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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ending March 31, 2000
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-29101
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SEQUENOM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0365889
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11555 Sorrento Valley Road, San Diego, California 92121
(Address of principal executive offices)
(858) 350-0345
(Registrant's telephone number, including area code)
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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) [X] Yes [_] No, and (2) has been
subject to such filing requirements for the past 90 days. [_] Yes [X] No
The Registrant has been subject to the filing requirements of Section
13(a) and 15 (d) less than 90 days because the Registrant's Registration
Statement on Form 8-A was declared effective by the Commission on February 11,
2000.)
The number of shares of the Registrant's Common Stock outstanding as of
April 28, 2000 was 24,273,566.
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SEQUENOM, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION........................................... 3
Item 1. Financial Statements........................................... 3
Condensed Consolidated Balance Sheets--as of March 31, 2000
(unaudited) and December 31, 1999................................. 3
Condensed Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 2000 and 1999........................ 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 2000 and 1999........................ 5
Notes to Condensed Unaudited Consolidated Financial Statements..... 6
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results of Operations.......................................... 7
PART II OTHER INFORMATION.............................................. 16
Item 2. Change in Securities........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SEQUENOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents......................... $139,158,287 $ 5,200,734
Short-term investments, available-for-sale........ 20,577,888 16,415,764
Accounts receivable............................... 1,078,994 --
Inventories....................................... 594,330 229,750
Deferred stock issuance costs..................... -- 645,534
Other current assets and prepaid expenses......... 531,593 914,243
------------ -----------
Total current assets.......................... 161,941,102 23,406,025
Equipment and leasehold improvements, net........... 6,168,285 6,294,011
Other assets........................................ 48,331 53,023
------------ -----------
Total assets.................................. $168,157,718 $29,753,059
============ ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses............. $ 5,720,143 $ 4,426,287
Current portion of capital lease obligations...... 479,223 461,784
------------ -----------
Total current liabilities..................... 6,199,366 4,888,071
Capital lease obligations, less current portion..... 1,064,295 1,189,428
Long-term debt...................................... -- 5,134,000
Accrued long-term interest payable on long-term
debt............................................... -- 1,003,000
Commitments
Stockholders' equity:
Convertible preferred stock, par value $0.001;
Authorized shares--5,000,000 and 14,842,757 at
March 31, 2000 and December 31, 1999,
respectively...................................
Aggregate liquidation preference--none and
$56,793,947 at March 31, 2000 and December 31,
1999, respectively.............................
Issued and outstanding shares--none and
14,842,757 at March 31, 2000 and December 31,
1999, respectively............................. -- 14,843
Common stock, par value $0.001;
Authorized shares--75,000,000 and 19,500,000 at
March 31, 2000 and December 31, 1999,
respectively...................................
Issued and outstanding shares--24,243,466 and
2,298,675 at March 31, 2000 and December 31,
1999, respectively............................. 24,244 2,299
Additional paid-in capital........................ 221,218,581 66,300,293
Notes receivable for stock........................ -- (2,056,466)
Deferred compensation related to stock options.... (2,800,806) (3,618,601)
Accumulated other comprehensive income............ 281,336 400,779
Accumulated deficit............................... (57,829,298) (43,504,587)
------------ -----------
Total stockholders' equity.................... 160,894,057 17,538,560
------------ -----------
Total liabilities and stockholders' equity.... $168,157,718 $29,753,059
============ ===========
See accompanying notes.
3
SEQUENOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
-------------------------
2000 1999
------------ -----------
(Unaudited)
Revenues:
Product revenue.............................. $ 1,450,525 $ --
Research and development grants.............. 124,141 --
------------ -----------
Total revenues........................... 1,574,666 --
Costs and expenses:
Cost of product revenue...................... 1,028,454 --
Research and development..................... 4,236,529 2,012,632
Selling, general and administrative.......... 5,212,372 1,441,557
Amortization of deferred compensation........ 2,497,803 --
------------ -----------
Total costs and expenses................. 12,975,158 3,454,189
------------ -----------
Loss from operations........................... (11,400,492) (3,454,189)
Interest income................................ 1,539,415 218,174
Interest expense............................... (4,479,620) (170,316)
Other income, net.............................. 15,987 --
------------ -----------
Net loss....................................... $(14,324,710) $(3,406,331)
============ ===========
Historical net loss per share, basic and
diluted....................................... $ (0.85) $ (10.27)
============ ===========
Weighted average shares outstanding, basic and
diluted....................................... 16,803,894 331,565
============ ===========
Pro forma net loss per share, basic and
diluted....................................... $ (0.65)
============
Pro forma weighted average shares outstanding,
basic and diluted............................. 22,057,958
============
See accompanying notes.
4
SEQUENOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
-------------------------
2000 1999
------------ -----------
(Unaudited)
Operating activities
Net loss........................................... $(14,324,711) $(3,406,331)
Adjustments to reconcile net loss to net cash used
in operating activities:
Non-cash items................................... 9,342,898 395,609
Changes in operating assets and liabilities:
Inventories.................................... (364,518) --
Accounts Receivable............................ (1,078,994) --
Other current assets........................... 1,283,543 (11,898)
Other assets................................... 5,102 --
Accounts payable and accrued expenses.......... 1,285,041 165,074
------------ -----------
Net cash used in operating activities.............. (3,851,639) (2,857,546)
Investing activities
Purchase of equipment and leasehold improvements... (474,143) (955,149)
Net change in marketable investment securities..... (4,201,428) (8,617,387)
------------ -----------
Net cash used in investing activities.............. (4,675,571) (9,572,536)
Financing activities
Net (payments) borrowings on capital lease
obligations....................................... (107,694) 525,136
Repayment of long-term debt........................ (3,090,870) --
Proceeds from issuance Series D Preferred.......... -- 11,873,909
Proceeds from issuance of Common Stock............. 145,818,087 --
------------ -----------
Net cash provided by financing activities.......... 142,619,523 12,399,045
------------ -----------
Net increase (decrease) in cash and cash
equivalents....................................... 134,092,313 (31,037)
Effect of exchange rate changes on cash and cash
equivalents (134,760) (110,171)
Cash and cash equivalents at beginning of period... 5,200,734 8,559,612
------------ -----------
Cash and cash equivalents at end of period......... $139,158,287 $ 8,418,404
============ ===========
Supplemental schedule of non-cash investing and
financing activities:
Conversion of Preferred Stock to Common Stock...... $ 56,793,947 $ --
============ ===========
Conversion of long-term debt and interest payable
to Common Stock................................... $ 7,387,010 $ --
============ ===========
Supplemental disclosure of cash flow information:
Interest paid...................................... $ 98,538 $ 98,316
============ ===========
See accompanying notes.
5
SEQUENOM, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited financial statements of SEQUENOM, Inc. have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation have been included. Interim results are not
necessarily indicative of results for a full year.
Through December 31, 1999, SEQUENOM was considered to be a development
stage company. The balance sheet at December 31, 1999 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. These financial statements should be read
in conjunction with the audited financial statements and footnotes thereto
included in the SEQUENOM's Annual Report on Form 10-K for the year ended
December 31, 1999, as filed with the Securities and Exchange Commission
("SEC").
(2) Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130") requires
reporting and displaying comprehensive income (loss) and its components which,
for SEQUENOM, includes net loss and unrealized gains and losses on investments
and foreign currency translation gains and losses. In accordance with SFAS
130, the accumulated balance of other comprehensive income (loss) is disclosed
as a separate component of stockholders' equity.
(3) Net Loss Per Share
In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff
Accounting Bulletin (or SAB) No. 98, basic net income (loss) per share is
computed by dividing the net income (loss) for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share is computed by dividing the net income (loss) for the
period by the weighted average number of common and common equivalent shares
outstanding during the period. Potentially dilutive securities comprised of
incremental common shares issuable upon the exercise of stock options and
warrants, and common shares issuable on conversion of preferred stock, were
excluded from historical diluted loss per share because of their anti-dilutive
effect.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares arising from preferred stock and
long-term debt that automatically converted upon the closing of the Company's
initial public offering in February 2000 (using the as-if converted method
from the original date of issuance) and reflects the elimination of interest
expense on the debt to be converted.
6
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results of Operations
THIS FORM 10-Q CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
SUCH STATEMENTS ARE ONLY PREDICTIONS AND ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, WITHOUT LIMITATION, THOSE DISCUSSED IN THIS ITEM 2 AS WELL AS THOSE
DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1999, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
We are a pioneer in the new field of industrial genomics. Since we began
operations in 1994, we have been primarily involved in the research and
development of high definition DNA analysis tools for industrial biomedical
and life science applications.
Since our inception, we have incurred significant losses and, for the three
months ended March 31, 2000, had a net loss of $14.3 million and as of March
31,2000 had an accumulated deficit of $57.8 million. Prior to the three months
ended March 31, 2000, our revenues were solely from research grants. We began
placing MassARRAY(TM) systems at beta sites and with pre-launch users in July
1999. We commenced a commercial launch of our MassARRAY system during the
fourth quarter of 1999. Our first commercial revenues were recognized in the
quarter ended March 31, 2000.
Our product revenues consist of both the sale of MassARRAY systems at the
time of placement and from disposable products, including SpectroCHIPs(TM), at
the time of shipment. We expect that each system placed in the field will
generate a recurring revenue stream from the sale of disposables. We also
expect the volume of disposables purchased from each site will increase over
time as the customer becomes familiar with the technology and incorporates
MassARRAY into a broad range of SNP analysis programs. In addition, we expect
to generate revenue from the sale of proprietary assays and software products
and other services provided to the customer. In some cases we may retain some
rights to assays developed in collaborations with third parties. This may
allow us to offer an expanded line of products to a broader market. Our sales
will be initially driven by the need for SNP validation and later could expand
into the areas of genomic drug development, diagnostics and agricultural
genomics.
Prior to the quarter ended March 31, 2000, our expenses consisted primarily
of costs incurred in research and development, manufacturing scale-up,
business development and from general and administrative costs associated with
our operations. With our first commercial revenues, we also added cost of
product revenue to our statement of operations. Our current products do not
provide sufficient gross margin for us to become profitable. To become
profitable, we will need to develop and introduce new higher margin products
and generate significant sales of disposables. We expect our research and
development expenses to increase in the future as we continue to improve and
develop products. Our selling expenses will increase as we expand
commercialization of our products. Moving to larger facilities, vacating our
current facilities in San Diego, and the additional obligations of a public
reporting entity will also add to our expenses. As a result, we expect to
incur losses for the foreseeable future.
We have a limited history of operations and we anticipate that our
quarterly results of operations will fluctuate for the foreseeable future due
to several factors, including market acceptance of current or new products,
patent conflicts, the introduction of new products by our competitors, the
timing and extent of our research and development efforts, and the timing of
significant orders. Our limited operating history makes accurate prediction of
future operations difficult or impossible.
7
Results of Operations for the Three Months Ended March 31, 2000 and 1999
Revenues
Product revenues were $1.5 million for the three months ended March 31,
2000, compared to no product revenue in the same period of 1999. These
revenues were derived from the sale of MassARRAY systems and disposable kits
containing our proprietary SpectroCHIP. During the quarter, we placed our
MassARRAY systems at the Center for Human Genetics at Boston University and a
second site of the National Institutes of Health in the United States and
Methexis Genomics in Europe. Revenues were also generated from three of our
original six beta site collaborators, the U.S. Department of Agriculture, the
National Institutes of Health and the National Cancer Institute, which
transitioned into commercial accounts during the period.
Research and development grant revenue was approximately $124,000 for the
quarter ended March 31, 2000 compared to no revenue from grant funding in the
same period of 1999. This amount represents the cash received from a Phase I
SBIR grant awarded to us by the National Institutes of Health.
Research and development expenses
Research and development expenses increased to $4.2 million in the quarter
ended March 31, 2000 from $2.0 million in the same period of 1999. These
expenses consist primarily of salaries and related personnel costs, materials
costs and costs related to completion of our product development. The $2.2
million increase from 1999 to 2000 consisted of a $1.3 million one-time charge
from forgiveness of loans granted to executives in 1999 in connection with the
exercise of stock options, approximately $500,000 from recruiting and adding
research and development personnel, and an increase in material and facilities
costs of approximately $400,000.
Selling, general and administrative expenses
Selling, general and administrative expenses increased to $5.2 million for
the three months ended March 31, 2000 from $1.4 million in the same period of
1999. These expenses consist primarily of salaries and related costs for
executive, finance and other administrative personnel, general and patent
related legal expenses, and business development expenses. Approximately $2.5
million of the $3.8 million increase from 1999 to 2000 was from a one-time
charge from forgiveness of loans granted to executives in 1999 in connection
with the exercise of stock options. The remaining increase consisted of
approximately $800,000 from an increase in selling, general and administrative
personnel and their related expenses, approximately $300,000 in additional
expenses associated with the expansion of our current facilities, and an
increase of approximately $200,000 from sales and marketing related
activities.
Amortization of deferred stock compensation
Deferred stock compensation represents the difference between the estimated
fair value of our common stock and the exercise price of options at the date
of grant. During the three months ended March 31, 2000, we recorded
amortization of deferred stock compensation totaling $2.5 million. We also
recorded deferred compensation totaling $1.6 million for options granted in
January 2000. These amounts are being amortized over the vesting periods of
the individual stock options using the graded vesting method. We expect to
record amortization for deferred compensation approximately as follows: $3.7
million during 2000, $939,000 during 2001, $432,000 during 2002, and $187,000
during 2003.
Interest income
Interest income increased to approximately $1.5 million for the quarter
ended March 31, 2000 from approximately $218,000 in the same period of 1999.
The increase resulted from higher average balances of cash and cash
equivalents and short-term investments in the first quarter of fiscal 2000,
resulting from the investment of the proceeds from our initial public offering
in February 2000.
8
Interest expense
Interest expense was $4.5 million in the quarter ended March 31, 2000
compared to approximately $170,000 in the same period of 1999. The $4.5
million is comprised of approximately $100,000 of interest related to capital
lease obligations and $4.8 million of non-cash interest expense recorded upon
conversion of debt of DEM4 million (approximately $2.0 million) into Common
Stock, offset by approximately $400,000 of non-cash gain recorded upon
issuance of Common Stock to extinguish long-term interest payable.
Income taxes
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $26.8 million and $12.3 million. We also have
federal and state research and development tax credit carryforwards of
approximately $925,000 and $483,000 and German net operating loss
carryforwards of approximately $7.9 million. The research and development tax
credit carryforwards will begin to expire in 2011, unless previously utilized.
The federal and state net operating loss and credit carryforwards will begin
to expire in 2000 and 2008, respectively. The German net operating losses may
be carried forward indefinitely. Pursuant to Internal Revenue Code Sections
382 and 388, our net operating loss and credit carryforwards may be limited
due to a cumulative change in ownership of more than 50%, which occurred
during 1998 and also in connection with our initial public offering in
February 2000. However, we do not believe these limitations will materially
impact the use of the net operating loss and credit carryforwards.
Liquidity and capital resources
In February 2000, we completed our initial public offering raising net
proceeds of approximately $144.1 million. Prior to that, we funded our
operations with $56.9 million of private equity financings, $6.0 million in
loans and convertible loans, and $2.2 million from equipment financing
arrangements. At March 31, 2000, cash, cash equivalents and short-term
investments totaled $159.7 million compared to $21.6 million at December 31,
1999. Our cash reserves are held in a variety of interest-bearing instruments
including investment-grade corporate bonds, commercial paper and money market
accounts.
Cash used in operations for the three months ended March 31, 2000 was $3.9
million compared to $2.9 million for the same period in 1999. A net loss of
$14.3 million for the quarter ended March 31, 2000 was partially offset by
non-cash charges of approximately $9.3 million for amortization of deferred
compensation, net interest expense associated with the repayment of debt and
conversion of debt to equity, forgiveness of loans granted to executives in
1999, depreciation and amortization and options issued to consultants.
Investing activities, other than the changes in our short-term investments,
consumed approximately $474,000 in cash during the first quarter due to
equipment expenditures.
Cash provided by financing activities was $142.6 million for the quarter
ended March 31, 2000 compared to $12.4 million for the same period in 1999.
Financing activities for the first quarter of 2000, included the receipt of
net proceeds of $145.8 million substantially from the sale of Common Stock in
our initial public offering, offset by $3.2 million repayment of long-term
debt and capital lease obligations. During the same period of 1999, we
received $11.8 million from the sale of Preferred Stock to investors, and
approximately $525,000 from equipment financing arrangements.
Working capital increased to $155.7 million at March 31, 2000 from $18.5
million at December 31, 1999. The increase in working capital resulted from
the receipt of net proceeds from our initial public offering completed in
February 2000.
As of March 31, 2000, we had an aggregate of $1.5 million in future
obligations of principal payments under capital leases, of which approximately
$479,000 million is obligated to be repaid within the next year. We used
approximately $3.1 million of the proceeds of our initial public offering for
the repayment of long-term debt.
9
We believe our existing cash, cash equivalents and short-term investments,
will be sufficient to fund our operating expenses, debt obligations and
capital requirements through at least the next 24 months. Our future capital
uses and requirements depend on numerous factors, including:
. our success in selling our MassARRAY system and associated
technologies;
. our progress with research and development;
. our ability to introduce and sell new products;
. our sales and marketing expenses;
. expenses associated with unforeseen litigation;
. costs and timing of obtaining new patent rights; and
. regulatory changes and competition and technological developments in
the market.
Therefore, our capital requirements may increase in future periods. As a
result, we may require additional funds and may attempt to raise additional
funds through equity or debt financings, collaborative arrangements with
corporate partners or from other sources.
We have a $25.0 million bank line of credit, all of which is available for
borrowing. We are currently negotiating an $8.0 million capital financing
arrangement. We cannot assure you that additional funding will be available to
finance our operations when needed or, if available, that the terms for
obtaining such funds will be favorable or will not result in dilution to our
stockholders.
Risks and uncertainties
The following is a summary of the many risks we face in our business. You
should carefully read these risks and uncertainties in evaluating our
business.
We are at an early stage of development and may not succeed or become
profitable.
We commenced operations in 1994 and are at an early stage of development.
We have incurred significant losses to date. We began beta site testing our
initial products in July 1999 and commercially launched our MassARRAY system
in December 1999. Our first product revenues were recognized in the first
quarter of fiscal 2000. Prior to that, our revenues were limited to grants
from governmental bodies. As a result, our business is subject to all of the
risks inherent in the development of a new business enterprise, such as the
need:
. to obtain substantial capital to support the expenses of developing
our technology and commercializing our products;
. to develop a market for our products;
. to successfully transition from a company with a research focus to a
company capable of supporting commercial activities; and
. to attract and retain qualified management, sales, technical and
scientific staff.
Our operations also may be affected by problems frequently encountered with
the use of new technologies and by the competitive environment in which we
operate, as well as the risks detailed below.
If we incur losses in the future, as we expect to do, the value of our
stock could decrease.
Since inception, we have recognized no revenue from product sales. Our
expenses have exceeded revenue in each of the years since our inception. It is
uncertain when, if ever, we will become profitable. As of March 31, 2000, our
accumulated deficit was $57.8 million. Our expenses have consisted principally
of research and development and of general and administrative expenses
incurred while building our business infrastructure. We
10
expect to continue to experience significant operating losses in the future as
we continue our research and development efforts, further develop our
manufacturing capabilities and expand our marketing and sales force in an
effort to commercialize our products. Our net operating loss and credit
carryforwards may be limited due to a cumulative change in ownership of more
than 50%, which occurred during 1998 and with our initial public offering in
February 2000.
We may not be able to successfully adapt our products for commercial
applications.
We have completed the initial development of our MassARRAY technology for
applications in the genetic aspects of drug development and life science
research. We may not be able to successfully adapt our products to the
commercial requirements of these fields. A number of potential applications of
our technology in these fields will require significant enhancements in our
core technology, including adaptation of our software and further
miniaturization. In addition, we need to enhance our population-based DNA
bank, establish databases for determining the medical importance of SNPs and
rapidly design assays for SNP analysis in sufficient quantity to meet the high
throughput that we expect our future customers will require. If we are unable,
for technological or other reasons, to complete the development, introduction
or scale-up of the manufacturing of any product or genotyping facility, or if
any product does not achieve a significant level of market acceptance, our
business, financial condition and results of operations could be seriously
harmed. Market acceptance will depend on many factors, including demonstrating
to customers that our technology is superior to other technologies and
products which are available now or which may become available in the future.
We believe that our revenue growth and profitability will substantially depend
on our ability to overcome significant technological challenges and
successfully introduce our products into the marketplace.
We may not be able to expand our business to offer services that our
customers are requesting.
We are currently planning on expanding our business to run multiple assays
at our facilities for some of our customers. To do this, we expect that we
will need to extensively expand our facilities, purchase equipment and hire
additional personnel. If we are unable to successfully implement or manage
this new business, our relationships with our customers may be harmed.
We may not successfully integrate future acquisitions.
In the future, we may acquire additional complementary companies, products
or technologies. Managing these acquisitions will entail numerous operational
and financial risks and strains, including:
. exposure to unknown liabilities;
. higher than expected acquisition and integration costs which may
cause our quarterly and annual operating results to fluctuate;
. combining the operations and personnel of acquired businesses with
our own which may be difficult and costly, and integrating or
completing the development and application of any acquired
technologies which may disrupt our business and divert our
management's time and attention;
. impairment of relationships with key customers of acquired businesses
due to changes in management and ownership of the acquired
businesses;
. inability to retain key employees of any acquired businesses or hire
enough qualified personnel to staff any new or expanded operations;
and
. increased amortization expenses if an acquisition results in
significant goodwill or other intangible assets.
If the medical relevance of SNPs becomes questionable, we may have less
demand for our products.
The genetic composition of diseases is complicated. We cannot be certain
that genetic information will play a key role in the development of drugs and
diagnostics in the future. If we are unable to generate valuable information
that can be used to develop these drugs and diagnostics, the demand for our
products will be reduced and our business is likely to be harmed.
11
Our system and related disposable sales may be limited if our MassARRAY
system is used below its capacity as a result of the speed of sample
preparation and the need for assay design.
The need to design a unique assay for each newly discovered SNP can
substantially delay the commencement of the analysis of that SNP. In addition,
the extraction of DNA from biological material is time consuming. MassARRAY
system users who need to develop assays or who lack sufficient sample
preparation resources therefore may be unable to use our system to its full
capacity. Customers who are unable to use our MassARRAY system to full
capacity may share MassARRAY systems, which would result in lower system
sales. Therefore, customers may not purchase sufficient quantities of
disposables for us to become profitable.
We depend on our customers to purchase sufficient quantities of
SpectroCHIPs and other disposables for us to be profitable.
Our customers may not generate sufficient throughput using our MassARRAY
system. This may limit their purchases of SpectroCHIPs and other disposables.
Factors which may limit the use of SpectroCHIPs and other disposables include:
the acceptance of our technology by our customers, the ability to analyze more
than one SNP simultaneously on a single spot and the training of customer
personnel. If our customers are slow to, or never, achieve sufficient
throughput, we may never achieve profitability.
If our customers are unable to adequately prepare samples as required by
our system, the overall market demand for our products may decline.
Before using our MassARRAY system, customers must prepare samples by
following several steps that are prone to human error, including DNA isolation
and DNA segment amplification. If DNA samples are not prepared appropriately,
our MassARRAY system will not generate a reading. If our customers experience
similar difficulties, they may achieve lower levels of throughput than those
for which our system was designed. If our customers are unable to generate
expected levels of throughput, they may not continue to purchase our
disposables, they may express their discontent with our products in the
marketplace, potentially driving down demand for our products, or they may
collaborate with others to jointly use our products. Any or all of these
actions would reduce the overall market demand for our products.
If ethical and other concerns surrounding the use of genetic information
become widespread, we may have less demand for our products.
Genetic testing has raised ethical issues regarding confidentiality and the
appropriate uses of the resulting information. For these reasons, governmental
authorities may call for limits on or regulation of the use of genetic testing
or prohibit testing for genetic predisposition to certain conditions,
particularly for those that have no known cure. Any of these scenarios could
reduce the potential markets for our products, which could seriously harm our
business, financial condition and results of operations.
We depend on third-party products and services and sole or limited sources
of supply to develop and manufacture some components of our products.
We rely to a substantial extent on outside vendors to manufacture many of
the components and subassemblies used in our products. Some of these
components and subassemblies are obtained from a single supplier or a limited
group of suppliers. Our reliance on outside vendors generally, and a sole or a
limited group of suppliers in particular, involves several risks, including:
. the inability to obtain an adequate supply of required components
due to manufacturing capacity constraints, a discontinuance of a
product by a third-party manufacturer or other supply constraints;
. reduced control over quality and pricing of components; and
. delays and long lead times in receiving materials from vendors.
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We have limited commercial manufacturing capability and experience and may
encounter manufacturing problems or delays which could result in lower
revenue.
We have not yet produced our SpectroCHIP in commercial quantities. We may
not be able to maintain acceptable quality standards while producing
commercial quantities. Our customers also require that we comply with current
good manufacturing practices that we may not be able to meet. To achieve the
production levels necessary for successful commercialization of our products,
we will need to scale-up our manufacturing facilities, establish more
automated manufacturing capabilities and maintain adequate levels of
inventory. We may not be able to manufacture sufficient quantities to meet
market demand. If we cannot achieve the required level and quality of
production, we may need to outsource production or rely on licensing and other
arrangements with third parties who possess sufficient manufacturing
facilities and capabilities. This could reduce our gross margins and expose us
to the risks inherent in relying on others. We may not be able to successfully
outsource our production or enter into licensing or other arrangements with
these third parties, which could adversely affect our business.
We have a limited sales force and limited experience in commercializing our
products which may cause significant difficulties in commercializing our
products.
Our direct sales force may not be sufficiently large or knowledgeable to
successfully penetrate the market. We may not be able to expand our direct
sales force to meet our commercial objectives. In addition, our sales force
may not be able to address complex scientific and technical issues raised by
our customers. Our customer support personnel may also lack the broad range of
technical expertise required to adequately service and support our products in
the field.
If we do not succeed in obtaining development and marketing rights for some
of the assays developed in collaboration with our customers, our revenue and
profitability could be reduced.
Our business strategy includes the development of assays in collaboration
with customers, and we intend to obtain commercialization rights for those
assays. If we are unable to obtain rights to those assays, our revenue and
profitability could be reduced. To date, we have not initiated significant
activities with respect to the exploitation of any commercialization rights or
products developed in collaboration with third parties. Even if we obtain
commercialization rights, commercialization of products may require resources
that we do not currently possess and may not be able to develop or obtain.
We may be unable to obtain licenses to patented SNPs which could prevent us
from obtaining significant revenue or becoming profitable.
The US Patent and Trademark Office has issued at least one patent to a
third party relating to a SNP. If important SNPs are patented, we will need to
obtain rights to those SNPs in order to develop, use and sell related assays.
Required licenses may not be available on commercially acceptable terms, or at
all. If we fail to obtain licenses to important patented SNPs, we may never
achieve significant revenue or become profitable.
Our academic arrangements are an important part of our business and failure
to maintain existing relationships or establish additional relationships could
adversely affect our research and product development efforts.
We have relationships with scientists and consultants at academic and other
institutions who conduct research at our request. Our existing relationships
may not be successful. These researchers are not employed by us and may have
commitments to, or consulting or advisory contracts with, other entities that
may limit their availability to work on our projects. As a result, we have
limited control over their activities and, except as otherwise required by our
agreements with these persons, we can expect only limited amounts of their
time to be dedicated to our projects. Our ability to make new discoveries and
to commercialize products based on those discoveries may depend in part on
continued arrangements with researchers at academic and other institutions. We
may not be able to negotiate acceptable arrangements with academic or other
institutions or individuals.
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Failure to expand our international sales as we intend would reduce our
ability to become profitable.
We expect that a significant portion of our sales will be made outside the
United States. A successful international effort will require us to develop
relationships with international customers and partners. We may not be able to
identify, attract or retain suitable international customers and partners. As a
result, we may be unsuccessful in our international expansion efforts.
Furthermore, expansion into international markets will require us to continue
to establish and grow foreign operations, hire additional personnel to run
these operations and maintain good relations with our foreign customers and
partners.
International operations involve a number of risks not typically present in
domestic operations, including:
. currency fluctuation risks;
. changes in regulatory requirements;
. costs and risks of deploying systems in foreign countries;
. licenses, tariffs and other trade barriers;
. political and economic instability;
. difficulties in staffing and managing foreign operations;
. potentially adverse tax consequences; and
. the burden of complying with a wide variety of complex foreign laws
and treaties.
Our international operations will also be subject to the risks associated
with the imposition of legislation and regulations relating to the import or
export of high technology products. We cannot predict whether tariffs or
restrictions upon the importation or exportation of our products will be
implemented by the United States or other countries.
We may lose money when we exchange foreign currency received from
international sales into US dollars.
A significant portion of our business is expected to be conducted in
currencies other than the US dollar. We recognize foreign currency gains or
losses arising from our operations in the period incurred. As a result,
currency fluctuations between the US dollar and the currencies in which we do
business will cause foreign currency translation gains and losses. We cannot
predict the effects of exchange rate fluctuations upon our future operating
results because of the number of currencies involved, the variability of
currency exposure and the potential volatility of currency exchange rates. We
do not currently engage in foreign exchange hedging transactions to manage our
foreign currency exposure.
The sales cycle for our products is lengthy. We may expend substantial funds
and management effort with no assurance of successfully selling our products or
services.
Our ability to obtain customers for our products and services depends in
significant part upon the perception that our products and services can help
accelerate efforts in genomics. The sales cycle is typically lengthy. Our sales
effort requires the effective demonstration of the benefits of our products and
services to and significant training of many different departments within a
potential customer. These departments might include research and development
personnel and key management. In addition, we may be required to negotiate
agreements containing terms unique to each customer. We may expend substantial
funds and management effort with no assurance that we will successfully sell
our products or services.
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We may not have adequate insurance and if we become subject to product
liability claims, we may experience reduced demand for our products or be
required to pay damages that exceed our insurance limitations.
Our business exposes us to potential product liability claims that are
inherent in the life science field. Any product liability claim in excess of
our insurance coverage would have to be paid out of our cash reserves which
would have a detrimental effect on our financial condition. It is difficult to
determine whether we have obtained sufficient insurance to cover potential
claims. Also, we cannot assure you that we can or will maintain our insurance
policies on commercially acceptable terms, or at all.
Responding to claims relating to improper handling, storage or disposal of
hazardous chemicals and radioactive and biological materials which we use,
could be time consuming and costly.
We use controlled hazardous and radioactive materials in our business. The
risk of accidental contamination or injury from these materials cannot be
completely eliminated. If an accident with these substances occurs, we could
be liable for any damages that result, which could seriously harm our
business. Additionally, an accident could damage our research and
manufacturing facilities and operations, resulting in delays and increased
costs.
If our manufacturing and laboratory facilities are damaged, we could
experience lost revenue and our business would be seriously harmed.
Our only manufacturing facility is located in San Diego, California. We
have laboratories located in San Diego, Sudbury, Massachusetts and Hamburg,
Germany. Damage to our facilities due to fire, natural disaster, power loss,
communications failure, unauthorized entry or other events could cause us to
cease development and manufacturing of our products. We have limited insurance
to protect against business interruption; however, there can be no assurance
this insurance will be adequate or will continue to be available to us on
commercially reasonable terms, or at all.
If we do not effectively manage our growth, it could affect our ability to
pursue business opportunities and expand our business.
Growth in our business has placed, and will continue to place, a
significant strain on our facilities, management systems and resources. We
will need to continue to improve our operational and financial systems and
managerial controls and procedures and expand, train and manage our workforce.
We will rely heavily on software systems, including an Enterprise Resource
Planning System, Baan, and a Laboratory Information Management System, LIMS,
that have been or will be installed and utilized. Furthermore, we will have to
maintain close coordination among our technical, accounting, marketing, sales
and research departments. If we fail to effectively manage our growth and
address the above concerns, it could affect our ability to pursue business
opportunities and expand our business.
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PART II OTHER INFORMATION
Item 2 Change in Securities.
Sales of Unregistered Securities
From January 1, 2000 to March 31, 2000, SEQUENOM, Inc. sold and issued the
following unregistered securities:
. 406,554 shares of our common stock issued upon the exercise of options
to purchase such stock for an aggregate consideration of $644,610; and
. 272,108 shares of our common stock issued in connection with the
conversion of debt to equity, for an aggregate price of $7,074,808; and
. 22,884 shares of our common stock issued for satisfaction of accrued
interest, for an aggregate price of $594,984.
The above securities were offered and sold by us in reliance upon
exemptions from registration pursuant to Section 4(2) of the Securities Act of
1933 as transactions not involving any public offering or Rule 701 promulgated
under the Securities Act of 1933. The recipients of the above-described
securities represented their intention to acquire the securities for
investment only and not with a view to distribution thereof. Appropriate
legends were affixed to the stock certificates issued in such transactions.
All recipients had adequate access, through employment or other relationships,
to information about the Registrant.
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
------- -----------
10.64 Building Lease agreement dated March 29th, 2000 between TPSC IV LLC,
a Delaware limited liability company, and SEQUENOM, INC, a Delaware
corporation.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2000.
16
SEQUENOM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEQUENOM, Inc.
Date: May 15, 2000 /s/ Stephen L. Zaniboni
By: _________________________________
Stephen L. Zaniboni
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial and Accounting Officer)
17