<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-31617
CIPHERGEN BIOSYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0595156
(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification Number)
6611 DUMBARTON CIRCLE, FREMONT, CALIFORNIA 94555
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 510-505-2100
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*
--- ---
* Registrant has been subject to such filing requirements since September 28,
2000, the effective date of its Registration Statement on Form S-1, and has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 since such date.
Number of shares of common stock, $0.001 par value, outstanding as of October
31, 2000: 26,729,889
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CIPHERGEN BIOSYSTEMS, INC.
INDEX FOR FORM 10-Q
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I FINANCIAL INFORMATION.................................................3
Item 1. Financial Statements and Notes........................................3
Unaudited Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999............................................3
Unaudited Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and September 30, 1999.4
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and September 30, 1999...........5
Notes to Unaudited Condensed Consolidated Financial Statements........6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........12
PART II OTHER INFORMATION....................................................13
Item 1. Legal Proceedings....................................................13
Item 2. Changes in Securities and Use of Proceeds............................13
Item 3. Defaults Upon Senior Securities......................................14
Item 4. Submission of Matters to a Vote of Security Holders..................14
Item 5. Other Information....................................................14
Item 6. Exhibits and Reports on Form 8-K.....................................14
SIGNATURES......................................................................................15
EXHIBITS........................................................................................16
</TABLE>
2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
CIPHERGEN BIOSYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,799 $ 18,010
Receivable from underwriters - 81,840
Accounts receivable, net 680 2,284
Accounts receivable from related parties 318 140
Inventories, net 722 1,412
Prepaid expenses and other current assets 322 205
----------------- ------------------
Total current assets 4,841 103,891
Property and equipment, net 867 4,570
Goodwill and other intangible assets 697 455
Notes receivable from related parties 261 284
Investment in joint venture 156 5
Other long-term assets 22 254
----------------- ------------------
Total assets $ 6,844 $ 109,459
================= ==================
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 728 $ 1,158
Accounts payable to related party 42 12
Accrued liabilities 931 2,379
Deferred revenue 161 476
Deferred revenue from related parties 134 113
Current portion of capital lease obligations 121 243
Current portion of long-term debt 366 221
Line of credit 825 -
----------------- ------------------
Total current liabilities 3,308 4,602
Capital lease obligations, net of current portion 184 357
Long-term debt, net of current portion 299 157
Deferred revenue 45 121
Deferred revenue from related parties 252 228
----------------- ------------------
Total liabilities 4,088 5,465
----------------- ------------------
Contingencies (Note 5)
Convertible preferred stock 25,339 -
----------------- ------------------
Preferred stock warrants 355 -
----------------- ------------------
Stockholders' equity (deficit):
Common stock 6 26
Additional paid-in capital 9,816 191,532
Notes receivable from stockholders (488) (1,294)
Deferred stock compensation (3,687) (15,039)
Accumulated other comprehensive income - (37)
Accumulated deficit (28,585) (71,194)
----------------- ------------------
Total stockholders' equity (deficit) (22,938) 103,994
----------------- ------------------
Total liabilities, convertible preferred stock
and stockholders' equity (deficit) $ 6,844 $ 109,459
================= ==================
</TABLE>
See notes to condensed consolidated financial statements.
3
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CIPHERGEN BIOSYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 969 $ 2,013 $ 2,753 $ 5,200
Revenue from related parties 292 325 297 778
------------- -------------- ------------- -------------
Total revenue 1,261 2,338 3,050 5,978
Cost of revenue:
Product revenue 241 819 931 2,035
Revenue from related parties 179 212 181 508
------------- -------------- ------------- -------------
Total cost of revenue 420 1,031 1,112 2,543
------------- -------------- ------------- -------------
Gross profit 841 1,307 1,938 3,435
Operating expenses:
Research and development 714 1,992 2,238 4,868
Sales and marketing 1,324 2,651 3,740 6,204
General and administrative 635 2,903 1,803 8,093
Amortization of intangible assets 91 76 274 243
------------- -------------- ------------- -------------
Total operating expenses 2,764 7,622 8,055 19,408
------------- -------------- ------------- -------------
Loss from operations (1,923) (6,315) (6,117) (15,973)
Interest and other income (expense), net (29) 144 (59) 592
------------- -------------- ------------- -------------
Net loss (1,952) (6,171) (6,176) (15,381)
Dividend related to beneficial conversion
feature of preferred stock - - - (27,228)
------------- -------------- ------------- -------------
Net loss attributable to common
stockholders $(1,952) $(6,171) $(6,176) $ (42,609)
============= ============== ============= =============
Basic and diluted net loss per share $ (0.31) $ (0.89) $ (0.97) $ (6.36)
============= ============== ============= =============
Shares used in computing
basic and diluted net loss per share
attributable to common stockholders 6,337 6,936 6,338 6,704
</TABLE>
See notes to condensed consolidated financial statements.
4
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CIPHERGEN BIOSYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
1999 2000
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,176) $(15,381)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 708 858
Common stock issued for services 11 7
Preferred stock issued for services - 378
Amortization of deferred compensation and accelerated
vesting of stock options 862 7,204
Amortization of debt discount (14) 4
Equity in net loss of joint venture 154 151
Provision for obsolete inventory - 51
Loss on disposal of fixed assets 56 172
Provision for doubtful accounts 45 45
Provision for warranty costs 10 106
Foreign currency translation adjustment - (37)
Changes in operating assets and liabilities:
Accounts receivable 31 (1,293)
Accounts receivable from related parties 379 (178)
Inventories 87 (741)
Prepaid and other current assets 72 (711)
Other long-term assets (20) (232)
Accounts payable and accrued liabilities (95) 1,772
Accounts payable to related parties (358) (30)
Deferred revenue (72) 391
Deferred revenue from related parties 386 (45)
--------------- ----------------
Net cash used in operating activities (3,934) (7,509)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (414) (4,055)
Issuance of notes receivable to related parties (11) (23)
Investment in joint venture (315) -
--------------- ----------------
Net cash used in investing activities (740) (4,078)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net - (349)
Exercise of common stock options 28 439
Repayment of stockholder loan - 65
Proceeds from issuance of preferred stock, net 1,019 26,894
Exercise of preferred stock warrants - 1,006
Principal payments on capital lease obligations (46) (141)
Proceeds from long-term debt 467 -
Repayments of long-term debt (356) (291)
Borrowings under line of credit 1,504 285
Payments under line of credit (941) (1,110)
--------------- ----------------
Net cash provided by financing activities 1,675 26,798
--------------- ----------------
Net increase (decrease) in cash and cash equivalents (2,999) 15,211
Cash and cash equivalents, beginning of period 7,002 2,799
--------------- ----------------
Cash and cash equivalents, end of period $ 4,003 $ 18,010
=============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid 110 109
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of property and equipment under capital leases 142 436
Common stock issued in exchange for notes receivable 327 892
Repurchase of common stock for cancellation of notes receivable 85 20
Dividend related to beneficial conversion feature - 27,228
Issuance of warrants in connection with Series E Preferred Stock - 214
Deferred stock-based compensation recognized on option grants 2,349 18,555
Initial public offering proceeds receivable after deducting underwriters
discounts and commissions - 81,840
Conversion of preferred stock to common - 53,981
</TABLE>
See notes to condensed consolidated financial statements.
5
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CIPHERGEN BIOSYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Ciphergen Biosystems, Inc. (the "Company") develops, manufactures and sells
ProteinChip-Registered Trademark- Systems, which consist of disposable
ProteinChip Arrays, ProteinChip Readers and ProteinChip Software for life
science researchers. These products are sold primarily to biologists at
pharmaceutical and biotechnology companies, and academic and government
research laboratories.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 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. The unaudited interim financial
statements have been prepared on the same basis as the annual financial
statements and, in the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the interim periods shown herein
are not necessarily indicative of operating results for the entire year.
The accompanying condensed consolidated financial statements include the
accounts of the Company and its four wholly-owned subsidiaries. All
intercompany transactions have been eliminated in consolidation. The Company
reports its minority ownership interest in Ciphergen Biosystems, K.K., a
joint venture, using the equity method of accounting. Intercompany profits
have been eliminated in the consolidated financial statements.
This unaudited financial data should be read in conjunction with the financial
statements and footnotes contained in the Company's Registration Statement on
Form S-1 filed on September 29, 2000.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements." Revenue from product sales
is recognized upon product shipment provided no significant obligations remain
and collections of the receivables are deemed probable. The Company recognizes
revenue for ongoing customer service contracts ratably over the period of the
service contract. Payments for service contracts are generally made in advance
and are non-refundable. Licensing product and distribution rights are recognized
ratably over the term of such agreements.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting for Stock Issued to Employees" and complies with
the disclosure provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under APB 25,
unearned compensation expense is based on the difference, if any, on the date
of the grant, between the fair value of the Company's stock and the exercise
price. Unearned compensation is amortized and expensed in accordance with
Financial Accounting Standards Board Interpretation No. 28. The Company
accounts for stock issued to non-employees in accordance with the provisions
of SFAS No. 123 and Emerging Issue Task
6
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Force No. 96-18, "Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
NOTE 2. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------- -------------
<S> <C> <C>
Raw materials......................... $ 471 $ 657
Work in process....................... 102 425
Finished goods........................ 149 330
------ ------
$ 722 $1,412
====== ======
</TABLE>
NOTE 3. NET LOSS PER SHARE
Basic earnings (loss) per share is calculated using the weighted average
number of common shares outstanding during the period. Because the Company is
in a net loss position, diluted earnings per share is calculated using the
weighted average number of common shares outstanding and excludes the effects
of potential common shares which are antidilutive. Potential common shares
include common stock subject to repurchase and incremental shares of common
stock issuable upon the exercise of stock options and warrants. Had the
Company been profitable, diluted earnings per share would have included the
shares used in the computation of basic net loss per share as well as an
additional 15.6 million and 10.1 million shares for the third quarters of
2000 and 1999, respectively, related to potential common shares not included
above.
NOTE 4. INITIAL PUBLIC OFFERING
On September 28, 2000 the Company sold 5.5 million shares of common stock in
its initial public offering, raising proceeds of $81.8 million, net of
underwriting discounts and commissions, but before other offering expenses.
Immediately prior to the effective date of the offering, all of the
convertible preferred stock outstanding was automatically converted into
common stock at a one-to-one ratio, and then a 0.43-for-1 reverse stock split
of all common stock was effected. All common and preferred shares, options,
warrants and per share amounts in the accompanying condensed consolidated
financial statements have been adjusted retroactively to reflect the stock
split.
On October 2, 2000 the Company sold an additional 825,000 shares of common stock
in connection with the exercise of an over-allotment option granted to the
underwriters and received proceeds, net of underwriting discounts and
commissions, of approximately $12.3 million.
The Company received the proceeds from its initial public offering, including
the exercise of the over-allotment option, on October 3, 2000. The
accompanying financial statements reflect the amount receivable from the
underwriters for 5.5 million shares, but do not include the amount receivable
from the October 2, 2000 exercise of the over-allotment option of 825,000
shares.
NOTE 5. CONTINGENCIES
We currently are a party to the following legal proceedings:
CIPHERGEN BIOSYSTEMS, INC., CIPHERGEN TECHNOLOGIES, INC. AND ILLUMESYS
PACIFIC, INC., V. MOLECULAR ANALYTICAL SYSTEMS, INC. AND LUMICYTE, INC. We
instituted the proceeding against Molecular Analytical Systems, Inc. and
LumiCyte, Inc., or the Defendants, on July 12, 2000 in the Superior Court of
the State of California for the County of Santa Clara, case number CV791094.
Defendant Molecular Analytical Systems, Inc., or MAS, notified us by letter
that we had allegedly committed a material breach of certain Technology
Transfer Agreements between MAS and us relating to SELDI technology, and
threatened to terminate those agreements unless we cure the alleged breach.
In particular, MAS has claimed that certain of our business activities,
including our continued marketing and sale of SELDI information and services
to research laboratories and other customers, are a material breach of the
Technology Transfer Agreements. More specifically, MAS objects to the
operation of our Biomarker Discovery Centers and to the sale of SELDI-derived
software that is not part of our ProteinChip Systems. The originally filed
claims in the lawsuit seek a declaration from the court that our activities
do not constitute a material breach, an injunction preventing MAS from
terminating the licenses provided by the agreements and other relief. On July
21, 2000, the Defendants removed the proceeding to the United States District
Court for the Northern District of California, case number C00-02628. On
August 16, 2000, the federal court remanded the action to the Santa Clara
Superior Court. Following remand of the action to state court, the parties
entered into a 60-day Tolling Agreement and Stand Down Agreement in which the
case was stayed for 60 days in order to give the parties an opportunity to
resolve their differences. MAS also agreed to suspend its notices purporting
to terminate the license agreements pending the conclusion of this
litigation. After numerous mediation sessions, no settlement was achieved.
Consequently, on October 30, 2000 the Company filed an amended complaint
against MAS and LumiCyte. The amended complaint expanded Ciphergen's claims
against MAS and LumiCyte, and added T. William Hutchens as a defendant, Dr.
Hutchens is the Chief Executive Officer of both MAS and LumiCyte, a former
officer and director of Ciphergen, and is the beneficial owner of
approximately 12.1% of Ciphergen's outstanding common stock. The amended
complaint also seeks, among other things, damages and injunctive relief
against defendants for unfair competition, misappropriation of trade secrets,
and breach of contract, as well as an injunction precluding defendants from
operating in Ciphergen's licensed markets. On October 30, 2000 MAS and
LumiCyte filed a cross-complaint against Ciphergen, Ciphergen Technologies,
Inc. and IllumeSys Pacific, Inc., the three plaintiffs which filed the
underlying lawsuit against MAS and LumiCyte pending in Santa Clara County
Superior Court of California case number CV791094. The cross-complaint
alleges claims for breach of contract, intentional interference with
prospective economic advantage, unfair competition, misappropriation of trade
secrets and declaratory relief regarding the rights of the parties under the
two technology transfer agreements between MAS and Ciphergen. In essence,
both sides are now requesting that the court declare the respective rights of
the parties under the technology transfer agreements. The cross-complaint
also seeks to terminate the agreements, to obtain injunctive relief, to
prevent use of alleged trade secrets of MAS, and damages. The parties are
currently commencing discovery. A trial setting conference has been scheduled
by the court for January 16, 2001, at which time it is expected that the
court will set a trial date.
MOLECULAR ANALYTICAL SYSTEMS, INC. V. CIPHERGEN BIOSYSTEMS. Molecular
Analytical Systems, Inc. filed the proceeding on December 9, 1999 in the
United States Trademark Trial and Appeal Board as opposition No. 116,315. We
have applied for registration of the Term "SELDI" as a trademark. MAS has
opposed registration of the trademark to us and is seeking to have the
trademark registered in its name instead. This proceeding is at an early
stage. A brief suspension of this proceeding has been lifted and discovery
continues. No damages are recoverable in this proceeding.
Although the ultimate outcome of these matters is not presently determinable,
management believes that the resolution of all such pending matters will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows. However, should the outcome of
these matters be unfavorable to the Company, the impact could be material to
the Company's consolidated financial position, results of operations or cash
flow.
NOTE 6. SUBSEQUENT EVENTS
Effective October 1, 2000, the Company expanded the eight-year lease for its
Fremont, California facility from 30,000 to 60,000 square feet and rented all
of the additional space to a new tenant under an 18 month sublease. This will
result in additional lease payments by us of $1.9 million per year. However,
during the term of the sublease, the additional lease cost is offset by the
rent paid to us by the sublessee.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We develop, manufacture and sell our ProteinChip-Registered Trademark- System,
which consists of disposable ProteinChip Arrays, a ProteinChip Reader and
ProteinChip Software. We market and sell our products primarily to research
biologists in pharmaceutical and biotechnology companies, and academic and
government research laboratories. As part of our early product design effort,
in February 1995, we signed an agreement with Stanford Research Systems, a
Sunnyvale, California based manufacturer of electronic test equipment, to
assist in this development. As part of our early market research activities,
in the fourth quarter of 1996, we began selling an early prototype of our
reader, which we purchased from a supplier in the U.K., combined with our own
software. In April 1997, we acquired IllumeSys Pacific, Inc., which held
specific rights to the SELDI technology for the life science research market.
Our first designed and manufactured system, the ProteinChip System, Series
PBS I, was available for customer shipment for additional market research in
the third quarter of 1997, and we discontinued supplying the U.K.-purchased
system. In July 1998, we acquired Ciphergen Technologies, Inc., which held
specific rights to the SELDI technology in other life science markets. During
1999, we initiated an expanded marketing program and in May began shipping
our first commercial product, the ProteinChip System, Series PBS II.
Also in 1999, we invested $315,000 for 30% ownership of Ciphergen Biosystems,
K.K., a joint venture we established with Sumitomo Corporation to distribute our
products in Japan. We have the right to purchase an additional 40% ownership
based on a predetermined formula as early as 2002. Until we exercise this right,
Sumitomo Corporation has agreed to arrange all working capital for Ciphergen
Biosystems, K.K. and receives payments from Ciphergen Biosystems, K.K. equal to
20% of the list price of our products sold by Ciphergen Biosystems, K.K. in
exchange for providing support services to Ciphergen Biosystems, K.K.
Since 1997, we have used our resources primarily to develop our proprietary
ProteinChip System and establish marketing and sales for commercialization of
our products. Since our inception we have incurred significant losses and as of
September 30, 2000, we had an accumulated deficit of $71.2 million.
We recognize revenue in accordance with Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." Revenue from the sale of our
ProteinChip System and disposable ProteinChip Arrays is recognized at the time
of shipment provided no significant obligations remain and collections of the
receivables are deemed probable. Currently, most of the units of our ProteinChip
System placed in the field generate a recurring revenue stream from the sale of
disposables. We expect the volume of disposables purchased from each site to
increase over time as customers become increasingly familiar with the technology
and adopt our ProteinChip System for a broader range of proteomics research
programs. Our sales are currently driven by the need for better tools to perform
protein biomarker discovery, characterization and assay development.
Our expenses have consisted primarily of costs incurred in manufacturing our
ProteinChip System, including materials, labor and overhead costs, marketing
and sales activities, research and development programs, and general and
administrative costs associated with our operations. We expect our cost of
revenue to increase in the future as we sell additional units of our
ProteinChip System and Arrays, but to decrease as a percent of total revenue
as we gain efficiencies from spreading our fixed costs over a greater number
of units. We expect our selling expenses to increase as we continue to
commercialize our products and expand our sales force. We expect our research
and development expenses to increase in the future as we continue to improve
and develop products. Expansion of our facilities and the additional
obligations of a public reporting entity will also add to our expenses. As a
result, we expect to incur losses for the foreseeable future. Our current
products do not provide sufficient revenue for us to become profitable. To
become profitable, we will need to increase unit sales of our ProteinChip
System and generate significant sales of disposables.
8
<PAGE>
Effective July, 2000, we began an eight-year lease of a 30,000 square foot
facility in Fremont, California. The new building houses most of our California
based employees, as well as a new Biomarker Discovery Center-TM-. We use
approximately 2,400 square feet of the Fremont space for a Biomarker Discovery
Center for which we expect to incur approximately $90,000 in operating costs per
year. In the first quarter of 2000, we also established our Scandinavian
headquarters for sales and service and a Biomarker Discovery Center facility in
Copenhagen, Denmark, with a 3 year lease at an annual lease cost of
approximately $80,000. In the third quarter of 2000, we leased space for a new
Biomarker Discovery Center near Philadelphia, Pennsylvania, with a 5 year
lease at an annual lease cost of approximately $61,000. We do not have customers
or partnerships for the Copenhagen or Philadelphia facilities at this time.
Until we initiate such revenue producing arrangements, we will deploy the staff
and facility on product development projects and product demonstrations for
potential partnerships.
We have a limited history of operations and we anticipate that our quarterly
results of operations will fluctuate for the foreseeable future due to several
factors, including market acceptance of current and new products, the length of
the sales cycle and timing of significant orders, the timing and results of our
research and development efforts, the introduction of new products by our
competitors and possible patent conflicts. Our limited operating history makes
accurate prediction of future results of operations difficult or impossible.
Fluctuations in the Company's operating results and market conditions for
pharmaceutical and biotechnology stocks in general could have a significant
impact on the volatility of the market price for our common stock and on the
future price of our common stock. The stock market has experienced significant
price and volume fluctuations that are often unrelated to the operating
performance of particular companies. The market price of our common stock, like
that of the securities of many other pharmaceutical and biotechnology companies,
has been and is likely to continue to be highly volatile.
Deferred stock compensation for options granted to employees is the difference
between the fair value of our common stock on the date such options were granted
and their exercise price. Deferred stock compensation for options granted to
consultants has been determined in accordance with Statement of Financial
Accounting Standards No. 123 as the fair value of the equity instruments issued.
Deferred stock compensation for options granted to consultants is periodically
remeasured as the underlying options vest in accordance with Emerging Issues
Task Force Bulletin No. 96-18.
Competition in our existing and potential markets is intense and we expect it to
increase. Currently, our principal competition comes from existing technologies
that are used to perform many of the same functions for which we market our
ProteinChip System. If we fail to compete effectively with these technologies
and products, or if competitors develop significant improvements in protein
detection systems or develop systems that are easier to use, our products may
not achieve market acceptance and our sales may not increase.
This Form 10-Q contains forward-looking statements based upon current
expectations, including statements with regard to revenue growth, increased
manufacturing efficiencies and a corresponding decline in cost of revenue as
a percent of revenue, the development of improved products, the outcome of
legal proceedings, the period of time for which the Company's existing
financial resources and interest income will be sufficient to enable the
Company to maintain current and planned operations, and the market risk of
the Company's investments. You can identify these statements by
forward-looking words such as "may," "will," "expect," "intend,"
"anticipate," "believe," "estimate," "plan," "could," "should," and
"continue," or similar words. Such forward-looking statements involve risks
and uncertainties, including, without limitation, the following. There is no
assurance that the Company's products will meet with market acceptance and
our sales may not increase. There is no assurance that the Company will
experience increased manufacturing efficiencies and that there will be a
corresponding decline in cost of revenue as a percent of revenue. There is no
assurance that the Company will successfully develop and introduce improved
products. There is no assurance that the resolution of litigation will not
harm our ability to pursue our business and strategy. There is no assurance
that the Company's existing financial resources and interest income will be
sufficient to enable the Company to maintain current and planned operations
for the period described, and there is no assurance that the Company will not
incur losses on its investments. For a discussion of other risks and
uncertainties affecting the Company's business, see the Company's
Registration Statement on Form S-1 as filed on September 29, 2000. The
Company's actual results and timing of certain events may differ
significantly from the results discussed in such forward-looking statements
as a result of these or other factors.
Ciphergen expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in Ciphergen's expectations with regard thereto
or any change in events, conditions, or circumstances on which any such
statements are based.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
REVENUE. Total revenue for the third quarter of 2000 was $2.3 million, an
increase of $1.1 million, or 85%, compared to the third quarter of 1999. The
increase was largely the result of increased sales of ProteinChip Systems and
Arrays in the United States and Europe. During the three months ended
September 30, 2000, $767,000 of revenue was derived from customers in Europe
and $162,000 from customers in Asia. This compares to $161,000 of revenue
from customers in Europe and $126,000 from customers in Asia during the three
months ended September 30, 1999.
COST OF REVENUE. Cost of revenue for the third quarter of 2000 was $1.0
million, an increase of $0.6 million, or 145%, compared to the third quarter
of 1999. The increase can be attributed to higher sales volumes and to
additions to our infrastructure to increase manufacturing capacity. Charges
related to deferred stock-based compensation were $99,000 in the third
quarter of 2000 compared to $9,000 in the same quarter of 1999. During the
coming year, cost of revenue is expected to grow more slowly than revenue,
thus declining as a percentage of revenue.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
third quarter of 2000 were $2.0 million, an increase of $1.3 million, or
179%, compared to the third quarter of 1999. The increase was due primarily
to higher compensation expenses resulting from an increase in headcount.
Charges related to deferred stock-based compensation were $508,000 in the
third quarter of 2000 compared to $29,000 in the same quarter of 1999.
Research and development expenses are expected to increase significantly over
the coming year.
SALES AND MARKETING EXPENSES. Sales and marketing expenses in the third
quarter of 2000 were $2.7 million, an increase of $1.3 million, or 100%,
compared to the third quarter of 1999. The increase was largely due to higher
compensation expenses resulting from the addition of field research
scientists and program managers in the United States and Europe. There was
also increased spending for trade shows, advertising and sales collateral.
Charges related to deferred stock-based compensation were $496,000 in the
third quarter of 2000 compared to $234,000 in the same quarter of 1999. Sales
and marketing expenses are expected to continue to increase significantly
during the next year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
during the third quarter of 2000 were $2.9 million, an increase of $2.3
million, or 357%, compared to the third quarter of 1999. The increase can be
attributed largely to charges related to deferred stock-based compensation,
which were $1.5 million in the third quarter of 2000 compared to $114,000 in
the corresponding quarter of 1999. In addition, we incurred higher
compensation expenses as the result of headcount increases, and increased
legal fees resulting from our litigation. We anticipate that general and
administrative expenses will continue to rise during the next year, though
not as fast as other operating expenses, as we add staff, improve our
infrastructure, absorb the additional costs of being a public company, and
aggressively pursue our litigation.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income in the third
quarter of 2000 was $307,000 compared to $53,000 in the same quarter of 1999.
The increase was due largely to the higher cash balances that resulted from
our Series E private placement in March, 2000. Interest expense of $41,000
for the third quarter of 2000 was nearly unchanged from the same quarter of
1999. Our share of the loss of our Japanese joint venture in the third
quarter of 2000 was $125,000 compared to $41,000 in the corresponding quarter
of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
REVENUE. Total revenue for the first nine months of 2000 was $6.0 million, an
increase of $2.9 million, or 96%, compared to the comparable period for 1999.
The increase was primarily due to increased sales of ProteinChip Systems and
Arrays in the United States and Europe. During the nine months ended
September 30, 2000, $1.8 million of revenue was derived from customers in
Europe and $601,000 from customers in Asia. This compares to $548,000 of
revenue from customers in Europe and $132,000 from customers in Asia during
the nine months ended September 30, 1999.
COST OF REVENUE. Cost of revenue for the first nine months of 2000 was $2.5
million, an increase of $1.4 million, or 129%, compared to the comparable
period in 1999. The increase resulted from higher sales volumes and to
additions to our infrastructure to increase manufacturing capacity. Charges
related to deferred stock-based compensation were $171,000 during the first
nine months of 2000 compared to $23,000 for the same period in 1999.
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RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the
first nine months of 2000 were $4.9 million, an increase of $2.6 million, or
118%, compared to the same period of 1999. The increase was due primarily to
charges related to deferred stock-based compensation, which were $1.4 million
in the first nine months of 2000 compared to $102,000 in the same period of
1999. In addition, higher compensation expenses resulting from an increase in
headcount, and the issuance of 25,800 shares of Series B preferred stock with
a fair market value of $378,000 to Stanford Research Systems in connection
with a product development agreement, caused an increase in expenses.
SALES AND MARKETING EXPENSES. Sales and marketing expenses in the first nine
months of 2000 were $6.2 million, an increase of $2.5 million, or 66%,
compared to the same period in 1999. The increase was largely due to higher
compensation expenses resulting from the addition of field research
scientists and program managers in the United States and Europe, and from
increased product promotion activities. Charges related to deferred
stock-based compensation were $1.0 million in the first nine months of 2000
compared to $402,000 in the same period of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the first nine months of 2000 were $8.1 million, an increase of $6.3 million,
or 349%, compared to the same period in 1999. The increase was due primarily
to charges related to deferred stock-based compensation, which were $4.9
million in the first nine months of 2000 compared to $335,000 in the
corresponding period of 1999. In addition, expenses rose as a result of
headcount increases and increased legal fees resulting from our litigation
and from increased patent activity.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income during the first
nine months of 2000 was $860,000 compared to $196,000 in the same quarter of
1999. The increase was due largely to the higher cash balances that resulted
from our Series E private placement in March, 2000. Interest expense of
$136,000 and our share of the loss of our Japanese joint venture of $150,000
for the first nine months of 2000 were both nearly unchanged compared to the
same period of 1999.
LIQUIDITY AND CAPITAL RESOURCES
From our inception through September 30, 2000, we have financed our
operations with $15.5 million from the sales of products and services to
customers; with private placements of preferred stock netting $53.2 million,
including a $27.1 million (net) Series E Preferred Stock financing completed
in March 2000; and with an initial public offering totaling approximately
$81.8 million in net proceeds, not including the October 2, 2000 exercise of
the over-allotment option. Cash, cash equivalents and IPO proceeds at
September 30, 2000 were $99.9 million compared to $2.8 million at December
31, 1999. The increase during the first nine months of 2000 was due primarily
to proceeds receivable from our initial public offering, and the Series E
financing, partially offset by cash used in operations. Long-term debt and
capital lease balances at September 30, 2000 were $514,000, net of current
portions. Net cash used in operating activities was $7.5 million in the first
nine months of 2000, which was primarily the result of net losses in
operations. Net cash used in investing activities was $4.1 million in the
first nine months of 2000, which consisted principally of capital equipment
purchases. Net cash provided by financing activities was $26.8 million in the
first nine months of 2000, largely the result of the sale of preferred stock
and the exercise of preferred stock warrants.
We expect to acquire additional capital equipment for our various facilities on
an ongoing basis as we add staff, increase capacity and improve capabilities. We
anticipate capital expenditures of between $150,000 and $500,000 for each
Biomarker Discovery Center we establish, consisting of approximately $100,000 to
$400,000 for laboratory equipment, and $50,000 to $100,000 for leasehold
improvements, office furnishings and computers. The Company expects that its
existing capital resources and interest income will enable the Company to
maintain current and planned operations at least through 2002. In the event that
the Company requires additional funding at any point in the future, the Company
will seek to raise such additional funding from other sources, including the
public equity market, private financings, collaborative arrangements and debt.
If additional capital is raised through the issuance of equity or securities
convertible into equity, our stockholders may experience dilution, and such
securities may have rights, preferences or privileges senior to those of the
holders of the common stock. Additional financing may not be available to us on
favorable terms, if at all. If we are unable to obtain financing, or to obtain
it on acceptable terms, we may be unable to execute our business plan.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosure
involves forward-looking statements. The Company is exposed to market
risk related mainly to changes in interest rates. The Company does not
invest in derivative financial instruments.
INTEREST RATE SENSITIVITY
Our funds are almost entirely invested in money market mutual funds. 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. That means that a change in
prevailing interest rates may cause the fair value of the principal
amount of an 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 rate rises, the fair value of the principal amount of
our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial
paper, money market funds, government and non-government debt securities.
The average duration of all of our investments has generally been less
than one year. Due to the short-term nature of these investments, we
believe we have no material exposure to interest rate risk arising from
our investments. Our exposure to market risk for changes in interest
rates relates primarily to the increase or decrease in the amount of
interest income we can earn on our available funds for investment. Our
long-term debt and capital lease agreements are at fixed interest rates.
We do not plan to use derivative financial instruments in our investment
portfolio. We plan to ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment
risk. We plan to mitigate default risk by investing in high-credit
quality securities.
FOREIGN CURRENCY EXCHANGE RISK
At this time, the Company does not participate in any foreign currency
exchange activities; therefore, it is not subject to risk of gains or
losses for changes in foreign exchange rates.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We currently are a party to the following legal proceedings:
CIPHERGEN BIOSYSTEMS, INC., CIPHERGEN TECHNOLOGIES, INC. AND
ILLUMESYS PACIFIC, INC., V. MOLECULAR ANALYTICAL SYSTEMS, INC. AND
LUMICYTE, INC. We instituted the proceeding against Molecular
Analytical Systems, Inc. and LumiCyte, Inc., or the Defendants, on
July 12, 2000 in the Superior Court of the State of California for
the County of Santa Clara, case number CV791094. Defendant Molecular
Analytical Systems, Inc., or MAS, notified us by letter that we had
allegedly committed a material breach of certain Technology Transfer
Agreements between MAS and us relating to SELDI technology, and
threatened to terminate those agreements unless we cure the alleged
breach. In particular, MAS has claimed that certain of our business
activities, including our continued marketing and sale of SELDI
information and services to research laboratories and other
customers, are a material breach of the Technology Transfer
Agreements. More specifically, MAS objects to the operation of our
Biomarker Discovery Centers and to the sale of SELDI-derived software
that is not part of our ProteinChip Systems. The originally filed
claims in the lawsuit seek a declaration from the court that our
activities do not constitute a material breach, an injunction
preventing MAS from terminating the licenses provided by the
agreements and other relief. On July 21, 2000, the Defendants removed
the proceeding to the United States District Court for the Northern
District of California, case number C00-02628. On August 16, 2000,
the federal court remanded the action to the Santa Clara Superior
Court. Following remand of the action to state court, the parties
entered into a 60-day Tolling Agreement and Stand Down Agreement in
which the case was stayed for 60 days in order to give the parties an
opportunity to resolve their differences. MAS also agreed to suspend
its notices purporting to terminate the license agreements pending
the conclusion of this litigation. After numerous mediation sessions,
no settlement was achieved. Consequently, on October 30, 2000 the
Company filed an amended complaint against MAS and LumiCyte. The
amended complaint expanded Ciphergen's claims against MAS and
LumiCyte, and added T. William Hutchens as a defendant, Dr. Hutchens
is the Chief Executive Officer of both MAS and LumiCyte, a former
officer and director of Ciphergen, and is the beneficial owner of
approximately 12.1% of Ciphergen's outstanding common stock. The
amended complaint also seeks, among other things, damages and
injunctive relief against defendants for unfair competition,
misappropriation of trade secrets, and breach of contract, as well as
an injunction precluding defendants from operating in Ciphergen's
licensed markets. On October 30, 2000 MAS and LumiCyte filed a
cross-complaint against Ciphergen, Ciphergen Technologies, Inc. and
IllumeSys Pacific, Inc., the three plaintiffs which filed the
underlying lawsuit against MAS and LumiCyte pending in Santa Clara
County Superior Court of California case number CV791094. The
cross-complaint alleges claims for breach of contract, intentional
interference with prospective economic advantage, unfair competition,
misappropriation of trade secrets and declaratory relief regarding
the rights of the parties under the two technology transfer
agreements between MAS and Ciphergen. In essence, both sides are now
requesting that the court declare the respective rights of the
parties under the technology transfer agreements. The cross-complaint
also seeks to terminate the agreements, to obtain injunctive relief,
to prevent use of alleged trade secrets of MAS, and damages. The
parties are currently commencing discovery. A trial setting
conference has been scheduled by the court for January 16, 2001, at
which time it is expected that the court will set a trial date.
Although we believe that the resolution of the litigation will not
harm our ability to continue to pursue our business and strategy,
litigation is unpredictable and we may not prevail. The court may
determine that LumiCyte or other companies possess exclusive rights
to provide information products and service products that we seek to
exercise as part of our business. The sublicense agreements referred
to above provide for termination in the event of material breach.
Therefore, if we lose the lawsuit, and if it were determined that the
sublicense agreements had been breached by our activities, such as
proteomics services for fees, there is a risk that our sublicense
agreements to sell ProteinChip Readers and Arrays could be
terminated. Substantially all of our revenue is derived from products
relying on technology covered by the sublicense agreements. If the
agreements were terminated, we would be precluded from selling any
SELDI-based products within the scope of the patents that we licensed
from MAS. Unless we were able to obtain a license to these rights, we
would no longer generate revenue from the sale of these products and
we would have to revise our business direction and strategy.
MOLECULAR ANALYTICAL SYSTEMS, INC. V. CIPHERGEN BIOSYSTEMS. Molecular
Analytical Systems, Inc. filed the proceeding on December 9, 1999 in
the United States Trademark Trial and Appeal Board as opposition No.
116,315. We have applied for registration of the Term "SELDI" as a
trademark. MAS has opposed registration of the trademark to us and is
seeking to have the trademark registered in its name instead. This
proceeding is at an early stage. A brief suspension of this
proceeding has been lifted and discovery continues. No damages are
recoverable in this proceeding.
For a more complete description of the main aspects in dispute in
these matters, please refer to Ciphergen's Registration Statement on
Form S-1 as filed with the Securities and Exchange Commission on
September 29, 2000 and the Form 8-K dated October 30, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2000, we granted stock
options to purchase an aggregate of 256,495 shares of our common stock
(on a post reverse split basis of 0.43-to-1), at an exercise price of
$3.49 per share to employees, directors and consultants under our 1993
Stock Option Plan. During the three months ended September 30, 2000
employees, directors and consultants exercised options for 264,487
shares of common stock (on a post reverse split basis) for aggregate
consideration of approximately $795,000. The issuance of these
restricted securities was deemed to be exempt from registration under
the Act in reliance upon Section 4(2) of the Act or Rule 701 promulgated
under Section 3(b) of the Act.
During the three months ended September 30, 2000 warrants for 66,112
shares of preferred stock (on a post reverse split basis) were exercised
for aggregate consideration of $195,000.
On September 28, 2000 in connection with our initial public offering,
all outstanding shares of preferred stock automatically converted on a
one-for-one basis to common stock. Immediately thereafter, we effected a
0.43-for-1 reverse stock split.
On September 28, 2000 we sold 5.5 million shares of common stock
through our initial public offering, raising $81.8 million net of
underwriting discounts and commissions, but before other offering
expenses. On October 2, 2000 we sold an additional 825,000 shares of
common stock in connection with the exercise of an over-allotment
option granted to the underwriters, raising $12.3 million net of
underwriting discounts and commmissions, but before other offering
expenses. The Company received the proceeds from its initial public
offering including the exercise of the over-allotment option on
October 3, 2000. Ciphergen's financial statements for the period
ending September 30, 2000 reflect the amount receivable from the
underwriters for 5.5 million shares but do not include the amount
receivable from the October 2, 2000 exercise of the over-allotment
option. Other offering expenses for the initial public offering,
excluding underwriters discounts and commissions, were approximately
$3.9 million. The managing underwriters in the offering were SG Cowen
Securities Corporation, ING Barings LLC and UBS Warburg
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LLC. The shares of common stock in the offering were registered under
the Act in a Registration Statement on Form S-1, as amended (No.
333-32812). The Securities and Exchange Commission declared the
Registration Statement effective on September 28, 2000. The net
proceeds have been invested in available-for-sale investments consisting
primarily of money market mutual funds. We intend to use the proceeds to
fund expansion of our operations, including continued development of new
products, expanding our facilities to meet our needs, establishing
Biomarker Discovery Centers, and for other working capital and general
corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On September 26, 2000, by written consent our stockholders approved
an increase in the number of shares reserved for issuance under the 1993
Stock Option Plan by 400,000 (172,000 post-split) shares to a new total
of 8,125,000 (3,493,750 post-split) shares.
(b) On September 28, 2000, by written consent our stockholders approved
a 0.43-for-1 reverse stock split of the Company's common stock.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits have been filed with this report:
<TABLE>
<C> <S>
3.2* Amended and Restated Certificate of Incorporation of Registrant
3.4* Amended and Restated Bylaws of Registrant
4.1* Form of Registrant's Common Stock Certificate
10.5* 2000 Stock Plan and related form of Stock Option Agreement
10.6* 2000 Employee Stock Purchase Plan
10.12* Lease Agreement dated January 28, 2000, between the Registrant
and John Arrillaga, Trustee of the John Arrillaga Survivor's
Trust and Richard T. Peery, Trustee of the Richard T. Peery
Separate Property Trust, and Amendment No. 1 dated as of
August 8, 2000
10.13* Employment Agreement dated as of August 24, 2000, between
William E. Rich and the Registrant
10.14* Sublease Agreement between the Registrant and BigBand Network,
dated as of August 25, 2000
27.1 Financial Data Schedule
</TABLE>
---------------
* Incorporated by reference to exhibits (with same exhibit number) to
Ciphergen Biosystems' Registration Statement on Form S-1 (File No. 333-32812)
declared effective on September 28, 2000.
(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.
Dated: November 14, 2000
CIPHERGEN BIOSYSTEMS, INC.
--------------------------
(Registrant)
/s/ William E. Rich, Ph.D.
----------------------------------------------
William E. Rich
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Matthew J. Hogan
----------------------------------------------
Matthew J. Hogan
Vice President and Chief Financial Officer
(principal financial officer)
15
