926617--3/17/2006--CIPHERGEN_BIOSYSTEMS

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We expect to continue to incur net losses in 2006 and 2007. If we are unable to significantly increase our revenues or significantly decrease our expenses, we may never achieve profitability. If we are unable to further establish the utility of our products, our products and services may not achieve market acceptance. If we fail to successfully market the Series 4000, expand sales of our ProteinChip Systems, and develop new and improved applications for our products, our revenue will not increase and we will not achieve profitability. We may experience increased manufacturing costs or failure rates for our ProteinChip Systems and Arrays that are higher than we anticipated, particularly for new products that are introduced. We may not succeed in developing diagnostic products and even if we do succeed in developing diagnostic products, they may never achieve significant commercial market acceptance. Our ability to commercialize our potential diagnostic tests is heavily dependent on our strategic alliance with Quest Diagnostics. If we are unable to attract additional clients for our Biomarker Discovery Center services and satisfy these clients, we may not be successful in furthering adoption of our products and technology or generating additional revenue through commercial rights related to biomarker discoveries. New product introductions can result in disruptions to our revenue patterns and increased sales and marketing costs, and may involve manufacturing challenges that can negatively impact our gross margin. If we fail to continue to develop the technologies we base our products on, we may not be able to successfully foster further adoption of our products and services as an industry standard or develop new product offerings. If we are unable to provide our customers with software that enables the integration and analysis of large volumes of data, the acceptance and use of our products may be limited. Our quarterly operating results may fluctuate significantly due to a number of causes outside our control. If we are unable to reduce our lengthy sales cycle, our ability to become profitable will be harmed. We will need to raise additional capital in the future, and if we are unable to secure adequate funds on terms acceptable to us, we may be unable to execute our business plan. Future changes in financial accounting standards or practices may cause adverse unexpected fluctuations and affect our reported results of operations. Because our business is highly dependent on key executives, scientists, engineers and sales people, our inability to recruit and retain these people could hinder our business expansion plans. If we are unable to successfully expand our limited manufacturing capacity for ProteinChip readers and arrays, we may encounter manufacturing and quality control problems as we increase our efforts to meet demand. We face intense competition in our current and potential markets and if our competitors develop new technologies or products, our products may not achieve market acceptance and may fail to capture market share. Shareholder litigation may have a negative financial impact on us and require management time and attention. If we are unable to maintain our licensed rights to the SELDI technology, we may lose the right to produce ProteinChip Systems and products based on the SELDI technology and the right to provide services and information related thereto. If the government grants a license to the SELDI technology to others, it may harm our business. If we fail to maintain our rights to utilize intellectual property directed to diagnostic biomarkers, we may not be able to offer diagnostic tests using those biomarkers. We have drawn funds from the $10 million secured line of credit provided by Quest Diagnostics. If we fail to achieve the loan forgiveness milestones set forth therein, we will be responsible for full repayment of the loan. If a competitor infringes our proprietary rights, we may lose any competitive advantage we may have as a result of diversion of management time, enforcement costs and the loss of the exclusivity of our proprietary rights. If others successfully assert their proprietary rights against us, we may be precluded from making and selling our products or we may be required to obtain licenses to use their technology. We rely on single-source suppliers for many components of our ProteinChip Systems as well as processing services for our ProteinChip Arrays, and if we are unable to obtain these components and processing services, we would be harmed and our operating results would suffer. We may incur additional costs due to recalls made by our suppliers of parts integrated into some of our products. If we fail to maintain certain distribution and patent license agreements, we may have to stop selling certain products and this may harm our revenue. If there are reductions in research funding, the ability of our existing and prospective customers to purchase our products could be seriously harmed. If we or our future potential partners fail to comply with FDA requirements, we may not be able to market our products and services and may be subject to stringent penalties; further improvements to our manufacturing operations may be required that would entail additional costs. Our diagnostic efforts may cause us to have significant product liability exposure. Business interruptions could limit our ability to operate our business. Legislative actions resulting in higher compliance costs are likely to adversely impact our future financial position, cash flows and results of operations. Our business is subject to risks from international operations. We are exposed to fluctuations in the exchange rates of foreign currency. Consolidation in the pharmaceutical and biotechnology industries may reduce the size of our target market and cause a decrease in our revenue. We may not successfully resolve problems encountered in connection with any future acquisitions or strategic investments. We are subject to environmental laws and potential exposure to environmental liabilities. Anti-takeover provisions in our charter, bylaws and Stockholder Rights Plan and under Delaware law could make a third party acquisition of us difficult. Because we do not intend to pay dividends, our stockholders will benefit from an investment in our common stock only if it appreciates in value. Risks Related to Our Convertible Senior Notes and Common Stock Substantial leverage and debt service obligations may adversely affect our cash flows. The notes are unsecured, and future indebtedness could effectively rank senior to the notes. The notes are not protected by restrictive covenants, including financial covenants. We may be unable to repay, repurchase or redeem the notes. There may not be an active, liquid market for our common stock or the notes. The notes and the common stock issuable upon conversion of the notes may be subject to restrictions on resale. At various times during 2003, 2004 and 2005, the price at which our common stock could be purchased on the Nasdaq National Market was lower than the conversion price of the notes, and our stock price may be lower than the conversion price in the future. The notes may not be rated or may receive a lower rating than anticipated. Our stock price has been highly volatile, and an investment in our stock could suffer a decline in value, adversely affecting the value of the notes or the shares into which those notes may be converted. Future sales of our common stock in the public market could adversely affect the trading price of our common stock, the value of the notes and our ability to raise funds in new stock offerings.

Full 10-K form ▸

926617--3/17/2006--CIPHERGEN_BIOSYSTEMS_INC