<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 000-30267
ORCHID BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3392819
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
303 COLLEGE ROAD EAST, PRINCETON, NJ 08540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 750-2200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [_] No [X]
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of July 30, 2000, was 33,164,609.
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION......................................... 1
Item 1. Financial Statements......................................... 1
Condensed Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999.................................... 2
Condensed Consolidated Statements Of Operations for the three
and six months ended June 30, 2000 and 1999 (unaudited).............. 3
Consolidated Statements Of Cash Flows for the six months ended
June 30, 2000 and 1999 (unaudited)................................... 4
Notes To Condensed Consolidated Financial Statements (unaudited)..... 5
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations.................................... 10
Item 3. Quantitative And Qualitative Disclosures About Market Risk... 16
PART II OTHER INFORMATION........................................... 18
Item 1. Legal Proceedings............................................ 18
Item 2. Changes In Securities And Use Of Proceeds.................... 18
Item 3. Defaults Upon Senior Securities.............................. 18
Item 4. Submission Of Matters To A Vote Of Security Holders.......... 19
Item 5. Other Information............................................ 19
Item 6. Exhibits And Reports On Form 8-K............................. 19
i
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 49,675 $33,804
Restricted cash........................................................... -- 400
Short-term investments.................................................... 38,176 ----
Accounts receivable, net.................................................. 4,519 2,102
Inventory................................................................. 1,968 ---
Other current assets...................................................... 1,834 1,041
-------- -------
Total current assets...................................................... 96,172 37,347
Equipment and leasehold improvements, net................................. 12,497 9,474
Goodwill, net............................................................. 30,004 31,051
Other intangibles, net.................................................... 15,732 16,519
Other assets.............................................................. 1,499 465
-------- -------
Total assets.............................................................. $155,904 $94,856
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable--bank........................................................ $ -- $ 1,000
Current portion of long-term debt......................................... 1,158 1,141
Accounts payable.......................................................... 4,369 2,302
Accrued expenses.......................................................... 2,088 4,777
Due to related party...................................................... -- 64
Deferred revenue.......................................................... 1,219 789
-------- -------
Total current liabilities................................................. 8,834 10,073
Long-term debt, less current portion...................................... 3,598 4,122
Commitments and contingencies
Manditorily redeemable convertible preferred stock, $.001 par
value, none authorized at June 30, 2000 (note 1):
Series C, at redemption value; issued
and outstanding 0 and 2,480,176 shares at June 30, 2000 and December 31,
1999, respectively........................................................ -- 27,530
Series E issued and outstanding 0 and
7,934,966 shares at June 30, 2000 and December 31, 1999,
respectively.............................................................. -- 39,035
Series E to be issued, at redemption value, (4,974,694 shares
at December 31, 1999)..................................................... -- 22,381
-------- -------
-- 88,946
-------- -------
See accompanying notes to condensed consolidated financial statements.
</TABLE>
1
<PAGE>
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- -----------
(UNAUDITED)
<S> <C> <C>
Stockholders' equity (deficit):
Preferred stock, $.001 par value. Authorized 5,000,000 shares;
no shares issued or outstanding...................................... $ -- $ --
Convertible preferred stock, $.001 par value (See note 11):
Series A; issued and outstanding 0 and
970,900 shares at June 30, 2000 and December 31, 1999, respectively.. -- 1
Series B, issued and outstanding 0 and
103,840 shares at June 30, 2000 and
December 31, 1999, respectively...................................... -- --
Common stock, $.001 par value. Authorized 50,000,000 shares;
Issued and outstanding 33,155,057 and 845,450 shares at June 30,
2000 and December 31, 1999, respectively............................. 33 1
Common stock to be issued (10,000 shares at
December 31, 1999)................................................... -- 76
Additional paid-in capital........................................... 239,710 50,325
Deferred compensation................................................ (19,966) (7,930)
Accumulated deficit.................................................. (76,305) (50,758)
--------- -----------
Total stockholders' equity (deficit)................................. 143,472 (8,285)
--------- -----------
Total liabilities and stockholders' equity (deficit)................. $ 155,904 $ 94,856
========= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
2000 1999 2000 1999
----------- -------- ---------- --------
<S> <C> <C> <C> <C>
Revenues:
Product revenue and access fees................................ $ 695 $ -- $ 930 $ --
Clinical laboratory testing.................................... 3,279 -- 6,160 --
Grant revenue.................................................. 86 307 378 307
Collaboration revenue.......................................... -- 250 -- 500
License and other revenue...................................... 534 -- 592 --
----------- -------- ---------- --------
Total revenues................................................. 4,594 557 8,060 807
----------- -------- ---------- --------
Operating expenses:
Cost of product revenue and access fees........................ 547 -- 610 --
Cost of clinical laboratory testing............................ 2,595 -- 4,835 --
Selling, general and administrative............................ 8,233 2,365 13,176 4,000
Research and development....................................... 12,341 3,381 16,742 6,157
----------- -------- ---------- --------
Total operating expenses....................................... 23,716 5,746 35,363 10,157
----------- -------- ---------- --------
Other income (expense):
Interest income................................................ 1,300 29 2,090 106
Interest expense............................................... (146) (500) (258) (504)
Other expense.................................................. -- -- (76) --
----------- -------- ---------- --------
1,154 (471) 1,756 (398)
----------- ----------
Net loss....................................................... (17,968) (5,660) (25,547) (9,748)
Beneficial conversion feature of preferred stock............... -- -- 29,574 --
----------- -------- ---------- --------
Net loss allocable to common stockholders...................... $ (17,968) $ (5,660) $ (55,121) $ (9,748)
=========== ======== ========== ========
Basic and diluted net loss per share allocable to common
stockholders (note 2).......................................... $(0.94) $(7.77) $(5.52) $(13.39)
=========== ======== ========== ========
Shares used in computing basic and diluted net loss per share
allocable to common stockholders (note 2)...................... 19,040,917 728,890 9,981,418 727,934
=========== ======== ========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------
<S> <C> <C>
2000 1999
------- ------
Cash flows from operating activities:
Net loss................................................. (25,547) (9,748)
Adjustments to reconcile net loss to
net cash used in operating activities:
Noncash research and development expense................. 4,775 --
Noncash compensation expense............................. 4,016 294
Noncash interest expense................................. -- 90
Depreciation and amortization............................ 2,701 457
Changes in assets and liabilities:
Accounts receivable...................................... (2,417) --
Inventory................................................ (1,968) --
Other current assets..................................... (793) 164
Other assets............................................. 332 140
Accounts payable......................................... 2,067 244
Accrued expenses......................................... (2,689) 411
Due to related party (64) (381)
Deferred revenue......................................... 430 (250)
------- ------
Net cash used in operating activities (19,157) (8,579)
------- ------
Cash flows from investing activities:....................
Capital expenditures..................................... (3,756) (4,976)
Decrease in restricted cash.............................. 400 --
Maturities of short-term investments..................... 7,703 7,615
Purchase of short term investments....................... (45,879) --
------ ------
Net cash (used in) provided by investing activities...... (41,532) 2,639
------- ------
Cash flows from financing activities:
Net proceeds from issuance of Series E manditorily
redeemable convertible preferred stock................... 29,574 --
Proceeds from issuance of debt from line of credit....... -- 1,894
Repayment of debt on lines of credit..................... (1,507) (58)
Proceed from convertible term notes...................... -- 6,515
Proceeds from issuance of common stock................... 48,405 --
Proceed from issuance of common stock warrants........... -- 1,075
Proceeds from exercise of common stock options........... 88 2
------- ------
Net cash provided by financing activities................ 76,560 9,428
------- ------
Net increase in cash and cash equivalents................ 15,871 3,488
Cash and cash equivalents at beginning of period......... 33,804 473
------- ------
Cash and cash equivalents at end of period............... 49,675 3,961
======= ======
Supplemental disclosure of noncash financing and
investing activities:
Deferred compensation from grant of common stock
options................................................ 16,052 638
Issuance of common stock and common stock warrants
for technology licenses................................. 4,775 --
Issuance of common stock in connection with
supply agreement....................................... 1,500 --
Issuance of common stock warrants in connection..........
with borrowings on line of credit........................ -- 8
Conversion of manditorily redeemable convertible preferred
stock and convertible preferred stock into common stock.. 118,521 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Orchid
BioSciences, Inc. and subsidiaries (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 annual
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
that may be expected for a full year.
The accompanying unaudited condensed consolidated financial statements include
the results of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
footnotes thereto included in the Company's Registration Statement on Form S-1
(File No. 333-30774) filed with the Securities and Exchange Commission and
declared effective on May 4, 2000.
(2) Net Loss Per Share
Net loss per share is computed in accordance with SFAS No. 128, "Earnings Per
Share," by dividing the net loss allocable to common stockholders by the
weighted average number of shares of common stock outstanding. During each
period presented, the Company has certain options, warrants, convertible
preferred stock and/or mandatorily redeemable convertible preferred stock, which
have not been used in the calculation of diluted net loss per share because to
do so would be anti-dilutive. As such, the numerator and the denominator used in
computing both basic and diluted net loss per share allocable to common
stockholders for each period are equal. The Company has reflected $29,573,564 as
a beneficial conversion feature in the net loss allocable to common stockholders
for the six months ended June 30, 2000 for the 5,971,903 shares of Series E
mandatorily redeemable convertible preferred stock ("Series E stock") sold in
January 2000. The amount of the beneficial conversion feature was calculated as
the difference between the fair value of the Company's common stock on the
commitment date of $11.75 per share over the conversion price of $4.50 per
share, with a limitation that the beneficial conversion feature can not exceed
the gross proceeds received from the issuance of the stock.
(3) GeneScreen, Inc. Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined
results of operations of Orchid and GeneScreen, Inc. ("GeneScreen") as if the
acquisition of GeneScreen by Orchid had occurred as of January 1, 1999, after
giving effect to certain pro forma adjustments, including amortization of
goodwill and other intangibles, and decreased interest expense from the
cancellation of Orchid's note payable to GeneScreen. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had Orchid and GeneScreen constituted a single entity during this
period or the results of operations which may occur in the future.
5
<PAGE>
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------- --------------------------
(in thousands)
1999 1999
<S> <C> <C>
Revenues $ 3,306 $ 6,851
Net loss allocable to common stockholders $ (6,449) $(39,951)
Basic and diluted net loss per share allocable
to common stockholders $ (8.84) $ (54.88)
</TABLE>
(4) Employment Agreements
Effective January 2000, the Company entered into three year employment
agreements with two executives of the Company. In certain cases, the Company may
be obligated to pay the executive's salary and benefits for up to eighteen
months after leaving the Company.
(5) Sale of Convertible Preferred Stock
In January 2000, the Company completed the sale of 5,971,903 shares of Series E
stock for gross proceeds of $29,573,564. The issuance of these securities
resulted in a $29,573,564 beneficial conversion feature which increased net loss
per share allocable to common stockholders in the six months ended June 30,
2000. The fair value of the Company's common stock on the commitment date was
$11.75; however, the amount of the beneficial conversion feature was limited to
the amount of gross proceeds received from the issuance of the Series E stock.
The Company also issued 1,040,341 shares of Series E stock related to the
conversion of the Affymetrix convertible promissory note and for cash received
by December 31, 1999 for which shares were not issued, and which was included in
Series E stock to be issued at December 31, 1999.
(6) Stock Option Grants
In January and on February 2, 2000, the Company granted 36,500, 679,400, 40,750
and 40,750 stock options under the 2000 Employee, Director and Consultant Stock
Plan at exercise prices of $1.25, $6, $12 and at the per share price of the
initial public offering (see note 12), respectively, for which an initial
compensation charge of approximately $4.3 million was recorded in the first
quarter of 2000 and will be recognized over the respective vesting periods of
the options. Some of these amounts result from grants to consultants which are
subject to remeasurement at the end of each reporting period based upon the
changes in the fair value of the common stock until the consultant completes
performance under the option agreement. In addition, the Company issued 600,000
performance based stock options at exercise prices of $6.00 for which
compensation expense will be measured as the difference between the fair value
of our common stock at the time the performance criteria is met and the exercise
price and will be immediately recorded as compensation expense.
On March 31, 2000, the Company granted 289,660 stock options under the 1995
Stock Incentive Plan at exercise prices of $12 per share for which an initial
compensation charge of approximately $800,000 was recorded in the first quarter
of 2000 and will be recognized over the respective vesting periods of the
options. Some of these amounts result from grants to consultants which are
subject to remeasurement at the end of each reporting period based upon the
changes in the fair value of the common stock until the consultant completes
performance under the option agreement.
During the quarter ended June 30, 2000, the Company issued approximately 300,000
stock options at various exercise prices to certain employees, directors and
consultants for which an initial compensation charge of approximately $5.1
million was recorded and will be recognized over the respective vesting periods
of the options. Some of these amounts result from grants to consultants which
are subject to remeasurement at the end of each reporting period based upon the
changes in the fair value of the common stock until the consultant completes
performance under the option agreement.
(7) 2000 Employee, Director and Consultant Stock Incentive Plan
On February 11, 2000 and March 17, 2000, respectively, the Board of Directors
and stockholders of the Company approved the 2000 Employee, Director and
Consultant Stock Incentive Plan ("Plan") for the issuance of common stock,
incentive stock options and non-qualified stock options to employees, directors
and consultants. The Board of Directors also authorized the granting of up to a
total of 1,500,000 options under this Plan and 3,500,000 under the 1995 Stock
Incentive Plan.
6
<PAGE>
(8) ABS Termination
Effective February 15, 2000, the Company's Collaborative Development and
Marketing Agreement with Advanced Bioanalytical Services, Inc. ("ABS") was
terminated. The Company paid ABS $75,000 in full and final settlement of all
amounts owed under this agreement.
(9) NEN Agreement
On February 21, 2000, the Company entered into an Agreement for the License and
Supply of Terminators with NEN Life Science Products, Inc. ("NEN") pursuant to
which NEN has agreed to supply the Company with terminators for use in the
Company's SNPkits. In consideration of NEN's agreement to supply the Company
with terminators at favorable prices, the Company sold NEN 125,000 shares of its
common stock for a purchase price of $750,000 and paid NEN an up-front fee of
$750,000. The Company also agreed to pay NEN a certain percentage of net sales
revenue based on the number of SNPkits sold, in certain cases. The 125,000
shares had a fair value of $1,500,000 on the date of the agreement. Since the
products being supplied are used in the Company's current products and may be
used in future products, the Company deferred and is amortizing the $750,000 up-
front fee plus the $750,000 excess of the fair value of the issued common stock
over the purchase price (or a total of $1.5 million) over the estimated four
year term of the agreement on a straight-line basis. The Company measured the
fair value of the common stock on the date of the agreement as these shares were
fully paid and nonforfeitable on that date. The Company is required to purchase
quantities of products with an approximate minimum value during each annual
period from the effective date as follows: first year $333,000, second year
$700,000, third year $990,000 and fourth year $1,320,000. Either party can
terminate the agreement any time after four years from the commencement date,
without cause, upon 90 days written notice.
(10) Sarnoff Agreement
On April 13, 2000, the Company amended its License and Option Agreement with
Sarnoff Corporation ("Sarnoff"). Under the terms of the amendment, in lieu of
all future cash payment, research funding, potential royalty payment and stock
issuance obligations, the Company made a payment to Sarnoff of approximately $3
million, issued 250,000 shares of common stock and granted five-year warrants
to purchase 75,000 shares of common stock to Sarnoff at an exercise price of
$8.00 per share. The Company exercised the remaining two option fields on a
non-exclusive basis as a result of this amendment. Previously, on February 2,
2000, the Company issued 100,000 shares of common stock to Sarnoff as an advance
on the issuances which would be owed in December 2000 for the two option fields
previously issued under the License and Option Agreement. As this licensed
technology has not reached technological feasibility and has no alternative
future uses, the cash payment of approximately $3.0 million and the fair value
of the equity securities of approximately $4.8 million was charged to research
and development expense; $1.2 million was recorded in the quarter ended March
31, 2000 and $6.6 was recorded in the quarter ended June 30, 2000.
(11) Change in Authorized Shares
On May 10, 2000, the Company filed a restated certificate of incorporation which
increased its authorized shares of common stock to 50,000,000 shares, revoked
all existing preferred stock designations and authorized 5,000,000 shares of
preferred stock. The Board of Directors has the authority, without any further
stockholder approval, to determine the price, privileges and other terms of the
shares of unissued preferred stock.
(12) Initial Public Offering
In May 2000 the Company completed its initial public offering of 6,900,000
shares of common stock at a price of $8.00 per share (excluding underwriters'
discounts), generating net proceeds of approximately $48.4 million. All shares
of Series A Convertible Preferred Stock ("Series A stock"), Series B Convertible
Preferred Stock ("Series B stock"), and Series E stock outstanding as of the
closing date of the offering were automatically converted into shares of common
stock on a one-for-one basis. The 2,480,176 shares outstanding of Series C
Convertible Preferred Stock ("Series C stock") converted into 4,825,259 shares
of common stock. No dividends were paid on any of the Series A, B, C, or E
stock.
7
<PAGE>
(13) Inventory
Inventory at June 30, 2000 consists entirely of raw materials.
(14) Legal Matters
The Company is not a party to any material legal proceeding. The Company is
engaged in discussions with Motorola, Inc. ("Motorola") in an attempt to resolve
certain areas of disagreement that have arisen under the existing collaboration
in the area of microfluidics. The primary issue of disagreement between the
parties relates to whether, under the terms of the agreement with Motorola,
Motorola has a right to obtain a license to the Company's SNP-IT technology for
use with Motorola's microfluidic chips. While the Company believes that, under
the terms of the agreement, Motorola has no rights to its SNP-IT technology,
there can be no assurance that an agreement can be reached with Motorola on this
issue or that the Company would prevail if this dispute were to develop into
arbitration or litigation. Nonetheless, the Company believes that, even if it
fails to successfully resolve this issue or to prevail in any such arbitration
or litigation, it would only be obligated to grant Motorola a non-exclusive
license to use its SNP-IT technology with their microfluidic chips on terms no
less favorable than those offered to other licensees. The Company does not
believe that such a result is likely to have a material adverse affect on the
Company's business, financial condition and operating results.
(15) Self-Insurance Reserve
GeneScreen Inc., the Company's wholly owned subsidiary, is self-insured for the
risk of loss relating to certain litigation claims that might arise from
GeneScreen's testing results. However, due to provisions in certain service
contracts, GeneScreen is insured for claims arising from testing performed under
the Texas, Ohio and Arizona contracts. Insurance coverage began in 1995 for
testing under the Texas contract, in 1997 for testing under the Ohio and Arizona
contracts and all other contracts in August 1998. Management estimates future
litigation costs based on historical litigation experience. The accrued
litigation reserve for the self-insured risk at June 30, 2000 was $156,000.
8
<PAGE>
(16) Segment Information
The Company operates in two segments, each of which are strategic businesses
that are managed separately because each business develops, manufactures and
sells distinct products and services. The segments and a description of their
business are as follows: (i) the Company prior to the acquisition of GeneScreen
("Orchid"), which performs SNP scoring analysis and markets related equipment
and consumables; and (ii) GeneScreen, which performs DNA laboratory analysis for
paternity, transplantation and forensic testing.
The Company evaluates performance of and allocates resources to the segments.
Prior to the acquisition of GeneScreen on December 30, 1999, the Company was
operated and managed as one business. Segment information as of and for the
three and six months ended June 30, 2000 for Orchid and GeneScreen is as
follows:
<TABLE>
<CAPTION>
Orchid GeneScreen Total
-------- ----------- --------
(in thousands)
<S> <C> <C> <C>
Six months:
Revenues from external customers 1,900 6,160 8,060
Segment net loss (23,660) (1,887) (25,547)
Three months:
Revenues from external customers 1,315 3,279 4,594
Segment net loss (17,023) (945) (17,968)
Total assets 112,929 42,975 155,904
</TABLE>
(17) Subsequent Events
In July 2000, the Company entered into a collaboration with the SNP Consortium
Ltd. under which the Company will perform certain SNP scoring service for
determining the allelic frequency of 60,000 SNP genomic markers in diverse
populations. The term of this collaboration is through the earlier of March 1,
2001 or completion of the project. The Company will bear all costs to perform
these services. Incremental costs are estimated to be between $3 to $6 million
and the Company will additionally need to accelerate previously planned capital
expenditures of approximately $4 million. In exchange, the Company has the right
to commercialize certain technology developed as a result of performing these
services.
9
<PAGE>
ORCHID BIOSCIENCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations as of June 30, 2000 and for the three and six month periods ended
June 30, 2000 and 1999 should be read in conjunction with the sections of our
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission and declared effective on May 4, 2000, as amended, entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The following discussion of the financial condition and results of
our operations should be read in conjunction with our Condensed Consolidated
Financial Statements, including the Notes thereto, included elsewhere in this
Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, and Section
27A of the Securities Act of 1933, as amended. When used in this report or
elsewhere by management from time to time, the words "believe," "anticipates,"
"intends," "plans," "estimates," and similar expressions are forward looking
statements. Such forward looking statements contained herein are based on
current expectations. Prospective investors are cautioned that any such forward-
looking statements are not guarantees of future performance and involve risks
and uncertainties. Actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors. For
a more detailed discussion of such forward looking statements and the potential
risks and uncertainties that may impact upon their accuracy, see the "Forward
Looking Statements" section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations and also the potential risks and
uncertainties set forth in the "Overview" section hereof and in the "Risk
Factors" section of our final prospectus dated May 4, 2000, comprising a part of
our Registration Statement on Form S-1 filed with the Securities and Exchange
Commission. Except as required by law, we undertake no obligations to update any
forward looking statements. You should also carefully consider the factors set
forth in other reports or documents that we file from time to time with the
Securities and Exchange Commission.
OVERVIEW
We are engaged in the development and commercialization of genetic diversity
technologies, products and services. Since we began operations in March 1995, we
have devoted substantially all of our resources to the development and
application of a portfolio of products and services using our proprietary
biochemistry for scoring SNPs and microfluidics technologies for applications in
drug discovery, principally in the field of pharmacogenetics and DNA synthesis.
For the first three years of our existence, we were primarily focused on
developing our microfluidics technologies for applications in high-throughput
synthesis of small molecules under collaborative research programs with
SmithKline Beecham and Sarnoff Corporation. During this period, we derived most
of our revenue from payments from SmithKline Beecham. Revenue during these early
years fluctuated due to the timing of both work performed under the contract
with SmithKline Beecham and of earning milestone revenue. After management and
an independent third-party consulting firm conducted a strategic review of our
business strategy in the first half of 1998, we decided to apply our research
and development efforts to the fields of pharmacogenetics and DNA synthesis. As
a result of this review of our business focus, we acquired substantially all of
the assets of Molecular Tool, Inc., in September 1998, a wholly-owned subsidiary
of GeneScreen, Inc., for approximately $7.1 million in cash, debt and equity
securities. Molecular Tool's proprietary SNP-IT primer-extension technology for
scoring SNPs matched very well with our microfluidics technologies that we
developed earlier. Together, these technologies formed the basis for our current
SNP technology, products and services.
On December 30, 1999, we acquired GeneScreen, Inc. for a net purchase price of
$42.7 million consisting of a combination of cash and shares of our Series E
mandatorily redeemable convertible preferred stock, offset by the cancellation
of certain debt owed to GeneScreen. We included $28.5 million as a beneficial
conversion feature in the purchase price. The amount of the beneficial
conversion feature was calculated as the difference between the $11.75 per share
fair value of our common stock on December 22, 1999, the commitment date which
was the date of the merger agreement for the acquisition, over the $4.50 per
share conversion price of the stock. GeneScreen is a company engaged in DNA
laboratory analysis for paternity, forensics and transplantation testing and had
revenues of approximately $13.7 million in 1999. In connection with the
acquisition of GeneScreen, we recorded approximately $43.1 million of goodwill
and other intangible assets, which we will amortize over periods ranging from 4
to 15 years.
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Most of our current activities and resources are directed toward commercializing
our SNP scoring products and services which apply our proprietary SNP-IT primer-
extension technology. We expect to recognize revenues from both the
placements of our SNPstream instrument systems and the sales of our SNPware
consumables. We also expect each SNPstream system we place will generate a
recurring revenue stream from the sale of our SNPware consumables. We also
provide, or plan to provide, a variety of genetic diversity services to the
pharmaceutical and biotechnology industries through our ultra high-throughput
MegaSNPatron facility.
GeneScreen's established business in paternity testing, forensics and
transplantation supports our goal of building our business in genetic diversity.
We believe our SNP-IT and microfluidics technologies will be able to improve the
performance of GeneScreen's genetic testing laboratories. We plan to use the
clinically approved laboratories at GeneScreen to expand our SNP scoring
services to pharmacogenetics testing of patient samples in pharmaceutical
clinical trials. We also plan to use these laboratories to conduct SNP scoring
services we plan to offer via the Internet.
GeneScreen's DNA testing business is dependent upon contracts with various
states and counties to provide paternity testing. These contracts are generally
put out to bid by each respective state every one to three years. The contract
bidding process is highly competitive and the award varies from state to state.
Some states and counties award contracts solely based on the lowest price while
others use a scoring matrix to achieve the desired mix of price, quality and
service. GeneScreen derives its transplantation business through tissue typing
and donor drive support services with independent bone marrow donor registries,
under contract with the National Marrow Program(R) (NMDP), and on a fee-for-
service basis directly with NMDP-affiliated donor centers. Bone marrow
registries are not-for-profit agencies that facilitate hematopoietic cell
transplants through organizing volunteer donor drives, maintaining donor
registries and other educational services. With the acquisition of GeneScreen,
we expect to generate service revenue in fiscal year 2000 and use GeneScreen's
CLIA approved testing laboratories to expand our genetic diversity testing
business and services.
Our ability to achieve profitability will depend in part on our ability to
successfully develop and commercialize our proprietary SNP scoring and
microfluidics technologies in the form of products and services for
pharmaceutical and biotechnology companies and research institutions. We
introduced our SNPstream 25K SNP scoring system, SNPware consumables and related
services in late 1999. We intend to develop additional models of SNPstream
instruments with lower throughput capabilities. Because our proprietary SNP-IT
primer-extension technology is very adaptable to other hardware platforms, we
intend to offer our SNPware kits and SNP-IT technology for use on instruments
made or sold by other companies. Our collaborations with Affymetrix, Inc. and
Amersham Pharmacia Biotech are examples of this platform propagation strategy.
We based our proprietary SNP value creation strategy on the creation of
proprietary rights covering the identification of SNPs and their associations to
medically important attributes of patients. We intend to develop intellectual
property rights in this area through collaborations with members of our Clinical
Genetics Network, pharmaceutical and biotechnology companies. We do not expect
royalties from commercial sale or license of intellectual property rights
generated by using our technologies for at least several years, if at all.
Through December 31, 1999, we had recorded an aggregate of $9.8 million of
deferred compensation expense resulting from the granting of stock options to
employees, directors or consultants covering shares of common stock, which stock
options had exercise prices below the fair value of the underlying common stock
at the date of their grant. Net of prior amortization, net deferred compensation
of $7.9 million at December 31, 1999 will be amortized over the vesting periods
of the respective options, typically four years. In January and February 2000,
we issued 36,500, 679,400, 40,750 and 40,750 stock options at exercise prices of
$1.25, $6.00, $12.00 and at the per share price of this offering, respectively,
for which we recorded deferred compensation of $4.3 million which will be
amortized over the respective vesting periods of the options. Included in the
679,400 options are 520,000 options granted to executive officers at an exercise
price of $6.00 per share for which we recorded deferred compensation of $3.1
million, which is included in the $4.3 million, and which will be amortized over
the respective vesting periods. On March 31, 2000, we granted 289,660 stock
options at exercise prices of $12.00 for which we recorded deferred compensation
of $800,000 which will be amortized over the respective vesting periods of the
options. In addition, in February 2000, we issued 600,000 performance based
stock options, at exercise prices of $6.00 per share, to executive officers, for
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which compensation expense will be measured as the difference between the fair
value of our common stock at the time the performance criteria is met and the
exercise price and will be immediately recorded as compensation expense. During
the quarter ended June 30, 2000, the Company issued approximately 300,000 stock
options at various exercise prices to certain employees, directors and
consultants for which an initial compensation charge of approximately $5.1
million was recorded and will be recognized over the respective vesting periods
of the options. Amortization of deferred compensation and compensation charges
from remeasurement of consultant options for the six months ended June 30, 2000
totaled $4.0 million.
We anticipate recording total compensation charges resulting from the
amortization of the deferred compensation recorded as of June 30, 2000
approximately as follows, in millions:
Six months ending, Year ending,
------------------ --------------------------------------
December 31
-----------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
$4.0 $7.2 $4.8 $3.5 $0.5
Some of these amounts result from grants to consultants which are subject to
remeasurement at the end of each reporting period based upon the changes in the
fair value of the common stock until the consultant completes performance under
his or her respective option agreement. Also, certain grants of performance
based options have been made for which no deferred compensation expense has been
recorded and for which compensation expense will be measured at the time the
performance criteria is met.
We have incurred losses since inception, and, as of June 30, 2000, we had total
stockholders' equity of $143.5 million, including an accumulated deficit of
$76.3 million. We anticipate incurring additional losses over at least the next
several years. We expect these losses to continue as we expand the
commercialization of our products and services to the research market and we
fully implement our proprietary SNP value creation business strategies. We
expect this expansion to result in increases in research and development,
marketing and sales, and general and administrative expenses. Payments under
strategic alliances, collaborations and licensing arrangements will be subject
to significant fluctuation in both timing and amount and therefore our results
of operations for any period may not be comparable to the results of operations
for any other period.
Sources of Revenue and Revenue Recognition
We have had, and expect in the future to have, several sources of revenue. Prior
to our acquisition of GeneScreen, we derived substantially all of our revenue
from research and development collaborations, technology grants and awards from
several governmental agencies. GeneScreen derives its revenue from the
performance of laboratory DNA testing services. In 1999, we derived our first
revenues from the placement of our first commercial SNPstream hardware system,
and commencing in 2000, we anticipate deriving increasing amounts of revenue
from the sale of SNPware consumables.
In connection with the research and development collaborations that provided the
majority of our revenue in the early years of our corporate history, we
recognized revenue when related research expenses were incurred and when we
satisfied specific performance obligations under the terms of the respective
research contracts. Up front licensing fees obtained in connection with such
agreements are deferred and amortized over the estimated performance period of
the respective research contract.
GeneScreen DNA laboratory and SNP scoring services revenue is recognized on an
accrual basis at the time test results are reported. Deferred revenue represents
the unearned portion of payments received in advance of tests being completed.
To date, we have offered our SNPstream system hardware in two basic types of
transactions, either a purchase and sale or an arrangement in which the customer
takes possession of the system and pays an access fee to use it. Revenue on the
sale of the hardware is recorded upon transfer of title and after we have met
all of our significant performance obligations. Access fees payments, which are
received when a system is initially placed, are deferred and revenue is
recognized on a straight-line basis over the term of the agreement.
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We have only recently begun to record revenue from the sale of SNPware
consumables. Such revenue is recognized upon the transfer of title, generally
when the SNPware products are shipped to our customer from our facility.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999
Revenue. Revenue for the three months ended June 30, 2000 of $4.6 million
represents an increase of $4.0 million as compared to revenue of $0.6 million
for the corresponding period of 1999. The increase was largely due to the
addition of our GeneScreen DNA testing operations and the access fees related to
the placements of our SNPstream(TM) 25K instrument systems, sales of SNPware(TM)
consumables and license revenue from an agreement to license our SNP-IT
technology. The results of operations for the quarter ended June 30, 1999 do
not include those of GeneScreen, Inc., which we acquired on December 30, 1999.
Cost of product revenue and access fees. Cost of product revenue and access fees
for the three months ended June 30, 2000 was $0.5 million. The increase was
attributable to the costs associated with the SNPstream instrument placements,
primarily depreciation, and consumables sold, in the three months ended June 30,
2000. There were no sales for the quarter ended June 30, 1999.
Cost of clinical laboratory testing. Cost of clinical laboratory testing was
$2.6 million for the three months ended June 30, 2000. The increase was
attributable to the acquisition of GeneScreen on December 30, 1999, which
provides 100% of the clinical laboratory testing.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries and related expenses for
executive, finance and other administrative personnel, recruiting expenses,
professional fees, legal expenses resulting from intellectual property
prosecution and protection, and other corporate expense including business
development and general legal activities. Selling, general and administrative
expenses for the three months ended June 30, 2000 was $8.2 million, an increase
of $5.8 million, as compared to $2.4 million for the corresponding period of
1999. This increase was primarily attributable to the expansion of
administration facilities and the hiring of additional personnel as we increased
our executive and administrative staffing in anticipation of becoming a public
company and supporting our future growth, amortization of deferred compensation
expense of $2.4 million and operating costs of $1.6 million related to
GeneScreen which was acquired on December 30, 1999, of which $0.8 million
represents amortization of intangibles related to the acquisition.
Research and development expenses. Research and development expenses consist
primarily of salaries and related personnel costs, fees paid to consultants and
outside service providers for chip development, material costs for prototypes
and test units, and other expenses related to the design, development, testing
and enhancement of our products. Research and development expenses for the
three months ended June 30, 2000 was $12.3 million, compared to $3.4 million for
the corresponding period of 1999. The increase in research and development
expenses of $8.9 million, was primarily attributable to increased expenses as we
hired additional research and development personnel, increased purchases of
laboratory supplies, increased equipment depreciation, amortization of deferred
compensation expense of $0.8 million, increased facilities expenses in
connection with the expansion of our internal and collaborative research efforts
and $6.6 million related to a $3.0 million cash payment made to and the fair
value of 250,000 shares of common stock and 75,000 warrants to purchase common
stock issued to Sarnoff Corporation under an amendment to a License and Option
Agreement. As the technology licensed under this agreement has not reached
technological feasibility and has no alternative uses, the $6.6 million has been
charged to research and development. Future research and development expenses
are expected to increase as additional personnel are hired and research and
development facilities are expanded to accommodate our strategic collaborations
and internal research.
Interest income. Interest income for the three months ended June 30, 2000 was
$1.3 million, compared to interest income of approximately $0 for the first
three months of 1999. This increase was primarily due to interest received on
larger cash, cash equivalent and short-term investment balances which we held as
a result of our receipt of proceeds from our Series E private placement in
December 1999 and January 2000 and our initial public offering in May 2000,
offset by amounts used in operating activities.
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Interest expense. Interest expense for the three months ended June 30, 2000 was
$0.1 million compared to $0.5 million in the corresponding period in 1999. This
was due to greater outstanding debt balance related to the bridge financing
completed in June 1999 as compared to the lower outstanding debt balance in 2000
comprised entirely of borrowings on our equipment line of credit.
Net loss allocable to common stockholders. Due to the factors discussed above,
for the three months ended June 30, 2000, we reported a net loss allocable to
common stockholders of $18.0 million as compared to $5.7 million in the
corresponding period in 1999.
Six Months Ended June 30, 2000 and 1999
Revenue. Revenue for the six months ended June 30, 2000 of $8.1 million
represents an increase of $7.3 million as compared to revenue of $0.8 million
for the corresponding period of 1999. The increase was largely due to the
addition of our GeneScreen DNA testing operations and the access fees related to
the placements of our SNPstream(TM) 25K instrument systems, Sales of
consumables, license revenue from an agreement to license our SNP-IT technology
and grant revenue. The results of operations for the six months ended June 30,
1999 do not include those of GeneScreen, Inc., which we acquired on December 30,
1999.
Cost of product revenue and access fees. Cost of product revenue and access fees
for the six months ended June 30, 2000 was $0.6 million. The increase was
attributable to the costs associated with the SNPstream instrument placements,
primarily depreciation, and consumables sold, in the first six months of 2000.
There were no sales for the six months ended June 30, 1999.
Cost of clinical laboratory testing. Cost of clinical laboratory testing was
$4.8 million for the six months ended June 30, 2000. The increase was
attributable to the acquisition of GeneScreen on December 30, 1999, which
provides 100% of the clinical laboratory testing.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries and related expenses for
executive, finance and other administrative personnel, recruiting expenses,
professional fees, legal expenses resulting from intellectual property
prosecution and protection, and other corporate expense including business
development and general legal activities. Selling, general and administrative
expenses for the six months ended June 30, 2000 were $13.2 million, an increase
of $9.2 million, as compared to $4.0 million for the corresponding period of
1999. This increase was primarily attributable to the expansion of
administration facilities and the hiring of additional personnel as we increased
our executive and administrative staffing in anticipation of becoming a public
company and supporting our future growth, amortization of deferred compensation
expense of $3.2 million and operating costs of $3.1 million related to
GeneScreen which was acquired on December 30, 1999, of which $1.6 million
represents amortization of intangibles related to the acquisition.
Research and development expenses. Research and development expenses consist
primarily of salaries and related personnel costs, fees paid to consultants and
outside service providers for chip development, material costs for prototypes
and test units, and other expenses related to the design, development, testing
and enhancement of our products. Research and development expenses for the six
months ended June 30, 2000 were $16.7 million, compared to $6.2 million for the
corresponding period of 1999. The increase in research and development expenses
of $10.5 million for the six months ended June 30, 2000, was primarily
attributable to increased expenses as we hired additional research and
development personnel, increased purchases of laboratory supplies, increased
equipment depreciation, amortization of deferred compensation expense of $0.8
million, increased facilities expenses in connection with the expansion of our
internal and collaborative research efforts and $7.8 million related to a $3.0
million cash payment made to and the fair value of 350,000 shares of common
stock and 75,000 warrants to purchase common stock issued to Sarnoff Corporation
as an advance on the issuances that would have been owed in December 2000 under
a License and Option Agreement and an amendment of that agreement. As the
technology licensed under this agreement has not reached technological
feasibility and has no alternative uses, the $7.8 million has been charged to
research and development. Future research and development expenses are expected
to increase as additional personnel are hired and research and development
facilities are expanded to accommodate our strategic collaborations and internal
research.
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Interest income. Interest income for the six months ended June 30, 2000 of $2.1
million increased $2.0 million compared to interest income of $0.1 million for
the first six months of 1999. This $2.0 million increase was primarily due to
interest received on larger cash, cash equivalent and short- term investment
balances which we held as a result of our receipt of proceeds from our Series E
private placement in December 1999 and January 2000 and our initial public
offering in May 2000, offset by amounts used in operating activities.
Interest expense. Interest expense for the six months ended June 30, 2000 was
$0.3 million compared to $0.5 million for the corresponding period in 1999. This
was due to greater outstanding debt balance related to the bridge financing
completed in June 1999 as compared to the lower outstanding debt balance in
2000, comprised entirely of borrowings on our equipment line of credit.
Net loss allocable to common stockholders. Due to the factors discussed above,
for the six months ended June 30, 2000, we reported a net loss allocable to
common stockholders of $55.1 million as compared to $9.7 million for the first
six months of 1999. Net loss allocable to common stockholders includes a
beneficial conversion feature on preferred stock for the six months ended June
30, 2000 of $29.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through research
and development funding from collaborative partners and two private placements
of equity securities that closed in March 1998 and in December 1999 and January
2000 with aggregate net proceeds from the private placements of approximately
$102 million. The sale of the Series E mandatorily redeemable convertible
preferred stock in December 1999 resulted in a $44.6 million beneficial
conversion feature which was included in net loss allocable to common
stockholders in 1999. The closing of Series E mandatorily redeemable convertible
preferred stock in January 2000 resulted in an additional $29.6 million
beneficial conversion feature which was included in net loss allocable to common
stockholders in the six months ended June 30, 2000. In December 1998, we
obtained a secured $6.0 million equipment line of credit, for the purchase of
plant and equipment at our corporate headquarters and research and development
laboratories. At December 31, 1999, this funding commitment expired and at June
30, 2000 we had borrowings of $4.3 million outstanding under this facility. We
lease our corporate and primary research facility under an operating lease which
expires in 2008.
As part of our transition from a business model based on microfluidics
technologies to one based on SNP scoring technologies, on April 13, 2000 we
amended our License and Option Agreement with Sarnoff by making a single payment
of approximately $3.0 million, issuing 250,000 shares of common stock and
delivering a five-year warrant to purchase 75,000 shares of our common stock at
an exercise price of $8.00 per share. Previously, on February 2, 2000, we issued
100,000 shares of common stock to Sarnoff as an advance on the issuances which
would be owed in December 2000 for the two option fields previously exercised
under the License and Option Agreement. As the licensed technology has not
reached technological feasibility and has no alternative uses, the cash payment
of approximately $3.0 million and the fair value of the equity securities of
approximately $4.8 million was charged to research and development expense in
the six months ended June 30, 2000.
As of June 30, 2000, we had $87.9 million in cash and cash equivalents and
short-term investments, compared to $33.8 million as of December 31, 1999. This
increase primarily reflects the completion of our private placement of equity
securities and our initial public offering in May 2000 which generated
approximately $48.4 million of proceeds, net of underwriting discounts and
commissions and offering expenses, from the sale of a total of 6,900,000 shares
of common stock, including the underwriters' over-allotment shares. To date,
inflation has not had a material effect on our business. We believe that our
cash reserves, expected short-term revenue, and the net proceeds of the initial
public offering completed in May 2000 will be sufficient to fund our operations
through at least the next 18 months. We may need to access the capital markets
for additional financing to operate our ongoing business activities.
Net cash used in operations for the six months ended June 30, 2000 was
approximately $19.2 million compared with approximately $8.6 million for the
comparable period in 1999. Non-cash charges in the six months ended June 30,
2000 included compensation expense of $4.0 million and research and development
expense from the issuance of equity securities of $4.8 million and depreciation
and amortization expense of $2.7 million. Investing activities included $3.8
million in cash used during the six months June 30, 2000 for equipment purchases
and $38.2 million for the net purchases of short term investments. Financing
activities included the use of $1.5 million to repay debt from lines of credit
and proceeds of $48.4 million from our initial public offering in May 2000 and
$29.6 million from the sale of our Series E preferred stock in January 2000.
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Working capital increased to approximately $87.3 million at June 30, 2000 from
approximately $27.3 million at December 31, 1999. The increase in working
capital was primarily due to our Series E mandatorily redeemable convertible
preferred stock financing in January 2000 and our initial public offering in May
2000.
We cannot assure you that our business or operations will not change in a manner
that would consume available resources more rapidly than anticipated. We also
cannot assure you that we will not require substantial additional funding before
we can achieve profitable operations. Our capital requirements depend on
numerous factors, including the following:
- our ability to enter into strategic alliances or make acquisitions;
- regulatory changes and competing technological and market developments;
- changes in our existing collaborative relationships;
- the cost of filing, prosecuting, defending and enforcing patent claims and
other intellectual property rights;
- the purchase of additional capital equipment;
- the development of our SNPstream and DNAstream and software product lines and
associated reagent consumables;
- the development of our SNPware consumables and kits;
- the success rate of establishing new contracts, and renewal rate of existing
contracts, for DNA testing services in the areas of paternity, forensics and
transplantation;
- the progress of our existing and future milestone and royalty producing
activities; and
- the availability of additional funding, if necessary, and if at all, on
favorable terms.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is principally confined to our cash equivalents and
short-term investments, all of which have maturities of less than one year. We
maintain a non-trading investment portfolio of investment grade, liquid debt
securities that limits the amount of credit exposure to any one issue, issuer or
type of instrument. The fair value of these securities approximates their cost.
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FORWARD LOOKING STATEMENTS
This report may contain forward-looking statements. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results or outcomes to differ materially
from those described in such forward-looking statements. These statements
address or may address the following subjects: results of operations; customer
growth and retention; development of technology; losses or earnings; operating
expenses, including, without limitation, marketing expense and technology and
development expense; and revenue growth. We caution investors that there can be
no assurance that actual results, outcomes or business conditions will not
differ materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, among others, our limited
operating history, unpredictability of future revenues and operating results,
and competitive pressures. For further information, refer to the more specific
factors and uncertainties discussed throughout this report.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings. We are engaged in
discussions with Motorola in an attempt to resolve certain areas of disagreement
that have arisen under our existing collaboration in the area of microfluidics.
The primary issue of disagreement between the parties relates to whether, under
the terms of our agreement, Motorola has a right to obtain a license to our SNP-
IT technology for use with Motorola's microfluidic chips. While we believe that,
under the terms of our agreement, Motorola has no rights to our SNP-IT
technology, we cannot assure you that we can reach agreement with Motorola on
this issue or that we would prevail if this dispute were to develop into
arbitration or litigation. Furthermore, we are likely to incur substantial costs
and expend substantial personnel time in resolving this issue if it becomes the
subject of arbitration or litigation. Nonetheless, we believe that, even if we
fail to successfully resolve this issue or to prevail in any such arbitration or
litigation, we would only be obligated to grant Motorola a non-exclusive license
to use our SNP-IT technology with their microfluidic chips on terms no less
favorable than those offered to other licensees. We do not believe that this
result is likely to have a material adverse affect on our business or financial
condition results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In April, May and June 2000, nine individuals exercised options to purchase an
aggregate of 26,208 shares of our common stock for an aggregate purchase price
of $24,711.
No underwriters were involved in the foregoing offers and sales of securities.
Such offers and sales were made in reliance upon an exemption from the
registration provisions of the Securities Act of 1933, as amended (the
"Securities Act"), set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or in the case of the exercise of options to purchase common stock,
Rule 701 under the Securities Act. All of the foregoing securities are deemed
restricted securities for purposes of the Securities Act.
We intend to use approximately $4 million of the net proceeds for capital
expenditures associated with technology and systems upgrades and expansion of
our headquarters. We have no specific plan at this time for use of the
remaining proceeds and expect to use such proceeds for working capital and
general corporate purposes including the payment of sales and marketing
expenses. We may, when the opportunity arises, use an unspecified portion of
the net proceeds to acquire or invest in complementary businesses, products and
technologies. From time to time, in the ordinary course of business, we expect
to evaluate potential acquisitions of such businesses, products or technologies.
However, we have no present understandings, commitments or agreements with
respect to any material acquisition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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
------ -----------
* 10.1 Non-Exclusive License Agreement by and between Registrant and PE
Biosystems dated as of July 1, 2000.
* 10.2 Non-Exclusive License Agreement by and between Registrant and Amersham
Pharmacia Biotech, Inc. dated as of June 12, 2000.
* 10.3 License and Supply Agreement for Automated SNP Analysis by and between
Registrant and Bristol-Myers Squibb Company dated as of June 12, 2000.
27 Financial Data Schedule
---------
* Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Registrant's application
requesting confidential treatment under Rule 406 of the Act, filed on
August 14, 2000.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the six months ended June 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.
ORCHID BIOSCIENCES, INC.
Date: August 14, 2000 By: /s/ Donald R. Marvin
--------------- --- -----------------------------------------------
DONALD R. MARVIN
Senior Vice President, Chief Operating
Officer, Chief Financial Officer
(principal financial and accounting officer)
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