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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 000-29101
SEQUENOM, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0365889
(State or other jurisdiction (I.R.S. Employer
or incorporation or organization) Identification No.)
3595 John Hopkins Court
San Diego, California 92121
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (858) 202-9000
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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) Yes [X] No [_] and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
February 28, 2001 as reported on the Nasdaq National Market, was approximately
$232,622,843. Shares of Common Stock held by each executive officer and
director and by each person who owns 10% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 28, 2001, there were 24,346,174 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12 and 13 of Part III incorporate by
reference information from the registrant's proxy statement to be filed with
the Securities and Exchange Commission in connection with the solicitation of
proxies for the registrant's 2001 Annual Meeting of Stockholders to be held on
June 1, 2001.
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SEQUENOM, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2000
INDEX
Page
----
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 18
Item 3. Legal Proceedings............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders........... 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 19
Matters.......................................................
Item 6. Selected Financial Data....................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition 21
and Results of Operations.....................................
Item 7a. Quantitative and Qualitative Disclosure of Market Risk........ 24
Item 8. Financial Statements and Supplementary Data................... 26
Item 9. Changes in and Disagreements With Accountants on Accounting 26
and Financial Disclosure......................................
PART III
Item 10. Directors and Executive Officers of the Registrant............ 27
Item 11. Executive Compensation........................................ 29
Item 12. Security Ownership of Certain Beneficial Owners and 29
Management....................................................
Item 13. Certain Relationships and Related Transactions................ 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 30
8-K...........................................................
SIGNATURES.............................................................. 33
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PART I
Item 1. Business
All statements in this discussion that are not historical are forward-
looking statements within the meaning of Section 21E of the Securities
Exchange Act, including statements regarding the Company's "expectations",
"beliefs", "hopes", "intentions", "strategies" or the like. Such statements
are based on management's current expectations and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. The Company cautions
investors that there can be no assurance that actual results or business
conditions will not differ materially from those projected or suggested in
such forward-looking statements as a result of various factors, including, but
not limited to, the risk factors discussed in this Annual Report on Form 10-K.
SEQUENOM expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in SEQUENOM's expectations with regard thereto or any
change in events, conditions, or circumstances on which any such statements
are based.
SEQUENOM, MassARRAY, Industrial Genomics, SpectroCHIP, SpectroJET,
MassEXTEND, BioMASS and SpectroTYPER are trademarks of SEQUENOM, Inc. This
Form 10-K also refers to trade names and trademarks of other organizations.
Overview
SEQUENOM is a leader in the worldwide effort to identify genes and genetic
variations with significant impact on human health. Using our innovative
technologies, information and scientific strategy, we are translating data
generated from the Human Genome Project into medically important applications.
Breaking through the significant limitations of traditional research that is
narrowly focused on very small genetic regions for a specific disease, our
MassARRAY technology enables the screening of virtually all human genes in
relation to all diseases and in large numbers of individuals. The combination
of our powerful technology and population genetics strategy is generating
results that position us to quickly capture intellectual property to utilize
in new genetics-based drugs, therapies and diagnostics.
Products
From clinical diagnostics and optimized therapeutics to environmental and
agriculatural testing, advances in genetic analysis will enhance many aspects
of life. This mission requires a greater understanding of genetic variation
and gene function. We have generated a suite of products to accelerate and
improve each stage of genetic variation analysis, leading to the performance
of large-scale and cost-effective genetic analysis projects using full genome
screens in large populations.
Our proprietary products and approaches include:
Full Genome Screens. A full genome screen is the analysis of virtually all
genes in the human genome in relation to a given disease--an enabling process
for identifying and prioritizing disease genes and related drug targets. While
other genetic approaches are generally restricted to relatively specific
regions or a defined number of candidate genes, we examine all genes in the
human genome in large numbers of individuals. This unique method generates a
complete picture of genes and genetic markers associated with a given disease
and ranks their order of importance. Full genome screens are possible through
the performance advantages presented by the MassARRAY system, the automated
SNP assay development process and our ability to analyze SNPs in sample pools.
This capability provides us and our customers with a significant advantage in
generating information and intellectual property related to genetic variations
and genes that are associated to disease.
The MassARRAY system. Our commercial launch of the MassARRAY system in late
1999 significantly advanced DNA analysis by introducing a technology that
analyzes DNA molecules directly and with high specificity--a method that we
have broadly patented. The MassARRAY system uses mass spectrometry and a
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miniaturized biochip, the SpectroCHIP, to analyze DNA molecules directly by
measuring their specific mass, eliminating the need for labels or tags. High
accuracy and high specificity enable automated large-scale assay design at a
low cost, the analysis of SNPs in sample pools and high-throughput, highly
accurate individual SNP analysis.
SNP Assays. The first step in studying the potential utility of a genetic
variation is to create a SNP assay, a robust, high throughput procedure for
measuring this variation. Assay design has consistently been a bottleneck for
a number of other genotyping technologies, requiring time-consuming individual
assay optimization and subsequent analytical validation of each assay for
robustness. In contrast, MassARRAY delivers highly specific results through
the accuracy and precision of mass spectrometry, which enables us to use one
universal set of assay conditions optimized for overall robustness. This
fundamental advantage has allowed us to develop our technology for automated,
precise assay development at a significantly reduced cost. As a result, we
have generated the largest SNP assay portfolio in the industry. Each of these
assays is a product used internally and by our customers to study genetic
variation or as a diagnostic test for disease or predisposition.
SNP Analysis in Sample Pools. The accuracy and precision of the MassARRAY
system allows us to analyze pools of hundreds of DNA samples in a single
reaction--a significant competitive advantage in terms of speed and cost for
large-scale disease association studies. Other technologies must individually
interrogate each SNP for every sample. We use SNP analysis in sample pools
internally and in collaborations as a rapid method for screening SNPs within
many people simultaneously in order to identify those SNPs with potential
medical utility. Through sample pooling, we and our customers now have the
ability to perform full genome screens.
Population Genetics Approach. Internally, we employ a proprietary screening
approach to identify disease associations that affect significant portions of
the population. We accomplish this by analyzing the occurrence of genetic
variations in a proprietary DNA bank of thousands of individuals
representative of the North American population, one of the most ethnically
diverse population in the world. Using our population genetics approach, we
are identifying novel and proprietary candidate disease genes, which we intend
to license to life science and pharmaceutical companies. We will also use this
approach to prioritize candidate disease genes and genetic markers for our
collaborators by determining the portion of the North American population
potentially affected by the gene or marker in question.
Business Strategy
We are pursuing a multi-tiered strategy to capture the value our technology
creates:
Sell MassARRAY systems and disposables and provide assay design
services. During 2000, our technology became the genotyping method of choice
for many of the top genomics institutions, with the leading contributors to
the Human Genome Project employing MassARRAY, including the U.S. National
Institutes of Health, the Whitehead Institute, The Sanger Centre and the
German National Research Center for Environment and Health. Other MassARRAY
customers include the National Cancer Institute, the US Department of
Agriculture, Quest Diagnostics, Specialty Laboratories, the Genomics Institute
of the Novartis Research Foundation, Gemini Genomics, Genaissance
Pharmaceuticals, Hitachi, Nissei Sangyo, Japan's National Cancer Center
Research Institute, the Korea Advanced Institute of Science and Technology,
Integrated DNA Technologies, AgResearch Limited, Genetics Institute, Life
Technologies, HiberGen Limited, Metabion and Boston University School of
Medicine. The 22 system placements in the first year since our commercial
product launch span across seven different countries. We have entered into an
agreement with Hitachi to distribute MassARRAY systems and provide genotyping
services in Asia. We will continue to sell MassARRAY systems, disposables,
including our SpectroCHIP, and assay design services to companies and
institutions with large-scale genotyping demands for genomics research,
diagnotics, drug development and agricultural biotech.
Commercialize validated SNP assays and SNP information with leading
genomic, diagnostic and pharmacogenomic companies. We are forming
collaborations with leading genomic entities, many of which are MassARRAY
system customers, that have high value SNP portfolios and proprietary patient
and control
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population DNA banks. Utilizing these resources, we develop assays, validate
SNP candidates and screen SNPs in various ethnic and patient groups. In most
collaborations, we retain rights to resulting discoveries that have diagnostic
and/or therapeutic applications and intellectual property, including rights to
royalties and revenue sharing from derived product sales and licensing.
Collaborators to date include Incyte Genomics, Genomics Institute of the
Novartis Research Foundation, GlaxoSmithKline, the University of Texas
Southwestern Medical Center at Dallas, the National Institutes of Health, the
National Cancer Institute, Gemini Genomics, the Public Health Research
Institute, Methexis Genomics and the National Institute of Diabetes and
Digestive and Kidney Diseases.
Generate and capitalize on the validated medical utility of SNPs, genes and
resulting drug targets for major human diseases. During the next two years, we
will seek to identify a large number of gene-based SNPs that contribute to
major human diseases. As we identify and validate the medical utility of SNPs
and genes, we will seek to enter into agreements with life science and
pharmaceutical companies to develop diagnostic and therapeutic products based
on these discoveries. To date, we have filed patents on five novel genes with
medical utility. Some discoveries will result from collaborations; others will
result from our internal population genetics approach.
Market Opportunity
The completion of the human genome sequence is the starting point in the
race to discover the subset of genes and genetic variations involved in
diseases. This fundamental knowledge is expected to cause a historical shift
in the practice in medicine from treating symptoms to addressing the cause of
an illness or disease state through genetic-based diagnostics and
therapeutics. Classic hypothesis-driven research approaches have proven
unsuccessful in unraveling the mysteries of the genome because they cannot
cope with the magnitude and complexity of the entire human genome. Our
technology and scientific strategies enable rapid and cost-effective
identification of the subset of genes and genetic variations that impact human
health.
Background
Single nucleotide polymorphisms, or SNPs, are the most common type of
genetic variation. SNPs are a change of position in a single letter of DNA
text, such as replacing a G with a T in one location. Another common variation
is the insertion or deletion of one or several letters. A third common
variation is an increase or decrease in the length of simple repeating DNA
sequences. All people carry these three kinds of variations. Some forms can
result in disease, yet most are benign.
Genetic Analysis or Genotyping. The process of determining the SNPs present
in an individual is called genotyping. Some SNPs are a major cause of
inherited diseases, while others are responsible for most individual
differences, such as drug responsiveness. However, most SNPs are of no medical
consequence. It is estimated that only one SNP in a thousand may be medically
relevant to disease susceptibility or responsiveness to disease therapy.
Capturing this information is both the challenge and opportunity in the
genomics industry.
Measuring SNP Allele Frequencies. A SNP is characterized as a specific
position in the genome where the genetic code differs from person to person.
Different genetic letters can be observed and these are referred to as
different alleles. Usually only two options, or alleles, exist per SNP. A SNP
allele frequency is the relative occurrence, expressed as a percentage, of
each SNP allele in a given population.
After a SNP is discovered, its potential relevance for human health must be
validated by determining the regularity of the variation in different segments
of the population. To identify the small subset of SNPs that contribute to
human disease or are responsible for variations in drug responsiveness,
billions of SNP measurements must be made and correlated with health and other
physical and mental features of interest. SNPs with a validated medical
utility are valuable for drug development and human medical diagnostics.
SNPs in Human Healthcare. In the healthcare market, SNPs with validated
medical utility can be used to determine disease predisposition, customize
treatments based on an individual's genetic profile, and improve
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diagnostic testing and drug development. In short, genetic-based medicine
should maximize drug efficacy, minimize side effects and ultimately improve
the cost and benefit ratio in healthcare.
Pharmaceutical companies can use SNP analysis to determine which SNPs have
a significant impact on a given population. They may also design clinical
trials to test candidate drugs on targeted individuals with specific
genotypes, thereby potentially improving results, reducing costs, and
permitting more accurate safety predictions for a drug. SNP analysis should
also allow pharmaceutical companies to re-evaluate and modify previously
failed or ineffective drugs by targeting or excluding specific patient
populations.
Intellectual Property
To establish and protect our proprietary technologies and products, we rely
on a combination of patent, copyright, trademark and trade secret laws, as
well as confidentiality provisions in our contracts.
We have implemented an aggressive patent strategy designed to provide us
with freedom to operate and facilitate commercialization of our current and
future products. Focusing on a global economy, our patent portfolio reflects
our transatlantic nature and includes 60 pending patent applications in the
United States and corresponding international and foreign filings in major
industrial nations. We currently own 18 and license six issued patents in the
United States, and we have received notices of allowances for 15 additional
patent applications. We also own four foreign issued patents.
Generally, US patents have a term of 17 years from the date of issue for
patents issued from applications filed with the US Patent Office prior to June
8, 1995, and 20 years from the application filing date or earlier claimed
priority date in the case of patents issued from applications filed on or
after June 8, 1995. Patents in most other countries have a term of 20 years
from the date of filing the patent application. Our issued United States
patents will expire between 2013 and 2017. Our success depends to a
significant degree upon our ability to develop proprietary products and
technologies and identify useful genetic markers. These genetic markers may
play a crucial role in the diagnosis and treatment of disease. We intend to
continue to file patent applications as we develop new products and genotyping
technologies. Patents provide some degree of protection for our intellectual
property. However, the assertion of patent protection involves complex legal
and factual determinations and is therefore uncertain. In addition, the laws
governing patentability and the scope of patent coverage continue to evolve,
particularly in the areas of molecular biology of interest to us. As a result,
there can be no assurance that patents will issue from any of our patent
applications or from applications licensed to us. The scope of any of our
issued patents may not be sufficiently broad to offer meaningful protection.
In addition, our issued patents or patents licensed to us may be successfully
challenged, invalidated, circumvented or declared unenforceable so that our
patent rights would not create an effective competitive barrier. Moreover, the
laws of some foreign countries may not protect our proprietary rights to the
same extent as do the laws of the United States and Canada. In view of these
factors, our intellectual property positions bear some degree of uncertainty.
We also rely in part on trade secret protection of our intellectual
property. We attempt to protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants. Our
employees and consultants also sign agreements requiring that they assign to
us their interests in patents and copyrights arising from their work for us.
All employees sign an agreement not to compete unfairly with us during their
employment and upon termination of their employment, through the misuse of
confidential information, soliciting employees, soliciting customers, and the
like. However, it is possible that these agreements may be breached or
invalidated and if so, there may not be an adequate corrective remedy
available. Despite the measures we have taken to protect our intellectual
property, we cannot assure you that third parties will not breach the
confidentiality provisions in our contracts or infringe or misappropriate our
patents, copyrights, trademarks, trade secrets and other proprietary rights.
In addition, we cannot assure you that third parties will not independently
discover or invent competing technologies or reverse engineer our trade
secrets, or other technology. Therefore, the measures we are taking to protect
our proprietary rights may not be adequate.
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Although we are not a party to any material legal proceedings, in the
future, third parties may file claims asserting that our technologies or
products infringe on their intellectual property. We cannot predict whether
third parties will assert such claims against us or against the licensors of
technology licensed to us, or whether those claims will harm our business. If
we are forced to defend against such claims, whether they are with or without
any merit, whether they are resolved in favor of or against us or our
licensors, we may face costly litigation and diversion of management's
attention and resources. As a result of such disputes, we may have to develop
costly non-infringing technology, or enter into licensing agreements. These
agreements, if necessary, may be unavailable on terms acceptable to us, or at
all, which could seriously harm our business or financial condition.
Competition
We face competition among various entities offering SNP validation
platforms and entities attempting to identify genes associated with specific
diseases and develop products, services, and intellectual property from these
discoveries.
Several companies also compete with us by utilizing their technologies in
the effort to determine the medical utility of SNPs and genes. These include
Affymetrix, Inc. through its newly formed Perlegen Sciences subsidiary, Celera
Genomics Group, Curagen, Human Genome Science, deCODE Genetics Inc., Incyte
Genomics, Myriad Genetics and others. Technologies predominantly used by our
competitors include gene sequencing, gene sequence variation detection, gene
expression analysis, linkage analysis, gene mapping, knockout techniques,
homology searches and others.
In the SNP genotyping marketplace, MassARRAY competes with alternative
technology platforms which differ in the areas of sample amplification,
analysis process, sample separation or SNP detection, most of which are based
on indirect detection of the molecule by hybridization and/or labeling. Such
technologies are offered by: Aclara BioSciences, Affymetrix, Inc., Amersham
Pharmacia Biotech, Applied Biosystems Group, Caliper Technologies Corporation,
Genometrix, Hyseq, Inc., Illumina, Inc., Luminex Corporation, Nanogen, Inc.,
Orchid BioSciences, Inc., Protogene Laboratories, Inc., Pyrosequencing AB,
Third Wave Technologies, Inc., Variagenics, Inc., Visible Genetics, Inc. and
others.
Strategic Collaboration and License Agreements
We enter into various arrangements with corporate partners, licensors,
licensees and others, as a part of our strategy for the research, development,
commercialization and distribution of some of our products. The success of
these agreements is dependent upon the parties' performance of their
obligations as expected. It is uncertain if any revenue will be derived from
any of the arrangements. If products are successfully developed under some of
our existing arrangements, royalties will be payable by us on sales of
products which incorporate licensed technology. As of December 31, 2000, we
have not sold any products that incorporate licensed technology.
Incyte Genomics, Inc.
In September 2000 we entered into a collaboration with Incyte Genomics to
validate in silico SNPs identified by Incyte. Incyte has licensed the SNPs
from the LifeSeq Gold database to us for validation. In return we are using
our proprietary MassARRAY technology to develop and validate assays, which we
will sell to genetic researchers worldwide. We will also provide Incyte with
information developed from SNP association studies using Incyte's SNPs and our
reference human DNA bank for inclusion in Incyte's LifeSeq group of databases.
We will jointly commercialize the resulting intellectual property and expect
to form partnership programs for downstream product development. This
agreement is in effect until termination by either party.
Hitachi Ltd.
In December 2000 we entered into an alliance with Hitachi, Ltd. to
distribute MassARRAY systems and provide genotyping services in Japan.
Hitachi's subsidiary Nissei Sangyo Co. Ltd. will become the exclusive
distributor of MassARRAY systems and consumables in the Japanese market. In
addition, Hitachi's Life Science
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Group is establishing a high throughput genotyping facility using MassARRAY
technology and our automated assay design bioinformatics.
Integrated DNA Technologies, Inc. (IDT)
In August 2000, we entered into an agreement with IDT under which we
purchase oligonnucleotides at a discount and secures a dedicated and reliable
source for both us and our customers. In connection with this agreement, we
sold IDT two MassARRAY systems that are used for ultra high throughput Quality
Control method for IDT's high volume oligonucleotide production process.
Dr. Franz Hillenkamp
In January 1999 we entered into a license agreement with Dr. Franz
Hillenkamp, a member of our scientific advisory board, under which Dr.
Hillenkamp granted us licenses to specified present and future patents in
exchange for royalty payments. We agreed to refund all of Dr. Hillenkamp's
expenses that he had incurred or will incur in connection with applying for,
maintaining and defending the licensed patents. This agreement terminates at
the end of the tenth calendar year after the first calendar year for which
licenses are paid.
Bruker-Franzen Analytik GmbH
In November 1997 we entered into a collaboration agreement with Bruker-
Franzen Analytik GmbH under which we cooperate in the manufacture, marketing
and customer service of a product designed for the exclusive processing of our
SpectroCHIPs under a joint Bruker-Franzen-Sequenom label. Under the agreement,
Bruker-Franzen designs, manufactures and supplies the product to the market.
We provide nucleic acid analysis services to customers and to corporate
partners using our MassARRAY system and develop, manufacture and market
SpectroCHIPs for various applications. Either party may terminate this
agreement upon 12 months' notice.
Research and Development
We believe that substantial investment in research and development is
essential to obtaining a long-term competitive position as a leading provider
of genotyping and assay design services. Our basic research efforts are
focused on expanding the applications of our MassARRAY technology, developing
related new technologies and expanding our SNP assay portfolio. During 2000,
our research and development resources were focused primarily on the research
activities associated with strategic collaborative agreements, such as our
agreement with Incyte, validation of products under development, and potential
improvements to our existing products. Our research and development expenses
for the years ended December 31, 2000, 1999 and 1998, were $19.2 million,
$10.3 million and $6.2 million, respectively.
Government Regulation
Our research and development activities involve the controlled use of
hazardous materials and chemicals. As a result, we are subject to federal,
state and local laws and regulations governing the use, storage, handling and
disposal of such materials and chemicals, as well as certain waste products.
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by us or our corporate partners,
collaborators or licensees. At the present time, we do not intend to develop
any pharmaceutical products ourselves. Our collaborative agreements provide
for the payment to us of royalties, or revenue sharing, on any pharmaceutical
products developed by our collaborators derived from use of our proprietary
technologies or information. Thus, the receipt and timing of regulatory
approvals for the marketing of such products may have a significant effect on
our future revenues. Pharmaceutical products developed by licensees will
require regulatory approval by governmental agencies prior to
commercialization. In particular, human pharmaceutical therapeutic products
are subject to rigorous testing and other approval procedures by the United
States Food and Drug
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Administration in the United States and similar health authorities in foreign
countries. Various federal and state statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of such pharmaceutical products. Obtaining these approvals and the
subsequent compliance with these regulations require the expenditure of
substantial resources over a significant period of time, and there can be no
assurance that any approvals will be granted on a timely basis, if at all. Any
such delay in obtaining or failure to obtain such approvals could adversely
affect our ability to earn royalties or other license-based fees, or share
revenues. Current governmental regulations may change as a result of future
legislation or administrative action and cannot be predicted.
Scientific Advisory Board
We have established a scientific advisory board made up of leading scholars
in the field of mass spectrometry, molecular medicine, proteonomics and
molecular microbiology. Members of our scientific advisory board consult with
us on matters relating to the development of our products described elsewhere
in this Annual Report on Form 10-K. Members of our Scientific Advisory Board
are reimbursed for the reasonable expenses of attending meetings of the
scientific advisory board. Some of the members may also receive options to
purchase shares of our common stock. The members of the scientific advisory
board are as follows:
Advisor Institution
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Charles R. Cantor, PhD,
Chairman SEQUENOM, Inc.
Robert Cotter, PhD Johns Hopkins University School of Medicine
Lindsay Farrer, PhD Boston University School of Medicine
Catherine Fenselau, PhD University of Maryland
Chris Sander, PhD Whitehead Institute, MIT Center for Genome Research
Ulf Goebel, PhD Charite University Clinic, Berlin, Germany
Franz Hillenkamp, PhD University of Munster, Germany
R. Sanders Williams,
M.D. UT Southwestern Medical Center
Ulf Landegren, PhD Rudbeck Laboratory, Sweden
Peter Roepstorff, PhD University of Odense, Denmark
Charlie Sing, PhD University of Michigan
Employees
As of February 28, 2001, we employed 198 persons, of whom 53 hold PhD or MD
degrees and 21 hold other advanced degrees. Approximately 110 employees are
engaged in research and development, 39 in business development, customer
support and sales and marketing, 12 in manufacturing and 37 in intellectual
property, finance and other administrative functions. None of our employees
are covered by a collective bargaining agreement. Our success will depend in
large part upon our ability to attract and retain employees. We face
competition in this regard from other companies, research and academic
institutions, government entities and other organizations. We believe that we
maintain good relations with our employees.
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RISKS AND UNCERTAINTIES
The following is a summary of the many risks and uncertainties we face in
our business. You should carefully read these risks and uncertainties as well
as the other information in this Annual Report on Form 10-K in evaluating our
business and our prospects.
We have a limited operating history.
We are a relatively new company, and for the most part, our technologies
are still in the early stages of development. We commercially launched our
first product, the MassARRAY system, in December 1999. 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 further developing
our technology and commercializing our products and services;
. develop a market for our products and services; and
. attract and retain qualified management, sales, technical and scientific
staff.
Our operations may also 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.
We have a history of operating losses, expect to incur future losses and
cannot be certain that we will become profitable.
We have experienced significant operating losses in each period since
inception, and we expect these losses to continue. It is uncertain when, if
ever, we will become profitable. As of December 31, 2000, our accumulated
deficit was $76.4 million. Our losses have resulted principally from costs
incurred in research and development and from selling, general and
administrative costs associated with our operations. These costs have exceeded
revenues and interest income in each period since inception. We have generated
revenues principally from MassARRAY system and disposable sales and government
research grants. We expect to incur increasing operating losses as a result of
expenses associated with production, marketing and sales, research and product
development and selling, general and administrative costs.
Our operating results may fluctuate significantly.
Our revenues and results of operations may fluctuate significantly,
depending on a variety of factors, including the following:
. our success in selling, and changes in the demand for, our products and
services;
. variations in the timing of payments from customers and collaborative
partners and the recognition of these payments as revenues;
. the pricing of our products and services;
. the timing of any new product or service offerings;
. changes in the research and development budgets of our customers and
partners;
. the introduction of new products and services by our competitors;
. changes in the regulatory environment affecting health care and health
care providers;
. expenses related to, and the results of, any litigation or other
proceedings relating to intellectual property rights;
. the cost and timing of our adoption of new technologies; and
. the cost, quality and availability of oligonucleotides, tissue samples,
reagents and related components and technologies.
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In particular, our revenues and operating results are unpredictable because
the sales cycle for our MassARRAY and service products is lengthy. Our
revenues and operating results depend, in part, primarily on the number and
timing of MassARRAY system placements that we make during the quarter and the
duration of revenue generating license agreements and collaborative programs
with partners. We expect to recognize a substantial portion of our quarterly
revenues in the last month of a quarter, with a concentration of these
revenues in the last weeks or days of the third month. Our expense levels are
relatively fixed in the short term and are based, in part, on our expectations
of our future revenues. Any delay in generating or recognizing revenues could
cause significant variations in our operating results from quarter to quarter
and could result in increased operating losses.
We believe that period-to-period comparisons of our financial results will
not necessarily be meaningful. You should not rely on these comparisons as an
indication of our future performance. If our operating results in any future
period fall below the expectations of securities analysts and investors, our
stock price will likely fall.
A reduction in revenues from sales of MassARRAY systems would harm our
business.
A decline in the demand for MassARRAY Systems would reduce our total
revenues and harm our business. We expect that the MassARRAY system will
continue to account for a substantial portion of our total revenues for the
foreseeable future. The following factors may reduce the demand for MassARRAY
systems:
. competition from other products;
. failure of SNPs to demonstrate medical relevance;
. negative publicity or evaluation; or
. intellectual property claims or litigation.
If we are unable to obtain additional funds, we would have to reduce or cease
operations, attempt to sell some or all of our operations or merge with
another entity.
Based on our current plans, we believe our existing cash, cash equivalents
and short-term investments, together with the net proceeds of this offering,
will be sufficient to fund our operating expenses, debt obligations and
capital requirements through at least the next 12 months. However, the actual
amount of funds that we will need during or after the next 12 months will be
determined by many factors, some of which are beyond our control, and we may
need funds sooner than currently anticipated. These factors include:
. the level of our success in selling our MassARRAY systems, consumables,
assays and services;
. the level of our sales and marketing expenses;
. the extent to which we enter into collaborations or joint ventures;
. our progress with research and development;
. our ability to introduce and sell new products and services;
. the costs and timing of obtaining new patent rights;
. the extent to which we acquire technologies or companies;
. regulatory changes and competition and technological developments in the
market; and
. the level of our expenses associated with litigation.
If we require additional funds and we are unable to obtain them on terms
favorable to us, we may be required to cease or reduce further
commercialization of our products and services, sell some or all of our
technology or assets or merge with another entity. If we raise additional
funds by selling additional shares of our capital stock, the ownership
interest of our stockholders will be diluted.
9
We may not be able to successfully adapt our products for commercial
applications.
A number of potential applications of our MassARRAY technology 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, expand databases for determining the medical
importance of SNPs and rapidly design assays for SNP analysis in sufficient
quantities 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 of our products 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 and services
into the marketplace.
We may not be able to expand our business to offer services to our customers.
We are currently planning on expanding our business to run multiple assays
and validate SNPs at our facilities for some of our customers. To do this, we
recently leased additional facilities, and will need to purchase equipment and
hire additional personnel. If we are unable to successfully implement or
manage an expanded business, or are delayed in doing so, our relationships
with our customers may be harmed.
We and our collaborative partners may not be successful in developing or
commercializing therapeutic, diagnostic or other products using our products
or services.
Development of therapeutic, diagnostic and other products based on our
discoveries and/or our collaborative partners' discoveries will also be
subject to other risks of failure inherent in their development or commercial
viability. These risks include the possibility that any such products will:
. fail to receive necessary regulatory approvals;
. fail to be developed prior to the successful marketing of similar
products by competitors;
. be found to be ineffective;
. be difficult or impossible to manufacture on a commercial scale;
. be uneconomical to market;
. be found to be toxic; or
. be impossible to market because they infringe on the proprietary rights
of third parties or compete with products marketed by third parties that
are superior.
If a partner or we discover therapeutic, diagnostic or other products using
our products or services, we may rely on that partner for product development,
regulatory approval, manufacturing and marketing of those products before we
can realize some of the milestone payments, royalties and other payments we
may be entitled to under the terms of our collaboration agreements. Our
collaboration agreements typically allow the partner significant discretion in
electing whether to pursue any of these activities. We cannot control the
amount and timing of resources our collaborators may devote to our programs or
potential products. As a result, we cannot be certain that our collaborators
will choose to develop or commercialize any products or will be successful in
doing so. In addition, if a collaborator is involved in a business
combination, such as a merger or acquisition or changes its business focus,
its performance in its agreement with us may suffer and, as a result, we may
not generate any revenues from the royalty, milestone and similar payment
provisions of our agreement with that collaborator.
10
We may not successfully develop or derive revenues from our genotyping and
gene discovery programs.
Our genotyping and gene discovery programs are still in the early stages of
development and may not result in marketable products. We are directing our
technology and development focus primarily toward identifying genes that are
believed to be responsible for, or indicate the presence of, certain diseases.
We have only identified a limited number of specific candidate genes under our
research programs and have not yet validated any disease genes. Our
technologies and approach to gene discovery may not enable us to successfully
identify the specific genes that cause or predispose individuals to the
complex diseases that are the targets of our efforts to identify genetic
variations that have medical utility. In addition, the diseases we are
targeting are generally believed to be caused by a number of genetic and
environmental factors. It may not be possible to address such diseases through
gene-based therapeutic or diagnostic products. Accordingly, even if we are
successful in identifying specific genes, our discoveries may not lead to the
development of commercial products.
If the medical relevance of SNPs becomes questionable, we may have less demand
for our products and services.
Some of the products we hope to develop involve new and unproven
approaches. They are based on the assumption that information about genes may
help scientists better understand complex disease processes. Scientists
generally have a limited understanding of the role of genes in diseases, and
few products based on gene discoveries have been developed. 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 and services will be reduced and our business is
likely to be harmed.
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 to those
assays. If we are unable to obtain rights to those assays, our revenue and
profitability could be reduced. To date, we have initiated limited activities
towards 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 depend on sales of SpectroCHIPs and other disposables for a significant
portion of our revenues.
Sales of SpectroCHIPs and other disposables will become an increasingly
important source of revenue. Factors which may limit the use of SpectroCHIPs
and other disposables include: additional sales of MassARRAY systems, the
acceptance of our technology by our customers, the extent of our customers'
level of utilization of their MassARRAY systems, and the training of customer
personnel. If our customers do not purchase sufficient quantities of
SpectroCHIPs and other disposables, our revenues will be lower than expected.
Our system and related disposable sales may be limited if our MassARRAY system
is used below its capacity.
The ramp-up rate of genotyping by customers could be less than originally
projected by those customers. Sample preparation, the extraction of DNA from
biological material, is time consuming. Assay design can also be time
consuming if a customer chooses not to use our service or products for
automated assay design. These items and other unforeseeable items may result
in MassARRAY system customers not being able to use our system to its full
capacity. In addition, customers may not purchase sufficient quantities of
disposables for us to become profitable.
11
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 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 which contributes to the length of
our sales cycle. We may expend substantial funds and management effort with no
assurance that we will successfully sell our products or services.
If our customers are unable to adequately prepare samples as required by our
MassARRAY 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.
We have limited commercial production capability and experience and may
encounter production problems or delays, which could result in lower revenue.
We assemble the MassARRAY system and manufacture the SpectroCHIP and
MassARRAY kit. To date, we have only produced these products in limited
quantities. Our customers require that we comply with current good
manufacturing practices that we may not be able to meet. We may not be able to
maintain acceptable quality standards as we ramp up production. To achieve
anticipated customer demand levels, we will need to scale-up our production
capability and maintain adequate levels of inventory. We may not be able to
produce 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. This reliance
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.
If ethical, privacy or other concerns surrounding the use of genetic
information become widespread, we may have less demand for our products and
services.
Our customers use our products and services for genetic testing. Genetic
testing has raised ethical issues regarding privacy 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. Similarly, such concerns may lead individuals
to refuse to use genetics tests even if permissible. Any of these scenarios
could reduce the potential markets for our products and services, 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 components and materials used in our
products.
We rely on outside vendors to supply the components and materials used in
our products. Some of these components and materials are obtained from a
single supplier or a limited group of suppliers. We have experienced quality
problems with, and delays in receiving, oligonucleotides, which are necessary
materials used
12
in connection with the operation of the MassARRAY system. 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 and
materials due to capacity constraints, a discontinuance of a product by
a supplier or other supply constraints;
. reduced control over quality and pricing of components and materials;
and
. delays and long lead times in receiving components or materials from
vendors.
If our access to necessary tissue samples or information is restricted, we
will not be able to continue to develop our business.
We need access to normal and diseased human tissue samples, other
biological materials and related clinical and other information to continue to
develop our products and services. We compete with many other companies for
these materials and information. We may not be able to obtain or maintain
access to these materials and information. In addition, government regulation
in the United States and foreign countries could result in restricted access
to, or use of, human and other tissue samples. If we lose access to sufficient
numbers or sources of tissue samples, or if tighter restrictions are imposed
on our use of the information generated from tissue samples, our business will
suffer.
We may not successfully integrate future acquisitions.
In the future, we may acquire additional complementary companies or
technologies. Managing these acquisitions will entail numerous operational and
financial risks, 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.
Our industry is highly competitive and we may not have the resources required
to successfully compete.
The biotechnology industry is highly competitive. We compete with a broad
range of companies in the United States and abroad that are engaged in the
development and production of products, services and strategies to analyze
genetic information. They include:
. biotechnology, pharmaceutical, chemical and other companies;
. academic and scientific institutions;
. governmental agencies; and
. public and private research organizations.
13
Many of our competitors have much greater financial, technical, research,
marketing, sales, distribution, service and other resources than we do.
Moreover, our competitors may offer broader product lines, services and have
greater name recognition than we do, and may offer discounts as a competitive
tactic. In addition, several early stage companies are currently making or
developing products that compete with or will compete with our products. Our
competitors may develop or market technologies or products that are more
effective or commercially attractive than our current or future products, or
that may render our technologies and products obsolete. We may also compete
against some of our customers, which may adversely affect our relationships
with them.
We are highly dependent on our Board of Directors and principal members of our
management and scientific staff, the loss of whom would impair our ability to
compete.
The loss of the services of any of these persons could delay or reduce our
product development and commercialization efforts. In addition, we will
require additional personnel in the areas of scientific research, diagnostic
testing, manufacturing and marketing. We may not be able to attract and retain
qualified personnel at the Board of Directors level or any management level,
which could seriously harm our business, financial condition and results of
operations.
We have a small number of sales and customer support personnel with limited
experience in selling and servicing our products.
Our sales force may not be sufficiently large or knowledgeable to
successfully penetrate the market. We may not be able to expand our sales
force to meet our commercial objectives. In addition, our sales and customer
support personnel 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.
Our ability to compete in the market may decline if we lose some of our
intellectual property rights due to lawsuits to protect or enforce our
patents.
Our success will depend on our ability to obtain and protect patents on our
technology and to protect our trade secrets. Our patents, which have been or
may be issued, may not afford meaningful protection for our technology and
products. Others may challenge our patents and, as a result, our patents could
be narrowed, invalidated or unenforceable. In addition, our current and future
patent applications may not result in the issue of patents in the United
States or foreign countries. Competitors may develop products similar to ours
that do not conflict with our patents. In addition, others may develop
products for use in the MassARRAY system in violation of our patents that
could reduce sales of disposables. In order to protect or enforce our patent
rights, we may initiate interference proceedings, oppositions, or patent
litigation against third parties, such as infringement suits. These lawsuits
could be expensive, take significant time and divert management's attention
from other business concerns. The patent position of biotechnology firms
generally is highly uncertain, involves complex legal and factual questions,
and has recently been the subject of much litigation. No consistent policy has
emerged from the U.S. Patent and Trademark Office or the courts regarding the
breadth of claims allowed or the degree of protection afforded under
biotechnology patents. In addition, there is a substantial backlog of
biotechnology patent applications at the U.S. Patent and Trademark Office, and
the approval or rejection of patent applications may take several years.
The rights we rely upon to protect the intellectual property underlying our
products may not be adequate, which could enable third parties to use our
technology and would reduce our ability to compete in the market.
We require our employees, consultants and advisors to execute
confidentiality agreements. However, we cannot guarantee that these agreements
will provide us with adequate protection against improper use or disclosure of
confidential information. In addition, in some situations, these agreements
may conflict with, or be
14
subject to, the rights of third parties with whom our employees, consultants
or advisors have prior employment or consulting relationships. Further, others
may independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to our trade secrets.
Our success will depend partly on our ability to operate without infringing on
or misappropriating the proprietary rights of others.
We may be sued for infringing on the patent rights of others. Intellectual
property litigation is costly, and, even if we prevail, the cost of such
litigation could adversely affect our business, financial condition and
results of operations. In addition, litigation is time consuming and could
divert management attention and resources away from our business. If we do not
prevail in any litigation, in addition to any damages we might have to pay, we
could be required to stop the infringing activity or obtain a license. Any
required license may not be available to us on acceptable terms, or at all. In
addition, some licenses may be non-exclusive, and therefore, our competitors
may have access to the same technology licensed to us. If we fail to obtain a
required license or are unable to design around a patent, we may be unable to
sell some of our products, which could have a material adverse affect on our
business, financial condition and results of operations. From time to time, we
receive letters from companies regarding their issued patents and patent
applications alleging or suggesting possible infringement.
We may be unable to obtain licenses to patented SNPs, which could prevent us
from obtaining significant revenue or becoming profitable.
The U.S. Patent and Trademark Office has issued and continues to issue
patents claiming SNP discoveries and their related associations and functions.
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.
Because our products currently depend on components licensed or supplied from
third parties, our breach of any of the terms of these licenses or supply
agreements could result in our loss of access to these components and could
delay or suspend our commercialization efforts.
We have acquired or licensed components of our technology from third
parties. Our failure to maintain the right to use these components could
seriously harm our business, financial condition and results of operations. In
addition, changes to or termination of our agreements with these third parties
could result in the loss of access to these aspects of our technology and
could delay or suspend our commercialization efforts.
Our grants from the government give the government certain license rights
to inventions resulting from funded work in the event that we fail to
commercialize the technology developed using government funds. Our business
could be harmed if the government exercises those rights.
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, 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.
15
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;
. the burden of complying with a wide variety of complex foreign laws and
treaties; and
. different rules, regulations, and policies governing intellectual
property protection and enforcement.
Our international operations are 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 U.S. dollars.
A significant portion of our business is expected to be conducted in
currencies other than the U.S. dollar. We recognize foreign currency gains or
losses arising from our operations in the period incurred. As a result,
currency fluctuations between the U.S. 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 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.
Our revenues are derived primarily from, and are subject to risks faced by,
pharmaceutical and biotechnology companies and governmental and others
research institutions.
We expect that our revenues in the foreseeable future will be derived
primarily from products and services provided to pharmaceutical and
biotechnology companies and governmental and other research institutions.
Accordingly, our success will depend upon their demand for our products. Our
operating results may fluctuate substantially due to reductions and delays in
research and development expenditures by these customers. These reductions and
delays may result from factors such as:
. changes in economic conditions;
. changes in government programs that provide funding;
. changes in the regulatory environment affecting health care and health
care providers;
16
. pricing pressures and reimbursement policies;
. market-driven pressures on companies to consolidate and reduce costs;
and
. other factors affecting research and development spending.
None of these factors is within our control.
We may not have adequate insurance and if we become subject to product
liability claims, we may experience reduced demand for our products and
services 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 production and laboratory facilities are damaged, we could experience
lost revenue and our business would be seriously harmed.
Our only production 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 result in a
loss of important data or cause us to cease development and production 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 personnel, 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 and a laboratory information management
system 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.
Our stock price could be volatile and your investment could suffer a decline
in value.
The trading price of our common stock has been volatile and could be
subject to wide fluctuations in price in response to various factors, many of
which are beyond our control, including:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations by us or our competitors;
. announcements related to patent and other intellectual property
developments;
17
. new products or services introduced or announced by us or our
competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the biotechnology, pharmaceutical and genomics
industries;
. changes in the market valuations of other similar companies;
. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel; and
. sales of our common stock.
In addition, the stock market in general, and the Nasdaq National Market
and the market for technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. Further,
there has been particular volatility in the market prices of securities of
biotechnology and life sciences companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been instituted against that company. Such litigation, if instituted
against us, could result in substantial costs and a diversion of management's
attention and resources, which could seriously harm our business, financial
condition and results of operations.
Anti-takeover provisions in our charter documents and Delaware law could make
a third-party acquisition of us difficult. This could limit the price
investors might be willing to pay in the future for our common stock.
The anti-takeover provisions in our certificate of incorporation, our
bylaws and Delaware law could make it more difficult for a third party to
acquire us without approval of our board of directors. As a result of these
provisions, we could delay, deter or prevent a takeover attempt or third party
acquisition that our stockholders consider to be in their best interests,
including a takeover attempt that results in a premium over the market price
for the shares held by our stockholders.
Item 2. Properties
We are headquartered in San Diego with a wholly-owned subsidiary in
Hamburg, Germany and an office in Sudbury, Massachusetts. Collectively we
lease approximately 154,000 square feet of space in five buildings under
leases that expire from November 2001 to March 2014. Three buildings totaling
approximately 134,000 square feet are located in San Diego, California, and
house our selling, general and administrative offices, research and
development facilities and manufacturing operations. We lease a 15,000 square
foot facility in Hamburg, Germany to support sales and distribution in Europe
and an approximately 5,500 square foot facility in Sudbury, Massachusetts to
support sales and customer support on the East Coast of the United States. We
believe these facilities are adequate for our current needs and that suitable
additional or alternative space will be available in the future on
commercially reasonable terms as needed.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) The Company's common stock is traded in the over-the-counter market on
the Nasdaq National Market (the "NNM") under the symbol "SQNM". The following
tables set forth the high and low sale prices, for the Company's common stock
as reported on the NNM for the period indicated commencing on January 31,
2000, the date the initial public offering price was determined.
High Low
------- ------
First Quarter, commencing on January 31, 2000 through
March 31, 2000.......................................... $191.25 $26.00
Second Quarter........................................... 52.56 17.00
Third Quarter............................................ 50.00 24.00
Fourth Quarter........................................... 45.50 12.13
There were approximately 162 holders of record of our common stock as of
December 31, 2000. The Company has not paid any cash dividends to date and
does not anticipate any being paid in the foreseeable future.
(b) On January 31, 2000, the Company's Form S-1 registration statement
(File No. 333-91665) was declared effective by the Securities and Exchange
Commission. The registration statement, as amended, covered the offering of
5,250,000 shares of common stock. The offering commenced on January 31, 2000
and the sale to the public of shares of common stock at $26.00 per share was
completed on February 3, 2000 for an aggregate price of approximately $136.5
million. The registration statement covered an additional 787,500 shares of
common stock that the underwriters had the option to purchase solely to cover
over-allotments. These shares were purchased on February 2, 2000 at $26.00 per
share for an aggregate price of approximately $20.5 million. The managing
underwriters for the offering were Warburg Dillon Read LLC, FleetBoston
Robertson Stephens Inc. and SG Cowen Securities Corporation. Expenses incurred
through December 31, 2000 in connection with the issuance and distribution of
common stock in the offering included underwriting discounts, commissions and
allowances of approximately $11.0 million and other expenses of approximately
$1.9 million. Total offering expenses of approximately $12.9 million resulted
in net offering proceeds to the Company of approximately $144.1 million. No
payments or expenses were paid to directors, officers or affiliates of the
Company or 10% owners of any class of equity securities of the Company. Of the
net offering proceeds, through December 31, 2000, approximately $3.6 million
has been used to payoff long-term and other debt, approximately $5.8 million
to purchase equipment and improve leaseholds and approximately $29.0 million
for general corporate purposes, including hiring additional personnel,
development and manufacturing of products, expansion of facilities and
expenses for filing and pursing patent applications. The balance is invested
in a variety of interest-bearing instruments including investment-grade
corporate bonds, commercial paper and money market accounts.
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes to such
statements and "Management's discussion and analysis of financial condition
and results of operations" included elsewhere in this Annual Report on Form
10-K. The consolidated statement of operations data for the years ended
December 31, 2000, 1999 and 1998 and the consolidated balance sheet data at
December 31, 2000 and 1999, are derived from our consolidated financial
statements, which have been audited by Ernst & Young LLP, independent
auditors, and are included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of operations data for the years ended December 31,
1997 and 1996 and the consolidated balance sheet data at December 31, 1998,
1997 and 1996 are derived from audited consolidated financial statements not
included in this Form 10-K. Historical results are not necessarily indicative
of the results to be expected in the future.
19
The pro forma net loss per share is calculated as if our convertible
preferred stock and 4.0 million German deutsche mark long-term debt owed to a
German government agency as of January 31, 2000, both of which converted into
common stock upon the closing of our initial public offering in February 2000,
were converted into shares of our common stock on the date of their issuance.
Years ended December 31,
----------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(In thousands, except per share data)
Consolidated statements of
operations data
Revenues:
Product...................... $ 8,253 $ -- $ -- $ -- $ --
Services..................... 1,447 -- -- -- --
Research and development
grants...................... 337 179 351 527 893
-------- -------- -------- ------- -------
Total revenues............. 10,037 179 351 527 893
Costs and expenses:
Cost of product revenue...... 5,844 -- -- -- --
Research and development..... 19,163 10,291 6,188 3,532 3,136
Selling, general and
administrative.............. 18,492 8,239 4,218 1,861 1,032
Amortization of deferred
stock compensation.......... 3,741 4,376 -- -- --
-------- -------- -------- ------- -------
Total costs and expenses... 47,240 22,906 10,406 5,393 4,168
-------- -------- -------- ------- -------
Loss from operations........... (37,203) (22,727) (10,055) (4,866) (3,275)
Other income (expense):
Interest income.............. 8,925 1,578 397 57 73
Interest expense............. (4,683) (790) (613) (308) (275)
Other income, net............ 75 169 -- -- --
-------- -------- -------- ------- -------
Net loss................... $(32,886) $(21,770) $(10,271) $(5,117) $(3,477)
======== ======== ======== ======= =======
Net loss per share, basic and
diluted....................... $ (1.46) $ (26.23) $ (33.33) $(22.62) $(23.45)
Shares used in computing net
loss per share, basic and
diluted....................... 22,454 830 308 226 148
Pro forma net loss per share,
basic and diluted(1).......... $ (1.39)
Shares used in computing pro
forma net loss per share,
basic and diluted(1).......... 23,711
As of December 31,
---------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------ ------
Consolidated balance sheet data
Cash, cash equivalents and short-term
investments......................... $138,424 $21,616 $28,497 $ 833 $1,326
Working capital...................... 134,519 18,518 26,014 (125) 820
Total assets......................... 166,262 29,753 32,777 2,273 2,714
Total long-term obligations.......... 1,827 7,326 7,408 3,772 2,872
Total stockholders' equity
(deficit)........................... 144,939 17,539 22,635 (2,747) (1,206)
- --------
(1) Computed on the basis described in Note 2 of Notes to Consolidated
Financial Statements.
20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this Annual Report on Form 10-
K. This discussion may contain forward-looking statements that involve risks
and uncertainties. As a result of many factors, such as those set forth under
"Risk and Uncertainties" and elsewhere in this Form 10-K, our actual results
may differ materially from those anticipated in these forward-looking
statements.
We are a genomics company that translates information generated from the
map of the human genome into useful applications. We offer a comprehensive
genotyping technology to determine the medical relevance of genetic
variations, called SNPs or single nucleotide polymorphisms. Since we began
operations in 1994, we have devoted substantially all of our resources to the
development and application of products, technologies and services to analyze
SNPs, and, more recently, to determine their association to disease. Our
products include the MassARRAY system for large-scale scoring of SNPs,
disposable MassARRAY kits consisting of our proprietary SpectroCHIP and
reagents, a SNP assay portfolio and an allele frequency database. Our services
include assay design for MassARRAY customers, in-house validation projects
using our MassARRAY system and disease association studies using our
proprietary population-based DNA bank. We are also using the MassARRAY
technology to identify the medical utility of SNPs and develop SNP panels
based on correlation to specific diseases on our own and in collaboration with
others.
We sold our first product, the MassARRAY system, in January 2000. Through
December 31, 2000, we have commercially placed a total of 22 systems with
leading companies and institutions. We currently sell our products to
genomics, pharmacogenomics, diagnostic and agricultural biotechnology
companies, as well as leading research institutions, in the United States,
Europe and Asia. Through December 31, 2000, our product revenues consisted of
revenues from both the sale of MassARRAY systems and the sale of MassARRAY
kits. MassARRAY kits are used in the operation of the MassARRAY system. Our
service revenues consisted of SNP validation services, with revenue recognized
as phases of the projects were completed. We anticipate that revenues from our
collaborations with third parties will become an increasingly important
component of our service revenues in the future. Prior to January 1, 2000, our
revenues had been solely from research grants.
Since our inception, we have incurred significant losses. As of December
31, 2000, we had an accumulated deficit of $76.4 million. Prior to January 1,
2000, our expenses consisted primarily of costs incurred in research and
development, production scale-up, business development and from general and
administrative costs associated with our operations. With our first commercial
revenues, we began incurring cost of product revenues and significantly
increased our sales and marketing expenses. Cost of product revenues includes
the materials, labor and overhead expenses related to the production of and
assembly of our products. We expect to incur losses for the foreseeable
future, and expect all expenses to increase, as we expand development and
commercialization of new information-based products, establish a high
throughput genotyping center, and fully implement our SNP validation business
strategies. Our planned move from our current facilities in San Diego to
expanded facilities in San Diego in March 2001 will also add to our expenses,
as the cost of exiting the current building will approximate $1.0 million and
will be expensed during 2001.
21
Results of Operations
Years ended December 31, 2000, 1999 and 1998
Revenues
Total revenues increased to approximately $10.0 million in 2000, from
approximately $179,000 in 1999 and approximately $351,000 in 1998. All
revenues in the years prior to 2000 resulted from research and development
grants. Product revenues were $8.3 million for the year ended December 31,
2000. These revenues were derived from the sale of MassARRAY systems and
disposable kits containing our proprietary SpectroCHIP. During the year 2000,
we sold 22 of our MassARRAY systems and sold our disposables to those that
used our system. Service revenues were approximately $1.5 million for the year
ended December 31, 2000. These service revenues consisted of completion of
significant phases in SNP validation projects.
Research and development expenses
Research and development expenses increased to $19.2 million in 2000 from
$10.3 million in 1999 and $6.2 million in 1998. These expenses consist
primarily of salaries and related personnel costs, materials costs and costs
related to improvements of our existing products and validation of products
under development. During 2000, our research and development resources were
focused primarily on the research activities associated with strategic
collaborative agreements, such as our agreement with Incyte, validation of
products under development, and potential improvements to our existing
products. The $8.9 million increase from 1999 to 2000 consisted of
approximately $4.0 million in materials and other costs related to research
and development of products and services and collaborative agreements,
approximately $3.6 million from increased personnel expenses associated with
additional research and development personnel and a $1.3 million charge
related to forgiveness of loans granted to research and development executives
in connection with the exercise of stock options. The $4.1 million increase
from 1998 to 1999 resulted from the expansion of our research and development
efforts and was comprised of a $2.3 million increase in salaries and related
personnel costs, additional material costs of $1.2 million and approximately
$600,000 of additional costs directly related to the scale-up of manufacturing
for our SpectoCHIPs.
Selling, general and administrative expenses
Selling, general and administrative expenses increased to $18.5 million in
2000 from $8.2 million in 1999 and $4.2 million in 1998. These expenses
consist primarily of salaries and related costs for executive, sales and
marketing, and other administrative personnel, general and patent related
legal expenses, and business development, customer support and sales and
marketing expenses. Approximately $4.2 million of the $10.3 million increase
from 1999 to 2000 resulted from charges related to the February 2000
forgiveness of loans granted to executives in 1999 in connection with the
exercise of stock options, the transition of Dr. Koster from President and
Chief Executive Officer to Vice Chairman of the Board of Directors in the
second quarter of 2000, and Dr. Koster's resignation from the Board of
Directors in the fourth quarter of 2000. The remaining increase consisted of
approximately $4.5 million from the expansion of our sales, marketing,
business development and customer support teams to support the
commercialization of our products, approximately $1.2 million in additional
expenses associated with our expanded facilities and other general expenses
related to the overall expansion of our operations, and approximately $400,000
in additional insurance and general legal costs as a result of becoming a
publicly traded company. The $4.0 million increase from 1998 to 1999 consisted
of $1.3 million for salaries and related personnel costs for additional
administrative personnel, approximately $800,000 from expenses related to the
increase in filing and pursuing patent applications, and $1.9 million
attributable to general expenses associated with the overall expansion of our
operations.
Amortization of deferred stock-based 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 year ended December 31, 2000, we recorded amortization of
deferred stock compensation totaling $3.8 million, compared to $4.4 million in
1999.
22
The 1999 amount included $1.6 million related to a remeasurement of options
originally granted to Dr. Koster in 1997. 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: $939,000 during 2001, $432,000 during 2002, and
$187,000 during 2003.
Interest income
Interest income increased to approximately $8.9 million in 2000 from
approximately $1.6 million in 1999, and approximately $397,000 in 1998. The
increase from 1999 to 2000 resulted from higher average balances of cash and
cash equivalents and short-term investments in 2000, from the investment of
our February 2000 IPO proceeds of approximately $144.1 million. The increase
from 1998 to 1999 resulted from higher average balances of cash and cash
equivalents and short-term investments in 1999 from the investment of the
proceeds from the sale of Series D convertible preferred stock in December
1998 and the first quarter of 1999.
Interest expense
Interest expense increased to approximately $4.7 million in 2000, from
approximately $790,000 in 1999, and from approximately $613,000 in 1998. The
$4.7 million is comprised of approximately $4.8 million of non-cash interest
expense recorded upon conversion of debt of $2.2 million (4.0 million German
deutsche marks exchanged at a rate of 1.84 deutsche marks per 1 US dollar)
into common stock and approximately $300,000 of interest related to capital
lease obligations, offset in part by approximately $400,000 of a non-cash gain
recorded upon issuance of common stock to extinguish long-term interest
payable. Interest expense increased from 1998 to 1999 due to higher average
borrowing under a capital lease arrangement.
Income taxes
As of December 31, 2000, we had federal and state net operating loss
carryforwards of approximately $60.1 million and $25.8 million, respectively.
We also have federal and state research and development tax credit
carryforwards of approximately $1.2 million and $894,000, respectively, and
German net operating loss carryforwards of approximately $9.8 million. The
research and development tax credit carryforwards will begin to expire in
2010, 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 (IPO) raising
net proceeds of approximately $144.1 million. Prior to our IPO, we funded our
operations with $55.6 million of private equity financings, $6.0 million in
loans and convertible loans and $2.2 million from equipment financing
arrangements. At December 31, 2000, cash, cash equivalents and short-term
investments totaled $138.4 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 year ended December 31, 2000 was $21.0
million compared with $14.7 million for the same period in 1999. A net loss of
$32.9 million in 2000 was partially offset by non-cash charges of $3.7 million
for amortization of deferred compensation, $3.7 million for depreciation and
amortization expense, $3.8 million of loan forgiveness, $1.0 million related
to remeasurment of stock options, and an increase of $19.8 million in
inventories, accounts receivable and other assets. Investing activities, other
than the changes in our short-term investments, consumed $5.8 million in cash
during 2000 due to expenditures for leasehold improvements and laboratory
equipment.
23
Cash provided by financing activities was $143.6 million for the year ended
December 31, 2000 compared to $12.6 million for the same period in 1999.
Financing activities included the receipt of net proceeds of $144.1 million
from the sale of common stock in our initial public offering during the year
ended December 31, 2000 and $11.8 million from the sale of preferred stock to
investors in the same period in 1999.
Working capital increased to $134.5 million at December 31, 2000 from $18.5
million at December 31, 1999. The increase in working capital was due to the
IPO net proceeds, partially offset by our use of cash in operations.
As of December 31, 2000, we had an aggregate of $2.0 million in future
obligations of principal payments under capital leases, of which $1.0 million
will 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 bank
debt in 2000.
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 12 months. However, the actual
amount of funds that we will need during or after the next 12 months will be
determined by many factors, some of which are beyond our control, and we may
need funds sooner than currently anticipated. These factors include:
. the level of our success in selling our MassARRAY systems, consumables,
assays and services;
. the level of our sales and marketing expenses;
. the extent to which we enter into collaborations or joint ventures;
. our ability to introduce and sell new products and services;
. the level of our expenses associated with litigation;
. the costs and timing of obtaining new patent rights;
. the extent to which we acquire technologies or companies; and
. regulatory changes and competition and technological developments in the
market.
We have a $25.0 million bank line of credit, all of which is available for
borrowing. In addition, we have established an $8.0 million capital equipment
financing agreement, $7.0 million of which was available for utilization at
December 31, 2000. We have no commitments for any additional financings. If
additional funds are required and we are unable to obtain them on terms
favorable to us, we may be required to cease or reduce further
commercialization of our products, to sell some or all of our technology or
assets or to merge with another entity. If we raise additional funds by
selling shares of our capital stock, the ownership interest of our
stockholders will be diluted.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Short-term investments
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest
in may have market risk. This means that a change in prevailing interest rates
may cause the fair value of the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate
later rises, the fair value of the principal amount of our investment will
probably decline. To minimize this risk in the future, we intend to maintain
our portfolio of cash equivalents and short-term investments in a variety of
securities, including commercial paper, money market funds, government and
non-government debt securities. The average duration of all of our investments
has generally been less than one year. Due to the short-term nature of these
investments, we believe we have no material exposure to interest rate risk
arising from our investments. Therefore, no quantitative tabular disclosure is
provided.
24
Long-term debt
Our long-term debt as of December 31, 1999 was denominated in German
deutsche marks. We converted approximately half of this debt into common stock
upon the closing of our initial public offering in February 2000, and repaid
the rest of this debt in cash from the proceeds of the initial public
offering. Increases in value of the German deutsche mark relative to the US
dollar before the conversion resulted in a translation loss of approximately
$200,000 through the date of the conversion and repayment.
Foreign currency rate fluctuations
The functional currency for our German subsidiary is the deutsche mark. The
German subsidiary's accounts are translated from the German deutsche mark to
the US dollar using the current exchange rate in effect at the balance sheet
date, for balance sheet accounts, and using the average exchange rate during
the period for revenues and expense accounts. The effects of translation are
recorded as a separate component of stockholders' equity. Our German
subsidiary conducts its business with customers in local European currencies.
Exchange gains and losses arising from these transactions are recorded using
the actual exchange differences on the date of the transaction. We have not
taken any action to reduce our exposure to changes in foreign currency
exchange rates, such as options or futures contracts, with respect to
transactions with our German subsidiaries or transactions with our European
customers. The net liabilities of our German subsidiary totaled $4.8 million
at December 31, 2000. A 1% decrease in the value of the German deutsche mark
relative to the US dollar would result in an approximately $23,000 unrealized
foreign translation loss.
Inflation
We do not believe that inflation has had a material adverse impact on our
business or operating results during the periods presented.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
changes the previous accounting definition of derivative--which focused on
freestanding contracts such as options and forwards, including futures and
swaps--expanding it to include embedded derivatives and many commodity
contracts. Under the statement, every derivative is recorded in the balance
sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivatives' fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. We
will adopt SFAS No. 133 effective January 1, 2001. We do not anticipate that
the adoption of SFAS No. 133 will have a material impact on our financial
position or results of operations, as we do not own or utilize derivative
instruments or engage in hedging activities.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. We believe our
revenue recognition has complied with SAB 101 since our inception.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation" ("FIN 44"). FIN 44 clarifies certain issues in the
application of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. FIN 44 became effective July 1, 2000, but certain
conclusions covered specific events that occured after either December 15,
1998 or January 12, 2000. Adoption of FIN 44 did not have a material impact on
the Company's financial statements.
25
Item 8. Financial Statements and Supplementary Data
Refer to the Index to the Financial Statements on Page F-l of the Financial
Report included herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
26
PART III
Certain information required by Part III is omitted from this report
because we will file a definitive proxy statement within 120 days after the
end of our fiscal year for our 2001 Annual Meeting of Stockholders to be held
on June 1, 2001 (the "Proxy Statement"), and the information included in the
Proxy Statement is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company, their positions with
the Company and ages as of December 31, 2000 are as follows:
Name Age Position
---- --- --------
Executive Officers &
Directors
Antonius Schuh, PhD..... 37 President, Chief Executive Officer and Director
Charles R. Cantor, PhD.. 58 Chief Scientific Officer and Director
Stephen L. Zaniboni..... 43 Senior Vice President and Chief Financial Officer
Delbert F. Foit, Jr..... 54 Chief Operating Officer
Andreas Braun, PhD, MD.. 45 Chief Medical Officer
Karsten Schmidt, PhD.... 39 Managing Director, SEQUENOM GmbH
Helmut Schuhsler,
PhD(1)(2).............. 40 Chairman of the Board of Directors
Ernst-Gunter Afting,
PhD, MD(2)............. 58 Director
John E. Lucas(1)(2)..... 69 Director
- --------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Antonius Schuh, PhD Dr. Schuh was appointed President, Chief Executive
Officer and a member of our board of directors in May 2000. Dr. Schuh joined
our German subsidiary as Managing Director in December 1996 and was promoted
to Executive Vice President, Business Development and Marketing, in 1998 when
he moved to our headquarters in San Diego, California. From 1993 until joining
us, Dr. Schuh was with Helm AG, an international pharma/chemical trading and
distribution corporation. While at Helm AG, he established and headed the
Pharma Business Development Group and the associated technical and regulatory
affairs department. Prior to that, from 1992 to 1993, he was with Fisons
Pharmaceuticals. Dr. Schuh earned his PhD in pharmaceutical chemistry from the
University of Bonn, in Germany.
Charles R. Cantor, PhD Dr. Cantor joined us as our Chief Scientific Officer
and Chairman of our scientific advisory board in August 1998. In May 2000, Dr.
Cantor was appointed to our board of directors. From 1992 until joining us,
Dr. Cantor served as the chair of, and as a professor in, the department of
biomedical engineering, and Director of the Center for Advanced Biotechnology,
at Boston University. Prior to that time, Dr. Cantor held positions at
Columbia University and the University of California, Berkeley. He was also
Director of the Human Genome Center of the Department of Energy at Lawrence
Berkeley Laboratory. Dr. Cantor published the first textbook on genomics: The
Science and Technology of the Human Genome Project and remains active in the
Human Genome Project through his membership in a number of the project's
advisory committees and review boards. He is a scientific advisor to 10
biotech and life science companies and two venture capital firms. He is also a
member of the National Academy of Sciences. Dr. Cantor earned his PhD from the
University of California, Berkeley.
Stephen L. Zaniboni Mr. Zaniboni joined us as our Senior Vice President and
Chief Financial Officer in April 1997. From 1994 until joining us, Mr.
Zaniboni served as Vice President, Finance for Aspect Medical Systems, Inc.
Prior to joining Aspect, Mr. Zaniboni was Corporate Controller for Behring
Diagnostics from 1988 to 1994 where he implemented financial systems during a
dramatic growth period. Before joining Behring, he held various financial
management positions at Boston Scientific Corp. Mr. Zaniboni began his career
with Arthur Andersen & Co. He earned his MBA from Boston College and he is a
Certified Public Accountant.
27
Delbert F. Foit, Jr. Mr. Foit joined us as our Chief Operating Officer in
March 1999. From 1996 until joining us, Mr. Foit served as Vice President of
North American Operations for the Laboratory Systems Division of Boehringer
Mannheim Inc. He also served in various other positions, beginning in 1992,
where he implemented a number of successful productivity initiatives first
with Microgenics then with Boehringer Mannheim's North American Laboratory
Systems. After the acquisition of Boehringer Mannheim by Hoffmann-La Roche,
Mr. Foit assumed overall responsibility for the combined Laboratory Systems
Operations of Roche and Boehringer in North America. Prior to his tenure with
Boehringer, Mr. Foit held positions as Director of Operations and Director of
Manufacturing for Ortho Diagnostics Systems, a Johnson and Johnson Company.
Mr. Foit earned his MBA from Rider University.
Andreas Braun, PhD, MD Dr. Braun joined us in 1995 and was promoted from
Vice President, Genomics to Chief Medical Officer in September 1999. From 1992
until joining us, Dr. Braun served as Deputy Head of the Clinical Laboratory
at the Childrens Hospital, University of Munich. Dr. Braun has published more
than 45 peer-reviewed scientific publications. His research work in functional
pharmacogenomics targeting the human bradykin receptor was recognized in 1996
with the Garbor Szasz Award which was granted by the German Society of
Clinical Chemistry. Dr. Braun earned doctorate degrees in biology and medical
science from the University of Munich.
Karsten Schmidt, PhD Dr. Schmidt joined our German subsidiary as Director,
Business Development in January 1999 and was appointed as Managing Director in
May of 1999. From 1996 until joining us, Dr. Schmidt served in a senior
management position at Rhone-Poulenc Rorer, Germany, where he was responsible
for all drug regulatory affairs for asthma and allergies. From 1994 to 1996,
Mr. Schmidt served as a manager in charge of regulatory affairs, for Fisons
Araneimittel, GmbH. As a member of the International Pharmaceutical Aerosol
Consortium, Dr. Schmidt was involved in the joint activities of five prominent
pharmaceutical companies in this field to develop inhaled asthma therapies
with ozone-friendly propellants. Dr. Schmidt is a trained pharmacist and has a
broad scientific background in biochemistry and molecular biology and is a
member of the board of directors for Bergen Group, Management Consultants AG.
Dr. Schmidt earned his PhD in pharmaceutical biology from the University of
Bonn.
Helmut Schuhsler, PhD Dr. Schuhsler joined us as the Chairman of our Board
of Directors in 1996. Since 1998, Dr. Schuhsler has served as a managing
partner at TVM Techno Venture Management, a German and U.S. venture capital
firm. He has been with TVM since 1990 and has been responsible for over 25
healthcare investments of the firm. He is currently a Director of several
biotechnology and instrumentation companies, including Medigene AG and GPC
Biotech. Dr. Schuhsler earned a PhD in the Social and Economic Sciences from
the University of Economics in Vienna.
Ernst-Gunter Afting, PhD, MD Dr. Afting joined us as a Director in 1996.
Since 1995, Dr. Afting has served as President of the National Research Center
for Environment and Health, GSF, a governmental science research center in
Munich. From 1993 to 1995, he served as President and Chief Executive Officer
of Roussel UCLAF, Paris. He also headed the pharmaceutical division of Hoechst
Group and was Chairman of the Divisional Pharmaceutical Board of Hoechst. He
was a member of the advisory committee on Science and Technology to the German
Chancellor Kohl from 1996 to 1997 and since 1996 has been a member of the
German National Advisory Committee on Health Research to the State Secretaries
of Science, Technology and Health. Dr. Afting also is a director of publicly
traded Titan, Inc. and Medigene AG. Dr. Afting has been a member of the
medical faculty at the University of Goettingen since 1985. He earned a PhD
and an MD in Chemistry from the University of Freiburg/Breisgau.
John E. Lucas Mr. Lucas joined us as a Director in 1998. Mr. Lucas
currently serves as Chairman and CEO of EpiCept Corporation which develops
topical pain control products. From 1994 to 1996, he was Founder, President
and CEO of American Scientific Resources, Inc. From 1991 to 1994, he held the
positions of President, CEO and Chairman at Oxigene, Inc. and held similar
positions from 1963 to 1991 at Luconex, Mast ImmunoSystems, Xoma, Millipore
Ventures, Chemetrics and Oxford Laboratories. Mr. Lucas serves as a Director
of VitaResc AG and EpiCept Corporation. Mr. Lucas earned an MBA from Harvard
University.
28
Section 16(a) Beneficial Ownership Reporting Compliance
Item 405 of Regulation S-K calls for disclosure of any known late filing or
failure by an insider to file a report required by Section 16 of the Exchange
Act. This disclosure is contained in the section entitled "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the
information in the section entitled "Compensation of Executive Officers and
Directors" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
information in the section entitled "Stock Ownership of Management and Certain
Beneficial Owners" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the
information in the section entitled "Certain Relationships and Related
Transactions" in the Proxy Statement.
29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The financial statements of the Company are included herein as required
under Item 8 of this annual report on Form 10-K. See Index to Financial
Statements on page F-l.
(2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts. The other financial
statement schedules have been omitted because they are either not required,
not applicable, or the information is otherwise included.
(3) Exhibits
The exhibits listed below are required by Item 601 of Regulation S-K. Each
management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K has been identified.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K in the quarter ended December 31,
2000.
Exhibit
Number Description of Document
------- -----------------------
3.1(1) Amended and Restated Certificate of Incorporation of the Registrant
3.2(1) Bylaws of Registrant, as amended.
4.1(1) Specimen common stock certificate.
10.1(1) Form of Warrant Agreement between the Registrant and holders of the
Series C Preferred Stock warrants.
10.2(1) Amended and Restated Registration Rights Agreement, dated December
21, 1998.
10.3(1)* Collaboration Agreement, dated November 24, 1997, between the
Registrant and Bruker-Franzen Analytik, GmbH.
10.4(1)* Contractual Agreement, dated October 1, 1998, between the Registrant
and GeSIM.
10.5(1)* License Agreement, dated January 14, 1999, and Addendum to License
Agreement and Patent Assignment, dated September 29, 1999, between
the Registrant and Franz Hillenkamp.
10.6(1)* Supply Agreement, dated April 1, 1999, between the Registrant and
Tactical Fabs, Inc.
10.7(1)* Specific Cooperative Research Agreement No. 58-5438-9-120, dated June
15, 1999, between the Registrant and U.S. Department of Agriculture
(US Meat Animal Research Center).
10.8(1)* OEM Supply Agreement, dated June 24, 1999, between the Registrant and
Beckman Coulter.
10.9(1)* Cooperative Research and Development Agreement, dated September 17,
1999, between the Registrant and Public Health Service.
10.10(1) Standard Industrial Gross Lease, dated December 12, 1996, between
Registrant and Sorrento Business Complex, L.P., as amended.
10.11(1) Master Equipment Lease Agreement No. 0135 and Letter extending the
equipment lease, dated October 22, 1998, between Registrant and
Phoenix Leasing Incorporated, as amended.
10.12(1) Standard Form Commercial Lease, dated June 24, 1999, between
Registrant and Cummings Properties, LLC, as amended.
10.13(1) Agreement for office space in Hamburg, dated May 1996, between the
Registrant and Fiszman-Steinriede, GbR, as amended.
30
Exhibit
Number Description of Document
------- -----------------------
10.14(1) Form of Indemnification Agreement between the Registrant and each of
its directors.
10.16(1)# 1994 Stock Plan.
10.17(1)# 1994 Stock Plan Form of Non-Qualified Stock Option Grant.
10.18(1)# 1994 Stock Plan Form of Incentive Stock Option Grant.
10.19(1)# 1994 Stock Plan Form of Stock Restriction Agreement.
10.20(1)# 1998 Stock Option/Stock Issuance Plan.
10.21(1)# 1998 Stock Option/Stock Issuance Plan Form of Notice of Grant of
Stock Option.
10.22(1)# 1998 Stock Option/Stock Issuance Plan Form of Stock Option
Agreement.
10.23(1)# 1998 Stock Option/Stock Issuance Plan Form of Stock Purchase
Agreement.
10.24(1)# 1998 Stock Option/Stock Issuance Plan Form of Stock Issuance
Agreement.
10.25(1)# 1999 Stock Incentive Plan.
10.26(1)# 1999 Employee Stock Purchase Plan.
10.27(1)# 1999 Stock Incentive Plan Form of Notice of Grant of Stock Option.
10.28(1)# 1999 Stock Incentive Plan Form of Stock Option Agreement.
10.29(2) Business Loan Agreement, dated March 3, 2000, between the Registrant
and Union Bank of California.
10.30(3) Building Lease Agreement, dated March 29, 2000, between the
Registrant and TPSC IV LLC, a Delaware limited liability company.
10.31(4) Global Master Rental Agreement, dated May 4, 2000, between the
Registrant and ComDisco.
10.32(4)* Strategic Alliance Agreement, dated May 3, 2000, between the
Registrant and Genaissance Pharmaceuticals, Inc.
10.33(4)* Purchase and License Agreement, dated June 20, 2000, between the
Registrant and Specialty Laboratories.
10.34(4) Settlement Agreement, dated May 31, 2000, between the Registrant and
Hubert Koster.
10.35(5)* High Throughput Oligonucleotide Manufacturing and Supply and
MassARRAYTM Analytical System Purchase Agreement, dated as of
August 24, 2000, between the Registrant and Integrated DNA
Technologies, Inc.
10.36(5)* Technology Access and Collaboration Agreement, dated as of September
29, 2000, between the Registrant and Incyte Genomics, Inc.
10.37# Note Secured by Stock Pledge Agreement, dated November 30, 2000
between Antonius Schuh and the Registrant.
10.38# Note Secured by Stock Pledge Agreement, dated November 30, 2000
between Stephen Zaniboni and the Registrant.
10.39# Note Secured by Stock Pledge Agreement, dated November 30, 2000
between Andreas Braun and the Registrant.
10.40# First Amended and Restated Employment Agreement, dated as of June
30, 2000 between Toni Schuh and the Registrant.
10.41# First Amended and Restated Employment Agreement, dated as of August
1, 2000 between Delbert F. Foit, Jr. and the Registrant.
10.42# First Amended and Restated Employment Agreement, dated as of August
1, 2000 between Steve Zaniboni and the Registrant.
31
Exhibit
Number Description of Document
------- -----------------------
10.43# First Amended and Restated Employment Agreement, dated as of August
1, 2000 between Andi Braun and the Registrant
10.44# Employment Agreement, dated May 3, 1999 between Dr. Karsten Schmidt
and Sequenom GmbH.
10.45* Technology Access and Collaboration Agreement Addendum dated as of
January 23, 2001 between Incyte Genomics and the Registrant.
10.46 Letter Amendment dated as of November 13, 2000 to Lease dated March
29, 2000 between TPSC IV, LLC and the Registrant.
10.47* Letter of Intent, MassARRAY(TM) Core Facility Contract Terms between
the Registrant and Hitachi, Ltd., Life Science Group dated as of
December 9, 2000.
10.48* Letter of Intent, MassARRAY(TM) Distribution Contract Terms between
the Registrant and Nissei Sangyo Co., Ltd. dated as of December 8,
2000.
10.49(6)# Form of Employment Agreement between Registrant and Employees Listed
on A thereto, as amended.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- --------
# Management contract or compensatory plan.
* Certain confidential portions of this Exhibit have been omitted pursuant to
a request for confidential treatment. Omitted portions have been filed
separately with the Securities and Exchange Commission.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 333-91665), as amended.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 2000.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended June 30, 2000.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended September 30, 2000.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 333-91665), as amended, which exhibit is hereby supplemented
with an additional Schedule A filed with this Annual Report on Form 10-K.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Antonius Schuh
Date: March 30, 2001 By: _________________________________
Antonius Schuh
President, Chief Executive
Officer and Director
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Stephen L. Zaniboni or Antonius Schuh, his or
her attorney-in-fact, with power of substitution in any and all capacities, to
sign any amendments to this Annual Report on Form 10-K, and to file the same
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
the attorney-in-fact or his or her substitute or substitutes may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Antonius Schuh President, Chief Executive March 30, 2001
____________________________________ Officer and Director
Antonius Schuh
/s/ Stephen L. Zaniboni Chief Financial Officer March 30, 2001
____________________________________ (Principal Financial and
Stephen L. Zaniboni Accounting Officer)
/s/ Charles Cantor Chief Scientific Officer and March 27, 2001
____________________________________ Director
Charles Cantor
/s/ Helmut Schuhsler Chairman of the Board of March 26, 2001
____________________________________ Directors
Helmut Schuhsler
/s/ Ernst-Gunter Afting Director March 26, 2001
____________________________________
Ernst-Gunter Afting
/s/ John Lucas Director March 26, 2001
____________________________________
John Lucas
33
SEQUENOM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999............. F-3
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998..................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 2000, 1999 and 1998.................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
SEQUENOM, Inc.
We have audited the accompanying consolidated balance sheets of SEQUENOM,
Inc. as of December 31, 2000 and 1999 and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 2000. These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our audits also included the financial statement schedule listed
in the index at Item 14 (a). Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SEQUENOM,
Inc. at December 31, 2000 and 1999 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2000,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects the information set forth therein.
Ernst & Young LLP
San Diego, California
February 9, 2001
F-2
SEQUENOM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 70,045,695 $ 5,200,734
Short-term investments, available-for-sale....... 68,378,050 16,415,764
Accounts receivable, net......................... 4,267,238 --
Inventories, net................................. 2,923,218 229,750
Other current assets and prepaid expenses........ 8,399,905 1,559,777
------------ ------------
Total current assets........................... 154,014,106 23,406,025
Equipment and leasehold improvements, net.......... 8,117,600 6,294,011
Other assets....................................... 4,130,178 53,023
------------ ------------
Total assets................................... $166,261,884 $ 29,753,059
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............ $ 8,707,810 $ 4,426,287
Deferred revenue................................. 9,830,430 --
Current portion of capital lease obligations..... 957,042 461,784
------------ ------------
Total current liabilities ..................... 19,495,282 4,888,071
------------ ------------
Deferred revenue, less current portion............. 750,000 --
Capital lease obligations, less current portion.... 1,077,200 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 14,482,757 at
December 31, 2000 and 1999, respectively.
Aggregate liquidation preference--none and
$56,793,947 at December 31, 2000 and 1999,
respectively; issued and outstanding shares--
none and 14,842,757 at December 31, 2000 and
1999, respectively.............................. -- 14,843
Common stock, par value $0.001; authorized
shares--75,000,000 and 19,500,000, at December
31, 2000 and 1999, respectively; issued and
outstanding shares--24,442,092 and 2,298,675 at
December 31, 2000 and 1999, respectively........ 24,442 2,299
Additional paid-in capital....................... 223,140,159 66,300,293
Notes receivable for stock....................... (598,500) (2,056,466)
Deferred compensation related to stock options... (1,551,044) (3,618,601)
Accumulated other comprehensive income........... 314,843 400,779
Accumulated deficit.............................. (76,390,498) (43,504,587)
------------ ------------
Total stockholders' equity..................... 144,939,402 17,538,560
------------ ------------
Total liabilities and stockholders' equity..... $166,261,884 $ 29,753,059
============ ============
See accompanying notes.
F-3
SEQUENOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Revenues:
Products........................... $ 8,253,473 $ -- $ --
Services........................... 1,446,975 -- --
Research and development grants.... 337,432 179,248 351,067
------------ ------------ ------------
Total revenues................... 10,037,880 179,248 351,067
------------ ------------ ------------
Costs and expenses:
Cost of product revenue............ 5,843,706 -- --
Research and development........... 19,163,382 10,291,213 6,187,572
Selling, general and
administrative.................... 18,492,487 8,238,809 4,218,453
Amortization of deferred stock
compensation ($3,142,559 and
$598,583, and $3,676,142 and
$700,218 related to selling,
general and administrative and
research and development in 2000
and 1999, respectively)........... 3,741,142 4,376,360 --
------------ ------------ ------------
Total costs and expenses......... 47,240,717 22,906,382 10,406,025
------------ ------------ ------------
Loss from operations................. (37,202,837) (22,727,134) (10,054,958)
Interest income...................... 8,925,416 1,577,635 397,361
Interest expense..................... (4,683,294) (790,260) (612,975)
Other income, net.................... 74,804 169,444 --
------------ ------------ ------------
Net loss......................... $(32,885,911) $(21,770,315) $(10,270,572)
============ ============ ============
Historical net loss per share, basic
and diluted......................... $ (1.46) $ (26.23) $ (33.33)
============ ============ ============
Weighted average shares outstanding,
basic and diluted................... 22,453,797 829,895 308,121
============ ============ ============
See accompanying notes.
F-4
SEQUENOM, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Deferred
Convertible Notes Compensation Accumulated
Preferred Stock Common Stock Additional Receivable Related to Other
--------------------- ------------------ Paid-In From Stock Comprehensive Accumulated
Shares Amount Shares Amount Capital Officers Options Income (Loss) Deficit
----------- -------- ---------- ------- ------------ ----------- ------------ ------------- ------------
Balance at
December 31,
1997............. 5,621,742 $ 5,622 292,260 $ 292 $ 8,569,705 $ -- $ -- $ 140,683 $(11,463,700)
Net loss........ -- -- -- -- -- -- -- -- (10,270,572)
Unrealized gain
on available-
for-sale
securities...... -- -- -- -- -- -- -- 23,326 --
Translation
adjustment...... -- -- -- -- -- -- -- (186,658) --
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
Exercise of
stock options... -- -- 38,750 39 7,086 -- -- -- --
Issuance of
stock options to
consultants..... -- -- -- -- 10,000 -- -- -- --
Issuance of
Series C
Convertible
Preferred Stock,
net issuance
costs of
$47,370......... 3,508,252 3,508 -- -- 11,000,115 -- -- -- --
Issuance of
Series D
Convertible
Preferred Stock,
net of issuance
costs of
$188,519........ 3,843,700 3,844 -- -- 24,791,687 -- -- -- --
Deferred
compensation.... -- -- -- -- 2,420,150 -- (2,420,150) -- --
----------- -------- ---------- ------- ------------ ----------- ----------- --------- ------------
Balance at
December 31,
1998............. 12,973,694 12,974 331,010 331 46,798,743 -- (2,420,150) (22,649) (21,734,272)
Net loss........ -- -- -- -- -- -- -- (21,770,315)
Unrealized loss
on available-
for-sale
securities...... -- -- -- -- -- -- -- (61,981) --
Translation
adjustment...... -- -- -- -- -- -- -- 485,409 --
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
Exercise of
stock options... -- -- 1,967,665 1,968 2,049,378 (2,056,466) -- -- --
Issuance of
stock options to
consultants..... -- -- -- -- 102,527 -- -- -- --
Issuance of
Series D
Convertible
Preferred stock,
net of issuance
costs of
$372,206........ 1,869,063 1,869 -- -- 11,774,834 -- -- -- --
Deferred
compensation.... -- -- -- -- 5,574,811 -- (5,574,811) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 4,376,360 -- --
----------- -------- ---------- ------- ------------ ----------- ----------- --------- ------------
Balance at
December 31,
1999............. 14,842,757 14,843 2,298,675 2,299 66,300,293 (2,056,466) (3,618,601) 400,779 (43,504,587)
Net loss........ -- -- -- -- -- -- -- -- (32,885,911)
Unrealized gain
on available-
for-sale
securities...... -- -- -- -- -- -- -- 228,563 --
Translation
adjustment...... -- -- -- -- -- -- -- (314,499) --
Comprehensive
loss............ -- -- -- -- -- -- -- -- --
Exercise of
stock options... -- -- 760,504 760 810,866 -- -- -- --
Purchases under
Employee Stock
Purchase Plan... -- -- 12,761 13 282,005 -- -- -- --
Issuance of
stock to
consultants..... -- -- 57,564 58 1,486,769 -- -- -- --
Exercise of
warrants........ -- -- 137,339 137 27,460 -- -- -- --
Issuance of
stock options to
consultants..... -- -- -- -- 116,076 -- -- -- --
Issuance of
common stock in
connection with
IPO, net of
issuance costs
of $12,950,158.. -- -- 6,037,500 6,038 144,050,804 -- -- -- --
Conversion of
preferred stock
to common
stock........... (14,842,757) (14,843) 14,842,757 14,843 -- -- -- -- --
Conversion of
debt to equity.. -- -- 272,108 272 6,791,754 -- -- -- --
Interest paid
with stock...... -- -- 22,884 23 594,961 -- -- -- --
Forgiveness of
notes receivable
from officers... -- -- -- -- -- 3,784,504 -- -- --
Issuance of
notes receivable
to officers
related to
exercise of
stock options... -- -- -- -- -- (2,326,538) -- -- --
Remeasurement of
stock options... -- -- -- -- 1,005,587 -- -- -- --
Deferred
compensation.... -- -- -- -- 1,673,584 -- (1,673,584) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 3,741,141 -- --
----------- -------- ---------- ------- ------------ ----------- ----------- --------- ------------
Balance at
December 31,
2000............. -- $ -- 24,442,092 $24,442 $223,140,159 $ (598,500) $(1,551,044) $ 314,843 $(76,390,498)
=========== ======== ========== ======= ============ =========== =========== ========= ============
Total
Stockholders'
Equity
(Deficit)
--------------
Balance at
December 31,
1997............. $ (2,747,398)
Net loss........ (10,270,572)
Unrealized gain
on available-
for-sale
securities...... 23,326
Translation
adjustment...... (186,658)
--------------
Comprehensive
loss............ (10,433,904)
Exercise of
stock options... 7,125
Issuance of
stock options to
consultants..... 10,000
Issuance of
Series C
Convertible
Preferred Stock,
net issuance
costs of
$47,370......... 11,003,623
Issuance of
Series D
Convertible
Preferred Stock,
net of issuance
costs of
$188,519........ 24,795,531
Deferred
compensation.... --
--------------
Balance at
December 31,
1998............. 22,634,977
Net loss........ (21,770,315)
Unrealized loss
on available-
for-sale
securities...... (61,981)
Translation
adjustment...... 485,409
--------------
Comprehensive
loss............ (21,346,887)
Exercise of
stock options... (5,120)
Issuance of
stock options to
consultants..... 102,527
Issuance of
Series D
Convertible
Preferred stock,
net of issuance
costs of
$372,206........ 11,776,703
Deferred
compensation.... --
Amortization of
deferred
compensation.... 4,376,360
--------------
Balance at
December 31,
1999............. 17,538,560
Net loss........ (32,885,911)
Unrealized gain
on available-
for-sale
securities...... 228,563
Translation
adjustment...... (314,499)
--------------
Comprehensive
loss............ (32,971,847)
Exercise of
stock options... 811,626
Purchases under
Employee Stock
Purchase Plan... 282,018
Issuance of
stock to
consultants..... 1,486,827
Exercise of
warrants........ 27,597
Issuance of
stock options to
consultants..... 116,076
Issuance of
common stock in
connection with
IPO, net of
issuance costs
of $12,950,158.. 144,056,842
Conversion of
preferred stock
to common
stock........... --
Conversion of
debt to equity.. 6,792,026
Interest paid
with stock...... 594,984
Forgiveness of
notes receivable
from officers... 3,784,504
Issuance of
notes receivable
to officers
related to
exercise of
stock options... (2,326,538)
Remeasurement of
stock options... 1,005,587
Deferred
compensation.... --
Amortization of
deferred
compensation.... 3,741,141
--------------
Balance at
December 31,
2000............. $144,939,402
==============
See accompanying notes.
F-5
SEQUENOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Operating activities
Net loss............................ $(32,885,911) $(21,770,315) $(10,270,572)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of deferred
compensation...................... 3,741,141 4,376,360 --
Depreciation and amortization...... 3,743,108 1,941,672 961,051
Non-cash interest expense on
conversion of debt................ 4,381,082 -- --
Forgiveness of loans............... 3,784,504
Remeasurement of stock options..... 1,005,587 -- --
Options issued to consultants...... 116,076 102,527 10,000
Loss on disposal of fixed assets... 58,059 -- --
Changes in operating assets and
liabilities:
Inventories...................... (2,685,877) (229,748) --
Accounts receivable.............. (4,263,287) -- --
Other current assets............. (8,789,403) (1,329,269) 47,305
Other assets..................... (4,077,156) (220,714) 56,085
Accounts payable and accrued
expenses........................ 541,280 1,965,358 1,111,892
Unearned revenue................. 10,454,271 -- --
Other liabilities................ 3,898,061 453,537 289,500
------------ ------------ ------------
Net cash used in operating
activities.................... (20,978,465) (14,710,592) (7,794,739)
Investing activities
Purchase of equipment and leasehold
improvements....................... (5,801,001) (4,477,537) (3,830,666)
Purchases of marketable securities.. (64,099,393) (23,057,477) (19,914,550)
Sales of marketable securities...... 574,790 628,999 --
Maturities of marketable
securities......................... 11,790,880 25,842,604 --
------------ ------------ ------------
Net cash used in investing
activities.................... (57,534,724) (1,063,411) (23,745,216)
Financing activities
Net proceeds from initial public
offering........................... 144,056,842 -- --
Proceeds from issuance of
convertible preferred stock........ -- 11,776,703 35,799,154
Proceeds from long-term debt........ -- -- 2,276,560
Repayment of long-term debt......... (3,090,870) -- --
Borrowings under capital lease
obligations........................ 905,398 912,149 1,306,312
Payments on capital lease
obligations........................ (522,368) (340,499) (226,758)
Proceeds from sale of stock to
consulants......................... 1,486,827 -- --
Proceeds from exercise of stock
options............................ 415,332 222,394 7,125
Proceeds from Employee Stock
Purchase Plan purchases............ 282,018 -- --
Proceeds from exercise of warrants.. 27,597 -- --
------------ ------------ ------------
Net cash provided by financing
activities.................... 143,560,776 12,570,747 39,162,393
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... 65,047,587 (3,203,256) 7,622,438
Effect of exchange rate changes on
cash and cash equivalents.......... (202,626) (155,622) 104,392
Cash and cash equivalents at
beginning of year.................. 5,200,734 8,559,612 832,782
------------ ------------ ------------
Cash and cash equivalents at
end of year................... $ 70,045,695 $ 5,200,734 $ 8,559,612
============ ============ ============
Supplemental schedule of non-cash
investing and financing activities:
Conversion of preferred stock to
common stock upon initial public
offering........................... $ 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....................... $ 339,126 $ 500,760 $ 323,475
============ ============ ============
See accompanying notes.
F-6
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
1. Nature of the Business
SEQUENOM, Inc. (the "Company") was incorporated on February 14, 1994 in the
State of Delaware. The Company is a pioneer in the large-scale validation of
genetic variations and their associated medical and commercial utility.
Genetic variations are the origin of most differences between individuals,
including predisposition to diseases and variation in drug response. The most
common genetic variations are single nucleotide polymorphisms, or SNPs. The
Company believes that the validation of SNPs and their association to
morbidity is a fundamental step in the development and commercialization of
new and improved diagnostic and pharmaceutical products.
The Company has developed proprietary systems, consumables, applications,
and information-based products along with a scientific strategy to determine
the association of SNPs and genes to disease. The Company offers proprietary
applications and information-based products to customers in the diagnostics,
genomics and pharmaceutical industries while using its technology with an
enabling and proven population genetics approach. Launched at the end of 1999,
the Company's MassARRAY systems are used today by a number of leading
companies and institutions in the United States, Europe and Asia. Through
1999, the Company was considered to be in the development stage. In
conjunction with the commencement of sales of the MassARRAY systems in 2000,
the Company is no longer considered to be in the development stage.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Sequenom GmbH. All significant
intercompany transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities when purchased of less than three months.
Short-Term Investments and Concentration of Credit Risk
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company's investment securities are classified as available-for-sale and
unrealized holding gains or losses are included in comprehensive income
(loss). Realized gains or losses, calculated based on the specific
identification method, were not material for the years ended December 31,
2000, 1999 and 1998.
At December 31, 2000, short-term investments consisted of the following:
Amortized Market Unrealized
Cost Value Gain
----------- ----------- ----------
Obligations of U.S. government
agencies.............................. $ 2,393,139 $ 2,415,716 $ 22,577
Corporate debt securities.............. 65,840,750 65,962,334 121,584
----------- ----------- --------
Total short-term investments......... $68,233,889 $68,378,050 $144,161
=========== =========== ========
Approximately 65% and 35% of these securities mature within one and two
years of December 31, 2000, respectively.
F-7
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, short-term investments consisted of the following:
Amortized Market Unrealized
Cost Value Gain
----------- ----------- ----------
Obligations of U.S. government
agencies.............................. $ 4,008,450 $ 3,986,720 $21,730
Corporate debt securities.............. 12,491,944 12,429,044 62,900
----------- ----------- -------
Total short-term investments......... $16,500,394 $16,415,764 $84,630
=========== =========== =======
Approximately 67% and 33% of these securities mature within one and two
years of December 31, 1999, respectively.
Inventories
Inventories are stated at the lower of cost or market. Standard cost, which
approximates actual cost, is used to value inventories. The components of
inventories were:
December 31,
-------------------
2000 1999
---------- --------
Raw materials.......................................... $2,723,710 $229,750
Work in process........................................ 1,976 --
Finished goods......................................... 197,532 --
---------- --------
Total................................................ $2,923,218 $229,750
========== ========
Equipment and Leasehold Improvements
Equipment is stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets (generally 3 to 5 years, or the
lease term, whichever is shorter). Leasehold improvements are amortized using
the straight-line method over the estimated useful life of the improvement or
the remaining term of the lease, whichever is shorter.
Software Costs
Purchased software is capitalized at cost and amortized over the estimated
useful life, generally three years. Software developed for use in the
Company's products is expensed as incurred until the technological feasibility
for the software has been established. Expenditures to date have been
classified as research and development expense.
Impairment of Long-Lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of, if indicators of
impairment exist, the Company assesses the recoverability of the affected
long-lived assets by determining whether the carrying value of such assets can
be recovered through the undiscounted future operating cash flows. If
impairment is indicated, the Company measures the amount of such impairment by
comparing the carrying value of the asset to the present value of the expected
future cash flows associated with the use of the asset. While the Company's
current and historical operating and cash flow losses are indicators of
impairment, the Company believes the future cash flows to be received from the
long-lived assets will exceed the assets' carrying value, and accordingly, the
Company has not recognized any impairment losses through December 31, 2000.
F-8
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value of Financial Instruments
Financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, are carried at cost,
which management believes approximates fair value because of the short-term
maturity of these instruments. In February 2000, the Company extinguished the
aggregate of $5,134,000 in long-term debt and $1,003,000 in accrued interest
through the issuance of 294,992 shares of common stock (with a fair value of
$7,669,792) and cash of approximately $3,100,000.
Revenue Recognition
In accordance with Staff Accounting Bulleting ("SAB") No. 101, Revenue
Recognition in Financial Statements, revenues are recognized, when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the price is fixed and determinable and collectibility is reasonably
assured. Revenue is deferred for fees received before earned. Revenues from
SNP validation services are recognized at the completion of key stages in the
performance of the service. Grant revenue is recorded as the research expenses
relating to the grants are incurred, provided that the amounts received are
not refundable if the research is not successful. Amounts received that are
refundable if the research is not successful would be recorded as deferred
revenue and recognized as revenue upon the grantor's acceptance of the success
of the research results.
Research and Development Costs
Research and development costs are expensed as incurred.
Patent Costs
Costs related to filing and pursuing patent applications are expensed as
incurred since recoverability of such expenditures is uncertain.
Income Taxes
In accordance with SFAS No. 109, Accounting for Income Taxes, a deferred
tax asset or liability is determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse. The
Company provides a valuation allowance against net deferred tax assets unless,
based upon the available evidence, it is more likely than not that the
deferred tax assets will be realized.
Foreign Currency Translation and Transactions
The financial statements of the Company's German subsidiary are measured
using the German Deutsche Mark ("DEM") as the functional currency. Assets and
liabilities of this subsidiary are translated at the rates of exchange at the
balance sheet date. Income and expense items are translated at the average
daily rate of exchange during the reporting period. Transactions denominated
in currencies other than the local currency are recorded based on exchange
rates at the time such transactions arise. Subsequent changes in exchange
rates result in transaction gains and losses, which are reflected in income as
unrealized (based on period-end translations) or realized upon settlement of
the transaction.
Stock-Based Compensation
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to follow Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees, and
F-9
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
related Interpretations in accounting for stock-based employee compensation.
Under APB 25, if the exercise price of the Company's employee and director
stock options equals or exceeds the estimated fair value of the underlying
stock on the date of grant, no compensation expense is recognized.
When the exercise price of the employee or director stock options is less
than the estimated fair value of the underlying stock on the grant date, the
Company records deferred compensation for the difference and amortizes this
amount to expense in accordance with Financial Accounting Standards Board
Interpretation No. ("FIN") 28, FIN 28, over the vesting period of the options.
Options or stock awards issued to non-employees are recorded at their fair
value and periodically remeasured as determined in accordance with SFAS No.
123 and Emerging Issues Task Force ("EITF") 96-18 and recognized over the
related service period.
Comprehensive Income (Loss)
In accordance with SFAS No. 130, Reporting Comprehensive Income, unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments are included in other comprehensive income
(loss).
Segment Reporting
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, requires the use of a management approach in identifying segments
of an enterprise. Management has determined that the Company operates in one
business segment.
Net Loss Per Share
In accordance with SFAS No. 128, Earnings Per Share, 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. Common equivalent shares are
comprised of incremental common shares issuable upon the exercise of stock
options and warrants, and common shares issuable on conversion of preferred
stock, and were excluded from historical diluted loss per share because of
their anti-dilutive effect.
Pro forma net loss per share, as disclosed in Note 12, 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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
F-10
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Accounting Pronouncements
The Company expects to adopt SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective January 1, 2001. Management does
not anticipate that the adoption of the SFAS No. 133 will have a significant
effect on its results of operations or financial position as the Company does
not engage in activities covered by SFAS No. 133.
In December 1999, the SEC staff issued SAB No. 101, which summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Management believes
that it's revenue recognition has been in accordance with SAB 101 since
inception. Accordingly, the adoption of SAB 101 did not have an impact on our
financial position or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 44, Accounting for Certain Transactions
Involving Stock Compensation. FIN 44 clarifies certain issues in the
application of APB 25, Accounting for Stock Issued to Employees. FIN 44 is
effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998 or January 12, 2000. Adoption of FIN 44
did not have material impact on the Company's financial statements.
3. Initial Public Offering of Common Stock
On February 1, 2000, the Company completed an initial public offering of
its common stock and sold 6,037,500 common shares at $26 per share, for a
total of approximately $157.0 million In addition, all then-outstanding shares
of preferred stock converted into common shares upon completion of the
offering. Net proceeds totaled approximately $144.1 million, after deducting
underwriting discounts and commissions and direct incremental costs of
approximately $12.9 million. The Company utilized approximately $3,080,400 of
the remaining net proceeds and 294,992 shares of common stock to repay an
aggregate of $6,137,000 in long-term debt and accrued interest (see Note 5).
4. Equipment and Leasehold Improvements
Equipment and leasehold improvements and related accumulated depreciation
and amortization are as follows:
December 31,
------------------------
2000 1999
----------- -----------
Laboratory equipment.... $ 9,676,662 $ 7,329,328
Leasehold improvements.. 2,223,164 1,394,657
Office furniture and
equipment.............. 2,095,020 535,084
----------- -----------
13,994,846 9,259,069
Less accumulated
depreciation and
amortization........... (5,877,246) (2,965,058)
----------- -----------
$ 8,117,600 $ 6,294,011
=========== ===========
F-11
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Long-Term Debt
From 1995 to 1997, the Company entered into three unsecured loan agreements
with a German agency (TBG) totaling DEM 6 million (approximately $2.9
million). Interest was payable semi-annually on the loans, with payments
starting at various times during 1997 and 1998. The combined annual interest
rate (nominal interest and additional interest) could not exceed 7% per year.
In addition to these interest payments, at the end of the loan term (earlier
of repayment or December 31, 2005 and December 31, 2007), the Company was
obligated to pay terminal interest to 25%, 30% and 35% of the amounts loaned
under the DEM 1 million, DEM 3 million and DEM 2 million agreements,
respectively, estimated to be approximately $1.2 million at the end of the
loan term. As of December 31, 1999, the Company had accrued interest in the
amount of $1,003,000, or 75% of the total terminal interest, expected to be
paid at the end of the loan term. The Company's accrual was recorded on a
straight-line basis, based on the assumption that the entire terminal interest
would be paid in 2000, the date the Company expected to repay the debt. In
December 1999, TBG agreed to accept 22,884 shares of the Company's common
stock, with an aggregate fair value of $595,000 at the closing of the initial
public offering, in full satisfaction of the Company's obligation for the
interest payable to TBG. Upon completion of the Company's initial public
offering in February 2000, the debt was repaid with cash from the IPO and the
$408,017 difference between the ultimate interest cost and the accrued
interest liability was recorded as a reduction of interest expense.
In 1998, the Company entered into another agreement with TBG for debt of
DEM 4 million (approximately $1.9 million), which was convertible into common
stock of the Company. Interest was payable at 6% of the Company's subsidiary's
annual profits, however, the combined interest rates on all TBG loans could
not exceed 9% of the Company's subsidiary's annual profits or 7% of the
principal outstanding. The Company could call for conversion in the event of a
triggering event, as defined in the agreement (generally, a change in control
or an initial public offering). TBG could call for conversion at any time. The
conversion ratio was calculated as the arithmetic mean between $3.15 per share
and a current valuation of the common stock at the time of conversion, not to
exceed $8.40 per share. The Company called for conversion of the loan upon
completion of its initial public offering and extinguished the debt through
the issuance of common stock with an aggregate fair value of $7,047,808. Upon
conversion, the Company recorded additional interest expense of $4,789,098,
equal to the difference between the fair value of the shares issued and the
amount of the debt.
The Company has a credit agreement with a financial institution that
provides for borrowings up to $25 million. Any borrowings under the agreement
will be secured by cash and cash equivalents and will bear interest at the
institution's reference rate less 0.5%. No borrowings have been made under
this agreement.
6. Stockholders' Equity
Convertible Preferred Stock
At December 31, 1999, convertible preferred stock outstanding was as
follows:
Price Per Number of Liquidation
Date Issued Series Share Shares Value
- ----------- ------ --------- ---------- -----------
March-August 1995....................... A $ .50 1,580,000 $ 790,000
December 1995........................... B $1.50 2,333,333 3,500,000
February-March 1996..................... B $1.50 643,330 964,995
May 1997................................ C $3.15 1,065,079 3,354,999
January 1998............................ C $3.15 3,508,252 11,050,994
December 1998........................... D $6.50 3,843,700 24,984,050
March 1999.............................. D $6.50 1,869,063 12,148,909
---------- -----------
14,842,757 $56,793,947
========== ===========
F-12
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Each share of preferred stock is convertible into one share of common stock
at the option of the holder. Upon completion of the Company's initial public
offering in February 2000, all of the shares of convertible preferred stock
automatically converted into shares of common stock on a one-for-one basis.
Warrants
In connection with the Series C Preferred Stock issued in May 1997, the
Company issued warrants to purchase 106,508 shares of Series C Preferred Stock
at an exercise price of $3.15 per share. As of December 31, 2000, 71,425 of
these warrants have been exercised.
Notes Receivable
In 1999, the Board of Directors authorized the issuance of approximately
$3.6 million in loans to executive officers, related to the exercise of their
stock options. The notes were full recourse and were also secured by the
underlying stock. The notes bore interest at the applicable federal rate in
existence when the notes were made (approximately 6%). The principal amount of
the notes and the related interest were required to be repaid on the earlier
of two years from the origination date of the loans or in the event of a
secondary public offering if the executive officers making the notes were
allowed to sell their stock. An aggregate of $2,056,466 of such loans were
issued as of December 31, 1999. The remainder of the loans were issued in
early 2000. In February 2000, the Board of Directors approved the forgiveness
of the loans, and the Company recorded compensation expense aggregating $3.8
million.
In 2000, the Board of Directors authorized the issuance of $595,686 in
loans to executive officers, related to the taxes owed in connection with
exercise of stock options. The notes bear interest at the applicable federal
rate in existence when the notes were made (6.25%). The principal balance and
related interest of the notes shall become due and payable the earlier of
December 31, 2001 or within ten business days after the time of the closing of
the Company's secondary offering of shares of its common stock, if at the time
of the secondary offering the executive officers making the notes are allowed
to sell their stock.
Stock Compensation Plans
The Company maintains several stock option plans under which the Company
may grant incentive stock options and non-qualified stock options to
employees, consultants and non-employee directors. Stock options have been
granted at prices at or above the fair market value on the date of the grant.
Options vest and expire according to terms established at the grant date.
Options generally vest over a period four years from the date of grant and
expire ten years from the date of grant. The plans provide for the grant of an
aggregate of 4,750,000 shares of common stock. Beginning in 2001, the amount
of authorized shares automatically increases by an amount equal to 4% of the
outstanding common stock on the last trading day of the prior year, subject to
an annual increase limitation of 2,000,000 shares.
F-13
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes all stock option transactions from January 1, 1998
through December 31, 2000.
Weighted
Average
Exercise
Shares Price
Subject to per
Outstanding Options Share
----------- ---------- --------
Outstanding at December 31, 1997........................ 1,220,000 $ 0.21
Granted............................................... 1,268,500 0.71
Canceled.............................................. (71,250) 0.28
Exercised............................................. (38,750) 0.18
---------- ------
Outstanding at December 31, 1998........................ 2,378,500 $ 0.47
Granted............................................... 1,080,500 3.00
Canceled.............................................. (58,250) 0.58
Exercised............................................. (2,198,825) 0.96
---------- ------
Outstanding at December 31, 1999........................ 1,201,925 $ 1.87
Granted............................................... 925,000 54.83
Canceled.............................................. (212,878) 79.46
Exercised............................................. (553,095) 1.48
---------- ------
Outstanding at December 31, 2000........................ 1,360,952 $24.20
========== ======
At December 31, 2000, 492,714 shares were available for future option
grants and 1,853,666 shares of common stock were reserved for issuance upon
exercise of options. The weighted average grant-date fair value of options
granted in 2000, 1999 and 1998 was $37.31, $4.77 and $0.17, respectively.
The following table summarizes information about options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
----------------------- --------------------
Weighted
Average Weighted
Remaining Number Average
Number Contractual Exercisable Exercise
Range of Exercise Price Outstanding Life and Vested Price
- ----------------------- ----------- ----------- ----------- --------
$ 0.05-$ 3.00..................... 719,852 7.93 263,779 $ 2.24
$24.13-$28.31..................... 443,100 9.58 33,708 $28.28
$95.38............................ 198,000 9.10 41,250 $95.38
--------- -------
$ 0.05-$95.38..................... 1,360,952 8.64 338,737 $24.67
========= =======
Employee Stock Purchase Plan
In November 1999, the Company adopted the 1999 Employee Stock Purchase Plan
("1999 ESPP"). The Company has reserved 250,000 shares of common stock for
issuance under the 1999 ESPP. Beginning in 2001, the amount of authorized
shares available under the 1999 ESPP will automatically increase each January
1st by an amount equal to 1% of the outstanding common stock on the last
trading day of the prior year, subject to an annual increase limitation of
500,000. The 1999 ESPP will have a series of concurrent offering periods, each
with a maximum duration of 24 months, however, no employee may participate in
more than one offering period at a time. Employees may allocate up to 15% of
their pay to purchase shares, limited to 1,000 shares per purchase period and
$25,000 per calendar year. Shares are purchased semi-annually at 85% of the
lower of the beginning or end of the period price. For the year ended December
31, 2000, 12,761 shares were purchased by employees at $22.10 per share.
F-14
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Had compensation cost for stock-based awards been determined consistent
with the fair value method prescribed in SFAS No. 123, the Company's net loss
would have been changed to the following pro forma amounts:
Years ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Pro forma net loss............... $(43,191,748) $(25,035,052) $(10,325,893)
Net loss as reported............. $(32,885,911) $(21,770,315) $(10,270,572)
Pro forma net loss per share,
basic and diluted............... $ (1.92) $ (30.17) $ (33.51)
Net loss per share, basic and
diluted, as reported............ $ (1.46) $ (26.23) $ (33.33)
The fair value of stock-based awards was estimated at the date of grant as
follows:
2000 1999 1998
------- -------------- --------------
Black- Minimum Minimum
Model Scholes Value Value
----- ------- -------------- --------------
Risk free interest rates............. 6% 6% 6%
Volatility........................... 90% Not applicable Not applicable
Dividend yield....................... 0% 0% 0%
Weighted average life................ 4 4 4
The minimum value pricing model is similar to the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor for volatility.
Deferred Compensation
The Company has recorded deferred compensation totaling $1,673,584 and
$5,574,811 in the years ended December 31, 2000 and 1999, respectively, in
connection with the grants of certain stock options to employees. Amortization
of deferred compensation was $3,741,141 and $4,376,360 and during the years
ended December 31, 2000 and 1999, respectively.
Consulting Arrangement Related to Initial Public Offering
In March 1999, the Company engaged two German consulting firms to assist
the Company in completing an initial public offering ("IPO") of its common
stock. The Company agreed to pay the consulting firms an aggregate amount of
DEM150,000, or approximately $78,000, plus a percentage of the amount of
capital raised attributable to their efforts. The Company also offered and
committed to sell the firms an aggregate of DEM3 million, or approximately
$1.5 million, of freely tradable common shares, for cash, at the IPO price in
conjunction with the completion of an IPO. The consulting firms also agreed
that the total advisory fee due to them under the original agreement would be
DEM789,000, or approximately $410,000.
In January 2000, the Company was advised that its March 1999 offer and
commitment to sell the shares may have been in violation of Section 5 of the
Securities Act of 1933. Such a violation would provide the consulting firms
with a "put right" through January 2001 pursuant to which they could demand
that the Company repurchase their shares at the original purchase price (i.e.,
the initial public offering price). In January 2000, the consulting firms
signed an agreement waiving any "put right" to which they otherwise would have
been entitled and assigning their stock purchase rights to third parties. The
Company agreed to register such shares with the Registration Statement related
to the initial public offering of its common stock, which was completed in
February 2000, and immediately prior to such offering, the designated third
parties purchased 28,782 shares at $26 per share. In February 2000, the
designated third parties sold such shares, and as a result the "put right"
expired.
F-15
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company accounted for the offer and commitment to sell as a stock
option, and valued the option in accordance with SFAS No. 123 and EITF 96-18.
However, the fair value of the option on the valuation date was not material.
7. Income Taxes
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are shown below. A valuation allowance of
$28,943,000 has been recorded as realization of such assets is uncertain.
December 31,
--------------------------
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss carryforwards.............. $ 26,469,000 $ 14,209,000
Research and development credits.............. 1,774,000 1,239,000
Capitalized research expenses................. 1,680,000 1,170,000
Other, net.................................... (980,000) 433,000
------------ ------------
Total deferred tax assets................... 28,943,000 17,051,000
Valuation allowance............................. (28,943,000) (17,051,000)
------------ ------------
Net deferred tax assets..................... $ -- $ --
============ ============
At December 31, 2000, the Company has federal and state tax net operating
loss carryforwards of approximately $60,139,000 and $25,760,000, respectively.
The difference between the federal and state tax loss carryforwards is
attributable to the capitalization of research and development expenses for
state tax purposes and the 55% limitation on the California loss carryforwards
in 2000 and the 50% limitation in earlier years. The federal tax loss
carryforwards will begin to expire in 2009, unless previously utilized.
Approximately $358,000 of the state tax loss carryforwards expired in 2000,
and the state tax loss carryforwards will continue to expire in 2001 unless
previously utilized. The Company also has German net operating loss
carryforwards of approximately $9,800,000, which may be carried forward
indefinitely.
The Company also has federal and state research and development tax credit
carryforwards of approximately $1,192,000 and $894,000, respectively. The
federal research and development tax credit carryforwards will begin to expire
in 2010 unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the
Company's 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,
the Company does not believe these limitations will materially impact the use
of the net operating loss and credit carryforwards.
8. Commitments
Building Leases
The Company leases facilities in the United States and Germany. In total,
the Company leases space in five buildings under leases that expire from
November 2001 to March 2014.
Total rent expense under these leases was approximately $1,409,000,
$562,000 and $446,000 in 2000, 1999 and 1998, respectively.
F-16
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capital Equipment Leases
During 1998, the Company entered into a master equipment lease agreement
providing for borrowings up to $2,100,000. Under the agreement, the lessor
will purchase equipment that the Company will lease subject to equal monthly
payments for a 42-month period. At December 31, 2000, the Company had borrowed
the full amount available under the agreement.
During 2000, the Company entered into an additional master equipment lease
agreement providing for borrowings up to $8,000,000. Under the agreement, the
lessor will purchase the equipment that the Company will lease subject to
quarterly payments for 14 quarters. At December 31, 2000, the Company had
borrowed $905,399 under the agreement.
Property under capital leases is included in equipment and leasehold
improvements, as follows:
December 31,
-----------------------
2000 1999
----------- ----------
Laboratory equipment.............................. $ 2,203,252 $1,706,765
Leasehold improvements............................ 34,357 34,357
Office furniture and equipment.................... 216,966 218,995
----------- ----------
2,454,575 1,960,117
Less accumulated amortization..................... (1,467,650) (812,805)
----------- ----------
$ 986,925 $1,147,312
=========== ==========
The following is a schedule of future minimum lease payments at December
31, 2000:
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ---------- -----------
2001........................................... $1,148,851 $ 4,059,642
2002........................................... 786,407 4,161,687
2003........................................... 294,358 4,159,359
2004........................................... 71,702 4,007,989
2005........................................... -- 3,239,276
Thereafter..................................... 39,328,284
---------- -----------
2,301,318 $58,956,237
===========
Less amount representing interest................. (267,076)
----------
Present value of minimum lease payments........... 2,034,242
Less current portion.............................. (957,042)
----------
Long-term capital lease obligations............... $1,077,200
==========
Consulting Agreements
The Company has entered into consulting agreements with a number of
individuals for scientific advisory services. Each individual received a
certain number of non-qualified stock options. In certain cases, the options
vest upon the later of the achievement of milestones or 10 years. In other
cases, the options vest ratably over a specific period, generally two years.
Compensation expense is measured either upon the achievement of milestones or
ratably over the service period, in accordance with EITF 96-18, and aggregated
$116,076, $102,527 and $10,000 in the years ended December 31, 2000, 1999, and
1998, respectively.
F-17
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Collaboration and Development Agreements
In August 1994, the Company entered into a development agreement with a
university for the design and construction of a prototype DNA sequencing mass
spectrometer. In September 1997, the Company extended the agreement through
September 30, 1999. Through December 31, 1999, the Company has paid
approximately $592,000 under this agreement, and no future payment commitments
exist under this agreement as of December 31, 2000.
In September 1994, the Company entered into a development agreement with
another university for the design of a system for preparation of DNA samples.
In September 1998, the agreement was extended to September 30, 1999. Through
December 31, 1999, the Company has paid approximately $677,000 under this
agreement, and as of December 31, 2000, no further payment commitments exist
under this agreement.
In October 1999, the Company entered into a second agreement continuing its
sponsored research relationship with this same university under a research
program directed to optimizing mass spectrometry based on analysis of nucleic
acids. Through December 31, 2000, the Company has paid approximately $250,000
under this agreement and is committed to pay approximately $126,000 in 2001.
In September 2000, the Company entered into a collaboration with Incyte
Genomics ("Incyte") to validate in silico SNPs identified by Incyte. Incyte
has licensed the SNPs from Incyte's LifeSeq Gold database for validation. In
return, the Company is using its proprietary MassARRAY technology to develop
and validate assays, which the Company will sell to genetic researchers
worldwide. The Company will also provide Incyte with information developed
from SNP association studies using Incyte's SNPs and the Company's reference
human DNA bank for inclusion in Incyte's LifeSeq(R) group of databases. The
Company and Incyte will jointly commercialize the resulting intellectual
property and expect to form partnership programs for downstream product
development. This agreement is in effect until termination by either party. As
of December 31, 2000, the Company has incurred related expenses totaling
approximately $730,000 in connection with the collaboration, and recognized
revenue in the amount of $907,975. The total expenses incurred related to the
Incyte collaboration represent substantially all of the costs associated with
service revenues for the year ended December 31, 2000.
License Agreements
The Company has entered into license agreements allowing the Company to
utilize certain patents. If these patents are used in connection with a
commercial product sale, the Company will pay royalties ranging from 1%-5% on
the related product revenues. Through December 31, 2000, the Company has not
sold any products that incorporate licensed technology.
9. Savings Plan
In 1998, the Company initiated a 401(k) savings plan covering most United
States employees. Individual employees may make contributions to the plan,
which can be matched by the Company in an amount determined by the Board of
Directors. The Company may also make contributions as determined by the Board
of Directors. The Company made a matching contribution totaling $110,712 in
2000.
10. German Government Grants
The Company's wholly-owned subsidiary, Sequenom GmbH, has been the
recipient of three grants from German government authorities. The first grant,
received in 1996 from the City/State of Hamburg, is for DEM 800,000
(approximately $475,000). This grant reimburses the subsidiary for the cost of
certain equipment to be used in a three-year research project. If the
equipment is not used for the grant's express purpose the equipment must be
relinquished to the City/State of Hamburg. Through December 31, 1998,
approximately
F-18
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DEM 704,000 (approximately $420,000) of such equipment had been purchased
under the grant program and was being used for the grant's express purpose. No
additional amounts are expected to be expended or received related to this
grant.
The second grant, also received in 1996, is from the German Federal
Ministry of Research and Development and amounts to DEM 2.2 million
(approximately $1.3 million). This grant reimburses the Company for certain
materials, personnel, travel and development costs. Through December 31, 1998,
approximately DEM 2.1 million (approximately $1.2 million) had been expended
and recognized under this grant program. No additional amounts are expected to
be expended or received related to this grant.
A third grant, received in 1998, is also from the German Federal Ministry
of Research and Development and amounts to DEM 1.4 million (approximately
$860,000). This grant reimburses the Company for certain materials, personnel,
travel and development costs. Through December 31, 2000, approximately
DEM 1.0 million (approximately $493,000) had been expended and recognized
under this grant program.
11. Geographic Information
The Company has a wholly-owned subsidiary located in Germany. The following
table presents information about the Company by geographic area. There were no
material amounts of transfers between geographic areas. Included in the
consolidated balance sheets are the following domestic and foreign components
at December 31, 2000 and 1999.
December 31,
--------------------------
2000 1999
------------ ------------
Current assets:
Domestic...................................... $151,072,420 $ 22,000,731
Foreign....................................... 2,941,686 1,405,294
------------ ------------
$154,014,106 $ 23,406,025
============ ============
Equipment and leasehold improvements, net:
Domestic...................................... $ 7,041,370 $ 4,902,314
Foreign....................................... 1,076,230 1,391,697
------------ ------------
$ 8,117,600 $ 6,294,011
============ ============
Other assets:
Domestic...................................... $ 4,130,178 $ 53,023
Foreign....................................... -- --
------------ ------------
$ 4,130,178 $ 53,023
============ ============
Total assets:
Domestic...................................... $162,243,968 $ 26,956,068
Foreign....................................... 4,017,916 2,796,991
------------ ------------
$166,261,884 $ 29,753,059
============ ============
Net loss:
Domestic...................................... $(30,565,278) $(18,896,256)
Foreign....................................... (2,320,633) (2,874,059)
------------ ------------
$(32,885,911) $(21,770,315)
============ ============
F-19
SEQUENOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Selected Quarterly Financial Data
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------ ----------- ----------- ----------- ------------
2000
Net sales............... $ 1,450,525 $ 1,806,775 $ 2,283,962 $ 2,712,211 $ 8,253,473
Gross profit............ 422,071 708,492 625,516 653,688 2,409,767
Net income (loss)....... (14,324,710) (5,643,808) (5,398,603) (7,518,790) (32,885,911)
Net income (loss) per
share
Historical, basic and
fully diluted........ $ (0.85) $ (0.23) $ (0.22) $ (0.31) $ (1.46)
Pro forma, basic and
fully diluted........ (0.65) (0.23) (0.22) (0.31) (1.39)
Shares used in
calculated per share
amounts
Historical, basic and
fully diluted........ 16,803,697 24,277,843 24,330,513 24,368,687 22,453,797
Pro forma, basic and
fully diluted........ 22,057,958 24,277,843 24,330,513 24,368,387 23,711,179
1999
Net sales............... $ -- $ -- $ -- $ -- $ --
Gross profit............ -- -- -- -- --
Net income (loss)....... (3,406,331) (4,345,669) (7,634,038) (6,384,277) (21,770,315)
Net income (loss) per
share
Historical, basic and
fully diluted........ $ (10.27) $ (12.82) $ (13.72) $ (3.01) $ (26.23)
Pro forma, basic and
fully diluted........ (0.24) (0.28) (0.48) (0.37) (1.42)
Shares used in
calculated per share
amounts
Historical, basic and
fully diluted........ 331,565 338,925 556,233 2,095,281 829,895
Pro forma, basic and
fully diluted........ 13,911,761 15,476,671 15,703,979 16,948,910 15,283,261
F-20
SCHEDULE II
SEQUENOM, INC.
VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E Column F
-------- ---------- ---------- ---------- ------------ --------
Additions
---------------------
Charged to Balance
Balance at Charged to Other at End
Beginning Costs and Accounts-- Deductions-- of
Description of Period Expenses Describe Describe Period
----------- ---------- ---------- ---------- ------------ --------
Year ended December 31,
2000
Allowance for doubtful
accounts............... $ -- $ 45,000 $ -- $ -- $ 45,000
Reserve for obsolete or
excess inventory....... $ -- $290,443 $ -- $203,803(1) $ 86,640
Warranty reserve........ $ -- $268,543 $ -- $ 79,819(2) $188,724
- --------
(1) Write off of obsolete or excess inventory
(2) Warranty items shipped to customers
There were no significant inventory or accounts receivable balances as of
December 31, 1999 and 1998.
F-21