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, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file 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 [X] No [_]
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of May 1, 2001 , was 33,477,384.
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, 2001
(unaudited) and December 31, 2000........................................................ 1
Condensed Consolidated Statements Of Operations for the three
months ended March 31, 2001and 2000 (unaudited).......................................... 2
Condensed Consolidated Statements Of Cash Flows for the three months ended
March 31, 2001 and 2000 (unaudited)...................................................... 3
Notes To Condensed Consolidated Financial Statements (unaudited)......................... 4
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations.................................................. 7
Item 3. Quantitative And Qualitative Disclosures About Market Risk....................... 11
PART II OTHER INFORMATION.......................................................... 11
Item 1. Legal Proceedings................................................................ 11
Item 2. Changes In Securities And Use Of Proceeds........................................ 12
Item 3. Defaults Upon Senior Securities.................................................. 12
Item 4. Submission Of Matters To A Vote Of Security Holders.............................. 12
Item 5. Other Information................................................................ 12
Item 6. Exhibits And Reports On Form 8-K................................................. 12
i
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 2001 2000
----------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 21,772 $ 14,558
Short-term investments 28,998 51,857
Accounts receivable, net 4,444 5,510
Inventory 3,005 3,526
Other current assets 1,634 2,065
--------- ---------
Total current assets 59,853 77,516
Equipment and leasehold improvements, net 22,284 19,657
Goodwill, net 28,643 28,977
Other intangibles, net 17,361 14,936
Other assets 1,233 1,241
--------- ---------
Total assets $ 129,374 $ 142,327
========= =========
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt 2,356 2,337
Accounts payable 848 5,492
Accrued expenses 5,054 4,034
Deferred revenue 1,432 1,009
--------- ---------
Total current liabilities 9,690 12,872
Long-term debt, less current portion 5,612 6,152
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value, authorized 5,000,000 shares, no shares
issued or outstanding -- --
Common stock, $.001 par value, authorized
50,000,000 shares issued and outstanding 33,461,709 and 33,195,096
at March 31, 2001 and December 31, 2000, respectively 33 33
Additional paid-in capital 234,628 234,692
Deferred compensation (11,046) (13,374)
Accumulated other comprehensive income 573 577
Accumulated deficit (110,116) (98,625)
--------- ---------
Total stockholders' equity 114,072 123,303
--------- ---------
Total liabilities and stockholders' equity $ 129,374 $ 142,327
========= =========
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,
---------
2001 2000
----------- -----------
Revenues:
Research products revenue $ 1,008 $ 232
Services revenue 3,897 2,881
License and other revenues 730 353
----------- -----------
Total revenues 5,635 3,466
----------- -----------
Operating expenses:
Cost of research products revenue 818 63
Cost of services revenue 2,872 2,240
Selling, general and administrative 7,417 4,943
Research and development 6,729 4,402
----------- -----------
Total operating expenses 17,836 11,648
----------- -----------
Operating loss (12,201) (8,182)
----------- -----------
Other income (expense):
Interest income 874 790
Interest expense (164) (111)
Other expense -- (76)
----------- -----------
Total other income (expense) 710 603
----------- -----------
Net loss (11,491) (7,579)
Beneficial conversion feature of preferred stock -- 29,574
----------- -----------
Net loss allocable to common stockholders $ (11,491) $ (37,153)
=========== ===========
Basic and diluted net loss per share allocable to common
stockholders (note 2) $ (0.34) $ (40.30)
=========== ===========
Shares used in computing basic and diluted net loss per
share allocable to common stockholders (note 2) 33,331,022 921,920
=========== ===========
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,
--------
2001 2000
---------------- ----------------
Cash flows from operating activities:
Net loss $ (11,491) $ (7,579)
Adjustments to reconcile net loss to net cash used in operating
activities:
Noncash research and development expense - 1,200
Noncash compensation expense 212 767
Depreciation and amortization 1,808 1,261
Changes in assets and liabilities:
Accounts receivable 1,066 (688)
Inventory 691 (29)
Deferred offering costs - (1,081)
Other current assets 431 (98)
Other assets 8 (14)
Accounts payable (4,645) 264
Accrued expenses 1,020 (1,951)
Deferred revenue 423 220
------------------ ---------------
Net cash used in operating activities (10,477) (7,728)
------------------ ---------------
Cash flows from investing activities:
Cash paid to acquire Cellmark, including acquisition costs (2,867)
Capital expenditures (1,881) (1,094)
Decrease in restricted cash - 400
Maturities of short-term investments 37,935 --
Purchase of short-term investments (14,971) (2,800)
------------------ ---------------
Net cash provided by (used in) investing activities 18,216 (3,494)
------------------ ---------------
Cash flows from financing activities:
Net proceeds from issuance of Series E mandatorily redeemable -
convertible preferred stock 29,574
Proceeds from issuance of debt from line of credit - --
Repayment of debt on lines of credit (521) (1,342)
Proceeds from exercise of common stock options 33 66
------------------ ---------------
Net cash provided by (used in) financing activities (488) 28,298
------------------ ---------------
Effect of foreign currency translation on cash and cash equivalents (37) --
------------------ ---------------
Net increase in cash and cash equivalents 7,214 17,076
Cash and cash equivalents at beginning of period 14,558 33,804
------------------ ---------------
Cash and cash equivalents at end of period $21,772 $50,880
================== ===============
Supplemental disclosure of noncash financing and investing activities:
Changes in deferred compensation from grant, forfeiture and
remeasurement of common stock options 2,116 5,242
Issuance of common stock for technology licenses -- 1,200
Issuance of common stock in connection with supply agreement -- 1,500
Issuance of common stock in connection with the acquisition of Cellmark 2,019 --
Issuance of common stock to SmithKline Beecham -- 76
Other comprehensive income (loss) (4) --
Supplemental disclosure of cash flow information:
Cash paid during the period for interest 160 105
See accompanying notes to condensed consolidated financial statements.
3
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 and 2000
(Dollars in thousands except per share data)
(unaudited)
(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 accounting principles generally accepted in the United States
of America 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 United States of America 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, 2000, 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 $110,116 through March 31, 2001 and it
expects to incur substantial losses in future periods.
(2) 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. During
each period presented, the Company has certain options, warrants, convertible
preferred stock and/or 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 period are equal. The Company has reflected $29,574 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.
(3) Acquisition of Cellmark Diagnostics and Genotyping Collaboration
Agreement with AstraZeneca
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 United Kingdom
which sells kits for and conducts tests for genetic diseases, including cystic
fibrosis. The acquisition has been accounted for by the purchase method and,
accordingly, the assets and liabilities acquired have been recorded at their
fair values. Assets acquired included intangibles of approximately $2,700. The
purchase price, including acquisition costs, was comprised of $2,867 in cash and
222,980 shares of the Company's common stock valued at $2,019.
As part of the agreement to purchase the Cellmark assets from
AstraZeneca, the Company entered into an Investor Rights Agreement with
AstraZeneca, pursuant to which the Company agreed to register 222,980 shares of
the Company's common stock issued to AstraZeneca. Pursuant to the terms of the
Investor Rights Agreement, if the Securities and Exchange Commission (the
"Commission") does not declare the registration statement registering the
222,980 shares of common stock effective by May 25, 2001, then the Company is
required to pay to AstraZeneca certain penalties. In addition, if the Commission
does not declare the registration statement effective on or about July 10, 2001,
the Company may repurchase from AstraZeneca the 222,980 shares of common stock
issued as partial consideration for the Cellmark assets at the price at which
the shares were originally issued. Upon the Company's exercise of such
repurchase rights, AstraZeneca may elect to refuse such repurchase and retain
such shares.
4
The results of operations of Cellmark have been included in the
Company's condensed consolidated statement of operations since the date of
acquisition by the Company on February 12, 2001 through March 31, 2001. The
acquisition of Cellmark is reflected in the accompanying condensed consolidated
balance sheet as of March 31, 2001.
In addition, on February 12, 2001, the Company entered into a
multi-year agreement with AstraZeneca to conduct a variety of studies using
SNPs. The genotyping agreement also allows access to the Company's SNP
databases, the development by the Company of proprietary SNP panels, and the use
of these panels in genetic association and linkage studies.
(4) Proposed Increase in Authorized Shares of Common Stock and Common Stock
Underlying the Stock Plan
In February 2001, the Board of Directors approved, subject to
stockholder approval, an increase of the Company's authorized shares of common
stock to 100,000,000 shares. At the same time, the Board also approved, subject
to stockholder approval, an increase in the number of shares available for
grants of stock or stock options under the Company's 2000 Employee, Director and
Consultant Stock Plan by 3,000,000.
(5) Inventory
Inventory is comprised of the following at March 31, 2001 and December
31, 2000, respectively:
March 31, 2001 December 31, 2000
----------------- -------------------
Raw materials $2,605 $3,074
Work in progress 320 452
Finished Goods 80 --
----------------------------------------
$3,005 $3,526
========================================
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.
(6) 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 business which markets
equipment and consumables for SNP scoring analysis ("Research Products"); and
(ii) the business which performs genotyping 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 Research Products segment. During the
first quarter 2001, the chief operating decision maker of the Company measured
segment profit/(loss) using operating loss, which excludes other income
(expense).
In 2001, the Company changed its basis of segmentation from "Orchid"
and "GeneScreen" to "Research Products" and "Services" to reflect how the chief
operating decision maker now views the business. This change would have had no
material impact on the previously reported segment information. Also, the
Company changed its method of measuring profitability in the fourth quarter of
2000 to operating loss from net loss. Segment information as of and for the
three months ended March 31, 2001 and 2000 is as follows:
- --------------------------------------------------------------------------------------------------
2001: Research Products Services Total
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Revenues from external
customers $ 1,738 $ 3,897 $ 5,635
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Segment operating loss (8,865) (3,336) (12,201)
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
Total assets 79,634 49,740 129,374
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
5
- ---------------------------------------------------------------------------------------------------------
2000: Research Products Services Total
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Revenues from external
customers 585 2,881 3,466
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Segment net loss (6,637) (942) (7,579)
- ---------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------- -----------------------
Total assets 73,565 44,010 117,575
- --------------------------------------------------------------------------------- -----------------------
(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.
The Company has been engaged in discussions with St. Louis University
of St. Louis, Missouri regarding its belief that the Company's SNP scoring
technology infringes certain claims under U.S. patent 5846710, 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 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 likely will 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 our management's attention from other business concerns.
The Company had been engaged in discussions with Motorola, Inc.
("Motorola") in an attempt to resolve certain areas of disagreement that arose
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 this issue has been resolved, there can be no
assurance that Motorola will not seek arbitration or litigation of the rights it
claims to our SNP-IT technology.
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, 2001 and December 31,
2000 was $156.
(8) Comprehensive Income (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, 2001 and 2000:
Three months ended
March 31,
---------
2001 2000
------------ ---------
Net loss $ (11,491) $ (7,579)
Other comprehensive income (loss):
Unrealized holding gains on available-for-sale securities 105
Foreign currency translation loss (109) --
--------- --------
Other comprehensive loss (4) --
--------- --------
Comprehensive loss $ (11,495) $ (7,579)
========= ========
6
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, 2001 and the Results of Operation for the three months ended March 31,
2001 and 2000 should be read in conjunction with our Condensed Consolidated
Financial Statements, including the Notes thereto, included elsewhere in this
Quarterly Report on 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. 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 Management's
Discussion and Analysis of Financial Condition and Results of Operations 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 for
the year ended December 31, 2000 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 single nucleotide polymorphisms, or SNPs,
and microfluidics technologies for applications in drug discovery, development
and marketing, principally in the field of high volume SNP scoring and
pharmacogenetics analysis. Since late 1999, following our acquisition of
GeneScreen, we also have been a leading provider of DNA testing services in the
paternity, forensics and HLA transplantation typing fields.
Most of our current activities and resources are directed toward
commercializing our SNP scoring products and services that apply our proprietary
SNP-IT primer extension technology. We currently have revenues from the sale of
our SNPstream instrument systems, our SNPware consumable kits and SNP genotyping
and pharmacogenetic services provided in our high throughput MegaSNPatron
facility. We also expect each SNPstream system we place will generate an
additional recurring revenue stream from the sale of our SNPware consumables. We
also are beginning to generate revenue from sales of SNPware consumables
designed to work on the platforms of various manufacturers, and from SNP-IT
license fees and royalties.
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 scoring system, SNPware consumables and related
services in late 1999. We intend to introduce the SNPstream 5K, and instrument
with lower throughput capabilities in the second half of 2001. 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 access fees and
royalties by licensing our SNP-IT technology for incorporation in the consumable
kits of others. Our collaborations with Affymetrix, Amersham Pharmacia Biotech,
Applied Biosystems and PerkinElmer are examples of this platform propagation
strategy.
Our proprietary pharmaceutical value creation strategy is based on the
creation of proprietary rights covering the identification of SNPs and their
associations to medically important attributes of patients. 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 uses of SNPs through our collaborations with
pharmaceutical and biotechnology companies. We intend to develop proprietary
rights around both diagnostic and therapeutic uses of SNPs. 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.
On February 12, 2001, we acquired certain assets of Cellmark Diagnostics, a
division of AstraZeneca, for a combination of cash and 222,980 shares of our
common stock. Cellmark is a leading provider of genetic diversity testing
services in the UK and sells kits and conducts testing for genetic diseases,
including cystic fibrosis, and had revenue in 2000 of approximately $6.0
million. 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. If the Securities and Exchange Commission does not
declare the registration statement effective by May 25, 2001, we are required to
pay to AstraZeneca certain penalties. In addition, if the Securities and
Exchange Commission does not declare the registration statement effective on or
about July 10, 2001, we may repurchase from AstraZeneca the 222,980 shares of
our common stock issued to AstraZeneca as partial consideration for our purchase
of the assets of Cellmark at the price at which the shares were originally
issued. Upon our exercise of such repurchase rights, AstraZeneca may elect to
refuse such repurchase and retain such shares.
7
GeneScreen's and Cellmark's business in paternity testing and forensics
supports our goal of extending our business in genetic diversity. We plan to use
the accredited laboratories at GeneScreen and Cellmark to offer clinical quality
pharmacogenetics 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 may eventually offer to
physicians and patients through a number of distribution channels, including the
Internet. Both GeneScreen's and Cellmark's DNA testing business is dependent
upon its successful competitive bidding and qualifications for contracts with
various governmental entities to provide paternity testing. We expect revenues
from the respective forensics businesses of GeneScreen and Cellmark to increase
as DNA analyses are increasingly being used by the criminal justice system to
identify perpetrators and exonerate the innocent.
In prior years, we have recorded deferred compensation resulting from
the granting of stock options to employees, directors or consultants covering
shares of common stock, which stock options had exercise prices below the fair
value of the underlying common stock at the date of their grant. During 2001,
all stock options were granted with grant prices equal to the fair market 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 $11.0 million at March 31, 2001 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, 2001
as follows (in millions):
------------------------------------------------------------------------------------------------------
Nine months ending
December 31, Year ending December 31,
----------------------------------------------------------------------------------------------------
2001 2002 2003 2004
---- ---- ---- ----
----------------------------------------------------------------------------------------------------
$3.0 $4.0 $3.8 $0.2
----------------------------------------------------------------------------------------------------
The portion of these amounts which result from grants to consultants
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 his or her respective option agreement. A reduction of
deferred compensation of $1.9 million was recorded in the three months ended
March 31, 2001 related to such remeasurements. Also, certain grants of
performance based options have been made for which 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, 2001, we
had total stockholders' equity of $114.1 million, including an accumulated
deficit of $110.1 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.
Sources of Revenues and Revenue Recognition
We have had, and expect in the future to have, several sources of
revenues. Prior to our acquisitions of GeneScreen and Cellmark, 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 business in the UK. In 2000, we derived our
first revenues from the performance of laboratory DNA testing services from
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 commencing in 2000, we derived increased amounts of revenues from the sale
of SNP-IT consumables. We also derived significant license revenue beginning in
2000. Our clinical laboratory services also include SNP scoring analysis.
In connection with the research and development collaborations that
provided the majority of our revenues in the early years of our corporate
history, we recognized revenues when related research expenses were incurred and
when we satisfied specific performance obligations under the terms of the
respective research contracts. Up-front licensing fees obtained in connection
with such agreements are deferred and amortized over the estimated performance
period of the respective research contract. Milestone payments are recognized as
revenues upon the completion of the milestone event or requirement.
DNA laboratory and SNP scoring services revenues are recognized on a
completed contract basis at the time test results are reported. Deferred
revenues represent the unearned portion of payments received in advance of tests
being completed.
8
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. Revenues on the sale of the hardware are recorded upon transfer of
title and after we have met all of our significant performance obligations.
Access fee payments, which are received when a system is initially placed, are
deferred and revenues are recognized on a straight-line basis over the term of
the agreement.
Revenues from the sale of SNPware consumables are recognized upon the
transfer of title, generally when the SNPware products are shipped to our
customers from our facility.
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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 and 2000
Revenues. Revenues for the three months ended March 31, 2001 of $5.6
million represents an increase of $2.1 million as compared to revenues of $3.5
million for the corresponding period of 2000. The increase was largely due to a
$1.0 million increase in revenues generated by our services operations,
partially attributable to revenues from Cellmark for the period following our
acquisition on February 12, 2001, and an increase of $0.8 million from research
products primarily from placements of SNPstream(R) 25K instrument systems and
sales of SNPware consumable kits.
Cost of research product revenues. Cost of research product revenues
for the three months ended March 31, 2001 was $0.8 million compared to $0.1
million for the corresponding period of 2000. The increase was attributable to
the costs associated with the SNPstream instrument placements and consumables
sold in the three months ended March 31, 2001.
Cost of services revenue. Cost of services revenue was $2.9 million for
the three months ended March 31, 2001 compared to $2.2 million in the
corresponding period of 2000. The increase was directly attributable to the
increase in services revenue including revenue from Cellmark which we acquired
on February 12, 2001.
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, 2001 were $7.4 million, an
increase of $2.5 million, as compared to $4.9 million for the corresponding
period of 2000. 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 and in anticipation of supporting our
growth.
Research and development expenses. Research and development expenses
consist primarily of salaries and related personnel costs, fees paid to
consultants and outside service providers for chip development, 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, 2001 were $6.7
million, compared to $4.4 million for the corresponding period of 2000. The
increase in research and development expenses of $2.3 million 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, and
increased facilities expenses in connection with the expansion of our internal
and collaborative research efforts, including our collaboration with The SNP
Consortium. Future research and development expenses are expected to increase as
we hire additional personnel and expand our research and development facilities
to accommodate our strategic collaborations and internal research.
Interest income. Interest income for the three months ended March 31,
2001 was $0.9 million, compared to $0.8 for the corresponding period of 2000.
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
initial public offering in May 2000, offset by amounts used to fund operating
activities.
Interest expense. Interest expense for the three months ended March 31,
2001 was approximately $0.2 million compared to $0.1 million in the
corresponding period in 2000. This was due to borrowings made during late 2000
on our equipment line of credit.
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Net loss allocable to common stockholders. Due to the factors discussed
above, for the three months ended March 31, 2001, we reported a net loss
allocable to common stockholders of $11.5 million as compared to $37.2 million
in the corresponding period in 2000. Net loss allocable to common stockholders
for 2000 included a beneficial conversion feature on preferred stock 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, 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, and $48.4 million from our initial public offering
which closed in May 2000. The sale of the series E mandatorily redeemable
convertible preferred stock in December 1999 resulted in a $44.6 million
beneficial conversion feature which was 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 $29.6 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 line of credit, for the purchase of plant and equipment at our
corporate headquarters and research and development laboratories whose
availability expired in 1999. In 2000, this agreement was amended to establish a
new borrowing base of an additional $8 million. At March 31, 2001, we had
borrowings of $7.6 million outstanding, and $3.7 million available to be
borrowed under this facility through 2001. We lease our corporate and primary
research facility under an operating lease which expires in 2008. On May 10,
2001, the Company filed a Registration Statement on Form S-3 with the Securities
and Exchange Commission. Pending review by the SEC, the Registration Statement
will permit us to offer and sell various types of securities, up to an aggregate
value of $75 million.
As of March 31, 2001, we had $50.8 million in cash and cash equivalents
and short-term investments, compared to $66.4 million as of December 31, 2000.
This decrease was related to the expansion of our genotyping facilities, cash
paid to acquire Cellmark and to fund operations of the Company.
Net cash used in operations for the three months ended March 31, 2001
was approximately $10.5 million compared with approximately $7.7 million for the
comparable period in 2000. Non-cash charges in 2001 included compensation
expense of $0.2 million and depreciation and amortization expense of $1.8
million. Investing activities included $2.8 million in cash paid during the
three months ended March 31, 2001 related to the acquisition of Cellmark,
capital expenditures of $1.9 million, and $23.0 million from net proceeds from
maturities net of purchases of short term investments. Financing activities
primarily consisted of $0.5 million used to repay debt from lines of credit.
Working capital decreased to approximately $50.2 million at March 31,
2001 from approximately $64.6 million at December 31, 2000. The decrease in
working capital was primarily due to cash used in operations during the three
months ended March 31, 2001.
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.
As of December 31, 2000, our net operating loss carryforwards were
approximately $87.0 million and $83.0 million for Federal and state income tax
purposes, respectively. 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.
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 and DNAstream
and software product lines and associated reagent consumables;
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. 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, 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, we may be affected by fluctuations in the exchange rate of
British pounds to US dollars.
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 expectation that
SNPstream systems we place will generate additional recurring revenue stream
from the sale of our SNPware consumables; our expectation of generating revenue
from sales of SNPware consumables designed to work on the platforms of various
manufacturers and from SNP-IT license fees and royalties; our plan to provide a
variety of SNP genotyping and pharmacogenetics services to the pharmaceutical
and biotechnology industries through our high throughput MegaSNPatron facility;
our intention to introduce SNPstream instruments with lower throughput
capabilities beginning in 2001; our intention to expand our offerings of SNPware
consumables for use on instruments made or sold by other companies and to obtain
access fees and royalties by licensing our SNP-IT technology for incorporation
in consumable kits of others; our intention to develop intellectual property
rights through our collaborations with pharmaceutical and biotechnology
companies; our intention to develop proprietary rights around both diagnostic
and therapeutic uses of SNPs; our plan to use accredited laboratories at
GeneScreen and Cellmark to offer clinical quality pharmacogenctics SNP scoring
services for clinical association studies and pharmaceutical clinical trials and
to physicians and patients via the Internet as well as other distribution
channels; our expectation that revenues from the respective forensics businesses
of GeneScreen and Cellmark to increase as DNA analysis are increasingly being
used by the criminal justice system; our anticipation of recording compensation
charges as of March 31, 2001; our expectation of expanding our operations that
may lead to increases in expenses; our expectation of having several sources of
revenue in the future; our belief that our cash reserves and expected short-term
revenue will be sufficient to fund operations through at least the next 12
months; our belief that our position is strong with respect to the dispute with
St. Louis University; and our belief that the issue with Motorola has been
resolved, or similar subjects. 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 5846710, 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 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 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
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declaratory judgment in this action, the lawsuit could take significant time, be
expensive and divert our management's attention from other business concerns.
We had been engaged in discussions with Motorola in an attempt to
resolve certain areas of disagreement that arose under our existing
collaboration in the area of microfluidics. The primary issues 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 our SNP-IT technology for
use with Motorola's microfluidic chips. While we believe this issue has been
resolved, there can be no assurance that Motorola will not still seek
arbitration or litigation of the rights it claims to our SNP-IT technology.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
We completed our initial public offering on May 4, 2000, the net
proceeds of which were approximately $48.4 million after underwriting discounts
and commissions and offering costs. Although we utilized a portion of these
proceeds to fund operations and for capital expenditures and in the recent
acquisition of Cellmark, 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, at this time, we have no understandings, commitments, or
agreements with respect to any material acquisition.
The following table sets forth our approximate cumulative use of net
offering proceeds from out initial public offering as of March 31, 2001 (in
thousands):
Capital Expenditures $10,800
Acquisition of Cellmark 2,900
Net cash used to fund operations 27,300
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 (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 Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.4 to
the Registrant's Registration Statement on Form S-1, No. 333-30774, and
incorporated herein by reference)
4 Specimen Stock Certificate (filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form S-1, No. 333-30774, and incorporated
herein by reference)
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#10.1 Genotyping Collaboration Agreement dated as of February 12, 2001 by and
between the Registrant and AstraZeneca UK, Limited (filed as Exhibit
10.13 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000, and incorporated herein by reference).
10.2 Investor Rights Agreement dated as of February 12, 2001 by and between
Registrant and AstraZeneca UK, Limited (filed as Exhibit 10.14 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2000, and incorporated herein by reference).
# Portions of this Exhibit were omitted and have been filed separately
with the Secretary of the Commission pursuant to the Registrant's
application requesting confidential treatment under Rule 406 of the Act,
filed as of April 2, 2001.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the three months ended March
31, 2001.
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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 15, 2001 By: /s/ Donald R. Marvin
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DONALD R. MARVIN
Senior Vice President, Chief Operating
Officer, Chief Financial Officer
(principal financial and accounting officer)
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