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 ended March 31, 2002
[_] 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)
4390 US ROUTE ONE, 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 [X] No [_]
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of May 1, 2002, was 55,461,068.
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I FINANCIAL INFORMATION .............................................. 1
Item 1. Financial Statements .............................................. 1
Condensed Consolidated Balance Sheets as of March 31, 2002
(unaudited) and December 31, 2001 ......................................... 1
Condensed Consolidated Statements Of Operations for the three
months ended March 31, 2002 and 2001 (unaudited) .......................... 2
Condensed Consolidated Statements Of Cash Flows for the three months ended
March 31, 2002 and 2001 (unaudited) ....................................... 3
Notes To Condensed Consolidated Financial Statements (unaudited) .......... 4
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations ................................................. 10
Item 3. Quantitative And Qualitative Disclosures About Market Risk ........ 16
PART II OTHER INFORMATION. ................................................ 17
Item 1. Legal Proceedings ................................................. 17
Item 2. Changes In Securities And Use Of Proceeds ......................... 18
Item 3. Defaults Upon Senior Securities ................................... 18
Item 4. Submission Of Matters To A Vote Of Security Holders ............... 18
Item 5. Other Information ................................................. 18
Item 6. Exhibits And Reports On Form 8-K .................................. 18
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)
March 31, December 31,
Assets 2002 2001
----------------- ----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 35,900 $ 10,746
Short-term investments 3,084 17,196
Accounts receivable, net 11,888 12,330
Inventory 6,051 5,354
Other current assets 1,392 1,855
----------------- -----------------
Total current assets 58,315 47,481
Equipment and leasehold improvements, net 29,632 29,615
Goodwill, net 3,318 3,265
Other intangibles, net 35,829 36,772
Other assets 3,413 3,783
----------------- -----------------
Total assets $130,507 $120,916
================= =================
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt 3,407 3,397
Accounts payable 6,317 6,161
Accrued expenses 8,862 9,180
Deferred revenue 1,124 1,221
----------------- -----------------
Total current liabilities 19,710 19,959
Long-term debt, less current portion 5,524 6,327
Other liabilities 1,298 1,392
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, authorized 5,000,000 shares, no shares
issued or outstanding -- --
Series A junior participating stock, $.001 par value,
1,000,000 shares designated; no shares issued or outstanding -- --
Common stock, $.001 par value, authorized 100,000,000 shares, issued and
outstanding 55,222,238 and 46,180,450 at March 31,
2002 and December 31, 2001, respectively 55 46
Additional paid-in capital 304,786 283,857
Deferred compensation (6,617) (7,543)
Accumulated other comprehensive income/(loss) (429) 181
Accumulated deficit (193,820) (183,303)
----------------- -----------------
Total stockholders' equity 103,975 93,238
----------------- -----------------
Total liabilities and stockholders' equity $130,507 $120,916
================= =================
See accompanying notes to condensed consolidated financial statements.
1
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
(unaudited)
Three months ended
March 31,
---------
2002 2001
---------------- ---------------
Revenues:
Products revenues $3,046 $ 1,008
Services revenues 11,595 3,897
Collaboration, license and other revenues 1,189 730
---------------- ---------------
Total revenues 15,830 5,635
---------------- ---------------
Operating expenses:
Cost of products revenues 1,452 818
Cost of services revenues 7,608 2,872
Selling, general and administrative 11,837 7,192
Research and development 6,269 6,954
---------------- ---------------
Total operating expenses 27,166 17,836
---------------- ---------------
Operating loss (11,336) (12,201)
---------------
Other income (expense):
Interest income 280 874
Interest expense (215) (164)
Other expense (140) --
---------------- ---------------
Total other income (expense) (75) 710
---------------- ---------------
Net loss before income taxes (11,411) (11,491)
Income tax benefit 894 --
---------------- ----------------
Net loss allocable to common stockholders (10,517) (11,491)
================ ================
Basic and diluted net loss per share allocable to common
stockholders $(.21) $(.34)
================ ================
Shares used in computing basic and diluted net loss per
share allocable to common stockholders 49,418,418 33,331,022
================ ================
See accompanying notes to condensed consolidated financial statements.
2
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three months ended
March 31,
--------
2002 2001
--------------- ------------
Cash flows from operating activities:
Net loss $ (10,517) $ (11,491)
Adjustments to reconcile net loss to net cash used in operating
activities:
Noncash compensation expense 602 212
Depreciation and amortization 2,596 1,808
Changes in assets and liabilities:
Accounts receivable 442 1,066
Inventory (697) 691
Other current assets 463 431
Other assets 138 8
Accounts payable 156 (4,645)
Accrued expenses (218) 1,020
Deferred revenue (97) 423
Other liabilities (94) --
--------------- -------------
Net cash used in operating activities (7,226) (10,477)
--------------- -------------
Cash flows from investing activities:
Cash paid to acquire Cellmark, including acquisition costs -- (2,867)
Capital expenditures (1,613) (1,881)
Maturities of short-term investments 13,755 37,935
Purchase of short-term investments -- (14,971)
--------------- -------------
Net cash provided by investing activities 12,142 18,216
--------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 21,262 33
Repayment of debt on line of credit (793) (521)
Payments of patent obligation (100) --
--------------- -------------
Net cash provided by (used in) financing activities 20,369 (488)
--------------- -------------
Effect of foreign currency translation on cash and cash equivalents (131) (37)
--------------- -------------
Net increase in cash and cash equivalents 25,154 7,214
Cash and cash equivalents at beginning of period 10,746 14,558
--------------- -------------
Cash and cash equivalents at end of period $35,900 $21,772
=============== =============
Supplemental disclosure of noncash financing and investing activities:
Changes in deferred compensation from grant, forfeiture and
remeasurement of common stock options 324 2,116
Issuance of common stock in connection with the acquisition of Cellmark -- 2,019
Supplemental disclosure of cash flow information:
Cash paid during the period for interest 75 160
See accompanying notes to condensed consolidated financial statements.
3
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 and 2001
(Dollars in thousands except per share data)
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Orchid BioSciences, Inc. and its subsidiaries (the "Company") have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US") 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 accounting
principles generally accepted in the US 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
include the results of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
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 Annual Report on Form 10-K for
the year ended December 31, 2001, as filed with the Securities and Exchange
Commission.
The Company has not yet achieved profitable operations or positive cash
flow from operations. There is no assurance that profitable operations, if ever
achieved, could be sustained on a continuing basis. In addition, development and
commercialization activities will require significant additional financing. The
Company's accumulated deficit aggregated $193,820 through March 31, 2002 and it
expects to incur substantial losses in future periods.
Certain reclassifications were made to prior year amounts to conform to
the current year presentation.
(2) Acquisition of Cellmark Diagnostics
On February 12, 2001, the Company completed its acquisition of certain
assets of AstraZeneca's business division, Cellmark Diagnostics ("Cellmark"), a
leading provider of genetic diversity testing services in the UK which also
sells kits for and conducts tests for genetic diseases, including cystic
fibrosis. The acquisition has been accounted for under the purchase method of
accounting and accordingly, the assets and liabilities acquired have been
recorded at their fair values. The results of operations of Cellmark have been
included in the Company's consolidated statement of operations since the date of
acquisition by the Company on February 12, 2001. The pro forma results of
operations of Cellmark have not been presented because they are immaterial to
the Company's results of operations for 2001.
(3) Lifecodes Corporation Proforma Financial Information
On December 5, 2001, the Company acquired all of the outstanding
equity securities of Lifecodes Corporation ("Lifecodes"). The following
unaudited pro forma financial information presents the combined results of
operations of the Company and Lifecodes as if the acquisition had occurred as of
January 1, 2001, after giving effect to certain pro forma adjustments, including
amortization of other intangibles and elimination of transaction related costs
incurred by Lifecodes prior to the acquisition. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company and Lifecodes constituted a single entity during
this period or the results of operations which may occur in the future.
Three months ended March 31, 2001
---------------------------------
(unaudited)
Revenues $ 14,055
Net loss allocable to common stockholders (11,483)
Basic and diluted net loss per share allocable
to common stockholders $ (0.29)
4
(4) Inventory
Inventory is comprised of the following at March 31, 2002 and
December 31, 2001, respectively:
March 31, 2002 December 31, 2001
---------------- -------------------
Raw materials $2,072 $3,087
Work in progress 2,154 1,208
Finished Goods 1,825 1,059
-------- -------
$6,051 $5,354
======== =======
Raw materials consist mainly of reagents, enzymes, chemicals and plates
used in SNP scoring, genotyping and to manufacture SNPware consumables. The
Company currently has only one supplier for oligonucleotides, an important raw
material. Work in progress consists mainly of case work not yet completed and
kits that are in the production process. Finished goods consist mainly of kits
that have been produced, but have not been shipped.
(5) Segment Information
The Company operates in two segments, each of which is a strategic
business that is managed separately because each business develops, manufactures
and sells distinct products and services. The segments and a description of each
of them are as follows: (i) the business which markets equipment and consumables
for SNP scoring, and other genetic analyses ("Products"); and (ii) the business
which performs genotyping services including DNA laboratory analysis for
paternity, transplantation and forensic testing and SNP scoring services
("Services"). The Company allocates the majority of its corporate and other
general and administrative expenses to its reportable segments based upon actual
usage, occupancy, percentage of each segments' revenue to the consolidated
revenue and other correlations with operating metrics. During 2002 and 2001, the
chief operating decision maker of the Company measured segment profit/(loss)
using operating loss, which excludes other income (expense). The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies, as discussed in Footnote 1 to the consolidated
financial statements included in the Company's Annual Report on Form 10-K filed
for the year ended December 31, 2001.
During 2002, the Company began the process of realigning its business
for marketing purposes into four business units. These business units will
consist of Orchid Life Sciences, Orchid Identity Genomics, Orchid Diagnostics
and Orchid GeneShield. Accordingly, goodwill by reportable segment has not been
determined.
In 2001, the Company changed the segment for its collaboration, license
and other revenues. In 2000, this segment included revenues from products;
however, in 2001, the chief operating decision maker determined that such
revenues should be included in its service segment. These changes had no
material impact on the previously reported segment information and such amounts
have not been reclassified. Segment information as of and for the three months
ended March 31, 2002 and 2001 is as follows:
- ---------------------------------------------------------------------------------------------------------
March 31, 2002: Products Services Total
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Revenues from external customers $3,046 $12,784 $15,830
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Segment operating loss (4,091) (7,245) (11,336)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Total assets 31,131 99,376 130,507
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
March 31, 2001: Products Services Total
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Revenues from external customers $1,738 $3,897 $5,635
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Segment net loss (8,865) (3,336) (12,201)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Total assets 79,634 49,740 129,374
- ---------------------------------------------------------------------------------------------------------
5
(6) Issuance of Common Stock
On March 5, 2002, the Company completed an offering through which an
aggregate of 9.0 million shares were sold, including an overallotment, to a
group of new and existing shareholders. The shares of common stock were offered
through a prospectus supplement pursuant to the Company's effective shelf
registration statement. The Company generated net proceeds as a result of this
offering of approximately $21,300.
(7) Contingencies
Effective January 2000, the Company entered into three-year employment
agreements with two executives of the Company. In certain cases, the Company may
be obligated to pay the executives' salary and benefits for up to eighteen
months after leaving the Company.
On or about November 21, 2001, the Company was made aware of a
complaint filed in the United States District Court for the Southern District of
New York naming the Company as defendants, along with certain of its officers
and underwriters. An amended complaint was filed on April 19, 2002. The
complaint, as amended, purportedly is filed on behalf of persons purchasing the
Company's stock between May 4, 2000 and December 6, 2000, and alleges violations
of Sections 11 and 15 of the Securities Act of 1933, as amended, and Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule
10b-5 promulgated thereunder. The amended complaint alleges that, in connection
with the Company's May 5, 2000 initial public offering, the defendants failed to
disclose additional and excessive commissions purportedly solicited by and paid
to the underwriter defendants in exchange for allocating shares of the Company's
stock to preferred customers and alleged agreements among the underwriter
defendants and preferred customers tying the allocation of IPO shares to
agreements to make additional aftermarket purchases at pre-determined prices.
Plaintiffs claim that the failure to disclose these alleged arrangements made
the Company's registration statement on Form S-1 filed with the SEC in May 2000
and the prospectus, a part of the registration statement, materially false and
misleading. Plaintiffs seek unspecified damages. The Company has not reserved
any amount related to this case as the Company believes that the allegations are
without merit and intends to vigorously defend against the plaintiffs' claims.
The Company has been in discussions with St. Louis University of St.
Louis, Missouri regarding its belief that our SNP scoring technology infringes
certain claims under U.S. patent 5,846,710, which is controlled by the
University. Although the Company is confident that its SNP scoring technology
does not infringe any claims under the University's patent, the Company
nonetheless entered into discussions with the University regarding the scope of
these claims in the hope of resolving the issue. Upon the Company's failure to
reach agreement with the University, in August 2000 the Company filed a lawsuit
against the University in the U.S. District Court for the Southern District of
California, Case No. 00CV1558L (JFS), seeking declaratory judgment of
non-infringement, invalidity and non-enforceability with respect to the
University's patent. While the Company believes that its position in this action
is strong, patent litigation is complex and might result in claims against the
Company, including patent infringement. As a result, the outcome of this action
is uncertain. Furthermore, while the Company is seeking declaratory judgment in
this action, the lawsuit could take significant time, be expensive and divert
the Company's attention from other business concerns.
Additionally, the Company has other certain claims against it arising
from the normal course of its business. The ultimate resolution of such matters,
in the opinion of management, will not have a material effect on the Company's
financial position or results of operations.
In connection with the Company's acquisition of certain patents in
2001, the Company assumed an obligation to pay future amounts over the next
three years. The obligation has been recorded in the accompanying consolidated
balance sheet as of March 31, 2002, at the net present value of the future
obligations. The payments which are to be made to the original patent holder are
as follows:
2002 $ 1,392
2003 1,178
2004 310
-------
Total 2,880
Less amount that represents interest (255)
-------
Net present value of future obligations $ 2,625
=======
6
The Company is also obligated to pay minimum royalties related to these
patents of $1.2 million in 2005, $1.6 million in 2006, and $1.9 million in 2007,
and each year thereafter until the expiration of the agreement.
(8) Comprehensive Loss
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") requires
reporting and displaying comprehensive income (loss) and its components which,
for the Company, includes net loss and unrealized gains and losses on
available-for-sale securities and foreign currency translation gains and losses.
In accordance with SFAS 130, the accumulated balance of other comprehensive
income (loss) is displayed as a separate component of stockholders' equity. The
following table reconciles net loss to comprehensive loss for the three months
ended March 31, 2002 and 2001:
Three months ended
March 31,
---------
2002 2001
--------- ---------
Net loss $(10,517) $(11,491)
Other comprehensive income (loss):
Unrealized holding gain (loss) arising during the period (253) 105
Less reclassification adjustment for gains included in net loss 105 --
----------- ------------
Unrealized holding gain (loss) on available-for-sale securities (358) 105
Foreign currency translation adjustment (252) (109)
----------- ------------
Other comprehensive loss (610) (4)
----------- ------------
Comprehensive loss $(11,127) $(11,495)
=========== ============
(9) Debt Covenants
Pursuant to the Company's line of credit which was amended in December
2000, the Company is required to provide a cash security deposit or letter of
credit equal to an amount defined in the agreement, if the Company does not
maintain minimum unrestricted cash, as defined in the agreement, equal to the
greater of $35,000 or twelve month's cash needs (calculated by taking the
trailing three months net cash used in operations multiplied by four) not to
exceed 50% of outstanding amounts on draws made in or subsequent to December 30,
2000 (50% equal to approximately $2,682 as of March 31, 2002.) As of December
31, 2001 and just prior to the follow-on offering (See Note 6), the Company did
not maintain the minimum unrestricted cash defined in the agreement. The Company
has received a waiver from its lender regarding its non-compliance with this
covenant for this period. Subsequent to March 31, 2002, the Company was not in
compliance with this financial covenant. On May 14, 2002, the Company initiated
the process to obtain a letter of credit in the amount of approximately $2,682
as required by the amended line of credit, which will be supported by a cash
deposit in the same amount. Once the letter of credit is issued, this cash
deposit will be reflected as restricted cash in the consolidated balance sheet.
The Company has also received written notice from the lender stating that the
lender waived the financial covenant violation as a result of not maintaining a
pledge of cash security deposit or letter of credit under this agreement for the
period of non-compliance through May 2002.
(10) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 as well as all purchase method business combinations completed after
June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. SFAS 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121.
7
The Company adopted certain provisions of SFAS 141 during 2001 for the
Lifecodes acquisition and fully adopted SFAS 141 on January 1, 2002. The Company
has adopted SFAS 142 effective January 1, 2002 as well. As such, goodwill
acquired in a purchase business combination completed after June 30, 2001, but
before SFAS 142 was adopted in full was not amortized, but continued to be
evaluated for impairment in accordance with the appropriate pre-SFAS 142
accounting literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001, continued to be amortized and tested
for impairment in accordance with the appropriate pre-SFAS 142 accounting
requirements prior to the adoption of SFAS 142.
SFAS 141 requires, upon adoption of SFAS 142, that the Company evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in SFAS 141 for recognition apart from
goodwill. In connection with its evaluation of intangible assets arising from
business combinations prior to the adoption of SFAS 141, the Company has
reclassified its workforce intangible asset with a net book value as of December
31, 2001 of approximately $1,073 to goodwill. Upon adoption of SFAS 142, the
Company was required to reassess the useful lives and residual values of all
intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company was required to test the intangible asset for impairment in
accordance with the provisions of SFAS 142. Any impairment loss would be
measured as of the date of adoption and recognized as the cumulative effect of a
change in accounting principle in the first interim period. The Company has
reassessed the useful lives and residual values of all of its intangible assets
in accordance with its adoption of SFAS 142 and determined that the existing
useful lives for its intangible assets are appropriate. No identifiable
intangible assets, were determined to have indefinite lives.
In connection with SFAS 142's transitional goodwill impairment
evaluation, the statement requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company will then have up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. The Company expects
to identify its reporting units and perform the transitional impairment test
during the second quarter of 2002. Upon the completion of this step, to the
extent a reporting unit's carrying amount exceeds its fair value, an indication
exists that the reporting unit's goodwill may be impaired, then the Company must
perform the second step of the transitional impairment test. In the second step,
the Company must compare the implied fair value of the reporting unit's
goodwill, determined by allocating the reporting unit's fair value to all of its
assets (recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation in accordance with SFAS 141, to its carrying amount,
both of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of operations.
The Company has unamortized goodwill as of March 31, 2002 of $3,318.
Due to the extensive effort needed to complete the transitional impairment test,
it is not practicable to reasonably estimate whether any transitional impairment
losses which may be required to be recognized as the cumulative effect of a
change in accounting principle.
SFAS 142 requires disclosure of what reported net loss and net loss per
share allocable to common stockholders would have been in all periods presented
exclusive of amortization expense recognized in those periods related to
goodwill and intangible assets that will no longer be amortized and changes in
amortization periods for intangible assets that will continue to be amortized.
This disclosure is reflected in the table below.
------------------------------------------------------------------------------------------------
For the three months
ended
Net Loss: March 31,2001
------------------------------------------------------------------------------------------------
Net loss as reported $(11,491)
------------------------------------------------------------------------------------------------
Add back: Goodwill amortization 518
------------------------------------------------------------------------------------------------
Net loss, as adjusted $(10,973)
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
Basic and diluted net loss per share allocable to common stockholders:
------------------------------------------------------------------------------------------------
Net loss per share, as reported $(.34)
------------------------------------------------------------------------------------------------
Goodwill amortization per share .01
------------------------------------------------------------------------------------------------
8
---------------------------------------------------------------------------------------------------
Net loss per share, as adjusted $(.33)
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
Goodwill amortization in the table below includes amortization of the workforce
intangible asset which was reclassified to goodwill upon the adoption of SFAS
142.
(11) Goodwill and Other Intangible Assets
The following table sets forth the Company's other intangible assets at
March 31, 2002:
Base technology $ 9,615
Customer list 5,040
Trademark/tradename 3,998
Patents and know-how 16,718
Developed technology 4,080
Other 1,470
---------
Total 40,921
Less accumulated amortization (5,092)
---------
$ 35,829
=========
Aggregate amortization expense:
For the three months ended March 31, 2002 $ 943
Estimated amortization expense:
For the nine months ended December 31, 2002 $ 3,389
For the year ending December 31, 2003 4,332
For the year ending December 31, 2004 4,285
For the year ending December 31, 2005 4,244
For the year ending December 31, 2006 4,044
As of March 31, 2002, the Company does not have any intangible assets
other than goodwill which are not subject to amortization. In addition, the
change in goodwill from $3,265 as of December 31, 2001 to $3,318 as of March 31,
2002 was the result of foreign currency translation adjustments during the
quarter ended March 31, 2002.
(12) Proposed Increase in Authorized Shares of Common Stock
In March 2002, the Board of Directors of the Company approved, subject
to stockholder approval, an increase of the Company's authorized shares of
common stock to 150,000,000 shares.
(13) Income Tax Benefit
The Company participates in the State of New Jersey's corporation
business tax benefit certificate transfer program (the "Program"), which allows
certain high technology and biotechnology companies to sell unused net operating
loss carryovers to other New Jersey corporation business taxpayers. During 2000,
the Company submitted an application to the New Jersey Economic Development
Authority (the "EDA") to participate in the Program, and the application was
approved. The EDA then issued a certificate certifying the Company's ability to
participate in the Program and the amount of New Jersey net operating loss
carryovers the Company has available to transfer. Since New Jersey law provides
that net operating losses can be carried over for up to seven years, the Company
may be able to transfer its New Jersey net operating losses from the last seven
years. The Program requires that the purchaser pay at least 75% of the amount of
the surrendered tax benefit.
During January 2002, the Company completed the sale of approximately
$11,000 of its New Jersey tax loss carryforwards and received $894, which was
recorded as an income tax benefit.
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 as of
March 31, 2002 and the Results of Operation for the three months ended March 31,
2002 and 2001 should be read in conjunction with our Consolidated Financial
Statements and related Notes to Consolidated Financial Statements and Selected
Financial Data included elsewhere in this Quarterly Report on Form 10-Q. This
Quarterly Report on 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. For a more detailed
discussion of such forward-looking statements and the potential risks and
uncertainties that may impact upon the accuracy of such statements in this
section, see the "Forward Looking Statements" section of this Quarterly Report
on Form 10-Q and also the potential risks and uncertainties set forth in the
"Overview" section hereof and in the "Risk Factors" section of our Annual Report
on Form 10-K filed with the Securities and Exchange Commission for the year
ended December 31, 2001. Except as required by law, we undertake no obligation
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 single nucleotide polymorphisms, or SNPs,
as well as microfluidics technologies for applications, principally in the field
of high volume SNP scoring and pharmacogenetics analysis.
In 2001, our business focused on our SNP scoring products and services
that apply our proprietary SNP-IT primer extension technology, and on our
identity genomics services in paternity and forensics. During 2001, we entered
into various agreements. These agreements had varying terms and included but
were not limited to: (i) services agreements whereby we agreed to provide
genetic analysis services; (ii) services agreements under which we would provide
SNP genotyping services; (iii) license agreements pursuant to which we granted
third parties royalty bearing, non-exclusive and exclusive licenses to use our
SNP-IT single base primer extension technology to produce and sell reagent kits
and software incorporating our technology; and (iv) agreements under which we
agreed to provide SNPstream instruments and SNPware consumables. We have
recognized revenue associated with these agreements. We are entitled to receive
royalties on product sales, if any, for the duration of any of our license
agreements, subject to certain creditable up-front payments we have received.
Since late 1999, following our acquisition of GeneScreen, Inc. ("GeneScreen")
and, our subsequent acquisitions of Cellmark and Lifecodes, in 2001, we also
have been a leading provider of DNA testing services in the paternity, forensics
and human leukocyte antigen, or HLA, transplantation typing fields.
Our ability to achieve profitability will depend, in part, on our
ability to continue to develop and commercialize our proprietary SNP scoring
technologies in the form of products and services for pharmaceutical,
biotechnology and diagnostic companies and research institutions, as well as our
ability to competitively bid on, and receive contracts, for identity genomics
testing services. We introduced our SNPstream 25K SNP scoring system, SNPware
consumables and related services in late 1999. In September 2001, we introduced
the SNPstream MT solution with medium throughput capabilities and based on the
Luminex xMap platform. Because our proprietary SNP-IT primer extension
technology is very adaptable to other hardware platforms, we intend to expand
our offerings of SNPware consumables for use on instruments made or sold by
other companies and to obtain license fees and royalties by licensing our SNP-IT
technology for incorporation in the consumable kits of others. Our
collaborations with Affymetrix, Amersham Biosciences, Applied Biosystems and
PerkinElmer are examples of this Platform Propagation strategy. We also provide
SNP-IT-based high quality SNP scoring to a variety of customers on a fee-for
service basis. Our MegaSNPatron facility currently offers high throughput SNP
genotyping services to such customers as AstraZeneca, Ellipsis, GlaxoSmithKline,
Lilly, Oklahoma Medical Research Foundation, Pig Improvement Corporation on
three different platforms, the SNPstream 25K, the SNPstream MT, and SNPcode.
And, in April of this year, we added our ultra-high throughput SNPstream UHT
system to our MegaSNPatron facility, giving us the broadest range of SNP scoring
options available to service customers in the industry. We believe
fee-for-service SNP scoring will be an attractive option for many customers.
Acquisitions
On December 30, 1999, we acquired GeneScreen, Inc. as a wholly owned
subsidiary, which operates genetic diversity testing laboratories in Dallas,
Texas and Dayton, Ohio. GeneScreen performs DNA laboratory analyses for
paternity, transplantation and forensic testing. GeneScreen's primary source of
revenue is paternity testing under contracts with various state and county
government agencies.
On February 12, 2001, we acquired Cellmark Diagnostics, a division of
AstraZeneca, in an asset acquisition, for a
10
combination of cash and 222,980 shares of our common stock. Cellmark is a
leading provider of genetic testing services in the UK and sells kits and
conducts testing for genetic diseases, including cystic fibrosis. We agreed to
prepare and file a registration statement on Form S-3 with the Securities and
Exchange Commission to register for resale the 222,980 shares of common stock
issued to AstraZeneca in partial consideration for our purchase of the assets of
Cellmark. The shares issued to AstraZeneca as part of the purchase were
registered with the Securities and Exchange Commission on May 10, 2001, which
registration became effective on May 18, 2001.
On December 5, 2001, we acquired all of the outstanding equity
securities of Lifecodes Corporation, in a tax-free transaction. Lifecodes, now a
wholly owned subsidiary of Orchid, is a leading provider of genomics testing for
forensics and paternity in the US. We acquired Lifecodes in order to strengthen
our position in the clinical testing market. Lifecodes also maintains a
diagnostic kit business which adds to our current products. We view this
acquisition, in addition to the two previous acquisitions of GeneScreen and
Cellmark, as a significant step in providing a cost efficient, high throughput
clinical testing business. In exchange for Lifecodes shares we agreed to issue
6,622,951 shares of our common stock to former stockholders of Lifecodes, of
which 1,414,754 shares were deposited in an escrow account and may be used to
compensate us in the event that we are entitled to indemnification under the
Amended and Restated Agreement and Plan of Merger. We also issued 313,978 and
472,313 fully vested options and warrants, respectively, which are exercisable
for our common stock in exchange for existing Lifecodes options and warrants.
The acquisition has been accounted for by the purchase method, and accordingly,
the assets and liabilities acquired have been recorded at their fair values. The
total consideration as a result of this acquisition is approximately $23.7
million.
GeneScreen's, Cellmark's, and Lifecodes' businesses in paternity and
forensics testing support our goal of extending our business in genetic
diversity. We intend to apply our ultra-high throughput SNP scoring technology
to the paternity and forensics businesses of GeneScreen, Cellmark, and Lifecodes
in order to significantly reduce the cost of providing these identity genomics
services. We also plan to use the accredited laboratories at GeneScreen,
Cellmark, and Lifecodes to offer clinical quality pharmacogenetic SNP scoring of
patient samples for clinical association studies and pharmaceutical clinical
trials. We also plan to use these laboratories to conduct pharmacogenetic SNP
scoring services that we plan to offer to physicians and patients in the future
through a number of distribution channels, including the Internet. Our DNA
testing business is dependent upon our ability to successfully and competitively
bid and qualify for contracts with various governmental entities to provide
paternity and forensics testing services. We expect revenues from the respective
forensics businesses of GeneScreen, Cellmark, and Lifecodes to increase as DNA
analyses are increasingly being used by the authorities within the criminal
justice system to identify perpetrators and exonerate the innocent.
Our GeneShield business, established in 2001, is working to implement a
strategy based on the creation of proprietary rights covering the identification
of SNPs and their associations to medically important attributes of patients.
GeneShield is also developing a number of innovative programs designed to
accelerate the adoption of pharmacogenetics into routine health care. These
programs are focused on health outcomes and may include a number of health
system participants, including providers, patients and payers. GeneShield
expects to announce its first beta test program in the last quarter of 2002. We
are developing intellectual property rights in this area through collaborations
with members of our Clinical Genetics Network, and we intend also to develop
intellectual property rights to medical and diagnostic uses of SNPs through our
collaborations with pharmaceutical and biotechnology companies. We expect
GeneShield to commence generating revenues in 2003.
Compensation Charges
In prior years, we recorded deferred compensation resulting from the
granting of stock options to employees, directors or consultants with exercise
prices below the fair market value of the underlying common stock at the date of
their grant. During 2001 and through March 31, 2002, all stock options were
granted with grant prices equal to the fair value of our common stock at the
grant date. Net of prior amortization, and remeasurement related to options
previously granted to consultants, deferred compensation of approximately $6.6
million at March 31, 2002 will be amortized over the vesting periods of the
respective options, typically four years.
We anticipate recording total compensation charges resulting from the
amortization in future periods of the deferred compensation as of March 31, 2002
as follows (in millions):
Year Ended December 31,
-----------------------
2002 2003
---- ----
$3.4 $3.2
The portion of these amounts which results from grants to consultants
is subject to remeasurement at the end of each reporting period based upon the
changes in the fair value of our common stock until the consultant completes
performance under his or her respective option agreement. A reduction of
deferred compensation of approximately $0.3 million was recorded for the three
months ended March 31, 2002 related to such remeasurements. Also, certain grants
of performance-based options have been made for which
11
no deferred compensation expense has been recorded and for which compensation
expense will be measured at the time the performance criteria is met as the
difference between the fair value of the common stock and the exercise price and
will be immediately recorded as compensation expense.
We have incurred losses since inception, and, as of March 31, 2002, we
had total stockholders' equity of approximately $104.0 million, including an
accumulated deficit of approximately $193.8 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 and
we fully implement our proprietary GeneShield business. We expect this expansion
to result in some 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.
Critical Accounting Policies
Our critical accounting policies are as follows:
. revenue recognition
. valuation of long-lived and intangible assets and goodwill.
Revenue Recognition. We have had, and expect in the future to have,
several sources of revenues. Prior to our acquisitions of GeneScreen, Cellmark,
and Lifecodes, we derived substantially all of our revenues from research and
development collaborations, technology grants and awards from several
governmental agencies. In 2001, we derived our first revenues from the sale of
testing kits and laboratory DNA testing services from our Cellmark division in
the UK. In 2000, we derived our first revenues from the performance of
laboratory DNA testing services by GeneScreen, our wholly owned subsidiary in
the US. In 1999, we derived our first revenues from the placement of our first
commercial SNPstream hardware system, and throughout 2000, 2001, and through
March 31, 2002, we derived increased amounts of revenues from the sale of
SNP-IT-based consumables. We also derived significant license revenues beginning
in 2000. Our services segment also includes SNP scoring analyses revenues.
In connection with the research and development collaborations that
provided the majority of our revenues in the early years of our corporate
history, we recognize revenues when related research expenses are incurred and
when we satisfy specific performance obligations under the terms of the
respective research contracts. We defer up-front licensing fees obtained in
connection with such agreements and amortize them over the estimated performance
period of the respective research contract. We recognize milestone payments as
revenues upon the completion of the milestone event or requirement, if it
represents the achievement of a significant step in research and development or
performance process.
We recognize DNA laboratory and SNP scoring service revenues on a
completed contract basis at the time test results are completed and reported.
Deferred revenues represent the unearned portion of payments received in advance
of tests being completed and reported.
To date, we have offered our SNPstream system hardware in two basic
types of transactions, either a purchase and sale transaction or an arrangement
in which the customer takes possession of the system and pays an access fee for
its use. We record revenues on the sale of the hardware upon transfer of title
and after we have met all of our significant performance obligations. We defer
access fee payments that we receive when a system is initially placed with a
customer, and recognize revenues on a straight-line basis over the term of the
agreement.
Revenues from the sale of consumables are recognized upon the transfer
of title, generally when our products are shipped to our customers from our
facilities.
Revenues from license arrangements, including license fees creditable
against potential future royalty obligations of the licensee, are recognized
when an arrangement is entered into if we have no significant continuing
involvement under the terms of the arrangement. If we have significant
continuing involvement under such an arrangement, license fees are deferred and
recognized over the estimated performance period. Management has made estimates
and assumptions relating to the performance period which are subject to change.
Changes in these estimates and assumptions could affect the amount of revenues
from licenses reported in any given period.
Valuation of long-lived and intangible assets and goodwill. We assess
the impairment of identifiable intangibles and long-lived assets whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include the following:
. significant underperformance relative to expected historical or
projected future operating results;
. significant changes in the manner of our use of the acquired assets
or the strategy for our overall business;
12
. significant negative industry or economic trends; and
. significant decrease in market value of assets.
When we determine that the carrying value of intangibles and long-lived
assets may not be recoverable based upon the existence of one or more of the
above indicators of impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business. Net
intangible assets, long-lived assets, amounted to $65.5 million as of March 31,
2002.
On January 1, 2002, Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets", became effective and, as a result,
we ceased to amortize approximately $3.3 million of net goodwill recorded as of
December 31, 2001. We had recorded approximately $1.9 million of amortization
during 2001. In connection with our adoption of SFAS 141 which became effective
on January 1, 2002, and our evaluation of intangible assets arising from
business combinations prior to the adoption of SFAS 141, we have reclassified
our work force intangible asset with a net book value as of December 31, 2001 of
approximately $1,073 to goodwill.In connection with SFAS 142's transitional
goodwill impairment evaluation, the statement requires us to perform an
assessment of whether there is an indication that goodwill is impaired as of the
date of adoption. To accomplish this, we must identify our reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. We will then have up to six months
from the date of adoption to determine the fair value of each reporting unit and
compare it to the reporting unit's carrying amount. We expect to identify our
reporting units and perform the transitional impairment test during the second
quarter of 2002. Upon the completion of this step, to the extent a reporting
unit's carrying amount exceeds its fair value, an indication exists that the
reporting unit's goodwill may be impaired, and we must perform the second step
of the transitional impairment test. In the second step, we must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS 141, to its carrying amount, both of which would
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in our statement of operations. Due
to the extensive effort needed to complete the transitional impairment test, it
is not practicable to reasonably estimate any transitional impairment losses
which may be required to be recognized as the cumulative effect of a change in
accounting principle.
Certain events or market and business conditions in the future could
cause us to revise our estimates and judgments, and could result in a material
impairment of property and equipment and other intangible assets.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 and 2001
Revenues. Revenues for the three months ended March 31, 2002 of
approximately $15.8 million represents an increase of approximately $10.2
million as compared to revenues of approximately $5.6 million for the
corresponding period of 2001. This increase is primarily attributable to an
increase of approximately $7.7 million in services revenues, which primarily
relates to our two acquisitions in 2001, Cellmark and Lifecodes. The increase
was also attributable to an increase in SNP genotyping services performed in
2002 under genotyping service arrangements. Products revenues also increased by
approximately $2.0 million, which relates primarily to our two acquisitions in
2001, Cellmark and Lifecodes, as well as an increase in SNPstream consumable
sales of approximately $0.3 million. We also recognized approximately $1.2
million in grants and collaboration revenues during the three months ended March
31, 2002.
Cost of products revenues. Cost of products revenues for the three
months ended March 31, 2002 was approximately $1.5 million, or 48% of products
revenues, compared to approximately $0.8 million, or 81% of products revenues
for the corresponding period of 2001. The increase in cost of products revenues
as a percent of products revenues is attributable to an increased number of
SNPstream consumables which had a higher gross margin than SNPstream systems for
the period ended March 31, 2002 versus the corresponding period in 2001. The
increase in cost of products revenues was attributable to the costs associated
with the SNPstream instrument placements and to consumables sold for the three
months ended March 31, 2002 compared to the corresponding period of 2001,
including increases related to our acquisition of Cellmark on February 12, 2001
and Lifecodes on December 5, 2001.
Cost of services revenues. Cost of services revenues was approximately
$7.6 million, or 63% of services revenues for the three months ended March 31,
2002 compared to approximately $2.9 million, or 74% of services revenues in the
corresponding period of 2001. The increase was primarily attributable to
increased costs associated with our Cellmark division of approximately $0.8
million, which we acquired on February 12, 2001, and costs associated with
Lifecodes of approximately $3.5 million, which we acquired on December 5, 2001.
The decrease in cost of services revenues as a percent of services revenues is
attributed to the inclusion of both our Cellmark and Lifecodes businesses in the
quarterly results for a full three month period, which generates a higher gross
margin on services revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries and related expenses for
executive, finance and other administrative personnel, recruiting expenses,
professional fees, legal expenses resulting from intellectual property
prosecution and protection, and other corporate expenses including business
development and general legal activities. Selling, general and administrative
expenses for the three months ended March 31, 2002 were approximately $11.8
million, an increase of approximately $4.6 million, as compared to approximately
$7.2 million for the corresponding period of 2001. We attribute this increase
primarily to the expansion of administration facilities and the hiring of
additional personnel as we increased our executive and administrative staffing
after becoming a public company and supporting our future growth, increased
amortization of deferred compensation of approximately $0.4 million, and
increased operating costs of approximately $0.9 million and $2.8 million related
to our acquisitions of Cellmark and Lifecodes on February 12, 2001 and December
5, 2001, respectively.
13
Research and development expenses. Research and development expenses
consist primarily of salaries and related personnel costs, fees paid to
consultants and outside service providers for development, laboratory
supplies for prototypes and test units, and other expenses related to the
design, development, testing and enhancement of our products. Research and
development expenses for the three months ended March 31, 2002 were
approximately $6.3 million, compared to approximately $7.0 million for the
corresponding period of 2001. The decrease in research and development expense
was primarily attributable to a decrease in purchases of laboratory supplies of
approximately $0.8 million, in addition to a decrease in research and
development expenses from our GeneScreen operations of approximately $0.3
million. These decreases were offset by increases in our research and
development expenses as a result of our two acquisitions in 2001, Cellmark and
Lifecodes, of approximately $0.4 million. We expect future research and
development expenses to decrease as our products shift from the research and
development stage to commercialization.
Interest income. Interest income for the three months ended March 31,
2002 was approximately $0.3 million, compared to approximately $0.9 for the
corresponding period of 2001. This decrease was primarily due to interest
received on larger cash, cash equivalent and short-term investment balances
which we held during 2001. This decrease is also attributable to lower interest
rates during 2002 compared to 2001.
Interest expense. Interest expense for the three months ended March 31,
2002 was approximately $0.2 million compared to approximately $0.2 million in
the corresponding period in 2001. Interest expense relates to borrowings made
during late 2000 and in May and December 2001 on our equipment loan line.
Income tax benefit. During the three months ended March 31, 2002, we
recorded an income tax benefit of approximately $0.9 million. This was related
to the sale of some of our net operating loss carryforwards to another company,
which is authorized by the New Jersey Economic Development Authority.
Net loss allocable to common stockholders. Due to the factors discussed
above, for the three months ended March 31, 2002, we reported a net loss
allocable to common stockholders of approximately $10.5 million as compared to
approximately $11.5 million in the corresponding period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
research and development funding from collaborative partners, from our two
private placements of equity securities with aggregate net proceeds of
approximately $102.0 million that closed in March 1998 and in December 1999 and
January 2000, approximately $48.4 million from our initial public offering which
closed in May 2000, approximately $33.2 million from our follow-on offering of
common stock in June 2001, and approximately $21.3 million from our follow-on
offering of common stock in February and March 2002. Our sale of series E
mandatorily redeemable convertible preferred stock in December 1999 resulted in
an approximate $44.6 million beneficial conversion feature which was included in
net loss allocable to common stockholders in 1999. The closing of our sale of
series E mandatorily redeemable convertible preferred stock in January 2000
resulted in an approximate additional $29.6 million beneficial conversion
feature which was included in net loss allocable to common stockholders in 2000.
In December 1998, we obtained a secured $6.0 million equipment loan line, for
the purchase of plant and equipment at our corporate headquarters and research
and development laboratories whose availability expired in 1999. In December
2000, this agreement was amended to establish a new borrowing base of an
additional $8.0 million. At March 31, 2002, we had borrowings of approximately
$8.1 million outstanding, and approximately $0.9 million available to be
borrowed under this facility through 2002. We lease our corporate and primary
research facility under operating leases, which expire in 2006 and 2008,
respectively. If we do not maintain minimum unrestricted cash, as defined in the
agreement, equal to the greater of $35 million or twelve months' cash needs
(calculated by taking the trailing three months net cash used in operations
multiplied by four), we are required to provide a cash security deposit or
letter of credit equal to an amount defined in the agreement, not to exceed 50%
of outstanding amounts on draws made in or subsequent to December 2000 (50%
equal to approximately $2.7 million at March 31, 2002). As of December 31, 2001,
and just prior to the follow-on offering (See Note 6), we did not maintain the
minimum unrestriced cash defined in the agreement. We have received a waiver
from our lender regarding our non-compliance with this convenant for this
period. Subsequent to March 31, 2002, we did not maintain the minimum cash
defined in the agreement, for which we have also received a waiver and requested
a letter of credit in the amount of $2.7 million. On May 14, 2002, we were not
in compliance with this financial covenant. On May 14, 2002, we initiated the
process to obtain a letter of credit in the amount of approximately $2.7 million
as required by the amended line of credit, which will be supported by a cash
deposit in the same amount. Once the letter of credit is issued, this cash
deposit will be reflected as restricted cash in the consolidated balance sheet.
We have also received written notice from the lender stating that the lender
waived the financial convenant violation as a result of not maintaining a pledge
of cash security deposit or letter or credit under this agreement for the period
of non-compliance through May 29, 2002.
On May 10, 2001, we filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission. Subject to our ongoing obligations under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, the Registration Statement permits us to offer and sell various types
of securities, up to an aggregate value of approximately $75.0 million, of which
approximately $16.8 million remains available for future use. The sale of common
stock in June 2001 for gross proceeds of approximately $35.7 million was
registered under this Registration Statement. The subsequent sale of common
stock in February and March 2002 for gross proceeds of approximately $22.5
million was also registered under a Prospectus Supplement to this Registration
Statement.
As of March 31, 2002, we had approximately $39.0 million in cash and
cash equivalents and short-term investments, compared to approximately $27.9
million as of December 31, 2001. This increase is due to our follow-on offering
of common stock in February and March 2002 which generated net proceeds of
approximately $21.3 million offset by cash paid to fund operations through March
31, 2002.
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Net cash used in operations for the three months ended March 31, 2002
was approximately $7.2 million compared with approximately $10.5 million for the
comparable period in 2001. Non-cash charges for the first three months of 2002
included compensation expense of approximately $0.6 million and depreciation and
amortization expense of approximately $2.6 million. Investing activities
included capital expenditures of approximately $1.6 million, and approximately
$13.8 million from net proceeds from maturities of short term investments.
Financing activities primarily consisted of approximately $21.3 million of net
proceeds from our offering of common stock in February and March 2002 and
repayment of debt of $0.8 million.
Working capital increased to approximately $38.6 million at March 31,
2002 from approximately $27.5 million at December 31, 2001. The increase in
working capital was primarily due to our offering of common stock in February
and March 2002, offset by cash used in operations during the three months ended
March 31, 2002.
We believe that our cash reserves and expected short-term revenue will
be sufficient to fund our operations through at least the next 12 months. We may
need to access the capital markets for additional financing to operate our
ongoing business activities.
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 development of our SNPware consumables, SNPstream systems and
related software, and associated reagent consumables;
. our ability to successfully secure contracts for high volume
genotyping services from pharmaceutical, biotechnology and
agricultural companies;
. the success rate of establishing new contracts, and renewal rate of
existing contracts, for identity genomics 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 at favorable terms, if
necessary.
As of December 31, 2001, our net operating loss carryforwards were
approximately $134.2 million and $123.5 million for Federal and state income tax
purposes, respectively, as adjusted for the sale of its state tax loss
carryforwards in January 2002. If not utilized, our Federal and state tax loss
carryforwards will begin to expire in 2003 and 2002, respectively. Utilization
of our net operating losses to offset future taxable income, if any, may be
substantially limited due to "change of ownership" provisions in the Internal
Revenue Code of 1986. We have not yet determined the extent to which limitations
were triggered as a result of past financings or may be triggered as a result of
future financings. This annual limitation is likely to result in the expiration
of certain net operating losses prior to their use.
Contractual Commitments. We maintain multiple contractual commitments
as of March 31, 2002, which will support our future business operations. Such
commitments relate to non-cancelable operating lease arrangements, long term
debt, minimum supply purchases, and future patent and minimum royalty
obligations. We have identified and quantified the significant commitments in
the following table.
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- ---------------------------------------------------------------------------------------------------------------------------------
Payments Due by Period
(in $ 000's)
- ---------------------------------------------------------------------------------------------------------------------------------
There
Contractual Obligations 2002 2003 2004 2005 2006 After Total
- ---------------------------------------------------------------------------------------------------------------------------------
Non-cancelable operating
lease arrangements (1) $ 2,853 $ 3,653 $ 3,272 $ 2,909 $ 2,264 $4,652 $ 19,603
Long-term debt (2) 2,604 3,498 2,170 659 -- -- 8,931
Future patent obligations (3) 1,392 1,178 310 -- -- -- 2,880
Minimum purchase
commitments (4) 700 990 1,320 -- -- -- 3,010
Future minimum royalties (5) -- -- -- 1,240 1,550 -- 2,790
--------------------------------------------------------------------------------------------
Total Contractual Obligations $ 7,549 $ 9,319 $ 7,072 $ 4,808 $ 3,814 $4,652 $ 37,214
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Such amounts represent future minimum rental commitments for office space
leased under non-cancelable operating lease arrangements. We lease
approximately 208,000 square feet for operations in the US and
approximately 75,000 square feet in Abingdon, UK to support foreign
operations.
(2) Such amounts primarily consist of amounts payable pursuant to our equipment
loan line. Also included in such amounts are notes payable to former
employees (net of unamortized discount) and capital lease obligations for
certain machinery and equipment (including interest).
(3) Such amounts represent obligations to pay future amounts over the next
three years in conjunction with our acquisition of US Patent No.
5,856,092 and its foreign counterparts from Affymetrix in July 2001.
(4) Such amounts represent minimum purchase commitments of terminators from
PerkinElmer (formerly known as NEN Life Science Products, Inc.) pursuant to
the License and Supply Agreement for Terminators, effective February 21,
2000.
(5) In connection with our acquisition of US Patent No. 5,856,092, we are
also obligated to pay future minimum royalties commencing in 2005 which
increases up to $1.9 million in 2007 and continue through the expiration of
the agreement.
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, which are conservative in nature, with a
focus on preservation of capital and all of which have maturities of less than
one year which limit their exposure to market fluctuations. We maintain a
non-trading investment portfolio of investment grade, liquid debt securities
that limit the amount of credit exposure to any one issue, issuer or type of
instrument.
Market risk refers to the risk of loss arising from adverse changes in
foreign currency exchange rates. As a result of our acquisition of Cellmark in
February 2001, the acquisition of Lifecodes in December 2001 and a limited
number of agreements with foreign companies we may be affected by fluctuations
in currency exchange rates.
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We have a minimal amount of long-term debt recorded on our books. The
interest rates applicable to such debt are not variable with respect to market
conditions.
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: our intention of vigorously
defending lawsuits; our expectation of identifying our reporting units and
performing impairment tests during the second quarter of 2002; our expected
launch dates of our products and services; our intention to expand our offerings
of products for instruments made or sold by others and to obtain license fees
and royalties by licensing our technology for incorporation in products of
others; our belief that fee-for-service SNP scoring will be an attractive option
for many customers; our intention of applying our ultra-high throughput SNP
scoring technology to the paternity and forensics businesses of GeneScreen,
Cellmark and Lifecodes in order to reduce costs; our plan to use the accredited
laboratories at GeneScreen, Cellmark and Lifecodes to offer clinical quality
pharmacogenetic SNP scoring of patient samples for studies and clinical trials
and to provide these services through a number of distribution channels; our
expectation that revenues from the respective forensic businesses of GeneScreen,
Cellmark and Lifecodes will increase; our expectation GeneShield will announce
its first beta test program in the last quarter of 2002; our intention of
developing intellectual property rights to medical and diagnostic uses of SNPs
through collaborations; our expectation GeneShield will commence generating
revenues in 2003; our anticipation of incurring additional losses as we expand;
our expectation of having several sources of revenues; our expectation that
future research and development expenses will decrease as products shift to
commercialization; and our belief that our cash reserves and expected short-term
revenue will be sufficient to fund our operations through at least the next 12
months. 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 revenues and operating results, and competitive pressures. For further
information, refer to the more specific factors and uncertainties discussed
throughout this report and in the "Risk Factors" section of our Annual Report on
Form 10-K for the year ended December 31, 2001.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On or about November 21, 2001, we were made aware of a complaint filed
in the United States District Court for the Southern District of New York naming
us as defendants, along with certain of our officers and underwriters. An
amended complaint was filed on April 19, 2002. The complaint, as amended,
purportedly is filed on behalf of persons purchasing our stock between May 4,
2000 and December 6, 2000, and alleges violations of Sections 11 and 15 of the
Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder. The amended complaint alleges that, in connection with our May 5,
2000 initial public offering, the defendants failed to disclose additional and
excessive commissions purportedly solicited by and paid to the underwriter
defendants in exchange for allocating shares of our stock to preferred customers
and alleged agreements among the underwriter defendants and preferred customers
tying the allocation of IPO shares to agreements to make additional aftermarket
purchases at pre-determined prices. Plaintiffs claim that the failure to
disclose these alleged arrangements made our registration statement on Form S-1
filed with the SEC in May 2000 and the prospectus, a part of the registration
statement, materially false and misleading. Plaintiffs seek unspecified damages.
We have not reserved any amount related to this case as we believe that the
allegations are without merit and intend to vigorously defend against the
plaintiffs' claims.
We have been in discussions with St. Louis University of St. Louis,
Missouri regarding its belief that our SNP scoring technology infringes certain
claims under US patent 5,846,710, which is controlled by the University.
Although we are confident that our SNP scoring technology does not infringe any
claims under the University's patent, we nonetheless entered into discussions
with the University regarding the scope of these claims in the hope of resolving
the issue. Upon our failure to reach agreement with the University, in August
2000 we filed a lawsuit against the University in the US District Court for
the Southern District of California, Case No. 00CV1558L (JFS), seeking
declaratory judgment of non-infringement, invalidity and non-enforceability with
respect to the University's patent. While we believe that our position in this
action is strong, patent litigation is complex and likely will result in claims
against us, including patent infringement. As a result, the outcome of this
action is uncertain. Furthermore, while we are seeking declaratory judgment in
this action, the lawsuit could take significant time, be expensive and divert
our management's attention from other business concerns.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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.
Exhibit
- -------
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 3.2 to the Registrant's Registration Statement on Form S-1,
No. 333-30774, and incorporated herein by reference)
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated June 12, 2001 (filed as Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2001 and incorporated herein by reference)
3.3 Certificate of Designation, Preferences, and Rights of Series A Junior
Participating Preferred Stock of the Registrant, dated August 1, 2001
(filed as Exhibit 3.3 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2001 and incorporated herein by
reference)
3.4 Second Amended and Restated Bylaws of the Registrant (filed as Exhibit
3.4 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2001 and incorporated herein by reference)
4.1 Specimen certificate for shares of common stock (filed as Exhibit 4.1
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001 and incorporated herein by reference)
4.2 Rights Agreement, dated as of July 27, 2001, by and between the
Registrant and American Stock Transfer & Trust Company, which includes
the form of Certificate of Designations setting forth the terms of the
Series A Junior Participating Preferred Stock, $0.001 par value, as
Exhibit A, the form of rights certificate as Exhibit B and the summary
of rights to purchase Series A Junior Participating Preferred Stock as
Exhibit C. Pursuant to the Rights Agreement, printed rights
certificates will not be mailed until after the Distribution Date (as
defined in the Rights Agreement) (filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form 8-A)
- ---------------
(b) Reports on Form 8-K
The Company filed the following reports on form 8-K with the Securities
and Exchange Commission during the quarter ended March 31, 2002:
Form 8-K filed February 21, 2002 announcing the Company's public offering
of 8.0 million newly issued shares of common stock on February 21, 2002.
Form 8-KA filed February 26, 2002 amending the Form 8-K filed February
21, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORCHID BIOSCIENCES, INC.
Date: May 14, 2002 By: /s/ Donald R. Marvin
--------------------
DONALD R. MARVIN
Senior Vice President, Chief Operating
Officer, Chief Financial Officer
(principal financial and accounting officer)
19
Exhibit Index
Exhibit Description
Number
3.1 Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-1, No. 333-30774, and incorporated herein by reference)
3.2 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated June 12, 2001 (filed as
Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001 and incorporated herein by
reference)
3.3 Certificate of Designation, Preferences, and Rights of Series A
Junior Participating Preferred Stock of the Registrant, dated
August 1, 2001 (filed as Exhibit 3.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001
and incorporated herein by reference)
3.4 Second Amended and Restated Bylaws of the Registrant (filed as
Exhibit 3.4 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001 and incorporated herein by
reference)
4.1 Specimen certificate for shares of common stock (filed as Exhibit
4.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001 and incorporated herein by
reference)
4.2 Rights Agreement, dated as of July 27, 2001, by and between the
Registrant and American Stock Transfer & Trust Company, which
includes the form of Certificate of Designations setting forth
the terms of the Series A Junior Participating Preferred Stock,
$0.001 par value, as Exhibit A, the form of rights certificate as
Exhibit B and the summary of rights to purchase Series A Junior
Participating Preferred Stock as Exhibit C. Pursuant to the
Rights Agreement, printed rights certificates will not be mailed
until after the Distribution Date (as defined in the Rights
Agreement) (filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form 8-A)
20