<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ending June 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-29101
SEQUENOM, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0365889
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11555 Sorrento Valley Road
San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 350-0345
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
The number of shares of the Registrant's Common Stock outstanding as of
July 31, 2000 was 24,299,367.
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SEQUENOM, INC.
INDEX
Page No.
-------
PART I - FINANCIAL INFORMATION ............................................ 1
Item 1. Financial Statements ............................................. 1
CONDENSED CONSOLIDATED BALANCE SHEETS ..................................... 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ........................... 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ........................... 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ............ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 16
PART II - OTHER INFORMATION ............................................... 17
Item 2. Changes in Securities and Use of Proceeds ........................ 17
Item 6. Exhibits and Reports on Form 8-K ................................. 17
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................. $ 109,677,866 $ 5,200,734
Short-term investments, available-for-sale ............ 41,964,910 16,415,764
Accounts receivable ................................... 2,105,790 --
Inventories ........................................... 1,454,585 229,750
Deferred stock issuance costs ......................... -- 645,534
Other current assets and prepaid expenses ............. 732,938 914,243
------------- -------------
Total current assets ..................................... 155,936,089 23,406,025
Equipment and leasehold improvements, net ................ 6,651,551 6,294,011
Other assets ............................................. 512,460 53,023
------------- -------------
Total assets ............................................. $ 163,100,100 $ 29,753,059
============= =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses ................. $ 5,625,801 $ 4,426,287
Current portion of capital lease obligations .......... 526,710 461,784
------------- -------------
Total current liabilities ................................ 6,152,511 4,888,071
Capital lease obligations, less current portion .......... 967,642 1,189,428
Long-term debt ........................................... -- 5,134,000
Accrued interest payable on long-term debt ............... -- 1,003,000
Stockholders' equity:
Convertible preferred stock, par value $0.001;
Authorized shares - 5,000,000 and 14,842,757
at June 30, 2000 and December 31, 1999,
respectively
Aggregate liquidation preference -
none and $56,793,947 at June 30, 2000 and
December 31, 1999, respectively
Issued and outstanding shares - none and
14,842,757 at June 30, 2000 and December 31,
1999, respectively ................................ -- 14,843
Common stock, par value $0.001;
Authorized shares - 75,000,000 and 19,500,000
at June 30, 2000 and December 31, 1999, respectively
Issued and outstanding shares - 24,268,269 and
2,298,675 at June 30, 2000 and December 31, 1999,
respectively ...................................... 24,268 2,299
Additional paid-in capital ............................ 221,572,445 66,300,293
Notes receivable for stock ............................ -- (2,056,466)
Deferred compensation related to stock options ........ (2,308,914) (3,618,601)
Accumulated other comprehensive income ................ 165,254 400,779
Deficit accumulated during the development stage ...... (63,473,106) (43,504,587)
------------- -------------
Total stockholders' equity ............................... 155,979,947 17,538,560
------------- -------------
Total liabilities and stockholders' equity ............... $ 163,100,100 $ 29,753,059
============= =============
</TABLE>
See accompanying notes.
Note: The balance sheet at December 31, 1999 is derived from the audited
financial statements at that date, but does not included all the footnote
disclosures required by generally accepted accounting principles.
1
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Product revenue .............................. $ 1,806,775 $ -- $ 3,257,300 $ --
Research and development grants .............. 132,945 54,560 257,086 54,560
------------ ------------ ------------ ------------
Total revenues ........................... 1,939,720 54,560 3,514,386 54,560
------------ ------------ ------------ ------------
Costs and expenses:
Cost of product revenue ...................... 1,098,283 -- 2,126,737 --
Research and development ..................... 3,784,806 2,544,070 8,021,335 4,556,702
Selling, general and administrative .......... 4,605,733 2,329,239 9,818,105 3,770,796
Amortization of deferred compensation ........ 491,892 -- 2,989,695 --
------------ ------------ ------------ ------------
Total costs and expenses ................. 9,980,714 4,873,309 22,955,872 8,327,498
------------ ------------ ------------ ------------
Loss from operations ......................... (8,040,994) (4,818,749) (19,441,486) (8,272,938)
Interest income .............................. 2,457,846 622,699 3,997,261 840,873
Interest expense ............................. (67,789) (158,908) (4,547,409) (329,224)
Other income, net ............................ 7,129 9,289 23,116 9,289
------------ ------------ ------------ ------------
Net loss ..................................... $ (5,643,808) $ (4,345,669) $(19,968,518) $ (7,752,000)
============ ============ ============ ============
Historical net loss per share,
basic and diluted .......................... $ (0.23) $ (12.82) $ (0.86) $ (23.12)
============ ============ ============ ============
Weighted average shares outstanding,
basic and diluted .......................... 24,277,843 338,925 23,200,501 335,280
============ ============ ============ ============
Pro forma net loss per share,
basic and diluted .......................... $ (0.23) $ (0.28) $ (0.86) $ (0.52)
============ ============ ============ ============
Pro forma weighted average shares outstanding,
basic and diluted .......................... 24,277,843 15,476,671 23,200,501 14,694,251
============ ============ ============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Operating activities
Net loss ................................................... $ (19,968,518) $ (7,751,998)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash items .......................................... 11,982,854 754,092
Changes in operating assets and liabilities:
Inventories ............................................. (1,225,483) (173,697)
Accounts receivable ..................................... (2,123,233) --
Other current assets .................................... 1,058,611 (284,753)
Other assets ............................................ (459,460) --
Accounts payable and accrued expenses ................... 1,253,565 1,098,473
------------- -------------
Net cash used in operating activities ...................... (9,481,664) (6,357,883)
Investing activities
Purchase of equipment and leasehold improvements ........... (2,859,973) (1,644,119)
Net change in marketable investment securities ............. (25,666,559) (11,353,164)
------------- -------------
Net cash used in investing activities ...................... (28,526,532) (12,997,283)
Financing activities
Net (payments) borrowings on capital lease obligations ..... (156,860) 530,976
Repayment of long-term debt ................................ (3,090,870) --
Proceeds from issuance of Series D preferred stock ......... -- 11,776,703
Proceeds from issuance of common stock ..................... 145,754,401 1,625
------------- -------------
Net cash provided by financing activities .................. 142,506,671 12,309,304
------------- -------------
Net increase (decrease) in cash and cash equivalents ....... 104,498,475 (7,045,862)
Effect of exchange rate changes on cash and cash equivalents (21,343) (215,302)
Cash and cash equivalents at beginning of period ........... 5,200,734 8,559,612
------------- -------------
Cash and cash equivalents at end of period ................. $ 109,677,866 $ 1,298,448
============= =============
Supplemental schedule of noncash investing and
financing activities:
Conversion of preferred stock .............................. $ 56,793,947 $ --
============= =============
Conversion of debt and interest payable to common stock .... $ 7,387,010 $ --
============= =============
Supplemental disclosure of cash flow information:
Interest paid .............................................. $ 166,327 $ 184,435
============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited financial statements of SEQUENOM, Inc.
("SEQUENOM" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included. Interim results
are not necessarily indicative of results for a full year.
Through December 31, 1999, SEQUENOM was considered a development stage
company. The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. These financial statements should be read in
conjunction with the audited financial statements and footnotes thereto included
in the SEQUENOM's Annual Report on Form 10-K for the year ended December 31,
1999, as filed with the Securities and Exchange Commission ("SEC").
(2) Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income ("SFAS 130") requires
reporting and displaying comprehensive income (loss) and its components which,
for SEQUENOM, includes net loss and unrealized gains and losses on investments
and foreign currency translation gains and losses. In accordance with SFAS 130,
the accumulated balance of other comprehensive income (loss) is disclosed as a
separate component of stockholders' equity.
(3) Net Loss Per Share
In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff
Accounting Bulletin No. 98 ("SAB 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 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 converted.
4
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS FORM 10-Q CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING
TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. SUCH
STATEMENTS ARE ONLY PREDICTIONS AND ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
WITHOUT LIMITATION, THOSE DISCUSSED IN THIS ITEM 2 AS WELL AS THOSE DISCUSSED IN
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999,
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
SEQUENOM is an industrial genomics company translating information
generated from the map of the human genome into useful applications. We offer a
comprehensive genotyping technology to determine the medical relevance of
genetic variations, called SNPs for single nucleotide polymorphisms. Since we
began operations in 1994, we have devoted substantially all of our resources to
the development and application of products, technologies and services to
analyze SNPs, and, more recently, to determine their association to disease. Our
products include the MassARRAY system that we believe will become the platform
of choice for large-scale scoring of SNPs, a SNP assay portfolio and an allele
frequency database to be commercially launched through an e-commerce platform.
Our distinct technologies include an automated assay design process and the
ability to analyze hundreds of samples in a single reaction. Our services
include assay design for MassARRAY customers, in-house validation projects using
our high throughput MassARRAY genotyping system and disease association studies
using our population-based DNA bank. In tandem and often in collaboration with
the efforts of our customers, we use the MassARRAY technology for in-house
programs to identify the medical utility of SNPs and develop assay portfolios
correlating genes to specific diseases.
We commenced commercial sales of the MassARRAY system in December 1999.
Through June 30, 2000, we have commercially placed a total of ten systems with
leading companies and institutions. We currently sell our products to genomics,
pharmacogenomics, diagnostic and agricultural biotech companies, as well as
leading research institutions, in the United States and Europe. In 2000, product
revenues consist of both the sale of MassARRAY systems at the time of placement
and from disposable products, including SpectroCHIPs(TM), at the time of
shipment. Prior to 2000, our revenues had been solely from research grants. 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 the future, we expect to generate revenue from the
sale of proprietary SNP assays and assay design services provided to customers.
We believe that our sales will be initially driven by the need for SNP
validation and later could expand into the areas of genomic drug development and
diagnostics.
Since our inception, we have incurred significant losses and as of June 30,
2000 had an accumulated deficit of $63.5 million. Prior to our fiscal year 2000,
our expenses consisted primarily of costs incurred in research and development,
manufacturing scale-up, business development and from general and administrative
costs associated with our operations. With our first commercial revenues, we
began incurring cost of product revenues. We expect to incur losses for the
foreseeable future as we expand development and commercialization of new
information-based products, establish a high throughput genotyping center, and
fully implement our SNP validation business strategies. Our planned move from
our current facilities to expanded facilities in San Diego, and the additional
obligations of a public reporting entity will also add to our expenses.
We have a limited history of operation 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 and the timing
and extent of research and development efforts. In addition, payments under
strategic alliances, collaborations and subscription and licensing arrangements
are subject to significant fluctuation in both timing and amount. Therefore our
results of operations for any period may not be comparable to the result of
operations for any other period.
5
<PAGE>
Results of Operations for the Three Months Ended June 30, 2000 and 1999
REVENUES
Product revenues were $1.8 million for the three months ended June 30,
2000, compared to no product revenue in the same period of 1999. These revenues
were derived from the sale of MassARRAY systems and disposable kits containing
our proprietary SpectroCHIP. During the quarter, we placed four of our MassARRAY
systems and continued to sell our disposables to customers who already have our
system.
Research and development grant revenue was approximately $133,000 for the
quarter ended June 30, 2000 compared to approximately $55,000 in the same period
of 1999. Revenue in both periods represented the cash received from a grant
awarded to us by a German research entity.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $3.8 million in the quarter
ended June 30, 2000 from $2.5 million in the same period of 1999. These expenses
consist primarily of salaries and related personnel costs, materials costs and
costs related to completion of our product development. The $1.3 million
increase consisted of approximately $690,000 from increased personnel costs
associated with recruiting and hiring additional research and development
personnel, an increase in consulting and material costs of approximately
$320,000, and approximately $290,000 primarily from additional facilities costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $4.6 million for
the three months ended June 30, 2000 from $2.3 million in the same period of
1999. These expenses consist primarily of salaries and related costs for
executive, sales, business development, finance and other administrative
personnel, and general and patent-related legal expenses. Approximately $1.0
million of the $2.3 million increase was from a one-time charge for costs
associated with the transition of Dr. Hubert Koster from President and CEO to
Vice Chairman of the Board of Directors. The remaining increase consisted of
approximately $830,000 from hiring additional selling, general and
administrative personnel, approximately $290,000 in additional expenses
associated with our facilities, and an increase of approximately $180,000 from
sales and marketing related activities.
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 three months ended June 30, 2000, we recorded amortization of
deferred stock compensation totaling approximately $492,000. The deferred
compensation is 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 in fiscal 2000,
$939,000 during 2001, $432,000 during 2002, and $187,000 during 2003.
INTEREST INCOME
Interest income increased to approximately $2.5 million for the quarter
ended June 30, 2000 from approximately $623,000 in the same period of 1999. The
increase resulted from higher average balances of cash and cash equivalents and
short-term investments in the second quarter of fiscal 2000, resulting from the
investment of the proceeds from our initial public offering in February 2000.
INTEREST EXPENSE
Interest expense was approximately $68,000 in the quarter ended June 30,
2000 compared to approximately $159,000 in the same period of 1999. The decrease
resulted from the long-term debt being repaid and converted to common stock upon
the completion of our initial public offering in February 2000, leaving only
capital lease obligations outstanding.
6
<PAGE>
Results of Operations for the Six Months Ended June 30, 2000 and 1999
REVENUES
Product revenues were $3.3 million for the six months ended June 30, 2000,
compared to no product revenue in the same period of 1999. These revenues were
derived from the sale of MassARRAY systems and disposable kits containing our
proprietary SpectroCHIP. Through June 30, 2000, we have commercially placed a
total of ten systems with leading companies and institutions.
Research and development grant revenue was approximately $257,000 for the
six months ended June 30, 2000 compared to approximately $55,000 in the same
period of 1999. The current year amount represents the cash received from a
Phase I SBIR grant awarded to us by the National Institutes of Health and from a
German research entity, while the 1999 grant revenue was from only the German
research entity.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $8.0 million in the six
months ended June 30, 2000 from $4.6 million in the same period of 1999. The
$3.4 million increase consisted of a $1.3 million one-time charge from
forgiveness of loans granted to executives in connection with the exercise of
stock options, approximately $1.2 million from increased personnel expenses
associated with recruiting and hiring additional research and development
personnel, an increase in consulting and material costs of approximately
$670,000, and an increase of approximately $230,000 in facilities costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $9.8 million for
the six months ended June 30, 2000 from $3.8 million in the same period of 1999.
One-time charges represent approximately $3.5 million of the $6.0 million
increase from 1999 to 2000. These charges are from forgiveness of loans granted
to executives in connection with the exercise of stock options in the first
quarter of fiscal 2000, and the transition of Dr. Koster from President and CEO
to Vice Chairman of the Board of Directors in the second quarter of fiscal 2000.
The remaining increase consisted of approximately $1.6 million from hiring
additional selling, general and administrative personnel and their related
expenses, approximately $590,000 in additional expenses associated with
facilities, and an increase of approximately $310,000 from sales and marketing
related activities.
INTEREST INCOME
Interest income increased to approximately $4.0 million for the six months
ended June 30, 2000 from approximately $841,000 in the same period of 1999. The
increase resulted from higher average balances of cash and cash equivalents and
short-term investments in the first six months of fiscal 2000, resulting from
the investment of the proceeds from the our initial public offering in February
2000.
INTEREST EXPENSE
Interest expense was $4.5 million in the six months ended June 30, 2000
compared to approximately $329,000 in the same period of 1999. The $4.5 million
is comprised of approximately $100,000 of interest related to capital lease
obligations, $4.8 million of non-cash interest expense recorded upon conversion
of debt of DEM4 million (approximately $2.0 million) into common stock, offset
by approximately $400,000 of non-cash gain recorded upon issuance of common
stock to extinguish long-term interest payable. Interest expense in 1999 was
from capital lease obligations and long-term debt that was subsequently repaid
or converted in February 2000.
7
<PAGE>
Liquidity and Capital Resources
In February 2000, we completed our initial public offering raising net
proceeds of approximately $144.1 million. Prior to that, we funded our
operations with $56.9 million of private equity financings, $6.0 million in
loans and convertible loans, and $2.2 million from equipment financing
arrangements. At June 30, 2000, cash, cash equivalents and short-term
investments totaled $151.6 million compared to $21.6 million at December 31,
1999. 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 six months ended June 30, 2000 was $9.5
million compared to $6.4 million for the same period in 1999. A net loss of
$20.0 million for the six months ended June 30, 2000 was partially offset by
non-cash charges of approximately $12.0 million for amortization of deferred
compensation, net interest expense associated with the repayment of debt and
conversion of debt to equity, forgiveness of loans granted to executives,
depreciation and amortization and options issued to consultants.
Investing activities, other than the changes in our short-term investments,
utilized approximately $2.9 million in cash during the first six months of
fiscal 2000 for equipment expenditures.
Cash provided by financing activities was $142.5 million for the six months
ended June 30, 2000 compared to $12.3 million for the same period in 1999.
Financing activities for the first half of 2000, included the receipt of net
proceeds of $145.8 million substantially from the sale of common stock in our
initial public offering, offset by $3.2 million repayment of long-term debt and
capital lease obligations. During the same period of 1999, we received $11.8
million from the sale of preferred stock to investors, and approximately
$531,000 from equipment financing arrangements.
Working capital increased to $149.8 million at June 30, 2000 from $18.5
million at December 31, 1999. The increase in working capital resulted from the
receipt of net proceeds from our initial public offering completed in February
2000.
As of June 30, 2000, we had an aggregate of $1.5 million in future
obligations of principal payments under capital leases, of which approximately
$527,000 must 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.
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.
8
<PAGE>
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. In addition, we have established an $8.0 million capital financing
agreement, all of which is available for utilization. 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.
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.
The market price of our common stock is extremely volatile, and the value of our
common stock may decrease suddenly.
As a result, at any time, the market value of our common stock could be
significantly less than the price that an investor paid for shares of our common
stock. This extreme volatility also puts us at risk for securities class action
litigation, which would cause us to divert both financial and managerial
resources, which could reduce our profits.
Our industry is highly competitive. Actions or access to resources by our
competitors or our inability to differentiate our company strategy or
technologies may increase volatility of our stock price or affect our ability to
successfully compete.
We compete with companies in the United States and abroad that are engaged
in the development and production of products that analyze genetic information.
Actions or access to resources by our competitors may include:
- announcements of technological innovations, collaborations, joint
ventures, mergers or acquisitions;
- greater financial, technical, research, marketing, sales,
distribution, service and other resources;
- broader product lines and greater name recognition; or
- offering discounts or completing SNP analysis projects for free as
competitive tactics.
9
<PAGE>
We have a history of operating losses, expect to incur future losses and cannot
be certain that we will become profitable.
We have experienced significant operating losses each year since inception,
and we expect these losses to continue. Our losses have resulted principally
from costs incurred in research and development and from general and
administrative costs associated with our operations. These costs have exceeded
revenues and interest income, which, to date, have been generated principally
from MassARRAY system and disposable sales and government research grants. We
expect to incur additional operating losses as a result of increases in expenses
for manufacturing, marketing and sales capabilities, research and product
development and general and administrative costs. We may never achieve
profitability. Among other things, our ability to manage the transition to a
commercially successful company will depend upon our ability to:
- expand our commercial manufacturing capability for SpectroCHIPs and
related disposables and meet acceptable quality controls;
- maintain supplier agreements for components of the MassARRAY system
and assays;
- develop our marketing capabilities cost effectively;
- establish sales and distribution capabilities cost-effectively;
- enter into subscription agreements with customers desiring to use our
products;
- develop products that are accepted by the marketplace;
- create a product mix that is appealing to genomics, pharmacogenomics,
diagnostic and agricultural biotech companies;
- avoid infringing on the intellectual property rights of others;
- enforce our intellectual property rights against others; and
- hire and retain qualified key personnel.
An inability to accomplish any of these tasks could seriously harm the
successful commercialization of our technologies and could have a material
adverse effect on our business, financial condition and results of operations.
We have a limited operating history.
We are a relatively new company and, for the most part, our technologies
are still in the early stages of development. We have just begun to incorporate
our technologies into commercial products. We need to make significant
investments to ensure our products perform correctly and are cost-effective. In
addition, we may need to obtain additional regulatory approvals to sell our
products for future application in diagnostics. Even if we develop our products
for commercial use and obtain all necessary regulatory approval, we may not be
able to develop products that:
- are accepted by the genomics, diagnostic or other marketplaces;
- meet customers' demands;
- are protected from competition by others;
- do not infringe the intellectual property rights of others;
- can be manufactured in sufficient quantities or at a reasonable cost;
or
- can be marketed successfully.
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We may not be able to successfully adapt our products for commercial
applications.
We have completed the commercial introduction of our MassARRAY technology
for applications in the genetic aspects of drug development and life science
research. 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, expand 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 are planning to move
from our current facilities, purchase equipment and hire additional personnel.
If we are unable to successfully implement or manage an expanded business, our
relationships with our customers may be harmed.
We may not successfully integrate future acquisitions or joint ventures.
In the future, we may acquire additional complementary companies, products
or technologies or form joint ventures to integrate technologies or marketing
efforts. Managing these acquisitions or joint ventures 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 or joint
ventures 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
or joint ventures 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 or joint venture
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 the ramp up rate of
our customers' internal genotyping needs is below projected throughput.
The ramp up rate of genotyping by customers could be less than originally
projected by those customers. The extraction of DNA from biological material is
time consuming. Assay design can also be time consuming if a customer chooses
not to use SEQUENOM's service for automated assay design. These items and other
unforeseeable items may result in MassARRAY system customers not being able 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:
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. 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.
We have limited commercial manufacturing 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.
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.
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
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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 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
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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.
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.
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,
and a laboratory information management system, 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.
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Item 3. 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, we 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
--------------
Prior to our initial public offering in February 2000, we had long-term
debt denominated in German deutsche marks. We converted approximately half of
this debt into common stock upon the closing of the offering and repaid the rest
of this debt in cash from the proceeds of the offering.
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 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, excluding intercompany debt, were $2.8
million at June 30, 2000. A 1% decrease in the value of German deutsche marks
relative to the US dollar would result in approximately a $28,000 unrealized
foreign translation loss.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On January 31, 2000, the Company's Form S-1 registration statement (File
No. 333-91665) was declared effective by the Securities and Exchange Commission.
The registration statement, as amended, covered the offering of 5,250,000 shares
of common stock. The offering commenced on January 31, 2000 and the sale to the
public of shares of common stock at $26.00 per share was completed on February
1, 2000 for an aggregate price of approximately $136.5 million. The registration
statement covered an additional 787,500 shares of common stock that the
underwriters had the option to purchase solely to cover over-allotments. These
shares were purchased on February 2, 2000 at $26.00 per share for an aggregate
price of approximately $20.5 million. The managing underwriters for the offering
were Warburg Dillon Read LLC, FleetBoston Robertson Stephens Inc. and SG Cowen
Securities Corporation. Expenses incurred through June 30, 2000 in connection
with the issuance and distribution of common stock in the offering included
underwriting discounts, commissions and allowances of approximately $11.0
million and other expenses of approximately $1.9 million. Total offering
expenses of approximately $12.9 million resulted in net offering proceeds to the
Company of approximately $144.1 million. No payments or expenses were paid to
directors, officers or affiliates of the Company or 10% owners of any class of
equity securities of the Company. Of the net offering proceeds, through June 30,
2000, approximately $3.2 million has been used to pay off long-term and other
debt, approximately $2.9 million to purchase equipment and approximately $8.5
million for general corporate purposes, including hiring additional personnel,
expansion of facilities, development and manufacturing of products, and expenses
for filing and pursuing patent applications; the balance remains as working
capital.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
The following is a list of exhibits filed as part of this Quarterly Report
on Form 10-Q.
Exhibit
Number Description
------- -----------
10.65 Global Master Rental Agreement dated May 4, 2000 between Comdisco,
and SEQUENOM, Inc.
10.66 Strategic Alliance Agreement dated May 3, 2000 between Genaissance
Pharmaceuticals, Inc, and SEQUENOM, Inc
10.67 Purchase and License Agreement dated June 20, 2000 between Specialty
Laboratories and SEQUENOM, Inc.
10.68 Settlement Agreement dated May 31, 2000 between Hubert Koster, and
SEQUENOM, Inc.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
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SEQUENOM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEQUENOM, Inc.
Date: August 14, 2000 By: /s/ Stephen L. Zaniboni
-------------------------------------
Stephen L. Zaniboni
Chief Financial Officer (Duly Authorized
Officer and Principal Financial and
Accounting Officer)
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