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 June 30, 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 August 1, 2001, was 39,530,830.
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 June 30, 2001
(unaudited) and December 31, 2000......................................... 1
Condensed Consolidated Statements Of Operations for the three and six
months ended June 30, 2001 and 2000 (unaudited)........................... 2
Condensed Consolidated Statements Of Cash Flows for the six months ended
June 30, 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....................................... 9
Item 3. Quantitative And Qualitative Disclosures About Market Risk........ 15
PART II OTHER INFORMATION................................................. 16
Item 1. Legal Proceedings................................................. 16
Item 2. Changes In Securities And Use Of Proceeds......................... 16
Item 3. Defaults Upon Senior Securities................................... 16
Item 4. Submission Of Matters To A Vote Of Security Holders............... 16
Item 5. Other Information................................................. 17
Item 6. Exhibits And Reports On Form 8-K.................................. 17
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)
June 30, December 31,
Assets 2001 2000
------------ --------------
(unaudited)
Current assets:
Cash and cash equivalents $ 20,147 $ 14,558
Short-term investments 49,955 51,857
Accounts receivable, net 4,424 5,510
Inventory 2,951 3,526
Other current assets 1,293 2,065
------------ --------------
Total current assets 78,770 77,516
Equipment and leasehold improvements, net 23,676 19,657
Goodwill, net 28,147 28,977
Other intangibles, net 16,978 14,936
Other assets 1,886 1,241
------------ --------------
Total assets $ 149,457 $142,327
============ ==============
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt 2,362 2,337
Accounts payable 2,760 5,492
Accrued expenses 3,748 4,034
Deferred revenue 512 1,009
------------ --------------
Total current liabilities 9,382 12,872
Long-term debt, less current portion 5,901 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
100,000,000 shares issued and outstanding 39,506,474 and 33,195,096
at June 30, 2001 and December 31, 2000, respectively 39 33
Additional paid-in capital 268,624 234,692
Deferred compensation (10,107) (13,374)
Accumulated other comprehensive income 41 577
Accumulated deficit (124,423) (98,625)
------------ --------------
Total stockholders' equity 134,174 123,303
------------ --------------
Total liabilities and stockholders' equity $ 149,457 $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 Six months ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
----------- ----------- ----------- ----------
Revenues:
Products revenue $ 1,211 $ 695 $ 2,219 $ 930
Services revenue 4,424 3,279 8,321 6,160
Collaboration, license and other revenues 1,083 620 1,813 970
----------- ----------- ----------- ----------
Total revenues 6,718 4,594 12,353 8,060
----------- ----------- ----------- ----------
Operating expenses:
Cost of products revenue 867 547 1,685 610
Cost of services revenue 2,859 2,595 5,731 4,835
Selling, general and administrative 9,155 8,233 16,572 13,176
Research and development 8,967 12,341 15,696 16,742
----------- ----------- ----------- ----------
Total operating expenses 21,848 23,716 39,684 35,363
----------- ----------- ----------- ----------
Operating loss (15,130) (19,122) (27,331) (27,303)
----------- ----------- ----------- ----------
Other income (expense):
Interest income 1,026 1,300 1,900 2,090
Interest expense (203) (146) (367) (258)
Other expense -- -- -- (76)
----------- ----------- ----------- ----------
Total other income (expense) 823 1,154 1,533 1,756
----------- ----------- ----------- ----------
Net loss (14,307) (17,968) (25,798) (25,547)
Beneficial conversion feature of preferred stock -- -- -- 29,574
----------- ----------- ----------- ----------
Net loss allocable to common stockholders $ (14,307) $ (17,968) $ (25,798) $ (55,121)
=========== =========== =========== ==========
Basic and diluted net loss per share allocable to common
stockholders (note 2) $(0.41) $(0.94) $(0.76) $(5.52)
=========== =========== =========== ==========
Shares used in computing basic and diluted net loss per
share allocable to common stockholders (note 2) 34,633,400 19,040,917 33,985,809 9,981,418
=========== =========== =========== ==========
See accompanying notes to condensed consolidated financial statements.
2
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six months ended
June 30,
--------
2001 2000
---------- --------
Cash flows from operating activities:
Net loss $(25,798) $(25,547)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash research and development expense - 4,775
Noncash compensation expense 1,630 4,016
Depreciation and amortization 3,548 2,701
Changes in assets and liabilities:
Accounts receivable 1,086 (2,417)
Inventory 745 (1,968)
Other current assets 772 (793)
Other assets (645) 332
Accounts payable (2,732) 2,067
Due to related party - (64)
Accrued expenses (57) (2,689)
Deferred revenue (497) 430
---------- --------
Net cash used in operating activities (21,948) (19,157)
---------- --------
Cash flows from investing activities:
Cash paid to acquire Cellmark, including acquisition costs (2,909) -
Capital expenditures (4,122) (3,756)
Decrease in restricted cash - 400
Sales of short-term investments 67,291 7,703
Purchase of short-term investments (65,765) (45,879)
---------- --------
Net cash used in investing activities (5,505) (41,532)
---------- --------
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 862 --
Repayment of debt on lines of credit (1,088) (1,507)
Net proceeds from issuance of common stock 33,284 48,405
Proceeds from exercise of common stock options and warrants 88 88
---------- --------
Net cash provided by financing activities 33,146 76,560
---------- --------
Effect of foreign currency translation on cash and cash equivalents (104) --
---------- --------
Net increase in cash and cash equivalents 5,589 15,871
Cash and cash equivalents at beginning of period 14,558 33,804
---------- --------
Cash and cash equivalents at end of period $ 20,147 $ 49,675
========== ========
Supplemental disclosure of noncash financing and investing activities:
Changes in deferred compensation from grant, forfeiture and
remeasurement of common stock options 1,637 16,052
Conversion of manditorily redeemable convertible preferred stock and
convertible preferred stock into common stock -- 118,521
Issuance of common stock for technology licenses -- 4,775
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 for services 229 --
Other comprehensive loss (536) --
Supplemental disclosure of cash flow information:
Cash paid during the period for interest 363 255
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
3
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $124,423 through June 30, 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 six months ended June 30, 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 also 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 $2,909 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. 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.
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 June 30, 2001. The acquisition of
Cellmark is reflected in the accompanying condensed consolidated balance sheet
as of June 30, 2001.
4
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. In the second quarter of
2001, the Company recognized revenue related to the accomplishment of a
milestone under this agreement.
(4) Increase in Authorized Shares of Common Stock and Common Stock Underlying
the Stock Plan
In 2001, the Board of Directors and stockholders approved an increase of
the Company's authorized shares of common stock to 100,000,000 shares. The Board
and the stockholders also approved 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 shares.
(5) Shelf Registration Statement and Issuance of Common Stock
On May 10, 2001, the Company filed a shelf registration statement on Form
S-3 with the Securities and Exchange Commission. This will permit the Company,
from time to time, to offer and sell various types of securities, up to a total
value of $75,000. The Company filed the registration statement to gain
additional flexibility in accessing capital markets for general corporate
business purposes. In June, 2001, the Company sold 5,950,000 shares to a group
of new and existing stockholders at a price of $6 per share. The shares of
common stock were offered through a prospectus supplement pursuant to the
Company's effective shelf registration statement. The offering raised net
proceeds of approximately $33,284 which will be used for general corporate
business purposes.
(6) Stockholder Rights Plan
On May 16, 2001, the Company's Board of Directors (the "Board") adopted a
Stockholder Rights Plan ("Rights Plan"), which is designed to protect the
Company's stockholders in the event of any takeover offer. On May 16, 2001, the
Company's Board declared a dividend of one preferred stock purchase right (a
"Right") for each outstanding share of the Company's common stock to
stockholders of record at the close of business on May 31, 2001 (the "Record
Date"). Each Right entitles the registered holder to purchase from the Company
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
$.001 par value per share, at an initial purchase price of $40.00 in cash,
subject to adjustment.
Initially, the Rights will be attached to all common stock certificates
representing shares then outstanding, and no separate Rights certificates will
be distributed. The Rights will separate from the common stock and a
Distribution Date, as defined in the Rights Plan, will occur if certain events
as described below occur. Rights will also be attached to all shares of common
stock issued following the Record Date but prior to the Distribution Date. The
Rights are not exercisable until the Distribution Date and will expire at the
close of business on May 16, 2011, unless earlier redeemed by the Company. The
Distribution Date has not occurred at June 30, 2001.
In the event that a person or a group of affiliated or associated persons
becomes the beneficial owner of more than 15% of the then outstanding shares of
common stock (except pursuant to an offer for all outstanding shares of common
stock which the Board determines to be fair to, and otherwise in the best
interests of, the Company and its stockholders), each holder of a Right will
thereafter have the right to receive, upon exercise, that number of shares of
common stock (or, in certain circumstances, cash, property or other securities
of the Company) which equals the exercise price of the Right divided by one-half
of the current market price (as defined in the Rights Plan) of the common stock
at the date of the occurrence of the event. However, Rights are not exercisable
following the occurrence of any of the events set forth above until such time as
the Rights are no longer redeemable by the Company. In the event that the
Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation, or, more than 50% of the
Company's assets or earning power is sold or transferred, each holder of a Right
shall thereafter have the right to receive, upon exercise, that number of shares
of common stock of the acquiring company which equals the exercise price of the
Right divided by one-half of the current market price (as defined in the Rights
Plan) of such common stock at the date of the occurrence of the event.
(7) Inventory
Inventory is comprised of the following at June 30, 2001 and December 31,
2000, respectively:
June 30, 2001 December 31, 2000
------------- -----------------
Raw materials $2,368 $3,074
Work in progress 548 452
Finished goods 35 --
------ ------
$2,951 $3,526
====== ======
5
Raw materials consist mainly of reagents, enzymes, chemicals and plates
used in SNP scoring, genotyping, and to manufacture SNPware consumables.
(8) 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 ("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 Products segment. During 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 "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 and
six months ended June 30, 2001 and 2000 is as follows:
- ------------------------------------------------------------------------------------------------
Three months ended June 30, 2001 Products Services Total
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Revenues from external customers 1,211 $ 5,507 6,718
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Segment operating loss (6,370) (8,760) (15,130)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Six months ended June 30, 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Revenues from external customers 2,219 10,134 12,353
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Segment operating loss (15,235) (12,096) (27,331)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Total assets 46,241 103,216 149,457
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Three months ended June 30, 2000 Products Services Total
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Revenues from external customers 1,315 3,279 4,594
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Segment net loss (17,023) (945) (17,968)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Six months ended June 30, 2000
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Revenues from external customers 1,900 6,160 8,060
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Segment net loss (23,660) (1,887) (25,547)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Total assets 112,929 42,975 155,904
- ------------------------------------------------------------------------------------------------
(9) 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.
6
The Company has been engaged in discussions with St. Louis University of
St. Louis, Missouri regarding the University's 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 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 attention of the Company's management 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 the Company's SNP-IT technology.
GeneScreen, Inc., the Company's wholly-owned subsidiary, has carried, in
increasing increments of limit, commercial and professional liability insurance
with a self-insured retention. However, GeneScreen may, as a result of
insurance contract limitations, be self-insured for risk of loss that might
arise out of GeneScreen's operations and testing results. Management estimates
future litigations costs based on historical litigation exposure. The accrued
litigation reserve for self-insured risk at June 30, 2001 and December 31, 2000
was $156.
(10) 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 and six
months ended June 30, 2001 and 2000:
Three months ended Six months ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
-------- -------- -------- ---------
Net loss $(14,307) $(17,968) $(25,798) ($25,547)
Other comprehensive income (loss):
Unrealized holding loss on available-for-
sale securities (481) (376) --
Foreign currency translation adjustments (51) -- (160) --
-------- -------- -------- ---------
(532) -- (536) --
-------- -------- -------- ---------
Comprehensive loss $(14,839) $(17,968) $(26,334) $ (25,547)
======== ======== ======== =========
(11) Subsequent Events
In July 2001, the Company completed a series of agreements that replace
its existing November 1999 collaboration to combine the Company's primer
extension technology with the Affymetrix GeneChip(R) GenFlex(TM) Tag Array in
the Company's SNPcode genotyping kits. In addition, the Company also acquired
from Affymetrix exclusive ownership of U.S. Patent No. 5,856,092 and its foreign
counterparts. Under the terms of these agreements, Affymetrix will supply
GenFlex arrays to the Company, who will use these products to provide SNPcode-
based genotyping services to its customers and distribute GenFlex arrays in
connection with SNPcode reagents to customers who want to conduct primer
extension-based genotyping using the Affymetrix GeneChip system. Also,
Affymetrix granted the Company a non-exclusive license to make and sell products
incorporating Affymetrix's proprietary universal Tag sequences.
(12) 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 $2,150 plus 50% of any future draw amount no later than June 30,
2001, unless the Company has
7
completed a follow-on offering resulting in at least $50,000 in net unrestricted
proceeds. During the quarter ended June 30, 2001, the Company did complete a
follow-on offering as described in note 5 above, however, the net unrestricted
proceeds from this offering was less than the minimum amount required under the
line of credit.
(13) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". 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 will require 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 will also
require 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, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company is required to adopt the provisions of SFAS 141 immediately
and SFAS 142 effective January 1, 2002. Furthermore, goodwill and intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before SFAS 142 is
adopted in full will not be amortized, but will continue 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 will continue 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 will require 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. Upon adoption of SFAS 142, the Company will be 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 will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS 142 within the first interim period. Any impairment loss will 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.
In connection with SFAS 142's transitional goodwill impairment evaluation,
the statement will require 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. 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 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 it 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.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of approximately $27,108, unamortized identifiable
intangible assets in the amount of approximately $15,966, all of which will be
subject to the transition provisions of SFAS 141 and 142. Amortization expense
related to goodwill was $2,074 and $1,037 for the year ended December 31, 2000
and the six months ended June 30, 2001, respectively. Because of the extensive
effort needed to comply with adopting SFAS 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these statements on the Company's
consolidated financial statements at the date of this report, including whether
it will be required to recognize any transitional impairment losses as the
cumulative effect of a change in accounting principle.
8
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 June
30, 2001 and the Results of Operations for the three and six months ended June
30, 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 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. Since late 1999,
following our acquisition of GeneScreen and, subsequently, our business
division, Cellmark Diagnostics, in 2001, 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(TM) primer extension technology. We currently have revenues from the sale
of our SNPstream(R) instrument systems, our SNPware(TM) consumable kits and SNP
genotyping and pharmacogenetic services provided in our high throughput
MegaSNPatron(TM) facilities. 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
technologies in the form of products and services for pharmaceutical,
biotechnology and diagnostic 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 MT (formerly referred to as
SNPstream 5K) solution with lower throughput capabilities together with a
partner, 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(TM) strategy. In the
second half of 2001, we expect to launch a SNP-IT-based kit that is designed for
use with the simple 96-well plate readers found in most laboratories or without
instrumentation. We expect that we will launch this SNP-IT-based kit in
partnership with an industry leader.
Our Pharmaceutical Value Creation(TM) 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 Cellmark Diagnostics, a division of
AstraZeneca, in an asset acquisition, for a 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.
9
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. Each of GeneScreen's and Cellmark's DNA
testing businesses is dependent upon its successful competitive bidding and
qualifications for contracts with various governmental entities to provide
paternity and forensics testing services. 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 with 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 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 $10.1 million at June 30, 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 June 30, 2001
as follows, in millions:
Six months ending
December 31, Year ending December 31,
------------------ ------------------------
2001 2002 2003 2004
---- ---- ---- ----
$2.1 $4.0 $3.8 $0.2
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 $1.6 million was recorded in the six
months ended June 30, 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 June 30, 2001, we had
total stockholders' equity of approximately $134.2 million, including an
accumulated deficit of approximately $124.4 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 SNP value creation business strategies. 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.
10
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 throughout
2000, we derived increased amounts of revenues from the sale of SNP-IT-based
consumables. We also derived significant license revenue beginning in 2000. Our
services segment also includes SNP scoring analyses.
In connection with the research and development collaborations that provide
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. 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.
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.
11
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 and 2000
Revenues. Revenues for the three months ended June 30, 2001 of
approximately $6.7 million represents an increase of $2.1 million as compared to
revenues of $4.6 million for the corresponding period of 2000. The increase in
revenues was due to an increase in revenues attributable to the successful
completion of the first milestone under our genotyping agreement with
AstraZeneca, revenues by our Cellmark division for the period following our
acquisition on February 12, 2001, and an increase from products primarily from
placements of SNPstream 25K instrument systems and sales of SNPware consumable
kits.
Cost of products revenue. Cost of products revenue for the three months
ended June 30, 2001 was approximately $0.9 million compared to approximately
$0.5 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 June 30, 2001.
Cost of services revenue. Cost of services revenue was approximately $2.9
million for the three months ended June 30, 2001 compared to approximately $2.6
million in the corresponding period of 2000. The increase was directly
attributable to the increase in services revenue including revenues received by
our Cellmark division 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 June 30, 2001 were approximately $9.2
million, an increase of approximately $1.0 million, as compared to approximately
$8.2 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
in anticipation of supporting our growth. During the quarter ended June 30, 2001
there was an increase in salaries and related expenses of approximately $0.7
million as well as an increase in selling and marketing expenses of
approximately $0.8 million. The Company also incurred approximately $1.1 million
in selling, general and administrative expenses relating to Cellmark, which was
acquired by the Company on February 12, 2001. These various increases in general
and administrative expenses were offset by a decrease in amortization of
deferred compensation of approximately $1.4 million.
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 June 30, 2001 were approximately
$9.0 million, compared to approximately $12.3 million for the corresponding
period of 2000. The decrease in research and development of $3.3 million was
primarily attributable to a transaction in 2000 with Sarnoff Corporation whereby
we recorded an approximate $6.6 million charge related to approximately a $3.0
million cash payment made to and the fair value of 250,000 shares of common
stock and five-year warrants to purchase 75,000 shares of common stock issued to
Sarnoff Corporation under an amendment to a License and Option Agreement. As
this licensed technology under this agreement has not reached technological
feasibility and has no alternative uses, the $6.6 million was charged to
research and development. Excluding this transaction, research and development
expense during the three months ended June 30, 2001 increased by approximately
$3.3 million. This increase was attributable to increased expenses as we hired
additional research and development personnel of approximately $1.1 million,
increased purchases of laboratory supplies of approximately $1.5 million, and
increased facilities expenses in connection with the expansion of our internal
and collaborative research efforts, including our collaboration with The SNP
Consortium. We expect future research and development expenses to increase as we
continue to hire additional personnel and we continue to expand research and
development facilities to accommodate our strategic collaborations and internal
research.
Interest income. Interest income for the three months ended June 30, 2001
was approximately $1.0 million, compared to approximately $1.3 million for the
corresponding period of 2000. This decrease was primarily due to interest
received in 2000 on larger cash, cash equivalent and short-term investment
balances which we held as a result of our receipt of proceeds from our Series E
private placement in December 1999 and January 2000 and our initial public
offering in May 2000, offset by amounts used to fund operating activities.
Interest expense. Interest expense for the three months ended June 30, 2001
was approximately $0.2 million compared to approximately $0.1 million in the
corresponding period in 2000. This increase was due to borrowings made in
December, 2000 and in May, 2001 on our equipment line of credit.
12
Net loss allocable to common stockholders. Due to the factors discussed
above, for the three months ended June 30, 2001, we reported a net loss
allocable to common stockholders of approximately $14.3 million as compared to
approximately $18.0 million in the corresponding period in 2000.
Six Months Ended June 30, 2001 and 2000
Revenues. Revenue for the six months ended June 30, 2001 of approximately
$12.4 million represents an increase of approximately $4.3 million as compared
to revenues of approximately $8.1 million for the corresponding period of 2000.
The increase was largely due to an approximate $2.2 million increase in revenues
generated by our services operations, partially attributable to revenues
generated by Cellmark for the period following our acquisition on February 12,
2001, an increase from products primarily from placements of two SNPstream 25K
instrument systems, sales of SNPware consumable kits, and the successful
completion of the first milestone under our genotyping agreement with
AstraZeneca.
Cost of products revenue. Cost of product revenues for the six months ended
June 30, 2001 was approximately $1.7 million compared to approximately $0.6
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 six months ended June 30, 2001.
Cost of services revenue. Cost of services revenue was approximately $5.7
million for the six months ended June 30, 2001 compared to approximately $4.8
million in the corresponding period of 2000. The increase was directly
attributable to the increase in services revenue including revenue generated by
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 six months ended June 30, 2001 were approximately $16.6 million
an increase of approximately $3.4 million, as compared to approximately $13.2
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
in anticipation of supporting our growth. During the six months ended June 30,
2001, there was increase in salaries and related expenses of approximately $0.8
million as well as an increase in selling and marketing expenses of
approximately $1.5 million. The Company also incurred approximately $1.4 million
in selling, general and administrative expenses relating to Cellmark which was
acquired by the Company on February 12, 2001. These various increases in general
and administrative expenses were offset by a decrease in amortization of
deferred compensation during the six months ended June 30, 2001 of approximately
$1.8 million.
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 six months ended June 30, 2001 were approximately
$15.7 million, compared to approximately $16.7 million for the corresponding
period of 2000. The decrease in research and development of approximately $1.0
million was primarily attributable to a prior year transaction with Sarnoff
Corporation whereby the Company recorded an approximate $7.8 million charge
related to approximately a $3.0 million cash payment made to and the fair value
of 350,000 shares of common stock and five-year warrants to purchase 75,000
shares of common stock issued to Sarnoff Corporation as an advance on the
issuances that would have been owed in December 2000 under a License and Option
Agreement and an amendment of that Agreement. As this licensed technology under
this agreement has not reached technological feasibility and has no alternative
uses, the $7.8 million was charged to research and development. Excluding this
transaction, research and development expense during the six months ended June
30, 2001 increased by approximately $6.8 million This increase was attributable
to increased expenses as we hired additional research and development personnel
of approximately $2.2 million, increased purchases of laboratory supplies of
approximately $2.5 million, increased equipment depreciation of approximately
$0.4 million, and increased facilities expenses in connection with the expansion
of our internal and collaborative research efforts, including our collaboration
with The SNP Consortium. We expect future research and development expenses to
increase as we continue to hire additional personnel and continue to expand
research and development facilities to accommodate our strategic collaborations
and internal research.
Interest income. Interest income for the six months ended June 30, 2001 was
$1.9 million, compared to approximately $2.1 million for the corresponding
period of 2000. This decrease was primarily due to interest received in 2000 on
larger cash, cash equivalent and short-term investment balances which we held as
a result of our receipt of proceeds from our Series E private placement in
December 1999 and January 2000 and our initial public offering in May 2000,
offset by amounts used to fund operating activities.
Interest expense. Interest expense for the six months ended June 30, 2001
was approximately $0.4 million compared to $0.3 million in the corresponding
period in 2000. This increase was due to borrowings made in December, 2000 and
in May, 2001 on our equipment line of credit.
13
Net loss allocable to common stockholders. Due to the factors discussed
above, for the six months ended June 30, 2001, we reported a net loss allocable
to common stockholders of approximately $25.8 million as compared to
approximately $55.1 million in the corresponding period in 2000. Net loss
allocable to common stockholders for 2000 included a beneficial conversion
feature on preferred stock of approximately $29.6 million.
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 that closed in March 1998 and in
December 1999 and January 2000 with aggregate net proceeds from the private
placements of approximately $102.0 million, $48.4 million from our initial
public offering which closed in May 2000, and approximately $33.3 million from
our follow-on offering of common stock in June 2001. 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 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 December 2000, this
agreement was amended to establish a new borrowing base of an additional $8.0
million. At June 30, 2001, we had borrowings of approximately $7.9 million
outstanding, and approximately $2.8 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. Pursuant to our line of credit
which was amended in December 2000, we are required to provide a cash security
deposit or letter of credit equal to $2.1 million plus 50% of any future draw
amount no later than June 30, 2001, unless we have completed a follow-on
offering of at least $50.0 million in net unrestricted proceeds. During the
quarter ended June 30, 2001, we did complete a follow-on offering as described
in note 5 above, however, the net unrestricted proceeds from this offering was
less than the minimum amount required under this line of credit. 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
$39.3 million remains available for future use. The June 2001 sale of common
stock for gross proceeds of $35.7 million were registered under this
Registration Statement.
As of June 30, 2001, we had approximately $70.1 million in cash and cash
equivalents and short-term investments, compared to approximately $66.4 million
as of December 31, 2000. This increase is due to proceeds received from our
offering of common stock in June, 2001, offset by operating expenses related to
the expansion of our genotyping and pharmaceutical value creation facilities,
cash paid to acquire Cellmark and to fund our operations during the six months
ended June 30, 2001.
Net cash used in operations for the six months ended June 30, 2001 was
approximately $21.9 million compared with approximately $19.2 million for the
comparable period in 2000. Non-cash charges in the six months ended June 30,
2001 included compensation expense of $1.6 million and depreciation and
amortization expense of $3.5 million. Investing activities included capital
expenditures of approximately $4.1 million, $2.9 million in cash paid related to
our acquisition of Cellmark, and $1.5 million from net proceeds from sales, net
of purchases of short term investments. Financing activities primarily consisted
of approximately $33.3 million of net proceeds from our offering of common stock
in June 2001.
Working capital increased to approximately $69.4 million at June 30, 2001
from approximately $64.6 million at December 31, 2000. This increase is due to
proceeds received from our offering of common stock in June, 2001, offset by
operating expenses related to the expansion of our genotyping and pharmaceutical
value creation facilities, cash paid to acquire Cellmark and to fund operations
of the Company during the six months ended June 30, 2001. The increase in
working capital was primarily due to our Series E mandatorily redeemable
convertible preferred stock financing in January 2000 and our initial public
offering in May 2000.
We believe that our cash reserves and expected short-term revenue will be
sufficient to fund our operations through at least the next 18-24 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 carry forwards were
approximately $87.0 million and approximately $83.0 million for Federal and
state income tax purposes, respectively. If not utilized, our Federal and state
tax loss carry forwards 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:
14
. 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 software
product lines 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 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.
Recent Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". 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 will require 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 will also
require 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, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
We are required to adopt the provisions of SFAS 141 immediately and SFAS
142 effective January 1, 2002. Furthermore, goodwill and intangible assets
determined to have an indefinite useful life acquired in a purchase business
combination completed after June 30, 2001, but before SFAS 142 is adopted in
full will not be amortized, but will continue 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 will continue 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 will require upon adoption of SFAS 142, that we 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.
Upon adoption of SFAS 142, we will be 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, we will be required to test the intangible asset for
impairment in accordance with the provisions of SFAS 142 within the first
interim period. Any impairment loss will 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.
In connection with SFAS 142's transitional goodwill impairment evaluation,
the statement will require that we are 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 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. 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. 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 it 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
our statement of operations.
As of the date of adoption, we expect to have unamortized goodwill in the
amount of approximately $27.1 million, unamortized identifiable intangible
assets in the amount of approximately $16.0 million, all of which will be
subject to the transition provisions of SFAS 141 and 142. Amortization expense
related to goodwill was approximately $2.1 million and $1.0 million for the year
ended December 31, 2000 and the six months ended June 30, 2001, respectively.
Because of the extensive effort needed to comply with adopting SFAS 141 and 142,
it is not practicable to reasonably estimate the impact of adopting these
statements on our consolidated financial statements at the date of this report,
including whether it will be required to recognize any transitional impairment
losses as the cumulative effect of a change in accounting principle.
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 the acquisition of our business
division, Cellmark, in February 2001, and a limited number of foreign
investments, we may be affected by fluctuations in exchange rates.
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
we will introduce the SNPstream MT solution and a SNP-IT-based kit in the second
half of 2001; our expectation that we will launch the SNP-IT-based kit in
partnership with an industry leader; 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
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
pharmacogenetics 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 18 to 24 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.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We have been in discussions with St. Louis University of St. Louis,
Missouri regarding the University's 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 might 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.
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.
The following table sets forth our approximate cumulative use of net
offering proceeds from out initial public offering as of June 30, 2001 (in
thousands):
Capital expenditures $13,100
Acquisition of Cellmark 2,900
Net cash used to fund operations 32,400
In May 2001, our Board of Directors approved the adoption of a Stockholder
Rights Plan (the "Rights Plan") under which all stockholders of record as of May
31, 2001 received rights to purchase shares of a new series of Preferred Stock.
The rights were distributed as a non-taxable dividend and will expire ten years
from the date of the adoption of the Rights Plan. The rights will be
exercisable only if a person of group acquires 15 percent or more of our common
stock. If a person acquires 15 percent or more of our common stock, all rights
holders except the buyer will be entitled to acquire shares of our common stock
at a discount. We filed a Form 8-K on May 22, 2001 in connection with the
adoption of the Rights Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters were put to a vote of security holders at our Annual
Meeting of Stockholders held on June 12, 2001: (i) the election of Sidney M.
Hecht as a Class I Director, to serve until 2004; (ii) to consider and vote upon
the proposal to increase the aggregate number of shares of the Company's common
stock authorized for issuance under the Company's 2000 Employee, Director, and
Consultant Stock Plan from 1,500,000 shares to 4,500,000 shares; (iii) to
consider and vote upon the proposal to amend the Company's Restated Certificate
of Incorporation to increase the aggregate umber of shares of common stock
authorized to be issued from 50,000,000 to 100,000,000 shares; (iv) to consider
and vote upon a proposal to ratify the appointment of KPMG LLP as the Company's
independent public accounts for the current fiscal year; and (v) to transact
such other business as may properly be brought before the meeting.
The following tables set forth information regarding the number of votes
cast for, against or withheld, abstentions and broker non-votes, with respect to
each matter presented at the meeting. Under the rules of the Nasdaq Stock
Market, brokers who hold
16
shares in street name for customers who are beneficial owners of those shares
may be prohibited from giving a proxy to vote shares held for such customers on
certain matters without specific instructions from such customers (broker non-
votes). Under Delaware law, abstentions and broker non-votes are counted as
shares represented at the meeting for purposes of determining the presence or
absence of a quorum at a stockholders meeting. The election of directors is
decided by plurality of the votes cast; withholding authority to vote for a
nominee for director will have no effect on the outcome of the vote. For the
proposals (i) to increase the aggregate number of shares of the Company's common
stock reserved for issuance under the Company's 2000 Employee, Director, and
Consultant Stock Plan by 3,000,000 shares and (ii) to ratify the appointment of
KPMG LLP as the Company's independent public accountants for the fiscal year
ending December 31, 2001, the affirmative vote of a majority of shares of Common
Stock voted affirmatively or negatively at the Meeting on the matter is
necessary for approval. Abstentions with respect to each of these two proposals
have no effect on the outcome of the vote. For the proposal to amend the
Company's Restated Certificate of Incorporated to increase the aggregate number
of shares of common stock authorized for issuance by the Company from 50,000,000
shares to 100,000,000 shares, the affirmative vote of the holders of at least
the majority of the outstanding common stock of the Company entitled to vote on
this matter is required for approval under Delaware law. Because abstentions are
treated as shares present or represented and entitled to vote, abstentions with
respect to this proposal have the same effect as a vote against the proposal.
Against Broker
Proposals: For or Withheld Abstentions Non-votes
--- ----------- ----------- ---------
(i) election of directors 24,024,534 43,439,000 -- --
(ii) proposal to increase the aggregate
number of shares of the Company's common
stock authorized for issuance under the
Company's 2000 Employee, Director, and
Consultant Stock Plan from 1,500,000 shares 19,766,622 2,588,240 1,713,110 1,000
to 4,500,000 shares
(iii) proposal to amend the Company's
Restated Certificate of Incorporation to
increase the aggregate number of shares of
common stock authorized to be issued from
50,000,000 to 100,000,000 shares 23,207,790 596,573 263,610 --
(iv) proposal to ratify the appointment of
KPMG LLP as the Company's independent public
accounts for the current fiscal year 24,028,917 24,121 14,935 --
(v) no other business was transacted at the
meeting
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 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant dated June 12, 2001.
17
3.3 Certificate of Designation, Preferences, and Rights of Series A Junior
Participating Preferred Stock of the Registrant dated August 1, 2001.
3.4 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)
4.1 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)
4.2 Rights Agreement, dated as of July 27, 2001, between the Registrant
and Stock Transfer & Trust Company, which includes the form of
Certificate of Designations setting forth the terms of the Series A
Junior Participating Preferred Stock, $0.01 par value as Exhibit A,
the form of the rights certificate as Exhibit B and the Summary of
Rights to Purchase Series A Junior Participating Preferred Shares 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, No. 000-30267, and
incorporated herein by reference).
(b) Reports on Form 8-K
The Company filed a report on form 8-K with the Securities and Exchange
Commission on May 22, 2001 announcing the approval by the Company's board
of directors of a Stockholder Rights Plan to protect it's stockholders.
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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: August 13, 2001 By: /s/ Donald R. Marvin
--- --------------------
DONALD R. MARVIN
Senior Vice President, Chief Operating
Officer, Chief Financial Officer
(principal financial and accounting officer)
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Exhibit Index
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 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant dated June 12, 2001.
3.3 Certificate of Designation, Preferences, and Rights of Series A Junior
Participating Preferred Stock of the Registrant dated August 1, 2001.
3.4 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)
4.1 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)
4.2 Rights Agreement, dated as of July 27, 2001, between the Registrant
and Stock Transfer & Trust Company, which includes the form of
Certificate of Designations setting forth the terms of the Series A
Junior Participating Preferred Stock, $0.01 par value as Exhibit A,
the form of the rights certificate as Exhibit B and the Summary of
Rights to Purchase Series A Junior Participating Preferred Shares 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, No. 000-30267, and
incorporated herein by reference).
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