UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| T | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
| EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 |
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. | |
| 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 T No £
Number of shares of common stock, $0.001 par value, outstanding as of April 30, 2001: 26,799,135
CIPHERGEN BIOSYSTEMS, INC.
INDEX FOR FORM 10-Q
MARCH 31, 2001
CIPHERGEN BIOSYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
| March 31, 2001 | December 31, 2000 | ||
| ASSETS | |||
| Current assets: | |||
| Cash and cash equivalents | $99,050 | $107,633 | |
| Accounts receivable, net | 2,640 | 2,949 | |
| Accounts receivable from related parties | 39 | 75 | |
| Inventories, net | 1,374 | 1,322 | |
| Prepaid expenses and other current assets | 1,103 | 969 | |
| Total current assets | 104,206 | 112,948 | |
| Property and equipment, net | 5,599 | 4,687 | |
| Long-term investments | 4,148 | - | |
| Goodwill and other intangible assets | 303 | 379 | |
| Notes receivable from related parties | 324 | 304 | |
| Investment in joint venture | - | 12 | |
| Other long-term assets | 618 | 618 | |
| Total assets | $115,198 | $118,948 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||
| Current liabilities: | |||
| Accounts payable | $2,483 | $1,769 | |
| Accounts payable to related party | 41 | 13 | |
| Accrued liabilities | 2,041 | 2,014 | |
| Deferred revenue | 662 | 579 | |
| Deferred revenue from related parties | 109 | 137 | |
| Current portion of capital lease obligations | 224 | 234 | |
| Current portion of long-term debt | 170 | 182 | |
| Total current liabilities | 5,730 | 4,928 | |
| Capital lease obligations, net of current portion | 256 | 307 | |
| Long-term debt, net of current portion | 76 | 117 | |
| Deferred revenue | 87 | 128 | |
| Deferred revenue from related parties | 212 | 221 | |
| Other long-term liabilities | 190 | 95 | |
| Total liabilities | 6,551 | 5,796 | |
| Contingencies (Note 4) | |||
| Stockholders' equity: | |||
| Common stock | 27 | 27 | |
| Additional paid-in capital | 175,096 | 175,694 | |
| Notes receivable from stockholders | (1,294) | (1,294) | |
| Deferred stock compensation | (10,246) | (12,362) | |
| Accumulated other comprehensive income | (63) | (24) | |
| Accumulated deficit | (54,873) | (48,889) | |
| Total stockholders' equity | 108,647 | 113,152 | |
| Total liabilities and stockholders' equity | $115,198 | $118,948 | |
See notes to condensed consolidated financial statements.
CIPHERGEN BIOSYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Three Months Ended March 31, | ||
| 2001 | 2000 | |
| Revenue: | ||
| Product revenue | $2,634 | $1,229 |
| Revenue from related parties | 49 | 265 |
| Total revenue | 2,683 | 1,494 |
| Cost of revenue: | ||
| Product revenue | 970 | 476 |
| Revenue from related parties | 30 | 97 |
| Total cost of revenue | 1,000 | 573 |
| Gross profit | 1,683 | 921 |
| Operating expenses: | ||
| Research and development | 2,622 | 967 |
| Sales and marketing | 3,038 | 1,500 |
| General and administrative | 3,353 | 1,108 |
| Amortization of intangible assets | 76 | 90 |
| Total operating expenses | 9,089 | 3,665 |
| Loss from operations | (7,406) | (2,744) |
| Interest and other income, net | 1,422 | 86 |
| Net loss | (5,984) | (2,658) |
| Dividend related to beneficial conversion feature of preferred stock | - | (27,228) |
| Net loss attributable to common stockholders | $(5,984) | $(29,886) |
| Basic and diluted net loss per share attributable to common stockholders | $(0.23) | $(4.59) |
| Shares used in computing basic and diluted net loss per share attributable to common stockholders | 26,327 | 6,511 |
See notes to condensed consolidated financial statements.
CIPHERGEN BIOSYSTEMS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Three Months Ended March 31, | ||
| 2001 | 2000 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||
| Net loss | $(5,984) | $(2,658) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||
| Depreciation and amortization | 479 | 252 |
| Common stock issued for services | - | 8 |
| Amortization of deferred compensation | 1,540 | 861 |
| Equity in net loss of joint venture | 12 | 28 |
| Changes in operating assets and liabilities: | ||
| Accounts receivable, net | 309 | (302) |
| Accounts receivable from related parties | 36 | 308 |
| Inventories, net | (33) | (153) |
| Prepaid and other current assets | (134) | (532) |
| Other long-term assets | - | (101) |
| Accounts payable and accrued liabilities | 741 | 444 |
| Accounts payable to related party | 28 | (8) |
| Deferred revenue | 42 | 63 |
| Deferred revenue from related parties | (37) | (8) |
| Other long-term liabilities | 95 | - |
| Net cash used in operating activities | (2,906) | (1,798) |
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||
| Purchase of property and equipment, net | (1,334) | (715) |
| Issuance of notes receivable to related parties | (20) | (7) |
| Purchase of long-term investments | (4,148) | - |
| Net cash used in investing activities | (5,502) | (722) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||
| Proceeds from issuance of common stock, net | (41) | - |
| Exercise of common stock options | 19 | 176 |
| Proceeds from issuance of preferred stock, net | - | 26,929 |
| Exercise of preferred stock warrants | - | 451 |
| Principal payments on capital lease obligations | (61) | (27) |
| Repayments of long-term debt | (53) | (128) |
| Borrowings under line of credit | - | 285 |
| Payments under line of credit | - | (1,110) |
| Net cash provided by (used in) financing activities | (136) | 26,576 |
| Effect of exchange rate changes | (39) | - |
| Net increase (decrease) in cash and cash equivalents | (8,583) | 24,056 |
| Cash and cash equivalents, beginning of period | 107,633 | 2,799 |
| Cash and cash equivalents, end of period | $99,050 | $26,855 |
| SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||
| Common stock issued in exchange for notes receivable | $ - | $300 |
| Repurchase of common stock for cancellation of notes receivable | - | 21 |
| Issuance of warrants in connection with Series E Preferred Stock | - | 205 |
| Deferred stock-based compensation | 576 | 12,513 |
| Dividend related to beneficial conversion feature of preferred stock | - | 27,228 |
| Transfer of fixed assets to inventory | 19 | 44 |
See notes to condensed consolidated financial statements.
CIPHERGEN BIOSYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Ciphergen Biosystems, Inc. (the "Company" or "Ciphergen") develops, manufactures and sells ProteinChip® 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 in Japan, 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 Form 10-K filed on April 2, 2001.
NOTE 2. INVENTORIES
Net inventories consisted of the following (in thousands):
| March 31, | December 31, | |
| 2001 | 2000 | |
| Raw materials | $615 | $605 |
| Work in process | 308 | 393 |
| Finished goods | 451 | 324 |
| $1,374 | $1,322 |
NOTE 3. NET LOSS PER SHARE
Basic net 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 2.2 million and 2.7 million shares for the first quarters of 2001 and 2000, respectively, related to potential common shares not included above.
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders for the periods indicated (in thousands, except per share amounts):
| Three Months Ended March 31, | ||
| 2001 | 2000 | |
| Numerator: | ||
| Net loss attributable to common stockholders | $(5,984) | $(29,886) |
| Denominator: | ||
| Weighted average common shares outstanding | 26,789 | 6,950 |
| Weighted average unvested common shares subject to repurchase | (462) | (439) |
| Denominator for basic and diluted calculations | 26,327 | 6,511 |
| Basic and diluted net loss per share attributable to common stockholders | $(0.23) | $(4.59) |
NOTE 4. CONTINGENCIES
The Company is currently party to two legal proceedings.
Ciphergen Biosystems, Inc., Ciphergen Technologies, Inc. and IllumeSys Pacific, Inc. v. Molecular Analytical Systems, Inc., LumiCyte, Inc. and T. William Hutchens. On July 12, 2000, the Company filed a lawsuit in the Superior Court of the State of California against Molecular Analytical Systems, Inc. ("MAS") and LumiCyte, Inc. ("LumiCyte") requesting a declaration that Ciphergen has the right to sell information and service products, including through its Biomarker Discovery Centers, and requesting a preliminary injunction preventing MAS from terminating the sublicense agreements. In October 2000, the Company made additional claims against MAS and LumiCyte, and added T. William Hutchens as an individual 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 10.7% of the Company's outstanding common stock. Ciphergen's action 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. In October 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 described above. 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 sublicense agreements between MAS and Ciphergen. The cross–complaint also seeks to terminate the sublicense agreements, to obtain injunctive relief, to prevent use of alleged trade secrets of MAS, and damages. Ciphergen and MAS have entered into an agreement that provides that MAS's license termination notices are suspended pending the conclusion of this lawsuit.
Molecular Analytical Systems, Inc. v. Ciphergen Biosystems. The proceeding was filed December 9, 1999 in the United States Trademark and Appeal Board. The Company has applied for registration of the term "SELDI" as a trademark. MAS has opposed registration of the trademark and is seeking to have the trademark registered in its name, instead. The Trademark and Appeal Board has suspended the proceedings until resolution of the lawsuit described above.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We develop, manufacture and sell our ProteinChip® System, which uses patented Surface Enhanced Laser Desorption/Ionization ("SELDI") technology. The ProteinChip System 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 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. We have also established Biomarker Discovery CentersTM to provide research services to our clients and to foster further adoption of our products and technology. Since our inception we have incurred significant losses and as of March 31, 2001, we had an accumulated deficit of $54.9 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 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 disposable ProteinChip Arrays.
Effective July 2000, we began an eight-year lease of a 30,000 square foot building in Fremont, California. The lease was subsequently amended to add another approximately 31,000 square feet, of which we sublease 27,000 square feet to an unrelated company. The building houses most of our California based employees, as well as a Biomarker Discovery Center. We expect to incur facilities costs of approximately $1.6 million per year in connection with our facility. We use approximately 8% of the Fremont space for a Biomarker Discovery Center for which we expect to incur approximately $140,000 in facilities 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 annual facilities costs of approximately $90,000. In the fourth quarter of 2000, we leased a Biomarker Discovery Center facility near Philadelphia, Pennsylvania, with annual facilities costs of approximately $60,000. We do not have customers or partnerships for the Copenhagen facility 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 or license issues. Our limited operating history makes accurate prediction of future results of operations difficult or impossible.
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 other 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: the risk that the Company's products will not meet with market acceptance and our sales may not increase; the risk that the Company will not experience increased manufacturing efficiencies and that there will be no corresponding decline in cost of revenue as a percent of revenue; the risk that the Company will fail to successfully develop and introduce improved products; the uncertainty regarding the resolution of litigation and our ability to pursue our business and strategy; the risk that the Company's existing financial resources and interest income will not be sufficient to enable the Company to maintain current and planned operations for the period described; and the risk that the Company will incur losses on its investments. For a discussion of other risks and uncertainties affecting the Company's business, see the Company's Annual Report on Form 10-K as filed on April 2, 2001 and the Company's other filings with the Securities and Exchange Commission. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
REVENUE. Total revenue for the first quarter of 2001 was $2.7 million, an increase of $1.2 million, or 80%, compared to the first quarter of 2000. The increase was largely the result of increased unit sales of ProteinChip Systems as well as an increase in sales of ProteinChip Arrays and the initiation of revenue from Biomarker Discovery Center research contracts.
COST OF REVENUE. Cost of revenue for the first quarter of 2001 was $1.0 million, an increase of $0.4 million, or 75%, compared to the first quarter of 2000. The increase was primarily due to higher sales volumes. Cost of revenue as a percent of revenue decreased from 38% to 37%, principally due to manufacturing efficiencies as unit volumes of our ProteinChip System production increased. Stock-based compensation expense in cost of revenue was $72,000 in the first quarter of 2001 compared to $25,000 in the same quarter of 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the first quarter of 2001 were $2.6 million, an increase of $1.7 million, or 171%, compared to the first quarter of 2000. The increase was due primarily to higher compensation expenses resulting from an increase in headcount. Stock-based compensation expense in research and development was $218,000 in the first quarter of 2001 compared to $136,000 in the same quarter of 2000. We expect research and development expenses exclusive of stock-based compensation to increase in 2001 relative to 2000.
SALES AND MARKETING EXPENSES. Sales and marketing expenses in the first quarter of 2001 were $3.0 million, an increase of $1.5 million, or 103%, compared to the first quarter of 2000. 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. Staffing in sales and marketing approximately doubled from March 31, 2000 to March 31, 2001. There was also increased spending for trade shows, advertising and sales literature. Stock-based compensation expense in sales and marketing was $298,000 in the first quarter of 2001 compared to $283,000 in the same quarter of 2000. We expect sales and marketing expenses exclusive of stock-based compensation to increase in 2001 relative to 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses during the first quarter of 2001 were $3.4 million, an increase of $2.2 million, or 203%, compared to the first quarter of 2000. The increase can be partly attributed to charges related to stock-based compensation, which were $1.0 million in the first quarter of 2001 compared to $417,000 in the corresponding quarter of 2000. In addition, we incurred higher compensation expenses as the result of headcount increases, and increased legal fees resulting from our litigation and patent filings. We expect general and administrative expenses exclusive of stock-based compensation to increase in 2001 relative to 2000.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest income in the first quarter of 2001 was $1.5 million compared to $159,000 in the same quarter of 2000. The increase was due to the higher cash and investment balances that resulted from our initial public offering in September 2000. Interest expense of $30,000 for the first quarter of 2001 was a decrease of approximately $21,000 from the same quarter of 2000. This was due to repaying our line of credit, and to declining lease and loan balances. In the first quarter of 2001, we recorded $12,000 as equity in the net loss of our Japanese joint venture, compared to a $28,000 loss in the corresponding quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
From our inception through March 31, 2001, we have financed our operations principally with $21.2 million from the sales of products and services to customers and with equity financings totaling $157.0 million. This includes the $101.2 million initial public offering in September 2000. Cash, cash equivalents and long-term investments at March 31, 2001 were $103.2 million compared to $107.6 million at December 31, 2000. Working capital at March 31, 2001 was $98.5 million, compared to $108.0 million at December 31, 2000.
Net cash used in operating activities was $2.9 million in the first three months of 2001, which was primarily the result of net losses in operations of $6.0 million, offset by $1.5 million of amortization of deferred compensation, $1.0 million of changes in operating assets and liabilities, and $479,000 of depreciation and amortization.
Net cash used in investing activities was $5.5 million in the first three months of 2001, which consisted principally of property and equipment purchases and purchases of long-term investments.
Net cash used in financing activities was $136,000 in the first three months of 2001, largely the result of repayments on long-term debt and capital lease obligations. Long-term debt and capital lease balances at March 31, 2001 were $726,000.
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 approximately $600,000 for each Biomarker Discovery Center we establish, consisting of laboratory equipment, 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 our 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.
RISK FACTORS
We expect to continue to incur net losses in the foreseeable future. If we are unable to significantly increase our revenues, we may never achieve profitability.
From our inception in December 1993, through March 31, 2001, we have generated cumulative revenue of approximately $21.2 million and have incurred net losses of approximately $54.9 million. We have experienced significant operating losses each year since our inception and expect these losses to continue for the next several years. For example, we experienced net losses of approximately $6.0 million in the first quarter of 2001, $20.3 million in 2000, $8.0 million in 1999, and $8.1 million in 1998. Our losses have resulted principally from costs incurred in research and development, sales and marketing, and general and administrative costs associated with our operations. These costs have exceeded our revenue which, to date, has been generated principally from product sales. We expect to incur additional operating losses and these losses may be substantial as a result of increases in expenses for manufacturing, marketing and sales, research and product development, and general and administrative costs. We may never achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
If we fail to successfully develop and commercialize our products, our revenue will not increase and we will not achieve profitability.
We began full commercialization of our products in May 1999. Our success will depend on our ability to continue to develop and expand commercial sales of our ProteinChip System, including our ProteinChip Arrays. In addition, we may encounter difficulties in producing our ProteinChip System or we may not be able to produce it economically, we may fail to achieve expected performance levels, or we may have to set a price for it that is unacceptable to our customers. We may not be able to successfully develop and commercialize our ProteinChip System or any other products on a timely basis, achieve anticipated performance levels, gain industry acceptance of such products or develop a profitable business.
If we are unable to maintain our licensed rights to the SELDI technology, we may lose the right to produce our ProteinChip Systems and products based on the SELDI technology.
Our commercial success depends on our ability to maintain our sublicenses to the SELDI technology. We acquired our core SELDI technology, which was originally developed at the Baylor College of Medicine, pursuant to royalty–bearing sublicenses in the fields in which we operate. Our rights under these sublicenses are set forth in agreements between MAS, the exclusive licensee of the Baylor patents, and our subsidiaries, IllumeSys Pacific, Inc. and Ciphergen Technologies, Inc.
In July 2000, in response to MAS's claims that we had materially breached the sublicense agreements and threatened termination of the sublicense agreements, we filed a lawsuit against MAS and LumiCyte requesting a declaration that we have the right to sell information and service products, including through our Biomarker Discovery Centers, and requesting a preliminary injunction preventing MAS from terminating the sublicense agreements. In October 2000, we made additional claims against MAS and LumiCyte and added Dr. T. William Hutchens as an individual defendant. Dr. Hutchens is the Chief Executive Officer of both MAS and LumiCyte, a former officer and director of Ciphergen, and the beneficial owner of approximately 10.7% of the Company's outstanding common stock.
We believe that our cause of action has merit and we intend to pursue the litigation aggressively. 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 others 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 do not prevail in our cause of action, and if the court determines that we have materially breached the sublicense agreements, there is a risk that the sublicense agreements 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 and we were unable to obtain a license to these rights, we would be precluded from selling any SELDI–based products within the scope of the Baylor patents, we would no longer generate revenue from the sale of these products and we would have to revise our business direction and strategy. See "Legal Proceedings."
If we are unable to reduce our lengthy sales cycle, our ability to become profitable will be harmed.
Our ability to obtain customers for our products depends in significant part upon the perception that our products and services can help enable protein biomarker discovery, characterization and assay development. From the time we make initial contact with a potential customer until we receive a binding purchase order typically takes between a few months to one year. Our sales effort requires the effective demonstration of the benefits of our products, and may require significant training, sometimes to many different departments within a potential customer. These departments might include research and development personnel and key management. In addition, we may be required to negotiate agreements containing terms unique to each customer. We may expend substantial funds and management effort and may not be able to successfully sell our products or services in a short enough time to achieve profitability.
We may need to raise additional capital in the future, and if we are unable to secure adequate funds on terms acceptable to us, we may be unable to execute our business plan.
We currently anticipate that current cash resources will be sufficient to meet our anticipated financial needs for at least the next two years. However, we may need to raise additional capital sooner in order to develop new or enhanced products or services, establish Biomarker Discovery Centers and other facilities, or acquire complementary products, businesses or technologies to respond to competitive pressures. If we are unable to obtain financing, or to obtain it on acceptable terms, we may be unable to successfully execute our business plan.
If we are unable to establish the accuracy and utility of our products, we will not achieve market acceptance.
We introduced our second generation ProteinChip System, Series PBS II, and second generation ProteinChip Arrays in May 1999. The commercial success of our ProteinChip System will depend upon validating its accuracy and utility for additional biological applications and increasing its market acceptance by researchers in pharmaceutical and biotechnology companies, academic and government research centers and clinical reference laboratories. If the accuracy of our ProteinChip System in providing commercially useful protein information proves to be not equal to or better than current technologies, it could seriously undermine market acceptance of our products and reduce the likelihood that we will ever achieve profitability.
If we are unable to provide our customers with software that enables the integration and analysis of large volumes of data, the acceptance and use of our products may be limited.
The successful commercial research application of our products requires that they enable researchers to process and analyze large volumes of data and to integrate the results into other phases of their research. The nature of our software enables a level of integration and analysis that is adequate for many projects. However, if we do not continue to develop and improve the capabilities of our ProteinChip Software to perform more complex analyses of customer samples and to meet increasing customer expectations, our products may not gain market acceptance, we may lose our current customers and we may be unable to develop a profitable business.
If we do not effectively manage growth, management attention could be diverted and our ability to increase revenues and profitability could be harmed.
We are rapidly and significantly expanding our operations, which is placing a significant strain on our financial, managerial and operational resources. For example, we have recently significantly increased our worldwide sales force and other personnel, with plans for further expansion, and have established additional Biomarker Discovery Centers, with plans to expand their scope. These changes could divert management attention or otherwise disrupt our operations. In order to achieve and manage this growth effectively, we must continue to improve and expand our operational and financial management capabilities and resources. Moreover, we will need to effectively train, integrate, motivate and retain our employees. Our failure to manage our growth effectively could damage our ability to increase revenue and become profitable.
If we are unable to successfully expand our limited manufacturing capacity, we may encounter manufacturing and quality control problems as we increase our efforts.
We currently have only one manufacturing facility at which we produce limited quantities of our ProteinChip Arrays and ProteinChip Readers. Some aspects of our manufacturing processes may not be easily scalable to allow for production of our ProteinChip Arrays or ProteinChip Readers in larger volumes, resulting in higher than anticipated material, labor and overhead costs per unit. As a result, manufacturing and quality control problems may arise as we increase our level of production. We may not be able to increase our manufacturing capacity in a timely and cost-effective manner and we may experience delays in manufacturing new products. If we are unable to consistently manufacture our ProteinChip Arrays and ProteinChip Readers on a timely basis because of these or other factors, we will not be able to meet anticipated demand. As a result, we may lose sales and fail to generate increased revenue and become profitable.
We face intense competition in our current and potential markets and if our competitors develop new technologies or products, our products may not achieve market acceptance and may fail to capture market share.
Competition in our existing and potential markets is intense and we expect it to increase. Currently, our principal competition comes from other technologies that are used to perform many of the same functions for which we market our ProteinChip System. The major technologies that compete with our ProteinChip System are liquid chromatography-mass spectrometry and 2D-gel electrophoresis-mass spectrometry. In the life science research market, protein research tools are currently provided by a number of companies. Several companies also provide products and services, some of which may be competitive with ours. In many instances these competitors may have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than we do. Additionally, our potential customers may internally develop competing technologies. 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 decrease.
If the government grants a license to others to the SELDI technology, it may harm our business.
Some of the inventions covered by the sublicense agreements were developed under a grant from an agency of the U.S. government and therefore the government has a paid-up non-exclusive non-transferable license to those inventions, and the right in limited circumstances to grant a license to others on reasonable terms. If the government exercises those rights our business could be harmed.
If a competitor infringes our proprietary rights, we may lose any competitive advantage we may have as a result of diversion of management time, enforcement costs and the loss of the exclusivity of our proprietary rights.
Our commercial success depends in part on our ability to maintain and enforce our proprietary rights. We rely on a combination of patents, trademarks and trade secrets to protect our technology and brand. In addition to our licensed SELDI technology, we also have submitted patent applications directed to subsequent technological improvements and application of the SELDI technology. Our patent applications may not result in us being granted additional patents.
If competitors engage in activities that infringe our proprietary rights, our management's focus will be diverted and we may incur significant costs in asserting our rights. We may not be successful in asserting our proprietary rights, which could result in our patents being held invalid or a court holding that the competitor is not infringing, either of which would harm our competitive position. We cannot be sure that others will not design around our patented technology.
We also rely upon the skills, knowledge and experience of our technical personnel. To help protect our rights, we require all employees to enter into confidentiality agreements that prohibit the disclosure of confidential information to anyone outside of us. These agreements may not provide adequate protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure.
If others successfully assert their proprietary rights against us, we may be precluded from making and selling our products or we may be required to obtain licenses to use their technology.
Our success also depends on avoiding infringing on the proprietary technologies of others. We are aware of third parties whose business involves the use of mass spectrometry for the analysis of proteins and DNA. Certain of these parties have issued patents or pending patent applications on technology that they might assert against us. If they successfully make such assertions, we may be required to obtain licenses to use that technology and such licenses may not be available on commercially reasonable terms, if at all. We may incur substantial costs defending ourselves in lawsuits against charges of patent infringement or other unlawful use of another's proprietary technology. Any such lawsuit may not be decided in our favor, and if we are found liable, we may be subject to monetary damages or injunction against using their technology.
If we are unsuccessful in obtaining a federal registration for the SELDI trademark and we are successfully sued for trademark infringement, we may be required to license the mark or change the name of our technology and incur associated costs.
MAS has opposed our trademark application for the SELDI mark on the basis of alleged earlier use of SELDI. That opposition remains pending. As a result, we may not be successful in obtaining a federal registration for the mark and may be sued by MAS for trademark infringement based on MAS' prior claimed rights to the SELDI mark. If MAS is successful, we will have to license rights to the mark or not use the name, and we will be subjected to costs and damages.
We rely on single-source suppliers for many components of our ProteinChip System and if we are unable to obtain components we would be harmed and our operating results would suffer.
We depend on many single-source suppliers for the necessary materials and components required to assemble our products. Because of limited quantities of products manufactured at this stage of our development, it is not economically feasible to qualify and maintain alternate vendors for most components of our ProteinChip Reader and ProteinChip Arrays. We have occasionally experienced delays in receiving components, resulting in manufacturing delays. If we are unable to procure the necessary materials and components from our current vendors, we will have to arrange new sources of supply and our materials and components shipments could be delayed, harming our ability to assemble and manufacture our ProteinChip Reader and ProteinChip Arrays, and our ability to sustain or increase revenue could be harmed. As a result, our costs could increase and our profitability could be harmed.
If there are reductions in research funding, the ability of our existing and prospective research customers to purchase our products could be seriously harmed.
A significant portion of our products for research use is likely to be sold to universities, government research laboratories, private foundations and other institutions where funding is dependent upon grants from government agencies, such as the National Institutes of Health. Government funding for research and development has fluctuated significantly in the past due to changes in congressional appropriations. Research funding by the government may be significantly reduced in the future. Any such reduction may seriously harm the ability of our existing and prospective research customers to purchase our products or reduce the number of ProteinChip Arrays used. Limitations in funding for commercial, academic and biotechnology and pharmaceutical companies that are the potential customers for our ProteinChip System and ProteinChip Arrays and cost containment pressures for biomedical research may limit our ability to sell our products.
Consolidation in the pharmaceutical and biotechnology industries may reduce the size of our target market and cause a decrease in our revenue.
Consolidation in the pharmaceutical and biotechnology industries is generally expected to occur. Planned or future consolidation among our current and potential customers could decrease or slow sales of our technology and reduce the markets our products target. Any such consolidation could limit the market for our products and seriously harm our ability to achieve or sustain profitability.
If we are unable to attract clients for our Biomarker Discovery Centers, we may not be successful in furthering adoption of our products and technology and achieving profitability.
An element of our business strategy is to establish Biomarker Discovery Centers, in part through partnerships with academic and government research centers, and with pharmaceutical and biotechnology companies. Although we are currently in negotiations with potential partners and clients, to date we have entered into only a few such arrangements. Failure to enter into additional arrangements could limit adoption of our products and prevent us from achieving profitability.
We rely on a continuous power supply to conduct our operations, and California's current energy crisis could disrupt our operations and increase our expenses.
California is in the midst of an energy crisis that could disrupt our operations and increase our expenses. In the event of an acute power shortage, California has on some occasions implemented, and may in the future continue to implement, rolling blackouts throughout California. We currently do not have backup generators or alternate sources of power in the event of a blackout, and our current insurance does not provide coverage for any damages we or our customers may suffer as a result of any interruption in our power supply. If blackouts interrupt our power supply, we would be temporarily unable to continue operations at our main facility in Fremont. Any such interruption in our ability to continue operations at our Fremont facility could damage our reputation, harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm our business and results of operations.
Furthermore, the deregulation of the energy industry instituted in 1996 by the California government has caused power prices to increase. If wholesale power prices continue to increase, our operating expenses will likely increase, as our main facility is located in Fremont, California.
Our stock price has been highly volatile, and your investment could suffer a decline in value.
The trading price of our common stock has been highly volatile and could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:
• actual or anticipated variations in quarterly operating results;
• failure to achieve, or changes in, financial estimates by securities analysts;
• announcements of new products, services or technological innovations by us or our competitors;
• conditions or trends in the pharmaceutical, biotechnology and life science industries;
• announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
• additions or departures of key personnel;
• sales of our common stock;
• developments regarding our litigation; and
• developments regarding our patents or other intellectual property, or that of our competitors.
In addition, the stock market in general, and the Nasdaq National Market and the market for technology companies in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of life science companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management's attention and resources.
There may not be an active, liquid trading market for our common stock.
There is no guarantee that an active trading market for our common stock will be maintained on the Nasdaq Stock Market's National Market. You may not be able to sell your shares quickly or at the latest market price if trading in our stock is not active.
The large number of shares of our common stock which recently became eligible for public sale could cause our stock price to decline.
The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. All of the shares sold in our recently completed initial public offering are freely transferable without restriction or further registration under the Securities Act, except for any shares purchased by our "affiliates," as defined in Rule 144 of the Securities Act. The remaining shares of common stock outstanding are "restricted securities" as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act, to the extent permitted by Rule 144 or other exemptions under the Securities Act.
On January 11, 2001 we registered 2,797,216 shares of common stock that are reserved for issuance upon exercise of options granted under our stock option and employee stock purchase plans. These shares can be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates.
Anti-takeover provisions in our charter and bylaws and under Delaware law could make a third party acquisition of us difficult.
Our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be deemed beneficial by our stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control of us.
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
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
Almost all of our revenue is realized in U.S. dollars. Therefore, we do not believe that we currently have any significant direct foreign currency exchange rate risk.
PART II OTHER INFORMATION
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., LumiCyte, Inc. and T. William Hutchens and Molecular Analytical Systems, Inc. v. Ciphergen Biosystems, Inc. There were no material developments in either of these causes of action during the first quarter of 2001. For a complete description of the main aspects in dispute in these matters, please refer to Ciphergen's Form 10-K filed with the Securities and Exchange Commission on April 2, 2001.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2001, we granted stock options to purchase an aggregate of 250,140 shares of our common stock at an exercise price of $8.50 per share to employees under our 2000 Stock Plan. During the three months ended March 31, 2001, employees exercised options for 14,022 shares of common stock for aggregate consideration of approximately $20,000. The issuance of these 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 March 31, 2001, no warrants were issued or exercised.
The Company had its initial public offering ("IPO") of 5,500,000 shares of common stock on September 28, 2000 at price of $16.00 per share. On October 3, 2000 the underwriters exercised their option to purchase an additional 825,000 shares of common stock. The IPO generated aggregate gross proceeds of approximately $101.2 million for the Company. The net proceeds to the Company were approximately $92.4 million, after deducting underwriting discounts and commissions of approximately $7.1 million and expenses of the offering of approximately $1.7 million. Combined with previously existing resources, the Company had $107.6 million in cash and cash equivalents at December 31, 2000.
From the time of receipt through March 31, 2001, the proceeds from the offering and previously-existing cash and cash equivalents were used for general corporate purposes including expansion of sales and marketing, research and development, and general and administrative functions; to establish and expand Biomarker Discovery Centers; for capital expenditures of approximately $1.9 million; and for working capital.
As of March 31, 2001, the Company had $103.2 million in cash, cash equivalents and long-term investments. In the future, the Company intends to utilize its financial resources for working capital; expansion of sales and marketing, reseach and development and general and administrative functions; capital expenditures; and general corporate purposes which may include strategic investments or acquisitions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| (a) | The following exhibits have been filed with this report: | |||
| 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 | |||
| *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. | |||
| On January 9, 2001, the Company filed a report on Form 8-K regarding its preliminary revenue forecast for the fourth quarter of 2000. | ||||
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: May 15, 2001
| 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) |
