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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________________ TO
_________________________.
Commission file # 000-28229
CALIPER TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
Delaware 33-0675808
(State of Incorporation) (I.R.S. Employer Identification Number)
605 FAIRCHILD DRIVE
MOUNTAIN VIEW, CA 94043-2234
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (650) 623-0700
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 [X] No [ ]
COMMON SHARES OUTSTANDING ON APRIL 27, 2001: 23,928,024
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CALIPER TECHNOLOGIES CORP.
TABLE OF CONTENTS
Page
PART I Financial Information
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets as of March 31, 2001
and December 31, 2000...................................................... 2
Condensed Statements of Operations for the Three Months
Ended March 31, 2001 and 2000............................................... 3
Condensed Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2000............................................... 4
Notes to Unaudited Condensed Financial Statements.............................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 18
Item 2. Changes in Securities and Use of Proceeds....................................... 19
Item 3. Defaults upon Senior Securities................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............................. 20
Item 5. Other Information............................................................... 20
Item 6. Exhibits and Reports on Form 8-K................................................ 20
Signatures..................................................................................... 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CALIPER TECHNOLOGIES CORP.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 9,184 $ 36,294
Marketable securities ................................. 118,724 106,303
Accounts receivable ................................... 2,070 2,991
Inventories ........................................... 4,018 2,206
Other receivable ...................................... -- 1,033
Prepaid expenses and other current assets ............. 1,526 1,237
--------- ---------
Total current assets .................................... 135,522 150,064
Marketable securities ................................... 56,326 49,102
Other receivable ........................................ 25,501 --
Investment in common stock .............................. 4,950 --
Security deposits ....................................... 3,000 3,000
Property and equipment, net ............................. 10,193 9,101
Notes receivable from officers .......................... 515 615
Other assets, net ....................................... 2,653 632
--------- ---------
Total assets ............................................ $ 238,660 $ 212,514
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 1,840 $ 2,960
Accrued compensation .................................. 1,872 1,946
Other accrued liabilities ............................. 865 1,351
Deferred revenue ...................................... 3,216 3,763
Current portion of equipment financing ................ 1,657 1,671
--------- ---------
Total current liabilities ............................... 9,450 11,691
Noncurrent portion of equipment financing ............... 3,491 3,534
Deferred revenue ........................................ 111 194
Other noncurrent liabilities ............................ 776 638
Commitments and contingencies
Stockholders' equity:
Common stock .......................................... 23 23
Additional paid-in capital ............................ 249,309 249,004
Deferred stock compensation ........................... (4,004) (4,772)
Accumulated deficit ................................... (22,022) (48,426)
Accumulated other comprehensive gain .................. 1,526 628
--------- ---------
Total stockholders' equity .............................. 224,832 196,457
--------- ---------
Total liabilities and stockholders' equity .............. $ 238,660 $ 212,514
========= =========
See accompanying notes.
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CALIPER TECHNOLOGIES CORP.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
-------- --------
Revenue:
Licensing ............................................................. $ 5,000 $ --
Other revenue ......................................................... 4,793 3,912
-------- --------
Total revenue ........................................................... 9,793 3,912
Costs and expenses:
Research and development .............................................. 9,831 7,091
General and administrative ............................................ 3,190 2,713
Amortization of deferred stock compensation (1) ....................... 768 1,446
-------- --------
Total costs and expenses ................................................ 13,789 11,250
-------- --------
Operating loss .......................................................... (3,996) (7,338)
Interest income, net .................................................... 2,900 1,338
Gain on settlement of litigation ........................................ 27,500 --
-------- --------
Net income(loss) before accounting change ............................... 26,404 (6,000)
Cumulative effect of a change in accounting principle ................... -- (2,294)
-------- --------
Net income(loss) ........................................................ $ 26,404 $ (8,294)
======== ========
Net income(loss) per share, basic:
Net income(loss) before accounting change ............................... $ 1.11 $ (0.29)
Cumulative effect of a change in accounting principle ................... -- (0.11)
-------- --------
Net income(loss) per share .............................................. $ 1.11 $ (0.40)
======== ========
Shares used in computing net income(loss) per share, basic .............. 23,835 20,887
Net income(loss) per share, diluted:
Net income(loss) before accounting change ............................... $ 1.03 $ (0.29)
Cumulative effect of a change in accounting principle ................... -- (0.11)
-------- --------
Net income(loss) ........................................................ $ 1.03 $ (0.40)
======== ========
Shares used in computing net income(loss)
per share, diluted .................................................... 25,681 20,887
(1) Amortization of deferred stock compensation relates to the following:
Research and development ........................................... $ 268 $ 515
General and administrative ......................................... 500 931
-------- --------
Total ................................................................... $ 768 $ 1,446
======== ========
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CALIPER TECHNOLOGIES CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net income(loss) ................................................ $ 26,404 $ (8,294)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Gain on settlement of litigation and non-cash license
revenue .................................................... (32,500) --
Cumulative effect of a change in accounting principle .......... -- 2,294
Depreciation and amortization .................................. 746 460
Amortization of deferred stock compensation .................... 768 1,446
Stock options issued to non-employees .......................... (58) 501
Changes in operating assets and liabilities:
Accounts receivable ......................................... 1,954 820
Notes receivable from officers .............................. 100 85
Inventories ................................................. (1,812) (920)
Prepaid expenses and other current assets ................... (289) (436)
Accounts payable and other accrued liabilities .............. (1,606) 785
Accrued compensation ........................................ (74) 130
Deferred revenue ............................................ (630) (508)
Other noncurrent liabilities ................................ 138 67
-------- --------
Net cash used in operating activities ........................... (6,859) (3,570)
-------- --------
INVESTING ACTIVITIES
Purchases of available-for-sale securities ...................... (68,572) (34,478)
Proceeds from sales of available-for-sale securities ............ 22,645 7,052
Proceeds from maturities of available-for-sale securities........ 27,180 12,577
Purchase of property and equipment .............................. (1,810) (373)
-------- --------
Net cash used in investing activities ........................... (20,557) (15,222)
-------- --------
FINANCING ACTIVITIES
Proceeds from equipment financing ............................... 400 657
Payments of obligations under equipment financing ............... (457) (396)
Proceeds from issuance of common stock .......................... 363 17
-------- --------
Net cash provided by financing activities ....................... 306 278
-------- --------
Net decrease in cash and cash equivalents ....................... (27,110) (18,514)
Cash and cash equivalents at beginning of period ................ 36,294 44,772
-------- --------
Cash and cash equivalents at end of period ...................... $ 9,184 $ 26,258
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid ................................................... $ 160 $ 150
======== ========
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NONCASH
INVESTING ACTIVITIES
Other receivable ............................................... 25,501 --
Investment in common stock ...................................... 4,950 --
Other assets .................................................... 2,049 --
See accompanying notes.
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CALIPER TECHNOLOGIES CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The accompanying unaudited condensed 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 Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring entries) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. For further information, refer to the financial
statements and notes thereto included in the Annual Report on Form 10-K for the
year ended December 31, 2000 filed by Caliper Technologies Corp.
REVENUE RECOGNITION
Revenue is earned from Caliper's collaboration agreement, Technology Access
Program agreements, Automated Microfluidics System 90, Applications Developer
Program, licensing and royalty agreements and government grants.
COLLABORATION AGREEMENT
Revenue from development activities under Caliper's collaboration agreement
is recorded in the period in which the costs are incurred. Direct costs
associated with this contract are reported as research and development expense.
Revenue related to the reimbursement of costs for the supply of chips and
reagents to our collaboration partner is recognized upon shipment. Caliper's
share of gross margin on components of the LabChip(R) system sold by the
collaboration partner is recognized as revenue upon shipment by the
collaboration partner to the end user.
TECHNOLOGY ACCESS PROGRAM AGREEMENTS
Caliper has entered into a number of multi-year Technology Access Program
agreements that include: (1) access to existing technology; (2) a multi-year
subscription for technology developed during the subscription period; (3)
development and support services; and (4) access to prototype LabChip systems
developed during the subscription period. Caliper allocates the total
arrangement fees to each element based on fair value. Fair value is based on
renewal rates for subscriptions, prices established by Caliper's management
having the relevant authority for development and support services and the price
at which a program participant has the ability to purchase unspecified
quantities of a specific prototype product.
Prior to January 1, 2000, Caliper recognized non-refundable license fees
under its Technology Access Programs as revenue upon transfer of the license to
third parties and when no further performance obligations existed. Effective
January 1, 2000, Caliper changed its method of accounting for non-refundable
license fees to recognize such fees ratably over the term of the committed
related Technology Access Program agreement. Caliper believes the change in
accounting principle is preferable based on guidance provided in SEC Staff
Accounting Bulletin No. 101 -- Revenue Recognition in Financial Statements.
Caliper further believes that the change is preferable as it is possible that
Technology Access Program participants would not pay the non-refundable license
fees without Caliper's continuing involvement in the subscription period, in
providing support services, and in making prototype products available for
purchase during the subscription period. The $2.3 million cumulative effect of
the change in accounting principle was reported as a charge in the period ended
March 31, 2000. The cumulative effect was initially recorded as deferred revenue
and is being recognized as revenue over the remaining contractual terms of the
Technology Access Program agreements. During the quarter ended March 31, 2000,
the impact of the change in accounting was to increase net loss by ($1.8
million), or ($0.09 per share), comprised of the $2.3 million cumulative effect
of the change in accounting principle ($0.11 per share), net of $450,000 of the
related deferred revenue which was recognized as revenue during the quarter
($0.02 per share). During the quarter ended March 31, 2001, we recorded $200,000
of the related deferred revenue as revenue ($0.01 per share). The remainder of
the related deferred revenue will be recognized as revenue approximately as
follows: $600,000 over the remainder of 2001 and $194,000 in 2002.
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Subscription fees are recognized ratably over the subscription period. When
payment of the subscription fee is contingent upon reaching a milestone, revenue
is deferred until the milestone is met. Support and development services revenue
is recognized in the periods the costs are incurred. Product revenue is
recognized upon transfer of title to the customer.
AUTOMATED MICROFLUIDICS SYSTEM 90 AND APPLICATIONS DEVELOPER PROGRAM
Product revenue is recognized upon the transfer of title to customers and
is recorded net of discounts, rebates and allowances. Service revenue is
recognized ratably over the service term.
LICENSING AND ROYALTY
Revenue from Caliper's up-front license fees is recognized when the
earnings process is complete and no further obligations exist. If further
obligations exist, the up-front license fee is recognized ratably over the
obligation period. Royalties from licenses are based on third party sales and
recorded as earned in accordance with contract terms, when third-party results
are reliably measured and collectibility is assured.
GOVERNMENT GRANTS
Caliper's grant from the National Institute of Standards and Technology
provides for the reimbursement of qualified expenses for research and
development as defined under the terms of the grant agreement. Revenue under
grant agreements is recognized when the related research expenses are incurred.
DERIVATIVE AND HEDGING ACTIVITIES ACCOUNTING POLICY FOR DERIVATIVE INSTRUMENTS
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended. In connection with the adoption of SFAS
133, the Company recognizes derivative financial instruments in the financial
statements at fair value regardless of the purpose or intent for holding the
instrument. Changes in the fair value of derivative financial instruments are
either recognized periodically in income or in shareholders' equity as a
component of comprehensive income (loss) depending on whether the derivative
financial instrument qualifies for hedge accounting, and if so, whether it is
designated as a fair value hedge or cash flow hedge. For derivative instruments
that are designated and qualify as fair value hedge (i.e., hedging the exposure
to changes in the fair value of an asset or a liability or an identified portion
thereof that is attributable to a particular risk), the gain or loss on the
derivative instrument as well as the offsetting loss or gain on the hedged item
attributable to the hedged risk are recognized in current earnings during the
period of the change in fair values. For derivative instruments that are
designated and qualify as a cash flow hedge (i.e., hedging the exposure to
variability in expected future cash flows that is attributable to a particular
risk), the effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive income and is reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings. The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of future cash flows of the
hedged item, if any, is recognized in current earnings during the period of
change. Hedge effectiveness is assessed on a quarterly basis.
As discussed in Note 4, Caliper has entered into a settlement agreement
with Aclara BioSciences, Inc.. The terms of the agreement provide that if
Caliper sells its 900,000 shares of Aclara's common stock between 18 and 24
months from the effective date of the settlement agreement, and the then fair
value of Aclara's stock is less than $36.11 per share, Aclara will pay Caliper
in cash a dollar amount equal to the difference between the aggregate fair value
of the Aclara stock at the date the shares are disposed and $32.5 million. If
the then fair value of the Aclara stock is greater than $36.11 per share,
Caliper will receive no additional consideration from Aclara. Caliper is
restricted from selling its shares of Aclara for 18 months following the
effective date of the settlement agreement. If Caliper sells its shares of
Aclara stock at any time after 24 months from the effective date of the
settlement agreement, Aclara will have no obligation to provide any additional
consideration to Caliper. As discussed in Note 4, Aclara has executed a
fully-funded $32.5 million standby letter of credit in favor of Caliper to
secure its performance under this potential obligation. In effect, Aclara has
guaranteed the aggregate settlement amount of $32.5 million, so long as Caliper
sells its Aclara stock within a specified period of time.
Caliper has accounted for this arrangement as if it received $4.3 million
in Aclara stock and a face value of $28.2 million other receivable reduced by
the initial fair value ($2.7 million) of an embedded derivative. The embedded
derivative has been designated as a fair value hedge of the Aclara stock. The
mark-to-market change in the fair value of the Aclara stock is recorded in
earnings in
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the other income or expense line on the statement of operations and is offset by
the gains or losses in the fair value of the derivative reported in the same
other income or expense line. The ineffective portion of the embedded derivative
is also recorded in the other income or expense line on the statement of
operations.
STOCK-BASED COMPENSATION
Caliper accounts for its stock options and equity awards in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and has elected to follow the "disclosure only"
alternative prescribed by Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Caliper accounts for stock options issued to
non-employees in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force 96-18. For the quarters ended March 31, 2001 and 2000,
compensation expense related to stock options issued to non-employees was
($58,000) and $501,000, respectively.
NET INCOME (LOSS) PER SHARE
Basic earnings per share is calculated based on the weighted-average number
of common shares outstanding during the period. Diluted earnings per share would
give effect to the dilutive effect of common stock equivalents consisting of
stock options and warrants (calculated using the treasury stock method).
Potentially dilutive securities have been excluded from the diluted earnings per
share computation for the quarter ended March 31, 2000 as they have an
antidilutive effect due to Caliper's net loss in that quarter.
A reconciliation of shares used in the calculations is as follows (in
thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
------- -------
Basic:
Weighted-average shares of common stock outstanding ........... 23,853 21,018
Less: weighted-average shares subject to repurchase ........... (18) (131)
------- -------
Weighted-average shares used in basic net income(loss)
per share ................................................... 23,835 20,887
======= =======
Diluted:
Weighted average shares of common stock outstanding ........... 23,853 21,018
Plus: weighted average shares of common stock equivalents ..... 1,846 --
Less: weighted average shares subject to repurchase ........... (18) (131)
------ ------
Weighted average shares used in diluted net income(loss)
per share .................................................. 25,681 20,887
======= =======
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NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
2001 2000
------ ------
Raw material ............ $3,360 $2,018
Work in process ......... 473 151
Finished goods .......... 185 37
------ ------
Total ................... $4,018 $2,206
====== ======
NOTE 3 -- COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income(loss) for the three months ended
March 31, 2001 and 2000 are as follows (in thousands):
Three Months Ended March 31,
----------------------------
2001 2000
------------ -------------
Net income(loss) ....................... $26,404 $(8,294)
Unrealized gain(loss) on securities .... 898 (214)
------- -------
Comprehensive income(loss) ............. $27,302 $(8,508)
======= =======
NOTE 4 -- LITIGATION
On March 22, 1999, Caliper filed a lawsuit in California Superior Court for
the County of Santa Clara against Aclara and others alleging that all the
defendants misappropriated certain of Caliper's trade secrets relating to
Caliper business plans, patents and intellectual property strategy. On September
14, 2000, Caliper reached a settlement agreement with the defendants other than
Aclara. On October 27, 2000, the jury returned a verdict in favor of Caliper and
against Aclara on Caliper's claims for misappropriation of trade secrets and
conversion of property. The jury awarded Caliper $52.6 million for damages to
Caliper and unjust enrichment to Aclara, which the court reduced to $35.6
million.
On April 23, 1999, Aclara filed a lawsuit in United States District Court
for the Northern District of California alleging that Caliper was making, using,
selling or offering for sale microfluidic devices in willful disregard of
Aclara's patent rights. The Aclara action sought damages for past and future
reduced sales or lost profits based upon Caliper's alleged fabrication, use,
sale or offer for sale of allegedly infringing products and processes, and
sought to enjoin Caliper's continued activities relating to these products.
Caliper counterclaimed for a declaratory judgment of noninfringement, invalidity
and unenforceability of all claims of the Aclara patent.
On January 12, 2000, Caliper filed a lawsuit in United States District
Court for the Northern District of California alleging that Aclara was
infringing four U.S. patents licensed to Caliper by Lockheed Martin Energy
Research Corporation. These patents cover technology for controlling the flow of
materials in microfluidic chips, as well as devices, systems and applications
that make use of this technology. Caliper subsequently amended this complaint to
add a fifth, related patent. Aclara counterclaimed for a declaratory judgment
that the patents in this suit were invalid, unenforceable and were not infringed
by Aclara.
On January 7, 2001, Caliper announced a comprehensive settlement agreement
with Aclara on all pending litigation between the two companies. Under the terms
of the settlement both companies agreed to dismiss all suits and countersuits in
the federal and state court actions and to cross-license selected patents. The
settlement provides Caliper with freedom to operate under Aclara's `022 family
of patents, which includes the `015 and other patents, for its glass chips and
related instruments through a fully paid, royalty-free license. Under the terms
of the agreement, Aclara will also pay Caliper $37.5 million over the next three
years in a combination of stock, cash, and committed minimum royalties. Caliper
has agreed to license to Aclara the "Ramsey" family of patents for use with
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Aclara's polymer chips and related instruments in exchange for license fees and
royalties. The two companies have also agreed to an alternative dispute
resolution procedure for handling potential future patent disagreements out of
court.
On March 22, 2001, in connection with the settlement agreement mentioned
above, Caliper received 900,000 shares of Aclara's common stock with a then
current fair value of $4.3 million. The common stock is restricted from sale for
a period of 18 months from the date of the settlement agreement. As a component
of the settlement agreement, Aclara has effectively guaranteed the value of the
Aclara common stock to be $32.5 million at the time of Caliper's sale of the
stock, provided that such sale occurs in the period from 18 months to 24 months
from the effective date of the settlement agreement. Aclara entered into a
fully-funded $32.5 million standby letter of credit in favor of Caliper to
secure its performance under this potential obligation. Accordingly, Caliper has
recognized the entire $32.5 million settlement in the quarter ended March 31,
2001. Caliper has recognized $5.0 million of license fee revenue and $27.5
million of litigation settlement in the income statement pursuant to the terms
contained in the settlement agreement. Caliper does not have any further
obligations under the agreement.
Caliper has accounted for this arrangement as if it received $4.3 million
in Aclara stock and a face value of $28.2 million other receivable reduced by
the initial fair value ($2.7 million) of an embedded derivative. The latter two
elements in combination represent the guarantee. The receivable will be accreted
to its face value of $28.2 million over the life of the receivable using the
level-yield method. The embedded derivative will be accounted for as discussed
in Note 1.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of March 31, 2001 and for the three month periods ended
March 31, 2001 and March 31, 2000 should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the year ended
December 31, 2000.
Except for historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. The cautionary
statements made in this report should be read as applying to all related
forward-looking statements wherever they appear in this report. Our actual
results could differ materially from those discussed here. Factors that could
cause or contribute to these differences include those discussed in "--Factors
Affecting Operating Results" below as well as those discussed elsewhere.
OVERVIEW
We are a leader in lab-on-a-chip technologies that miniaturize, integrate
and automate many laboratory processes. We develop, manufacture and sell our
proprietary LabChip(R) systems to pharmaceutical and other companies. We believe
our LabChip(R) systems have the potential to assemble the power and reduce the
scale of entire laboratories full of equipment and people. From inception in
July 1995 through March 2001, our operating activities were primarily devoted to
research, development and commercialization of technologies involving the
manipulation of very small amounts of fluid, which are referred to as
"microfluidic technologies," and first-generation products such as the Agilent
2100 Bioanalyzer, LabChip(R) kits and our high throughput systems, recruiting
personnel, business development, raising capital and acquiring assets. In 1999,
we recognized revenue from our first product sales when we sold initial versions
of our high throughput system for drug screening to three of our Technology
Access Program customers Amgen, Eli Lilly and Roche. In addition, in September
1999, Agilent Technologies, Inc., our commercial partner, introduced our first
LabChip(R) system for use by individual researchers. In March 2000, we
recognized revenue from our first multi-capillary sipper chip system and
Millennium Pharmaceuticals joined our Technology Access Program, becoming our
fourth Technology Access Program customer, and also joined our joint
applications development program, which was formalized later in the year as our
Applications Developer Program. In May 2000, we introduced the DNA 500
LabChip(R) kit for the automated analysis of small DNA fragments to determine
their size and concentration. In August 2000, we introduced the Protein 200
LabChip(R) kit for the automated sizing and analysis of protein samples. In
September 2000, we introduced the Automated Microfluidics System 90 to perform
automated high throughput nucleic acid analysis. In December 2000,
GlaxoSmithKline became our second Applications Developer Program customer, with
the goal of developing new applications in synthetic chemistry using our
LabChip(R) technology. On January 7, 2001, we announced a comprehensive
settlement agreement with Aclara Biosciences on all pending litigation between
the two companies. As a result, Aclara will pay us $37.5 million over the next
three years in a combination of stock, cash, and committed minimum royalties. We
shipped our first Automated Microfluidics System 90 and our first microfluidics
development workstation, the Caliper 42, in March 2001. In April 2001, we
introduced the DNA 1000 LabChip(R) kit for the automated analysis of DNA
fragments to determine their size and concentration.
Since our inception, we have incurred significant losses and, as of March
31, 2001, we had an accumulated deficit of $22.0 million. Our losses have
resulted principally from costs incurred in research and development,
manufacturing scale-up, and from general and administrative costs associated
with our operations. We expect to continue to incur substantial research and
development, manufacturing scale-up, and general and administrative costs. As a
result, we will need to generate significantly higher revenue to achieve
profitability.
Our revenue has been derived principally from contract revenue earned under
our collaboration agreement with Agilent and from our Technology Access Program
customers. To a lesser extent, we have derived revenue from the sale of products
and government grants. In addition, during the quarter ended March 31, 2001, we
derived revenue of $5.0 million from our initial licensing of the Ramsey family
of patents to Aclara. This licensing revenue will not recur in year 2001.
Although we are developing and plan to introduce future products, we cannot
provide assurance that we will be successful in these efforts. To date, we have
generated a substantial portion of our revenue from a limited number of sources.
During the quarter ended March 31, 2001, our licensing of the Ramsey family of
patents to Aclara accounted for 51% of our revenue, Agilent alone accounted for
24% of our revenue and our Technology Access Program customers collectively
accounted for 18% of our revenue. During the quarter ended, March 31, 2000
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Agilent alone accounted for 38% of our revenue in this period and three
Technology Access Program customers collectively accounted for 55% of our
revenue in this period.
Under our collaboration agreement, Agilent funds our research and
development expenditures related to the collaboration, reimburses us for our
costs of supplying chips and reagents to Agilent and pays us a share of the
gross margin earned on all components of LabChip(R) systems they sell. We record
revenue from development and support activities under our collaboration
agreement in the period in which the costs are incurred. We report direct costs
associated with this contract as research and development expense. We recognize
revenue related to the reimbursement of costs for the supply of chips and
reagents to Agilent upon shipment. We recognize as revenue our share of gross
margin on components of the LabChip(R) system sold by Agilent upon shipment to
the end user. Agilent only began marketing and sales efforts for the Agilent
2100 Bioanalyzer in late 1999. Sales of new and innovative instrumentation such
as the Agilent 2100 Bioanalyzer involve a long sales cycle, requiring customer
training and demonstration periods. Sales of the Agilent 2100 Bioanalyzer
increased during the course of 2000 and the first quarter of 2001 indicating, we
believe, a growing market acceptance of this technology.
Under our Technology Access Program agreements, we recognize as revenue
non-refundable license fees over the contract period, product sales upon the
transfer of title to the customer, and development and support fees in the
period in which the costs are incurred. Subscription fees and development and
support fees may be received annually or quarterly in advance depending upon the
terms of the agreement. We record payments received in advance under all of
these agreements as deferred revenue until earned.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 and 2000
Revenue. Revenue increased to $ 9.8 million for the quarter ended March 31,
2001 from $3.9 million for the comparable period in 2000. Of the increase, $5.0
million is attributed to a licensing fee for the Ramsey family of patents to
Aclara. The remaining increase is principally attributed to product sales
derived from our commercial collaboration with Agilent.
Research and Development Expenses. Research and development expenses
consist primarily of salaries and related personnel costs, fees paid to
consultants and outside service providers for chip development, material costs
for prototype and test units, legal expenses resulting from intellectual
property prosecution and litigation, and other expenses related to the design,
development, testing and enhancement of our products. Research and development
expenses increased to $9.8 million for the quarter ended March 31, 2001 from
$7.1 million for the quarter ended March 31, 2000. The increase of $2.7 million
was attributable to continued growth of research and development activities,
including $2.1 million related to growth in personnel and services to support
our Technology Access Program, partner collaboration and initial product
launches as a result of a 57% increase in headcount from March 31, 2000. We
expect research and development spending to increase in proportion to our
revenue growth over the next several years as we expand our research and product
development efforts.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related expenses for executive, finance and
other administrative personnel, recruiting expenses, professional fees, and
other corporate expenses including business development and general legal
activities. General and administrative expenses increased to $3.2 million for
the quarter ended March 31, 2001 from $2.7 million for the quarter ended March
31, 2000. The increase of $479,000 was primarily due to compensation for general
and administrative personnel, as a result of a 36% increase in headcount
compared to the quarter ended March 31, 2000. We expect general and
administrative expenses to continue to increase over the next several years to
support our growing business activities, the commercialization of our products,
and due to the costs associated with operating as a public company.
Amortization of Deferred Stock Compensation. Deferred stock compensation
represents the difference between the deemed fair value of our common stock for
accounting purposes and the exercise price of options at the date of grant.
During 1998 and 1999, we recorded deferred stock compensation totaling $13.2
million. This amount is being amortized over the respective vesting periods of
the individual stock options using the graded vesting method. We recorded
amortization of deferred compensation of $768,000 for the quarter ended March
31, 2001, compared to $1.4 million as of March 31, 2000. We expect to record
amortization expense for deferred compensation as follows: $1.8 million for the
remainder of 2001, $1.4 million during 2001, $670,000 during 2003 and $122,000
during 2004. The amount of deferred compensation expense to be recorded in
future periods may decrease if unvested options for which deferred compensation
has been recorded are subsequently canceled.
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Interest Income, Net. Net interest income consists of income from our cash
and investments offset by expenses related to our financing obligations. Net
interest income increased to $2.9 million for the quarter ended March 31, 2001
from net interest income of $1.3 million for the quarter ended March 31, 2000.
The increase primarily resulted from proceeds of $104.9 million raised in August
2000 from the sale of 2,300,000 shares of common stock in a private placement.
Gain on Settlement of Litigation. The litigation settlement was $27.5
million for the quarter ended March 31, 2001, resulting from the comprehensive
settlement agreement with Aclara for the dismissal of all suits and countersuits
between the two companies, which occurred in January 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and marketable securities were $184.2 million at
March 31, 2001 compared to $191.7 million at December 31, 2000. We used cash of
$6.9 million for operations for the three month period ended March 31, 2001 as
compared to $3.6 for the comparable period in 2000. Cash used in the three month
period ended March 31, 2001 consisted primarily of the net income of $26.4
million offset by non-cash charges of $31.0 million related to gain on
litigation settlement and non-cash revenue, amortization of deferred stock
compensation, stock options issued to non-employees and depreciation and
amortization expense and $2.2 million from changes in operating assets and
liabilities.
As of March 31, 2001, we have a committed capital resource of $32.5 million
as a result of a litigation settlement. As a component of the settlement
agreement, Aclara has effectively guaranteed the value of the Aclara common
stock to be $32.5 million at the time of our sale of the stock, provided that
sale occurs in the period from 18 months to 24 months from the effective date of
the settlement agreement. Aclara has entered into a fully-funded $32.5 million
standby letter of credit in favor of us to secure its performance under this
potential obligation.
Net cash used in investing activities was $20.6 million for the three
months ended March 31, 2001 as compared to $15.2 million for the comparable
period in 2000. Net cash used in investing consists primarily of purchases of
available-for-sale investments as well as capital expenditures offset by
proceeds from sales and maturities of available-for-sale investments.
Net cash provided by financing activities was $306,000 for the quarter
ended March 31, 2001 as compared to $278,000 for the comparable period in 2000.
Net proceeds from financing activities consisted principally of $400,000 from
equipment financing and $363,000 from employee stock option exercises offset in
part by repayments of equipment financing arrangements of $457,000.
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing and supporting
our products, and other factors. We expect to devote substantial capital
resources to continue our research and development efforts, to expand our
support and product development activities, and for other general corporate
activities. We believe that our current cash balances, together with the revenue
to be derived from our collaboration with Agilent and our Technology Access
Program agreements and our licensing initiatives will be sufficient to fund our
operations at least through the year 2002. During or after this period, if cash
generated by operations is insufficient to satisfy our liquidity requirements,
we may need to sell additional equity or debt securities or obtain additional
credit arrangements. Additional financing may not be available on terms
acceptable to us or at all. The sale of additional equity or convertible debt
securities may result in additional dilution to our stockholders.
FACTORS AFFECTING OPERATING RESULTS
OUR LABCHIP(R) SYSTEMS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD CAUSE OUR
REVENUE TO GROW SLOWLY OR DECLINE.
Our technologies are still in the early stages of development, and our
LabChip(R) systems incorporating these technologies have only recently been made
commercially available. If our LabChip(R) systems do not gain market acceptance,
we will be unable to generate sales and our revenue will decline. The commercial
success of our LabChip(R) systems will depend upon market acceptance of the
merits of our LabChip(R) systems by pharmaceutical and biotechnology companies,
academic research centers and other companies that rely upon laboratory
experimentation. We have not yet demonstrated these benefits. Market acceptance
will depend on many factors, including:
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o our ability to demonstrate the advantages and potential economic value
of our LabChip(R) systems over alternative well-established
technologies and products
o the extent of Agilent's efforts to market the Agilent 2100 Bioanalyzer
o our ability to market our high throughput systems through our
Technology Access Program or other commercial programs
Because the products comprising our LabChip(R) systems have been in
operation for a limited period of time, their accuracy, reliability, ease of use
and commercial value have not been fully established. If the Agilent 2100
Bioanalyzer customers or our Technology Access Program customers do not approve
of our LabChip(R) systems because these systems fail to generate the quantities
and quality of data they expect, are too difficult or costly to use, or are
otherwise deficient, market acceptance of these LabChip(R) systems would suffer
and further sales may be limited. We cannot provide assurance that these
customers' efforts to put our LabChip(R) systems into use will continue or will
be expeditious or effective. Potential customers for our high throughput systems
may also wait for indications from our four initial Technology Access Program
customers that our high throughput systems work effectively and generate
substantial benefits. Further, non-acceptance by the market of our LabChip(R)
systems could undermine not only those systems but subsequent LabChip(R) systems
as well.
WE EXPECT TO INCUR FUTURE OPERATING LOSSES AND MAY NOT ACHIEVE PROFITABILITY.
We have experienced significant operating losses each year since our
inception and may incur additional operating losses this year, primarily as a
result of expected increases in expenses for manufacturing capabilities,
research and product development costs and general and administrative costs. We
may not achieve profitability. For example, we experienced net losses of
approximately $3.0 million in 1998, $14.4 million in 1999 and $13.3 million in
2000. As of March 31, 2001, we had an accumulated deficit of approximately $22.0
million. Our losses have resulted principally from costs incurred in research
and development and from general and administrative costs associated with our
operations. These costs have exceeded our litigation settlement and
reimbursement, interest income and revenue which, to date, have been generated
principally from collaborative research and development agreements, technology
access fees, cash and investment balances and, to a lesser extent, product sales
and government grants.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND ANY FAILURE TO MEET FINANCIAL
EXPECTATIONS MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A
DECLINE IN OUR STOCK PRICE.
Our quarterly operating results have fluctuated significantly in the past
and we expect they will fluctuate in the future as a result of many factors,
some of which are outside of our control. For example, our revenues have varied
dramatically as a result of new customers joining our Technology Access Program
and product shipments. It is possible that in some future quarter or quarters,
our operating results will be below the expectations of securities analysts or
investors. In this event, the market price of our common stock may fall abruptly
and significantly. Because our revenue and operating results are difficult to
predict, we believe that period-to-period comparisons of our results of
operations are not a good indication of our future performance.
If revenue declines in a quarter, whether due to a delay in recognizing
expected revenue or otherwise, our earnings will decline because many of our
expenses are relatively fixed. In particular, research and development and
general and administrative expenses and amortization of deferred stock
compensation are not affected directly by variations in revenue.
OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY CAUSE US TO ENGAGE IN COSTLY LITIGATION AND, IF WE ARE NOT SUCCESSFUL, COULD
ALSO CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING OUR
PRODUCTS.
Third parties may assert infringement or other intellectual property claims
against us, such as the Aclara litigation that was recently settled and is
described under "Part II -- Item 1. Legal Proceedings." We may have to pay
substantial damages, including treble damages, for past infringement if it is
ultimately determined that our products infringe a third party's proprietary
rights. Further, we may be prohibited from selling our products before we obtain
a license, which, if available at all, may require us to pay substantial
royalties. Even if these claims are without merit, defending a lawsuit takes
significant time, may be expensive and may divert management attention from
other business concerns. We are aware of third-party patents that may relate to
our technology or potential products. We have also been notified that third
parties have attempted to provoke an interference with one issued U.S. patent
that we have exclusively licensed to determine the priority of inventions. Any
public announcements related to litigation or interference proceedings initiated
or threatened against us could cause our stock price to decline. We recently
settled intellectual property litigation
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with Aclara concerning one family of Aclara patents. However, Aclara could
assert other patent infringement claims against us in the future in alternative
dispute resolution proceedings established under our settlement agreement. If we
are found to be infringing any valid patent claims asserted by Aclara in
alternative dispute resolution proceedings, we may be prohibited from selling
our products before we obtain a license, which, if available at all, may require
us to pay substantial royalties.
WE MAY NEED TO INITIATE LAWSUITS TO PROTECT OR ENFORCE OUR PATENTS, WHICH WOULD
BE EXPENSIVE AND, IF WE LOSE, MAY CAUSE US TO LOSE SOME OF OUR INTELLECTUAL
PROPERTY RIGHTS, WHICH WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET.
We rely on patents to protect a large part of our intellectual property and
our competitive position. In order to protect or enforce our patent rights, we
may initiate patent litigation against third parties, such as the patent
infringement suit against Aclara that was recently settled and is described
under "Part II -- Item 1. Legal Proceedings." These lawsuits could be expensive,
take significant time, and could divert management's attention from other
business concerns. They would put our patents at risk of being invalidated or
interpreted narrowly and our patent applications at risk of not issuing. We may
also provoke these third parties to assert claims against us. Patent law
relating to the scope of claims in the technology fields in which we operate is
still evolving and, consequently, patent positions in our industry are generally
uncertain. We cannot provide assurance that we will prevail in any of these
suits or that the damages or other remedies awarded, if any, will be
commercially valuable. During the course of these suits, there may be public
announcements of the results of hearings, motions and other interim proceedings
or developments in the litigation. If securities analysts or investors perceive
any of these results to be negative, it could cause our stock to decline.
THE RIGHTS WE RELY UPON TO PROTECT OUR INTELLECTUAL PROPERTY UNDERLYING OUR
PRODUCTS MAY NOT BE ADEQUATE, WHICH COULD ENABLE THIRD PARTIES TO USE OUR
TECHNOLOGY AND WOULD REDUCE OUR ABILITY TO COMPETE IN THE MARKET.
In addition to patents, we rely on a combination of trade secrets,
copyright and trademark laws, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
Nevertheless, these measures may not be adequate to safeguard the technology
underlying our products. If they do not protect our rights, third parties could
use our technology, and our ability to compete in the market would be reduced.
In addition, employees, consultants and others who participate in the
development of our products may breach their agreements with us regarding our
intellectual property, and we may not have adequate remedies for the breach. We
also may not be able to effectively protect our intellectual property rights in
some foreign countries. For a variety of reasons, we may decide not to file for
patent, copyright or trademark protection outside of the United States. We also
realize that our trade secrets may become known through other means not
currently foreseen by us. Notwithstanding our efforts to protect our
intellectual property, our competitors may independently develop similar or
alternative technologies or products that are equal or superior to our
technology and products without infringing on any of our intellectual property
rights or design around our proprietary technologies.
IF WE DO NOT SUCCESSFULLY INTRODUCE NEW PRODUCTS AND EXPAND THE RANGE OF
APPLICATIONS FOR OUR LABCHIP(R) SYSTEMS, WE MAY EXPERIENCE A DECLINE IN REVENUE
OR SLOW REVENUE GROWTH AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We intend to develop LabChip(R) systems with increasingly high throughput
capabilities and develop a broad range of applications for our LabChip(R)
technology. If we are unable to do so, our LabChip(R) systems may not become
widely used and we may experience a decline in revenue or slow revenue growth
and may not achieve or maintain profitability.
In order for our high throughput systems to achieve the levels of
throughput necessary to meet customers' demands, we may need to develop and
manufacture sipper chips with more than four capillaries. Our current high
throughput systems operate with sipper chips with one and four capillaries,
small glass tubes used to draw compounds into the chip. In order to achieve the
levels of throughput that our customers desire, we may need to develop a
LabChip(R) system accommodating more than four capillaries, which we may not be
able to do. If we cannot cost-effectively deliver chips with more than four
capillaries, we may not be able to attract new customers to purchase our high
throughput systems, which would seriously harm our future prospects. Further,
our existing Technology Access Program customers may decide not to renew their
annual access subscriptions, which would seriously reduce our revenue.
We must develop new applications for existing LabChip(R) instruments, which
we may not be able to do. The Agilent 2100 Bioanalyzer uses LabChip(R) kits that
we specifically design for each application. We currently have LabChip(R) kits
commercially available for six applications relating to DNA, RNA and protein
sizing and quantification. DNA and RNA are commonly used acronyms for chemicals
that contain, or transmit, genetic information in living things. We currently
are developing LabChip(R) kits for
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other applications. If we are unable to develop LabChip(R) kits for specific
applications required by potential customers, those customers may not purchase
the Agilent 2100 Bioanalyzer.
We must also continue to develop applications for our high throughput
systems. If we are not able to complete the development of these applications,
or if we experience difficulties or delays, we may lose our current Technology
Access Program customers and may not be able to obtain new customers.
WE RELY HEAVILY ON AGILENT TO MANUFACTURE, MARKET AND DISTRIBUTE THE AGILENT
2100 BIOANALYZER. IF AGILENT FAILS TO PERFORM UNDER OUR AGREEMENT OR
SUCCESSFULLY COMMERCIALIZE OUR COLLABORATIVE PRODUCTS, OUR REVENUE FROM THE
AGILENT 2100 BIOANALYZER MAY NOT BE MATERIAL AND WE MAY LOSE THE DEVELOPMENT
FUNDING WE CURRENTLY RECEIVE FROM AGILENT.
Agilent manufactures, markets and distributes the Agilent 2100 Bioanalyzer
under an agreement we entered into in May 1998. We also rely on Agilent for
significant financial and technical contributions in the development of products
covered by the agreement. Our ability to develop, manufacture and market these
products successfully depends significantly on Agilent's performance under this
agreement. Sales of new and innovative instrumentation such as the Agilent 2100
Bioanalyzer involve a long sales cycle, requiring customer training and
demonstration periods. Although sales of the Agilent 2100 Bioanalyzer increased
in 2000 and the first quarter of 2001, we cannot predict whether this trend will
continue at its current pace, if at all. If Agilent experiences manufacturing or
distribution difficulties, does not actively market the Agilent 2100
Bioanalyzer, or does not otherwise perform under this agreement, our revenue
from the Agilent 2100 Bioanalyzer may not be material. In addition, Agilent may
terminate the agreement at their discretion at any time after May 2001. If
Agilent terminates this agreement, we would need to obtain development funding
from other sources, and we may be required to find one or more other
collaborators for the development and commercialization of our products. Our
inability to enter into agreements with commercialization partners or develop
our own marketing, sales, and distribution capabilities would increase costs and
impede the commercialization of our products.
AGILENT MAY COMPETE WITH US IF OUR COLLABORATION TERMINATES AFTER MAY 2003,
WHICH COULD REDUCE THE POTENTIAL REVENUE FROM OUR INDEPENDENT PRODUCT SALES.
Under the terms of our agreement with Agilent, if they, or we, terminate
our agreement after May 2003, we will grant to Agilent a non-exclusive license
to our LabChip(R) technologies as then developed for use in the research
products field. Consequently, there is the possibility that we may experience
competition from Agilent after May 2003, which would reduce our ability to sell
products independently or through other commercial partners.
IF AGILENT DETERMINES THAT WE MAY BE VIOLATING A THIRD-PARTY PATENT, IT MAY
TERMINATE SALES OF THE AGILENT 2100 BIOANALYZER, WHICH WILL DECREASE OUR
REVENUE.
Under our collaboration agreement with Agilent, Agilent may elect at any
time to stop developing, manufacturing or distributing any product that it
reasonably determines, on the advice of counsel, poses a substantial risk of
infringing a third-party patent. For example, if a third-party claims that we
are violating their patent, then Agilent may terminate marketing and selling of
the Agilent 2100 Bioanalyzer system, which Agilent began marketing in September
1999, which will decrease our future revenue.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND MAY ENCOUNTER
MANUFACTURING PROBLEMS OR DELAYS, WHICH COULD RESULT IN LOST REVENUE.
Although Agilent manufactures the Agilent 2100 Bioanalyzer, we manufacture
the chips used in this instrument and also currently manufacture instruments and
sipper chips for our high throughput systems. We currently have limited
manufacturing capacity for our LabChip(R) system products and experience
variability in manufacturing yields for chips. If we fail to deliver chips and
high throughput screening products in a timely manner, our relationships with
our customers could be seriously harmed, and revenue would decline. We currently
have one manufacturing location in Mountain View, California. The actual number
of chips we are able to sell or use depends in part upon the manufacturing
yields for these chips. We have only recently begun to manufacture significant
numbers of sipper chips and are continuing to develop our manufacturing
procedures for these chips. In order to offer sipper chips with more than four
capillaries for high throughput applications, we will need to continue to
achieve consistently high yields in this process. We cannot provide assurance
that manufacturing or quality problems will not arise as we attempt to scale-up
our production of chips or that we can scale-up manufacturing in a timely manner
or at commercially reasonable costs. If we are unable to consistently
manufacture sipper chips or chips for the Agilent 2100 Bioanalyzer on a timely
basis because of these or other factors, our product sales will decline. We are
currently manufacturing high throughput instruments in-house and in limited
volumes. If demand for our
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high throughput instruments increases, we will either need to expand our
in-house manufacturing capabilities or outsource to Agilent or other
manufacturers.
WE ARE DEPENDENT ON A SOLE-SOURCE SUPPLIER FOR OUR GLASS AND IF WE ARE UNABLE TO
BUY THIS COMPONENT ON A TIMELY BASIS, WE WILL NOT BE ABLE TO DELIVER OUR
PRODUCTS TO CUSTOMERS.
We currently purchase a key component for our chips from a sole-source
supplier located in Germany. Although we keep surplus inventory in our Mountain
View manufacturing facility, if we are unable to replenish this component on a
timely basis, we will not be able to deliver our chips to our customers which
would harm our business.
OUR BUSINESS OPERATIONS MAY BE ADVERSELY AFFECTED BY THE CALIFORNIA ENERGY
CRISIS.
Our principal facilities are located in the Silicon Valley in Northern
California. California has been experiencing an energy crisis that has resulted
in disruptions in power supply and increases in utility costs to consumers and
business throughout the State. Should the energy crisis continue, together with
many other Silicon Valley companies, we may experience power interruptions and
shortages and be subject to significantly higher costs of energy. Although, we
have not experienced any material disruption to our business to date, if the
energy crisis continues and power interruptions or shortages occur in the
future, they may adversely affect our business. Any material increase in energy
costs may also adversely affect our financial results.
IF A NATURAL DISASTER STRIKES OUR MANUFACTURING FACILITY WE WOULD BE UNABLE TO
MANUFACTURE OUR PRODUCTS FOR A SUBSTANTIAL AMOUNT OF TIME AND WE WOULD
EXPERIENCE LOST REVENUE.
We rely on a single manufacturing location to produce our chips and high
throughput systems, and have no alternative facilities. The facility and some
pieces of manufacturing equipment are difficult to replace and could require
substantial replacement lead-time. Our manufacturing facility may be affected by
natural disasters such as earthquakes and floods. Earthquakes are of particular
significance since the manufacturing facility is located in Mountain View,
California, an earthquake-prone area. In the event our existing manufacturing
facility or equipment is affected by man-made or natural disasters, we would be
unable to manufacture products for sale, meet customer demands or sales
projections. If our manufacturing operations were curtailed or ceased, it would
harm our business.
BECAUSE A SMALL NUMBER OF CUSTOMERS AND AGILENT HAVE ACCOUNTED FOR, AND ARE
LIKELY TO CONTINUE TO ACCOUNT FOR, A SUBSTANTIAL PORTION OF OUR REVENUE, OUR
REVENUE COULD DECLINE DUE TO THE LOSS OF ONE OF THESE CUSTOMERS OR THE
TERMINATION OF OUR AGREEMENT WITH AGILENT.
Historically we have had very few customers and one commercial partner,
Agilent, from which we have derived the majority of our revenue and, if we were
to lose any one of these, our revenue would decrease substantially. For the
quarter ended March 31, 2001, Agilent, Technology Access Program customers, and
our initial licensing of the Ramsey family of patents to Aclara in connection
with our litigation settlement with them, accounted for 93% of our total
revenue. Agilent and three customers accounted for 90% of total revenue for the
year ended December 31, 2000. Agilent and four customers accounted for 88% of
total revenue in 1999. We and Agilent introduced the Agilent 2100 Bioanalyzer
system in September 1999 and have received only modest revenue from the sale of
this product on a commercial scale. Although we anticipate that future sales of
the Agilent 2100 Bioanalyzer system will further expand our revenue base, we
expect that we will continue to rely on our large customers and on Agilent for
the majority of our revenue.
WE HAVE REACHED THE FINAL CONTRACT YEAR FOR SOME OF OUR TECHNOLOGY ACCESS
PROGRAM AGREEMENTS.
The third and final year of our Technology Access Program agreement with
Amgen began on January 1, 2001. In addition, the third and final year of our
Technology Access Program agreement with Eli Lilly will begin on August 12,
2001. Although we believe that these customers will continue to use LabChip(R)
products and services, we may not derive significant revenue from them in the
future.
WE DEPEND ON OUR KEY PERSONNEL, THE LOSS OF WHOM WOULD IMPAIR OUR ABILITY TO
COMPETE.
We are highly dependent on the principal members of our management and
scientific staff. The loss of services of any of these persons could seriously
harm our product development and commercialization efforts. In addition,
research, product development and
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commercialization will require additional skilled personnel in areas such as
chemistry and biology, software engineering and electronic engineering. Our
business is located in Silicon Valley, California, where demand for personnel
with these skills is extremely high and is likely to remain high. As a result,
competition for and retention of personnel, particularly for employees with
technical expertise, is intense and the turnover rate for these people is high.
If we are unable to hire, train and retain a sufficient number of qualified
employees, our ability to conduct and expand our business could be seriously
reduced. The inability to retain and hire qualified personnel could also hinder
the planned expansion of our business.
POTENTIAL ACQUISITIONS MAY HAVE UNEXPECTED CONSEQUENCES OR IMPOSE ADDITIONAL
COSTS ON US.
Our business is dependent upon growth in the market for microfluidic
products and our ability to enhance our existing products and introduce new
products on a timely basis. One of the ways we may address the need to develop
new products is through acquisitions of complementary businesses and
technologies. From time to time, we may consider and evaluate potential
acquisitions or business combinations, which may include a possible merger or
consolidation of our business with another entity. We may engage in discussions
relating to these types of transactions in the future. Acquisitions involve
numerous risks, including the following:
o difficulties in integration of the operations, technologies, and
products of the acquired companies
o the risk of diverting management's attention from normal daily
operations of the business
o accounting consequences, including charges for in-process research and
development expenses, resulting in variability in our quarterly
earnings
o potential difficulties in completing projects associated with
purchased in-process research and development
o risks of entering markets in which we have no or limited direct prior
experience and where competitors in such markets have stronger market
positions
o the potential loss of key employees of the acquired company
o the assumption of unforeseen liabilities of the acquired company
We cannot provide assurance that future acquisitions or business combinations in
which we are involved, if any, will be successful and will not adversely affect
our financial condition or results of operations. Failure to manage growth
effectively and successfully integrate acquisitions we make could harm our
business and operating results.
RISKS RELATED TO OWNING OUR COMMON STOCK
OUR STOCK PRICE IS EXTREMELY VOLATILE, AND INVESTORS COULD LOSE A SUBSTANTIAL
PORTION OF THEIR INVESTMENT.
Our stock has been trading on the Nasdaq National Market only since
mid-December 1999. We initially offered our common stock to the public at $16.00
per share. Since then our stock price has been extremely volatile and has
ranged, through April 27, 2001, from a high of approximately $202.00 per share
on March 2, 2000 to a low of $12.00 per share on March 22, 2001. Our stock price
may drop substantially following an investment in our common stock. We expect
that our stock price will remain volatile as a result of a number of factors,
including:
o announcements by analysts regarding their assessment of Caliper and
its prospects
o announcements of our financial results or other corporate
developments, particularly if they differ from investors' expectations
o general market volatility for technology stocks
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PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER,
WHICH COULD LIMIT THE PRICE INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR
OUR COMMON STOCK.
Provisions in our certificate of incorporation and bylaws may have the effect of
delaying or preventing an acquisition, merger in which we are not the surviving
company or changes in our management. In addition, because we are incorporated
in Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law. These provisions may prohibit large stockholders, in
particular those owning 15% or more of the outstanding voting stock, from
consummating a merger or combination including us. These provisions could limit
the price that investors might be willing to pay in the future for our common
stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the principal amount of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. Declines of interest rates over
time will reduce our interest income from our investments. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
investments in a variety of securities, including commercial paper, money market
funds, government and non-government debt securities.
The table below presents our investment portfolio by expected maturity and
related weighted average interest rates at March 31, 2001:
FAIR
2001 2002 2003 TOTAL VALUE
-------- -------- -------- -------- --------
Money market fund ........................... $ 9,184 -- -- $ 9,184 $ 9,184
Average interest rate ....................... 5.98% -- -- 5.98%
Available for sale marketable securities .... $ 88,923 $ 67,063 $ 20,538 $176,524 $178,050
Average interest rate ....................... 6.15% 6.30% 6.29% 6.23%
Total securities ............................ $ 98,107 $ 67,063 $ 20,538 $185,708 $187,234
Average interest rate ....................... 6.13% 6.30% 6.29% 6.21%
Our equipment financings, amounting to $5.1 million as of March 31, 2001,
are all at fixed rates and therefore, have minimal exposure to changes in
interest rates.
We have operated primarily in the United States and all sales to date have
been made in U.S. dollars. Accordingly, we have not had any material exposure to
foreign currency rate fluctuations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 22, 1999, we filed a lawsuit in California Superior Court for the
County of Santa Clara (Case No. CV 780743), against Aclara Biosciences Inc. and
others alleging that all defendants misappropriated our trade secrets relating
to our business plans, patents and intellectual property strategy. The suit
sought damages and equitable remedies to prevent Aclara and the other defendants
from benefiting from the alleged misappropriation and breach of duties. On
September 14, 2000, we reached a settlement agreement with the defendants other
than Aclara. On October 27, 2000, the jury returned a verdict in favor of
Caliper and against Aclara on Caliper's claims for misappropriation of trade
secrets and conversion of property. The jury awarded Caliper $52.6 million for
damages to Caliper and unjust enrichment to Aclara, which the court reduced to
$35.6 million.
On April 23, 1999, Aclara Biosciences filed a lawsuit in United States
District Court for the Northern District of California (Case No. C-99-1968BZ)
alleging that we are making, using, selling or offering for sale microfluidic
devices that infringe United States Patent Number 5,750,015 in willful disregard
of Aclara's patent rights. The Aclara action sought damages for past and future
reduced sales or lost profits based upon our alleged fabrication, use, sale or
offer for sale of allegedly infringing products and processes, and
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sought to enjoin our continued activities relating to these products. We
counterclaimed for a declaratory judgment of noninfringement, invalidity and
unenforceability of all claims of the Aclara patent.
On January 12, 2000, we filed a lawsuit in the United States District Court
for the Northern District of California against Aclara (Case No.
C-00-0145CRB(JCS)) alleging that Aclara was infringing four U.S. patents that
have been licensed to us by Lockheed Martin Energy Research Corporation, which
operates the Department of Energy's Oak Ridge National Laboratory where the
inventions were made. These patents cover technology for controlling the flow of
materials in microfluidic chips, as well as devices, systems and applications
that make use of this technology. We subsequently amended this complaint to add
a fifth, related patent. Aclara counterclaimed for a declaratory judgment that
the patents in this suit were invalid, unenforceable and were not infringed by
Aclara.
On January 7, 2001, we announced that we had reached a comprehensive
settlement agreement with Aclara on all pending litigation between the two
companies. Under the terms of the settlement both companies agreed to dismiss
all suits and countersuits in the federal and state court actions and to
cross-license selected patents. The settlement provides us with freedom to
operate under Aclara's `022 family of patents, which includes the `015 and other
patents, for our glass chips and related instruments through a fully paid,
royalty-free license. Under the terms of the agreement, Aclara will also pay us
$37.5 million over the next three years in a combination of stock, cash, and
committed minimum royalties. We have agreed to license to Aclara the Ramsey
family of patents for use with Aclara's polymer chips and related instruments in
exchange for license fees and royalties. The two companies have also agreed to
an alternative dispute resolution procedure for handling potential future patent
disagreements out of court.
On March 22, 2001, in connection with the settlement agreement mentioned
above, we received 900,000 shares of Aclara's common stock with a then current
fair value of $4.3 million. The common stock is restricted from sale for a
period of 18 months from the date of the settlement agreement. As a component of
the settlement agreement, Aclara has effectively guaranteed the value of the
Aclara common stock to be $32.5 million at the time of our sale of the stock,
provided that such sale occurs in the period from 18 months to 24 months from
the effective date of the settlement agreement. Aclara entered into a
fully-funded $32.5 million standby letter of credit in favor of us to secure its
performance under this potential obligation. Accordingly, we have recognized the
entire $32.5 million settlement in the quarter ended March 31, 2001. We have
recognized $5.0 million of license fee revenue and $27.5 million of litigation
settlement in the income statement pursuant to the terms contained in the
settlement agreement. We do not have further obligations under the agreement.
We have accounted for this arrangement as if we received $4.3 million in
Aclara stock and a face value of $28.2 million other receivable reduced by the
initial fair value ($2.7 million) of an embedded derivative. The latter two
elements in combination represent the guarantee. The receivable will be accreted
to its face value of $28.2 million over the life of the receivable using the
level-yield method. The embedded derivative will be accounted for as discussed
in Note 1.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Our initial public offering of Common Stock was effected through a
Registration Statement on Form S-1 (File No. 333-88827) that was declared
effective by the SEC on December 14, 1999 and pursuant to which we sold all
5,175,000 shares of our Common Stock registered.
The aggregate offering price of the 5,175,000 shares registered and sold
was $82.8 million. Of this amount, $5.8 million was paid in underwriting
discounts and commissions, and an additional $1.1 million of expenses was
incurred through December 31, 1999. None of the expenses were paid, directly or
indirectly, to directors, officers or persons owning 10 percent or more of our
common stock, or to our affiliates.
As of March 31, 2001, we had applied the estimated aggregated net proceeds
of $75.9 million from our initial public offering as follows:
Temporary investments ........ $ 10.6 million
Working capital .............. $ 55.5 million
Capital expenditures ......... $ 7.6 million
Repayment of indebtedness .... $ 2.2 million
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The foregoing amounts represent our best estimate of our use of proceeds
for the period indicated. No such payments were made to our directors or
officers or their associates, holders of 10% or more of any class of our equity
securities or to our affiliates, other than payments to officers for salaries in
the ordinary course of business.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3.1(1) Amended and Restated Certificate of Incorporation of Caliper.
3.2(2) Bylaws of Caliper.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2(3) Specimen Stock Certificate.
10.30(4) Cross-License Agreement, dated March 12, 2001, between Caliper and
Aclara BioSciences, Inc.
10.31(4) Common Stock Issuance Agreement, dated March 12, 2001, between Caliper
and Aclara BioSciences, Inc.
10.32(4) Settlement Agreement and Mutual General Release, dated March 12, 2001,
between Caliper and Aclara BioSciences, Inc.
(1) Previously filed as Exhibit 3.3 to our Registration Statement on Form S-1,
Registration No. 333-88827.
(2) Previously filed as Exhibit 3.4 to our Registration Statement on Form S-1,
Registration No. 333-88827.
(3) Previously filed as the like-numbered Exhibit to our Registration Statement
on Form S-1, Registration No. 333-88827.
(4) Confidential treatment has been requested for a portion of this exhibit.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K on January 10, 2001, which
disclosed that we had reached a comprehensive settlement agreement
with Aclara BioSciences on all pending litigation between the two
companies.
We also filed a Current Report on Form 8-K on February 5, 2001, which
announced our fourth quarter financial results for 2000.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CALIPER TECHNOLOGIES CORP.
May 14, 2001 By: /s/ JAMES L. KNIGHTON
--------------------------------------------
James L. Knighton
Executive Vice President and Chief Financial
Officer
By: /s/ ANTHONY T. HENDRICKSON
---------------------------------------------
Anthony T. Hendrickson
Corporate Controller and Principal Accounting
Officer
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EXHIBIT INDEX
3.1(1) Amended and Restated Certificate of Incorporation of Caliper.
3.2(2) Bylaws of Caliper.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2(3) Specimen Stock Certificate.
10.30(4) Cross-License Agreement, dated March 12, 2001, between Caliper and
Aclara BioSciences, Inc.
10.31(4) Common Stock Issuance Agreement, dated March 12, 2001, between Caliper
and Aclara BioSciences, Inc.
10.32(4) Settlement Agreement and Mutual General Release, dated March 12, 2001,
between Caliper and Aclara BioSciences, Inc.
(1) Previously filed as Exhibit 3.3 to our Registration Statement on Form S-1,
Registration No. 333-88827.
(2) Previously filed as Exhibit 3.4 to our Registration Statement on Form S-1,
Registration No. 333-88827.
(3) Previously filed as the like-numbered Exhibit to our Registration Statement
on Form S-1, Registration No. 333-88827.
(4) Confidential treatment has been requested for a portion of this exhibit.
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