SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 000-30267
ORCHID BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3392819
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
303 COLLEGE ROAD EAST, PRINCETON, NJ 08540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 750-2200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of May 31, 2000, was 32,889,381.
ORCHID BIOSCIENCES, INC.
INDEX TO FORM 10-Q/A
PART I FINANCIAL INFORMATION......................................... 1
Item 1. Financial Statements......................................... 1
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999.................................... 1
Condensed Consolidated Statements Of Operations for the three
months ended March 31, 2000 and 1999 (unaudited)..................... 3
Consolidated Statements Of Cash Flows for the three months ended
March 31, 2000 and 1999 (unaudited).................................. 4
Notes To Condensed Consolidated Financial Statements (unaudited)..... 5
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations.................................. 10
Item 3. Quantitative And Qualitative Disclosures
About Market Risk.......................................... 13
PART II OTHER INFORMATION.......................................... 14
Item 1. Legal Proceedings............................................ 14
Item 2. Changes In Securities And Use Of Proceeds.................... 14
Item 3. Defaults Upon Senior Securities.............................. 14
Item 4. Submission Of Matters To A Vote Of Security Holders.......... 14
Item 5. Other Information............................................ 15
Item 6. Exhibits And Reports On Form 8-K............................. 16
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Restated Pro Forma
(NOTE 2) DECEMBER 31,
MARCH 31, DECEMBER 31, 1999
2000 1999 (NOTE 4)
---- ---- --------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 50,880 $33,804 $33,804
Restricted cash........................................................... -- 400 400
Short-term investments.................................................... 2,800 -- --
Accounts receivable, net.................................................. 2,791 2,102 2,102
Laboratory materials and supplies......................................... 212 182 182
Other current assets...................................................... 957 859 859
-------- ------- -------
Total current assets...................................................... 57,640 37,347 37,347
Deferred offering costs................................................... 1,081 -- --
Equipment and leasehold improvements, net................................. 10,218 9,474 9,474
Goodwill, net............................................................. 30,532 31,051 31,051
Other intangibles, net.................................................... 16,126 16,519 16,519
Other assets.............................................................. 1,978 465 465
-------- ------- -------
Total assets.............................................................. $117,575 $94,856 $94,856
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable--bank........................................................ $ -- $ 1,000 $ 1,000
Current portion of long-term debt......................................... 1,071 1,141 1,141
Accounts payable.......................................................... 2,566 2,302 2,302
Accrued expenses.......................................................... 2,826 4,777 4,777
Due to related party...................................................... 64 64 64
Deferred revenue.......................................................... 1,009 789 789
-------- ------- -------
Total current liabilities................................................. 7,536 10,073 10,073
Long-term debt, less current portion...................................... 3,851 4,122 4,122
Commitments and contingencies
Manditorily redeemable convertible preferred stock, $.001 par
value (converts into 17,734,919 shares of common stock on an
unaudited pro forma basis at December 31, 1999 upon
consummation of the offering -- See note 12):
Series C, at redemption value, designated 2,493,692 shares; issued
and outstanding 2,480,176 shares at March 31, 2000 and December 31,
1999 (Aggregate liquidation value of $27,530 at March 31, 2000 and
December 31, 1999)........................................................ 27,530 27,530 --
Series E, designated 19,000,000 shares; issued and outstanding
18,881,563 and 7,934,966 shares at March 31, 2000 and December 31, 1999,
respectively (Aggregate liquidation value of $84,967 and $35,707 at --
March 31, 2000 and December 31, 1999, respectively)....................... 90,990 39,035
Series E to be issued, at redemption value, (4,974,694 shares,
including 518,534 shares subject to repurchase rights at
December 31, 1999) (Aggregate liquidation value of
$22,282 at December 31, 1999)............................................. -- 22,381 --
-------- ------- -------
118,520 88,946 --
-------- ------- -------
See accompanying notes to condensed consolidated financial statements.
1
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
PRO FORMA
DECEMBER 31,
MARCH 31, DECEMBER 31, 1999
2000 1999 (SEE NOTE 4)
---- ---- ------------
(UNAUDITED) (UNAUDITED)
Stockholders' equity (deficit):
Preferred stock, $.001 par value. Authorized 23,400,000 shares;
38,961 shares with no designation; no shares issued or
outstanding....................................................... $ -- $ -- $ --
Convertible preferred stock, $.001 par value (converts into
1,074,740 shares of common stock on an unaudited pro forma
basis at December 31, 1999 upon consummation of the
offering - See note 12):
Series A, designated 1,200,000 shares; issued and outstanding
970,900 shares at March 31, 2000
and December 31, 1999............................................. 1 1 --
Series B, designated 300,000 shares; issued and outstanding
103,840 shares at March 31, 2000 and
December 31, 1999................................................. -- -- --
Series D, designated 367,347 shares; no shares issued or
outstanding....................................................... -- -- --
Common stock, $.001 par value. Authorized 30,000,000 shares;
Issued and outstanding 1,196,450 and 845,450 shares at March 31,
2000 and December 31, 1999, respectively (19,655,109 shares
on an unaudited pro forma basis at December 31, 1999 upon
conversion of the manditorily redeemable convertible
preferred stock and the convertible preferred stock).............. 1 1 20
Common stock to be issued (10,000 shares at
December 31, 1999)................................................ -- 76 76
Additional paid-in capital........................................ 58,408 50,325 139,253
Deferred compensation............................................. (12,405) (7,930) (7,930)
Accumulated deficit............................................... (58,337) (50,758) (50,758)
-------- -------- -----------
Total stockholders' equity (deficit).............................. (12,332) (8,285) 80,661
-------- -------- -----------
Total liabilities and stockholders' equity (deficit).............. $117,575 $ 94,856 $ 94,856
======== ======== ===========
See accompanying notes to condensed consolidated financial statements.
2
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Three months ended March 31,
----------------------------
Restated
(NOTE 2)
2000 1999
---- ----
Revenues:
Product revenue................................................................... $ 232 $ --
Laboratory testing................................................................ $ 2,881 --
Grant revenue..................................................................... 292 --
Contract revenue.................................................................. -- 250
License and other revenue......................................................... 61 --
-------- --------
Total revenues.................................................................... 3,466 250
-------- --------
Operating expenses:
Cost of product revenue........................................................... 63 --
Cost of laboratory testing........................................................ 2,240 --
Selling, general and administrative............................................... 4,943 1,635
Research and development.......................................................... 4,402 2,776
-------- --------
Total operating expenses.......................................................... 11,648 4,411
-------- --------
Other income (expense):
Interest income................................................................... 790 78
Interest expense.................................................................. (111) (5)
Other expense..................................................................... (76) --
-------- --------
603 73
-------- --------
Net loss.......................................................................... (7,579) (4,088)
Beneficial conversion feature of preferred stock.................................. 29,574 --
-------- --------
Net loss allocable to common stockholders......................................... $(37,153) $ (4,088)
======== ========
Basic and diluted net loss per share allocable to common
Stockholders (note 1)............................................................. $(40.30) $(5.62)
======== ========
Shares used in computing basic and diluted net loss per share
allocable to common stockholders (note 1)......................................... 921,920 726,978
======== ========
See accompanying notes to condensed consolidated financial statements.
3
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three months ended March 31,
----------------------------
Restated
(NOTE 2)
2000 1999
------- -------
Cash flows from operating activities:
Net loss....................................................................... $(7,579) $(4,088)
Adjustments to reconcile net loss to
net cash used in operating activities:
Noncash research and development expense....................................... 1,200 --
Noncash compensation expense................................................... 767 10
Depreciation and amortization.................................................. 1,261 228
Changes in assets and liabilities:
Accounts receivable............................................................ (688) (20)
Laboratory materials and supplies.............................................. (29) --
Deferred offering costs........................................................ (1,081) --
Other current assets........................................................... (98) (710)
Other assets................................................................... (14) (140)
Accounts payable............................................................... 264 1,682
Accrued expenses............................................................... (1,951) 165
Due to related party........................................................... -- (381)
Deferred revenue............................................................... 220 --
------- -------
Net cash used in operating activities.......................................... (7,728) (3,254)
------- -------
Cash flows from investing activities:.......................................... --
Capital expenditures........................................................... (1,094) (3,649)
Decrease in restricted cash.................................................... 400 --
Maturities of short-term investments........................................... -- 6,390
Purchase of short term investments............................................. (2,800) --
------- -------
Net cash used in (provided by) investing activities............................ (3,494) 2,741
------- -------
Cash flows from financing activities:
Net proceeds from issuance of Series E manditorily
redeemable convertible preferred stock......................................... 29,574 --
Proceeds from issuance of debt from line of credit............................. -- 942
Repayment of debt on lines of credit........................................... (1,342) (22)
Proceeds from exercise of common stock options................................. 66 --
------- -------
Net cash provided by financing activities...................................... 28,298 920
------- -------
Net increase in cash and cash equivalents...................................... 17,076 407
Cash and cash equivalents at beginning of period............................... 33,804 473
------- -------
Cash and cash equivalents at end of period..................................... $50,880 $ 880
======= =======
Supplemental disclosure of noncash financing and investing activities:
Deferred compensation from issuance of restricted stock, grant of options and
warrants....................................................................... $ 5,242 $ 250
Issuance of common stock for technology licenses............................... 1,200 --
Issuance of common stock in connection with supply agreement................... 1,500 --
See accompanying notes to condensed consolidated financial statements.
4
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
(unaudited)
(in thousands)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Orchid
BioSciences, Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete annual
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included. Interim results are not necessarily indicative of results
that may be expected for a full year.
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
footnotes thereto included in the Company's Registration Statement on Form S-1
(File No. 333-30774) filed with the Securities and Exchange Commission and
declared effective on May 4, 2000.
(2) Restatement and Reclassifications
The Company's consolidated financial statements as of and for the quarter ended
March 31, 2000 have been restated to reverse a $438 sales transaction which
should not have been recorded. The Company's consolidated financial statements
for the quarter ended March 31, 2000 have also been reclassified to reflect
certain revenue as product revenue instead of license and other revenue and
certain expenses as cost of product revenue instead of research and development
expense. The impact of this adjustment and reclassification is as follows:
AS
PREVIOUSLY As
REPORTED RESTATED
----------------------- -------------------------
Balance Sheet:
Equipment and leasehold
improvements, net $ 9,803 $ 10,218
Deferred revenue 571 1,009
Deficit accumulated during the
development stage (58,314) (58,337)
Statement of Operations:
Product revenue 545 232
License and other revenue 186 61
Cost of product revenue 446 63
Revenue and development expense 4,434 4,402
Net loss (7,556) (7,579)
Net loss allocable to common
stockholders (37,130) (37,153)
Basic and diluted net loss per share
allocable to common stockholders (40.27) (40.30)
(3) Net Loss Per Share
Net loss per share is computed in accordance with SFAS No. 128, "Earnings Per
Share," by dividing the net loss allocable to common stockholders by the
weighted average number of shares of common stock outstanding. As of
5
December 31, 1999 and March 31, 2000, the Company has certain options, warrants,
convertible preferred stock and mandatorily redeemable convertible preferred
stock, which have not been used in the calculation of diluted net loss per share
because to do so would be anti-dilutive. As such, the numerator and the
denominator used in computing both basic and diluted net loss per share
allocable to common stockholders for each year are equal. The Company has
reflected $29,573,564 as a beneficial conversion feature in the net loss
allocable to common stockholders for the quarter ended March 31, 2000 for the
5,971,903 shares of Series E mandatorily redeemable convertible preferred stock
("Series E stock") sold in January 2000. The amount of the beneficial conversion
feature was calculated as the difference between the fair value of the Company's
common stock on the commitment date of $11.75 per share over the conversion
price of $4.50 per share, with a limitation that the beneficial conversion
feature can not exceed the gross proceeds received from the issuance of the
stock.
(4) Pro Forma Balance Sheet
Upon the closing of the Company's initial public offering (see note 12(a)) all
of the outstanding shares and shares to be issued of convertible preferred stock
and mandatorily redeemable convertible preferred stock at December 31, 1999
automatically converted into 18,809,659 shares of common stock and the
repurchase rights of certain Series E stock holders expired. The December 31,
1999 unaudited pro forma balance sheet has been prepared assuming the conversion
of the convertible preferred stock outstanding and the mandatorily redeemable
convertible preferred stock outstanding and to be issued as of December 31,
1999, into common stock as of December 31, 1999.
(5) GeneScreen, Inc. Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined
results of operations of Orchid and GeneScreen, Inc. ("GeneScreen") as if the
acquisition of GeneScreen by Orchid had occurred as of January 1, 1999, after
giving effect to certain pro forma adjustments, including amortization of
goodwill and other intangibles, and decreased interest expense from the
cancellation of Orchid's note payable to GeneScreen. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had Orchid and GeneScreen constituted a single entity during this
period or the results of operations which may occur in the future.
6
THREE MONTHS ENDED
MARCH 31,
1999
----
Revenues........................................... $ 3,545
Net loss allocable to common stockholders.......... $(4,976)
Basic and diluted net loss per share allocable
to common stockholders............................. $ (6.84)
(6) Employment Agreements
Effective January 2000, we entered into three year employment agreements with
two executives of the Company. In certain cases, the Company may be obligated
to pay the executive salary and benefits for up to eighteen months after leaving
the Company.
(7) Sale of Convertible Preferred Stock
In January 2000, the Company completed the sale of 5,971,903 shares of Series E
stock for gross proceeds of $29,573,564. The issuance of these securities
resulted in a $29,573,564 beneficial conversion feature which increase net loss
per share allocable to common stockholders in the first quarter of 2000. The
fair value of the Company's common stock on the commitment date was $11.75;
however, the amount of the beneficial conversion feature was limited to the
amount of gross proceeds received from the issuance of the Series E stock. The
Company also issued 1,040,341 shares of Series E stock related to the conversion
of the Affymetrix convertible promissory note and for cash received by December
31, 1999 for which shares were not issued, and which was included in Series E
stock to be issued at December 31, 1999.
(8) Stock Option Grants
In January and on February 2, 2000, the Company granted 36,500, 679,400, 40,750
and 40,750 stock options under the 2000 Employee, Director and Consultant Stock
Plan at exercise prices of $1.25, $6, $12 and at the per share price of the
initial public offering (see note 12(a)), respectively, for which a compensation
charge of approximately $4.3 million will be recognized over the respective
vesting periods of the options. Some of these amounts result from grants to
consultants which are subject to remeasurement at the end of each reporting
period based upon the changes in the fair value of the common stock until the
consultant completes performance under the option agreement. In addition, the
Company issued 600,000 performance based stock options at exercise prices of
$6.00 for which compensation expense will be measured as the difference between
the fair value of our common stock at the time the performance criteria is met
and the external price and will be immediately recorded as compensation expense.
On March 31, 2000, the Company granted 289,660 stock options under the 1995
Stock Incentive Plan at exercise prices of $12 per share for which a
compensation charge of approximately $800,000 will be recognized over the
respective vesting periods of the options. Some of these amounts result from
grants to consultants which are subject to remeasurement at the end of each
reporting period based upon the changes in the fair value of the common stock
until the consultant completes performance under the option agreement.
(9) 2000 Employee, Director and Consultant Stock Incentive Plan
On February 11, 2000 and March 17, 2000, respectively, the Board of Directors
and stockholders of the Company approved the 2000 Employee, Director and
Consultant Stock Incentive Plan ("Plan") for the issuance of common stock,
incentive stock options and non-qualified stock options to employees, directors
and consultants. The Board of Directors also authorized the granting of up to a
total of 1,500,000 options under this Plan and 3,500,000 under the 1995 Stock
Incentive Plan.
(10) ABS Termination
Effective February 15, 2000, the Company's Collaborative Development and
Marketing Agreement with Advanced Bioanalytical Services, Inc. ("ABS") was
terminated. The Company paid ABS $75,000 in full and final settlement of all
amounts owed under this agreement.
7
(11) NEN Agreement
On February 21, 2000, the Company entered into an Agreement for the License and
Supply of Terminators with NEN Life Science Products, Inc. ("NEN") pursuant to
which NEN has agreed to supply the Company with terminators for use in the
Company's SNPkits. In consideration of NEN's agreement to supply the Company
with terminators at favorable prices, the Company sold NEN 125,000 shares of its
common stock for a purchase price of $750,000 and paid NEN an up-front fee of
$750,000. The Company also agreed to pay NEN a certain percentage of net sales
revenue based on the number of SNPkits sold, in certain cases. The 125,000
shares had a fair value of $1,500,000 on the date of the agreement. Since the
products being supplied are used in the Company's current products and may be
used in future products, the Company will defer and amortize the $750,000 up-
front fee plus the $750,000 excess of the fair value of the issued common stock
over the purchase price (or a total of $1.5 million) over the estimated four
year term of the agreement on a straight-line basis. The Company measured the
fair value of the common stock on the date of the agreement as these shares were
fully paid and nonforfeitable on that date. The Company is required to purchase
quantities of products with an approximate minimum value during each annual
period from the effective date as follows: first year $333,000, second year
$700,000, third year $990,000 and fourth year $1,320,000. Either party can
terminate the agreement any time after four years from the commencement date,
without cause, upon 90 days written notice.
(12) Subsequent Events
(a) Initial Public Offering
In May 2000, the Company completed its initial public offering of 6,900,000
shares of common stock at a price of $8.00 per share (excluding underwriters'
discounts), generating net proceeds of approximately $48.4 million. All
shares of Series A Convertible Preferred Stock ("Series A stock"), Series B
Convertible Preferred Stock ("Series B stock"), and Series E stock
outstanding as of the closing date of the offering were automatically
converted into shares of common stock on a one-for-one basis. The 2,480,176
shares outstanding of Series C Convertible Preferred Stock ("Series C stock")
converted into 4,825,259 shares of common stock. No dividends were paid on
any of the Series A, B, C, or E stock.
(b) Change in Authorized Shares
On May 10, 2000, the Company filed a restated certificate of incorporation
which increased its authorized shares of common stock to 50,000,000 shares,
revoked all existing preferred stock designations and authorized 5,000,000
shares of preferred stock. The Board of Directors has the authority, without
any further stockholder approval, to determine the price, privileges and
other terms of the shares of unissued preferred stock.
(c) Sarnoff Agreement
On April 13, 2000, the Company amended its License and Option Agreement with
Sarnoff Corporation ("Sarnoff"). Under the terms of the amendment, in lieu of
all future cash payment, research funding, potential royalty payment and
stock issuance obligations, the Company made a payment to Sarnoff of
approximately $3 million and issued 250,000 shares of common stock and
granted five-year warrants to purchase 75,000 shares of common stock at an
exercise price of $8.00 per share. The Company exercised the remaining two
option fields on a non-exclusive basis as a result of this amendment.
Previously, on February 2, 2000, the Company issued 100,000 shares of common
stock to Sarnoff as an advance on the issuances which would be owed in
December 2000 for the two option fields previously issued under the License
and Option Agreement. As this licensed technology has not reached
technological feasibility and has no alternative future uses, the cash
payment of approximately $3.0 million and the fair value of the equity
securities of approximately $4.8 million will be charged to research and
development expense; $1.2 million was recorded in the quarter ended March 31,
2000 and $6.6 million will be recorded in the quarter ended June 30, 2000.
(13) Recent Accounting Announcements
In December 1999, the staff of the Securities and Exchange Commission issued a
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements, including the recognition of non-refundable fees received
upon entering into arrangements. Our revenue recognition
8
policies are consistent with the provisions of SAB 101 and our financial
statements reflect this policy for all periods presented.
(14) Legal Matters
The Company is not a party to any material legal proceeding. The Company is
engaged in discussions with Motorola, Inc. ("Motorola") in an attempt to resolve
certain areas of disagreement that have arisen under the existing collaboration
in the area of microfluidics. The primary issue of disagreement between the
parties relates to whether, under the terms of the agreement with Motorola,
Motorola has a right to obtain a license to the Company's SNP-IT technology for
use with Motorola's microfluidic chips. While the Company believes that, under
the terms of the agreement, Motorola has no rights to its SNP-IT technology,
there can be no assurance that an agreement can be reached with Motorola on this
issue or that the Company would prevail if this dispute were to develop into
arbitration or litigation. Nonetheless, the Company believes that, even if it
fails to successfully resolve this issue or to prevail in any such arbitration
or litigation, it would only be obligated to grant Motorola a non-exclusive
license to use its SNP-IT technology with their microfluidic chips on terms no
less favorable than those offered to other licensees. The Company does not
believe that such a result is likely to have a material adverse affect on the
Company's business, financial condition and operating results.
(15) Self-Insurance Reserve
GeneScreen Inc., the Company's wholly owned subsidiary, is self-insured for the
risk of loss relating to certain litigation claims that might arise from
GeneScreen's testing results. However, due to provisions in certain service
contracts, GeneScreen is insured for claims arising from testing performed under
the Texas, Ohio and Arizona contracts. Insurance coverage began in 1995 for
testing under the Texas contract, in 1997 for testing under the Ohio and Arizona
contracts and all other contracts in August 1998. Management estimates future
litigation costs based on historical litigation experience. The accrued
litigation reserve for the self-insured risk at March 31, 2000 was $176,000.
(16) Segment Information
The Company operates in two segments, each of which are strategic businesses
that are managed separately because each business develops, manufactures and
sells distinct products and services. The segments and a description of their
business are as follows: (i) the Company prior to the acquisition of GeneScreen
("Orchid"), which performs SNP scoring analysis and markets related equipment
and consumables; and (ii) GeneScreen, which performs DNA laboratory analysis for
paternity, transplantation and forensic testing.
The Company evaluates performance of and allocates resources to the segments.
Prior to the acquisition of GeneScreen on December 30, 1999, the Company was
operated and managed as one business. Segment information as of and for the
quarter ended March 31, 2000 for Orchid and GeneScreen is as follows:
Orchid GeneScreen Total
-------- ----------- --------
Revenues from external customers 585 2,881 3,466
Segment net loss (6,637) (942) (7,579)
Total assets 116,276 1,299 117,575
9
ORCHID BIOSCIENCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations as of March 31, 2000 and for the three month periods ended March 31,
2000 and 1999 should be read in conjunction with the sections of our
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission and declared effective on May 4, 2000, as amended, entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The following discussion of the financial condition and results of
our operations should be read in conjunction with our Condensed Consolidated
Financial Statements, including the Notes thereto, included elsewhere in this
Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, and Section
27A of the Securities Act of 1933, as amended. When used in this report or
elsewhere by management from time to time, the words "believe," "anticipates,"
"intends," "plans," "estimates," and similar expressions are forward looking
statements. Such forward looking statements contained herein are based on
current expectations. Prospective investors are cautioned that any such forward-
looking statements are not guarantees of future performance and involve risks
and uncertainties. Actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors. For
a more detailed discussion of such forward looking statements and the potential
risks and uncertainties that may impact upon their accuracy, see the "Forward
Looking Statements" section of this Management's Discussion and Analysis of
Financial Condition and Results of Operation and also the potential risks and
uncertainties set forth in the "Overview" section hereof and in the "Risk
Factors" section of our final prospectus dated May 4, 2000, comprising a part of
our Registration Statement on Form S-1 filed with the Securities and Exchange
Commission. Except as required by law, we undertake no obligations to update any
forward looking statements. You should also carefully consider the factors set
forth in other reports or documents that we file from time to time with the
Securities and Exchange Commission.
OVERVIEW
We are engaged in the development and commercialization of genetic diversity
technologies, products and services. Since we began operations in March 1995, we
have devoted substantially all of our resources to the development and
application of a portfolio of products and services using our proprietary
biochemistry for scoring SNPs and microfluidics technologies for applications in
drug discovery, principally in the field of pharmacogenetics and DNA synthesis.
On December 30, 1999, we acquired GeneScreen, Inc. for a net purchase price of
$42.7 million consisting of a combination of cash and shares of our Series E
mandatorily redeemable convertible preferred stock, offset by the cancellation
of certain debt owed to GeneScreen. We included $28.5 million as a beneficial
conversion feature in the purchase price. The amount of the beneficial
conversion feature was calculated as the difference between the $11.75 per share
fair value of our common stock on December 22, 1999, the commitment date which
was the date of the merger agreement for the acquisition, over the $4.50 per
share conversion price of the stock. GeneScreen is a company engaged in DNA
laboratory analysis for paternity, forensics and transplantation testing and had
revenues of approximately $13.7 million in 1999. In connection with the
acquisition of GeneScreen, we recorded approximately $43.1 million of goodwill
and other intangible assets, which we will amortize over periods ranging from 4
to 15 years.
Most of our current activities and resources are directed toward commercializing
our SNP scoring products and services which apply our proprietary SNP-IT primer-
extension technology. We expect to recognize revenues from the sale of both our
SNPstream instrument systems and our SNPware consumables. We also expect each
SNPstream system we sell or lease will generate a recurring revenue stream from
the sale of our SNPware consumables. We also provide, or plan to provide, a
variety of genetic diversity services to the pharmaceutical and biotechnology
industries through our ultra high-throughput MegaSNPatron facility.
GeneScreen's established business in paternity testing, forensics and
transplantation supports our goal of building our business in genetic diversity.
We believe our SNP-IT and microfluidics technologies will be able to improve the
performance of GeneScreen's genetic testing laboratories. We plan on using the
clinically approved laboratories at GeneScreen to expand our SNP scoring
services to pharmacogenetics testing of patient samples in
10
pharmaceutical clinical trials. We also plan on using these laboratories to
conduct SNP scoring services offered via the Internet.
GeneScreen's DNA testing business is dependent upon contracts with various
states and counties to provide paternity testing. These contracts are generally
put out to bid by each respective state every one to three years. The contract
bidding process is highly competitive and the award varies from state to state.
Some states and counties award contracts solely based on the lowest price while
others use a scoring matrix to achieve the desired mix of price, quality and
service. GeneScreen derives its transplantation business through contracts on a
bid basis with the National Marrow Donor Program, a not-for-profit agency that
facilitates hematopoietic cell transplants through organizing volunteer donor
drives, maintaining a national donor registry and other educational services.
With the acquisition of GeneScreen, we expect to generate service revenue in
fiscal year 2000 and use GeneScreen's CLIA approved testing laboratories to
expand our genetic diversity testing business and services.
Our ability to achieve profitability will depend in part on our ability to
successfully develop and commercialize our proprietary SNP scoring and
microfluidics technologies in the form of products and services for
pharmaceutical and biotechnology companies and research institutions. We
introduced our SNPstream 25K SNP-IT-based SNP scoring system, SNPware
consumables and related services in late 1999. We intend to develop additional
models of SNPstream instruments with lower throughput capabilities. Because our
proprietary SNP-IT primer-extension technology is very adaptable to other
hardware platforms, we intend to offer our SNPware kits for use on instruments
made or sold by other companies. Our collaboration with Affymetrix, Inc. is an
example of this platform propagation strategy.
We based our proprietary SNP value creation strategy on the creation of
proprietary rights covering the identification of SNPs and their associations to
medically important attributes of patients. We intend to develop intellectual
property rights in this area through collaborations with members of our Clinical
Genetics Network, pharmaceutical and biotechnology companies. We do not expect
royalties from commercial sale or license of intellectual property rights
generated by using our technologies for at least several years, if at all.
We have incurred losses since inception, and, as of March 31, 2000, we had a
total stockholders' deficit of $12.3 million, including an accumulated deficit
of $58.3 million. We anticipate incurring additional losses over at least the
next several years. We expect these losses to continue as we expand the
commercialization of our products and services to the research market and we
fully implement our proprietary SNP value creation business strategies. We
expect this expansion to result in increases in research and development,
marketing and sales, and general and administrative expenses. Payments under
strategic alliances, collaborations and licensing arrangements will be subject
to significant fluctuation in both timing and amount and therefore our results
of operations for any period may not be comparable to the results of operations
for any other period.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
Revenue. Revenue for the three months ended March 31, 2000 of $3.5 million
represented an increase of $3.2 million compared to $.3 million for the first
three months of 1999. The increase was largely due to the addition of our
GeneScreen DNA testing operations, access fee revenue from the placement of our
SNPstream(TM) 25K instrument systems and sales of SNPware(TM) consumables. The
results of operations for the quarter ended March 31, 1999 do not include those
of GeneScreen, Inc., which we acquired on December 30, 1999.
Cost of product revenue. Cost of product revenue for the three months ended
March 31, 2000 was $63,000 compared to $0 for the first three months of 1999.
The increase was attributable to the cost of consumables sold and depreciation
of the placed SNPstream instrument, in the first three months of 2000. There
were no sales for the quarter ended March 31, 1999.
Cost of laboratory testing. Cost of laboratory testing was $2.2 million for the
three months ended March 31, 2000. The increase was attributable to the
acquisition of GeneScreen in December 1999, which provided 100% of the
laboratory testing.
11
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended March 31, 2000 were $4.9
million, an increase of $3.3 million or 206%, compared to $1.6 million for the
first three months of 1999. The increase was primarily attributable to the
expansion of administration facilities and the hiring of additional personnel as
we increased our executive and administrative staffing in anticipation of
becoming a public company and supporting our future growth, amortization of
deferred compensation expense and operating costs related to GeneScreen which
was acquired in December 1999.
Research and development expenses. Research and development expenses for the
three months ended March 31, 2000 of $4.4 million represented an increase of
$1.6 or 57%, compared to $2.8 million for the first three months of 1999. The
increase in collaborative research and development expenses was primarily
attributable to increased expenses as we hired additional research and
development personnel, increased purchases of laboratory supplies, increased
equipment depreciation, amortization of deferred compensation expense, increased
facilities expenses in connection with the expansion of our internal and
collaborative research efforts and the issuance of 100,000 shares of common
stock to Sarnoff Corporation as an advance on the issuances that would have been
owed in December 2000 under a License and Option Agreement. Future research and
development expenses are expected to increase as additional personnel are hired
and research and development facilities are expanded to accommodate our
strategic collaborations and internal research.
Other income (expense). Other income (expense) for the three months ended March
31, 2000 of $.6 million increased $.5, or 500%, compared to other income,
(expense) of $.1 million for the first three months of 1999. This increase was
primarily due to interest received on larger cash, cash equivalent and short-
term investment balances which we held as a result of our receipt of proceeds
from our Series E private placement in December 1999 and January 2000.
Net loss allocable to common stockholders. Due to the factors discussed above,
for the three months ended March 31, 2000, we reported a net loss allocable to
common stockholders of $37.2 million as compared to $4.1 million in the first
three months of 1999. Net loss per share allocable to common stockholders
includes a beneficial conversion feature on preferred stock for the three months
ended March 31, 2000 of $29.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through research
and development funding from collaborative partners and two private placements
of equity securities that closed in March 1998 and in December 1999 and January
2000 with aggregate net proceeds from the private placements of approximately
$102 million. The sale of the Series E mandatorily redeemable convertible
preferred stock in December 1999 resulted in a $44,554,000 beneficial conversion
feature which is included in net loss allocable to common stockholders in 1999.
The closing of Series E mandatorily redeemable convertible preferred stock in
January 2000 resulted in an additional $29,573,564 beneficial conversion feature
which is included in net loss allocable to common stockholders and net loss per
share allocable to common stockholders in the first quarter of 2000. In December
1998, we obtained a secured $6.0 million equipment line of credit, for the
purchase of plant and equipment at our corporate headquarters and research and
development laboratories. At December 31, 1999, this funding commitment expired
and at March 31, 2000 we had borrowings of $4.4 million outstanding under this
facility. We lease our corporate and primary research facility under an
operating lease which expires in 2008.
As part of our transition from a business model based on microfluidics
technologies to one based on SNP scoring technologies, on April 13, 2000 we
amended our License and Option Agreement with Sarnoff by making a single payment
of approximately $3.0 million, issuing 250,000 shares of common stock and
delivering a five-year warrant to purchase 75,000 shares of our common stock at
an exercise price of $8.00 per share. Previously on February 2, 2000, we issued
100,000 shares of common stock to Sarnoff as an advance on the issuances which
would be owed in December 2000 for the two option fields previously exercised
under the License and Option Agreement. As the licensed technology has not
reached technological feasibility and has no alternative uses, the cash payment
of approximately $3.0 million and the fair value of the equity securities of
approximately $4.8 million will be charged to research and development expense
in 2000.
As of March 31, 2000, we had $53.7 million in cash and cash equivalents and
short-term investments, compared to $33.8 million as of December 31, 1999. This
increase primarily reflects the completion of our private placement of equity
securities. In addition, our initial public offering in May 2000 generated
approximately $48.4 million of proceeds, net of underwriting discounts and
commissions and offering expenses, from the sale of a total of 6,900,000 shares
of common stock, including the underwriters' over-allotment shares. To date,
inflation has not had
12
a material effect on our business. We believe that our cash reserves, expected
short-term revenue, and the net proceeds of the initial public offering
completed in May 2000 will be sufficient to fund our operations through at least
the next 18 months. We may need to access the capital markets for additional
financing to operate our ongoing business activities.
Net cash used in operations for the quarter ended March 31, 2000 was
approximately $7.7 million compared with approximately $3.3 million for the
comparable period in 1999. Non-cash charges in 2000 included compensation
expense of $0.8 million and research and development expense from the issuance
of equity securities of $1.2 million and depreciation and amortization expense
of $1.3 million. Investing activities included $1.1 million in cash used during
the quarter ended March 31, 2000 for equipment purchases and $2.8 million for
the purchases of short term investments. Financing activities included the use
of $1.3 million to repay debt from lines of credit.
Working capital increased to approximately $50.1 million at March 31, 2000 from
approximately $27.3 million at December 31, 1999. The increase in working
capital was primarily due to our Series E mandatorily redeemable convertible
preferred stock financing in January 2000.
We cannot assure you that our business or operations will not change in a manner
that would consume available resources more rapidly than anticipated. We also
cannot assure you that we will not require substantial additional funding before
we can achieve profitable operations. Our capital requirements depend on
numerous factors, including the following:
- our ability to enter into strategic alliances or make acquisitions;
- regulatory changes and competing technological and market developments;
- changes in our existing collaborative relationships;
- the cost of filing, prosecuting, defending and enforcing patent claims and
other intellectual property rights;
- the purchase of additional capital equipment;
- the development of our SNPstream and DNAstream and software product lines and
associated reagent consumables;
- the development of our SNPware consumables and kits;
- the success rate of establishing new contracts, and renewal rate of existing
contracts, for DNA testing services in the areas of paternity, forensics and
transplantation;
- the progress of our existing and future milestone and royalty producing
activities; and
- the availability of additional funding, if necessary, and if at all, on
favorable terms.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is principally confined to our cash equivalents and
short-term investments, all of which have maturities of less than one year. We
maintain a non-trading investment portfolio of investment grade, liquid debt
securities that limits the amount of credit exposure to any one issue, issuer or
type of instrument. The fair value of these securities approximates their cost.
FORWARD LOOKING STATEMENTS
This report may contain forward-looking statements. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results or outcomes to differ materially
from those described in such forward-looking statements. These statements
address or may address the following subjects: results of operations, customer
growth and retention; development of technology; losses or earnings; operating
expenses, including, without limitation, marketing expense and technology and
development expense; and revenue growth. We caution investors that there can be
no assurance that actual results, outcomes or business conditions will not
differ materially from those projected or suggested in such forward- looking
statements as a result of various factors, including, among others, our limited
operating history, unpredictability of future
13
revenues and operating results, and competitive pressures. For further
information, refer to the more specific factors and uncertainties discussed
throughout this report.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings. We are engaged in
discussions with Motorola in an attempt to resolve certain areas of disagreement
that have arisen under our existing collaboration in the area of microfluidics.
The primary issue of disagreement between the parties relates to whether, under
the terms of our agreement, Motorola has a right to obtain a license to our SNP-
IT technology for use with Motorola's microfluidic chips. While we believe that,
under the terms of our agreement, Motorola has no rights to our SNP-IT
technology, we cannot assure you that we can reach agreement with Motorola on
this issue or that we would prevail if this dispute were to develop into
arbitration or litigation. Furthermore, we are likely to incur substantial costs
and expend substantial personnel time in resolving this issue if it becomes the
subject of arbitration or litigation. Nonetheless, we believe that, even if we
fail to successfully resolve this issue or to prevail in any such arbitration or
litigation, we would only be obligated to grant Motorola a non-exclusive license
to use our SNP-IT technology with their microfluidic chips on terms no less
favorable than those offered to other licensees. We do not believe that this
result is likely to have a material adverse affect on our business or financial
condition results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) In December 1999 and January 2000, we privately placed an aggregate of
18,881,563 shares of our Series E convertible preferred stock and received
net proceeds of approximately $85.5 million. In May 2000, we completed our
initial public offering of 6,900,000 shares of our common stock and received
net proceeds of approximately $48.4 million.
(b) In February 2000, twelve individuals exercised options to purchase an
aggregate of 45,632 shares of our common stock for an aggregate purchase
price of $45,583.
(c) In March 2000, thirteen individuals exercised options to purchase an
aggregate of 65,002 shares of our common stock for an aggregate purchase
price of $18,399.
No underwriters were involved in the foregoing offers and sales of securities.
Such offers and sales were made in reliance upon an exemption from the
registration provisions of the Securities Act of 1933, as amended (the
"Securities Act"), set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or in the case of the exercise of options to purchase common stock,
Rule 701 under the Securities Act. All of the foregoing securities are deemed
restricted securities for purposes of the Securities Act.
We intend to use approximately $4 million of the net proceeds for capital
expenditures associated with technology and systems upgrades and expansion of
our headquarters. We have no specific plan at this time for use of the
remaining proceeds and expect to use such proceeds for working capital and
general corporate purposes including the payment of sales and marketing
expenses. We may, when the opportunity arises, use an unspecified portion of
the net proceeds to acquire or invest in complementary businesses, products and
technologies. From time to time, in the ordinary course of business, we expect
to evaluate potential acquisitions of such businesses, products or technologies.
However, we have no present understandings, commitments or agreements with
respect to any material acquisition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 17, 2000, we held our annual meeting of stockholders. At the meeting,
our stockholders elected Sidney M. Hecht, Ph.D., Samuel D. Isaly, Jeremy M.
Levin, D.Phil., MB.Bchir., Dale R. Pfost, Ph.D., Robert M. Tien, M.D., M.P.H.
and Anne M. VanLent to serve as our Directors. The stockholders also approved
our Restated Certificate of Incorporation, Amended and Restated Bylaws and 2000
Employee, Director and Consultant Stock
14
Plan. In addition, our stockholders increased the shares of common stock
reserved for issuance under the 1995 Stock Incentive Plan to 3,500,000, reserved
1,500,000 shares of common stock for issuance under the 2000 Employee, Director
and Consultant Stock Plan and ratified the Board of Director's appointment of
KPMG LLP to serve as our independent public accountants for the fiscal year
ending December 31, 2000. 25,004,784 shares voted in favor of each resolution.
There were no votes against any proposal and there were no abstentions.
On February 16, 2000, certain stockholders acted by written consent in lieu of a
special meeting to amend our Certificate of Incorporation to change our
corporate name from Orchid Biocomputer, Inc. to Orchid BioSciences, Inc. There
were no votes against the amendment and there were no abstentions.
ITEM 5. OTHER INFORMATION.
Not applicable.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------------
The following is a list of exhibits filed as part of this Quarterly Report on
Form 10-Q/A.
Exhibit
Number Description
-----------
3.1 Restated Certificate of Incorporation
4 Specimen Stock Certificate (filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1, No. 333-
30774)
10.1 1995 Stock Incentive Plan, as amended, including form of stock
option certificate for incentive and non-statutory stock
options (filed as Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1 No. 333-30774)
10.2 2000 Employee, Director, Consultant Stock Plan, including form
of stock option agreement for non-statutory and incentive
stock options (filed as Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1, No. 333-30774)
10.3 Executive Benefit Program, including Executive Deferred
Compensation Plan Executive and Severance Plan (filed as
Exhibit 10.3 to the Registrant's Registration Statement on
Form S-1, No. 333-30774)
10.6 License and Option Agreement, dated December 10, 1997, between
Sarnoff Corporation and the Registrant, as amended by
Amendment to License and Option Agreement dated as of April
13, 2000 by and between Sarnoff Corporation and the Registrant
(filed as Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1, No. 333-30774)
10.7 Employment Agreement, effective as of January 1, 2000, by and
between the Registrant and Dale R. Pfost, Ph.D. (filed as
Exhibit 10.7 to the Registrant's Registration Statement on
Form S-1, No. 333-30774)
10.8 Employment Agreement, effective as of January 1, 2000, by and
between the Registrant and Donald R. Marvin. (filed as Exhibit
10.8 to the Registrant's Registration Statement on Form S-1,
No. 333-30774)
10.9 Agreement for the License and Supply of Terminators, dated
February 16, 2000 between the Registrant and NEN Life Science
Products, Inc. (filed as Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1, No. 333-30774)
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------------
No reports on Form 8-K have been filed during the three months ended March 31,
2000.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to its Report of Form 10-Q for
the quarter ended March 31, 2000 to be signed on its behalf by the undersigned,
thereunto duly authorized.
ORCHID BIOSCIENCES, INC.
Date: August 10, 2000 By: /s/ Donald R. Marvin
--- --------------------
DONALD R. MARVIN
Senior Vice President, Chief Operating
Officer, Chief Financial Officer
(principal financial and accounting
officer)
17