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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 September 30, 2000
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-29101
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SEQUENOM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0365889
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
11555 Sorrento Valley Road San Diego, California 92121
(Address of principal executive offices) (Zip Code)
(858) 350-0345
Registrant's telephone number, including area code
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
The number of shares of the Registrant's Common Stock outstanding as of
October 31, 2000 was 24,433,957.
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SEQUENOM, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
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.. 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 20
PART II - OTHER INFORMATION..................................................................... 21
Item 2. Changes in Securities and Use of Proceeds.............................................. 21
Item 6. Exhibits and Reports on Form 8-K....................................................... 21
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September December 31,
30, 2000 1999
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 91,667,221 $ 5,200,734
Short-term investments, available-for-sale....... 49,521,811 16,415,764
Accounts receivable.............................. 13,528,431 --
Inventories...................................... 2,393,248 229,750
Deferred stock issuance costs.................... -- 645,534
Other current assets and prepaid expenses........ 7,834,190 914,243
------------ ------------
Total current assets......................... 164,944,901 23,406,025
Equipment and leasehold improvements, net.......... 7,122,015 6,294,011
Other assets....................................... 2,508,428 53,023
------------ ------------
Total assets................................. $174,575,344 $ 29,753,059
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses............ $ 11,279,666 $ 4,300,127
Current portion of capital lease obligations..... 731,987 461,784
Deferred revenue................................. 10,139,356 126,160
------------ ------------
Total current liabilities.................... 22,151,009 4,888,071
Capital lease obligations, less current portion.... 1,098,520 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
September 30, 2000 and December 31, 1999,
respectively..................................
Aggregate liquidation preference--none and
$56,793,947 at September 30, 2000 and December
31, 1999, respectively........................
Issued and outstanding shares--none and
14,842,757 at September 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
September 30, 2000 and December 31, 1999,
respectively..................................
Issued and outstanding shares--24,407,624 and
2,298,675 at September 30, 2000 and December
31, 1999, respectively........................ 24,408 2,299
Additional paid-in capital..................... 222,193,675 66,300,293
Notes receivable for stock..................... -- (2,056,466)
Deferred compensation related to stock
options....................................... (2,162,270) (3,618,601)
Accumulated other comprehensive income......... 141,709 400,779
Accumulated deficit during the development
stage......................................... (68,871,707) (43,504,587)
------------ ------------
Total stockholders' equity................... 151,325,815 17,538,560
------------ ------------
Total liabilities and stockholders' equity... $174,575,344 $ 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 Nine months ended
September 30, September 30,
------------------------ --------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product revenue....... $ 2,283,962 $ -- $ 5,543,800 $ --
Services.............. 500,000 -- 500,000 --
Research and
development grants... -- 26,093 254,548 80,653
----------- ----------- ------------ ------------
Total revenues...... 2,783,962 26,093 6,298,348 80,653
----------- ----------- ------------ ------------
Costs and expenses:
Cost of product
revenue.............. 1,658,446 -- 3,785,183 --
Research and
development.......... 4,328,087 2,580,975 12,349,422 7,137,677
Selling, general and
administrative....... 4,118,581 1,592,499 13,936,686 5,363,295
Amortization of
deferred
compensation......... 407,838 3,615,150 3,397,533 3,615,150
----------- ----------- ------------ ------------
Total costs and
expenses........... 10,512,952 7,788,624 33,468,824 16,116,122
----------- ----------- ------------ ------------
Loss from operations.... (7,728,990) (7,762,531) (27,170,476) (16,035,469)
Interest income......... 2,412,331 384,823 6,409,593 1,225,696
Interest expense........ (82,352) (247,041) (4,629,761) (576,265)
Other (expense) income,
net.................... 408 (9,289) 23,524 --
----------- ----------- ------------ ------------
Net loss................ $(5,398,603) $(7,634,038) $(25,367,120) $(15,386,038)
=========== =========== ============ ============
Historical net loss per
share, basic and
diluted................ $ (0.22) $ (13.72) $ (3.01) $ (39.41)
=========== =========== ============ ============
Weighted average shares
outstanding, basic and
diluted................ 24,330,513 556,233 8,414,073 390,486
=========== =========== ============ ============
Pro forma net loss per
share, basic and
diluted................ $ (0.22) $ (0.48) $ (1.08) $ (1.03)
=========== =========== ============ ============
Pro forma weighted
average shares
outstanding, basic and
diluted................ 24,330,513 15,703,979 23,551,819 14,714,027
=========== =========== ============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Operating activities
Net loss.......................................... $(25,367,120) $(15,386,038)
Adjustments to reconcile net loss to net cash used
in operating activities:
Non-cash items.................................. 12,284,410 5,003,465
Changes in operating assets and liabilities:
Inventories..................................... (2,206,059) (243,036)
Accounts receivable............................. (13,567,163) --
Other current assets............................ (6,056,618) (263,499)
Other assets.................................... (2,455,406) 4,829
Accounts payable and accrued expenses........... 7,116,825 1,434,575
Deferred revenue................................ 10,013,196 --
------------ ------------
Net cash used in operating activities............. (20,237,935) (9,449,704)
Investing activities
Purchase of equipment and leasehold improvements.. (3,031,071) (3,275,247)
Net change in marketable investment securities.... (33,048,834) (5,178,842)
------------ ------------
Net cash used in investing activities............. (36,079,905) (8,454,089)
Financing activities
Net borrowings on capital lease obligations....... 179,295 674,607
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............ 145,843,941 37,721
------------ ------------
Net cash provided by financing activities......... 142,932,366 12,489,031
------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... 86,614,526 (5,414,762)
Effect of exchange rate changes on cash and cash
equivalents...................................... (148,039) (98,250)
Cash and cash equivalents at beginning of period.. 5,200,734 8,559,612
------------ ------------
Cash and cash equivalents at end of period........ $ 91,667,221 $ 3,046,600
============ ============
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..................................... $ 248,679 $ 359,140
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
SEQUENOM, INC.
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) New Accounting Pronouncements
In December 19999, the SEC staff issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. We will incorporate
the guidance
4
<PAGE>
SEQUENOM, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of SAB 101 in the first quarter of 2001. We do not anticipate that the
adoption of SAB 101 will have a material impact on our financial position or
results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation ("FIN 44"). FIN 44 clarifies certain issues in the
application of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. FIN 44 did not have material impact on the Company's
financial statements.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Form 10-Q may contain forward-looking statements. When used in this
Form 10-Q, the words "anticipate," "believe," "estimate," "will," "intend" and
"expect" and similar expressions identify forward-looking statements. Although
we believe that our plans, intentions and expectations reflected in any such
forward-looking statements are reasonable, we can give no assurance that these
plans, intentions or expectations will be achieved. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied, by any such forward-looking statements contained in this
Form 10-Q. Important factors that could cause actual results to differ
materially from our forward-looking statements are set forth in this Form 10-
Q, included under the heading "Risks and Uncertainties." In addition, the
"Risk Factors" discussed in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, filed with the Securities and Exchange
Commission should be taken into consideration. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements set forth in this Form 10-Q. We
are under no obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise.
OVERVIEW
We are a genomics company that translates 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 or 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 for large-scale scoring of SNPs,
disposable MassARRAY kits consisting of our proprietary SpectroCHIP and
reagents, a SNP assay portfolio and an allele frequency database. Our services
include assay design for MassARRAY customers, in-house validation projects
using our MassARRAY system and disease association studies using our
proprietary population-based DNA bank. We are also using the MassARRAY
technology to identify the medical utility of SNPs and develop SNP panels
based on correlation to specific diseases on our own and in collaboration with
others.
We sold our first product, the MassARRAY system, in January 2000. Through
September 30, 2000, we have commercially placed a total of 16 systems with
leading companies and institutions. We currently sell our products to
genomics, pharmacogenomics, diagnostic and agricultural biotechnology
companies, as well as leading research institutions, in the United States,
Europe and Asia. Through September 30, 2000, our product revenues consisted of
revenues from both the sale of MassARRAY systems and the sale of MassARRAY
kits, both of which are recognized at the time of shipment. MassARRAY kits are
used in the operation of the MassARRAY system. Our service revenues consisted
of SNP validation services, recognized as phases of the projects were
completed. We anticipate that revenues from our collaborations with third
parties will become an increasingly important component of our service
revenues in the future. Prior to January 1, 2000, our revenues had been solely
from research grants.
Since our inception, we have incurred significant losses. As of September
30, 2000, we had an accumulated deficit of $68.9 million. Prior to January 1,
2000, our expenses consisted primarily of costs incurred in research and
development, production scale-up and business development and from general and
administrative costs associated with our operations, as well as sales and
marketing expenses. With our first commercial revenues, we began incurring
cost of product revenues. Cost of product revenues includes the materials,
labor and overhead expenses related to the production of and assembly of our
products. We expect to incur losses for the foreseeable future, and expect all
expenses to increase, 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 in San Diego to expanded facilities in San Diego will
also add to our expenses.
6
<PAGE>
Results of Operations for the Three Months Ended September 30, 2000 and 1999
Revenues
Total revenues increased to $2.8 million for the three months ended
September 30, 2000, from approximately $26,000 in the same period of the prior
year, all of which related to research and development grants. Product
revenues were $2.3 million for the three months ended September 30, 2000.
These revenues were derived from the sale of MassARRAY systems and disposable
kits containing our proprietary SpectroCHIP. During the quarter, we placed
three of our MassARRAY systems and continued to sell our disposables to
customers who already have our system. Service revenues were $500,000 for the
quarter ended September 30, 2000. These revenues consisted of completion of
significant phases in SNP validation projects.
Research and development expenses
Research and development expenses increased to $4.3 million in the quarter
ended September 30, 2000, from $2.6 million in the same period of 1999. These
expenses consist primarily of salaries and related personnel costs, and
materials and other costs related to product development. The $1.7 million
increase consisted of approximately $1.0 million from an increase in and
material costs and other product development costs, and approximately $700,000
from increased personnel costs associated with recruiting and hiring
additional research and development personnel.
Selling, general and administrative expenses
Selling, general and administrative expenses increased to $4.1 million for
the three months ended September 30, 2000, from $1.6 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
$940,000 of the increase resulted from hiring additional selling, general and
administrative personnel, approximately $556,000 from additional expenses
associated with our facilities, and approximately $471,000 from increased
sales and marketing expenses.
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 September 30, 2000, we recorded
amortization of deferred stock compensation totaling approximately $408,000
compared to $3.6 million in the same period of 1999. 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 2000, $939,000 in 2001,
$432,000 in 2002, and $187,000 in 2003.
Interest income
Interest income increased to approximately $2.4 million for the quarter
ended September 30, 2000 from approximately $385,000 in the same period of
1999. The increase resulted from higher average balances of cash and cash
equivalents and short-term investments, resulting from the investment of the
net proceeds from our initial public offering in February 2000.
Interest expense
Interest expense was approximately $82,000 in the quarter ended September
30, 2000 compared to approximately $247,000 in the same period of 1999. The
decrease was a result of 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.
7
<PAGE>
Results of Operations for the Nine Months Ended September 30, 2000 and 1999
Revenues
Total revenues increased to $6.3 million for the nine months ended
September 30, 2000, from approximately $81,000 in the same period of the prior
year, all of which related to research and development grants. Product
revenues were $5.5 million for the nine months ended September 30, 2000. These
revenues were derived from the sale of MassARRAY systems and disposable kits
containing our proprietary SpectroCHIP. Validation service revenue for the
nine months ended September 30, 2000 was $500,000. Research and development
grant revenue was approximately $255,000 for the nine months ended September
30, 2000.
Research and development expenses
Research and development expenses increased to $12.3 million in the nine
months ended September 30, 2000, from $7.1 million in the same period of 1999.
The $5.2 million increase consisted of a $1.3 million one-time charge related
to forgiveness of loans granted to research and development executives in
connection with the exercise of stock options, approximately $1.7 million from
increased personnel expenses associated with recruiting and hiring additional
research and development personnel, an increase in other costs related to
research and development of products and services of approximately $2.2
million.
Selling, general and administrative expenses
Selling, general and administrative expenses increased to $13.9 million for
the nine months ended September 30, 2000, from $5.4 million in the same period
of 1999. One-time charges represent approximately $3.5 million of the $8.5
million increase from 1999 to 2000. These charges are related to forgiveness
of loans granted to executives in 1999 in connection with the exercise of
stock options in the first quarter of 2000, and the transition of Dr. Koster
from President and Chief Executive Officer to Vice Chairman of the Board of
Directors in the second quarter of 2000. The remaining increase consisted of
approximately $2.5 million from the addition of selling, general and
administrative personnel, approximately $1.0 million from increased sales and
marketing related expenses, and approximately $881,000 million in additional
expenses associated with facilities.
Interest income
Interest income increased to approximately $6.4 million for the nine months
ended September 30, 2000 from approximately $1.2 million in the same period of
1999. The increase resulted from higher average cash and cash equivalent
balances and short-term investments, resulting from the investment of the net
proceeds from the our initial public offering in February 2000.
Interest expense
Interest expense was $4.6 million in the nine months ended September 30,
2000 compared to approximately $576,000 in the same period of 1999. The $4.6
million is comprised of approximately $4.8 million of non-cash interest
expense recorded upon conversion of debt of $2.2 million (4.0 million German
deutsche marks exchanged at a rate of 1.84 deutsche marks per 1 US dollar)
into common stock, approximately $200,000 of interest related to capital lease
obligations, offset in part 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 on
long-term debt that was subsequently repaid or converted into common stock
February 2000.
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 September 30, 2000, cash, cash equivalents and short-term
investments totaled $141.2 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.
8
<PAGE>
Cash used in operations for the nine months ended September 30, 2000 was
$20.2 million compared to $9.5 million for the same period in 1999. A net loss
of $25.4 million for the nine months ended September 30, 2000 was partially
offset by non-cash charges of approximately $12.3 million consisting of
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 $3.0 million in cash during the first nine months of
2000 for equipment expenditures.
Cash provided by financing activities was $142.9 million for the nine
months ended September 30, 2000 compared to $12.5 million for the same period
in 1999. Financing activities for the first nine months of 2000, included the
receipt of net proceeds of $145.8 million, substantially all of which was from
the sale of common stock in our initial public offering, offset by $3.1
million repayment of long-term debt and approximately $179,000 of borrowings
under capital lease agreements. During the same period of 1999, we received
$11.8 million from the sale of preferred stock to investors, and approximately
$675,000 from equipment financing arrangements.
Working capital increased to $142.8 million at September 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 September 30, 2000, we had an aggregate of $1.8 million in future
obligations of principal payments under capital leases, of which approximately
$732,000 must be repaid by September 30, 2001. 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. 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 systems, consumables,
assays and services;
. the level of our sales and marketing expenses;
. the extent to which we enter into collaborations or joint ventures;
. our progress with research and development;
. our ability to introduce and sell new products and services;
. the level of our expenses associated with litigation;
. the costs and timing of obtaining new patent rights;
. the extent to which we acquire technologies or companies; and
. regulatory changes and competition and technological developments in the
market.
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 have a $25.0 million bank line of credit, all of which was available for
borrowing as of September 30, 2000. In addition, we have established an $8.0
million capital financing agreement, $7.5 million of which was available for
utilization at September 30, 2000. 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.
9
<PAGE>
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.
Our stock price could be volatile and your investment could suffer a decline
in value.
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.
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 commercially launched our
first product, the 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 further developing
our technology and commercializing our products and services;
. develop a market for our products and services; and
. attract and retain qualified management, sales, technical and scientific
staff.
Our operations may also 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.
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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 in each period since
inception, and we expect these losses to continue. It is uncertain when, if
ever, we will become profitable. As of September 30, 2000, our accumulated
deficit was $68.9 million. Our losses have resulted principally from costs
incurred in research and development and from selling, general and
administrative costs associated with our operations. These costs have exceeded
revenues and interest income in each period since inception. We have generated
revenues principally from MassARRAY system and disposable sales and government
research grants. We expect to incur increasing operating losses as a result of
expenses associated with production, marketing and sales, research and product
development and selling, general and administrative costs.
Our operating results fluctuate significantly.
Our revenues and results of operations may fluctuate significantly,
depending on a variety of factors, including the following:
. our success in selling, and changes in the demand for, our products and
services;
. variations in the timing of payments from customers and collaborative
partners and the recognition of these payments as revenues;
. the pricing of our products and services;
. the timing of any new product or service offerings;
. changes in the research and development budgets of our customers and
partners;
. the introduction of new products and services by our competitors;
. changes in the regulatory environment affecting health care and health
care providers;
. expenses related to, and the results of, any litigation or other
proceedings relating to intellectual property rights;
. the cost and timing of our adoption of new technologies; and
. the cost, quality and availability of tissue samples, reagents and
related components and technologies.
In particular, our revenues and operating results are unpredictable because
the sales cycle for our MassARRAY and service products is lengthy. Our
revenues and operating results depend, in part, on the number and timing of
MassARRAY system placements that we make during the quarter. We expect to
recognize a substantial portion of our quarterly revenues in the last month of
a quarter, with a concentration of these revenues in the last weeks or days of
the third month. Our expense levels are relatively fixed in the short term and
are based, in part, on our expectations of our future revenues. Any delay in
generating or recognizing revenues could cause significant variations in our
operating results from quarter to quarter and could result in increased
operating losses.
We believe that period-to-period comparisons of our financial results will
not necessarily be meaningful. You should not rely on these comparisons as an
indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price will likely fall.
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<PAGE>
A reduction in revenues from sales of MassARRAY systems would harm our
business.
A decline in the demand for MassARRAY Systems would reduce our total
revenues and harm our business. It would also have an adverse effect on the
sales of our consumable products. We expect that the MassARRAY system will
continue to account for a substantial portion of our total revenues for the
foreseeable future. A variety of factors, including the following, may reduce
the demand for MassARRAY systems:
. competition from other products;
. failure of SNPs to demonstrate medical relevance;
. negative publicity or evaluation; or
. intellectual property claims or litigation.
We may not be able to successfully adapt our products for commercial
applications.
A number of potential applications of our MassARRAY technology 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
quantities 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 of our products 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 and services
into the marketplace.
We may not be able to expand our business to offer services to our customers.
We are currently planning on expanding our business to run multiple assays
and validate SNPs 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.
Our collaborative partners may not be successful in developing or
commercializing therapeutic, diagnostic or other products using our products
or services.
Development of therapeutic, diagnostic and other products based on our
collaborative partners' discoveries will also be subject to other risks of
failure inherent in their development or commercial viability. These risks
include the possibility that any such products will:
. fail to receive necessary regulatory approvals;
. fail to be developed prior to the successful marketing of similar
products by competitors;
. be found to be ineffective;
. be difficult or impossible to manufacture on a commercial scale;
. be uneconomical to market;
. be found to be toxic; or
. be impossible to market because they infringe on the proprietary rights
of third parties or compete with products marketed by third parties that
are superior.
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If a partner or we discover therapeutic, diagnostic or other products using
our products or services, we may rely on that partner for product development,
regulatory approval, manufacturing and marketing of those products before we
can realize some of the milestone payments, royalties and other payments we
may be entitled to under the terms of our collaboration agreements. Our
collaboration agreements typically allow the partner significant discretion in
electing whether to pursue any of these activities. We cannot control the
amount and timing of resources our collaborators may devote to our programs or
potential products. As a result, we cannot be certain that our collaborators
will choose to develop or commercialize any products. In addition, if a
collaborator is involved in a business combination, such as a merger or
acquisition or changes its business focus, its performance in its agreement
with us may suffer and, as a result, we may not generate any revenues from the
royalty, milestone and similar payment provisions of our agreement with that
collaborator.
We may not successfully develop or derive revenues from our genotyping and
gene discovery programs.
Our genotyping and gene discovery programs are still in the early stages of
development and may not result in marketable products. We are directing our
technology and development focus primarily toward identifying genes that are
believed to be responsible for, or indicate the presence of, certain diseases.
We have only identified a limited number of specific candidate genes under our
research programs and have not yet validated any disease genes. Our
technologies and approach to gene discovery may not enable us to successfully
identify the specific genes that cause or predispose individuals to the
complex diseases that are the targets of our efforts to identify genetic
variations that have medical utility. In addition, the diseases we are
targeting are generally believed to be caused by a number of genetic and
environmental factors. It may not be possible to address such diseases through
gene-based therapeutic or diagnostic products. Accordingly, even if we are
successful in identifying specific genes, our discoveries may not lead to the
development of commercial products.
If the medical relevance of SNPs becomes questionable, we may have less demand
for our products and services.
Some of the products we hope to develop involve new and unproven
approaches. They are based on the assumption that information about genes may
help scientists better understand complex disease processes. Scientists
generally have a limited understanding of the role of genes in diseases, and
few products based on gene discoveries have been developed. 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 and services will be reduced and our business is
likely to be harmed.
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 to 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 depend on sales of SpectroCHIPs and other disposables for a significant
portion of our revenues.
Sales of SpectroCHIPs and other disposables will become an increasingly
important source of revenue. Factors which may limit the use of SpectroCHIPs
and other disposables include: additional sales of MassARRAY systems, the
acceptance of our technology by our customers, the extent of our customers'
level of utilization of their MassARRAY systems, and the training of customer
personnel. If our customers do not purchase sufficient quantities of
SpectroCHIPs and other disposables, our revenues will be lower than expected.
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<PAGE>
Our system and related disposable sales may be limited if our MassARRAY system
is used below its capacity.
The ramp-up rate of genotyping by customers could be less than originally
projected by those customers. Sample preparation, the extraction of DNA from
biological material, is time consuming. Assay design can also be time
consuming if a customer chooses not to use our 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. In
addition, customers may not purchase sufficient quantities of disposables for
us to become profitable.
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 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 which contributes to the length of
our sales cycle. We may expend substantial funds and management effort with no
assurance that we will successfully sell our products or services.
If our customers are unable to adequately prepare samples as required by our
MassARRAY 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.
We have limited commercial production capability and experience and may
encounter production problems or delays, which could result in lower revenue.
We assemble the MassARRAY system and manufacture the SpectroCHIP and
MassARRAY kit. To date, we have only produced these products in limited
quantities. Our customers require that we comply with current good
manufacturing practices that we may not be able to meet. We may not be able to
maintain acceptable quality standards as we ramp up production. To achieve
anticipated customer demand levels, we will need to scale-up our production
capability and maintain adequate levels of inventory. We may not be able to
produce 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. This reliance
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.
If ethical, privacy or other concerns surrounding the use of genetic
information become widespread, we may have less demand for our products and
services.
Our customers use our products and services for genetic testing. Genetic
testing has raised ethical issues regarding privacy 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
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predisposition to certain conditions, particularly for those that have no
known cure. Similarly, such concerns may lead individuals to refuse to use
genetics tests even if permissible. Any of these scenarios could reduce the
potential markets for our products and services, 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 components and materials used in our
products.
We rely on outside vendors to supply the components and materials used in
our products. Some of these components and materials are obtained from a
single supplier or a limited group of suppliers. We have experienced quality
problems with, and delays in receiving, oligonucleotides, which are necessary
materials used in connection with the operation of the MassARRAY system. 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 and
materials due to capacity constraints, a discontinuance of a product by a
supplier or other supply constraints;
. reduced control over quality and pricing of components and materials; and
. delays and long lead times in receiving components or materials from
vendors.
If our access to necessary tissue samples or information is restricted, we
will not be able to continue to develop our business.
We need access to normal and diseased human tissue samples, other
biological materials and related clinical and other information to continue to
develop our products and services. We compete with many other companies for
these materials and information. We may not be able to obtain or maintain
access to these materials and information. In addition, government regulation
in the United States and foreign countries could result in restricted access
to, or use of, human and other tissue samples. If we lose access to sufficient
numbers or sources of tissue samples, or if tighter restrictions are imposed
on our use of the information generated from tissue samples, our business will
suffer.
We may not successfully integrate future acquisitions.
In the future, we may acquire additional complementary companies or
technologies. Managing these acquisitions will entail numerous operational and
financial risks, 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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<PAGE>
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 a broad
range of companies in the United States and abroad that are engaged in the
development and production of products, services and strategies to 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, services and have
greater name recognition than we do, and may offer discounts as a competitive
tactic. In addition, several early 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 may also compete
against some of our customers, which may adversely affect our relationships
with them.
We have a small number of sales and customer support personnel with limited
experience in selling and servicing our products.
Our sales force may not be sufficiently large or knowledgeable to
successfully penetrate the market. We may not be able to expand our sales
force to meet our commercial objectives. In addition, our sales and customer
support personnel 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 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 or patent litigation against third
parties, such as infringement suits. 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 U.S.
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 U.S. Patent and Trademark Office, and the approval or rejection of
patent applications may take several years.
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
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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
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 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.
We may be unable to obtain licenses to patented SNPs, which could prevent us
from obtaining significant revenue or becoming profitable.
The U.S. Patent and Trademark Office has issued and continues to issue
patents claiming SNP discoveries and their related associations and functions.
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.
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 are also 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.
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We may lose money when we exchange foreign currency received from
international sales into U.S. dollars.
A significant portion of our business is expected to be conducted in
currencies other than the U.S. dollar. We recognize foreign currency gains or
losses arising from our operations in the period incurred. As a result,
currency fluctuations between the U.S. 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 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.
Our revenues are derived primarily from, and are subject to risks faced by,
pharmaceutical and biotechnology companies and governmental and others
research institutions.
We expect that our revenues in the foreseeable future will be derived
primarily from products and services provided to pharmaceutical and
biotechnology companies and governmental and other research institutions.
Accordingly, our success will depend upon their demand for our products. Our
operating results may fluctuate substantially due to reductions and delays in
research and development expenditures by these customers. These reductions and
delays may result from factors such as:
. changes in economic conditions;
. changes in government programs that provide funding;
. changes in the regulatory environment affecting health care and health
care providers;
. pricing pressures and reimbursement policies;
. market-driven pressures on companies to consolidate and reduce costs; and
. other factors affecting research and development spending.
None of these factors is within our control.
We may not have adequate insurance and if we become subject to product
liability claims, we may experience reduced demand for our products and
services 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 production and laboratory facilities are damaged, we could experience
lost revenue and our business would be seriously harmed.
Our only production 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,
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communications failure, unauthorized entry or other events could result in a
loss of important data or cause us to cease development and production 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 personnel, 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 primarily in deutsche marks.
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 liabilities of our German subsidiary, excluding
intercompany debt, were $2.9 million at September 30, 2000. A 1% decrease in
the value of German deutsche marks relative to the US dollar would result in
approximately a $32,000 unrealized foreign translation gain. As of January
2002, the functional currency of our German subsidiary will be the Euro.
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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 3, 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 September 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 September 30, 2000, approximately $3.2 million
has been used to payoff long-term and other debt, approximately $3.0 million
to purchase equipment and approximately $18.0 million for general corporate
purposes, including hiring additional personnel, development and manufacturing
of products, expansion of facilities and expenses for filing and pursing
patent applications; the balance is invested in a variety of interest-bearing
instruments including investment-grade corporate bonds, commercial paper and
money market accounts.
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.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.69 High Throughput Olignonucleotide Manufacturing and Supply and
MassARRAY Analytical System Purchase Agreement, dated August 24, 2000,
between SEQUENOM, Inc. and Integrated DNA Technologies, Inc.
10.70 Technology Access and Collaboration Agreement, dated September 29,
2000 between SEQUENOM, Inc. and Incyte Genomics, Inc.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEQUENOM, Inc.
Date: November 14, 2000 /s/ Stephen L. Zaniboni
By: _________________________________
Stephen L. Zaniboni
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
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