SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending September 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-29101
SEQUENOM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0365889
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3595 John Hopkins Court 92024
San Diego, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (858) 202-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
The number of shares of the Registrant's Common Stock outstanding as of October
31, 2001 was 37,357,729.
SEQUENOM, INC.
INDEX
Page No.
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PART I - FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
CONDENSED CONSOLIDATED BALANCE SHEETS 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II - OTHER INFORMATION 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits 27
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents, restricted cash $ 73,841,616 $ 70,045,695
Short-term investments, available-for-sale 86,347,473 68,378,050
Accounts receivable, net 11,636,562 4,267,238
Inventories, net 6,631,085 2,923,218
Other current assets and prepaid expenses 8,110,058 3,858,473
------------- -------------
Total current assets 186,566,794 149,472,674
Equipment and leasehold improvements, net 18,782,153 8,117,600
Other assets 169,697,690 8,671,610
------------- -------------
Total assets $ 375,046,637 $ 166,261,884
============= =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 31,817,801 $ 8,707,810
Deferred revenue 6,802,065 9,830,430
Current portion of debt and capital lease obligations 1,128,873 957,042
------------- -------------
Total current liabilities 39,748,739 19,495,282
Deferred revenue, less current portion 1,150,000 750,000
Debt and capital lease obligations, less current portion 3,792,732 1,077,200
Stockholders' equity:
Convertible preferred stock, par value $0.001; 5,000,000 shares
authorized and no shares issued and outstanding -- --
Common stock, par value $0.001; 75,000,000 shares authorized,
37,357,642 and 24,442,092 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively
37,358 24,442
Additional paid-in capital 457,475,516 223,140,159
Notes receivable for stock (399,843) (598,500)
Deferred compensation related to stock options (788,775) (1,551,044)
Accumulated other comprehensive income 575,663 314,843
Accumulated deficit (126,544,753) (76,390,498)
------------- -------------
Total stockholders' equity 330,355,166 144,939,402
------------- -------------
Total liabilities and stockholders' equity $ 375,046,637 $ 166,261,884
============= =============
See accompanying notes.
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
---------------------------- ----------------------------
(Unaudited) (Unaudited)
Revenues:
Product related $ 6,238,759 $ 2,283,962 $ 14,955,606 $ 5,543,800
Services 2,485,090 500,000 6,267,404 500,000
Research and development grants 80,585 -- 183,160 254,548
------------ ------------ ------------ ------------
Total revenues 8,804,434 2,783,962 21,406,170 6,298,348
------------ ------------ ------------ ------------
Costs and expenses:
Cost of product and service revenue 5,361,297 1,658,446 14,558,637 3,785,183
Research and development 8,537,212 4,328,087 20,641,498 12,349,422
Selling, general and administrative 5,642,603 4,118,581 15,677,187 13,936,686
In-process research and development 24,920,000 -- 24,920,000 --
Amortization of deferred compensation 214,498 407,838 755,434 3,397,533
------------ ------------ ------------ ------------
Total costs and expenses 44,675,610 10,512,952 76,552,756 33,468,824
------------ ------------ ------------ ------------
Loss from operations (35,871,176) (7,728,990) (55,146,586) (27,170,476)
Interest income 1,424,847 2,412,331 5,151,687 6,409,593
Interest expense (39,017) (82,352) (187,338) (4,629,761)
Other income, net 52,159 408 27,982 23,524
------------ ------------ ------------ ------------
Net loss $(34,433,187) $ (5,398,603) $(50,154,255) $(25,367,120)
============ ============ ============ ============
Historical net loss per share, basic and diluted $ (1.37) $ (0.22) $ (2.04) $ (3.01)
============ ============ ============ ============
Weighted average shares outstanding, basic and
diluted 25,098,290 24,330,513 24,600,228 8,414,073
============ ============ ============ ============
Pro forma net loss per share, basic and diluted $ (1.37) $ (0.22) $ (2.04) $ (1.08)
============ ============ ============ ============
Pro forma weighted average shares outstanding, basic
and diluted 25,098,290 24,330,513 24,600,228 23,551,819
============ ============ ============ ============
See accompanying notes.
2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
------------------------------
2001 2000
-------------- -------------
(Unaudited)
Operating activities
Net loss $ (50,154,255) $ (25,367,120)
Adjustments to reconcile net loss to net cash used in operating
activities:
Non-cash items 29,922,466 12,284,410
Changes in operating assets and liabilities:
Accounts receivable (7,287,555) (13,567,163)
Inventories (3,311,566) (2,206,059)
Other current assets (1,134,310) (6,056,618)
Other assets (1,749,105) (2,455,406)
Accounts payable and accrued expenses 8,679,490 7,116,825
Deferred revenue (2,628,366) 10,013,196
------------- -------------
Net cash used in operating activities (27,663,201) (20,237,935)
Investing activities
Purchase of equipment and leasehold improvements (12,886,345) (3,031,071)
Net change in marketable investment securities (17,477,344) (33,048,834)
Cash received from purchase acquisition 61,350,477 --
------------- -------------
Net cash provided by (used in) investing activities 30,986,788 (36,079,905)
Financing activities
Net borrowings on capital lease obligations 137,363 179,295
Repayment of long-term debt -- (3,090,870)
Proceeds from issuance of common stock 557,206 145,843,941
------------- -------------
Net cash provided by financing activities 694,569 142,932,366
------------- -------------
Net increase (decrease) in cash and cash equivalents 4,018,156 86,614,526
Effect of exchange rate changes on cash and cash equivalents (222,235) (148,039)
Cash and cash equivalents at beginning of period 70,045,695 5,200,734
------------- -------------
Cash and cash equivalents at end of period $ 73,841,616 $ 91,667,221
============= =============
Supplemental schedule of noncash investing and financing activities:
Conversion of preferred stock $ -- $ 56,793,947
============= =============
Conversion of debt and interest payable to common stock $ -- $ 7,387,010
============= =============
Fair value of net assets acquired, net of cash $ 179,449,523 $ --
============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 187,338 $ 248,679
============= =============
See accompanying notes.
3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited financial statements of SEQUENOM, Inc. ("SEQUENOM" or
the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included. Interim results
are not necessarily indicative of results for a full year.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. Certain amounts in the December 31, 2000 balance sheet
have been reclassified to conform with current year presentation.
These financial statements should be read in conjunction with the audited
financial statements and footnotes thereto included in SEQUENOM's Annual Report
on Form 10-K for the year ended December 31, 2000, as filed with the Securities
and Exchange Commission ("SEC").
(2) Inventories
Inventories at September 30, 2001 and December 31, 2000 consisted of:
September 30, December 31,
2001 2000
------------ ------------
Raw materials $ 5,670,607 $ 2,810,350
Work-in-process -- 1,976
Finished goods 1,051,513 197,532
----------- -----------
Less reserves (91,035) (86,670)
----------- -----------
$ 6,631,085 $ 2,923,218
=========== ===========
(3) Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income ("SFAS 130") requires reporting and
displaying comprehensive income (loss) and its components which, for SEQUENOM,
includes net loss and unrealized gains and losses on investments and foreign
currency translation gains and losses. In accordance with SFAS 130, the
accumulated balance of other comprehensive income (loss) is disclosed as a
separate component of stockholders' equity.
(4) Net Loss Per Share
In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff Accounting
Bulletin No. 98 ("SAB 98"), basic net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income (loss) per share
is computed by dividing the net income (loss) for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. Potentially dilutive securities comprised of incremental common shares
issuable upon the exercise of stock options and warrants, and common shares
issuable on conversion of preferred stock, were excluded from historical diluted
loss per share because of their anti-dilutive effect.
Pro forma net loss per share has been computed as described above and also gives
effect to common equivalent shares arising from preferred stock and long-term
debt that automatically converted upon the closing of the Company's initial
public offering in February 2000 (using the as-if converted method from the
original date of issuance) and reflects the elimination of interest expense on
the debt converted.
4
(5) New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued FASB
Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business Combinations" and
"Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for goodwill. FAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Under FAS 142, goodwill will
be tested annually and whenever events or circumstances occur indicating that
goodwill might be impaired. FAS 141 and FAS 142 are effective for all business
combinations completed after June 30, 2001. Upon adoption of FAS 142,
amortization of goodwill recorded for business combinations consummated prior to
July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001
that do not meet the criteria for recognition under FAS 141 will be reclassified
to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning
after December 15, 2001. As required by FAS 142, the Company will perform the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002. The Company determined the purchase price of Gemini Genomics
plc, which was acquired in September 2001, in accordance with EITF 99-12 which
assigns a price to the shares issued based on the market price at the time of
the announcement of the acquisition, which resulted in a purchase price of
approximately $240.8 million. Had the Company valued the acquisition at the date
that the deal was consummated in late September, the purchase price would have
been approximately $120 million. Adoption of FAS 142 in the first quarter of
2002 will likely result in the Company recording a cumulative effect of a change
in accounting principle to reduce the carrying value of the goodwill based on
its then implied fair value.
(6) Business Combination
In September 2001, SEQUENOM completed the merger with Gemini Genomics, a company
based in the United Kingdom. Under the terms of the agreement, holders of Gemini
Genomics ordinary shares received 0.2000 of a share of newly issued SEQUENOM
common stock in exchange for each ordinary share of Gemini Genomics. Holders of
Gemini Genomics American Depository Shares (ADSs) received 0.4000 of a share of
newly issued SEQUENOM common stock in exchange for each Gemini Genomics ADS. As
a result of this transaction, SEQUENOM issued approximately 12.9 million shares
and assumed outstanding options and warrants, equivalent to approximately 1.5
million additional shares. The transaction was accounted for using the purchase
method of accounting.
In connection with this transaction, the Company conducted an independent
valuation of the intangible assets acquired in order to allocate the purchase
price in accordance with Accounting Principles Board Opinion No. 16. The total
purchase price of $240.8 million is estimated to be allocated as follows (in
millions):
Net assets acquired $56.1
In-process research and 24.9
development
5
Intangible assets 18.7
Goodwill 141.1
------
$240.8
======
The intangible assets are being amortized over their estimated useful lives of
five years. The goodwill is not being amortized, but will be subject to an
annual impairment test. At the time of acquisition, the technological
feasibility of the acquired in-process research and development had not yet been
established and management determined that at this time the technology has no
future alternative uses and accordingly, the value assigned to in-process
research and development was immediately charged to the statement of operations.
The following unaudited pro forma data reflects the combined results of
operations of the Company and Gemini Genomics as if the acquisition has occurred
on January 1, of the respective year ($ in thousands, except per share data):
Nine Months Ended
September 30,
-----------------------------
2001 2000
------------- -------------
Revenues $ 22,911 $ 6,414
Net loss $(41,244) $(32,848)
Net loss per share, basic and diluted $ (1.11) $ (0.90)
Weighted average shares outstanding 37,313,869 36,502,655
The above pro forma data does not reflect a $24.9 million in-process research
and development charge.
(7) Subsequent Event
In November 2001, the Company announced the offer of a voluntary stock option
exchange program for its employees, officers and board members. Under the
program, participants will be able to tender for cancellation stock options that
have exercise prices equal to or greater than $10 per share for new options
expected to be issued on a date which is a least six months plus one day from
the date of cancellation of the tendered options. Approximately 1.9 million of
the 3.3 million options currently issued and outstanding are expected to be
eligible for the program.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains forward-looking statements. When used in this Form 10-Q,
the words "anticipate," "believe," "estimate," "will," "intend, "expect" and
similar expressions identify forward-looking statements. Although we believe
that our plans, intentions and expectations reflected in any such
forward-looking statements are reasonable, we can give no assurance that these
plans, intentions or expectations will be achieved. Actual results, performance
or achievements could differ materially from those contemplated, expressed or
implied by any such forward-looking statements. Important factors that could
cause actual results to differ materially from our forward-looking statements
are set forth in this Form 10-Q, including under the heading
6
"Risks and Uncertainties." In addition, the "Risk Factors" discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000, filed
with the SEC, and the "Risk Factors" discussed in the Company's proxy statement
for its special meeting of stockholders filed with the SEC on July 19, 2001
should be taken into consideration. All forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by the cautionary statements set forth in this Form 10-Q and in the Form 10-K
and proxy statement. We are under no obligation to update any forward-looking
statement, whether as a result of future events or otherwise.
OVERVIEW
We are a discovery genetics company with the tools, information and strategies
for determining the medical impact of genes and genetic variations. Utilizing a
novel population genetics approach, we are systematically identifying potential
disease-related genes that affect significant portions of the overall
population. Our core technology components include the MassARRAY(TM) system for
genetic variation and drug target validation, a broad portfolio of single
nucleotide polymorphisms (SNP) assays and diverse human population samples.
These components represent enabling technology advancements that we believe
should allow us to screen virtually all human genes in relation to all diseases
across large human populations. Using these technologies in house and in
partnerships, we are generating a portfolio of candidate disease gene markers
associated with significant human health disorders, including cardiovascular
disease, cancer, diabetes, stress and obesity. By focusing on disease genes with
a broad population impact, we expect to play an important role in bringing new
therapeutic products to the market while maximizing the return on our drug
development efforts.
In September 2001, we completed our merger with Gemini Genomics plc, a company
based in the United Kingdom. Under the terms of our agreement with Gemini
Genomics, holders of Gemini Genomics ordinary shares received 0.2 of a share of
newly issued SEQUENOM common stock in exchange for each ordinary share of Gemini
Genomics. Holders of Gemini Genomics American Depository Shares (ADSs) received
0.4 of a share of newly issued SEQUENOM common stock in exchange for each Gemini
Genomics ADS. As a result of this transaction, SEQUENOM issued approximately
12.9 million shares and assumed outstanding options and warrants to purchase
approximately 1.5 million additional shares. The transaction was accounted for
using the purchase method of accounting. We estimate that our integration
expenses will total approximately $23.0 million. These expenses include
transaction and restructuring costs. As of September 30, 2001, we had incurred
approximately $9.5 million of integration related costs.
Since we began operations in 1994, we have devoted substantially all of our
resources to the development and application of products, technologies and
services to analyze genetic variations, or SNPs, and, more recently, to
determine their association with disease. Our products include the MassARRAY(TM)
system, disposable MassARRAY(TM) kits consisting of SpectroCHIPs(TM) and
reagents, a SNP assay portfolio and a portfolio of proprietary information on
genes implicated in
7
disease. Our services include assay design for MassARRAY(TM) customers, in-house
validation projects using our MassARRAY(TM)system and disease association
studies using our proprietary DNA banks. We also use the MassARRAY(TM)
technology to identify the medical utility of genes and develop SNP panels based
on the correlation of SNPs to specific diseases. We expect that the merger with
Gemini Genomics will expand our ability to perform disease gene association and
genetic marker validation studies. We believe this will provide a pipeline of
validated genes for downstream development of diagnostic and therapeutic
products.
We commenced sales of our first product, the MassARRAY(TM) system, in January
2000. Through September 30, 2001, we had placed a total of 48 systems with
leading companies and institutions. We have sold our products to genomics,
pharmacogenomics, diagnostic and agricultural biotechnology companies, as well
as leading research institutions, in the United States, Europe and Asia. Through
September 30, 2001 our product revenues consisted of revenues from the placement
of MassARRAY(TM) systems, the sales of MassARRAY(TM) kits used in the operation
of our MassARRAY(TM) systems and the licensing of our proprietary software,
which is licensed separately from the MassARRAY(TM) system. Our service revenues
consist of genetic validation services, with revenue recognized as phases of the
projects were completed. We anticipate that revenues from our collaborations
with third parties will become an increasingly important component of our
service revenues in the future.
Since our inception, we have incurred significant losses. As of September 30,
2001, we had an accumulated deficit of $126.5 million. We expect to incur losses
for the foreseeable future, and expect all expenses to increase, as we expand
development and commercialization of new information-based products, complete
our high-throughput genotyping center, and fully implement our genetic
validation business strategies. The addition of three foreign-based Gemini
Genomics subsidiaries will also result in an increase in operating costs.
Beginning in 2002, we will report financial results and progress of our
operations in the context of two distinct business units: SEQUENOM Genetic
Systems and SEQUENOM Pharmaceuticals. SEQUENOM Genetic Systems will include the
Company's operations that support sales of MassARRAY(TM) systems and consumables
and the provision of genetic services. SEQUENOM Pharmaceuticals will include
operations relating to genetic discovery, validation of candidate genes, target
discovery and ultimately diagnostic and therapeutic products.
Results of Operations for the Three and Nine Months Ended September 30, 2001 and
2000
Revenues
Total revenues for the three and nine months ended September 30, 2001 were $8.8
million and $21.4 million, respectively, compared to $2.8 million and $6.3
million, respectively, for the same periods in 2000.
Product related revenues for the three and nine months ended September 30, 2001
were $6.2 million and $15.0 million, respectively, compared to $2.3 million and
$5.5 million, respectively, for the same periods in 2000. We placed ten of our
MassARRAY(TM) systems during
8
the quarter ended September 30, 2001, compared to three systems in the same
period of the prior year. We placed 26 systems in the nine months ended
September 30, 2001, compared to 16 systems in the same period of the prior year.
Service revenues for the three and nine months ended September 30, 2001 were
$2.5 million and $6.3 million, respectively, compared to $500,000 and $500,000,
respectively, from services in the same periods in 2000. We derived these
revenues from the completion of significant phases in genetic validation
projects. The number and magnitude of these projects have increased in 2001.
Research and development grant revenue for the three and nine months ended
September 30, 2001 were approximately $81,000 and $183,000, respectively,
compared to none and approximately $255,000 for the same periods of 2000.
Cost of product and service Revenue
Total cost of product and service revenue for the three and nine months ended
September 30, 2001 were $5.4 million and $14.6 million, respectively, compared
to $1.7 million and $3.8 million, respectively, for the same periods in 2000.
Gross margin for the three months ended September 30, 2001 was 39%, compared to
40% for the same period of the prior year. Gross margin for the nine months
ended September 30, 2001 was 31%, compared to 37% for the same period of the
prior year. Gross margins decreased in both the three month and nine month
period due to the increase in our lower margin service revenue in 2001.
Generally, we expect our service revenue to reduce our overall gross margin
initially.
Research and development expenses
Research and development expenses for the three and nine months ended September
30, 2001 were $8.5 million and $20.6 million, respectively, compared to $4.3
million and $12.3 million, respectively, in the same periods in the prior year.
During the third quarter and first nine months of 2001, our expenses increased
in comparison to the same periods in the prior year as we entered into new
collaborations and expanded existing collaborations.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three and nine months ended
September 30, 2001 were $5.6 million and $15.7 million, respectively, compared
to $4.1 million and $13.9 million, respectively, in the same periods in the
prior year. The increases in both the three months and nine months resulted from
the increase in our sales and marketing activities, expenses associated with
pursuing patents on the intellectual property we have developed, and costs
related to forming, supporting and expanding our collaborations. The amount for
the nine months ended September 30, 2000 included a one-time charge of $2.5
million from the forgiveness of certain officers' indebtedness in the final
quarter of 2000 and a one-time charge of $1 million in connection with the
termination of employment of a former chief executive officer.
9
In-process research and development In connection with the completion of
the merger with Gemini Genomics, we recorded a non-recurring, non-cash
in-process research and development charge of $24.9 million. This amount
represents the value of the research and development assets acquired from Gemini
Genomics that are not currently technologically feasible, does not have
alternative future uses at this time and will require significant further
development before they will be available for licensing.
Amortization of deferred stock compensation
Deferred stock compensation represents the difference between the estimated fair
value of our common stock and the exercise price of options at the date of
grant. Amortization of this amount for the three and nine months ended September
30, 2001 was approximately $214,000 and $755,000, respectively, compared to
approximately $408,000 and $3.4 million, respectively, for the same periods in
the prior year. The deferred compensation is being amortized over the vesting
periods of the individual stock options using the graded vesting method. We
expect to record the amortization of deferred compensation as follows: $184,000
during the remainder of 2001, $432,000 during 2002, and $182,000 during 2003.
Interest income
Interest income for the three months and nine months ended September 30, 2001
was $1.4 million and $5.2 million, respectively, compared to $2.4 million and
$6.4 million, respectively, in the same periods in the prior year. The decreases
in interest income resulted from lower average balances of cash, cash
equivalents, restricted cash and short-term investments as a result of the use
of cash to fund our operations and lower interest rates.
Interest expense
Interest expense for the three month and nine month periods ended September 30,
2001 was approximately $39,000 and $187,000, respectively, compared to
approximately $82,000 and $4.6 million, respectively, in the same periods in the
prior year. The nine-month amount in 2000 was comprised of approximately
$200,000 of interest related to capital lease obligations, $4.8 million of
non-cash interest expense recorded upon conversion of debt into common stock and
was offset by approximately $400,000 of non-cash gain recorded upon issuance of
common stock to extinguish long-term interest payable. Interest expense in all
other periods related only to capital lease obligations.
Liquidity and Capital Resources
In February 2000, we completed our initial public offering raising net proceeds
of approximately $144.1 million. At September 30, 2001, cash, cash equivalents,
restricted cash and short-term investments totaled $160.2 million. This amount
included $61.4 million as a result of our merger with Gemini Genomics. Our cash
reserves are held in a variety of interest-bearing instruments including
investment-grade corporate bonds, commercial paper and money market accounts.
Our working capital was $146.8 million at September 30, 2001.
Cash used in operations for the nine months ended September 30, 2001 was $27.7
million compared with $20.2 million for the same period in 2000. The net loss of
$50.2 million for the nine months ended September 30, 2001 was partially offset
by non-cash charges of $29.9
10
million, of which $24.9 million was related to the non-recurring in-process
research and development charge associated with the Gemini Genomics merger.
Investing activities, other than the changes in our short-term investments and
the $61.4 million in cash acquired from Gemini, used $12.9 million in cash
during the first nine months of 2001 due to expenditures for leasehold
improvements at our new facility and additional laboratory equipment associated
with our high-throughput genotyping area.
Cash provided by financing activities was approximately $695,000 for the nine
months ended September 30, 2001 compared to $142.9 million for the same period
in 2000. Financing activities in the first nine months of 2001 included the
receipt of proceeds from the exercise of stock options and employee stock
purchase plan purchases and net borrowings under our capital lease agreement.
During the same period in 2000, we received $145.8 million from the sale of
common stock, which was partially offset by $3.4 million used to repay long-term
debt and capital lease obligations.
As of September 30, 2001, we had an aggregate of $4.9 million in future
obligations consisting of principal payments under capital leases and line of
credit arrangements, $1.4 million of which we plan to repay within the next
year.
Based on our current plans, we believe our existing cash, cash equivalents and
short-term investments will be sufficient to fund our operating expenses, debt
obligations and capital requirements through at least the next 12 months.
However, the actual amount of funds that we will need during or after the next
12 months will be determined by many factors, some of which are beyond our
control, and we may need funds sooner than currently anticipated. These factors
include:
. the demand for our MassARRAY(TM) systems, consumables, software, assays and
services;
. the cash used in and provided by our collaborations or joint ventures;
. rate of investment in gene discovery activities;
. the impact of acquisitions on our cash balances; and
. the impact of any litigation.
We have a $25.0 million bank line of credit, $22.0 million of which is available
for borrowing. In addition, we have established an $8.0 million capital
equipment financing agreement, $5.0 million of which was available for
utilization at September 30, 2001. We have no commitments for any additional
financings. If additional funds are required and we are unable to obtain them on
acceptable terms, we may be required to cease or reduce further
commercialization of our products, to sell some or all of our technology or
assets or to merge with another entity. If we raise additional funds by selling
shares of our capital stock, the ownership interest of our stockholders will be
diluted.
11
Risks and Uncertainties
The following is a summary of the many risks we face in our business. You should
carefully read these risks and uncertainties in evaluating our business.
Recent Operating Losses; Accumulated Deficit
We have experienced significant operating losses in each period since our
inception. We expect these losses to continue and it is uncertain when, if ever,
we will become profitable. We had an accumulated deficit of $126.5 million as of
September 30, 2001. These losses have resulted principally from costs incurred
in research and development and from selling, general and administrative costs
associated with our operations. Our costs have exceeded our revenues in each
period since our inception. We expect to incur increasing operating losses in
the future as a result of expenses associated with marketing and sales,
production, research and product development, selling, general and
administrative costs as well as costs associated with consolidating and
integrating Gemini Genomics, a company that we acquired in September 2001, into
our business.
We Have a Limited Operating History
We are a relatively new company and, for the most part, our technologies are
still in the early stages of development. We have just begun to incorporate our
technologies into commercial products. We need to make significant investments
to ensure our products perform correctly and are cost-effective. In addition, we
may need to obtain additional regulatory approvals to sell our products for
future application in diagnostics. Even if we develop our products for
commercial use and obtain all necessary regulatory approval, we may not be able
to develop products that:
. are accepted by the genomics, diagnostic or other marketplaces;
. meet customers' demands;
. are protected from competition by others;
. do not infringe the intellectual property rights of others;
. can be manufactured in sufficient quantities or at a reasonable cost; or
. can be marketed successfully.
Our Operating Results May Fluctuate Significantly
Our revenues and results of operations may fluctuate significantly, depending on
a variety of factors, including the following:
. our success in selling, and changes in the demand for, our products and
services;
. variations in the timing of payments from customers and collaborative
partners and the recognition of these payments as revenues;
. the pricing of our products and services;
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. the timing of any new product or service offerings;
. changes in the research and development budgets of our customers and
partners;
. the introduction of new products and services by our competitors;
. changes in the regulatory environment affecting health care and healthcare
providers;
. expenses related to, and the results of, any litigation or other
proceedings relating to intellectual property rights;
. our ability to enter into and maintain strategic collaborations;
. our ability to identify candidate disease gene markers that may lead to
future therapeutic products;
. the cost and timing of our adoption of new technologies;
. the cost, quality and availability of oligonucleotides, tissue samples,
reagents and related components and technologies; and
. the cost of integrating and consolidating the operations of Gemini Genomics
into our business.
In particular, our revenues and operating results are unpredictable because they
depend on the number and timing of MassARRAY(TM) system placements that we make
during the quarter and the duration of revenue generating license agreements and
collaborative programs with partners. Any delay in generating or recognizing
revenues could cause significant variations in our operating results from
quarter to quarter and could result in increased operating losses.
We believe that period-to-period comparisons of our financial results will not
necessarily be meaningful. You should not rely on these comparisons as an
indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price will likely fall.
A Reduction in Revenues from Sales of MassARRAY(TM) Systems Would Harm Our
Business
A decline in the demand for MassARRAY(TM) Systems would reduce our total
revenues and harm our business. We expect that sales of the MassARRAY(TM) system
will account for a substantial portion of our total revenues for the foreseeable
future. The following factors may reduce the demand for MassARRAY(TM) systems:
. competition from other products;
. failure of SNPs to demonstrate medical relevance;
. negative publicity or evaluation; or
13
. intellectual property claims or litigation.
We May Need Additional Capital in the Future to Support Our Growth
Based on our current plans, we believe our cash, cash equivalents and short-term
investments will be sufficient to fund our operating expenses, debt obligations
and capital requirements through at least the next 12 months. However, the
actual amount of funds that we will need during or after the next 12 months will
be determined by many factors, some of which are beyond our control, and we may
need funds sooner than currently anticipated. These factors include:
. the level of our success in selling our MassARRAY/TM/ systems, consumables,
assays and services;
. the level of our sales and marketing expenses;
. the extent to which we enter into licensing arrangements, collaborations or
joint ventures;
. our progress with research and development;
. our ability to introduce and sell new products and services;
. the costs and timing of obtaining new patent rights;
. the extent to which we acquire technologies or companies;
. our success in consolidating and integrating Gemini Genomics into our
business;
. regulatory changes and competition and technological developments in the
market; and
. the level of our expenses associated with litigation.
If we require additional funds and we are unable to obtain them on terms
favorable to us, we may be required to cease or reduce further commercialization
of our products and services, sell some or all of our technology or assets or
merge with another entity. If we raise additional funds by selling additional
shares of our capital stock, the ownership interest of our stockholders will be
diluted.
We May Not Be Able to Successfully Adapt Our Products for Commercial
Applications
A number of potential applications of our MassARRAY/TM/ technology will require
significant enhancements in our core technology. If we are unable to complete
the development, introduction or scale-up of the manufacturing of any product or
genotyping facility, or if any of our products do not achieve a significant
level of market acceptance, our business, financial condition and results of
operations could be seriously harmed. Market acceptance will depend on many
factors, including demonstrating to customers that our technology is superior to
other technologies and products which are available now or which may become
available in the future. We believe that our revenue growth and profitability
will substantially depend on our ability to overcome significant technological
challenges and successfully introduce our products and services into the
marketplace.
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We May Not Be Able to Form and Maintain the Collaborative Relationships that Our
Business Strategy Requires and the Relationships May Lead to Disputes Over
Technology Rights
We must form research collaborations and licensing arrangements with several
partners at the same time to operate our business successfully. To succeed, we
will have to maintain our existing relationships and establish additional
collaborations. We cannot be sure that we will be able to establish any
additional research collaborations or licensing arrangements necessary to
develop and commercialize products using our technology or that we can do so on
terms favorable to us. If our collaborations are not successful or we are not
able to manage multiple collaborations successfully, our programs will suffer.
If we increase the number of collaborations, it will become more difficult to
manage the various collaborations successfully and the potential for conflicts
among the collaborators will increase.
We and our Collaborative Partners May Not Be Successful in Developing or
Commercializing Therapeutic, Diagnostic or Other Products Using Our Products,
Services or Discoveries
Development of therapeutic, diagnostic and other products based on our
discoveries and/or our collaborative partners' discoveries will be subject to
risks of failure inherent in their development or commercial viability. These
risks include the possibility that any such products will:
. fail to receive necessary regulatory approvals;
. fail to be developed prior to the successful marketing of similar products
by competitors;
. be found to be ineffective;
. be difficult or impossible to manufacture on a commercial scale;
. be uneconomical to market;
. be found to be toxic; or
. be impossible to market because they infringe on the proprietary rights of
third parties or compete with products marketed by third parties that are
superior.
If a partner or we discover therapeutic, diagnostic or other products using our
products, services or discoveries, we may rely on that partner for product
development, regulatory approval, manufacturing and marketing of those products
before we can realize some of the milestone payments, royalties and other
payments we may be entitled to under the terms of our collaboration agreements.
Our collaboration agreements may allow the partner significant discretion in
electing whether to pursue any of these activities. We cannot control the amount
and timing of resources our collaborators may devote to our programs or
potential products. As a result, we cannot be certain that our collaborators
will choose to develop or commercialize any products or will be successful in
doing so. In addition, if a collaborator is involved in a business combination,
such as a merger or acquisition or changes its business focus, its performance
in its agreement with us may suffer and, as a result, we may not generate any
revenues or only limited
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revenues from the royalty, milestone and similar payment provisions of our
agreement with that collaborator.
We May Not Successfully Develop or Derive Revenues From Our Genotyping and Gene
Discovery Programs
Our genotyping and gene discovery programs are still in the early stages of
development and may not result in marketable products. We are directing our
technology and development focus primarily toward identifying genes that are
believed to be responsible for, or indicate the presence of, certain diseases.
We have only identified a limited number of specific candidate genes under our
research programs. Our technologies and approach to gene discovery may not
enable us to successfully identify the specific genes that cause or predispose
individuals to the complex diseases that are the targets of our efforts to
identify genetic variations that have medical utility. In addition, the diseases
we are targeting are generally believed to be caused by a number of genetic and
environmental factors. It may not be possible to address such diseases through
gene-based therapeutic or diagnostic products. Accordingly, even if we are
successful in identifying specific genes, our discoveries may not lead to the
development of commercial products.
If the Medical Relevance of SNPs Becomes Questionable, We May Have Less Demand
for Our Products and Services
Some of the products we hope to develop involve new and unproven approaches.
They are based on the assumption that information about genes may help
scientists better understand complex disease processes. Scientists generally
have a limited understanding of the role of genes in diseases, and few products
based on gene discoveries have been developed. We cannot be certain that genetic
information will play a key role in the development of drugs and diagnostics in
the future. If we are unable to generate valuable information that can be used
to develop these drugs and diagnostics, the demand for our products and services
will be reduced and our business will be harmed.
If We Do Not Succeed in Obtaining Development and Marketing Rights for Some of
the Assays Developed in Collaboration with Others, our Revenue and Profitability
Could Be Reduced
Our business strategy includes the development of assays in collaboration with
others, and we intend to obtain commercialization rights to those assays. If we
are unable to obtain rights to those assays, our revenue and profitability could
be reduced. To date, we have initiated limited activities towards the
exploitation of any commercialization rights or products developed in
collaboration with third parties. Even if we obtain commercialization rights,
commercialization of products may require resources that we do not currently
possess and may not be able to develop or obtain.
We Depend on Sales of SpectroCHIPs/TM/ and Other Disposables for a Significant
Portion of Our Revenues
Sales of SpectroCHIPs/TM/ and other disposables are an important source of
revenue. Factors which may limit the use of SpectroCHIPs/TM/ and other
disposables include: failure to achieve additional sales of MassARRAY/TM/
systems, the acceptance of our technology by our customers, the extent of our
customers' level of utilization of their MassARRAY/TM/ systems, and the training
16
of customer personnel. If our customers do not purchase sufficient quantities of
SpectroCHIPs/TM/ and other disposables, our revenues will be lower than
anticipated.
If Ethical, Privacy or Other Concerns Surrounding the Use of Genetic Information
Becomes Widespread, We May Have Less Demand for our Products and Services
Genetic testing has raised ethical issues regarding privacy and the appropriate
uses of the resulting information. For these reasons, governmental authorities
may call for limits on or regulation of the use of genetic testing or prohibit
testing for genetic predisposition to certain conditions, particularly for those
that have no known cure. Similarly, such concerns may lead individuals to refuse
to use genetics tests even if permissible. Any of these scenarios could reduce
the potential markets for our products and services, which could seriously harm
our business, financial condition and results of operations.
If We Do Not Have Adequate Access to Genetic Materials, We Will Not Be Able to
Develop Our Pharmaceuticals Business
We depend on third parties for the collection of extensive and detailed
proprietary clinical data and the collection and storage of large quantities of
genetic material (including DNA) and other biological samples. We need access to
normal and diseased human tissue samples, other biological materials and related
clinical and other information to develop our products and services. We may not
be able to obtain or maintain access to these materials and information. If the
validity of the consents obtained from our volunteers or our collaborators'
volunteers is successfully challenged, we may lose access to genetic material.
In addition, government regulation in the United States and foreign countries
could result in restricted access to, or use of, human and other tissue samples.
If we lose access to sufficient numbers or sources of tissue samples, or if
tighter restrictions are imposed on our use of the information generated from
tissue samples, our business will suffer.
We May Not Successfully Integrate Gemini Genomics and any Other Future
Acquisitions
In September 2001 we completed our acquisition of Gemini Genomics. In the
future, we may acquire additional companies or technologies. Managing our
acquisition of Gemini Genomics and any future acquisition will entail numerous
operational and financial risks, including:
. exposure to unknown liabilities;
. higher than expected acquisition and integration costs which may cause our
quarterly and annual operating results to fluctuate;
. combining the operations and personnel of acquired businesses with our own,
which may be difficult and costly, and integrating or completing the
development and application of any acquired technologies, which may disrupt
our business and divert our management's time and attention;
. impairment of relationships with key customers of acquired businesses due
to changes in management and ownership of the acquired businesses;
. inability to retain key employees of any acquired businesses or hire enough
qualified personnel to staff any new or expanded operations; and
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. increased amortization expenses if an acquisition results in significant
goodwill or other intangible assets.
If the Validity of the Consents From Our Volunteers or Our Clinical
Collaborators' Volunteers Is Successfully Challenged, We Could Be Forced To Stop
Using Some Of Our Clinical Or Genetic Resources, Which Could Hinder Our Gene
Discovery Programs
We have attempted to ensure that all clinical data and genetic and other
biological samples that we receive from our Canadian subsidiary and our clinical
collaborators have been collected from volunteers who have provided our
collaborators or us with appropriate consents for the data and samples to be
used for purposes which extend to cover our gene discovery program and other
activities. In addition, we have attempted to ensure that data and samples that
have been collected by our clinical collaborators are provided to us on an
anonymous basis. We have also attempted to ensure that the volunteers from whom
our data and samples are collected do not retain or have conferred on them any
proprietary or commercial rights to the data or samples or any discoveries
derived from them. Our clinical collaborators are based in a number of different
countries (the United Kingdom, Sweden, China and Australia), and we also collect
data through our Canadian subsidiary. While we believe that one of our
advantages is the number of different ethnic groups we have information about in
our clinical database, the fact that our data and samples come from and are
collected by entities based in different countries results in complex legal
questions regarding the adequacy of consents and the status of genetic material
under a large number of different legal systems. The consents obtained in any
particular country could be challenged in the future, and those consents may
prove invalid, unlawful or otherwise inadequate for our purposes. Any findings
against us or our clinical collaborators could deny us access to or force us to
stop using some of our clinical or genetic resources which could hinder our gene
discovery programs. Also, we could become involved in legal challenges which
could consume a substantial proportion of our management and financial
resources.
We May Not Have the Resources Required to Successfully Compete in the
Biotechnology Industry
The biotechnology industry is highly competitive. We expect to compete with a
broad range of companies in the United States and abroad that are engaged in the
development and production of products, services and strategies to analyze
genetic information. They include:
. biotechnology, pharmaceutical, chemical and other companies;
. academic and scientific institutions;
. governmental agencies; and
. public and private research organizations.
Many of our competitors have much greater financial, technical, research,
marketing, sales, distribution, service and other resources than we do.
Moreover, our competitors may offer broader product lines, services and have
greater name recognition than we do, and may offer discounts as a competitive
tactic. In addition, several early stage companies are currently making or
developing products that compete with our products. Our competitors may develop
or market technologies or products that are more effective or commercially
attractive than our current or
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future products, or that may render our technologies or products obsolete. We
may also compete against some of our customers, which may adversely affect our
relationships with them.
Our Ability to Compete in the Market May Decline If We Lose Some of Our
Intellectual Property Rights Due to Lawsuits to Protect or Enforce our Patents
Our success will depend on our ability to obtain and protect patents on our
technology and to protect our trade secrets. Our patents, which have been or may
be issued, may not afford meaningful protection for our technology and products.
Others may challenge our patents and, as a result, our patents could be
narrowed, invalidated or unenforceable. In addition, our current and future
patent applications may not result in the issue of patents in the United States
or foreign countries. Competitors may develop products similar to ours that do
not conflict with our patents. In addition, others may develop products for use
with the MassARRAYTM system in violation of our patents that could reduce sales
of disposables. In order to protect or enforce our patent rights, we may
initiate interference proceedings, oppositions, or patent litigation against
third parties, such as infringement suits. These lawsuits could be expensive,
take significant time and divert management's attention from other business
concerns. The patent position of biotechnology firms generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office or the courts regarding the breadth of claims
allowed or the degree of protection afforded under biotechnology patents. In
addition, there is a substantial backlog of biotechnology patent applications at
the U.S. Patent and Trademark Office, and the approval or rejection of patent
applications may take several years.
Our Success Will Depend Partly on Our Ability to Operate Without Infringing on
or Misappropriating the Proprietary Rights of Others
We may be sued for infringing on the patent rights of others. From time to time,
we receive letters from companies regarding their issued patents and patent
applications alleging or suggesting possible infringement. Intellectual property
litigation is costly, and, even if we prevail, the cost of such litigation could
adversely affect our business, financial condition and results of operations. In
addition, litigation is time consuming and could divert management attention and
resources away from our business. If we do not prevail in any litigation, in
addition to any damages we might have to pay, we could be required to stop the
infringing activity or obtain a license. Any required license may not be
available to us on acceptable terms, or at all. In addition, some licenses may
be non-exclusive, and therefore, our competitors may have access to the same
technology licensed to us. If we fail to obtain a required license or are unable
to design around a patent, we may be unable to sell some of our products, which
could have a material adverse affect on our business, financial condition and
results of operations.
The Rights We Rely Upon to Protect the 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
We require our employees, consultants and advisors to execute confidentiality
agreements. However, we cannot guarantee that these agreements will provide us
with adequate protection against improper use or disclosure of confidential
information. In addition, in some situations, these agreements may conflict
with, or be subject to, the rights of third parties with whom our employees,
consultants or advisors have prior employment or consulting relationships.
Further,
19
others may independently develop substantially equivalent proprietary
information and techniques, or otherwise gain access to our trade secrets.
If We Do Not Effectively Manage Our Growth, It Could Affect Our Ability to
Pursue Business Opportunities and Expand Our Business
Growth in our business has placed, and will continue to place, a significant
strain on our personnel, facilities, management systems and resources. We will
need to continue to improve our operational and financial systems and managerial
controls and procedures and expand, train and manage our workforce. We will have
to maintain close coordination among our technical, accounting, marketing, sales
and research departments. If we fail to effectively manage our growth and
address the above concerns, it could affect our ability to pursue business
opportunities and expand our business.
We Have Limited Commercial Production Capability and Experience and May
Encounter Production Problems or Delays, Which Could Result in Lower Revenue
We assemble the MassARRAY system and manufacture the SpectroCHIP and MassARRAY
kit. To date, we have only produced these products in limited quantities. Our
customers require that we comply with current good manufacturing practices that
we may not be able to meet. We may not be able to maintain acceptable quality
standards as we ramp up production. To achieve anticipated customer demand
levels, we will need to scale-up our production capability and maintain adequate
levels of inventory. We may not be able to produce sufficient quantities to meet
market demand. If we cannot achieve the required level and quality of
production, we may need to outsource production or rely on licensing and other
arrangements with third parties. This reliance could reduce our gross margins
and expose us to the risks inherent in relying on others. We may not be able to
successfully outsource our production or enter into licensing or other
arrangements with these third parties, which could adversely affect our
business.
We Depend on Third-Party Products and Services and Sole or Limited Sources of
Supply to Develop and Manufacture Components and Materials Used in Our Products
We rely on outside vendors to supply the components and materials used in our
products. Some of these components and materials are obtained from a single
supplier or a limited group of suppliers. We have experienced quality problems
with, and delays in receiving, oligonucleotides, which are necessary materials
used in connection with the operation of the MassARRAY system. Our reliance on
outside vendors generally, and a sole or a limited group of suppliers in
particular, involves several risks, including:
. the inability to obtain an adequate supply of required components and
materials due to capacity constraints, a discontinuance of a product by a
supplier or other supply constraints;
. reduced control over quality and pricing of components and materials; and
. delays and long lead times in receiving components or materials from
vendors.
We May Be Unable to Obtain Licenses to Patented SNPs, Which Could Prevent Us
from Obtaining Significant Revenue or Becoming Profitable
The U.S. Patent and Trademark Office has issued and continues to issue patents
claiming SNP discoveries and their related associations and functions. If
important SNPs are patented, we will
20
need to obtain rights to those SNPs in order to develop, use and sell related
assays. Required licenses may not be available on commercially acceptable terms,
or at all. If we fail to obtain licenses to important patented SNPs, we may
never achieve significant revenue or become profitable.
Because Our Products Currently Depend on Components Licensed or Supplied from
Third Parties, Our Breach of Any of the Terms of These Licenses or Supply
Agreements Could Result in Our Loss of Access to These Components and Could
Delay or Suspend Our Commercialization Efforts
We have acquired or licensed components of our technology from third parties.
Our failure to maintain the right to use these components could seriously harm
our business, financial condition and results of operations. In addition,
changes to or termination of our agreements with these third parties could
result in the loss of access to these aspects of our technology and could delay
or suspend our commercialization efforts.
Our grants from the government give the government certain license rights to
inventions resulting from funded work in the event that we fail to commercialize
the technology developed using government funds. Our business could be harmed if
the government exercises those rights.
Our Revenues Are Derived Primarily From, and Are Subject to Risks Faced By,
Pharmaceutical and Biotechnology Companies and Governmental and Others Research
Institutions
We expect that our revenues in the foreseeable future will be derived primarily
from products and services provided to pharmaceutical and biotechnology
companies and governmental and other research institutions. Accordingly, our
success will depend upon their demand for our products and services. Our
operating results may fluctuate substantially due to reductions and delays in
research and development expenditures by these customers. These reductions and
delays may result from factors such as:
. changes in economic conditions;
. changes in government programs that provide funding;
. changes in the regulatory environment affecting health care and health care
providers;
. pricing pressures and reimbursement policies;
. market-driven pressures on companies to consolidate and reduce costs; and
. other factors affecting research and development spending.
None of these factors is within our control.
Risks Associated with Foreign Operations
Nearly all of the operations of Gemini Genomics, a company we acquired in
September 2001, were and continue to be conducted outside the United States, in
countries where Sequenom did not previously have operations. As a result of our
acquisition of Gemini Genomics, we are subject to the increased risks of doing
business abroad.
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We expect that a significant portion of our sales will be made outside the
United States. A successful international effort will require us to continue to
develop relationships with international customers and partners. We may not be
able to identify, attract or retain suitable international customers and
partners. Expansion into international markets will require us to continue to
establish and grow foreign operations, hire additional personnel to run these
operations and maintain good relations with our foreign customers and partners.
International operations involve a number of risks not typically present in
domestic operations, including:
. currency fluctuation risks;
. changes in regulatory requirements;
. costs and risks of deploying systems in foreign countries;
. licenses, tariffs and other trade barriers;
. political and economic instability;
. difficulties in staffing and managing foreign operations;
. potentially adverse tax consequences;
. the burden of complying with a wide variety of complex foreign laws and
treaties; and
. different rules, regulations, and policies governing intellectual property
protection and enforcement.
Our international operations are also be subject to the risks associated with
the imposition of legislation and regulations relating to the import or export
of high technology products. We cannot predict whether tariffs or restrictions
upon the importation or exportation of our products will be implemented by the
United States or other countries.
If Our Production and Laboratory Facilities are Damaged, We Could Experience
Lost Revenue and Our Business Would Be Seriously Harmed
Our only production facility is located in San Diego, California. We have
laboratories located in San Diego, Sudbury, Massachusetts, Germany, Sweden, the
United Kingdom and Canada. Damage to our facilities due to fire, natural
disaster, power loss, communications failure, unauthorized entry or other events
could result in a loss of important data or cause us to cease development and
production of our products. We have limited insurance to protect against
business interruption; however, there can be no assurance this insurance will be
adequate or will continue to be available to us on commercially reasonable
terms, or at all.
Our Stock Price Could Be Volatile and Your Investment Could Suffer a Decline in
Value
The trading price of our common stock has been volatile and could be subject to
wide fluctuations in price in response to various factors, many of which are
beyond our control, including:
. actual or anticipated variations in quarterly operating results;
22
. announcements of technological innovations by us or our competitors;
. developments or disputes concerning patent or proprietary rights; and
. general market conditions out of our control.
Responding to Claims Relating to Improper Handling, Storage or Disposal of
Hazardous Chemicals and Radioactive and Biological Materials Which We Use, Could
Be Time Consuming and Costly
We use controlled hazardous and radioactive materials in the conduct of our
business. The risk of accidental contamination or injury from these materials
cannot be completely eliminated. If an accident with these substances occurs, we
could be liable for any damages that result, which could seriously harm our
business. Additionally, an accident could damage our research and manufacturing
facilities and operations, resulting in delays and increased costs. Such damage
and any expense resulting from delays, disruptions or any claims may not be
covered by our insurance policies.
If We Cannot Attract and Retain Highly-Skilled Personnel, Our Growth Might Not
Proceed as Rapidly as We Intend
The success of our business will depend on our ability to identify, attract,
hire, train, retain and motivate highly-skilled personnel, in particular
scientific, medical and technical personnel, for our future success. Competition
for highly skilled personnel is intense, and we might not succeed in attracting
and retaining these employees. If we cannot attract and retain the personnel we
require, we might not be able to expand our business as rapidly as we intend.
We Are Highly Dependent on Our Board of Directors and Principal Members of Our
Management and Scientific Staff, the Loss of Whom Would Impair Our Ability to
Compete
The loss of the services of any of these persons could delay or reduce our
product development and commercialization efforts. We may not be able to attract
and retain qualified personnel at the Board of Directors level or any management
level, which could seriously harm our business, financial condition and results
of operations.
We May Not Have Adequate Insurance and If We Become Subject to Product Liability
Claims, We May Experience Reduced Demand for Our Products and Services or Be
Required to Pay Damages that Exceed Our Insurance Limitations
Our business exposes us to potential product liability claims that are inherent
in the life science field. Any product liability claim in excess of our
insurance coverage would have to be paid out of our cash reserves, which would
have a detrimental effect on our financial condition. It is difficult to
determine whether we have obtained sufficient insurance to cover potential
claims. Also, we cannot assure you that we can or will maintain our insurance
policies on commercially acceptable terms, or at all.
Power Shortages Caused by the California Energy Crisis Could Materially
Interrupt Our Operations
Some locations in California have experienced sporadic periods of electricity
outages. This condition is expected to continue into the future and may worsen
during periods of peak energy consumption. An interruption in power supplied to
our facilities could disrupt the performance of
23
our computer systems and could adversely affect our ability to store and use
genetic data, identify the specific function of genes and affect our ability to
conduct normal operations.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Short-Term Investments
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that a change in prevailing interest rates may
cause the fair value of the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the fair
value of the principal amount of our investment will probably decline. To
minimize this risk, we maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds, government and non-government debt securities. The average duration of
all of our investments has generally been less than one year. Due to the
short-term nature of these investments, we believe we have no material exposure
to interest rate risk arising from our investments. Therefore, no quantitative
tabular disclosure is required.
Foreign Currency Rate Fluctuations
We have subsidiaries in Germany, the United Kingdom, Sweden and Canada. The
functional currency for each subsidiary, respectively, is as follows: the German
mark, the British pound, the Swedish Krona, and the Canadian dollar . Each
subsidiary's accounts are translated from its functional currency to the US
dollar using the current exchange rate in effect at the balance sheet date for
balance sheet accounts, and using the average exchange rate during the period
for revenues and expense accounts. The effects of translation are recorded as a
separate component of stockholders' equity. Our subsidiaries conduct their
business with customers primarily in their local currency. Exchange gains and
losses arising from these transactions are recorded using the actual exchange
differences on the date of the transaction. We have not taken any action to
reduce our exposure to changes in foreign currency exchange rates, such as
options or futures contracts, with respect to transactions with our subsidiaries
or transactions with our European customers. The net assets of our largest
subsidiary, were $65.4 million at September 30, 2001. A 1% decrease in the value
of the British pound relative to the US dollar would result in approximately a
$450,000 unrealized foreign translation loss. As of January 2002, the functional
currency of our German subsidiary will be the Euro.
PART II-OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On September 20, 2001, the Company completed its acquisition of Gemini Genomics
plc pursuant to a Scheme of Arrangement under Section 425 of the U.K. Companies
Act 1985. In connection with the acquisition of Gemini Genomics, the Company
issued approximately 12,950,836 shares of its common stock. In issuing these
shares, the Company relied on the exemption from registration provided by
Section 3(a)(10) of the Securities Act of 1933, as amended. In accordance with
Section 3(a)(10), the High Court of Justice in England and Wales conducted a
hearing upon the fairness of the merger and approved the Scheme of Arrangement
on September 18, 2001.
25
On January 31, 2000, the Company's Form S-1 registration statement (File No.
333-91665) was declared effective by the Securities and Exchange Commission. The
registration statement, as amended, covered the offering of 5,250,000 shares of
common stock. The offering commenced on January 31, 2000 and the sale to the
public of shares of common stock at $26.00 per share was completed on February
3, 2000 for an aggregate price of approximately $136.5 million. The registration
statement covered an additional 787,500 shares of common stock that the
underwriters had the option to purchase solely to cover over-allotments. These
shares were purchased on February 2, 2000 at $26.00 per share for an aggregate
price of approximately $20.5 million. The managing underwriters for the offering
were Warburg Dillon Read LLC, FleetBoston Robertson Stephens Inc. and SG Cowen
Securities Corporation. Expenses incurred in connection with the issuance and
distribution of common stock in the offering included underwriting discounts,
commissions and allowances of approximately $11.0 million and other expenses of
approximately $1.9 million, results in net offering proceeds to the Company of
approximately $144.1 million. No payments or expenses were paid to directors,
officers or affiliates of the Company or 10% owners of any class of equity
securities of the Company. Of the net offering proceeds, through September 30,
2001, approximately $3.4 million has been used to payoff long-term and other
debt, approximately $28.0 million to purchase equipment or make leasehold
improvements, approximately $5.0 million related to the merger with Gemini
Genomics, and approximately $60.6 million for general corporate purposes,
including hiring additional personnel, expansion of facilities, development and
manufacturing of products, and expenses for filing and pursing patent
applications. The balance is invested in a variety of interest-bearing
instruments including investment-grade corporate bonds, commercial paper and
money market accounts.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a special meeting on August 23, 2001. At the special meeting,
the Company's stockholders voted on the following two proposals:
1. The issuance of up to 14,403,870 shares of common stock of the Company,
pursuant to a Scheme of Arrangement under Section 425 of the U.K. Companies Act
1985 to be implemented in accordance with the Transaction Agreement, dated May
29, 2001, by and between the Company and Gemini Genomics plc; and
2. An amendment to the Company's certificate of incorporation to provide
that the Sequenom board of directors will have the exclusive right to set the
authorized number of directors from time to time and that 66 2/3% of the
outstanding voting power of Sequenom common stock will be required to amend,
alter or repeal this provision, and a related amendment to Sequenom's bylaws to
provide that the authorized number of directors will be fixed as set forth in
the certificate of incorporation rather than the bylaws.
The first proposal was approved with 12,939,182 votes cast for, 1,476,659
votes cast against and 80,571 votes abstaining. The August 23, 2001 special
meeting was adjourned and consideration of the second proposal was postponed
until September 17, 2001.
26
On September 17, 2001, the Company reconvened the special meeting. At the
reconvened meeting, the second proposal was not approved with 12,913,970 votes
cast for, 3,874,447 votes cast against and 18,201 votes abstaining.
Item 6. Exhibits
(a) Exhibits
The following is a list of exhibits filed as part of this Quarterly Report on
Form 10-Q.
Exhibit
Number Description
10.51 Research Collaboration and License Agreement, dated August 23, 2001,
between SEQUENOM, Inc. and Glaxo Group Limited and SmithKline Beecham
Corporation.
27
SEQUENOM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEQUENOM, Inc.
Date: November 14, 2001 By: /s/ Stephen L. Zaniboni
-----------------------------------------------
Stephen L. Zaniboni
Senior Vice President, Chief Financial Officer and
Secretary (Duly Authorized Officer and Principal
Financial and Accounting Officer)