
molecular weight because large molecules fly slower than small molecules. All
the steps in the MALDI-TOF process are accomplished in less than a thousandth
of a second.
CHIPS AS MINIATURIZED LAUNCHING PADS
SpectroCHIPs are flat silicon wafers with an array of 96 or 384 small, evenly
spaced water-attracting spots surrounded by water-repelling surface areas.
Because biomolecules are water soluble, they migrate to the water-attracting
spots. These spots are treated with the light-absorbing matrix that makes the
mass spectrometry of biomolecules possible. As such, our proprietary
SpectroCHIPs serve as a launching pad for vaporizing a variety of biomolecules
appropriately prepared for use with the MassARRAY system. In addition, the
SpectroCHIPs are
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essential for the miniaturization and automation of the MALDI-TOF process. A
SpectroCHIP's high precision surface structure allows very small samples to be
accurately positioned and distributed uniformly into an array format which
serves as an effective launching pad for the automated MALDI-TOF process.
The DNA samples are transferred from a microtiter plate to the spots on the
chip using our SpectroJET nanoliter dispensing unit. Ten chips then can be
positioned on a cartridge and transferred to the SpectroREADER array reading
mass spectrometer. The mass spectrometer utilizes our proprietary SpectroTYPER
software and sequentially scans the positions on the array in a fully
automated mode, completing each scan within three seconds. This proprietary
technology to shrink the scale of samples from microliter to nanoliter volumes
is the key element for highly accurate and automatic data acquisition.
ASSAYS AND ENZYMATIC REACTIONS
A key element of the MassARRAY system is the BioMASS assay. An assay is a test
that provides analytical information about a reaction of interest, such as the
weight of a biomolecule. In order to use our MassARRAY system, the user must
prepare the sample using the BioMASS assay. The central components of any
BioMASS assay are ingredients such as beads for immobilization and buffer
solutions for conditioning the sample necessary for mass spectrometry
analysis. Every SNP analysis using our MassARRAY system requires the use of a
BioMASS assay. Prior to the BioMASS assay, DNA must be extracted from cells
and a specific segment must be amplified using commercially available kits.
The BioMASS assay includes all of the ingredients required to prepare a DNA
fragment for SNP analysis, except the enzymes and nucleotide building blocks
which are necessary for the primer extension reaction. The primer extension
reaction known as a MassEXTEND assay is the step where a known sequence of
DNA, known as a primer, binds to a specific region of DNA in which a SNP is
located. Users of the MassARRAY system can prepare their own primer extension
reaction, or we can collaborate with customers to develop a customized primer
extension reaction by way of assay design. When we develop primer extension
reactions for the analysis of specific SNPs, customers can purchase a specific
MassEXTEND assay from us that contains the customized primer extension
reaction for the SNP of interest. We currently offer a generic MassEXTEND
assay kit and are collaborating with our beta site and pre-launch users on a
variety of SNP-specific MassEXTEND assays. In the future, we intend to develop
chips that allow the performance of MassEXTEND reactions in a miniaturized
format on the surface of the chip.
BIOINFORMATICS
The SpectroTYPER software calculates, records, compares and reports the
genotypes at the rate of three seconds per sample. It includes advanced
digital signal processing, data compression and interpretation to achieve full
automation of the analysis and archiving of molecular weight signals as SNP
genotypes. This software distinguishes between signal and noise, identifies
patterns that correspond to assays, and interprets the signals as SNP
genotypes without labor-intensive data processing.
PRODUCTS
We have developed a suite of products that we collectively call the MassARRAY
system. The MassARRAY system consists of the SpectroREADER array-scanning mass
spectrometer, SpectroJET nanoliter-dispensing unit, a MassARRAY kit and the
SpectroTYPER MassARRAY workstation. The MassARRAY kit contains the MassEXTEND
assay, including the SpectroCHIP, buffer solutions and enzymes. The hardware
components, including the mass spectrometer and the dispensing unit, are off-
the-shelf instruments modified to run our MassARRAY technology.
We commenced a commercial launch of our MassARRAY system during the fourth
quarter of 1999. To date, we have commercially placed six MassARRAY systems,
three of which were placed with former beta site users. Current commercial and
beta sites are Genzyme Corporation, U.S. Department of Agriculture, The
National Institutes of Health, National Cancer Institute and Center for Human
Genetics at Boston University in the United States and University of Munster,
GLE Medicon and Methexis Genomics in Europe.
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MASSARRAY SYSTEM
Our MassARRAY system consists of hardware, software and disposable components:
Hardware components
The MassARRAY system is a series of integrated hardware components that
processes prepared DNA samples for SNP reading and analysis. The 96- or 384-
well microtiter plates contain prepared samples of extended DNA fragments.
Samples from each well are then transferred by the dispensing unit onto an
array of individual water-attracting spots that are located on the surface of
the SpectroCHIPs. The SpectroCHIPs are then run through the mass spectrometer
for SNP reading and analysis.
The MassARRAY system has been designed to be either partially automated using
a customized 96- or 384-channel microliter dispenser or fully automated with
the addition of our automated process line for users with industrial-scale
throughput needs. Our process line links several liquid-handling modules using
a robot to fully automate the DNA sample preparation process including
amplification, enzymatic extension and conditioning for SNP analysis. The
process line has been designed for a capacity of up to 100-microtiter plates
per 24 hours.
SpectroJET nanoliter-dispensing unit
The SpectroJET nanoliter-dispensing unit is a liquid-handling module that
transfers samples from microtiter plates to the SpectroCHIP. The SpectroJET
dispenses nanoliter volumes of DNA samples onto precise locations on the
SpectroCHIP's surface.
The reading system
The SpectroREADER array mass spectrometer is the analytical component of the
MassARRAY system adapted specifically for the analysis of our SpectroCHIPs. We
have adapted the mass spectrometer to analyze interchangeable cartridges
holding 10 SpectroCHIPs in the SpectroREADER. This dramatically improves the
automation and throughput of our MassARRAY system because all the positions on
the 10 chips can be analyzed in a single, automated, unattended run. The
SpectroREADER separates, detects and characterizes the SNPs according to their
different molecular weights.
SOFTWARE COMPONENT
Interpretation software
Our suite of software products, called the SpectroTYPER, incorporates
proprietary modules for molecular weight recognition and data compression and
interpretation. The software correlates a reading from the SpectroREADER with
a genotype in the SNP sample. The MassARRAY technology allows the SpectroTYPER
software to interpret raw data without extensive processing. This reduces the
amount of time and computer resources necessary and increases the reliability
for SNP analysis. The SpectroTYPER runs on Windows NT and uses an Oracle
database.
DISPOSABLE COMPONENTS
The SpectroCHIP
The key component of our MassARRAY system is our SpectroCHIP, a small,
approximately 2x3 cm, silicon chip. The SpectroCHIP allows for reliable and
automated scanning of samples of the array and substantially increases the
capacity of MALDI-TOF mass spectrometry. Additional throughput can be obtained
by simultaneously preparing DNA fragments for multiple SNP analysis, a process
referred to as multiplexing. Samples are placed on the surface of the
SpectroCHIP using our SpectroJET nanoliter-dispenser. SpectroCHIPs are
designed for single-use only, and we expect their consumption to generate a
recurring revenue stream.
MassARRAY kit
The MassARRAY kit consists of a MassEXTEND assay including the SpectroCHIP,
buffer solutions and enzymes. Each kit can be used to read and analyze 10
SpectroCHIPs for a total of 960 or 3,840 reactions. We have in-house expertise
to design specific assays in collaboration with our customers that deliver
highly accurate results. In addition, our assays serve a wide range of
applications and can be designed for simultaneous analyses.
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POPULATION-BASED DNA BANK
We have established a population-based DNA bank as a value-added universal
reference tool for demonstrating the medical importance of genetic variances
potentially involved in the development of diseases. We intend to sell access
or license subscriptions to this resource to pharmaceutical and genomics
companies to validate the existence of potential SNPs. Our bank complements
the patient-based DNA banks collected by these potential customers, which are
typically disease specific. We believe the data sets derived will represent
essential tools for decision making in genomic drug development and the
interpretation of diagnostic and genetic profiling results. Also, as a
function of our in-house assay design services, we will use samples from the
DNA bank to investigate SNPs across healthy multiethnic population pools
segregated by age and gender, thereby determining which SNP frequencies change
as a function of these parameters. Our DNA bank currently consists of more
than 8,000 individual samples collected from the North American continent.
These samples were collected using stringent criteria and are sorted by age,
sex and ethnicity. Blood samples are representative of the ages from newborn
to 80. We have the capacity to increase the size of our bank to include tens
of thousands of samples.
FUTURE PRODUCT DEVELOPMENT
Our product development efforts will seek to provide value-added applications
for a broader customer base and advanced MassARRAY systems that offer reduced
cost and higher throughput.
384 SPECTROCHIP
In the second quarter of 2000, we intend to commercially offer a SpectroCHIP
with 384 sample spots on the chip surface. The 384 SpectroCHIP currently is
being used for in-house projects. The size of the silicon chip will remain the
same. This chip may significantly increase sample throughput and reduce
reagent consumption per sample.
FUTURE-GENERATION FUNCTIONALIZED SPECTROCHIP
We intend to further miniaturize by moving some of the DNA sample preparation
steps onto the chip surface. With the functionalized SpectroCHIP, the
enzymatic reactions will take place on the surface of the chip thereby
eliminating the need for the microtiter plate, providing a significant
reduction in reaction volumes.
THE MASSARRAY INTEGRATED SYSTEM AND BIOINFORMATICS
The implementation of the functionalized chip should allow us to integrate all
steps of the DNA analysis process, including sample preparation, into one
automated system. We intend for the MassARRAY integrated system and
bioinformatics to be compatible with all leading commercial and public domain
genetic database formats so customers will be able to integrate the MassARRAY
system seamlessly into whichever downstream analytical processes they prefer.
FUTURE APPLICATIONS
Our MassARRAY system is not restricted to DNA analysis. It can analyze a broad
range of molecules of medical and biological importance, such as proteins,
carbohydrates and metabolites. We intend to make enhancements to our MassARRAY
system for the analysis of additional medically relevant biomolecules.
PRODUCT COMMERCIALIZATION
We are seeking to penetrate the SNP analysis market by identifying areas of
potential widespread interest and establishing commercial relationships with
opinion leaders. We initiated this effort by selecting six highly visible
academic, government and commercial centers as collaborators to validate our
MassARRAY system in pre-launch testing. These centers are Genzyme Corporation,
the US Department of Agriculture, the National Institutes of Health and, the
National Cancer Institute in the U.S. and the University of Munster and GLE
Medicon in Germany. In October 1999, we contracted for the first sale of a
MassARRAY system. We commenced a commercial launch of our MassARRAY system
during the fourth quarter of 1999.
To strategically place our MassARRAY system into the market, the pre-launch
customers were selected, and we are continuing to target customers, based on
the following criteria:
. entities within the genomic community with high visibility or proven
expertise and which generally adopt new technologies before others;
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. entities that are pursuing diverse programs relating to basic genomic
research, agricultural genomics, human DNA diagnostics and genomic drug
discovery and development;
. entities with substantial genotyping demands in terms of both sample
volumes and number/complexity of assays to be designed.
We intend to develop proprietary disposable SNP tests, called assays, and
software products that are useful initially as research tools to confirm the
association of particular SNPs with particular diseases and subsequently as
diagnostic kits that can be sold for SNP profiling. In addition, we will seek
to retain commercial rights to assays that we develop on behalf of or together
with our customers. Over time, with our customers, we intend to develop
knowledge-based genomic products that combine pharmaceutical, medical and
genetic information, such as validated SNP sets for specific diseases. Also,
in addition to DNA, we believe our MassARRAY technology can serve as a
platform for the analysis of many other biomolecules. We therefore intend to
develop new products for applications other than DNA and SNP analysis.
RECENT DEVELOPMENTS
In the first quarter of 2000, we commercially placed three MassARRAY systems.
In addition, three of our six original beta site users, the U.S. Department of
Agriculture, the National Institutes of Health and the National Cancer
Institute, are now commercial accounts. Additional systems have also been
purchased by the Center for Human Genetics at Boston University and a second
site of the National Institutes of Health in the U.S. and Methexis Genomics in
Europe. These centers will use the MassARRAY systems to analyze genetic
variations or SNPs that are believed to cause diseases or to be relevant to
predisposition to diseases.
We have made two advancements further establishing our position in the field
of SNP validation. First, we have developed SNP assay design software that
allows us to generate hundreds of assays a day. Secondly, we have developed
the ability to analyze SNPs in a single sample of pooled individuals. This
allows us to determine SNP frequency in reference populations by analyzing
pools of DNA samples rather than testing individual samples. We believe these
advancements will provide us with the opportunity to develop our own high
throughput facility that will enable us to analyze millions of SNPs through
the assessment of DNA pools from reference populations and patients. This
could yield high value validated SNP portfolios for specific diseases. We
intend to design assays for customers' candidate SNP portfolios as well as
public domain SNPs. We intend to confirm these with SNP frequency and function
information using our ability to analyze SNPs using sample pools which should
offer performance advantages in throughput and cost.
We are now manufacturing the SpectroCHIP with 384 wells in addition to the
SpectroCHIP with 96 wells. We expect to commercially offer our SpectroCHIP
with 384 wells in the second quarter of 2000.
SALES AND MARKETING
Our sales strategy is to initially place systems and then promote ongoing
disposables and assay sales and system upgrades. The initial placement is
executed by a business development team with expertise in the pharmaceutical
industry, drug development and contract marketing. Identification and active
development of lead customer contacts is based on a thorough knowledge of the
marketplace and supported by highly visible scientists employed by or
associated with us. The sales and marketing team, which has core competencies
in molecular biology, biochemistry, microfluidics and mass spectrometry,
focuses on ongoing disposables and new product sales. These teams collectively
consist of 12 people and are based out of our San Diego, Boston and Hamburg
offices. We expect to add additional business development and sales and
marketing team members to commercialize our MassARRAY system.
All our facilities have MassARRAY systems available for demonstration and
customer training purposes. Fully automated high throughput process lines have
been installed in San Diego and Hamburg for large-scale assay design projects
and high value marker function programs.
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OPERATIONS
We manufacture SpectroCHIPs, required reagents and SpectroTYPER software at
our San Diego facility. Total current capacity of this facility is estimated
at 100,000 SpectroCHIPs a year with the ability to double our manufacturing
capacity at the existing facility.
The manufacturing area is designed to optimize material flow and personnel
movement with all the manufacturing and quality control operations located in
one area. Critical components are produced in an environmentally controlled
clean room and isolated from the rest of the facility in compliance with
quality system requirements, or QSRs, and ISO 9001 registration standards.
Access and safety features are designed to meet federal, state and local
health ordinances.
We have established some and intend to develop additional alternate/multiple
sources of system components other than those produced in-house. Current major
equipment suppliers are Bruker Datonik GmbH and PE Biosystems for mass
spectrometers, GeSIM GmbH for the nanoliter-dispensing unit, Beckman
Instruments, Inc. for the 96-channel dispenser, and Robocon Incorporated for
the robotic components of the automated process line.
We utilize a company-wide enterprise resource planning system to manage and
control our material and product inventories. This system encompasses product
costing, materials procurement, production planning and scheduling, inventory
tracking and control, product engineering and configuration control, with
links to document control for all manufacturing, quality control, quality
assurance and regulatory compliance procedures.
INTELLECTUAL PROPERTY
To establish and protect our proprietary technologies and products, we rely on
a combination of patent, copyright, trademark and trade secret laws, as well
as confidentiality provisions in our contracts.
We have implemented an aggressive patent strategy designed to provide us with
freedom to operate and facilitate commercialization of our current and future
products. Focusing on a global economy, our patent portfolio reflects our
transatlantic nature and includes 50 pending patent applications in the United
States and corresponding international and foreign filings in major industrial
nations. We currently own eleven and license six issued patents in the United
States and have received notices of allowances for five additional patent
applications. We also own two foreign issued patents.
Our patent strategy uniquely positions us by providing patent protection for
systems and technology that allows the direct detection of biomolecules
without labels using mass spectrometry in a manner amenable to high throughput
genotyping.
The issued, allowed and pending patents distinguish us from competitors by
claiming proprietary methods for directly genotyping DNA and other
biomolecules by measuring the mass of the molecules without requiring labels
for detection. Claims to these novel methods include protection for carrying
out biopolymer purification and diagnostic methods in solution or directly by
immobilization on solid supports such as beads or chip surfaces. These methods
also allow multiplexing or analysis of more than one sample both in a single
reaction and as arrays of compounds allowing the system to be easily amenable
to high throughput genotyping. Industrial genomics is possible because mass
spectrometric analysis can be miniaturized and therefore automated. We have
extensive patent protection for novel nanoliter liquid dispensing systems and
pending claims to multifunctional solid surfaces containing nanoliter sized
elements including our SpectroCHIP. Generally, US patents have a term of 17
years from the date of issue for patents issued from applications filed with
the US Patent Office prior to June 8,1995, and 20 years from the application
filing date or earlier claimed priority date in the case of patents issued
from applications filed on or after June 8, 1995. Patents in most other
countries have a term of 20 years from the date of filing the patent
application. Our issued United States patents will expire between 2013 and
2017. Our success depends to a significant degree upon our ability to develop
proprietary products and technologies. We intend to continue to file patent
applications as we develop new products and technologies.
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Patents provide some degree of protection for our intellectual property.
However, the assertion of patent protection involves complex legal and factual
determinations and is therefore uncertain. In addition, the laws governing
patentability and the scope of patent coverage continue to evolve,
particularly in the areas of molecular biology of interest to us. As a result,
there can be no assurance that patents will issue from any of our patent
applications or from applications licensed to us. The scope of any of our
issued patents may not be sufficiently broad to offer meaningful protection.
In addition, our issued patents or patents licensed to us may be successfully
challenged, invalidated, circumvented or unenforceable so that our patent
rights would not create an effective competitive barrier. Moreover, the laws
of some foreign countries may not protect our proprietary rights to the same
extent as do the laws of the United States and Canada. In view of these
factors, our intellectual property positions bear some degree of uncertainty.
We also rely in part on trade secret protection of our intellectual property.
We attempt to protect our trade secrets by entering into confidentiality
agreements with third parties, employees and consultants. Our employees and
consultants also sign agreements requiring that they assign to us their
interests in patents and copyrights arising from their work for us. All
employees sign an agreement not to compete unfairly with us during their
employment and upon termination of their employment, through the misuse of
confidential information, soliciting employees, soliciting customers, and the
like. However, it is possible that these agreements may be breached or
invalidated and if so, there may not be an adequate corrective remedy
available. Despite the measures we have taken to protect our intellectual
property, we cannot assure you that third parties will not breach the
confidentiality provisions in our contracts or infringe or misappropriate our
patents, copyrights, trademarks, trade secrets and other proprietary rights.
In addition, we cannot assure you that third parties will not independently
discover or invent competing technologies or reverse engineer our trade
secrets, or other technology. Therefore, the measures we are taking to protect
our proprietary rights may not be adequate.
Although we are not a party to any material legal proceedings, in the future,
third parties may file claims asserting that our technologies or products
infringe on their intellectual property. We cannot predict whether third
parties will assert such claims against us or against the licensors of
technology licensed to us, or whether those claims will harm our business. If
we are forced to defend against such claims, whether they are with or without
any merit, whether they are resolved in favor of or against us or our
licensors, we may face costly litigation and diversion of management's
attention and resources. As a result of such disputes, we may have to develop
costly non-infringing technology, or enter into licensing agreements. These
agreements, if necessary, may be unavailable on terms acceptable to us, or at
all, which could seriously harm our business or financial condition.
COLLABORATION AND LICENSE AGREEMENTS
We have a collaboration agreement with Bruker-Franzen Analytik GmbH under
which we cooperate in the manufacture, marketing and customer service of a
product designed for the exclusive processing of our SpectroCHIPs under a
joint Bruker-Franzen-Sequenom label. Under the agreement, Bruker-Franzen
designs, manufactures and supplies the product to the market. We provide
nucleic acid analysis services to customers and to corporate partners using
our MassARRAY system and develop, manufacture and market SpectroCHIPs for
various applications. Either party may terminate this agreement upon 12
months' notice.
We have entered into a patent and know-how license agreement with the Trustees
of Boston University under which Boston University granted to us a worldwide
license to some of its patents as well as technical assistance, and we agreed
to make royalty payments. Boston University may license the patents to others
under specified circumstances if we fail to put the technology to commercial
use or make it available to the public. We may terminate this agreement upon
written notice to the university. In any event, this agreement will expire
when the last licensed patent expires.
We have entered into a license agreement with The Johns Hopkins University
under which the university granted to us a worldwide license to some of its
patents related to mass spectrometer instruments. Johns Hopkins also agreed to
provide related technical assistance. We agreed to pay a processing fee,
maintenance fee and to make royalty payments. Johns Hopkins reserves specified
rights to the patents in the event that we fail to put the
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technology to commercial use or make it available to the public. We may
terminate this agreement upon written notice to the university. In any event,
this agreement will expire when the last licensed patent expires.
We have an original equipment manufacturer supply and license agreement with
PerSeptive Biosystems, Inc. under which we purchase Mass Spectrometry products
at a discount from PerSeptive for incorporation into our products. Our right
to resell the products under the agreement is limited in geographical scope.
In connection with this agreement, PerSeptive also granted us a right to use
the patents and other intellectual property incorporated into the products
that we purchase from PerSeptive under the agreement. The term of the
agreement is for three years after the date it was signed. However, the
agreement may be terminated earlier for reasons of default or insolvency of a
party.
We also entered into a license agreement with Prof. Dr. Franz Hillenkamp, a
member of our scientific advisory board, under which Dr. Hillenkamp granted us
licenses to specified present and future patents in exchange for royalty
payments. We agreed to refund all of Dr. Hillenkamp's expenses that he had
incurred or will incur in connection with applying for, maintaining and
defending the licensed patents. This agreement terminates at the end of the
tenth calendar year after the first calendar year for which licenses are paid.
As of December 31, 1999, we had incurred costs of approximately $1.8 million
in connection with these collaboration and license agreements. During the life
of the these agreements, we may be obligated to pay royalties ranging from 1%-
5% of the revenues from the sale of the products relating to these agreements.
As of December 31, 1999, we have not sold any products which utilize these
patents.
COMPETITION
The markets for our products are very competitive, and we expect the intensity
of competition to increase. Currently, we compete primarily with other
companies performing similar tasks using alternative technologies. Many of our
competitors have greater financial, operational, sales and marketing
resources, and more experience in research and development than we have. These
competitors and other companies may have developed or could in the future
develop new technologies that compete with our products or which could render
our products obsolete.
In the SNP genotyping marketplace, MassARRAY competes with alternative
technology concepts which differ in the areas of sample amplification,
analysis process, sample separation or SNP detection and are all based on
indirect detection of the molecule hybridization and/or labeling. Such
technologies include:
. Gel-based fluorescent sequencing as offered by PE Biosystems, Amersham
Pharmacia Biotech, Visible Genetics, Inc. and others and primarily
developed for DNA analysis, such as DNA sequencing;
. Single base primer extensions and colormetric detection offered by the
genetic bit analysis of Orchid Biocomputer Inc.;
. Fluorescence resonance energy transfer, or FRET, offering real-time PCR-
based fluorescent detection and incorporated in PE Biosystems' TaqMan
product line;
. Invader and Invader Squared SNP detection, an alternative linear
amplification technology including structure-based hybridization and enzyme
cleavage developed by Third Wave Technologies, recently acquired by PE
Biosystems.;
. Hybridization methods, such as those used by Affymetrix, Inc., Hyseq, Inc.,
Nanogen, Inc., Protogene Laboratories Inc. and others with miniaturized
chip formats and those offered by Genometrix in microtiter plate arrays;
. Bead-based capture technologies involving hybridization and fluorescent
detection as developed by Illumina, Inc., which uses fiber optics, or
Luminex Corporation, which uses flow cytometry;
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. Massive parallel signature sequencing used by Lynx Therapeutics, primarily
developed for de novo DNA sequencing; and
. Micro-fluidic methods, such as those used by Aclara BioSciences, Inc. and
Caliper Technologies Corporation, if combined with other technologies, such
as those used by PE Biosystems, could result in technologies for SNP
analysis.
The number of entities applying mass spectrometry in DNA analysis is
increasing continuously. PE Biosystems and GeneTrace Systems Inc. have
implemented analysis concepts that involve direct analysis of enzymatically-
generated nucleic acid fragments by MALDI-TOF. Rapigene Inc., recently
acquired by Qiagen N.V., and GeneTrace Systems Inc. use a mass spectrometry
approach that incorporates mass labels and therefore is an indirect analysis
of the molecule.
GOVERNMENT REGULATION
We are not subject to direct governmental regulation other than the laws and
regulations generally applicable to businesses in the jurisdictions in which
we operate.
SCIENTIFIC ADVISORY BOARD
We have established a scientific advisory board made up of leading scholars in
the field of mass spectrometry, molecular medicine, proteonomics and molecular
microbiology. Members of our scientific advisory board consult with us on
matters relating to the development of our products described elsewhere in
this prospectus. Members of our Scientific Advisory Board are reimbursed for
the reasonable expenses of attending meetings of the scientific advisory
board. Some of the members may also receive options to purchase shares of our
common stock. The members of the scientific advisory board are as follows:
<TABLE>
<CAPTION>
ADVISOR INSTITUTION
------- -----------
<S> <C>
Charles R. Cantor, PhD,
Chairman Sequenom, Inc.
Robert Cotter, PhD Johns Hopkins University School of Medicine
Catherine Fenselau, PhD University of Maryland
Ulf Goebel, PhD Charite University Clinic, Berlin, Germany
Franz Hillenkamp, PhD University of Munster, Germany
Ulf Landegren, PhD Uppsala University, Sweden
Peter Roepstorff, PhD University of Odense, Denmark
Charlie Sing, PhD University of Michigan
</TABLE>
EMPLOYEES
As of February 29, 2000, we employed 116 persons, of whom 38 hold PhD or MD
degrees and 19 hold other advanced degrees. Approximately 65 employees are
engaged in research and development, 14 in business development, sales and
marketing, 10 in manufacturing and 27 in intellectual property, finance and
other administrative functions. Our success will depend in large part upon our
ability to attract and retain employees. We face competition in this regard
from other companies, research and academic institutions, government entities
and other organizations. We believe that we maintain good relations with our
employees.
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RISKS AND UNCERTAINTIES
The following is a summary of the many risks we face in our business. You
should carefully read these risks and uncertainties in evaluating our
business.
WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND MAY NOT SUCCEED OR BECOME
PROFITABLE.
We commenced operations in 1994 and are at an early stage of development. We
have incurred significant losses to date and through December 31, 1999, our
revenues have been limited to grants from governmental bodies. We began beta
site testing our initial products in July 1999 and commercially launched our
MassARRAY system in December 1999. As a result, our business is subject to all
of the risks inherent in the development of a new business enterprise, such as
the need:
. to obtain substantial capital to support the expenses of developing our
technology and commercializing our products;
. to develop a market for our products;
. to successfully transition from a company with a research focus to a
company capable of supporting commercial activities; and
. to attract and retain qualified management, sales, technical and scientific
staff.
Our operations also may be affected by problems frequently encountered with
the use of new technologies and by the competitive environment in which we
operate, as well as the risks detailed below.
IF WE INCUR LOSSES IN THE FUTURE, AS WE EXPECT TO DO, THE VALUE OF OUR STOCK
COULD DECREASE.
Since inception, we have recognized no revenue from product sales. Our
expenses have exceeded revenue in each of the years since our inception. It is
uncertain when, if ever, we will become profitable. As of December 31, 1999,
our accumulated deficit was $43.5 million. Our expenses have consisted
principally of research and development and of general and administrative
expenses incurred while building our business infrastructure. We expect to
continue to experience significant operating losses in the future as we
continue our research and development efforts, further develop our
manufacturing capabilities and expand our marketing and sales force in an
effort to commercialize our products. Our net operating loss and credit
carryforwards may be limited due to a cumulative change in ownership of more
than 50%, which occurred during 1998 and with our initial public offering in
February 2000.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS, AS WE EXPECT, WE WOULD HAVE TO
REDUCE OR CEASE OPERATIONS, ATTEMPT TO SELL SOME OR ALL OF OUR OPERATIONS OR
MERGE WITH ANOTHER ENTITY.
Based on our current plans, we believe our existing cash, cash equivalents and
short-term investments, will be sufficient to fund our operating expenses,
debt obligations and capital requirements through at least the next 24 months.
However, the actual amount of funds that we will need during or after the next
12 months will be determined by many factors, some of which are beyond our
control, and we may need funds sooner than currently anticipated. These
factors include:
. the level of our success in selling our MassARRAY system and associated
technologies;
. our progress with research and development;
. our ability to introduce and sell new products;
. the level of our sales and marketing expenses;
. the level of our expenses associated with unforeseen litigation;
. the costs and timing of obtaining new patent rights; and
. regulatory changes and competition and technological developments in the
market.
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If additional funds are required and we are unable to obtain them on terms
favorable to us, we may be required to cease or reduce further
commercialization of our products, to sell some or all of our technology or
assets or to merge with another entity. If we raise additional funds by
selling additional shares of our capital stock, the ownership interest of our
stockholders will be diluted.
WE MUST DEVELOP AND COMMERCIALIZE OUR NEXT GENERATION PRODUCTS AT REDUCED
COSTS FOR US TO BE PROFITABLE.
Our current products do not provide sufficient gross margin for us to become
profitable. We intend to develop and manufacture our next generation products
at a lower cost than the cost of our current products. We may not be
successful in doing so. In addition, our gross margin and profitability may be
negatively impacted if we are unable to achieve market acceptance or
appropriate pricing for our next generation products.
WE MAY NOT BE ABLE TO SUCCESSFULLY ADAPT OUR PRODUCTS FOR COMMERCIAL
APPLICATIONS.
We have completed the initial development of our MassARRAY technology for
applications in the genetic aspects of drug development and life science
research. We may not be able to successfully adapt our products to the
commercial requirements of these fields. A number of potential applications of
our technology in these fields will require significant enhancements in our
core technology, including adaptation of our software and further
miniaturization. In addition, we need to enhance our population-based DNA
bank, establish databases for determining the medical importance of SNPs and
rapidly design assays for SNP analysis in sufficient quantity to meet the high
throughput that we expect our future customers will require. If we are unable,
for technological or other reasons, to complete the development, introduction
or scale-up of the manufacturing of any product or genotyping facility, or if
any product does not achieve a significant level of market acceptance, our
business, financial condition and results of operations could be seriously
harmed. Market acceptance will depend on many factors, including demonstrating
to customers that our technology is superior to other technologies and
products which are available now or which may become available in the future.
We believe that our revenue growth and profitability will substantially depend
on our ability to overcome significant technological challenges and
successfully introduce our products into the marketplace.
WE MAY NOT BE ABLE TO EXPAND OUR BUSINESS TO OFFER SERVICES THAT OUR CUSTOMERS
ARE REQUESTING
We are currently planning on expanding our business to run multiple assays at
our facilities for some of our customers. To do this, we expect that we will
need to extensively expand our facilities, purchase equipment and hire
additional personnel. If we are unable to successfully implement or manage
this new business, our relationships with our customers may be harmed.
WE MAY NOT SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS.
In the future, we may acquire additional complementary companies, products or
technologies. Managing these acquisitions will entail numerous operational and
financial risks and strains, including:
. exposure to unknown liabilities;
. higher than expected acquisition and integration costs which may cause our
quarterly and annual operating results to fluctuate;
. combining the operations and personnel of acquired businesses with our own
which may be difficult and costly, and integrating or completing the
development and application of any acquired technologies which may disrupt
our business and divert our management's time and attention;
. impairment of relationships with key customers of acquired businesses due
to changes in management and ownership of the acquired businesses;
. inability to retain key employees of any acquired businesses or hire enough
qualified personnel to staff any new or expanded operations; and
. increased amortization expenses if an acquisition results in significant
goodwill or other intangible assets.
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IF THE MEDICAL RELEVANCE OF SNPS BECOMES QUESTIONABLE, WE MAY HAVE LESS DEMAND
FOR OUR PRODUCTS.
The genetic composition of diseases is complicated. We cannot be certain that
genetic information will play a key role in the development of drugs and
diagnostics in the future. If we are unable to generate valuable information
that can be used to develop these drugs and diagnostics, the demand for our
products will be reduced and our business is likely to be harmed.
OUR SYSTEM AND RELATED DISPOSABLE SALES MAY BE LIMITED IF OUR MASSARRAY SYSTEM
IS USED BELOW ITS CAPACITY AS A RESULT OF THE SPEED OF SAMPLE PREPARATION AND
THE NEED FOR ASSAY DESIGN.
The need to design a unique assay for each newly discovered SNP can
substantially delay the commencement of the analysis of that SNP. In addition,
the extraction of DNA from biological material is time consuming. MassARRAY
system users who need to develop assays or who lack sufficient sample
preparation resources therefore may be unable to use our system to its full
capacity. Customers who are unable to use our MassARRAY system to full
capacity may share MassARRAY systems, which would result in lower system
sales. Therefore, customers may not purchase sufficient quantities of
disposables for us to become profitable.
WE DEPEND ON OUR CUSTOMERS TO PURCHASE SUFFICIENT QUANTITIES OF SPECTROCHIPS
AND OTHER DISPOSABLES FOR US TO BE PROFITABLE.
Our customers may not generate sufficient throughput using our MassARRAY
system. This may limit their purchases of SpectroCHIPs and other disposables.
Factors which may limit the use of SpectroCHIPs and other disposables include:
the acceptance of our technology by our customers, the ability to analyze more
than one SNP simultaneously on a single spot and the training of customer
personnel. If our customers are slow to, or never, achieve sufficient
throughput, we may never achieve profitability.
IF OUR CUSTOMERS ARE UNABLE TO ADEQUATELY PREPARE SAMPLES AS REQUIRED BY OUR
SYSTEM, THE OVERALL MARKET DEMAND FOR OUR PRODUCTS MAY DECLINE.
Before using our MassARRAY system, customers must prepare samples by following
several steps that are prone to human error, including DNA isolation and DNA
segment amplification. If DNA samples are not prepared appropriately, our
MassARRAY system will not generate a reading. If our customers experience
similar difficulties, they may achieve lower levels of throughput than those
for which our system was designed. If our customers are unable to generate
expected levels of throughput, they may not continue to purchase our
disposables, they may express their discontent with our products in the
marketplace, potentially driving down demand for our products, or they may
collaborate with others to jointly use our products. Any or all of these
actions would reduce the overall market demand for our products.
IF ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC INFORMATION
BECOME WIDESPREAD, WE MAY HAVE LESS DEMAND FOR OUR PRODUCTS.
Genetic testing has raised ethical issues regarding confidentiality and the
appropriate uses of the resulting information. For these reasons, governmental
authorities may call for limits on or regulation of the use of genetic testing
or prohibit testing for genetic predisposition to certain conditions,
particularly for those that have no known cure. Any of these scenarios could
reduce the potential markets for our products, which could seriously harm our
business, financial condition and results of operations.
WE DEPEND ON THIRD-PARTY PRODUCTS AND SERVICES AND SOLE OR LIMITED SOURCES OF
SUPPLY TO DEVELOP AND MANUFACTURE SOME COMPONENTS OF OUR PRODUCTS.
We rely to a substantial extent on outside vendors to manufacture many of the
components and subassemblies used in our products. Some of these components
and subassemblies are obtained from a single supplier or a limited group of
suppliers. Our reliance on outside vendors generally, and a sole or a limited
group
of suppliers in particular, involves several risks, including:
. the inability to obtain an adequate supply of required components due to
manufacturing capacity constraints, a discontinuance of a product by a
third-party manufacturer or other supply constraints;
. reduced control over quality and pricing of components; and
. delays and long lead times in receiving materials from vendors.
19
<PAGE>
WE HAVE LIMITED COMMERCIAL MANUFACTURING CAPABILITY AND EXPERIENCE AND MAY
ENCOUNTER MANUFACTURING PROBLEMS OR DELAYS WHICH COULD RESULT IN LOWER
REVENUE.
We have not yet produced our SpectroCHIP in commercial quantities. We may not
be able to maintain acceptable quality standards while producing commercial
quantities. Our customers also require that we comply with current good
manufacturing practices that we may not be able to meet. To achieve the
production levels necessary for successful commercialization of our products,
we will need to scale-up our manufacturing facilities, establish more
automated manufacturing capabilities and maintain adequate levels of
inventory. We may not be able to manufacture sufficient quantities to meet
market demand. If we cannot achieve the required level and quality of
production, we may need to outsource production or rely on licensing and other
arrangements with third parties who possess sufficient manufacturing
facilities and capabilities. This could reduce our gross margins and expose us
to the risks inherent in relying on others. We may not be able to successfully
outsource our production or enter into licensing or other arrangements with
these third parties, which could adversely affect our business.
WE HAVE A LIMITED SALES FORCE AND LIMITED EXPERIENCE IN COMMERCIALIZING OUR
PRODUCTS WHICH MAY CAUSE SIGNIFICANT DIFFICULTIES IN COMMERCIALIZING OUR
PRODUCTS.
Our direct sales force may not be sufficiently large or knowledgeable to
successfully penetrate the market. We may not be able to expand our direct
sales force to meet our commercial objectives. In addition, our sales force
may not be able to address complex scientific and technical issues raised by
our customers. Our customer support personnel may also lack the broad range of
technical expertise required to adequately service and support our products in
the field.
OUR ABILITY TO COMPETE IN THE MARKET MAY DECLINE IF WE LOSE SOME OF OUR
INTELLECTUAL PROPERTY RIGHTS DUE TO BECOMING INVOLVED IN EXPENSIVE LAWSUITS TO
PROTECT OR ENFORCE OUR PATENTS.
Our success will depend on our ability to obtain and protect patents on our
technology and to protect our trade secrets. Our patents, which have been or
may be issued, may not afford meaningful protection for our technology and
products. Others may challenge our patents and, as a result, our patents could
be narrowed, invalidated or unenforceable. In addition, our current and future
patent applications may not result in the issue of patents in the United
States or foreign countries. Competitors may develop products similar to ours
that do not conflict with our patents. In addition, others may develop
products for use in the MassARRAY system in violation of our patents that may
reduce sales of disposables. In order to protect or enforce our patent rights,
we may initiate interference proceedings, infringement suits or patent
litigation against third parties. These lawsuits could be expensive, take
significant time and divert management's attention from other business
concerns. The patent position of biotechnology firms generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the US
Patent and Trademark Office or the courts regarding the breadth of claims
allowed or the degree of protection afforded under biotechnology patents. In
addition, there is a substantial backlog of biotechnology patent applications
at the US Patent and Trademark Office, and the approval or rejection of patent
applications may take several years.
THE RIGHTS WE RELY UPON TO PROTECT OUR INTELLECTUAL PROPERTY UNDERLYING OUR
PRODUCTS MAY NOT BE ADEQUATE, WHICH COULD ENABLE THIRD PARTIES TO USE OUR
TECHNOLOGY AND WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET.
We require our employees, consultants and advisors to execute confidentiality
agreements. However, we cannot guarantee that these agreements will provide us
with adequate protection against improper use or disclosure of confidential
information. In addition, in some situations, these agreements may conflict
with, or be subject to, the rights of third parties with whom our employees,
consultants or advisors have prior employment or consulting relationships.
Further, others may independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to our trade secrets.
OUR SUCCESS WILL DEPEND PARTLY ON OUR ABILITY TO OPERATE WITHOUT INFRINGING ON
OR MISAPPROPRIATING THE PROPRIETARY RIGHTS OF OTHERS.
We may be sued for infringing on the patent rights of others. Intellectual
property litigation is costly, and, even if we prevail, the cost of such
litigation could adversely affect our business, financial condition and
results of operations. In addition, litigation is time consuming and could
divert management attention and resources away from our business. If we do not
prevail in any litigation, in addition to any damages we might have to pay, we
20
<PAGE>
could be required to stop the infringing activity or obtain a license. Any
required license may not be available to us on acceptable terms, or at all. In
addition, some licenses may be non-exclusive, and therefore, our competitors
may have access to the same technology licensed to us. If we fail to obtain a
required license or are unable to design around a patent, we may be unable to
sell some of our products, which could have a material adverse affect on our
business, financial condition and results of operations. From time to time, we
receive letters from companies regarding their issued patents and patent
applications alleging possible infringement. For example, we have received
correspondence from a company informing us of its recently issued patent
concerning a diagnostic method relying upon a specific manner for comparing
mass spectra, upon which it believes we may be infringing. We do not believe
that we infringe this patent.
IF WE DO NOT SUCCEED IN OBTAINING DEVELOPMENT AND MARKETING RIGHTS FOR SOME OF
THE ASSAYS DEVELOPED IN COLLABORATION WITH OUR CUSTOMERS, OUR REVENUE AND
PROFITABILITY COULD BE REDUCED.
Our business strategy includes the development of assays in collaboration with
customers, and we intend to obtain commercialization rights for those assays.
If we are unable to obtain rights to those assays, our revenue and
profitability could be reduced. To date, we have not initiated significant
activities with respect to the exploitation of any commercialization rights or
products developed in collaboration with third parties. Even if we obtain
commercialization rights, commercialization of products may require resources
that we do not currently possess and may not be able to develop or obtain.
WE MAY BE UNABLE TO OBTAIN LICENSES TO PATENTED SNPS WHICH COULD PREVENT US
FROM OBTAINING SIGNIFICANT REVENUE OR BECOMING PROFITABLE.
The US Patent and Trademark Office has issued at least one patent to a third
party relating to a SNP. If important SNPs are patented, we will need to
obtain rights to those SNPs in order to develop, use and sell related assays.
Required licenses may not be available on commercially acceptable terms, or at
all. If we fail to obtain licenses to important patented SNPs, we may never
achieve significant revenue or become profitable.
BECAUSE OUR PRODUCTS CURRENTLY DEPEND ON COMPONENTS LICENSED FROM THIRD
PARTIES, A BREACH BY US OF ANY OF THE TERMS OF THESE LICENSES COULD RESULT IN
THE LOSS OF ACCESS TO THESE COMPONENTS AND COULD DELAY OR SUSPEND OUR
COMMERCIALIZATION EFFORTS.
Some aspects of our technology have been acquired or licensed from third
parties. A failure by us to maintain the right to use these components could
seriously harm our business, financial condition and results of operations. In
addition, changes to or termination of our agreements with these third parties
could result in the loss of access to these aspects of our technology and
could delay or suspend our commercialization efforts. Our grants from the
government give the government certain license rights to inventions resulting
from funded work in the event that we fail to commercialize the technology
developed using government funds. Our business could be harmed if the
government exercises those rights.
OUR ACADEMIC ARRANGEMENTS ARE AN IMPORTANT PART OF OUR BUSINESS AND FAILURE TO
MAINTAIN EXISTING RELATIONSHIPS OR ESTABLISH ADDITIONAL RELATIONSHIPS COULD
ADVERSELY AFFECT OUR RESEARCH AND PRODUCT DEVELOPMENT EFFORTS.
We have relationships with scientists and consultants at academic and other
institutions who conduct research at our request. Our existing relationships
may not be successful. These researchers are not employed by us and may have
commitments to, or consulting or advisory contracts with, other entities that
may limit their availability to work on our projects. As a result, we have
limited control over their activities and, except as otherwise required by our
agreements with these persons, we can expect only limited amounts of their
time to be dedicated to our projects. Our ability to make new discoveries and
to commercialize products based on those discoveries may depend in part on
continued arrangements with researchers at academic and other institutions. We
may not be able to negotiate acceptable arrangements with academic or other
institutions or individuals.
FAILURE TO EXPAND OUR INTERNATIONAL SALES AS WE INTEND WOULD REDUCE OUR
ABILITY TO BECOME PROFITABLE.
We expect that a significant portion of our sales will be made outside the
United States. A successful international effort will require us to develop
relationships with international customers and partners. We may not be able to
identify, attract or retain suitable international customers and partners. As
a result, we may be unsuccessful in our international expansion efforts.
Furthermore, expansion into international markets will require us to continue
21
<PAGE>
to establish and grow foreign operations, hire additional personnel to run
these operations and maintain good relations with our foreign customers and
partners.
International operations involve a number of risks not typically present in
domestic operations, including:
. currency fluctuation risks;
. changes in regulatory requirements;
. costs and risks of deploying systems in foreign countries;
. licenses, tariffs and other trade barriers;
. political and economic instability;
. difficulties in staffing and managing foreign operations;
. potentially adverse tax consequences; and
. the burden of complying with a wide variety of complex foreign laws and
treaties.
Our international operations will also be subject to the risks associated with
the imposition of legislation and regulations relating to the import or export
of high technology products. We cannot predict whether tariffs or restrictions
upon the importation or exportation of our products will be implemented by the
United States or other countries.
WE MAY LOSE MONEY WHEN WE EXCHANGE FOREIGN CURRENCY RECEIVED FROM
INTERNATIONAL SALES INTO US DOLLARS.
A significant portion of our business is expected to be conducted in
currencies other than the US dollar. We recognize foreign currency gains or
losses arising from our operations in the period incurred. As a result,
currency fluctuations between the US dollar and the currencies in which we do
business will cause foreign currency translation gains and losses. We cannot
predict the effects of exchange rate fluctuations upon our future operating
results because of the number of currencies involved, the variability of
currency exposure and the potential volatility of currency exchange rates. We
do not currently engage in foreign exchange hedging transactions to manage our
foreign currency exposure.
THE SALES CYCLE FOR OUR PRODUCTS IS LENGTHY. WE MAY EXPEND SUBSTANTIAL FUNDS
AND MANAGEMENT EFFORT WITH NO ASSURANCE OF SUCCESSFULLY SELLING OUR PRODUCTS
OR SERVICES.
Our ability to obtain customers for our products and services depends in
significant part upon the perception that our products and services can help
accelerate efforts in genomics. The sales cycle is typically lengthy. Our
sales effort requires the effective demonstration of the benefits of our
products and services to and significant training of many different
departments within a potential customer. These departments might include
research and development personnel and key management. In addition, we may be
required to negotiate agreements containing terms unique to each customer. We
may expend substantial funds and management effort with no assurance that we
will successfully sell our products or services.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT HAVE THE RESOURCES REQUIRED
TO SUCCESSFULLY COMPETE.
The biotechnology industry is highly competitive. We compete with companies in
the United States and abroad that are engaged in the development and
production of products that analyze genetic information. They include:
. biotechnology, pharmaceutical, chemical and other companies;
. academic and scientific institutions;
. governmental agencies; and
. public and private research organizations.
Many of our competitors have much greater financial, technical, research,
marketing, sales, distribution, service and other resources than we do.
Moreover, our competitors may offer broader product lines and have greater
name recognition than we do, and may offer discounts as a competitive tactic.
In addition, several development
22
<PAGE>
stage companies are currently making or developing products that compete with
or will compete with our products. Our competitors may develop or market
technologies or products that are more effective or commercially attractive
than our current or future products, or that may render our technologies and
products obsolete.
WE ARE HIGHLY DEPENDENT ON PRINCIPAL MEMBERS OF OUR MANAGEMENT AND SCIENTIFIC
STAFF, THE LOSS OF WHOM WOULD IMPAIR OUR ABILITY TO COMPETE.
We are highly dependent on the principal members of our management and
scientific staff. The loss of the services of any of these persons could delay
or reduce our product development and commercialization efforts. In addition,
we will require additional personnel in the areas of scientific research,
diagnostic testing, manufacturing and marketing. We may not be able to attract
and retain qualified personnel, which could seriously harm our business,
financial condition and results of operations.
WE MAY NOT HAVE ADEQUATE INSURANCE AND IF WE BECOME SUBJECT TO PRODUCT
LIABILITY CLAIMS, WE MAY EXPERIENCE REDUCED DEMAND FOR OUR PRODUCTS OR BE
REQUIRED TO PAY DAMAGES THAT EXCEED OUR INSURANCE LIMITATIONS.
Our business exposes us to potential product liability claims that are
inherent in the life science field. Any product liability claim in excess of
our insurance coverage would have to be paid out of our cash reserves which
would have a detrimental effect on our financial condition. It is difficult to
determine whether we have obtained sufficient insurance to cover potential
claims. Also, we cannot assure you that we can or will maintain our insurance
policies on commercially acceptable terms, or at all.
RESPONDING TO CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF
HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS WHICH WE USE,
COULD BE TIME CONSUMING AND COSTLY.
We use controlled hazardous and radioactive materials in our business. The
risk of accidental contamination or injury from these materials cannot be
completely eliminated. If an accident with these substances occurs, we could
be liable for any damages that result, which could seriously harm our
business. Additionally, an accident could damage our research and
manufacturing facilities and operations, resulting in delays and increased
costs.
IF OUR MANUFACTURING AND LABORATORY FACILITIES ARE DAMAGED, WE COULD
EXPERIENCE LOST REVENUE AND OUR BUSINESS WOULD BE SERIOUSLY HARMED.
Our only manufacturing facility is located in San Diego, California. We have
laboratories located in San Diego, Sudbury, Massachusetts and Hamburg,
Germany. Damage to our facilities due to fire, natural disaster, power loss,
communications failure, unauthorized entry or other events could cause us to
cease development and manufacturing of our products. We have limited insurance
to protect against business interruption; however, there can be no assurance
this insurance will be adequate or will continue to be available to us on
commercially reasonable terms, or at all.
IF WE DO NOT EFFECTIVELY MANAGE OUR GROWTH, IT COULD AFFECT OUR ABILITY TO
PURSUE BUSINESS OPPORTUNITIES AND EXPAND OUR BUSINESS.
Growth in our business has placed, and will continue to place, a significant
strain on our facilities, management systems and resources. We will need to
continue to improve our operational and financial systems and managerial
controls and procedures and expand, train and manage our workforce. We will
rely heavily on software systems, including an Enterprise Resource Planning
System, Baan, and a Laboratory Information Management System, LIMS, that have
been or will be installed and utilized. Furthermore, we will have to maintain
close coordination among our technical, accounting, marketing, sales and
research departments. If we fail to effectively manage our growth and address
the above concerns, it could affect our ability to pursue business
opportunities and expand our business.
CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK AMONG OUR EXISTING EXECUTIVE
OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM
INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
Our executive officers, directors and beneficial owners of 5% or more of our
common stock and their affiliates, in aggregate, beneficially own
approximately 35% of our outstanding common stock. As a result, these persons,
acting together, may have the ability to determine the outcome of matters
submitted to our stockholders for
23
<PAGE>
approval, including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets. In addition,
such persons, acting together, may have the ability to control the management
and affairs of our company. Accordingly, this concentration of ownership may
harm the market price of our common stock by:
. delaying, deferring or preventing a change in control of our company;
. impeding a merger, consolidation, takeover or other business combination
involving our company; or
. discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of our company.
OUR STOCK PRICE COULD BE VOLATILE AND YOUR INVESTMENT COULD SUFFER A DECLINE
IN VALUE, WHICH IN TURN COULD AFFECT OUR ABILITY TO RAISE ADDITIONAL CAPITAL
TO FUND THE COMMERCIALIZATION OF OUR PRODUCTS.
The trading price of our common stock has been and is likely to 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:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations by us or our competitors;
. announcements related to patent and other intellectual property
developments;
. new products or services introduced or announced by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the biotechnology, pharmaceutical and genomics
industries;
. changes in the market valuations of other similar companies;
. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel; and
. sales of our common stock.
In addition, the stock market in general, and the Nasdaq National Market and
the market for technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. Further,
there has been particular volatility in the market prices of securities of
biotechnology and life sciences companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our operating performance. 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 that company. Such litigation, if instituted
against us, could result in substantial costs and a diversion of management's
attention and resources, which could seriously harm our business, financial
condition and results of operations.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD MAKE
A THIRD-PARTY ACQUISITION OF US DIFFICULT. THIS COULD LIMIT THE PRICE
INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR OUR COMMON STOCK.
The anti-takeover provisions in our certificate of incorporation, our bylaws
and Delaware law could make it more difficult for a third party to acquire us
without approval of our board of directors. As a result of these provisions,
we could delay, deter or prevent a takeover attempt or third party acquisition
that our stockholders consider to be in their best interests, including a
takeover attempt that results in a premium over the market price for the
shares held by our stockholders. Please see "Description of securities" for
more information on these anti-takeover provisions.
24
<PAGE>
ITEM 2. PROPERTIES
We currently lease an approximately 31,000 square foot facility in San Diego,
California for our headquarters and as the base for marketing and product
support operations, research and development and manufacturing activities.
Under this lease we can add approximately 14,000 square feet through fiscal
2001. This lease expires in September 2004. In addition, we are currently
negotiating to lease an 82,500 square foot facility in San Diego. If we are
successful, we are likely to vacate our existing San Diego facility. We will
need to make improvements to any additional space to make it suitable for our
needs. We also lease an approximately 3,000 square foot facility in Sudbury,
Massachusetts for product and customer support. In addition, we lease an
approximately 15,000 square foot facility in Hamburg, Germany to support sales
and distribution in Europe. Under the terms of our current leases, we pay rent
of approximately $53,000 per month.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market on the
Nasdaq National Market (the "NNM") under the symbol "SQNM". The following
tables set forth the high and low sale prices, for the Company's common stock
as reported on the NNM for the period indicated commencing on January 31,
2000, the date the initial public offering price was determined.
<TABLE>
<CAPTION>
2000 HIGH LOW
---- ------- ------
<S> <C> <C>
First Quarter, commencing on January 31, 2000
through March 22, 2000................................... $191.25 $26.00
</TABLE>
There were approximately 350 holders of record of common stock as of February
29, 2000.
DIVIDEND POLICY
The Company has not paid any cash dividends to date and does not anticipate
any being paid in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
From January 1, 1996 to December 31, 1999, the Company sold and issued the
following unregistered securities:
. 643,330 shares of our Series B convertible preferred stock for an aggregate
price of $964,995 in March 1996;
. warrants to purchase 70,000 shares of our Series A convertible preferred
stock in connection with the Comdisco lease arrangement;
. 4,573,331 shares of our Series C convertible preferred stock for an
aggregate price of $14,405,993 in May 1997 and January 1998;
. warrants to purchase 106,503 shares of our Series C convertible preferred
stock in connection with the sale of our Series C preferred stock;
. 5,712,763 shares of our Series D convertible preferred stock for an
aggregate price of $37,132,959 in December 1998 and March 1999;
. 2,381,575 shares of our common stock issued upon the exercise of options to
purchase such stock for an aggregate consideration of $2,151,429; and
. 6,349 shares of our common stock issued to one of our executive officers
for an aggregate consideration of $20,000.
The above securities were offered and sold by us in reliance upon exemptions
from registration pursuant to Section 4(2) of the Securities Act of 1933 as
transactions not involving any public offering or Rule 701 promulgated under
the Securities Act of 1933. The recipients of the above-described securities
represented their intention to acquire the securities for investment only and
not with a view to distribution thereof. Appropriate legends were affixed to
the stock certificates issued in such transactions. All recipients had
adequate access, through employment or other relationships, to information
about the Registrant.
26
<PAGE>
USE OF PROCEEDS
A Registration Statement on Form S-1 (File No. 333-91665) registering
5,817,826 shares of our common stock was declared effective by the SEC on
January 31, 2000. The amount of net offering proceeds from the IPO and over-
allotment option was approximately $144.1 million. Such proceeds have been
invested in short-term investment-grade securities. The principal purposes of
the offering were to: (1) increase our equity capital, (2) create a public
market for the our Common Stock in order to facilitate future access to public
equity markets and (3) create liquidity for our existing stockholders. We
intend to use the net proceeds of this offering, together with our existing
cash and cash equivalents and short-term investments, to fund research and
development, expand laboratory and office facilities and for general corporate
purposes. We may also use a portion of the net proceeds for the acquisition of
businesses, technologies or products complementary to us. There are no present
arrangements or agreements for any such acquisitions. The amounts actually
expended for each purpose may vary significantly depending upon numerous
factors, including future sales growth, the progress of our product
development efforts and the amount of cash generated or used by our
operations. We believe that our existing cash, cash equivalents and short-term
investments and interest income will be adequate to satisfy our capital
requirements and fund operations for the foreseeable future.
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to such
statements and "Management's discussion and analysis of financial condition
and results of operations" included elsewhere in this Annual Report on Form
10-K. The consolidated statement of operations data for the years ended
December 31, 1997, 1998 and 1999 and the consolidated balance sheet data at
December 31, 1998 and 1999, are derived from our consolidated financial
statements which have been audited by Ernst & Young LLP, independent auditors,
and are included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of operations data for the years ended December 31,
1995 and 1996 and the consolidated balance sheet data at December 31, 1995 and
1996 are derived from audited consolidated financial statements not included
in this Form 10-K. Historical results are not necessarily indicative of the
results to be expected in the future.
The pro forma net loss per share is calculated as if our convertible preferred
stock and DEM4 million long-term debt owed to TBG as of December 31, 1999,
both of which converted into common stock upon the closing of our initial
public offering in February 2000, were converted into shares of our common
stock on the date of their issuance.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA
Research and development
grants.................... $ -- $ 893 $ 527 $ 351 $ 179
Costs and expenses:
Research and development.. 1,274 3,136 3,532 6,188 10,291
General and
administrative........... 420 1,032 1,861 4,218 8,239
Amortization of deferred
stock compensation....... -- -- -- -- 4,376
Total costs and expenses... 1,694 4,168 5,393 10,406 22,906
-------- -------- -------- --------- ---------
Loss from operations....... (1,694) (3,275) (4,866) (10,055) (22,727)
Other income (expense):
Interest income........... 2 73 57 397 1,578
Interest expense.......... (28) (275) (308) (613) (790)
Other income, net......... -- -- -- -- 169
-------- -------- -------- --------- ---------
Net loss................... $ (1,720) $ (3,477) $ (5,117) $ (10,271) $ (21,770)
======== ======== ======== ========= =========
Net loss per share, basic
and diluted............... $ (65.87) $ (23.45) $ (22.62) $ (33.33) $ (26.23)
Shares used in computing
net loss per share, basic
and diluted............... 26 148 226 308 830
Pro forma net loss per
share, basic and
diluted(1)... $ (1.41)
Shares used in computing
pro forma net loss per
share basic and
diluted(1)................ 15,283
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA
Cash, cash equivalents and
short-term investments.... $ 1,877 $ 1,326 $ 833 $ 28,497 $ 21,616
Working capital............ 1,379 694 (125) 26,014 18,518
Total assets............... 2,911 2,714 2,273 32,777 29,753
Total long-term
obligations............... 891 2,872 3,772 7,408 7,326
Total stockholders' equity
(deficit)................. 1,354 (1,206) (2,747) 22,635 17,539
</TABLE>
- --------
(1) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and the notes to
those statements included elsewhere in this Form 10-K. This discussion may
contain forward-looking statements that involve risks and uncertainties. As a
result of many factors, such as those set forth under "Risk and uncertainties"
and elsewhere in this Form 10-K, our actual results may differ materially from
those anticipated in these forward-looking statements.
We are a pioneer in the new field of industrial genomics. Since we began
operations in 1994, we have been primarily involved in the research and
development of high definition DNA analysis tools for industrial biomedical
and life science applications.
We are a development stage company. Since our inception, we have incurred
significant losses and, as of December 31, 1999, we had an accumulated deficit
of $43.5 million. Through December 31, 1999, our revenues have been solely
from research grants. We began placing MassARRAY systems at beta sites and
with pre-launch users in July 1999. We commenced a commercial launch of our
MassARRAY system during the fourth quarter of 1999. We expect revenue
generated from our commercial launch to begin during the first quarter of
2000.
We expect to recognize revenue from the sale of both MassARRAY systems at the
time of placement and from disposable products, including SpectroCHIPs, at the
time of shipment. We expect that each system placed in the field will generate
a recurring revenue stream from the sale of disposables. We also expect the
volume of disposables purchased from each site will increase over time as the
customer becomes familiar with the technology and incorporates MassARRAY into
a broad range of SNP analysis programs. In addition, we expect to generate
revenue from the sale of proprietary assays and software products and other
services provided to the customer. In some cases we may retain some rights to
assays developed in collaborations with third parties. This may allow us to
offer an expanded line of products to a broader market. Our sales will be
initially driven by the need for SNP validation and later could expand into
the areas of genomic drug development, diagnostics and agricultural genomics.
Our expenses have consisted primarily of costs incurred in research and
development, manufacturing scale-up, business development and from general and
administrative costs associated with our operations. We expect our research
and development expenses to increase in the future as we continue to improve
and develop products. Our selling expenses will increase as we commercialize
our products. Expansion of our facilities and the additional obligations of a
public reporting entity will also add to our expenses. In addition, we expect
to record a $3.6 million charge to operating expenses in the first quarter of
2000 resulting from the forgiveness of loans granted to executive officers.
These loans were granted in connection with the exercise of stock options. As
a result, we expect to incur losses for the foreseeable future.
Our current products do not provide sufficient gross margin for us to become
profitable. To become profitable, we will need to develop and introduce new
higher margin products and generate significant sales of disposables.
We have a limited history of operations and we anticipate that our quarterly
results of operations will fluctuate for the foreseeable future due to several
factors, including market acceptance of current or new products, patent
conflicts, the introduction of new products by our competitors, the timing and
extent of our research and development efforts, and the timing of significant
orders. Our limited operating history makes accurate prediction of future
operations difficult or impossible.
29
<PAGE>
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues
Research and development grant revenue decreased to approximately $179,000 in
1999 from approximately $351,000 in 1998 and from $527,000 in 1997. As we
approached the commercial launch of our products, we received funding from
private equity financings and did not pursue grant funding.
Research and development expenses
Research and development expenses increased to $10.3 million in 1999 from $6.2
million in 1998 and $3.5 million in 1997. These expenses consist primarily of
salaries and related personnel costs, materials costs and costs related to
completion of our product development. The $4.1 million increase from 1998 to
1999 resulted from the expansion of our research and development efforts and
was comprised of a $2.3 million increase in salaries and related personnel
costs, additional material costs of $1.2 million and approximately $600,000 of
additional costs directly related to the scale-up of manufacturing for our
SpectoCHIPs. The $2.7 million increase from 1997 to 1998 resulted from an
additional $1.3 million in personnel costs and approximately $1.4 million in
additional supplies related to the development of our MassARRAY system.
General and administrative expenses
General and administrative expenses increased to $8.2 million in 1999 from
$4.2 million in 1998 and $1.9 million in 1997. These expenses consist
primarily of salaries and related costs for executive, finance and other
administrative personnel, general and patent related legal expenses, and
business development expenses. Salaries and related personnel costs for
additional administrative personnel represented $1.3 million of the increase
in 1999. Approximately $800,000 of the increase was due to expenses related to
filing and pursuing patent applications. The remaining $1.9 million portion of
the 1999 increase was attributed to general expenses associated with the
overall expansion of our operations. Expenses relating to filing and pursuing
patent applications increased by $800,000 from 1997 to 1998. These expenses
increased because a higher number of patents were filed worldwide. Expenses
related to an increase in personnel represented the remainder of the increase.
Amortization of deferred stock compensation
Deferred stock compensation represents the difference between the estimated
fair value of our common stock and the exercise price of options at the date
of grant. During the year ended December 31, 1999, we recorded amortization of
deferred stock compensation totaling $4.4 million, including $1.6 million
related to a remeasurement of options originally granted to an officer in
1997. We anticipate that additional deferred compensation totaling $1.6
million will be recorded for options granted in January 2000. These amounts
are being amortized over the vesting periods of the individual stock options
using the graded vesting method. We expect to record amortization for deferred
compensation approximately as follows: $3.7 million during 2000, $939,000
during 2001, $432,000 during 2002, and $187,000 during 2003.
Interest income
Interest income increased to approximately $1.6 million in 1999 from
approximately $397,000 in 1998. The increase resulted from higher average
balances of cash and cash equivalents and short-term investments in 1999,
resulting from the investment of the proceeds from the sale of Series D
convertible preferred stock in December 1998 and the first quarter of 1999.
The increase was due to higher average balances of cash and cash equivalents
and short-term investments in 1998, resulting from the investment of the
proceeds from the sale of Series C convertible preferred stock in February
1998. Interest income increased to $397,000 in 1998 from $57,000 as a result
of higher average balances of cash and cash equivalents and short-term
investments in 1998, resulting from the investment of the proceeds from the
sale of Series C convertible preferred stock in February 1998
30
<PAGE>
Interest expense
Interest expense increased to approximately $790,000 in 1999 from
approximately $613,000 in 1998 and $308,000 in 1997. Interest expense
increased in 1999 due to higher average borrowing under a capital lease
arrangement. The 1998 increase in interest expense resulted from both an
increase in borrowings under a capital lease agreement and from the issuance
of convertible debt.
Other income, net
Other income, net of approximately $169,000 in 1999 primarily represents the
gain on a disposal of a fixed asset during 1999.
Income taxes
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $26.8 million and $12.3 million. We also have
federal and state research and development tax credit carryforwards of
approximately $925,000 and $483,000 and German net operating loss
carryforwards of approximately $7.9 million. The research and development tax
credit carryforwards will begin to expire in 2011, unless previously utilized.
The federal and state net operating loss and credit carryforwards will begin
to expire in 2000 and 2008, respectively. The German net operating losses may
be carried forward indefinitely. Pursuant to Internal Revenue Code Sections
382 and 388, our net operating loss and credit carryforwards may be limited
due to a cumulative change in ownership of more than 50%, which occurred
during 1998 and also in connection with our initial public offering in
February 2000. However, we do not believe these limitations will materially
impact the use of the net operating loss and credit carryforwards.
Liquidity and capital resources
We have funded our operations with $55.6 million of private equity financings,
$6.0 million in loans and convertible loans, and $2.2 million from equipment
financing arrangements. In addition, in February 2000, we completed our
initial public offering raising net proceeds of approximately $144.1 million.
At December 31, 1999, cash, cash equivalents and short-term investments
totaled $21.6 million compared to $28.5 million at December 31, 1998. Our cash
reserves are held in a variety of interest-bearing instruments including
investment-grade corporate bonds, commercial paper and money market accounts.
Cash used in operations for the year ended December 31, 1999 was $14.7 million
compared with $7.8 million for the same period in 1998. A net loss of $21.8
million in 1999 was partially offset by non-cash charges of $4.4 million for
amortization of deferred compensation, $1.9 million for depreciation and
amortization expense and an increase of $2.0 million in accounts payable and
accrued expenses. Investing activities, other than the changes in our short-
term investments, consumed $4.5 million in cash during 1999 due to leasehold
improvements and equipment expenditures.
Cash provided by financing activities was $12.6 million for the year ended
December 31, 1999 compared to $39.2 million for the same period in 1998.
Financing activities included the receipt of net proceeds of $11.8 million
from the sale of preferred stock to investors during the year ended December
31, 1999 and $35.8 million in the same period in 1998.
Working capital decreased to $18.5 million at December 31, 1999 from $26.0
million at December 31, 1998. The decrease in working capital was due to our
use of cash in operations, higher accounts payable and accrued liabilities as
a result of increased product and business development, expenses, and payment
of capital lease obligations, offset in part by higher inventory and prepaid
expenses.
As of December 31, 1999, we had an aggregate of $7.8 million in future
obligations of principal payments under capital leases and long-term debt, of
which $0.5 million is obligated to be repaid within the next year. We used
approximately $3.1 million of the proceeds of our initial public offering for
the repayment of long-term bank debt.
31
<PAGE>
We believe our existing cash, cash equivalents and short-term investments,
will be sufficient to fund our operating expenses, debt obligations and
capital requirements through at least the next 24 months. Our future capital
uses and requirements depend on numerous factors, including:
. our success in selling our MassARRAY system and associated technologies;
. our progress with research and development;
. our ability to introduce and sell new products;
. our sales and marketing expenses;
. expenses associated with unforeseen litigation;
. costs and timing of obtaining new patent rights; and
. regulatory changes and competition and technological developments in the
market.
Therefore, our capital requirements may increase in future periods. As a
result, we may require additional funds and may attempt to raise additional
funds through equity or debt financings, collaborative arrangements with
corporate partners or from other sources.
We have a $25.0 million bank line of credit, all of which is available for
borrowing. We have no commitments for any additional financings, and we cannot
assure you that additional funding will be available to finance our operations
when needed or, if available, that the terms for obtaining such funds will be
favorable or will not result in dilution to our stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Short-term investments
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest
in may have market risk. This means that a change in prevailing interest rates
may cause the fair value of the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate
later rises, the fair value of the principal amount of our investment will
probably decline. To minimize this risk in the future, we intend to maintain
our portfolio of cash equivalents and short-term investments in a variety of
securities, including commercial paper, money market funds, government and
non-government debt securities. The average duration of all of our investments
has generally been less than one year. Due to the short term nature of these
investments, we believe we have no material exposure to interest rate risk
arising from our investments. Therefore, no quantitative tabular disclosure is
required.
Long-term debt
Our long-term debt is denominated in German deutsche marks. We converted
approximately half of this debt into common stock upon the closing of our
initial public offering in February 2000, and repaid the rest of this debt in
cash from the proceeds of the initial public offering. Increases in value of
the German deutsche mark relative to the US dollar before the conversion
resulted in a translation loss of approximately $200,000 through the date of
the conversion and repayment.
Foreign currency rate fluctuations
The functional currency for our German subsidiary is the deutsche mark. The
German subsidiary's accounts are translated from the German deutsche mark to
the US dollar using the current exchange rate in effect at the balance sheet
date, for balance sheet accounts, and using the average exchange rate during
the period for revenues and expense accounts. The effects of translation are
recorded as a separate component of stockholders' equity. Our German
subsidiary conducts its business with customers in local European currencies.
Exchange gains and losses arising from these transactions are recorded using
the actual exchange differences on the date of
32
<PAGE>
the transaction. We have not taken any action to reduce our exposure to
changes in foreign currency exchange rates, such as options or futures
contracts, with respect to transactions with our German subsidiaries or
transactions with our European customers. The net tangible assets of our
German subsidiary, without regard to the long-term debt, totaled $3.6 million
at December 31, 1999. A 1% decrease in the value of German deutsche marks
relative to the US dollar would result in an approximately $21,000 unrealized
foreign translation loss.
Inflation
We do not believe that inflation has had a material adverse impact on our
business or operating results during the periods presented.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
changes the previous accounting definition of derivative--which focused on
freestanding contracts such as options and forwards, including futures and
swaps--expanding it to include embedded derivatives and many commodity
contracts. Under the statement, every derivative is recorded in the balance
sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000. We do not
anticipate that the adoption of SFAS No. 133 will have a material impact on
our financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to the Index on Page F-l of the Financial Report included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company, their positions with the
Company and ages as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Executive Officers & Directors
Hubert Koster, PhD............... 59 President, Chief Executive Officer and Director
Charles R. Cantor, PhD........... 57 Chief Scientific Officer
Stephen L. Zaniboni.............. 42 Senior Vice President and Chief Financial Officer
Antonius Schuh, PhD.............. 36 Executive Vice President, Business Development and
Marketing
Delbert F. Foit, Jr.............. 53 Chief Operating Officer
Andreas Braun, PhD, MD........... 43 Chief Medical Officer
Karsten Schmidt, PhD............. 38 Managing Director, Sequenom GmbH
Helmut Schuhsler, PhD(1)......... 40 Chairman of the Board of Directors
Ernst-Gunter Afting, PhD, MD(2).. 57 Director
John E. Lucas(1)(2).............. 68 Director
Peter Reinisch, PhD.............. 59 Director
</TABLE>
- --------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Hubert Koster, PhD Dr. Koster is our founder, President, Chief Executive
Officer and a member of our board of directors and our scientific advisory
board. In 1978, Dr. Koster was appointed tenured professor of organic
chemistry and biochemistry at Hamburg University. Dr. Koster founded
Biosyntech, GmbH, the first biotech company in Germany in 1981 and served on
its board of directors and scientific advisory board. In 1987, he co-founded
MilliGen/Biosearch, the biotech division of Millipore Corporation in Bedford,
MA, and served as Vice President of Science and Technology. Dr. Koster
currently holds more than 20 patents and authored more than 110 publications
prior to founding Sequenom in 1994. Dr. Koster studied chemistry at Hamburg
University, completed doctoral research at the Max Planck Institute for
Experimental Medicine in Gottingen, and completed post-doctoral research work
at the Max Planck Institute for Virus Research in Tubingen.
Charles R. Cantor, PhD Dr. Cantor joined us as our Chief Scientific Officer
and Chairman of our scientific advisory board in August 1998. From 1992 until
joining us, Dr. Cantor served as the chair of, and as a professor in the
department of biomedical engineering and biophysics, and Director of the
Center for Advanced Biotechnology at Boston University. Prior to that time,
Dr. Cantor held positions at Columbia University and the University of
California, Berkeley. He was also Director of the Human Genome Center of the
Department of Energy at Lawrence Berkeley Laboratory. Dr. Cantor published the
first textbook on genomics: The Science and Technology of the Human Genome
Project and remains active in the Human Genome Project through his membership
in a number of the project's advisory committees and review boards. He is a
scientific advisor to 16 biotech and life science companies and two venture
capital firms. He is also a member of the National Academy of Sciences. Dr.
Cantor earned his PhD from the University of California, Berkeley.
Stephen L. Zaniboni Mr. Zaniboni joined us as our Chief Financial Officer in
April 1997. From 1994 until joining us, Mr. Zaniboni served as Vice President,
Finance for Aspect Medical Systems, Inc. Prior to joining Aspect, Mr. Zaniboni
was Corporate Controller for Behring Diagnostics from 1988 to 1994 where he
implemented financial systems during a dramatic growth period. Before joining
Behring, he held various financial management positions at Boston Scientific
Corp. Mr. Zaniboni began his career with Arthur Andersen & Co. He earned his
MBA from Boston College and he is a Certified Public Accountant.
34
<PAGE>
Antonius Schuh, PhD Dr. Schuh joined our German subsidiary as Managing
Director in December 1996 and was promoted to Executive Vice President,
Business Development and Marketing, in 1998 when he moved to our headquarters
in San Diego, California. From 1993 until joining us, Dr. Schuh was with Helm
AG, an international pharma/chemical trading and distribution corporation.
While at Helm AG, he established and headed the Pharma Business Development
Group and the associated technical and regulatory affairs department. Prior to
that, from 1992 to 1993, he was with Fisons Pharmaceuticals. Dr. Schuh is a
co-founder of BIOND, Heidelberg, a board member of Austrian Orphan
Pharmaceuticals AG, Vienna, and an advisor to Juelich Enzyme Products,
Juelich, Federal Republic Germany. Dr. Schuh earned his PhD in pharmaceutical
chemistry from the University of Bonn, in Germany.
Delbert F. Foit, Jr. Mr. Foit joined us as our Chief Operating Officer in
March 1999. From 1996 until joining us, Mr. Foit served as Vice President of
North American Operations for the Laboratory Systems Division of Boehringer
Mannheim Inc. He also served in various other positions, beginning in 1992,
where he implemented a number of successful productivity initiatives first
with Microgenics then with Boehringer Mannheim's North American Laboratory
Systems. After the acquisition of Boehringer Mannheim by Hoffmann-La Roche,
Mr. Foit assumed overall responsibility for the combined Laboratory Systems
Operations of Roche and Boehringer in North America. Prior to his tenure with
Boehringer, Mr. Foit held positions as Director of Operations and Director of
Manufacturing for Ortho Diagnostics Systems, a Johnson and Johnson Company.
Mr. Foit earned his MBA from Rider University.
Andreas Braun, PhD, MD Dr. Braun joined us in 1995 and was promoted from Vice
President, Genomics to Chief Medical Officer in September 1999. From 1992
until joining us, Dr. Braun served as Deputy Head of the Clinical Laboratory
at the Childrens Hospital, University of Munich. Dr. Braun has published more
than 45 peer-reviewed scientific publications. His research work in functional
pharmacogenomics targeting the human bradykin receptor was recognized in 1996
with the Garbor Szasz Award which was granted by the German Society of
Clinical Chemistry. Dr. Braun earned doctorate degrees in biology and medical
science from the University of Munich.
Karsten Schmidt, PhD Dr. Schmidt joined our German subsidiary as Director,
Business Development in January 1999 and was appointed as Managing Director in
May of 1999. From 1996 until joining us, Dr. Schmidt served in a senior
management position at Rhone-Poulenc Rorer, Germany, where he was responsible
for all drug regulatory affairs for asthma and allergies. From 1994 to 1996,
Mr. Schmidt served as a manager in charge of regulatory affairs, for Fisons
Araneimittel, GmbH. As a member of the International Pharmaceutical Aerosol
Consortium, Dr. Schmidt was involved in the joint activities of five prominent
pharmaceutical companies in this field to develop inhaled asthma therapies
with ozone-friendly propellants. Dr. Schmidt is a trained pharmacist and has a
broad scientific background in biochemistry and molecular biology. Dr. Schmidt
earned his PhD in pharmaceutical biology from the University in Bonn.
Helmut Schuhsler, PhD Dr. Schuhsler joined us as the Chairman of our Board of
Directors in 1996. Since 1998, Dr. Schuhsler has served as a managing partner
at TVM Techno Venture Management, a German and US venture capital firm. He has
been with TVM since 1990 and has been responsible for over 25 healthcare
investments of the firm. He is currently a Director of several biotechnology
and instrumentation companies. Dr. Schuhsler earned a PhD in the Social and
Economic Sciences from the University of Economics in Vienna.
Ernst-Gunter Afting, PhD, MD Dr. Afting joined us as a Director in 1996.
Since 1995, Dr. Afting has served as the Managing Director of Gesellschaft fur
Strahlenforschung, one of the largest German research organizations. From 1993
to 1995, he served as President and Chief Executive Officer of Roussel UCLAF,
Paris. He also headed the pharmaceutical division of Hoechst Group and was
Chairman of the Divisional Pharma Board of Hoechst. Dr. Afting earned a PhD
and an MD in Chemistry from the University of Freiburg/Breisgau.
John E. Lucas Mr. Lucas joined us as a Director in 1998. Mr. Lucas currently
serves as a management consultant to six biomedical companies. From 1994 to
1996, he was Founder, President and CEO of American Scientific Resources,
Ltd., a manufacturer of blood testing materials. From 1991 to 1994, he held
the positions
35
<PAGE>
of President, CEO and Chairman at Oxigene, Inc. and held similar positions
from 1974 to 1991 at Luconex, Mast ImmunoSystems, Xoma, Millipore Ventures,
Chemetrics and Oxford Laboratories. Mr. Lucas serves as a Director of InSite
Vision Incorporated. Mr. Lucas earned an MBA from Harvard University.
Peter Reinisch, PhD Dr. Reinisch joined us as a Director in 1998. Dr.
Reinisch has served as an advisor to the general partners of Global Life
Sciences LP located in Guernsey, Channel Islands, a position he has held since
1996. Dr. Reinisch is on the board of directors or has board visitation rights
for eight companies. From 1994 to 1998, he advised companies in the Corange
Group and played a key role in the co-establishment of Global Life Sciences
LP. Prior to that time, Dr. Reinisch held various senior management positions
with Corange/Boehringer Mannheim primarily in the area of business development
of the Diagnostics division. Dr. Reinisch earned a PhD in Business
Administration from the Technical University of Vienna.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), upon the Company becoming registered under the Exchange Act,
the Company's directors, executive officers, and any persons holding more than
10% of the Company's Common Stock are required to report their initial
ownership of the Company's Common Stock and any subsequent changes in that
ownership to the SEC. Specific due dates for these reports have been
established and the Company is required to identify in this Form 10-K those
persons who failed to timely file these reports. The Company was not a
reporting company in 1999 and no filings were required. However, the Company
became registered under Section 12 of the Exchange Act on January 31, 2000 and
the initial statements of beneficial ownership on Form 3 for all directors,
executive officers and 10% stockholders were filed prior to that date.
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table shows all compensation received during the year ended
December 31, 1999 and December 31, 1998 by our Chief Executive Officer and our
other five executive officers whose salary and bonus exceeded $100,000 in 1999
for services rendered in all capacities to us during 1999.
Other annual compensation for Dr. Koster includes, for 1998, $94,266 paid in
connection with his relocation to our corporate headquarters in San Diego from
Hamburg, Germany, $3,900 for use of a company automobile and $1,000 paid in
connection with various tax services and, for 1999, $6,923 paid in connection
with his relocation, and $5,702 for use of a company automobile. Other annual
compensation for Mr. Zaniboni includes, for 1998, $12,098 paid in connection
with his relocation to San Diego, California and $1,275 paid for various tax
services and, for 1999, amounts paid for various tax services. Other annual
compensation for Dr. Shuh and Andreas Braun for both years reflects the amount
paid for various tax services. Other annual compensation for Dr. Cantor during
1999 represents payment for his services as chief of our scientific advisory
board. Other annual compensation for Mr. Foit represents the amount paid in
connection with his relocation to our corporate headquarters in San Diego.
Other annual compensation for all officers listed represents income from the
exercise of non-qualified stock options.
SUMMARY COMPENSATION
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
-------------------------
ANNUAL
COMPENSATION SECURITIES
NAME AND PRINCIPAL ---------------- OTHER ANNUAL UNDERLYING OTHER
POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
- ------------------ ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hubert Koster........... 1998 $252,000 $10,000 $99,166 255,000 --
President and 1999 $279,334 $10,000 $12,625 155,000 450,688
Chief Executive Officer
Stephen L. Zaniboni..... 1998 132,500 10,000 13,373 140,000 --
Senior Vice President, 1999 185,208 10,000 1,650 50,000 17,084
Financial Officer
Antonius Schuh.......... 1998 150,426 10,000 -- 130,000 --
Executive Vice
President, 1999 187,223 10,000 750 50,000 23,126
Business Development
and Marketing
Charles R. Cantor....... 1999 180,000 21,000 30,000 100,000 207,200
Chief Scientific
Officer
Andreas Braun........... 1998 136,000 10,000 350 50,000 --
Chief Medical Officer 1999 145,917 10,000 1,150 130,000 --
Delbert F. Foit, Jr. ... 1999 126,000 7,432 10,460 100,000 --
(from April 1, 1999)
Chief Operating Officer
</TABLE>
37
<PAGE>
OPTIONS
The following table shows information regarding options granted to the
executive officers listed in the summary compensation table above during the
fiscal years ended December 31, 1998 and 1999. We have not granted any stock
appreciation rights.
Each option represents the right to purchase one share of our common stock.
The options generally become vested over four years. To the extent not already
vested, some of these options may also accelerate and become exercisable in
the event of a merger in which we are not the surviving corporation or upon
the sale of substantially all of our assets. In the years ended December 31,
1998 and 1999, we granted options to purchase an aggregate of 1.3 million and
1.1 million shares of common stock, respectively, to various officers,
employees, directors and consultants.
The potential realizable value at assumed annual rates of stock price
appreciation for the option term represents hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The 5% and 10% assumed annual rates of compounded stock price
appreciation are required by rules of the Securities and Exchange Commission
and do not represent our estimate or projection of our future common stock
prices. These amounts represent assumed rates of appreciation in the value of
our common stock from the fair market value on the date of grant. Actual
gains, if any, on stock option exercises are dependent on the future
performance of our common stock and overall stock market conditions. The
amounts reflected in the table may not necessarily be achieved.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT
--------------------------------------------- ASSUMED ANNUAL
% OF RATES OF
NUMBER OF TOTAL OPTIONS APPRECIATION OF
SECURITIES GRANTED TO STOCK PRICE FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM
OPTIONS IN 1998 & PRICE EXPIRATION ---------------
NAME YEAR GRANTED 1999 PER SHARE DATE 5% 10%
- ---- ---- ---------- ------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Hubert Koster........... 1998 75,000 6% $0.55 09/18/08 $25,942 $65,742
72,656 6 1.10 12/11/08 50,262 127,374
107,344 9 1.00 12/11/08 67,508 171,079
1999 8,420 * 3.30 01/29/09 17,474 44,284
36,580 3 3.00 01/29/09 69,015 174,897
60,000 6 3.00 07/09/09 113,201 286,874
50,000 5 3.00 10/21/09 94,334 239,062
Option grants in last two fiscal years
Stephen L. Zaniboni..... 1998 20,000 2 0.50 04/02/08 6,289 15,937
20,000 2 0.50 06/24/08 6,289 15,937
100,000 8 1.00 12/11/08 62,889 159,374
1999 50,000 5 3.00 10/21/09 94,334 239,062
Antonius Schuh.......... 1998 30,000 2 0.50 09/18/08 9,433 23,906
100,000 8 1.00 12/11/08 62,889 159,374
1999 50,000 5 3.00 10/21/09 94,334 239,062
Charles R. Cantor....... 1998 5,000 * 0.50 04/02/08 1,572 3,984
180,000 15 0.50 06/24/08 56,601 143,433
1999 100,000 9 3.00 01/29/09 188,668 478,124
Andreas Braun........... 1998 50,000 4 1.00 12/11/08 31,444 79,687
1999 30,000 3 3.00 01/29/09 56,600 143,437
100,000 9 3.00 10/21/09 188,668 478,124
Delbert F. Foit, Jr..... 1999 100,000 9 3.00 04/09/09 188,668 478,124
</TABLE>
- --------
* Less than 1%.
38
<PAGE>
The following table shows information at December 31, 1999 concerning the
number and value of unexercised options held by each of the executive officers
listed in the summary compensation table above. Options shown as exercisable
in the table below are immediately exercisable. However, we have rights to
repurchase shares of the common stock underlying some of these options upon
termination of the holder's employment with us. There was no public trading
market for the common stock as of December 31, 1999. Accordingly, the value of
unexercised in-the-money options listed below has been calculated on the basis
of the initial public offering price of $26.00 per share, less the applicable
exercise price per share, multiplied by the number of shares underlying such
options.
Aggregated option exercises in the year ended December 31, 1999 and year-end
option values
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1999 AT DECEMBER 31, 1999
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Hubert Koster........... 790,000 1,589,984 -- -- --
Stephen L. Zaniboni..... 260,000 492,500 -- -- --
Antonius Schuh.......... 330,000 687,500 -- -- --
Charles R. Cantor....... 351,000 657,200 -- -- --
Andreas Braun........... 120,000 317,500 130,000 2,990,00 --
Delbert F. Foit, Jr. ... 25,000 -- 75,000 1,725,000 --
</TABLE>
DIRECTOR COMPENSATION
Certain outside directors receive cash compensation. One outside director
receives $2,500 per quarter for his services as a director to the Company.
Another outside director received $4,000 per month for advisory services in
connection with our initial public offering. All directors are reimbursed for
the reasonable expenses of attending the meetings of the board of directors or
committees. Under our 1999 Stock Incentive Plan, each individual who first
becomes a non-employee member of the board of directors at any time after
January 31, 2000 will receive an option to purchase 15,000 shares of our
common stock on the date the individual joins the board of directors, provided
the individual has not previously been employed by us or any parent or
subsidiary corporation. In addition, on the date of each annual stockholders
meeting held after the effective date of this offering beginning in 2000, each
non-employee member of the board of directors will automatically be granted an
option to purchase 3,000 shares of common stock, provided such individual has
served as a non-employee member of the board of directors for at least six
months.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee currently consists of Messrs. Lucas and Schuhsler.
Neither member of the compensation committee has been an officer or employee
of ours at any time. None of our executive officers serves as a member of the
board of directors or compensation committee of any other company that has one
or more executive officers serving as a member of our board of directors or
compensation committee. Prior to the formation of the compensation committee
in November 1999, the board of directors as a whole made decisions relating to
compensation of our executive officers.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
All of our current employees have entered into agreements with us which
contain restrictions and covenants. These provisions include covenants
relating to the protection of our confidential information, the assignment of
inventions, and restrictions on competition and soliciting our clients,
employees, or independent contractors.
None of our employees is employed for a specified term, and each employee's
employment with us is subject to termination at any time by either party for
any reason, with or without cause.
39
<PAGE>
Dr. Koster's employment agreement provides for a salary of $240,000 per year,
subject to periodic increases by our board of directors at its discretion. In
connection with his employment with us, Dr. Koster was granted an option to
purchase 300,000 shares of our common stock under our 1994 and 1998 stock
plans. Dr. Koster has exercised these options. We recorded deferred
compensation as a result of a remeasurement of these options originally
granted in 1997. Dr. Koster was also reimbursed for expenses he incurred in
relocating from Hamburg, Germany to our corporate offices in San Diego,
California, in connection with his employment agreement. If Dr. Koster's
employment is terminated involuntarily or without cause, Dr. Koster will be
entitled to receive his annual salary in periodic payments, until he secures
other full-time employment with another company or until one year has elapsed
after termination, whichever is earlier.
Mr. Zaniboni's employment agreement provides for a salary of $195,000 per
year, subject to periodic increases by our board of directors at its
discretion. Mr. Zaniboni is also entitled to receive a bonus of $10,000 per
year. In connection with his employment with us, Mr. Zaniboni was granted
options to purchase 210,000 shares of our common stock under our 1994 and 1998
stock plans. Mr. Zaniboni has exercised these options. If Mr. Zaniboni's
employment is terminated involuntarily or without cause, Mr. Zaniboni will be
entitled to receive his annual salary in periodic payments, until he secures
other full-time employment with another company or until six months have
elapsed after termination, whichever is earlier.
Dr. Schuh's employment agreement provides for a salary of $195,000 per year,
subject to periodic increases by our board of directors at its discretion. Dr.
Schuh is also entitled to receive a bonus of $10,000 per year. In connection
with his employment with us, Dr. Schuh was granted options to purchase 280,000
shares of our common stock under our 1994 and 1998 stock plans. Dr. Schuh has
exercised these options. If Dr. Schuh's employment is terminated involuntarily
or without cause, Dr. Schuh will be entitled to receive his annual salary in
periodic payments, until he secures other full-time employment with another
company or until six months have elapsed after termination, whichever is
earlier.
Dr. Cantor's employment agreement provides for a salary of $180,000 per year,
subject to periodic increases by our board of directors at its discretion. Dr.
Cantor is also entitled to receive a bonus of $21,000 per year. In addition,
Dr. Cantor will be paid $30,000 in connection with his service as the Chairman
of our scientific advisory board. Moreover, we will pay for up to 12 visits
per year to Boston University that Dr. Cantor is required to make in
connection with his leave of absence from his positions at the university. In
connection with his employment with us, Dr. Cantor was granted options to
purchase 280,000 shares of our common stock under our 1994 and 1998 stock
plans. Dr. Cantor has exercised these options. If Dr. Cantor's employment is
terminated involuntarily or without cause, Dr. Cantor will be entitled to
receive his annual salary in periodic payments, until he secures other full-
time employment with another company or until six months have elapsed after
termination, whichever is earlier.
Mr. Foit's employment agreement provides for a salary of $180,000 per year,
subject to periodic increases by our board of directors at its discretion. Mr.
Foit is also entitled to receive a bonus of $10,000 per year. We also agreed
to pay reasonable expenses, up to a maximum of $50,000, associated with Mr.
Foit's relocation to our corporate offices in San Diego, California. Mr. Foit
was also granted an additional $1,000 monthly housing allowance during his
first twelve months of service with us. In connection with his employment with
us, Mr. Foit was granted options to purchase 100,000 shares of our common
stock under our 1998 Stock Option/Stock Issuance Plan. Mr. Foit has exercised
a portion of these options. If Mr. Foit's employment is terminated
involuntarily or without cause, Mr. Foit will be entitled to receive his
annual salary in periodic payments, until he secures other full-time
employment with another company or until six months have elapsed after
termination, whichever is earlier.
PENSION AND LONG-TERM INCENTIVE PLANS
The Company has no pension or long-term incentive plans.
40
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 29, 2000, by: (i) each
person who is known by the Company to beneficially own more than 5% of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Company's officers named under "Executive Compensation" and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
------------------------------
NUMBER OF
SHARES
NUMBER OF UNDERLYING
SHARES OPTIONS OR
BENEFICIAL OWNER OUTSTANDING WARRANTS PERCENT
- ---------------- ----------- ---------- -------
<S> <C> <C> <C>
Five Percent Stockholders
Funds affiliated with TVM Techno Venture
Management(1)................................. 2,604,305 38,854 10.9%
Maximilianstrasse 35
Einang C
80539 Munich
Germany
Alpinvest International B.V.(2)................ 1,445,665 31,746 6.2
De Gooise Poort
Gooimeer 3 NL 1410 AB
Nararden
The Netherlands
Directors and Named Executive Officers
Hubert Koster, PhD............................. 2,017,691 200,000 9.2%
Helmut Schuhsler, PhD.......................... 2,674,305 38,854 11.3
Ernst-Gunter Afting, PhD, MD................... 106,748 -- 0.4
John E. Lucas.................................. 52,685 -- 0.2
Peter Reinisch, PhD(3)......................... 832,871 10,000 3.5
Stephen L. Zaniboni............................ 261,920 36,000 1.2
Antonius Schuh, PhD............................ 330,000 36,000 1.5
Charles R. Cantor, PhD......................... 359,269 45,000 1.7
Andreas Braun, PhD, MD......................... 250,000 36,000 1.2
Karsten Schmidt, PhD........................... 22,500 7,500 0.1
Delbert F. Foit, Jr. .......................... 42,570 87,000 0.5
All directors and executive officers as a group
(11 persons).................................. 6,950,559 496,354 30.1%
</TABLE>
- --------
(1) Includes 834,902 shares owned by TVM Zweite Beteiligung-US L.P; 538,461
shares owned by TVM Medical Ventures; 474,957 shares owned by TVM
Eurotech L.P.; 388,749 shares owned by TVM Techno Venture Enterprises No.
II L.P.; 259,168 shares owned by TVM Intertech L.P.; 67,900 shares owned
by TVM Techno Venture Management No. III GmbH; and 40,168 shares owned by
TVM Techno Venture Investors No. 1 L.P. Dr. Schuhsler and Friedrich
Bornikoel are the Managing Directors of TVM Techno Venture Management
GmbH and Dr. Schuhsler is also a member of the Board of Management of TVM
Medical Ventures GmbH & Co. KG. Dr. Schuhsler disclaims beneficial
ownership of all shares issued or issuable to the foregoing entities,
except to the extent of his pecuniary interest, but exercises shared
voting and investment power with respect to some of these shares.
(2) There is no single person at Alpinvest that exercises voting control over
shares held by Alpinvest. Voting requires the signature of two of the
authorized signatories. Mr. Stan Vermeulen and Mr. Jaap Vermeulen are two
natural persons authorized to sign on behalf of Alpinvest.
(3) Represents shares owned by GLS LP Investments III Limited. Dr. Reinisch
is affiliated with GLS LP Investments III Limited. Dr. Reinisch disclaims
beneficial ownership of all shares issued or issuable to the foregoing
entities, except to the extent of his pecuniary interest, but exercises
shared voting and investment power with respect to some of these shares.
41
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF MANAGEMENT
We have loaned money to some of our executive officers under the terms of
promissory notes and stock pledge agreements, whereby the executive officers
pledge shares of our common stock issued upon the exercise of options to
purchase such common stock. These loans were used by the executive officers
upon the exercise of these options to acquire the underlying shares of common
stock. Each loan is required to be repaid on the earlier of two years after
its execution or the completion of a secondary public offering by us, in which
the officer making the note is allowed to sell his shares of our common stock.
The amount outstanding at December 31, 1999 on each loan shown below
represents the largest aggregate amount of indebtedness outstanding at any
time during the term of each such loan. The executive officers to whom we have
made these loans and the principal terms of the loans are shown in the
following table:
<TABLE>
<CAPTION>
AMOUNT APPROXIMATE
OUTSTANDING AT INTEREST
DECEMBER 31, RATE
EXECUTIVE OFFICER POSITION 1999 PER ANNUM
----------------- -------- -------------- -----------
<S> <C> <C> <C>
Hubert Koster........... President and Chief Executive Officer $953,266 6%
Charles R. Cantor....... Chief Scientific Officer 477,391 6
Antonius Schuh.......... Executive Vice President, Business 312,956 6
Development and Marketing
Stephen L. Zaniboni..... Senior Vice President, Chief Financial Officer 295,743 6
</TABLE>
In February 2000, the Board of Directors approved the forgiveness of the
loans.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with each of our directors and
officers containing provisions that may require us to indemnify them against
liabilities that may arise by reason of their status or service as directors
or officers and to advance their expenses incurred as a result of any
proceeding against them. However, we will not indemnify directors or officers
with respect to liabilities arising from willful misconduct of a culpable
nature. For more information concerning these agreements, see "Description of
securities--limitation of liabilities and indemnification matters."
CONSULTING AGREEMENT
During the period beginning when we were organized in 1994 until July 1997,
Dr. Hubert Koster worked for us as a consultant. We paid Dr. Koster $5,000 per
month until September 1996 at which time we increased his consulting
compensation to $12,500 per month, in consideration for his services to us.
Dr. Koster's consulting arrangement was terminated when he was appointed as
our President and Chief Executive Officer in 1997.
INTELLECTUAL PROPERTY ASSIGNMENTS
Since our inception, Dr. Koster has assigned several personal patents and
other intellectual property rights to us that are key in the development of
our products and technology. As partial consideration for these assignments,
we reimbursed Dr. Koster for patent application costs and prior to 1996 we
issued shares of our Series A convertible preferred stock to Dr. Koster. We
have paid no additional consideration to Dr. Koster except for those amounts
paid in connection with his employment or consulting services to us since
January 1996.
Dr. Cantor is named as an inventor on a number of patents which we have
licensed from Boston University. If we are commercially successful and are
required to make royalty payments to Boston University under our license
arrangements, Dr. Cantor could receive additional compensation from Boston
University. In addition, we fund research at Boston University; however, Dr.
Cantor receives no direct compensation from Boston University as a result of
this funding.
42
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The financial statements of the Company are included herein as required
under Item 8 of this annual report on Form 10-K. See Index on page F-l.
(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted since they are either
not required, not applicable, or the information is otherwise included.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the last quarter in 1999
since we were not subject to this reporting requirement during 1999.
(C) EXHIBITS
The exhibits listed below are required by Item 601 of Regulation S-K.
Each management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K has been identified.
<TABLE>
<C> <S>
EXHIBIT
NUMBER
-------
#3.1 Restated /certificate of Incorporation of the Company (Exhibit 3.2).
#3.2 Amended and Restated Bylaws of the Company (Exhibit 3.4).
#4.1 Form of Certificate for Common Stock.
10.63 Business Loan Agreement, dated March 3, 2000, between the Registrant
and Union Bank of California
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
- --------
# Incorporated by reference to the same-numbered exhibit (except as otherwise
indicated) to the Company's Registration Statement on Form S-1 (No. 333-
91665), as amended.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act or 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SEQUENOM, INC.
/s/ Hubert Koster
Date: March 27, 2000 By: _________________________________
Hubert Koster
President and Chief Executive
Officer
POWER OF ATTORNEY
Known all men by these presents, that each person whose signature appears
below constitutes and appoints Stephen L. Zaniboni or Hubert Koster, his or
her attorney-in-fact, with power of substitution in any and all capacities, to
sign any amendments to this Annual Report on Form 10-K, and to file the same
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
the attorney-in-fact or his or her substitute or substitutes may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Hubert Koster President and Chief Executive March 27, 2000
____________________________________ Officer
Hubert Koster
/s/ Stephen L. Zaniboni Chief Financial Officer March 27, 2000
____________________________________ (Principal Financial and
Stephen L. Zaniboni Accounting Officer)
/s/ Helmut Schuhsler Chairman of the Board of March 27, 2000
____________________________________ Directors and Director
Helmut Schuhsler
/s/ Ernst-Guhter Afting Director March 27, 2000
____________________________________
Ernst-Gunter Afting
/s/ Peter Reinisch Director March 27, 2000
____________________________________
Peter Reinisch
/s/ John Lucas Director March 27, 2000
____________________________________
John Lucas
</TABLE>
44
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999.............. F-3
Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999 and the period February 14, 1994 (inception) to
December 31, 1999........................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period
February 14, 1994 (inception) to December 31, 1999....................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999 and the period February 14, 1994 (inception) to
December 31, 1999........................................................ F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Sequenom, Inc.
We have audited the accompanying consolidated balance sheets of Sequenom, Inc.
(a development stage company) as of December 31, 1998 and 1999 and the related
consolidated statements of operations, stockholders' equity (deficit), and
cash flows for each of the three years in the period ended December 31, 1999
and the period from February 14, 1994 (inception) to December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sequenom,
Inc. (a development stage company) at December 31, 1998 and 1999, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999 and the period from February 14, 1994
(inception) to December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
San Diego, California
February 25, 2000
F-2
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 8,559,612 $ 5,200,734
Short-term investments, available-for-sale......... 19,937,876 16,415,764
Grant receivable................................... -- 105,041
Inventories........................................ -- 229,750
Deferred stock issuance costs...................... -- 645,534
Other current assets and prepaid expenses.......... 251,596 809,202
----------- -----------
Total current assets................................. 28,749,084 23,406,025
Equipment and leasehold improvements, net............ 3,941,888 6,294,011
Other assets......................................... 86,312 53,023
----------- -----------
Total assets......................................... $32,777,284 $29,753,059
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............. $ 2,385,254 $ 4,426,287
Current portion of capital lease obligations....... 349,489 461,784
----------- -----------
Total current liabilities............................ 2,734,743 4,888,071
Capital lease obligations, less current portion...... 730,064 1,189,428
Long-term debt....................................... 5,964,000 5,134,000
Accrued long-term interest payable on long-term
debt................................................ 713,500 1,003,000
Commitments
Stockholders' equity:
Convertible preferred stock, par value $0.001;
Authorized shares-14,842,757
Aggregate liquidation preference-$44,645,038 and
$56,793,947 at December 31, 1998 and 1999,
respectively
Issued and outstanding shares-12,973,694 and
14,842,757 at December 31, 1998 and 1999,
respectively..................................... 12,974 14,843
Common stock, par value $0.001;
Authorized shares-19,500,000
Issued and outstanding shares-331,010 and
2,298,675 at December 31, 1998 and 1999,
respectively.................................... 331 2,299
Additional paid-in capital......................... 46,798,743 66,300,293
Notes receivable for stock......................... -- (2,056,466)
Deferred compensation related to stock options..... (2,420,150) (3,618,601)
Accumulated other comprehensive income (loss)...... (22,649) 400,779
Deficit accumulated during the development stage... (21,734,272) (43,504,587)
----------- -----------
Total stockholders' equity........................... 22,634,977 17,538,560
----------- -----------
Total liabilities and stockholders' equity........... $32,777,284 $29,753,059
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
YEAR ENDED DECEMBER 31, FEBRUARY 14, 1994
--------------------------------------- (INCEPTION) TO
1997 1998 1999 DECEMBER 31, 1999
----------- ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Research and development
grants................. $ 526,573 $ 351,067 $ 179,248 $ 1,949,791
Costs and expenses:
Research and
development........... 3,531,558 6,187,572 10,291,213 25,342,801
General and
administrative........ 1,860,629 4,218,453 8,238,809 15,999,881
Amortization of
deferred
compensation.......... -- -- 4,376,360 4,376,360
----------- ------------ ------------ ------------
5,392,187 10,406,025 22,906,382 45,719,042
----------- ------------ ------------ ------------
Loss from operations.... (4,865,614) (10,054,958) (22,727,134) (43,769,251)
Interest income......... 56,986 397,361 1,577,635 2,109,960
Interest expense........ (308,191) (612,975) (790,260) (2,014,740)
Other income, net....... -- -- 169,444 169,444
----------- ------------ ------------ ------------
Net loss................ $(5,116,819) $(10,270,572) $(21,770,315) $(43,504,587)
=========== ============ ============ ============
Historical net loss per
share, basic and
diluted................ $ (22.62) $ (33.33) $ (26.23)
=========== ============ ============
Weighted average shares
outstanding, basic and
diluted................ 226,251 308,121 829,895
=========== ============ ============
Pro forma net loss per
share, basic and
diluted................ $ (1.42)
============
Pro forma weighted
average shares
outstanding, basic and
diluted................ 15,283,261
============
</TABLE>
See accompanying notes.
F-4
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFERRED DEFICIT
CONVERTIBLE NOTES COMPENSATION ACCUMULATED ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE RELATED TO OTHER DURING THE STOCKHOLDERS'
---------------- -------------- PAID-IN FROM STOCK COMPREHENSIVE DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICERS OPTIONS INCOME (LOSS) STAGE (DEFICIT)
--------- ------ ------- ------ ---------- ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss......... -- $ -- -- $ -- $ -- $ -- $ -- $ -- $(1,149,498) $(1,149,498)
Translation
adjustment....... -- -- -- -- -- -- -- (1,703) -- (1,703)
Comprehensive
loss............. -- -- -- -- -- -- -- -- -- (1,151,201)
Issuance of
common stock..... -- -- 1 -- 1 -- -- -- -- 1
Issuance of
Series A
Convertible
Preferred Stock,
net of issuance
costs of $35,484 442,000 442 -- -- 185,074 -- -- -- -- 185,516
Issuance of
Series A
Convertible
Preferred Stock
for services..... 38,000 38 -- -- 18,962 -- -- -- -- 19,000
Issuance of
Series A
Convertible
Preferred Stock
for assets....... 1,100,000 1,100 -- -- 548,900 -- -- -- -- 550,000
--------- ------ ------- ------ --------- ------ ------- ------- ----------- -----------
BALANCE AT
DECEMBER 31,
1994............. 1,580,000 1,580 1 -- 752,937 -- -- (1,703) (1,149,498) (396,684)
Net loss........ -- -- -- -- -- -- -- -- (1,720,201) (1,720,201)
Translation
adjustment...... -- -- -- -- -- -- -- (3,222) -- (3,222)
-----------
Comprehensive
loss............ -- -- -- -- -- -- -- -- -- (1,723,423)
Issuance of
Series B
Convertible
Preferred Stock,
net of issuance
costs of
$32,940......... 2,333,333 2,333 -- -- 3,464,727 -- -- -- -- 3,467,060
Issuance of
Common Stock.... -- -- 26,250 26 1,287 -- -- -- -- 1,313
Exercise of
stock options... -- -- 122,000 122 5,978 -- -- -- -- 6,100
--------- ------ ------- ------ --------- ------ ------- ------- ----------- -----------
BALANCE AT
DECEMBER 31,
1995............. 3,913,333 3,913 148,251 148 4,224,929 -- -- (4,925) (2,869,699) 1,354,366
Net loss........ -- -- -- -- -- -- -- -- (3,477,182) (3,477,182)
Translation
adjustment...... -- -- -- -- -- -- -- (63,554) -- (63,554)
-----------
Comprehensive
loss............ -- -- -- -- -- -- -- -- -- (3,540,736)
Issuance of
Series B
Convertible
Preferred Stock,
net of issuance
costs of
$10,592......... 643,330 644 -- -- 953,647 -- -- -- -- 954,291
Issuance of
warrants........ -- -- -- -- 18,000 -- -- -- -- 18,000
Deferred
compensation
related to
issuance of
options to
consultants..... -- -- -- -- 33,000 -- (25,000) -- -- 8,000
--------- ------ ------- ------ --------- ------ ------- ------- ----------- -----------
BALANCE AT
DECEMBER 31,
1996............. 4,556,663 4,557 148,251 148 5,229,576 -- (25,000) (68,479) (6,346,881) (1,206,079)
Net loss........ -- -- -- -- -- -- -- -- (5,116,819) (5,116,819)
Translation
adjustment...... -- -- -- -- -- -- -- 209,162 -- 209,162
-----------
Comprehensive
loss............ -- -- -- -- -- -- -- -- -- (4,907,657)
Exercise of
stock options... -- -- 144,009 144 35,856 -- -- -- -- 36,000
Issuance of
Series C
Convertible
Preferred Stock,
net of issuance
costs of
$49,661......... 1,065,079 1,065 -- -- 3,304,273 -- -- -- -- 3,305,338
Amortization of
deferred
compensation.... -- -- -- -- -- -- 25,000 -- -- 5,000
--------- ------ ------- ------ --------- ------ ------- ------- ----------- -----------
BALANCE AT
DECEMBER 31,
1997............. 5,621,742 5,622 292,260 292 8,569,705 -- -- 140,683 (11,463,700) (2,747,398)
</TABLE>
F-5
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFERRED DEFICIT
CONVERTIBLE NOTES COMPENSATION ACCUMULATED ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE RELATED TO OTHER DURING THE
------------------ ---------------- PAID-IN FROM STOCK COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICERS OPTIONS INCOME (LOSS) STAGE
---------- ------- --------- ------ ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss........ -- -- -- -- -- -- -- -- (10,270,572)
Unrealized gain
on available-
for-sale
securities...... -- -- -- -- -- -- -- 23,326 --
Translation
adjustment...... -- -- -- -- -- -- -- (186,658) --
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
Exercise of
stock options... -- -- 38,750 39 7,086 -- -- -- --
Issuance of
stock options to
consultants..... -- -- -- -- 10,000 -- -- -- --
Issuance of
Series C
Convertible
Preferred Stock,
net of issuance
costs of
$47,370......... 3,508,252 3,508 -- -- 11,000,115 -- -- -- --
Issuance of
Series D
Convertible
Preferred stock,
net of issuance
costs of
$188,519........ 3,843,700 3,844 -- -- 24,791,687 -- -- -- --
Deferred
compensation.... -- -- -- -- 2,420,150 -- (2,420,150) -- --
---------- ------- --------- ------ ----------- ----------- ----------- -------- ------------
BALANCE AT
DECEMBER 31,
1998............. 12,973,694 12,974 331,010 331 46,798,743 -- (2,420,150) (22,649) (21,734,272)
Net loss........ -- -- -- -- -- -- -- -- (21,770,315)
Unrealized loss
on available-
for-sale
securities...... -- -- -- -- -- -- -- (61,981) --
Translation
adjustment...... -- -- -- -- -- -- -- 485,409 --
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
Exercise of
stock options... -- -- 1,967,665 1,968 2,049,378 (2,056,466) -- -- --
Issuance of
stock options to
consultants..... -- -- -- -- 102,527 -- -- -- --
Issuance of
Series D
Convertible
Preferred stock,
net of issuance
costs of
$372,206........ 1,869,063 1,869 -- -- 11,774,834 -- -- -- --
Deferred
compensation.... -- -- -- -- 5,574,811 -- (5,574,811) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 4,376,360 -- --
---------- ------- --------- ------ ----------- ----------- ----------- -------- ------------
BALANCE AT
DECEMBER 31,
1999............. 14,842,757 $14,843 2,298,675 $2,299 $66,300,293 $(2,056,466) $(3,618,601) $400,779 $(43,504,587)
========== ======= ========= ====== =========== =========== =========== ======== ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Net loss........ (10,270,572)
Unrealized gain
on available-
for-sale
securities...... 23,326
Translation
adjustment...... (186,658)
-------------
Comprehensive
loss............ (10,433,904)
Exercise of
stock options... 7,125
Issuance of
stock options to
consultants..... 10,000
Issuance of
Series C
Convertible
Preferred Stock,
net of issuance
costs of
$47,370......... 11,003,623
Issuance of
Series D
Convertible
Preferred stock,
net of issuance
costs of
$188,519........ 24,795,531
Deferred
compensation.... --
-------------
BALANCE AT
DECEMBER 31,
1998............. 22,634,977
Net loss........ (21,770,315)
Unrealized loss
on available-
for-sale
securities...... (61,981)
Translation
adjustment...... 485,409
-------------
Comprehensive
loss............ (21,346,887)
Exercise of
stock options... (5,120)
Issuance of
stock options to
consultants..... 102,527
Issuance of
Series D
Convertible
Preferred stock,
net of issuance
costs of
$372,206........ 11,776,703
Deferred
compensation.... -- --
Amortization of
deferred
compensation.... 4,376,360
-------------
BALANCE AT
DECEMBER 31,
1999............. $17,538,560
=============
</TABLE>
See accompanying notes.
F-6
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
YEARS ENDED DECEMBER 31, FEBRUARY 14, 1994
--------------------------------------- (INCEPTION) TO
1997 1998 1999 DECEMBER 31, 1999
----------- ------------ ------------ -----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(5,116,819) $(10,270,572) $(21,770,315) $(43,504,587)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Amortization of
deferred
compensation.......... -- -- 4,376,360 4,376,360
Depreciation and
amortization.......... 351,173 961,051 1,941,672 3,716,056
Warrants issued in
conjunction with lease
financing............. -- -- -- 18,000
Options issued to
consultants........... 25,000 10,000 102,527 145,527
Stock issued for
technology and
services.............. -- -- -- 569,000
Changes in operating
assets and
liabilities:
Inventories........... -- -- (229,748) (229,748)
Other current assets.. 75,364 47,305 (1,329,269) (1,622,278)
Other assets.......... (107,427) 56,085 (220,714) (241,703)
Accounts payable and
accrued expenses..... 231,155 1,111,892 1,965,358 4,481,607
Other liabilities..... 149,500 289,500 453,537 1,041,537
----------- ------------ ------------ ------------
Net cash used in
operating activities... (4,392,054) (7,794,739) (14,710,592) (31,250,229)
INVESTING ACTIVITIES
Purchase of equipment
and leasehold
improvements........... (490,891) (3,830,666) (4,477,537) (10,200,289)
Purchases of marketable
securities............. -- (19,914,550) (23,057,477) (42,972,027)
Sales of marketable
securities............. -- -- 628,999 628,999
Maturities of marketable
securities............. -- -- 25,842,604 25,842,604
----------- ------------ ------------ ------------
Net cash used in
investing activities... (490,891) (23,745,216) (1,063,411) (26,700,713)
FINANCING ACTIVITIES
Proceeds from issuance
of Convertible
Preferred Stock........ 3,305,338 35,799,154 11,776,703 53,908,061
Proceeds from long-term
debt................... 1,165,000 2,276,560 -- 6,039,160
Borrowings under capital
lease obligations...... -- 1,306,312 912,149 2,218,461
Payments on capital
lease obligations...... -- (226,758) (340,499) (567,257)
Proceeds from issuance
of convertible notes to
stockholders........... -- -- -- 1,580,000
Proceeds from issuance
of Common Stock........ 36,000 7,125 222,394 272,893
----------- ------------ ------------ ------------
Net cash provided by
financing activities... 4,506,338 39,162,393 12,570,747 63,451,318
----------- ------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents............ (376,607) 7,622,438 (3,203,256) 5,500,376
Effect of exchange rate
changes on cash and
cash equivalents....... (116,748) 104,392 (155,622) (299,642)
Cash and cash
equivalents at
beginning of period.... 1,326,137 832,782 8,559,612 --
----------- ------------ ------------ ------------
Cash and cash
equivalents at end of
period................. $ 832,782 $ 8,559,612 $ 5,200,734 $ 5,200,734
=========== ============ ============ ============
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of
convertible notes into
Series B Convertible
Preferred Stock........ $ -- $ -- $ -- $ 1,580,000
=========== ============ ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Interest paid........... $ 158,691 $ 323,475 $ 500,760 $ 813,482
=========== ============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. NATURE OF THE BUSINESS
Sequenom, Inc. (the "Company") was incorporated on February 14, 1994 in the
State of Delaware. Since inception, the Company has been primarily involved in
the research and development of high definition DNA analysis tools for
industrial biomedical and life science applications, and has not yet generated
revenues from its planned commercial operations. Accordingly, through the date
of these financial statements the Company is considered to be a development
stage company.
Since inception, the Company has incurred significant losses and, as of
December 31, 1999, has an accumulated deficit of $43.5 million. Revenues to
date have been solely from research grants. The Company began placing Mass
Array systems at beta sites and pre-launch partners in July 1999. Information
received from these sites is being used to optimize product offerings. The
Company expects to generate revenue from the commercial launch of its Mass
Array system in the first quarter of 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Sequenom GmbH. All significant
intercompany transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original maturities
when purchased of less than three months.
SHORT-TERM INVESTMENTS AND CONCENTRATION OF CREDIT RISK
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company's investment securities are classified as available-for-sale and
unrealized holding gains or losses are included in comprehensive income
(loss). Realized gains or losses, calculated based on the specific
identification method, were not material for the years ended December 31,
1997, 1998 and 1999.
At December 31, 1999, short-term investments consisted of the following:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
COST VALUE GAIN
----------- ----------- ----------
<S> <C> <C> <C>
Obligations of U.S. government
agencies.............................. $ 4,008,450 $ 3,986,720 $21,730
Corporate debt securities.............. 12,491,944 12,429,044 62,900
----------- ----------- -------
Total short-term investments........... $16,500,394 $16,415,764 $84,630
=========== =========== =======
</TABLE>
Approximately 67% and 33% of these securities mature within one and two years
of December 31, 1999, respectively.
F-8
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1998, short-term investments consisted of the following:
<TABLE>
<CAPTION>
AMORTIZED MARKET UNREALIZED
COST VALUE GAIN
----------- ----------- ----------
<S> <C> <C> <C>
Obligations of U.S. government
agencies.............................. $ 6,829,729 $ 6,830,085 $ 356
Corporate debt securities.............. 13,084,821 13,107,791 22,970
----------- ----------- -------
Total short-term investments........... $19,914,550 $19,937,876 $23,326
=========== =========== =======
</TABLE>
Approximately 75% and 25% of these securities mature within one and two years
of December 31, 1998, respectively.
INVENTORIES
Inventories consist principally of raw materials and are stated at the lower
of cost or market. Cost is determined by first in, first out (FIFO) method.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment is stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets (generally 3 to 5 years or the
lease term, whichever is shorter). Leasehold improvements are amortized using
the straight-line method over the estimated useful life of the improvement or
the remaining term of the lease, whichever is shorter.
SOFTWARE COSTS
Purchased software is capitalized at cost and amortized over the estimated
useful life, generally three years. Software developed for use in the
Company's products is expensed as incurred until both (i) technological
feasibility for the software has been established, and (ii) all research and
development activities for the other components of the system have been
completed. The Company believes this will occur after the Company has received
evaluations from the beta sites and has concluded any resulting modifications
to the products. Expenditures to date have been classified as research and
development expense.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, if indicators of
impairment exist, the Company assesses the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can
be recovered through the undiscounted future operating cash flows. If
impairment is indicated, the Company measures the amount of such impairment by
comparing the carrying value of the asset to the present value of the expected
future cash flows associated with the use of the asset. While the Company's
current and historical operating and cash flow losses are indicators of
impairment, the Company believes the future cash flows to be received from the
long-lived assets will exceed the assets' carrying value, and accordingly, the
Company has not recognized any impairment losses through December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, are carried at cost,
which management believes approximates fair value because of the short-term
maturity of these instruments.
F-9
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Grant revenue is recorded as the research expenses relating to the grants are
incurred, provided that the amounts received are not refundable if the
research is not successful. Amounts received that are refundable if the
research is not successful would be recorded as deferred revenue and
recognized as revenue upon the grantor's acceptance of the success of the
research results.
The Company's product shipments through December 31, 1999 have been under
arrangements whereby the customer is performing beta testing on the Mass Array
product and may elect to purchase the product following the completion of an
evaluation period. Revenue under these arrangements will be recognized upon
the completion of the evaluation period and upon the customer's definitive
acceptance of the product. Certain of these arrangements require the customer
to make one or more payments during the testing and evaluation period. Amounts
received under these arrangements (approximately $126,000 through December 31,
1999) are recorded as customer advances, which are included in accounts
payable and accrued expenses in the accompanying balance sheet.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed in the period incurred.
PATENT COSTS
Costs related to filing and pursuing patent applications are expensed as
incurred as recoverability of such expenditures is uncertain.
INCOME TAXES
In accordance with SFAS No. 109, Accounting for Income Taxes, a deferred tax
asset or liability is determined based on the difference between the financial
statement and tax basis of assets and liabilities as measured by the enacted
tax rates which will be in effect when these differences reverse. The Company
provides a valuation allowance against net deferred tax assets unless, based
upon the available evidence, it is more likely than not that the deferred tax
assets will be realized.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Company's German subsidiary are measured using
the German Deutsche Mark (DEM) as the functional currency. Assets and
liabilities of this subsidiary are translated at the rates of exchange at the
balance sheet date. Income and expense items are translated at the average
daily rate of exchange during the reporting period. Transactions denominated
in currencies other than the local currency are recorded based on exchange
rates at the time such transactions arise. Subsequent changes in exchange
rates result in transaction gains and losses which are reflected in income as
unrealized (based on period-end translations) or realized upon settlement of
the transaction.
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related
Interpretations in accounting for stock-based employee compensation. Under APB
25, if the exercise price of the Company's employee and director stock options
equals or exceeds the estimated fair value of the underlying stock on the date
of grant, no compensation expense is recognized.
When the exercise price of the employee or director stock options is less than
the estimated fair value of the underlying stock on the grant date, the
Company records deferred compensation for the difference and amortizes this
amount to expense in accordance with FASB Interpretation No. 28, or FIN 28,
over the vesting period of the options.
F-10
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Options or stock awards issued to non-employees are recorded at their fair
value as determined in accordance with SFAS No. 123 and EITF 96-18 and
recognized over the related service period.
COMPREHENSIVE INCOME (LOSS)
In accordance with SFAS No. 130, Reporting Comprehensive Income, unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments are included in other comprehensive income
(loss).
SEGMENT REPORTING
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, requires the use of a management approach in identifying segments
of an enterprise. Management has determined that the Company operates in one
business segment.
NET LOSS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff Accounting
Bulletin (or SAB) No. 98, basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number
of common shares outstanding during the period. Diluted net income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common and common equivalent shares outstanding
during the period. Potentially dilutive securities comprised of incremental
common shares issuable upon the exercise of stock options and warrants, and
common shares issuable on conversion of preferred stock, were excluded from
historical diluted loss per share because of their anti-dilutive effect.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares arising from preferred stock and
long-term debt that automatically converted upon the closing of the Company's
initial public offering in February 2000 (using the as-if converted method
from the original date of issuance) and reflects the elimination of interest
expense on the debt to be converted.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified
to conform to the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
The Company expects to adopt SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective January 1, 2001. Management does
not anticipate that the adoption of the SFAS No. 133 will have a significant
effect on its results of operations or financial position as the Company does
not engage in activities covered by SFAS No. 133.
F-11
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INITIAL PUBLIC OFFERING OF COMMON STOCK
On February 1, 2000, the Company completed an initial public offering of its
common stock and sold 6,037,500 common shares at $26 per share. In addition,
all then-outstanding shares of Preferred Stock converted into common shares
upon completion of the offering. Proceeds of $145,986,750, after underwriting
discounts and commissions, were received in February 2000. The Company also
incurred approximately $1,900,000 in direct incremental costs of the offering,
including $410,000 related to two German consulting firms, which will be
offset against the proceeds of the offering. The Company utilized
approximately $3,080,400 of the remaining net proceeds and 294,992 shares of
common stock to repay an aggregate of $6,137,000 in long-term debt and accrued
interest (see Note 5).
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements and related accumulated depreciation and
amortization are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
---------- ----------
<S> <C> <C>
Laboratory equipment.................................. $3,982,149 $7,329,328
Leasehold improvements................................ 1,044,891 1,394,657
Office furniture and equipment........................ 417,990 535,084
---------- ----------
5,445,030 9,259,069
Less accumulated depreciation and amortization........ 1,503,142 2,965,058
---------- ----------
$3,941,888 $6,294,011
========== ==========
</TABLE>
Total depreciation and amortization expense amounted to $351,173, $961,051 and
$1,941,672 for the years ended December 31, 1997, 1998 and 1999, respectively.
Depreciation expense for the period from inception (February 14, 1994) through
December 31, 1999 was $3,716,056.
5. LONG-TERM DEBT
In 1995, the Company entered into agreements with Technologie Beteiligungs
Gesellschaft ("TBG") for two unsecured loans, one for DEM 1 million
(approximately $700,000) and the other for DEM 3 million (approximately $2.0
million). In 1997, the Company's subsidiary entered into another agreement
with the same German bank for an additional unsecured loan of DEM 2 million
(approximately $1.2 million).
Interest is payable semi-annually on the loans. The 1995 loans began accruing
interest at 6% per annum commencing March 31, 1997 and payments commenced in
June 1997. The effective nominal interest rate over the life of the 1995 loans
is 4.8%. The 1997 loan bears interest at 7% and payments commenced in 1998.
The subsidiary is also required to pay additional interest equal to 9% of the
subsidiary's annual profits, to the extent that such profits exceed DEM
100,000 per year. The subsidiary has not earned any such profits through
December 31, 1999. The combined annual interest rate (nominal interest and
additional interest) may not exceed 7% per year through December 31, 2000.
Commencing January 1, 2001 and January 1, 2003, any amounts still outstanding
will accrue additional interest at 6% and 7% per annum for the 1995 loans and
1997 loan, respectively.
F-12
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
In February 2000, the Company repaid DEM 6 million (approximately $3,080,400)
outstanding under these agreements, with a portion of the proceeds received
from the initial public offering.
In addition, at the end of the loan term (earlier of repayment or December 31,
2005 and December 31, 2007 for the 1995 loans and 1997 loan, respectively),
the subsidiary is obligated to pay terminal interest equal to 25%, 30% and 35%
of the amounts loaned under the DEM 1 million, DEM 3 million and DEM 2 million
agreements, respectively, estimated to be approximately $1.2 million at the
end of the loan term. The Company has accrued interest in the amount of
$1,003,000 relating to the terminal interest representing approximately 75% of
the terminal interest to be paid at the end of the loan term. The Company's
accrual has been recorded on a straight-line basis, based on the assumption
that the entire terminal interest would be paid in 2000, when the Company has
been expecting it would be able to repay the debt. The bank may elect to forgo
collection of such amounts in certain situations. In December 1999, TBG agreed
to accept 22,884 shares of the Company's common stock, with an aggregate fair
value of $595,000, at the closing of the initial public offering in full
satisfaction of the Company's obligation for interest payable to TBG. Upon the
completion of the Company's initial public offering in February 2000, the
$408,016 difference between the ultimate interest cost and the accrued
interest liability was recorded as a reduction of interest expense.
In January 1998, the Company entered into an agreement with TBG for debt of
DEM 4 million (approximately $2.3 million) which is convertible into Common
Stock. Interest is payable at 6% of the subsidiary's annual profits. However,
the combined annual interest rate on all loans granted by TBG may not exceed
9% of the subsidiary's annual profits or 7% of the principal outstanding. The
Company may call for conversion in the event of a triggering event, as defined
in the agreement (generally a change in control or an initial public
offering). TBG may call for conversion at any time. The conversion ratio is
calculated as the arithmetic mean between $3.15 per share and a current
valuation of the Common Stock at the time of conversion, not to exceed $8.40
per share. The Company called for conversion of the loan upon completion of
its initial public offering in February 2000, resulting in the issuance of
approximately 272,108 shares of common stock with an aggregate fair value of
$7,074,808. Upon conversion, the Company recorded additional interest expense
of $4,789,098, equal to the difference between the fair value of the shares
issued and the amount of the debt.
6. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At December 31, 1999, convertible preferred stock outstanding is as follows:
<TABLE>
<CAPTION>
PRICE PER NUMBER OF LIQUIDATION
DATE ISSUED SERIES SHARE SHARES VALUE
----------- ------ --------- ---------- -----------
<S> <C> <C> <C> <C>
March - August 1995.................. A $ .50 1,580,000 $ 790,000
December 1995........................ B $1.50 2,333,333 3,500,000
February - March 1996................ B $1.50 643,330 964,995
May 1997............................. C $3.15 1,065,079 3,354,999
January 1998......................... C $3.15 3,508,252 11,050,994
December 1998........................ D $6.50 3,843,700 24,984,050
March 1999........................... D $6.50 1,869,063 12,148,909
---------- -----------
14,842,757 $56,793,947
========== ===========
</TABLE>
F-13
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Each share of Preferred Stock is convertible into one share of Common Stock at
the option of the holder. Each share of Preferred Stock automatically
converted to Common Stock upon the closing of the initial public offering in
February 1, 2000. A particular series of Preferred Stock may be converted upon
at least a two-thirds vote of the related holders of such series of Preferred
Stock.
No dividends shall be declared or paid to the holders of Series A Preferred
Stock or Common Stock unless the holders of Series B, Series C and Series D
Preferred Stock have been paid in full for all of the dividends to which they
are entitled. No dividends can be declared or paid to the holders of Series A
Preferred Stock or Common Stock at a rate greater than the rate paid to the
holders of Series B and Series C Preferred Stock.
The Series D Preferred Stock has preference as to the assets of the Company
upon liquidation over all other classes of capital stock. In liquidation, the
holders of Series A, Series B, Series C, and Series D Preferred Stock are
entitled to the greater of (i) $0.50, $1.50, $3.15 or $6.50 per share of
Series A, Series B, Series C, or Series D Preferred Stock, respectively
(subject to certain adjustments), plus declared but unpaid dividends, or (ii)
the amount per share of the Series D Preferred Stock as would have been
payable had all shares been converted to Common Stock immediately prior to a
liquidation event, plus declared but unpaid dividends. If the assets of the
Company are insufficient to permit payment in full, the entire assets of the
Company available for distribution will be distributed ratably first among the
holders of the Series D Preferred Stock and then the Series C, Series B,
Series A and Common Stock, respectively.
The holders of Series B Preferred Stock have redemption rights under certain
limited conditions.
In February 1998, a German bank purchased 2,700 shares or approximately 5% of
Sequenom GmbH common stock for DM 3 million (approximately $1.7 million). The
German bank's ownership interest in the subsidiary was convertible, at the
option of the Company, into Series C preferred stock. Later in 1998, the
Company effected the conversion of the minority interest into 540,000 shares
of Series C common stock at $3.15 per share. Due to the Company's ability and
intention to convert the minority interest, which existed from the date of the
original transaction, the Company accounted for the transaction as a sale of
Series C preferred stock and has not reflected any minority interest in its
losses during the time the German bank held the 5% minority interest.
Upon completion of the Company's initial public offering in February 2000, all
of the shares of Convertible Preferred Stock automatically converted into
shares of common stock on a one-for-one basis.
WARRANTS
In 1994, the Company entered into a $1 million equipment lease. Under the
terms of this agreement, the Company issued warrants to purchase 70,000 shares
of Series A Preferred Stock at an exercise price of $0.50 per share. In
connection with those warrants, the Company recorded $18,000 of additional
interest expense.
In connection with the Series C Preferred Stock issued in May 1997, the
Company issued warrants to purchase 106,508 shares of Series C Preferred Stock
at an exercise price of $3.15 per share.
NOTES RECEIVABLE
In 1999, the Board of Directors authorized the issuance of approximately $3.6
million in loans to executive officers, related to the exercise of their stock
options. The notes are full recourse and are also secured by the underlying
stock. The notes bear interest at the applicable federal rate in existence
when the notes were made
F-14
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
(approximately 6%). The principal amount of the notes and the related interest
are required to be repaid on the earlier of two years from the origination
date of the loans or in the event of a secondary public offering if the
executive officers making the note are allowed to sell their stock. An
aggregate of $2,056,466 of such loans were issued as of December 31, 1999. The
remainder of the loans were issued in early 2000. In February 2000, the Board
of Directors approved the forgiveness of the loans, and the Company recorded
compensation expense aggregating approximately $3.6 million.
STOCK COMPENSATION PLANS
In December 1998, the Company adopted the 1998 Stock Option/Stock Issuance
Plan ("1998 Plan"). The Plan provides for the grant to directors, employees,
and consultants of options to purchase common stock. The Plan also provides
for the issuance of shares of common stock, subject to the Company's right to
repurchase the shares at the original purchase price in the event the employee
terminates prior to vesting. Prior to the 1998 Plan, the Company granted
options under the 1994 Stock Plan ("1994 Plan"). All options previously
granted under the 1994 Plan were transferred to the 1998 Plan in 1999. The
number of shares of common stock issuable under the plans was 1,700,000 and
2,700,000 in 1997 and 1998, respectively. At December 31, 1999, the number of
shares issuable under the 1998 Plan was 3,900,000. Options granted under the
1998 Plan generally vest over a four-year period.
In November 1999, the Company adopted the Stock Incentive Plan (the "1999
Plan). The 1999 Plan provides for the grant of 4,750,000 shares of common
stock, which consists of the number of shares estimated to carryover from the
1998 Plan, plus an increase of approximately 850,000 shares. Beginning in
2001, the amount of authorized shares available under the 1999 Plan will
automatically increase each January 1st by an amount equal to 4% of the
outstanding common stock on the prior December 31st, subject to an annual
increase limitation of 2,000,000 shares. Officers, employees, board members
and consultants are eligible to participate in the 1999 Plan. Through December
31, 1999, no options have been granted under the 1999 Plan.
In November 1999, the Company adopted the 1999 Employee Stock Purchase Plan
("1999 ESPP"). The Company has reserved 250,000 shares of common stock for
issuance under the 1999 ESPP. Beginning in 2001, the amount of authorized
shares available under the 1999 ESPP will automatically increase each January
1st by an amount equal to 1% of the outstanding common stock in the prior
December 31st, subject to an annual increase limitation of 500,000. The 1999
ESPP will have a series of concurrent offering periods, each with a maximum
duration of 24 months, however, no employee may participate in more than one
offering period at a time. Employees may allocate up to 15% of their pay to
purchase shares. The purchase price is the lower of $22.10 or 85% of the
closing stock price on July 31, 2000.
F-15
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The stock option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Balance at December 31, 1996............................ 683,000 $0.18
Granted............................................... 731,000 $0.25
Cancelled............................................. (50,000) $0.25
Exercised............................................. (144,000) $0.25
----------
Balance at December 31, 1997............................ 1,220,000 $0.21
Granted............................................... 1,268,500 $0.71
Cancelled............................................. (71,250) $0.28
Exercised............................................. (38,750) $0.18
----------
Balance at December 31, 1998............................ 2,378,500 $0.47
Granted............................................... 1,080,500 $3.00
Cancelled............................................. (58,250) $0.58
Exercised............................................. (2,198,825) $0.96
----------
Balance at December 31, 1999............................ 1,201,925 $1.87
==========
</TABLE>
At December 31, 1999, 194,500 shares were available for future option grants
and 1,396,425 shares of Common Stock were reserved for issuance upon exercise
of options. The weighted average grant-date fair value of options granted in
1997, 1998 and 1999 was $0.07, $0.17 and $4.77, respectively.
The following table summarizes information about options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------- --------------------------
WEIGHTED AVERAGE NUMBER WEIGHTED
RANGE OF NUMBER REMAINING EXERCISABLE AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE AND VESTED EXERCISE PRICE
-------------- ----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C>
$0.05 - $0.25 289,000 6.73 205,217 $0.21
$0.50 - $1.10 235,675 8.61 71,129 $0.72
$3.00 - $3.30 677,250 8.18 43,916 $3.00
--------- -------
$0.05 - $3.30 1,201,925 7.92 320,262 $0.70
========= =======
</TABLE>
Had compensation cost for these option grants been determined consistent with
the fair value method prescribed in SFAS No. 123, the Company's net loss would
have been changed to the following pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Pro forma net loss................ $(5,122,653) $(10,325,893) $(25,035,052)
Net loss as reported.............. $(5,116,819) $(10,270,572) $(21,770,315)
Pro forma net loss per share,
basic and diluted................ $ (22.64) $ (33.51) $ (30.17)
Net loss per share, basic and
diluted, as reported............. $ (22.62) $ (33.33) $ (26.23)
</TABLE>
F-16
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of these options was estimated at the date of grant using the
minimum value pricing model with the following weighted average assumptions
for 1997, 1998 and 1999, respectively: risk-free interest rate of 6%; dividend
yield of 0%; and a weighted-average life of the options of four years.
The minimum value pricing model is similar to the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor for volatility. In addition, option
valuation models require the input of highly subjective assumptions. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
DEFERRED COMPENSATION
The Company has recorded deferred compensation totalling $2,420,150 and
$5,574,811 in December 1998 and 1999, respectively, in connection with the
grants of certain stock options to employees. Amortization of deferred
compensation was $4,376,360 during the year ended December 31, 1999.
In January 2000, the Company granted options to purchase 76,000 shares of
stock at $3.00 per share and recorded additional deferred compensation of
approximately $1.6 million.
CONSULTING ARRANGEMENT RELATED TO INITIAL PUBLIC OFFERING
In March 1999, the Company engaged two German consulting firms to assist the
Company in completing an initial public offering (IPO) of its common stock.
The Company agreed to pay the consulting firms an aggregate amount of
DEM150,000, or approximately $78,000, plus a percentage of the amount of
capital raised attributable to their efforts. The Company also offered and
committed to sell the firms an aggregate of DEM3 million, or approximately
$1.5 million, of freely tradable common shares, for cash, at the IPO price in
conjunction with the completion of an IPO. The consulting firms also agreed
that the total advisory fee due to them under the original agreement would be
DEM 789,000, or approximately $410,000.
In January 2000, the Company was advised that its March 1999 offer and
commitment to sell the shares may have been in violation of Section 5 of the
Securities Act of 1933. Such a violation would provide the consulting firms
with a "put right" through January 2001 pursuant to which they could demand
that the Company repurchase their shares at the original purchase price (i.e.,
the initial public offering price). In January 2000, the consulting firms
signed an agreement waiving any "put right" to which they otherwise would have
been entitled and assigning their stock purchase rights to designated third
parties. The Company agreed to register such shares with the Registration
Statement related to the initial public offering of its common stock, which
was completed in February 2000, and immediately prior to such offering, the
designated third parties purchased 28,782 shares at $26 per share. In February
2000, the designated third parties sold such shares, and as a result the "put
right" expired.
The Company has accounted for the offer and commitment to sell as a stock
option, and has valued the option in accordance with SFAS No. 123 and EITF 96-
18. However, the fair value of the option on the date performance was
completed was not material.
F-17
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are shown below. A valuation allowance of
$17,051,000 has been recorded as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $7,495,000 $14,209,000
Research and development credits.................... 521,000 1,239,000
Capitalized research expenses....................... 1,028,000 1,170,000
Other, net.......................................... 150,000 433,000
---------- -----------
Total deferred tax assets........................... 9,194,000 17,051,000
Valuation allowance................................. (9,194,000) (17,051,000)
---------- -----------
Net deferred tax assets............................. $ -- $ --
========== ===========
</TABLE>
At December 31, 1999, the Company has federal and state tax net operating loss
carryforwards of approximately $26,790,000 and $12,259,000, respectively. The
difference between the federal and state tax loss carryforwards is
attributable to the capitalization of research and development expenses for
state tax purposes. The federal tax loss carryforwards will begin to expire in
2008, unless previously utilized.
Approximately $278,000 of the state tax loss carryforwards expired in 1999,
and the state tax loss carryforwards will continue to expire in 2000 unless
previously utilized. The Company also has German net operating loss
carryforwards of approximately $7,900,000, which may be carried forward
indefinitely. The Company also has federal and state research and development
tax credit carryforwards of approximately $925,000 and $483,000, respectively,
which will begin to expire in 2011 unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's
net operating loss and credit carryforwards may be limited due to a cumulative
change in ownership of more than 50% which occurred during 1998. However, the
Company does not believe these limitations will materially impact the use of
the net operating loss and credit carryforwards.
8. COMMITMENTS
LEASES
The Company leases facilities both in the United States and Germany. In
September 1999, the Company amended its lease of office and research and
development space to extend through September 2004. Prior to that date, the
Company had been subject to a short-term lease agreement that commenced in
October 1996. The Company's subsidiary entered into a lease of office and
research and development space in 1995 that extends through June 2001. Total
rent expense under these leases was approximately $250,000 in 1997, $446,000
in 1998, $562,345 in 1999 and $1,305,346 for the period from February 14, 1994
(inception) through December 31, 1999.
During 1998, the Company entered into a master equipment lease agreement
providing for borrowings up to $2,100,000. Under the agreement, the lessor
will purchase equipment that the Company will lease and make
F-18
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS (CONTINUED)
monthly payments for a 42-month period. At December 31, 1999, the Company had
borrowed the full amount available under the agreement.
Property under capital leases is included in equipment and leasehold
improvements, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
--------- ----------
<S> <C> <C>
Laboratory equipment................................... $ 957,323 $1,706,765
Leasehold improvements................................. 33,211 34,357
Office furniture and equipment......................... 115,701 218,995
--------- ----------
1,106,235 1,960,117
Less accumulated amortization.......................... 174,270 812,805
--------- ----------
$ 931,965 $1,147,312
========= ==========
</TABLE>
The following is a schedule by year of future minimum lease payments at
December 31, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
---- ---------- ----------
<S> <C> <C>
2000.................................................. $ 724,135 $ 806,666
2001.................................................. 870,776 865,517
2002.................................................. 508,332 682,699
2003.................................................. 18,055 684,420
2004.................................................. -- 533,109
---------- ----------
2,121,298 $3,572,411
==========
Less amount representing interest..................... 470,086
----------
Present value of minimum lease payments............... 1,651,212
Less current portion.................................. 461,784
----------
Long-term capital lease obligations................... $1,189,428
==========
</TABLE>
CONSULTING AGREEMENTS
The Company has entered into a consulting agreements with a number of
individuals for scientific advisory services. Each individual receives a
certain number of non-qualified stock options. In certain cases, the options
vest upon the later of the achievement of milestones or 10 years. In other
cases, the options vest ratably over a specific period, generally two years.
Compensation expense is measured either upon the achievement of milestones or
ratably over the service period, in accordance with EITF 96-18, and aggregated
$24,000, $10,000 and $102,527 in the years ended December 31, 1997, 1998 and
1999, respectively.
DEVELOPMENT AGREEMENTS
In August 1994, the Company entered into a development agreement with a
university for the design and construction of a prototype DNA sequencing mass
spectrometer. In September 1997, the Company extended the agreement through
September 30, 1999. Through December 31, 1999, the Company has paid
approximately $592,000 under this agreement and is committed to pay
approximately $21,000 in 2000.
F-19
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS (CONTINUED)
In September 1994, the Company entered into a development agreement with
another university for the design of a system for preparation of DNA samples.
In September 1998, the agreement was extended to September 30, 1999. Through
December 31, 1999, the Company has paid approximately $677,000 under this
agreement and is committed to pay approximately $55,000 in 2000.
In October 1999, the Company entered into a second agreement continuing its
sponsored research relationship with this same university under a research
program directed to optimizing mass spectrometry based on analysis of nucleic
acids. Through December 31, 1999, the Company has paid $41,342 under this
agreement and is committed to pay approximately $124,000 of the remainder of
2000.
LICENSE AGREEMENTS
The Company has entered into license agreements allowing the Company to
utilize certain patents. If these patents are used in connection with a
commercial product sale, the Company will pay royalties ranging from 1%-5% on
the related product revenues. Through December 31, 1999, the Company has not
sold any products which utilize these patents.
9. SAVINGS PLAN
In 1998, the Company initiated a 401(k) savings plan covering most United
States employees. Individual employees may make contributions to the plan,
which can be matched by the Company in an amount determined by the Board of
Directors. The Company may also make profit sharing contributions as
determined by the Board of Directors. Through December 31, 1999, the Company
has not made any contributions to the plan.
10. GERMAN GOVERNMENT GRANTS
The Company's wholly owned subsidiary, Sequenom GmbH, has been the recipient
of three grants from German government authorities. The first grant, received
in 1996 from the City/State of Hamburg, is for DEM 800,000 (approximately
$475,000). This grant reimburses the subsidiary for the cost of certain
equipment to be used in a three-year research project. If the equipment is not
used for the grant's express purpose the equipment must be relinquished to the
City/State of Hamburg. Through December 31, 1998, approximately DEM 704,000
(approximately $420,000) of such equipment had been purchased under the grant
program and was being used for the grant's express purpose. No additional
amounts are expected to be expended or received related to this grant.
The second grant, also received in 1996, is from the German Federal Ministry
of Research and Development and amounts to DEM 2.2 million (approximately $1.3
million). This grant reimburses the Company for certain materials, personnel,
travel and development costs. Through December 31, 1998, approximately
DEM 2.1 million (approximately $1.2 million) had been expended and recognized
under this grant program. No additional amounts are expected to be expended or
received related to this grant.
A third grant, received in 1998, is also from the German Federal Ministry of
Research and Development and amounts to DEM 1.4 million (approximately
$860,000). This grant reimburses the Company for certain materials, personnel,
travel and development costs. Through December 31, 1999, approximately DEM
329,000 (approximately $179,400) had been expended and recognized under this
grant program.
F-20
<PAGE>
SEQUENOM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. GEOGRAPHIC INFORMATION
The Company has a wholly-owned subsidiary located in Germany. The following
table presents information about the Company by geographic area. There were no
material amounts of transfers between geographic areas. Included in the
consolidated balance sheets are the following domestic and foreign components
at December 31, 1998 and 1999.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------- ------------
<S> <C> <C>
Current assets:
Domestic..................................... $ 26,828,538 $ 22,000,731
Foreign...................................... 1,920,546 1,405,294
------------- ------------
$ 28,749,084 $ 23,406,025
============= ============
Equipment and leasehold improvements, net:
Domestic..................................... $ 2,805,418 $ 4,902,314
Foreign...................................... 1,136,470 1,391,697
------------- ------------
$ 3,941,888 $ 6,294,011
============= ============
Other assets:
Domestic..................................... $ 12,550 $ 53,023
Foreign...................................... 73,762 --
------------- ------------
$ 86,312 $ 53,023
============= ============
Total assets:
Domestic..................................... $ 29,646,506 $ 26,956,068
Foreign...................................... 3,130,778 2,796,991
------------- ------------
$ 32,777,284 $ 29,753,059
============= ============
Net loss:
Domestic..................................... $ (7,929,395) $(18,896,256)
Foreign...................................... (2,341,177) (2,874,059)
------------- ------------
$(10,270,572) $(21,770,315)
============= ============
</TABLE>
F-21
<PAGE>
EXHIBIT 10.63
UNION BANK OF CALIFORNIA
COMMERCIAL PROMISSORY NOTE
S. GALINDO/N/24410
================================================================================
Borrower Name: SEQUENOM, INC.
Borrower Address: 11555 SORRENTO VALLEY ROAD
SAN DIEGO, CA 92121
Office: 40067
Loan Number: 8276091941
Maturity Date: SEPTEMBER 2, 2002
Amount: $25,000,000.00
================================================================================
Date: March 3, 2000 $25,000,000.00
FOR VALUE RECEIVED, the undersigned ("Debtor") promises to pay to the order of
UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below, the principal sum
of TWENTY-FIVE MILLION AND NO/100 Dollars ($25,000,000.00), or so much thereof
as is disbursed together with interest on the balance of such principal sum from
time to time outstanding, at a per annum rate equal to the Reference Rate minus
500/1000 percent (0.500%); rate to change as and when the Reference Rate shall
change.
As used herein the term "Reference Rate" shall mean the rate announced by Bank
from time to time at its corporate headquarters as its "Reference Rate." The
Reference Rate is an index rate determined by Bank from time to time as a means
of pricing certain extensions of credit and is neither directly tied to any
external rate of interest or index nor necessarily the lowest rate of interest
charged by Bank at any given time. All computations of interest under this note
shall be made on the basis of a year of 360 days, for actual days elapsed.
1. PAYMENTS. INTEREST PAYMENTS. Debtor shall pay interest on the 2ND day of
each MONTH commencing APRIL 2, 2000.
PRINCIPAL PAYMENTS. Debtor shall pay principal in installments of $1,041,666.66
each on the 2ND day of each MONTH commencing OCTOBER 2, 2000. On SEPTEMBER 2,
2002, all principal and interest then unpaid shall be due and payable.
Debtor shall pay all amounts under this note in lawful money of the United
States at Bank's GOLDEN TRIANGLE COMMERCIAL BANKING Office, or such other office
as may be designated by Bank, from time to time.
2. LATE PAYMENTS. If any installment payment required by the terms of this
note shall remain unpaid ten days after due, at the option of Bank, Debtor shall
pay a fee of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of
Bank, and, to the extent permitted by law, interest shall be payable on the
outstanding principal under this note at a per annum rate equal to five percent
(5%) in excess of the interest rate specified in the initial paragraph of this
note, calculated from the date of default until all amounts payable under this
note are paid in full.
4. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but
not be limited to, any of the following: (a) the failure of Debtor to make any
payment required under this note when due; (b) any breach, misrepresentation or
other default by Debtor, any guarantor, co-maker, endorser, or any person or
entity other than Debtor providing security for this note (hereinafter
individually and collectively referred to as the "Obligor") under any security
agreement, guaranty or other agreement between Bank and any Obligor; (c) the
insolvency of any Obligor or the failure of any Obligor generally to pay such
Obligor's debts as such debts become due; (d) the commencement as to any Obligor
of any voluntary or involuntary proceeding under any laws relating to
bankruptcy, insolvency, reorganization, arrangement, debt adjustment or debtor
relief; (e) the assignment by any Obligor for the benefit of such Obligor's
creditors; (f) the appointment, or commencement of any proceedings for the
appointment, of a receiver, trustee, custodian or similar official for all or
substantially all of any Obligor's property; (g) the commencement of any
proceeding for the dissolution or liquidation of any Obligor; (h) the
termination of existence or death of any Obligor; (i) the revocation of any
guaranty or subordination agreement given in connection with this note; (j) the
failure of any Obligor to comply with any order, judgment, injunction, decree,
writ or demand of any court or other public authority; (k) the filing or
recording against any Obligor, or the property of any Obligor, of any notice of
levy, notice to withhold, or other legal process for taxes other than property
taxes; (l) the default by any Obligor personally liable for amounts owed
hereunder on any obligation concerning the borrowing of money; (m) the issuance
against any Obligor, or the property of any Obligor, of any writ of attachment,
execution, or other judicial lien; or (n) the deterioration of the financial
condition of any Obligor which results in Bank deeming itself, in good faith,
insecure.
Upon the occurrence of any such default, Bank, in its discretion, may cease to
advance funds hereunder and may declare all obligations under this note
immediately due and payable; however, upon the occurrence of an event of default
under d, e, f, or g, all principal and interest shall automatically become
immediately due and payable.
5. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are
not paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement of
this note. Debtor and any endorsers of this note, for the maximum period of time
and the full extent permitted by law, (a) waive diligence, presentment, demand,
notice of nonpayment, protest, notice of protest, and notice of every kind; (b)
waive the right to assert the defense of any statute of limitations to any debt
or obligation hereunder; and (c) consent to renewals and extensions of time for
the payment of any amounts due under this note. If this note is signed by more
than one party, the term "Debtor" includes each of the undersigned and any
successors in interest thereof; all of whose liability shall be joint and
several. Any married person who signs this note agrees that recourse may be had
against the separate property of that person for any obligations hereunder. The
receipt of any check or other item of payment by Bank, at its option, shall not
be considered a payment on account until such check or other item of payment is
honored when presented for payment at the drawee bank. Bank may delay the credit
of such payment based upon Bank's schedule of funds availability, and interest
under this note shall accrue until the funds are deemed collected. In any action
brought under or arising out of this note, Debtor and any endorser of this note,
including their successors and assigns, hereby consents to the jurisdiction of
any competent court within the State of California, as provided in any
alternative dispute resolution agreement executed between Debtor and Bank, and
consents to service of process by any means authorized by California law. The
term "Bank" includes, without limitation, any holder of this note. This note
shall be construed in accordance with and governed by the laws of the State of
California. This note hereby incorporates any alternative dispute resolution
agreement previously, concurrently or hereafter executed between Debtor and
Bank.
SEQUENOM, INC.
By: /s/ STEVE ZANIBONI
---------------------------------- ----------------------------------
STEVE ZANIBONI, SEC./TREASURER/CFO
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
<PAGE>
UNION BANK OF CALIFORNIA
SECURITY AGREEMENT (INVESTMENT SECURITIES)
THIS SECURITY AGREEMENT (INVESTMENT SECURITIES) ("Agreement") is entered into as
of MARCH 3, 2000, between SEQUENOM, INC. ______________________________________
_______________________________________________________________________________
_____________________________________________________________________("Debtor")
and UNION BANK OF CALIFORNIA, N.A. ("Bank"). In consideration of any financial
accommodations given, to be given or continued, Debtor and Bank agree as
follows:
1. GRANT OF SECURITY INTEREST. As security for the payment and performance of
all of Debtor's obligations to Bank, irrespective of the manner in which or the
time at which such obligations arose or shall arise, and whether direct or
indirect, alone or with others, or absolute or contingent, but excluding
indebtedness which is now or hereafter defined as "consumer credit" in the
Federal Truth in Lending Act and the regulations thereunder ("Act") unless the
security interest granted to Bank under this Agreement is disclosed as required
by the Act (collectively, "Obligations"), Debtor hereby grants to Bank a
continuing security interest in and to all of the below described personal
property in which Debtor now has or hereafter acquires an interest, wherever
located: account no. 510001164-00 maintained with UNION BANK OF CALIFORNIA
INVESTMENT SERVICES ("Securities Intermediary"), all security entitlements,
investment property and other financial assets now or hereafter credited to said
securities account, and all of Debtor's rights in respect of said securities
account, security entitlements, investment property and other financial assets;
and deposit account no. 510001164-00 maintained by Debtor with Bank; together
with all products, proceeds and revenues of and from the personal property
described above, and all substitutions and additions including stock rights,
rights to subscribe, dividends of any kind, interest, new securities and other
property to which Debtor is or may hereafter become entitled to receive on
account of such personal property (collectively, "Collateral"). In the event an
Accommodation Encumbrance Rider is executed in connection herewith, the
obligations of Accommodator hereunder shall be limited as described in said
rider. In such event, the word "Debtor" as used herein shall mean "Accommodator"
in all cases where the context so requires.
2. PERFECTION OF SECURITY INTEREST. It is the intent of Debtor and Bank that
the security interest herein granted be perfected by "control" (as defined in
Section 8-106 of the Uniform Commercial Code or the equivalent section of
Division/Article 8 of the Commercial Code, as amended from time to time, of the
state whose law governs this Agreement). Debtor agrees that it will from time to
time as required by Bank execute and deliver all notices and other documents
Bank deems necessary or desirable for Bank to obtain and maintain a first
priority perfected security interest in, and control over, the Collateral, will
perform such other acts, and execute and deliver to Bank such additional
assignments, agreements and instruments, as Bank may require in connection with
the administration and enforcement of this Agreement and Bank's rights, powers
and remedies hereunder, and will join with Bank in taking any other action
required by Bank to obtain and maintain such security interest and protect the
rights and priorities of Bank with respect to the Collateral. In particular,
Debtor will at Bank's request (a) deliver to Bank each and every certificated
security and instrument which constitutes part of the Collateral, accompanied by
appropriate assignments and/or stock or bond powers duly endorsed in blank, and
(b) originate such entitlement orders, and join with Bank in executing such
other instructions to or agreements with securities intermediaries, as may be
necessary or desirable for Bank to obtain control of each securities account,
each security entitlement and each other financial asset which constitutes part
of the Collateral. Debtor agrees that if any Collateral is now or hereafter held
by Bank in its capacity as a securities intermediary or pursuant to a
safekeeping or similar agreement, Bank shall be deemed to possess such
Collateral as a secured party for purposes of perfecting its security interest,
and if there is any conflict between the terms of the agreement under which Bank
is holding such Collateral and this Agreement, the terms of this Agreement shall
prevail.
3. MAINTENANCE OF COLLATERAL COVERAGE. Debtor shall maintain the Collateral,
or shall cause the Collateral to be maintained, in an amount such that the
Obligations secured hereby shall not at any time exceed the sum of
(a) EIGHTY-FIVE AND NO/1000 percent (85.00%) of the Current Value (as
hereinafter defined) of Collateral consisting of (i) United States government
securities, (ii) state or municipal government or agency securities rated BBB-
or better by Standard & Poor's, or Baa3 or better by Moody's, (iii) corporate
debt or equity securities (exclusive, however, of corporate debt or equity
securities issued by Bank or Bank's corporate parent, UnionBanCal Corporation)
which are regularly traded on the New York Stock Exchange, the American Stock
Exchange or NASDAQ and, in the case of corporate debt, are rated BBB- or better
by Standard & Poor's, or Baa3 or better by Moody's, and (iv) money market
securities acceptable to Bank in its sole discretion, and (b) one hundred
percent (100%) of the amount of cash denominated in United States Dollars which
is held by Bank as Collateral pursuant to this Agreement. The "Current Value" of
any given item of Collateral is the fair market value of such item of Collateral
as marked to market monthly or at such other intervals as Bank deems desirable.
If at any time Bank's Collateral valuation indicates a deficiency with respect
to the required Collateral coverage, Bank shall give telephonic or other notice
of such deficiency to Debtor, and Debtor shall, within five (5) business days
following Debtor's receipt of such notice, either (x) deliver to Bank additional
Collateral, or (y) repay the outstanding principal balance of the Obligations,
in either case in an amount sufficient to restore compliance with the required
Collateral coverage.
<PAGE>
4. CERTAIN TRANSACTIONS INVOLVING COLLATERAL. So long as there is no
deficiency with respect to required Collateral and no Event of Default (as
hereinafter defined) has occurred and is then continuing, Debtor may (a)
withdraw such portions of the Collateral as consist solely of cash dividends
paid in the ordinary course of business and/or interest income, and (b) sell,
trade, transfer or exchange (but not, except as provided in clause (a), above,
withdraw) assets out of, into or within any securities account which constitutes
all or any portion of the Collateral so long as any such sale, trade, transfer
or exchange is for fair market value and is either (i) in compliance with the
terms of the investment plan most recently agreed upon between Debtor and
Debtor's investment manager and acknowledged by Bank, or (ii) results in the
acquisition of a like-kind asset of equal or higher quality than the asset sold,
traded, transferred or exchanged. If there is a deficiency with respect to
required Collateral, or if an Event of Default has occurred and is then
continuing, Debtor agrees, on behalf of itself and its agents (if any), that
Bank may immediately take any and all actions which Bank deems necessary or
desirable to preclude Debtor or any agent of Debtor from making any withdrawals,
or effecting any sales, trades, transfers or exchanges, of Collateral.
5. DEBTOR'S REPRESENTATIONS, WARRANTIES AND COVENANTS. Debtor represents,
warrants and covenants that (a) Debtor has good and marketable title to the
Collateral, free and clear of all liens, encumbrances, claims and restrictions
of any kind or nature other than the security interest of Bank and any
restrictive legend appearing on any security certificate or instrument which
constitutes part of the Collateral, (b) Debtor has all requisite right, power
and authority to grant to Bank the security interest in the Collateral which is
herein granted, (c) Debtor will at all times keep the Collateral free and clear
of all liens, encumbrances and claims of any kind or nature other than the
security interest of Bank, (d) Debtor will not sell, transfer or otherwise
dispose of any of the Collateral or any interest therein to any individual or
entity, except as permitted by this Agreement or with the prior written consent
of Bank, (e) except for any restrictive legend appearing on any security
certificate or instrument which constitutes part of the Collateral, and except
as Debtor may have otherwise advised Bank in writing prior to the date of this
Agreement, no portion of the Collateral (i) is subject to any condition which
relates to or would impair or restrict its transferability, or (ii) consists of
"restricted securities" or securities issued by an "affiliate" of Debtor, as
each of such terms is defined in Rule 144 of the Securities and Exchange
Commission, (f) Debtor will pay, prior to delinquency, all taxes, levies,
assessments or other claims which are or may become liens against the
Collateral, (g) Debtor will deliver to Bank promptly or ensure that Bank
promptly receives (i) all Collateral, (ii) except as otherwise provided herein,
all proceeds of, and all securities and other assets distributed in respect of,
any of the Collateral, (iii) such specific acknowledgments, Regulation U
Statement of Purpose forms or other agreements or writings as Bank may require
relating to the Collateral, and (iv) copies of records and other reports
relating to the Collateral in such form and detail and at such times as Bank may
from time to time require, and (h) Debtor will not exercise or refrain from
exercising any voting or consensual rights or powers relating to any Collateral
if, in the judgment of Bank, such action would have a material adverse effect on
the value of the Collateral.
6. RIGHTS OF BANK AS SECURED PARTY; POWER OF ATTORNEY. Debtor agrees that
Bank may, at any time whether before or after the occurrence of an Event of
Default, without notice or demand, and either in Bank's name or in the name of
Debtor (a) notify the issuer of any Collateral, or any securities intermediary,
to make payment to Bank of any amounts now or hereafter due or distributable on
or in respect of any Collateral, (b) enforce collection of any Collateral,
whether by legal proceedings or otherwise, and endorse, receive and receipt for
all proceeds, dividends, interest, principal and other sums so collected, (c)
make any compromise or settlement Bank deems desirable or proper with respect to
any Collateral, (d) participate in any recapitalization, reclassification,
reorganization, consolidation, redemption, stock split, merger or liquidation of
any issuer of any Collateral and, in connection therewith, deposit or surrender
control of any Collateral, accept money or other property in exchange for any
Collateral, and take such other actions as Bank deems proper in connection
therewith, (e) apply to the Obligations, in such order of application as Bank
shall determine, any money or other property received on or in respect of, or in
exchange for, any Collateral, or hold the same in a non-interest bearing account
as additional or substitute Collateral pursuant to the provisions of this
Agreement, (f) cause all Or any portion of the Collateral to be transferred into
Bank's name or into the name of Bank's nominee, and (g) exercise as to the
Collateral all rights, powers and remedies of an owner. Debtor irrevocably
appoints Bank, or any officer of Bank, as Debtor's true and lawful attorney-in-
fact coupled with an interest, with full power of substitution, to sign or
endorse any instrument, document or other writing necessary or desirable to
transfer title or other rights to or in any of the Collateral, and to do all
acts necessary or incidental to assert, protect and enforce Bank's rights in the
Collateral and under this Agreement.
7. EVENTS OF DEFAULT. The term "Event of Default" shall mean the occurrence
of any of the following events: (a) Debtor shall fail to pay when due any
principal, interest or other payment required under the terms of any note or
other agreement (including this Agreement) evidencing or relating to the
Obligations (collectively, "Loan Documents"), (b) there shall occur any
"default" or "event of default" under and as defined in any of the Loan
Documents, (c) Debtor shall fail to perform any covenant or agreement contained
in this Agreement, or any representation, warranty, certificate or other
statement (financial or otherwise) made or furnished by or on behalf of Debtor
shall be false, incorrect, incomplete or misleading in any material respect when
made or furnished, (d) the Collateral shall decline in value, or otherwise
deteriorate, by an amount or to an extent which Bank in good faith deems
material, or Bank shall in good faith deem its rights with respect to the
Collateral to be impaired, or (e) Bank shall in good faith believe that the
prospect for due and punctual payment of all or any of the Obligations is
impaired.
<PAGE>
8. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default, Bank
may, at its option and without notice or demand (a) declare the Obligations to
be immediately due and payable, and the same shall thereupon be and become
immediately due and payable, (b) cease advancing money or extending financial
accommodations to or for the benefit of Debtor under any of the Loan Documents,
(c) exercise all voting and other rights as a holder of the Collateral, (d)
exercise any or all rights available upon default to a secured party under the
Commercial Code, as amended from time to time, of the state whose law governs
this Agreement, including without limitation the right to (i) take possession of
any Collateral and sell or dispose of all or any part thereof in such
commercially reasonable manner as Bank may elect, whether at public or private
sale, or both, by way of one or more contracts or transactions and for cash or
on terms, or (ii) order the Securities Intermediary to sell any Collateral on
any established market or over the counter or to cause any Collateral to be
redeemed, and (e) exercise or enforce any or all other rights or remedies
available to Bank under this Agreement, any of the other Loan Documents, at law,
in equity or otherwise. Debtor agrees that if notice to Debtor of any intended
disposition of the Collateral or any other intended action is required by law in
a particular instance, notice given at least five (5) calendar days prior to the
date of the intended disposition or other action shall be deemed commercially
reasonable.
9. BANK'S DUTIES. The sole duty of Bank and its agents with respect to
Collateral in their respective possession shall be to exercise reasonable care
in the custody and preservation of such Collateral, and Bank and its agents
shall be deemed to have exercised reasonable care in the custody and
preservation of such Collateral if such Collateral is accorded treatment
substantially equivalent to that which each accords its own property. Debtor
agrees that neither Bank nor its agents shall have any responsibility for
ascertaining or initiating any action with respect to, or for informing Debtor
of, calls, conversions, exchanges, maturities, declining value, tenders or other
matters relating to any Collateral, regardless of whether they have or are
deemed to have knowledge of such matters, for taking any steps to preserve any
rights against any person or entity with respect to any Collateral or for
otherwise protecting any Collateral against any claims of others. Neither Bank
nor its agents shall be responsible for any injury or loss to the Collateral, or
any part thereof, arising from any cause beyond their reasonable control. Bank
may at any time deliver or cause to be delivered all or any part of the
Collateral to Debtor, and Debtor's receipt shall be a complete and full
acquittance for the Collateral so delivered, and Bank shall thereafter be
discharged from any liability or responsibility therefor.
10. DEBTOR'S WAIVERS. Debtor waives any right to require Bank to (a) give
Debtor notice of Bank's acceptance of this Agreement, (b) to the extent not
contrary to public policy, give notice of the terms, time and place of any
public or private sale of the Collateral, (c) proceed against any person or
entity, or exhaust any Collateral or pursue any remedy in Bank's' power
whatsoever, and (d) make any presentment, demand or protest, or give any notice
of default, nonperformance, protest or dishonor, in connection with any
instrument, document or agreement evidencing the Obligations. Debtor
acknowledges that Bank may release, substitute or add Collateral, endorsers or
guarantors without affecting the liability of Debtor hereunder and under the
other Loan Documents, and waives the right to plead any statute of limitations,
or any defense to the personal liability of Debtor, as a defense to Bank's
exercise of any right or remedy hereunder.
11. REIMBURSEMENT OF COSTS AND EXPENSES. Debtor shall, to the extent permitted
by applicable law, reimburse Bank, on demand, for all costs and expenses
incurred by Bank in performing any agreement of Debtor which Debtor shall fail
to perform, or in taking any other action which Bank deems necessary for the
maintenance or preservation of any Collateral or Bank's interest therein. In
addition, Debtor shall reimburse Bank, on demand, for all reasonable attorneys'
fees (including the reasonable estimate of the allocated costs and expenses of
Bank's in-house legal counsel and legal staff), costs and other expenses
incurred or paid by Bank in collecting, modifying or compromising the
Obligations or in enforcing or exercising its rights or remedies created by,
connected with or provided for in any of the Loan Documents, whether or not an
arbitration, judicial action or other proceeding is commenced. If such a
proceeding is commenced, only the prevailing party shall be entitled to
attorneys' fees and court costs.
12. MISCELLANEOUS. All rights, powers and remedies of Bank hereunder shall be
cumulative and not alternative. This Agreement may be amended, modified or
waived only in a writing signed by all parties hereto. All representations and
warranties contained in this Agreement are continuing and shall survive the
execution, delivery and performance of this Agreement. If more than one Debtor
executes this Agreement, their obligations hereunder are joint and several. All
words used herein in the singular shall be deemed to have been used in the
plural when the context and construction so require. Any married person who
signs this Agreement expressly agrees that recourse may be had against his/her
separate property for all of his/her obligations hereunder. This Agreement shall
inure to the benefit of and be binding upon Bank and Debtor and their respective
successors and assigns; provided, however, that Debtor may not assign its rights
or delegate its duties hereunder without the prior written consent of Bank. Upon
any sale, assignment or transfer by Bank of all or any portion of the
Obligations, Bank shall be fully discharged from all liability with respect to
any Collateral transferred therewith. Should any one or more provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions
shall nevertheless be effective. Any notices or other communications provided
for or allowed hereunder shall be effective only when given by one of the
following methods and addressed to the respective party at its address given
with the signatures at the end of this Agreement (or at such other address as
the party changing its address shall notify the other as provided herein) and
shall be considered to have been validly given
<PAGE>
(a) upon delivery, if delivered personally, (b) upon receipt, if mailed, first
class postage prepaid, with the United States Postal Service, (c) on the
guaranteed delivery date, if sent by courier service of recognized standing,
and (d) upon telephoned confirmation of receipt, if telecopied. Unless separate
notice is requested in writing by any Debtor, notice given to any Debtor shall
constitute notice to all Debtors. Except for the Loan Documents and any other
documents and instruments referenced herein, this Agreement constitutes the
entire agreement between Bank and Debtor relating to the Collateral and
supersedes all prior understandings or agreements concerning the subject matter
hereof. This Agreement shall be governed by the laws of the State of CALIFORNIA
and, unless otherwise defined or provided herein, all words used in this
Agreement have the meanings given them in the Commercial Code of such state.
IN WITNESS WHEREOF, Debtor and Bank have executed this Agreement as of the date
first hereinabove set forth.
"DEBTOR"
SEQUENOM, INC.
By:
---------------------------------- ----------------------------------
STEVE ZANIBONI, SEC./TREASURER/CFO
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
Address: 11555 SORRENTO VALLEY ROAD
SAN DIEGO, CA 92121
"BANK"
UNION BANK OF CALIFORNIA, N.A.
By:
----------------------------------
Title: DAN FINSTER
VICE PRESIDENT
ADDRESS: 4660 LA JOLLA VILLAGE DRIVE
SAN DIEGO, CA 92122
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-95797) pertaining to the 1999 Stock Incentive Plan and the
1999 Employee Stock Purchase Plan of Sequenom, Inc. of our report dated
February 25, 2000, with respect to the consolidated financial statements of
Sequenom, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
ERNST & YOUNG LLP
San Diego, California
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FINANCIAL STATEMENTS AS OF AND FOR THE YEAR END DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCLUDED IN THE COMPANY'S 1999 ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,201
<SECURITIES> 16,415
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 230
<CURRENT-ASSETS> 1,560
<PP&E> 9,259
<DEPRECIATION> 2,965
<TOTAL-ASSETS> 29,753
<CURRENT-LIABILITIES> 4,888
<BONDS> 6,323
0
15
<COMMON> 2
<OTHER-SE> 17,521
<TOTAL-LIABILITY-AND-EQUITY> 29,753
<SALES> 0
<TOTAL-REVENUES> 179
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,906
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 790
<INCOME-PRETAX> (21,770)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,770)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,770)
<EPS-BASIC> (1.42)
<EPS-DILUTED> (1.42)
</TABLE>
