Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                           |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                       |
| ** ** | **for  the quarterly period ended September 30, 2009.**                                                                                                                                                                     |
| ** ** | ** **                                                                                                                                                                                                                       |
| ** ** | **Or**                                                                                                                                                                                                                           |
| ** ** | ** **                                                                                                                                                                                                                       |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                          |
| ** ** | ** **                                                                                                                                                                                                                       |
| ** ** | **for  the transition period from                   to                 .** |

 

**Commissionfile # 000-28229**

 

**CALIPERLIFE SCIENCES, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**              | ** ** | **33-0675808**                           |
|---------------------------|------------|------------------------------------------|
| (State of  Incorporation) |       | (I.R.S. Employer  Identification Number) |

 

**68Elm Street**

**Hopkinton,Massachusetts 01748**

(Address and zip codeof principal executive offices)

 

Registrant’stelephone number, including area code:**(508) 435-9500**

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateweb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes o   No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large  accelerated filer o                |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o   No x

 

**NUMBEROF SHARES OF COMMON STOCK OUTSTANDING ON October 31, 2009: 49,032,477**

 

 

 

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**CALIPERLIFE SCIENCES, INC.**

 

**TABLEOF CONTENTS**

 
| ** **                                                                                                             | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I    FINANCIAL INFORMATION                                                                              |       | 2        |
|                                                                                                                   |       |     |
| Item 1.  Financial Statements (unaudited)                                                                         |       | 2        |
| Condensed Consolidated  Balance Sheets as of September 30, 2009 and December 31, 2008                        |       | 2        |
| Condensed  Consolidated Statements of Operations for the Three and Nine Months Ended  September 30, 2009 and 2008 |       | 3        |
| Condensed Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2009  and 2008           |       | 4        |
| Notes to Condensed Consolidated Financial Statements                                                                   |       | 5        |
|                                                                                                                   |       |     |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations               |       | 17       |
|                                                                                                                   |       |     |
| Item 3. Quantitative and Qualitative Disclosures  About Market Risk                                               |       | 25       |
|                                                                                                                   |       |     |
| Item 4. Controls and Procedures                                                                                   |       | 25       |
|                                                                                                                   |       |     |
| PART II   OTHER INFORMATION                                                                                  |       | 26       |
|                                                                                                                   |       |     |
| Item  1. Legal Proceedings                                                                                             |       | 26       |
|                                                                                                                   |       |     |
| Item  1A. Risk Factors                                                                                                 |       | 26       |
|                                                                                                                   |       |     |
| Item 2. Unregistered Sales of Equity Securities  and Use of Proceeds                                              |       | 27       |
|                                                                                                                   |       |     |
| Item 3. Defaults Upon Senior Securities                                                                           |       | 27       |
|                                                                                                                   |       |     |
| Item 4. Submission of Matters to a Vote of  Security Holders                                                      |       | 27       |
|                                                                                                                   |       |     |
| Item 5.  Other Information                                                                                        |       | 27       |
|                                                                                                                   |       |     |
| Item 6.  Exhibits                                                                                                 |       | 28       |
|                                                                                                                   |       |     |
| SIGNATURES                                                                                                             |       | 29       |
|                                                                                                                   |       |     |
| EXHIBIT  INDEX                                                                                                         |       | 30       |
| Ex-31.1  Section 302 Certification of CEO                                                                         |       |     |
| Ex-31.2  Section 302 Certification of CFO                                                                         |       |     |
| Ex-32.1  Section 906 Certification of CEO                                                                         |       |     |
| Ex-32.2  Section 906 Certification of CFO                                                                         |       |     |

 

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**PART I. FINANCIAL INFORMATION**

** **

**CALIPERLIFE SCIENCES, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(unaudited,in thousands, except share data)**

 

**Item1.    Financial Statements**

 
| ** **                                                                                                                                              | ** ** | **September 30,  2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                              | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current  assets:                                                                                                                                        |       |                         |       |                            |       |
| Cash  and cash equivalents                                                                                                                              |       | $                            | 24,180     |                            | $          | 23,667 |   |
| Marketable  securities                                                                                                                                  |       | 2,340                        |       | 3,034                           |       |
| Accounts  receivable, net                                                                                                                               |       | 23,698                       |       | 27,396                          |       |
| Inventories                                                                                                                                             |       | 13,189                       |       | 17,579                          |       |
| Prepaid  expenses and other current assets                                                                                                              |       | 2,225                        |       | 2,481                           |       |
| Total  current assets                                                                                                                                   |       | 65,632                       |       | 74,157                          |       |
| Property  and equipment, net                                                                                                                            |       | 9,656                        |       | 10,735                          |       |
| Intangible  assets, net                                                                                                                                 |       | 29,725                       |       | 34,399                          |       |
| Goodwill                                                                                                                                                |       | 22,905                       |       | 22,905                          |       |
| Other  assets                                                                                                                                           |       | 731                          |       | 882                             |       |
| Total  assets                                                                                                                                           |       | $                            | 128,649    |                            | $          | 143,078 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                          | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Current  liabilities:                                                                                                                                   |       |                         |       |                            |       |
| Accounts  payable                                                                                                                                       |       | $                            | 4,644      |                            | $          | 8,377 |   |
| Accrued  compensation                                                                                                                                   |       | 7,376                        |       | 5,175                           |       |
| Other  accrued liabilities                                                                                                                              |       | 10,073                       |       | 9,725                           |       |
| Deferred  revenue and customer deposits                                                                                                                 |       | 12,816                       |       | 14,284                          |       |
| Current  portion of accrued restructuring                                                                                                               |       | 2,262                        |       | 1,806                           |       |
| Borrowings  under credit facility                                                                                                                       |       | 14,900                       |       | 14,900                          |       |
| Total  current liabilities                                                                                                                              |       | 52,071                       |       | 54,267                          |       |
| Noncurrent  portion of accrued restructuring                                                                                                            |       | 1,842                        |       | 2,670                           |       |
| Other  noncurrent liabilities                                                                                                                           |       | 7,568                        |       | 8,275                           |       |
| Deferred  tax liability                                                                                                                                 |       | 1,128                        |       | 1,128                           |       |
| Commitments  and contingencies                                                                                                                          |       |                         |       |                            |       |
| Stockholders’  equity:                                                                                                                             |       |                         |       |                            |       |
| Preferred  stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and  outstanding                                                      |       | —                       |       | —                          |       |
| Common  stock, $0.001 par value; 100,000,000 shares authorized, 49,029,978 and  48,596,233 shares issued and outstanding in 2009 and 2008, respectively |       | 49                           |       | 49                              |       |
| Additional  paid-in capital                                                                                                                             |       | 382,041                      |       | 378,919                         |       |
| Accumulated  deficit                                                                                                                                    |       | (316,487                     | )          | (302,412                        | )          |
| Accumulated  other comprehensive income                                                                                                                 |       | 437                          |       | 182                             |       |
| Total  stockholders’ equity                                                                                                                        |       | 66,040                       |       | 76,738                          |       |
|                                                                                                                                                    |       |                         |       |                            |       |
| Total  liabilities and stockholders’ equity                                                                                                        |       | $                            | 128,649    |                            | $          | 143,078 |   |

 

*Seeaccompanying notes.*

 

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**CALIPERLIFE SCIENCES, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except per share data)**

**(unaudited)**

 
| ** **                                                             | ** ** | **Three Months Ended******** September 30,** | ** ** | **Nine Months Ended******** September 30,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2009**                                                         | ** ** | **2008**                                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues:                                                              |       |                                                             |       |                                                            |       |   |   |   |   |
| Product  revenue                                                       |       | $                                                                | 20,952     |                                                            | $          | 19,965 |   | $ | 60,760 |   | $ | 59,655 |   |
| Service  revenue                                                       |       | 8,200                                                            |       | 10,563                                                          |       | 23,761 |   | 28,860 |   |
| License  fees and contract revenue                                     |       | 3,021                                                            |       | 3,513                                                           |       | 8,234 |   | 8,844 |   |
|                                                                   |       |                                                             |       |                                                            |       |   |   |   |   |
| Total  revenue                                                         |       | 32,173                                                           |       | 34,041                                                          |       | 92,755 |   | 97,359 |   |
|                                                                   |       |                                                             |       |                                                            |       |   |   |   |   |
| Costs  and expenses:                                                   |       |                                                             |       |                                                            |       |   |   |   |   |
| Cost  of product revenue                                               |       | 11,947                                                           |       | 11,983                                                          |       | 36,030 |   | 36,321 |   |
| Cost  of service revenue                                               |       | 5,393                                                            |       | 6,590                                                           |       | 16,431 |   | 19,134 |   |
| Cost  of license revenue                                               |       | 356                                                              |       | 588                                                             |       | 1,057 |   | 1,154 |   |
| Research  and development                                              |       | 4,221                                                            |       | 4,953                                                           |       | 13,406 |   | 15,526 |   |
| Selling,  general and administrative                                   |       | 10,786                                                           |       | 10,256                                                          |       | 33,235 |   | 36,945 |   |
| Amortization  of intangible assets                                     |       | 1,548                                                            |       | 1,742                                                           |       | 4,662 |   | 6,721 |   |
| Restructuring  charges, net                                            |       | 1,044                                                            |       | 2,686                                                           |       | 1,096 |   | 2,666 |   |
|                                                                   |       |                                                             |       |                                                            |       |   |   |   |   |
| Total  costs and expenses                                              |       | 35,295                                                           |       | 38,798                                                          |       | 105,917 |   | 118,467 |   |
|                                                                   |       |                                                             |       |                                                            |       |   |   |   |   |
| Operating  loss                                                        |       | (3,122                                                           | )          | (4,757                                                          | )          | (13,162 | ) | (21,108 | ) |
| Interest  expense, net                                                 |       | (144                                                             | )          | (227                                                            | )          | (535 | ) | (584 | ) |
| Other  expense, net                                                    |       | (85                                                              | )          | (411                                                            | )          | (202 | ) | (92 | ) |
|                                                                   |       |                                                             |       |                                                            |       |   |   |   |   |
| Loss  before income taxes                                              |       | (3,351                                                           | )          | (5,395                                                          | )          | (13,899 | ) | (21,784 | ) |
|                                                                   |       |                                                             |       |                                                            |       |   |   |   |   |
| Provision  for income taxes                                            |       | (26                                                              | )          | (1                                                              | )          | (176 | ) | (229 | ) |
|                                                                   |       |                                                             |       |                                                            |       |   |   |   |   |
| Net  loss                                                              |       | $                                                                | (3,377     | )                                                               | $          | (5,396 | ) | $ | (14,075 | ) | $ | (22,013 | ) |
|                                                                   |       |                                                             |       |                                                            |       |   |   |   |   |
| Net  loss per share, basic and diluted                                 |       | $                                                                | (0.07      | )                                                               | $          | (0.11 | ) | $ | (0.29 | ) | $ | (0.46 | ) |
| Shares  used in computing net loss per common share, basic and diluted |       | 49,013                                                           |       | 48,378                                                          |       | 48,816 |   | 47,987 |   |

 

*Seeaccompanying notes.*

 

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**CALIPERLIFE SCIENCES, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited,in thousands)**

 
| ** **                                                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2009**                                                | ** ** | **2008** | ** ** |
| **Operating activities**                                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net  loss                                                                 |       | $                                                       | (14,075    | ) | $ | (22,013 | ) |
| Adjustments  to reconcile net loss to net cash from operating activities: |       |                                                    |       |   |   |
| Depreciation  and amortization                                            |       | 6,992                                                   |       | 9,561 |   |
| Stock-based  compensation expense, net                                    |       | 2,916                                                   |       | 2,988 |   |
| Restructuring  charges, net                                               |       | 1,096                                                   |       | 2,666 |   |
| Foreign  currency exchange losses                                         |       | 229                                                     |       | 120 |   |
| Changes  in operating assets and liabilities:                             |       |                                                    |       |   |   |
| Accounts  receivable                                                      |       | 3,939                                                   |       | 2,843 |   |
| Inventories                                                               |       | 4,547                                                   |       | (1,955 | ) |
| Prepaid  expenses and other current assets                                |       | 367                                                     |       | (314 | ) |
| Accounts  payable and other accrued liabilities                           |       | (4,159                                                  | )          | (2,832 | ) |
| Accrued  compensation                                                     |       | 2,092                                                   |       | (1,871 | ) |
| Deferred  revenue and customer deposits                                   |       | (1,632                                                  | )          | 1,640 |   |
| Other  noncurrent liabilities                                             |       | (707                                                    | )          | 1,346 |   |
| Payments  of accrued restructuring obligations, net                       |       | (1,453                                                  | )          | (2,187 | ) |
|                                                                      |       |                                                    |       |   |   |
| Net  cash from operating activities                                       |       | 152                                                     |       | (10,008 | ) |
|                                                                      |       |                                                    |       |   |   |
| **Investing activities**                                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Purchases  of marketable securities                                       |       | (2,814                                                  | )          | (1,914 | ) |
| Proceeds  from sales of marketable securities                             |       | 400                                                     |       | — |   |
| Proceeds  from maturities of marketable securities                        |       | 3,148                                                   |       | 2,911 |   |
| Other  assets                                                             |       | 66                                                      |       | (42 | ) |
| Purchases  of property and equipment                                      |       | (1,230                                                  | )          | (2,720 | ) |
| Deferred  gain from divestiture of product lines                          |       | 711                                                     |       | — |   |
|                                                                      |       |                                                    |       |   |   |
| Net  cash from investing activities                                       |       | 281                                                     |       | (1,765 | ) |
|                                                                      |       |                                                    |       |   |   |
| **Financing activities**                                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Borrowings  under credit facility                                         |       | 17,500                                                  |       | 4,000 |   |
| Payments  of credit facility                                              |       | (17,500                                                 | )          | (2,000 | ) |
| Proceeds  from issuance of common stock                                   |       | 270                                                     |       | 928 |   |
|                                                                      |       |                                                    |       |   |   |
| Net  cash from financing activities                                       |       | 270                                                     |       | 2,928 |   |
|                                                                      |       |                                                    |       |   |   |
| Effect  of exchange rates on changes in cash and cash equivalents         |       | (190                                                    | )          | (130 | ) |
| Net  increase (decrease) in cash and cash equivalents                     |       | 513                                                     |       | (8,975 | ) |
| Cash  and cash equivalents at beginning of period                         |       | 23,667                                                  |       | 15,709 |   |
|                                                                      |       |                                                    |       |   |   |
| Cash  and cash equivalents at end of period                               |       | $                                                       | 24,180     |   | $ | 6,734 |   |

 

*Seeaccompanying notes.*

 

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**CALIPERLIFE SCIENCES, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**September 30,2009**

**(unaudited)**

 

**1. Basisof Presentation and Summary of Significant Accounting Policies**

 

***Basis of Presentation***

 

The accompanyingunaudited consolidated financial statements of Caliper Life Sciences, Inc.and its wholly owned subsidiaries (collectively, the “Company” or “Caliper”)have been prepared by the Company pursuant to the rules and regulations ofthe Securities and Exchange Commission (“SEC”) and generally acceptedaccounting principles for interim financial information. Certain informationand footnote disclosures normally included in financial statements prepared inaccordance with U.S. generally accepted accounting principles (“GAAP”) havebeen condensed or omitted pursuant to such rules or regulations. The December 31,2008 consolidated balance sheet has been derived from the Company’s auditedfinancial statements as of that date, but does not include all disclosuresrequired by U.S. GAAP. In the opinion of management, all adjustments(consisting of normal recurring entries) considered necessary for a fairpresentation have been included. However, these unaudited consolidatedfinancial statements should be read in conjunction with Caliper’s Annual Reporton Form 10-K for the year ended December 31, 2008.

 

Operating results for thethree and nine months ended September 30, 2009 are not necessarilyindicative of the results that may be expected for the full fiscal year or forany future periods. For example, the Company typically experiences higherrevenue in the fourth quarter of its fiscal year due to spending patterns ofits customers, and may realize significant periodic fluctuations in license andcontract revenue depending on the timing and circumstances of underlyingindividual transactions.

 

Caliper currentlyoperates in one business segment: the development and commercialization of lifescience instruments and related consumables and services for use in drugdiscovery and development and other life sciences research.

 

As shown in theconsolidated financial statements, at September 30, 2009, Caliper has atotal cash, cash equivalents and marketable securities balance of $26.5 millionand an accumulated deficit of $316.5 million.  On March 6, 2009,Caliper entered into a Second Amended and Restated Loan and Security Agreement(the “Credit Facility”) with a bank. The accompanying financial statementsassume that Caliper’s cash, cash equivalents and marketable securities balanceat September 30, 2009, and access to available capital under its CreditFacility are sufficient to fund operations through at least November 30,2010, which is the date of maturity of its Credit Facility, based upon itscurrent operating plan. Caliper’s ability to fund its operations will depend onmany factors, including particularly its ability to increase product andservice sales, control margins and operating costs and maintain its borrowingcapacity and compliance with the covenants of its Credit Facility. As morefully described in Note 8, the amount of available capital that Caliper is ableto access under the Credit Facility at any particular time is dependent upon aborrowing base formula, which ultimately relies on the underlying performanceof the business. The Credit Facility also contains certain rights which, ifexercised by the lender, could result in any or all of the following: anacceleration of the maturity date of any outstanding debt, a reduction inborrowing capacity, and a termination of advances. If economic conditionsworsen and Caliper’s business performance is not as strong as anticipated, thenCaliper could experience an event of default or a reduction in its borrowingcapacity under the Credit Facility, which if not cured to the bank’ssatisfaction, could potentially have a material adverse impact on its abilityto access capital under its Credit Facility in order to fund planned 2009 and2010 operations. If such events were to occur, Caliper’s business would beadversely affected.

 

Caliper evaluates eventsand transactions that occur after the balance sheet date as potentialsubsequent events.  Caliper performedthis evaluation through November 9, 2009, the date on which its financialstatements were issued, and concluded that no such events exist.

 

***Summary of Significant Accounting Principles***

 

The accounting policiesunderlying the accompanying unaudited consolidated financial statements arethose set forth in Note 2 to the consolidated financial statementsincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2008, filed with the SEC on March 13, 2009. Those policies are notpresented herein, except to the extent that new policies have been adopted orthat the description of existing policies has been meaningfully updated.

 

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***Revenue Recognition***

 

*GeneralPolicy*

 

Caliper recognizesrevenue when persuasive evidence of an arrangement exists, delivery hasoccurred or services have been rendered, the fee is fixed or determinable, andcollectability is reasonably assured or probable, as applicable. Product revenueis recognized upon passage of title, which for the majority of sales occurswhen goods are shipped under Caliper’s standard terms of “FOB origin.” Revenueassociated with customer product purchases delivered under terms of “FOBdestination” is deferred until the product is received by the customer.Revenues on shipments subject to customer acceptance provisions are recognizedonly upon customer acceptance provided all other revenue recognition criteriaare met. In general, sales made by Caliper do not include general return rightsor privileges. In the limited circumstance where a right of return exists,Caliper recognizes revenue when the right has lapsed. Based upon Caliper’sprior experiences, sales returns have not been significant and therefore a generalprovision for sales returns or other allowances is not recorded at the time ofsale. Revenue from services offered by Caliper is generally recognized as theservices are performed (or, as applicable, ratably over the contract serviceterm in the case of annual maintenance contracts). Provision is made at thetime of sale for estimated costs related to Caliper’s warranty obligations tocustomers.

 

Cash received fromcustomers as advance deposits for undelivered products and services includingcontract research and development services, is recorded within customerdeposits until revenue is recognized. Revenue related to annual maintenancecontracts or other remaining undelivered performance obligations is deferredand recognized upon completion of the underlying performance criteria.

 

*Product Revenue*

 

Product revenue isrecognized upon the shipment and transfer of title to customers and is recordednet of discounts and allowances. Revenues on shipments subject to customeracceptance provisions are recognized only upon customer acceptance provided allother revenue recognition criteria are met. Customer product purchases aregenerally delivered under standardized terms of “FOB origin” with the customerassuming the risks and rewards of product ownership at the time of shippingfrom Caliper’s warehouse. Revenue associated with customer product purchasesdelivered under terms of “FOB destination” is deferred until product isdelivered to the customer. In accordance with Accounting Standards Update (ASU)No. 2009-13, Caliper defers the relative selling price of any elementsthat remain undelivered after product shipment and/or acceptance (asapplicable), such as remaining services to be performed.

 

*Serviceand Annual Maintenance Agreements*

 

Caliper’s general policyis to recognize revenue on a proportional performance basis in accordance withdefined contractual outputs.  The vastmajority of services work that is performed (generally by Caliper’s Alliancesand Discovery Services, “CDAS,” services group) is performed on a singledeliverable or task order basis.  Service revenue is recognized as services are performed, typically usingthe proportional performance method based upon defined outputs or otherreasonable measures as applicable, or ratably over the contract service term inthe case of annual maintenance contracts. Customers may purchase optionalwarranty coverage during the initial standard warranty term and annualmaintenance contracts beyond the standard warranty expiration. These optionalservice offerings are not included in the price Caliper charges customers forthe initial product purchase. Under Caliper’s standard warranty, the customeris entitled to repair or replacement of defective goods. Software upgrades arenot included in the standard warranty.

 

*Licensingand Royalty*

 

Revenue from up-frontlicense fees is recognized when the earnings process is complete and no furtherobligations exist. If further obligations exist, the up-front license fee isrecognized ratably over the obligation period. Royalties under licenses arerecorded as earned in accordance with contract terms, when third-party resultsare reliably measured and collectability is reasonably assured.  Method patent licenses purchased by our commercialimaging customers are recognized ratably over the term of the license.

 

*ContractRevenue*

 

Revenue from contractresearch and development services is recognized as earned based on theperformance requirements of the contract. Non-refundable contract fees; unlessbased upon time and materials, time and expense, or substantive milestones; aregenerally recognized using the proportional performance method.

 

*MultipleElement Arrangements*

 

Caliper’s revenuearrangements often include the sale of an instrument, consumables, software,service, technology licenses,

 

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installation andtraining. Revenue arrangements may include one of these single elements, or mayincorporate one or more elements in a single transaction or combination ofrelated transactions.  During the third quarter of 2009, Caliper adoptedthe guidance of ASU No. 2009-13, *Revenue Recognition (Topic605): Multiple-Deliverable Revenue Arrangements,*and ASU No. 2009-14,*Software (Topic 985): Certain Revenue ArrangementsThat Include Software Elements* which were ratified by the FinancialAccounting Standards Board (FASB) Emerging Issues Task Force on September 23,2009.  ASU No. 2009-13 affects accountingand reporting for all multiple-deliverable arrangements.  It also affects companies that are affectedby the amendments of ASU No. 2009-14.

 

The amendments in the ASUNo. 2009-14 provide that tangible products containing software componentsand non-software components that function together to deliver the tangibleproduct’s essential functionality are no longer within the scope of thesoftware revenue guidance in Subtopic 985-605. In addition, the amendments require that hardware components of a tangibleproduct containing software components always be excluded from the softwarerevenue guidance.

 

ASU No. 2009-13establishes a selling price hierarchy for determining the selling price of adeliverable in a sale arrangement.  Theselling price for each deliverable is based on vendor-specific objectiveevidence (“VSOE”) if available, third-party evidence (“TPE”) if VSOE is notavailable, or estimated selling price if neither VSOE or TPE is available.  The amendments in this ASU eliminate theresidual method of allocation and require that arrangement consideration beallocated at the inception of the arrangement to all deliverables using therelative selling price method.  Therelative selling price method allocates any discount in the arrangement proportionatelyto each deliverable on the basis of the deliverable’s selling price.

 

Caliper has elected toadopt these standards in the third quarter of 2009, both prospectively andeffective beginning on January 1, 2009. Caliper has concluded that adoption of these standards did notmaterially affect any of the quarterly periods of 2009.

 

*Imaging Product Line*

 

Caliper’s Imagingproducts typically contain the following elements: the imaging instrument,software, installation services, training services, post-contract supportservices (PCS), and for Caliper’s commercial customers, a method patentlicense. Prior to ASU 2009-14, Caliper accounted for these instruments underthe software revenue recognition guidance as the software was determined to bemore than incidental to the instrument. As a result of the adoption of ASU2009-14, Caliper has concluded that the software functions together with theinstrument to deliver the instrument’s essential functionality, and thus is nolonger subject to the guidance of Subtopic 985-605. As such, Caliper now usesthe guidance of ASC 605-25, as updated by ASU 2009-13, to allocate arrangementconsideration to each element of the arrangement.

 

As required by ASU2009-13, when allocating arrangement consideration, a determination of sellingprice must be made for each element of the arrangement.  Where VSOE exists for an element, Caliper hasused VSOE as the selling price. Caliper generally and historically hasdemonstrated VSOE for installation services, training services, PCS, and itsmethod patents. Caliper’s Imaging instruments are always delivered togetherwith software. As such, VSOE does not exist for these elements. Caliperconcluded that sufficient TPE does not exist to serve as a basis fordetermining selling price due to the unique and proprietary technologiesoffered in its products; however, Caliper has considered any TPE informationthat is available in its estimates of selling price.  As a result, Caliper has estimated the sellingprice of the combined Imaging instrument and software. In estimating sellingprices, Caliper considers a number of factors including: Caliper’s pricingpolicies and objectives, information gathered from its experience in customernegotiations, market research and information, recent technological trends andinnovation, the nature of any services purchased by the customer, andcompetitor pricing (where available).

 

*Research Product Lines*

 

Caliper’s Researchproducts, which include microfluidic and automation offerings, typicallycontain the following elements: the instrument, software, installationservices, training services and for Caliper’s microfluidic customers, themicrofluidic chip.  Caliper uses theguidance of ASC 605-25, as updated by ASU 2009-13, to allocate arrangementconsideration to each element of the arrangement.

 

As required by ASU2009-13, when allocating arrangement consideration, a determination of sellingprice must be made for each element of the arrangement.  Where VSOE exists for an element, Caliper hasused VSOE as the selling price. Caliper generally and historically hasdemonstrated VSOE for installation services, training services and itsmicrofluidic chips. Caliper’s Research instruments and software are rarely soldseparately. As such, VSOE does not exist for these elements. Caliper concludedthat sufficient TPE does not exist to serve as a basis for determining sellingprice due to the unique and proprietary technologies offered in its products;however, Caliper has considered any TPE information that is available in itsestimates of selling price.  Caliper hasestimated the selling price of the combined Research instrument and software.In estimating selling prices, Caliper considers a number of factors including:Caliper’s pricing policies and objectives, information gathered from ourexperience in customer negotiations, market research and information, recenttechnological trends and innovation, the nature of any services purchased bythe customer, and competitor pricing (where available). 

 

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Prior to the adoption ofthe new standards, Caliper allocated arrangement consideration associated withits Imaging and Research product lines to the various elements using theresidual method which was required under the previous literature. This requiredCaliper to allocate VSOE to all of the undelivered elements, with the remainingarrangement consideration, including any discounts on the transaction, gettingallocated to the delivered elements. The new standards do not allow the use ofthe residual method, and require arrangement consideration to be allocated toall of the elements based on their relative selling prices. For Caliper’sarrangements, this typically results in an increase in the revenue that Caliperrecognizes when it delivers an instrument, the magnitude of which is affectedby the size of the discount.

 

***Fair Values of Assets and Liabilities***

 

Caliper measures fairvalue at the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date.  The Statement prioritizes the assumption that marketparticipants would use in pricing the asset or liability (the “inputs”) into athree-tier fair value hierarchy.  This fair value hierarchy gives thehighest priority (Level 1) to quoted prices in active markets for identicalassets or liabilities and the lowest priority (Level 3) to unobservable inputsin which little or no market data exists, requiring companies to develop theirown assumptions.

 

Observable inputs that donot meet the criteria of Level 1, and include quoted prices for similar assetsor liabilities in active markets or quoted prices for identical assets andliabilities in markets that are not active, are categorized as Level 2. Level 3 inputs are those that reflect our estimates about the assumptionsmarket participants would use in pricing the asset or liability, based on the bestinformation available in the circumstances.  Valuation techniques forassets and liabilities measured using Level 3 inputs may include methodologiessuch as the market approach, the income approach or the cost approach, and mayuse unobservable inputs such as projections, estimates and management’sinterpretation of current market data.  These unobservable inputs are onlyutilized to the extent that observable inputs are not available orcost-effective to obtain.

 

On September 30,2009, Caliper’s investments were valued in accordance with the fair valuehierarchy as follows (in thousands):

 
| ** **                      | ** ** | **Total  Fair********Value** | ** ** | **Quoted******** Prices in******** Active******** Markets******** (Level 1)** | ** ** | **Observable******** Inputs******** (Level 2)** | ** ** | **Unobservable******** Inputs******** (Level 3)** | ** ** |
|---------------------------------|------------|------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Money  market funds             |       | $                            | 7,639      |                                                                                              | $          | 7,639                                                     |       | $                                                           | —     |   | $ | — |   |
| Commercial  paper               |       | —                       |       | —                                                                                            |       | —                                                    |       | —                                                      |       |
| U.S.  corporate notes and bonds |       | 614                          |       | —                                                                                            |       | 614                                                       |       | —                                                      |       |
| U.S.  treasury bills            |       | 1,699                        |       | —                                                                                            |       | 1,699                                                     |       | —                                                      |       |
| Total                           |       | $                            | 9,952      |                                                                                              | $          | 7,639                                                     |       | $                                                           | 2,313      |   | $ | — |   |

 

Investments are generallyclassified as Level 1 or Level 2 because they are valued using quoted marketprices, broker or dealer quotations, market prices received from industrystandard pricing data providers or alternative pricing sources with reasonablelevels of price transparency.  Investments in U.S. Treasury Securities andovernight Money Market Mutual Funds have been classified as Level 1 becausethese securities are valued based upon quoted prices in active markets orbecause the investments are actively traded.

 

As of September 30,2009, Caliper’s cash and available for sale securities of $26.5 million allhave contracted maturities of less than one year.  In addition, none of Caliper’s securitieswere in an unrealized loss position as of September 30, 2009.

 

***Income Taxes***

 

Caliper accounts forincome taxes and uncertainty in income taxes recognized in financial statementsin accordance with FASB ASC 740,*IncomeTaxes.*   ASC 740 prescribes a comprehensive model for therecognition, measurement, and financial statement disclosure of uncertain taxpositions. Unrecognized tax benefits are the differences between tax positionstaken, or expected to be taken, in tax returns, and the benefits recognized foraccounting purposes pursuant to ASC 740. Caliper classifies uncertain taxpositions as short-term liabilities within accrued expenses.  During thenine-month period ended September 30, 2009 and 2008, Caliper’s taxprovisions primarily relate to foreign taxes in jurisdictions where itswholly-owned subsidiaries are profitable.

 

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***Goodwill***

 

Caliper performs a testfor the impairment of goodwill annually following the related acquisition, ormore frequently if events or circumstances indicate that goodwill may beimpaired. Because Caliper has a single operating segment, which is the solereporting unit, Caliper performs this test by comparing the fair value ofCaliper with its carrying value, including goodwill. If the fair value exceedsthe carrying value, goodwill is not impaired. If the book value exceeds thecarrying value, Caliper would calculate the potential impairment loss bycomparing the implied fair value of goodwill with the book value of goodwill.If the implied fair value of goodwill is less than the book value, animpairment charge would be recorded equal to the difference. Caliper recorded agoodwill impairment charge of $43.4 million in 2008 which is described inNote 7 to our consolidated financial statements in our Annual Report on Form 10-Kfor the year ended December 31, 2008 filed with the SEC on March 13,2009.

 

As of September 30,2009, Caliper analyzed its goodwill for indicators of impairment, and concludedthat there were none.

 

***Recent Accounting Pronouncements***

 

In November 2007,the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 07-1 (“EITF No. 07-1”),*Accounting for Collaborative Arrangements Related tothe Development and Commercialization of Intellectual Property.*    EITF No. 07-1 requirescollaborators in such an arrangement to present the result of activities forwhich they act as the principal on a gross basis and report any paymentsreceived from (or payments made to) other collaborators based on otherapplicable GAAP or, in the absence of other applicable GAAP, based on analogyto authoritative accounting literature or a reasonable, rational, andconsistently applied accounting policy election. Caliper adopted EITF No. 07-1during the first quarter of 2009.  This standard has subsequently beencodified under FASB ASC Topic 620. The effect of adoption did not have amaterial impact on Caliper’s financial statements and therefore did not requireretroactive application as Caliper’s collaborative agreements do notincorporate such revenue- and cost-sharing arrangements.

 

In December 2007,the FASB issued SFAS No. 141(R),*BusinessCombinations*. This Standard will require an acquiring company tomeasure all assets acquired and liabilities assumed, including contingentconsiderations and all contractual contingencies, at fair value as of theacquisition date. In addition, an acquiring company is required to capitalizeIn-Process Research and Development and either amortize it over the life of theproduct, or write it off if the project is abandoned or impaired. The Standardis effective for transactions occurring on or after January 1, 2009.  Caliper will apply the disclosure provisionsas appropriate in future filings.  Thisstandard has subsequently been codified under FASB ASC 820.

 

In April 2009, theFASB issued Staff Position No. 107-1 (“FSP FAS 115-2”) and APB 28-1,*Interim Disclosures About Fair Value of FinancialInstruments*, effective for interim and annual periods ending after June 15,2009. FSP FAS 115-2 requires fair value disclosures of financial instruments ona quarterly basis, as well as new disclosures regarding the methodology andsignificant assumptions underlying the fair value measures and any changes tothe methodology and assumptions during the reporting period. Caliper will applythe disclosure provisions as appropriate in future filings. These standardshave subsequently been codified under FASB ASC Topic 825.

 

In April 2009, theFASB issued Staff Position No. 115-2 (“FSP FAS 115-2”) and Staff Position No. 124-2(“FSP FAS 124-2”), *Recognition andPresentation of Other-Than-Temporary Impairments*, which amends theother-than-temporary impairment guidance for debt and equity securities. FSPFAS 115-2 and FSP FAS 124-2 shall be effective for interim and annual reportingperiods ending after June 15, 2009. These standards have subsequently been codified under FASB ASC Topic320. Caliper believes that adoption will not have a material impact on itsresults of operations, financial position or cash flows.

 

In April 2009, theFASB issued FSP Issue No. FAS No. 157-4 (“FSP FAS 157-4”),*Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions that are not Orderly*. FSP FAS No. 157-4provides additional guidance for estimating fair value in accordance with SFAS No. 157.FSP No. 157-4 is effective for reporting periods ending after June 15,2009.  This standard has subsequently been codified under FASB ASC Topic820.  Caliper believes that adoption willnot have a material impact on its results of operations, financial position orcash flows.

 

In May 2009, theFASB issued SFAS No. 165,*SubsequentEvents*.  SFAS No. 165 provides authoritative accountingliterature for the evaluation and disclosure of subsequent events.  SFAS No. 165is effective for reporting periods ending after June 15, 2009. Caliper believes that adoption will not have a material impact on its resultsof operations, financial position or cash flows. This standard has subsequentlybeen codified under FASB ASC Topic 855.

 

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Effective July 1,2009, the FASB issued accounting guidance which establishes the FASB AccountingStandards Codification (the “Codification”) as the sources of authoritativeaccounting principles recognized by the FASB to be applied by nongovernmentalentities in the preparation of financial statements in conformity with U.S.GAAP.  Rules and interpretivereleases of the SEC under authority of federal securities laws are also sourcesof authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level ofauthority.  The Codification supersededall existing non-SEC accounting and reporting standards.  All other non-grandfathered, non-SECaccounting literature not included in the Codification isnon-authoritative.  The Codification doesnot change GAAP and did not impact the Company’s financial position or resultsof operations.

 

**2. Product Line Divestitures**

 

***PDQ Product Line Divestiture***

 

On October 29, 2008,Caliper entered into an Asset Sale and Purchase Agreement (the “PurchaseAgreement”) with Sotax Corporation (“Sotax”), a Virginia corporation and aprivately-owned subsidiary of SOTAX Holding A.G. based in Switzerland. ThePurchase Agreement provided for the sale of Caliper’s PharmaceuticalDevelopment and Quality (“PDQ”) product line to Sotax for a purchase price ofapproximately $15.8 million, including $13.8 million in cash togetherwith certain assumed liabilities upon closing which were approximately$2.0 million (the “Purchase Price”). In addition, $1.0 million of thePurchase Price was placed into an escrow account until the first anniversary ofNovember 10, 2008, the closing date. The escrow secures Caliper’sindemnification obligations to Sotax, if any, under the Purchase Agreement. ThePurchase Agreement also contains representations, warranties and indemnitiesthat are customary in asset sale transactions. Caliper realized approximately$12.6 million in net cash proceeds from the sale of its PDQ product lineupon closing, after the escrow account deposit and transaction expenses. Aspart of this transaction, Caliper sold approximately $0.5 million in netassets, which consisted primarily of inventory net of deferred revenue andaccrued expenses. Caliper recorded a $1.4 million gain on the sale of the PDQproduct line based upon the net proceeds in excess of total divested netassets, which included $10.5 million of goodwill that was allocated to theproduct line on a relative fair value basis.  During the nine months endedSeptember 30, 2008 there was $7.2 million in revenue attributable to thePDQ product line in the accompanying statement of operations.

 

In September 2009,approximately $0.7 million was released to Caliper from escrow after theparties reached agreement related to indemnification claims made by Sotax inconnection with the Purchase Agreement. Caliper has deferred the gain related to these proceeds until the firstanniversary date of the closing, which is November 10, 2009.  Assuming there are no additional claims madeby Sotax, this amount will be recorded as a gain on the sale of the PDQ productline within other income during the fourth quarter of 2009.

 

***AutoTrace Product Line Divestiture***

 

On November 10,2008, Caliper entered into an Asset Purchase Agreement (the “Asset PurchaseAgreement”) with Dionex Corporation (“Dionex”), a publicly traded Delawarecorporation. The Asset Purchase Agreement provided for the sale of Caliper’sAutoTrace product line to Dionex for a purchase price of approximately$5.0 million. As part of this transaction, Caliper sold approximately$0.3 million in net assets, which consisted primarily of inventory, net ofdeferred revenue and accrued expenses. Caliper recorded a $0.7 million gain onthe sale of the AutoTrace product line based upon the net proceeds in excess oftotal divested net assets, which included $3.8 million of goodwill thatwas allocated to the product line on a relative fair value basis. Duringthe nine months ended September 30, 2009 and 2008 there was $0.3 millionand $2.0 million, respectively, in revenue attributable to the AutoTraceproduct line in the accompanying statement of operations.  The $0.3million of 2009 revenue included remaining revenues associated with thetransition services arrangement that ended during the first quarter of 2009.

 

**3.Inventories**

 

Inventories are stated atthe lower of cost (determined on a first-in, first-out basis, or “FIFO”) ormarket. Amounts are relieved from inventory and recognized as a component ofcost of sales on a FIFO basis. Inventories consist of the following (inthousands):

 
| ** **      | ** ** | **September 30,  2009** | ** ** | **December 31,   2008** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------------|------------|
| Raw  material   |       | $                            | 6,754      |                              | $          | 10,173 |   |
| Work-in-process |       | 599                          |       | 907                               |       |
| Finished  goods |       | 5,836                        |       | 6,499                             |       |
| Inventories     |       | $                            | 13,189     |                              | $          | 17,579 |   |

 

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**4.Intangibles**

 

Intangibles, net, consistof the following assets acquired in connection with previous businesscombinations (in thousands):

 
| ** **                                   | ** ** | **September 30,  2009** | ** **   | **December 31,  2008** | ** ** |
|----------------------------------------------|------------|------------------------------|--------------|-----------------------------|------------|
| Core  technologies                           |       | $                            | 19,298       |                        | $          | 21,893 |   |
| Developed  and contract technologies         |       | 4,400                        |         | 5,884                       |       |
| Customer  contracts, lists and relationships |       | 3,129                        |         | 3,724                       |       |
| Trade  names                                 |       | 2,898                        |         | 2,898                       |       |
|                                         |       | $                            |  29,725 |                        | $          | 34,399 |   |

 

**5.Warranty Obligations**

 

Caliper provides forestimated warranty expenses as a component of cost of revenue at the timeproduct revenue is recognized.  Caliper offers a one-year limited warrantyon most products, which is included in the selling price. Caliper’s standardlimited warranty covers repair or replacement of defective goods, apreventative maintenance visit on certain products, and telephone-basedtechnical support. Factors that affect Caliper’s warranty liability include thenumber of installed units, historical and anticipated rates of warranty claims,and cost per claim. Caliper periodically assesses the adequacy of its recordedwarranty liabilities and adjusts amounts as necessary.

 

Changes in Caliper’swarranty obligation are as follows (in thousands):

 
| ** **                           | ** ** | **Nine  Months Ended September 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| Balance  at beginning of period      |       | $                                                   | 1,362      |   | $ | 1,684 |   |
| Warranties  issued during the period |       | 1,365                                               |       | 1,177 |   |
| Settlements  made during the period  |       | (1,144                                              | )          | (1,224 | ) |
| Balance  at end of period            |       | $                                                   | 1,583      |   | $ | 1,637 |   |

 

**6.Comprehensive Loss**

 

Comprehensive loss is asfollows (in thousands):

 
| ** **                                       | ** ** | **Three Months Ended******** September 30,** | ** ** | **Nine  Months Ended******** September 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                                         | ** ** | **2008**                                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  loss                                        |       | $                                                                | (3,377     | )                                                           | $          | (5,396 | ) | $ | (14,075 | ) | $ | (22,013 | ) |
| Unrealized  gain (loss) on marketable securities |       | 3                                                                |       | (74                                                         | )          | 40 |   | (86 | ) |
| Foreign  currency translation gain (loss)        |       | 93                                                               |       | (327                                                        | )          | 215 |   | (79 | ) |
|                                             |       |                                                             |       |                                                        |       |   |   |   |   |
| Comprehensive  loss                              |       | $                                                                | (3,281     | )                                                           | $          | (5,797 | ) | $ | (13,820 | ) | $ | (22,178 | ) |

 

**7.Accrued Restructuring Costs**

 

Caliper’s accruedrestructuring costs as of September 30, 2009 were comprised of futurecontractual obligations pursuant to facility operating leases covering certainidle space as further described below.  The following table summarizeschanges in accrued restructuring obligations during the nine months ended September 30,2009 (in thousands):

 
| ** **                            | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-----------|------------|
| Balance,  December 31, 2008      |       | $         | 4,476      |   |
| Restructuring  charge                 |       | 1,017     |       |
| Adjustments  to estimated obligations |       | (8        | )          |
| Interest  accretion                   |       | 72        |       |
| Payments                              |       | (1,453    | )          |
| Balance,  September 30, 2009     |       | 4,104     |       |
|                                       |            |           |            |  |

 

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The remaining facilityobligations are payable as follows (in thousands):

 
| **Years Ended December 31:** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2009  (remainder of fiscal year)            |       | $          | 550        |   |
| 2010                                        |       | 2,025      |       |
| 2011                                        |       | 861        |       |
| 2012                                        |       | 540        |       |
| 2013                                        |       | 508        |       |
| Thereafter                                  |       | 190        |       |
| Total  minimum payments                     |       | 4,674      |       |
| Less:  Amount representing interest         |       | 570        |       |
| Present  value of future payments           |       | 4,104      |       |
| Less:  Current portion of obligations       |       | 2,262      |       |
| Non-current  portion of obligations         |       | $          | 1,842      |   |

 

The restructuringobligations reflected above resulted from the following actions:

 

During the first quarterof 2008, Caliper initiated the consolidation of its West Coast businessoperations to reduce overall facility costs and improve productivity andeffectiveness of its research and development spending. The consolidation planentailed abandoning approximately 36,500 square feet of space in Mountain View,California, which was completed in September 2008. This partial facilityabandonment was accounted for in accordance with FASB ASC 420,*Accounting for Costs Associated with Exit orDisposal Activities,* pursuant to which Caliper recorded a liabilityequal to the fair value of the remaining lease payments as of the cease-usedate. Fair value was determined based upon the discounted present value ofremaining lease rentals (using a discount rate of 5.5%) for the space no longeroccupied, considering future estimated sublease income, estimated broker feesand required tenant improvements. Caliper calculated the fair value as$4.6 million and recorded this amount within restructuring charges in thesecond half of fiscal 2008.  The lease term expires November 30,2013.

 

In July 2009,Caliper abandoned approximately 19,000 square feet at its Hopkinton,Massachusetts facilities.  This facility consolidation was enabled as theresult of the product line divestitures completed in the fourth quarter of 2008and continued efforts to reduce operating costs.  Caliper recorded arestructuring charge of approximately $1.0 million related to this action inthe third quarter of 2009.  Caliper has accounted for this restructuringactivity in accordance with FASB ASC 420, pursuant to which Caliper hasrecorded a liability equal to the fair value of the remaining lease payments asof the cease-use date.  Fair value was determined based upon thediscounted present value of remaining lease payments (using a discount rate of6.5%), considering future estimated sublease income, estimated broker fees andrequired tenant improvements.  The lease term expires on December 31,2015.

 

**8.Revolving Credit Facility**

 

On March 6, 2009,Caliper entered into the Credit Facility, which permits Caliper to borrow up to$25 million in the form of revolving loan advances, including up to$5 million in the form of letters of credit.  Principal borrowingsunder the Credit Facility accrue interest at a floating annual rate equal tothe Base Rate (as hereafter defined) plus one percent if Caliper’s unrestrictedcash held at the bank exceeds or is equal to $20 million, or the Base Rate plustwo percent if Caliper’s unrestricted cash held at the bank is below $20million.  The “Base Rate” is the greater of:  (i) the bank’sannounced “prime rate” and (ii) four and one-half of one percent(4.5%).  Under the Credit Facility, Caliper is permitted to borrow up to$25 million, subject to a borrowing base limit consisting of (a) 80% ofeligible accounts receivable plus (b) the lesser of 70% of Caliper’sunrestricted cash at the bank or $12 million; provided that on each of thefirst three business days and each of the last three business days of eachfiscal quarter, the borrowing base is (a) 80% of eligible accountsreceivable plus (b) the lesser of 90% of Caliper’s unrestricted cash atthe bank or $12 million. Eligible accounts receivable do not includeinternationally billed receivables, unbilled receivables, and receivables agedover 90 days from invoice date. The Credit Facility matures on November 30,2010.  The Credit Facility serves as a source of capital for ongoingoperations and working capital needs.

 

The Credit Facilityincludes customary lending and reporting covenants, including certain financialcovenants regarding Caliper’s required levels of liquidity and earnings thatare tested as of the last day of each quarter.  As of September 30,2009, Caliper was in compliance with its covenants.  The Credit Facilityalso includes a net liquidity clause.  Under this clause, if Caliper’stotal cash, cash equivalents and marketable securities, held at the bank, netof debt outstanding under the Credit Facility, are less than $0.5 million (the “NetLiquidity Limit”), the bank will apply all of Caliper’s accounts receivablecollections, received within its lockbox arrangement with the bank, to theoutstanding principal.  Such amounts would be eligible to be re-borrowedby Caliper subject to the borrowing base limit.

 

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The Credit Facility alsoincludes certain rights for the bank to accelerate the maturity of the debt,modify the borrowing base or stop making advances, upon the occurrence ofcertain customary events of default, some of which may be viewed asdeterminable based on the bank’s discretion.  Caliper does not believe thebank will exercise these rights as long as Caliper is meeting its covenants andachieving its forecasts.  The Credit Facility also includes customaryevents of default, such as payment default, material adverse change conditionsand insolvency conditions, that could cause interest to be charged at theinterest rate in effect as of the date of default plus two percentage points,or in the event of any uncured events of default (including non-compliance withliquidity and earnings financial covenants), that could result in the bank’sright to declare all outstanding obligations immediately due and payable. Should an event of default occur, including the occurrence of a materialadverse change, and based on such default the bank were to declare alloutstanding obligations immediately due and payable, Caliper may be required tosignificantly reduce its costs and expenses, sell additional equity or debtsecurities, or restructure portions of its business, which could involve thesale of certain business assets.  In such case, the sale of additionalequity or convertible debt securities may result in additional dilution toCaliper’s stockholders.  Furthermore, additional capital may not beavailable on terms favorable to Caliper, if at all.  In this circumstance,if Caliper could not significantly reduce its costs and expenses, obtainadequate financing on acceptable terms when such financing is required or restructureportions of its business, Caliper’s business would be adversely affected. In addition, the amount of available capital that Caliper is able to accessunder the Credit Facility at any particular time is dependent upon theborrowing base formula, which relies on the ability of its business to generateaccounts receivable that are eligible according to the Credit Facility. If economic conditions worsen and its business performance is not as strong asanticipated, then Caliper could experience an event of default or a reductionin borrowing capacity under the Credit Facility, which if not cured to the bank’ssatisfaction, could potentially have a material adverse impact on Caliper’sability to access capital under its Credit Facility in order to fund its operations. If such events were to occur, Caliper’s business would be adversely affected.

 

Outstanding obligationsunder the Credit Facility were $14.9 million as of September 30,2009.  The Credit Facility is classified as short-term consistent withCaliper’s intent to utilize the Credit Facility to fund operations and workingcapital needs on a revolving loan basis, including the mechanics of the NetLiquidity Limit described above.  Interest is due monthly and has rangedfrom 4.5% to 7.5% in 2009 and 2008.

 

**9. LegalProceedings**

 

Commencing on June 7,2001, Caliper and three of its then officers and directors (David V. Milligan,Daniel L. Kisner and James L. Knighton) were named as defendants in threesecurities class action lawsuits filed in the United States District Court forthe Southern District of New York. The cases have been consolidated under thecaption, In re Caliper Technologies Corp. Initial Public Offering SecuritiesLitigation, 01 Civ. 5072 (SAS) (GBD). Similar complaints were filed against approximately300 other public companies that conducted initial public offerings of theircommon stock during the late 1990s (the “IPO Lawsuits”). On August 8,2001, the IPO Lawsuits were consolidated for pretrial purposes before UnitedStates Judge Shira Scheindlin of the Southern District of New York. Together,those cases are denominated In re Initial Public Offering SecuritiesLitigation, 21 MC 92(SAS). On April 19, 2002, a Consolidated AmendedComplaint was filed alleging claims against Caliper and the individualdefendants under Sections 11 and 15 of the Securities Act of 1933, andunder Sections 10(b) and 20(a) of the Securities Exchange Act of1934, as well as Rule 10b-5 promulgated thereunder. The ConsolidatedAmended Complaint also names certain underwriters of Caliper’s December 1999initial public offering of common stock as defendants. The Complaint allegesthat these underwriters charged excessive, undisclosed commissions to investorsand entered into improper agreements with investors relating to aftermarkettransactions. The Complaint seeks an unspecified amount of money damages.Caliper and the other issuers named as defendants in the IPO Lawsuits moved on July 15,2002, to dismiss all claims on multiple grounds. By Stipulation and Order datedOctober 9, 2002, the claims against Messrs. Milligan, Kisner andKnighton were dismissed without prejudice. On February 19, 2003, the Courtgranted Caliper’s motion to dismiss all claims against it. Plaintiffs were notgiven the right to replead the claims against Caliper. In March 2009, allof the plaintiffs, underwriters and issuers involved in this litigation enteredinto a new global settlement agreement.  The hearing for final approval ofthe settlement was held on September 10, 2009. On October 5, 2009, JudgeScheindlin issued her opinion and order approving the settlement agreement.When Judge Scheindlin’s order becomes final, the settlement will provideCaliper with a release of all claims against it, and will not require anypayments from Caliper. The final resolution of this litigation is not expectedto have a material impact on Caliper.

 

On January 23, 2009,Caliper filed a patent infringement suit against Shimadzu Corporation and itsU.S. subsidiary, Shimadzu Scientific Instruments, Inc., in the UnitedStates District Court for the Eastern District of Texas. The complaint waspromptly served upon Shimadzu’s U.S. subsidiary, and subsequently served onShimadzu Corporation in Japan.  In this suit, Caliper alleges thatShimadzu’s MCE-202 MultiNA instrument system, which performs electrophoreticseparations analysis of nucleic acids, infringes 11 different U.S. patentsowned by Caliper. In its answer to this complaint, Shimadzu denied infringementof any valid claim of any of the 11 patents asserted against Shimadzu byCaliper, and alleged that each patent asserted by Caliper is invalid and/orunenforceable.   Caliper filed its preliminary infringementcontentions with the Court on February 10, 2009, and Shimadzu filed itspreliminary invalidity contentions with the Court on July 23, 2009. The Markman hearing for this case has been scheduled by the Court to be held inMay 2010.

 

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On July 13, 2009,HandyLab, Inc., a private company based in Ann Arbor, Michigan, filed acomplaint against Caliper in United States District for the Court EasternDistrict of Michigan, Southern Division, seeking declaratory judgment that either(i) HandyLab’s RaiderTM and JaguarTM systems and related consumable productsdo not infringe 13 patents owned or licensed by Caliper and/or (ii) theclaims of the 13 patents identified in HandyLab’s complaint are invalid. The complaint filed by HandyLab did not contain any other claims againstCaliper.  On August 6, 2009, HandyLab and Caliper entered into aStandstill and Tolling Agreement pursuant to which the parties agreed topostpone the formal service of the complaint filed by HandyLab or the filing orcommencement of new claims concerning HandyLab’s products or either party’smicrofluidic technology for an agreed upon period of time while the partiesdiscuss a potential licensing arrangement.

 

From time to time Caliperis involved in litigation arising out of claims in the normal course ofbusiness, and when a probable loss contingency arises, records a loss provisionbased upon actual or possible claims and assessments. The amount of possibleclaim recorded is determined on the basis of the amount of the actual claim,when the amount is both probable and the amount of the claim can be reasonablyestimated. If a loss is deemed probable, but the range of potential loss iswide, Caliper records a loss provision based upon the low end estimate of the probablerange and may adjust that estimate in future periods as more informationbecomes available. Litigation loss provisions, when made, are reflected withingeneral and administrative expenses in the Statement of Operations and areincluded within accrued legal expenses in the accompanying balance sheet. Basedon the information presently available, management believes that there are nooutstanding claims or actions pending or threatened against Caliper, theultimate resolution of which will have a material adverse effect on ourfinancial position, liquidity or results of operations, although the results oflitigation are inherently uncertain, and adverse outcomes are possible.

 

**10. Stock-Based Compensation, Options and Restricted StockActivity and Net Loss per Weighted Average Common Share Outstanding**

 

***Stock-Based Compensation***

 

Caliper recognizes allshare-based payments, including grants of stock options, in the incomestatement as an operating expense, based on their fair values. Caliperestimates the fair value of each option award on the date of grant using aBlack-Scholes-Merton based option-pricing model.

 

Stock-based compensationexpense is included within costs and expenses as follows (in thousands):

 
| ** **                           | ** ** | **Three Months Ended******** September 30** | ** ** | **Nine  Months Ended******** September 30** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                                        | ** ** | **2008**                                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
| Cost  of product revenue             |       | $                                                               | 86         |                                                       | $          | 77 |   | $ | 245 |   | $ | 242 |   |
| Cost  of service revenue             |       | 31                                                              |       | 21                                                         |       | 75 |   | 63 |   |
| Research  and development            |       | 144                                                             |       | 116                                                        |       | 439 |   | 304 |   |
| Selling,  general and administrative |       | 751                                                             |       | 777                                                        |       | 2,157 |   | 2,379 |   |
| Total                                |       | $                                                               | 1,012      |                                                       | $          | 991 |   | $ | 2,916 |   | $ | 2,988 |   |

 

On June 2, 2009,Caliper’s stockholders approved a new 2009 Equity Incentive Plan (the “2009Equity Incentive Plan”), and Caliper reserved an aggregate of 10 million sharesof common stock for issuance pursuant to the 2009 Equity Incentive Plan. The2009 Equity Incentive Plan replaced Caliper’s 1999 Equity Incentive Plan (the “1999Plan”) and 1999 Non-Employee Directors’ Equity Incentive Plan (the “1999Directors’ Plan” and, collectively with the 1999 Plan, the “Existing Plans”),which were due to terminate on September 30, 2009. Collectively, the 2009Equity Incentive Plan and Existing Plans are referred to as the “Plans.” The Existing Plans are described in Note 12 to the consolidated financialstatements included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2008 filed with the SEC on March 13,2009.  The 2009 Equity Incentive Plan provides for the grant of incentivestock options, nonqualified stock options, restricted stock, restricted stockunits, and other types of stock-based awards to officers, employees,non-employee directors and consultants. Of the 10 million shares reserved underthe 2009 Equity Incentive Plan, Caliper has established a 2.5 millionshare limit on the number of shares that may be granted as “full value” awards.A full value award is an award which is a one-for-one common stock equivalent,such as a restricted stock grant that does not require the individual to pay apurchase or exercise price to receive the shares of common stock.  The2009 Equity Incentive Plan has a ten-year term through June 2, 2019, andstock options granted under the 2009 Equity Incentive Plan have a maximum termof ten years.

 

As of September 30,2009, an aggregate of 10,530,438 shares of the Company’s common stock weresubject to outstanding awards previously granted under the Existing Plans. Tothe extent that any of these awards terminate, expire or lapse, the sharessubject to such terminated awards will not become available for issuance undereither the Existing Plans or the 2009 Equity Incentive Plan.  No newequity awards will be made under the Existing Plans.

 

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The fair value of eachoption award issued under Caliper’s equity plans is estimated on the date ofgrant using a Black-Scholes-Merton based option pricing model that uses theassumptions noted in the following table. Expected volatilities are based onhistorical volatility of Caliper’s stock. The expected term of the options isbased on Caliper’s historical option exercise data taking into considerationthe exercise patterns of the option holders during the option’s life. Therisk-free interest rate is based on the U.S. Treasury yield curve in effect onthe date of the grant.

 
| ** **                              | ** ** | **Nine  Months Ended September 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| Expected  volatility (%)                |       | 75-91                                               |       | 40-47 |   |
| Risk-free  interest rate (%)            |       | 1.60-1.95                                           |       | 2.24-3.53 |   |
| Expected  term (years)                  |       | 3.4-4.5                                             |       | 3.4-4.2 |   |
| Expected  dividend yield (%)            |       | —                                              |       | — |   |
| Weighted  average grant date fair value |       | $                                                   | 0.55       |   | $ | 1.27 |   |
|                                         |            |                                                     |            |  |  |  |  |

 

***Options and Restricted Stock Activity***

 

A summary of stock optionand restricted stock activity under the Plans as of September 30, 2009,and changes during the nine months then ended is as follows:

 
| **Stock Options**                                  | ** ** | **Shares** | ** ** | **Weighted******** Average******** Exercise******** Price** | ** ** | **Weighted******** Average******** Remaining******** Contractual******** Term** | ** ** | **Aggregate******** Intrinsic Value** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **                                                                 | ** ** | ** **                                                                                          | ** ** | **(in thousands)**                         | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | ** **                                                                 | ** ** | ** **                                                                                          | ** ** | ** **                                      | ** ** |
| Outstanding  at December 31, 2008                  |       | 7,666,461  |       | $                                                                          | 5.45       |                                                                                                | 6.35       |                                            | $          | 567 |   |
| Granted                                                 |       | 1,635,754  |       | 1.33                                                                       |       | —                                                                                              |       | —                                          |       |
| Exercised                                               |       | (27,854    | )          | 0.97                                                                       |       | —                                                                                              |       | 7                                               |       |
| Canceled                                                |       | (961,918   | )          | 4.66                                                                       |       | —                                                                                              |       | —                                          |       |
| Outstanding  at September 30, 2009                 |       | 8,312,443  |       | $                                                                          | 4.74       |                                                                                                | 6.66       |                                            | $          | 2,515 |   |
| Exercisable  at September 30, 2009                 |       | 5,165,118  |       | $                                                                          | 5.90       |                                                                                                | 5.34       |                                            | $          | 21 |   |
| Vested  and expected to vest at September 30, 2009 |       | 8,161,937  |       | $                                                                          | 4.78       |                                                                                                | 6.62       |                                            | $          | 3,284 |   |

 
| **Restricted Stock Units**                   | ** ** | **Shares** | ** ** | **Weighted Average******** Grant Date******** Fair Market per******** Share Value** | ** ** |
|--------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| Outstanding  and non-vested at December 31, 2008  |       | 601,720    |       | $                                                                                                                           | 5.01       |   |
| Granted                                                |       | 1,848,570  |       | 0.84                                                                                                                        |       |
| Vested                                                 |       | (209,763   | )          | 5.02                                                                                                                        |       |
| Cancelled                                              |       | (22,532    | )          | 3.63                                                                                                                        |       |
| Outstanding  and non-vested at September 30, 2009 |       | 2,217,995  |       | 1.55                                                                                                                        |       |
|                                                        |            |            |            |                                                                                                                             |            |  |

 

The total fair value ofrestricted stock that vested during the nine months ended September 30,2009 was approximately $1.1 million.  As of September 30, 2009, therewas $5.1 million of total unrecognized compensation cost related tounvested stock-based compensation arrangements granted under the Plans. Thatcost is expected to be recognized over a weighted-average remaining service(vesting) period of approximately 2.1 years.

 

***Common Shares Outstanding***

 

During the nine monthsended September 30, 2009, Caliper issued 433,745 shares of common stock asa result of purchases under Caliper’s employee stock purchase plan, andactivity related to options and vesting of restricted stock.

 

***Net Loss per Weighted Average Common Share Outstanding***

 

Basic net loss per shareis calculated based upon net loss divided by the weighted-average number ofcommon shares outstanding during the period. The calculation of diluted netloss per share excludes common stock equivalents consisting of stock options,unvested restricted stock, unvested restricted stock units and warrants(calculated using the treasury stock method), which would have an anti-dilutiveeffect.

 

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The weighted averagenumber of shares used to compute both basic and diluted net loss per shareconsists of the following (in thousands):

 
| ** **                                                                                                                                               | ** ** | **Three Months Ended******** September 30,** | ** ** | **Nine  Months Ended******** September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                                                                               | ** ** | **2009**                                                         | ** ** | **2008**                                                    | ** ** | **2009** | ** ** | **2008** | ** ** |
| Basic  and diluted                                                                                                                                       |       | 49,013                                                           |       | 48,378                                                      |       | 48,816 |   | 47,987 |   |
|                                                                                                                                                     |       |                                                             |       |                                                        |       |   |   |   |   |
| Anti-dilutive  common stock equivalents excluded from calculation of diluted net loss per  share (prior to the application of the treasury stock method) |       | 16,704                                                           |       | 14,753                                                      |       | 16,704 |   | 14,753 |   |

 

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**Item 2.****                                                        ****Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

*ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations as of September 30, 2009 and for the three and nine monthsended September 30, 2009 should be read in conjunction with our financialstatements included in this Quarterly Report on Form 10-Q and Management’sDiscussion and Analysis of Financial Condition and Results of Operations andour financial statements included in our Annual Report on Form 10-K forthe year ended December 31, 2008 filed with the SEC on March 13,2009.*

 

*Thediscussion in this report contains forward-looking statements that involverisks and uncertainties, such as statements of our plans, objectives,expectations and intentions. Our actual results could differ materially fromthose discussed here. Factors that could cause or contribute to thesedifferences include those discussed under the caption “Risk Factors” below, aswell as those discussed elsewhere. The cautionary statements made in thisreport should be read as applying to all related forward-looking statementswherever they appear in this report.*

 

**ExecutiveSummary**

 

***Business***

 

Caliper develops andsells innovative and enabling products and services to the life sciencesresearch community, a customer base that includes pharmaceutical andbiotechnology companies, and government and other not-for-profit researchinstitutions. We believe our integrated systems, consisting of instruments,software and reagents, our laboratory automation tools and our assaydevelopment and discovery services enable researchers to better understand thebasis for disease and more effectively discover safe and effective drugs. Ourstrategy is to transform drug discovery and development by offeringtechnologies and services that ultimately enhance the ability to predict theeffects that new drug candidates will have on humans. Our offerings leverageour extensive portfolio of molecular imaging, microfluidics, automation andliquid handling technologies, and scientific applications expertise to addresskey opportunities and challenges in the drug discovery and developmentprocess—namely, the complex and costly process to conceive of and bring a newdrug to market.

 

We believe thatincreasing the clinical relevance of drug discovery experimentation, whether atearly stage, lower cost, in vitro (artificial environment) testing or laterstage, more expensive preclinical in vivo (in a living organism) testing, willhave a profound impact in helping our customers to determine the ultimatelikelihood of success of drugs in treating humans. We believe our enablingofferings in both the in vitro and in vivo testing arenas, and a uniquestrategy of enhancing the “bridge” or linkages between in vitro, in vivo andthe clinic in order to optimize the cost of the experiment versus the clinicalinsight gained, allow us to address growing, unmet needs in the market anddrive ongoing demand for our products and services. These market needs areunderscored by key challenges that face the pharmaceutical and biotechnologyindustry, including late-stage drug failures and unforeseen side effects comingto light late in the development process or after drugs are on the market.

 

We presently offer anarray of products and services, many based on highly enabling proprietarytechnologies that address critical experimental needs in drug discovery andpreclinical development and related processes. Our technologies are alsoenabling for other life sciences applications beyond drug discovery, such asenvironmental-related testing, and in applied markets such as agriculture andforensics. We also believe that our technology platforms may be able to provideease of use, cost and data quality benefits for certain in vitro and in vivodiagnostic applications.

 

We have multiple channelsof distribution for our products: direct to customers, indirect through ourinternational network of distributors, through partnership channels under ourCaliper Driven program and through joint marketing agreements. Through ourdirect and indirect channels, we sell products, services and complete systemsolutions, developed by us, to end customers. Our Caliper Driven program iscore to our business strategy and complementary to our direct sales anddistribution network activities, as it enables us to extend the commercialpotential of our LabChip and advanced liquid handling technologies into new industriesand new applications with experienced commercial partners. We also utilizejoint marketing agreements to enable others to market and distribute ourproducts. By using direct and indirect distribution, and out-licensing ourtechnology under our Caliper Driven program, we seek to maximize penetration ofour products and technologies into the marketplace and position Caliper as aleader in the life sciences tools market.

 

Our product and serviceofferings are organized into three core business areas—Imaging, DiscoveryResearch (Research), and Caliper Discovery Alliances and Services (CDAS)—withthe goal of creating a more scalable infrastructure while putting increasedfocus on growth and profitability.

 

·                      The Imaging business area is focused onpreclinical imaging, where Caliper believes it holds a global leadershipposition. Principal activities of this business area include the expansion ofthe IVIS imaging instrument and related reagent product 

 

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lines, development of newtherapeutic area applications and facilitating additional imaging modalities.

·                 The Research business area is responsiblefor utilizing Caliper’s core automation and microfluidic technologies toaddress an expanding array of opportunities in drug discovery and life scienceresearch, including molecular biology sample preparation and analysis forgenomics, proteomics, diagnostics, cellular screening and forensics.

·                 The CDAS business area is responsible forexpanding drug discovery collaborations and alliances, and increasing sales ofdrug discovery services. The focus of CDAS is to capitalize on market “outsourcing”trends, and to offer complementary services to Caliper’s Imaging and Researchplatform solutions.

 

***Third Quarter Overview***

 

Our revenues during thethree months ended September 30, 2009 were $32.2 million compared to $34.0million for the three months ended September 30, 2008, the latter of whichincluded $3.0 million of revenue from product lines that were divested in thefourth quarter of 2008.  Foreign currency translation movements occurringwithin the three months ended September 2009 had an immaterial impact ontotal revenues.

 

The table below providesa reconciliation of our GAAP basis revenue to pro forma revenue results for thequarters ended September 30, 2009 and 2008, after giving effect to ourdivestures of the PDQ and AutoTrace product lines during the fourth quarter of2008. We believe this is a useful measure in evaluating revenue performancebetween comparative periods; however, these non-GAAP comparisons are notintended to substitute for GAAP financial measures.

 
| ** **      | ** ** | **Quarter Ended September 30,** | ** ** | ** **              | ** ** | ** **                         | ** ** |
|-----------------|------------|------------------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **      | ** ** | ** **                                     | ** ** | ** **              | ** ** | **Non-GAAP  Adjustments (1)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** |
| ** **      | ** ** | **GAAP**                                       | ** ** | **(in thousands)** | ** ** | **Non-GAAP**                       | ** ** | **GAAP** | ** ** | **GAAP** | ** ** |
| ** **      | ** ** | **2009**                                       | ** ** | **2008**                | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **% Chg** | ** ** | **% Chg(2)** | ** ** |
|            |       |                                           |       |                    |       |                               |       |   |   |   |   |   |   |   |   |   |   |
| Research        |       | $                                              | 15,708     |                    | $          | 17,684                             |       | $ | — |   | $ | (3,002 | ) | $ | 15,708 |   | $ | 14,682 |   | (11 | )% | 7 | % |
| Imaging         |       | 12,189                                         |       | 10,592                  |       | —                             |       | — |   | 12,189 |   | 10,592 |   | 15 | % | 15 | % |
| Services (CDAS) |       | 4,276                                          |       | 5,765                   |       | —                             |       | — |   | 4,276 |   | 5,765 |   | (26 | )% | (26 | )% |
| Total revenue   |       | $                                              | 32,173     |                    | $          | 34,041                             |       | $ | — |   | $ | (3,002 | ) | $ | 32,173 |   | $ | 31,039 |   | (5 | )% | 4 | % |

 

----

| (1) | For purposes of  comparing growth rates for each of the three principal areas of our business,  the above non-GAAP table reconciliations exclude revenues related to the PDQ  and AutoTrace product lines divested in November 2008. We anticipate no  further revenue from either of the former PDQ or AutoTrace product lines in  2009. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Currency effects, which  are not reflected in the column percentages in the above table, were  unfavorable by 2% pertaining to our Imaging strategic business units, but had  an immaterial impact on total revenues for the period.                                                                                                           |

 

*Revenue Highlights by Strategic Business Unit*

 

Research revenues(excluding revenue of divested product lines), which are comprised primarily ofmicrofluidics and laboratory automation products and services, increased by 7%on a non-GAAP basis to $15.7 million during the third quarter of 2009 from$14.7 million during the third quarter of 2008.  Overall Research growthwas primarily attributable to sales of our proprietary LabChip GX instrument,continued growth in revenues from microfluidic consumables (chips, kits andreagents), and increased sales of our Zephyr liquid handling instrument. Demandin the case of each of these principal growth areas is attributable, webelieve, to the differentiated capabilities of our products for use in variousmolecular biology research application areas, such as protein characterization.

 

Imaging revenuesincreased by 15% (or 17% before negative foreign currency effects) to $12.2million during the third quarter of 2009 from $10.6 million during the thirdquarter of 2008.  Imaging growth was driven by continued strong globaldemand for our IVIS instruments and accessories, reagents and services whichare used to profile molecular biology conditions or events in small livingmammals, primarily mice, or cells.

 

CDAS revenues decreasedby 26% to $4.3 million during the third quarter of 2009 from $5.8 millionduring the third quarter of 2008. The net decrease resulted from the completionof a government services contract which ended in 2008, and the timing ofproject task orders under our ongoing contract with the EnvironmentalProtection Agency (EPA) under its ToxCast screening program.  These revenue decreases were partially offsetby commercial service revenue growth related to both in vitro and in vivoprofiling services.

 

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*ThirdQuarter Financial Performance*

 

Total gross marginincreased by approximately 1% during the third quarter of 2009 compared to thesame period in 2008 primarily due to improved product margins of 43%, whichwere driven primarily by a favorable mix of material cost reductions achievedwith respect to increased sales volumes and strategic sourcing initiativesrelated to several of our product lines, for example our IVIS and LabChip GXinstruments.

 

Operating expenses(research and development plus selling, general and administrative expenses)decreased by 1% to $15.0 million during the third quarter of 2009 from $15.2million in the third quarter of 2008. This reduction included $0.7 million of research and development expensereduction resulting from streamlining and cost-reduction initiativesimplemented throughout 2008, offset by a $0.5 million increase in selling,general and administrative expenses which was primarily related to a $1.0million credit within the third quarter of 2008.  This one-time credit related to the mediatedsettlement of prior litigation matters.

 

Net loss narrowed by $2.0million, or 37%, to $3.4 million ($0.07 per share) during the third quarter of2009 from $5.4 million ($0.11 per share) during the third quarter of2008.  The overall reduction in net loss reflected the benefit of costreductions implemented in 2008 to coincide with our strategic reconfigurationaround our high growth proprietary products and services.

 

**CriticalAccounting Policies and Estimates**

 

The critical accountingpolicies that we believe impact significant judgments and estimates used in thepreparation of our consolidated financial statements presented in this reportare described in our Management’s Discussion and Analysis of FinancialCondition and Results of Operations and in the Notes to the ConsolidatedFinancial Statements, each included in our Annual Report on Form 10-K forthe fiscal year ended December 31, 2008 filed with the SEC on March 13,2009.

 

During the third quarterof 2009, Caliper adopted the guidance of ASU No. 2009-13, *Revenue Recognition (Topic 605): Multiple-Deliverable RevenueArrangements,*and ASU No. 2009-14, *Software(Topic 985): Certain Revenue Arrangements That Include Software Elements*which were ratified by the Financial Accounting Standards Board (FASB) EmergingIssues Task Force on September 23, 2009.  The adoption of these ASU’s is more fullydiscussed in Note 1 to the accompanying financial statements.

 

The above ASUs areeffective for transactions entered into or materially modified on or after June 15,2010.  Early adoption is permitted, butthe standards must be adopted for the entire fiscal year in which they areadopted.  Caliper has elected to adoptthese standards in the third quarter of 2009, both prospectively and effectivebeginning on January 1, 2009.  Caliper has concluded that adoption of these standards did notmaterially affect any of the quarterly periods of 2009.

 

**Resultsof Operations for the Three and Nine Months Ended September 30, 2009**

 

Operating results for thenine months ended September 30, 2009 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2009. Forexample, we typically experience higher revenues in the fourth quarter of ourfiscal year as a result of the capital spending patterns of our customers.

 

***Revenue***

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **September 30,**           | ** ** | **September 30,**      | ** ** |
| **(In thousands)**            | ** ** | **2009**                         | ** ** | **2008**                    | ** ** | **$ Change** | ** ** | **%  Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
| Product  revenue                   |       | $                                | 20,952     |                        | $          | 19,965 |   | $ | 987 |   | 5 | % | $ | 60,760 |   | $ | 59,655 |   | $ | 1,105 |   | 2 | % |
| Service  revenue                   |       | 8,200                            |       | 10,563                      |       | (2,363 | ) | (22 | )% | 23,761 |   | 28,860 |   | (5,099 | ) | (18 | )% |
| License  fees and contract revenue |       | 3,021                            |       | 3,513                       |       | (492 | ) | (14 | )% | 8,234 |   | 8,844 |   | (610 | ) | (7 | )% |
|                               |       |                             |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  Revenues                    |       | $                                | 32,173     |                        | $          | 34,041 |   | $ | (1,868 | ) | (5 | )% | $ | 92,755 |   | $ | 97,359 |   | $ | (4,604 | ) | (5 | )% |

 

*ProductRevenue.    *Product revenue increased $1.0 million during thethree months ended September 30, 2009, compared to the same period in2008, or $2.6 million with respect to our current product offerings (i.e.,excluding $1.6 million of revenue attributed to divested product lines carriedin the third quarter of 2008 which we subsequently divested).  Of the $2.6million increase in current product offering revenues, $1.2 million was relatedto Imaging product sales compared to the third quarter of 2008 which was basedupon a 10% increase in IVIS instrument unit placements and a 17% increase inreagent sales related to the IVIS product lines. The IVIS instrument productmix during the third quarter of 2009 was more heavily comprised of IVISSpectrum and Kinetic instruments which resulted in a higher average sellingprice of total units sold.  The remaining $1.4 million in current productoffering 

 

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revenue increase resultedprimarily from microfluidic product revenues which increased by $1.0 million,or 21% overall compared to the third quarter of 2008 and a $0.4 millionincrease in automation product revenues.  The net increase in microfluidic revenues was comprised of a $0.9million increase in sales of our LabChip GX instruments and a $0.6 millionincrease in microfluidic consumables (chips, kits and reagents) sales, offsetin part by a $0.7 million decrease in sales of our EZ Reader platform resultingfrom six fewer instrument placements within the quarter.  The net increasein automation product revenues during the three months ended September 30,2009, compared to the same period in 2008, was primarily due to a $0.6 millionincrease in Zephyr liquid handling instruments due to an 8 unit increase inplacements, offset by a $0.4 million decrease in revenue from sales of ourStaccato Automated Workstations and liquid handling parts and accessoriessales.

 

Product revenue increasedby $1.1 million during the nine months ended September 30, 2009, comparedto the same period in 2008, or $6.1 million with respect to our current productofferings (i.e., excluding $5.0 million of revenue attributed to divestedproduct lines carried in the nine months ended 2008 which we subsequentlydivested).  Of the $6.1 million increasein current product offering revenues, $3.6 million, or 17%, was related toImaging product sales compared to the nine months ended September 30,2008.  The Imaging product sales increase was due to a 10% increase inIVIS instrument placements as well as a 24% increase in reagent sales relatedto the IVIS product lines. The increase in product revenues also included a$2.5 million, or 8%, increase in Research product sales compared to thefirst nine months of 2008.  The Research product sales increase wascomprised of an increase in microfluidic product revenues of $4.5 million, or39%, while automation product revenues decreased by $2.0 million, or 9%. The increase in microfluidic revenues during the nine months ended September 30,2009, compared to the same period in 2008, was primarily due to (a)  a$1.9 million increase in sales of our LabChip GX instruments which was drivenby an increase in instrument placements, which were 76 units in 2009, comparedto 36 units within the prior period; (b) a $0.8 million increase in salesof our EasyReader platform, which was a result of continued adoption of ourProfilerPro plates for rapid kinase profiling; and (c) continued growth inrevenues from microfluidic consumables (chips, kits and reagents) within ourdirect sales channel, which increased by $1.8 million, or 64%, within theperiod.  The decrease in automation product revenues during the ninemonths ended September 30, 2009, compared to the same period in 2008, wasprimarily due to (a) a $2.3 million decrease in revenue from sales of ourStaccato Automated Workstation instruments, which was primarily as a result ofa specific sale in 2008 that resulted in $1.4 million in product revenueswithin the 2008 period; and (b) $0.5 million in reduced instrument salesof our TurboVap product line primarily within our European distributionchannel; offset in part by a $0.6 million increase in sales of our Zephyrliquid handling instrument and a $0.2 million increase in sales of ourRapidTrace instrument.

 

*ServiceRevenue.*   Servicerevenue decreased during the three and nine months ended September 30,2009, compared to the same period in 2008, primarily from $1.3 million and $3.7million, respectively, in service contract and billable revenue that waspreviously associated with the divested PDQ and AutoTrace product lines. During the three months ended September 30, 2009, the remaining servicerevenue decline of $1.1 million consisted of a $1.4 million decrease in CDASservice revenues due principally to lower government contract revenues from ourongoing contract with the EPA for its ToxCast screening program, offset by a$0.3 million increase in all other instrument-related services, which is mainlyattributable to our growing installed base of our IVIS and LabChip instruments.

 

During the nine monthsended September 30, 2009, the service revenue decline was comprised of theaforementioned decrease related to divested product lines of $3.7 milliontogether with a $1.9 million decrease in CDAS service revenues, partiallyoffset by a $0.5 million increase in all other instrument-related services,primarily attributable to our IVIS instrument installed base. CDAS servicerevenues were down on a net basis in the nine months ended September 30,2009, as compared to the same period in 2008, due to a $3.2 million decline inin vitro government contract services and a $0.6 million decline in other invitro services.   These declines werepartially offset by an increase in all other CDAS service revenues including a$0.3 million increase in in vivo corporate services primarily from phenotypingrevenue related to a single customer contract that experienced contractualdelays in 2008, and $1.6 million related to new in vitro screening contractswith a single customer.

 

*LicenseFees and Contract Revenue.*    License fees and contractrevenue decreased during the three months ended September 30, 2009,compared to the same period in 2008, primarily from a decrease in microfluidiclicense revenue milestones of $0.9 million which occurred in the third quarterof 2008, partially offset by new license revenues of $0.3 million and a $0.1million increase in funding from a collaborative partner.   License fees and contract revenue decreasedduring the nine months ended September 30, 2009, compared to the sameperiod in 2008, primarily from a $0.5 million decrease in government grantrevenues and a $0.3 million decrease in microfluidic contract and licenserevenues, but were offset in part by a $0.2 million increase in Imaging licenserevenues.

 

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***Costs of Revenue***

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** | **September 30,**      | ** ** |
| **(In thousands)** | ** ** | **2009**                         | ** ** | **2008**                    | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Product                 |       | $                                | 11,947     |                        | $          | 11,983 |   | $ | (36 | ) | — | % | $ | 36,030 |   | $ | 36,321 |   | $ | (291 | ) | (1 | )% |
| Service                 |       | 5,393                            |       | 6,590                       |       | (1,197 | ) | (18 | )% | 16,431 |   | 19,134 |   | (2,703 | ) | (14 | )% |
| License                 |       | 356                              |       | 588                         |       | (232 | ) | (39 | )% | 1,057 |   | 1,154 |   | (97 | ) | (8 | )% |
| Total  Costs            |       | $                                | 17,696     |                        | $          | 19,161 |   | $ | (1,465 | ) | (8 | )% | $ | 53,518 |   | $ | 56,609 |   | $ | (3,091 | ) | (5 | )% |

 

*Costof Product Revenue.*    Costof product revenue decreased during the three months ended September 30,2009, compared to the three months ended September 30, 2008, primarily asa result of a 2.0% reduction in material costs as a percentage of salesresulting from more favorable product mix sales as well as reductions inwarranty charges, and reduced charges for obsolete inventory within the period.

 

Cost of product revenuedecreased slightly during the nine months ended September 30, 2009,compared to the nine months ended September 30, 2008, as a result of a 0.8%reduction in material cost spending, as a percentage of sales, resulting fromfavorable product mix changes and a $0.3 million decrease in overallmanufacturing spending comprised primarily of reduced labor costs incurred withrespect to manufacturing operations.  These decreases were partiallyoffset by an increase in warranty parts, inventory provisions and othervariable manufacturing costs, as a percentage of sales, by approximately 14%,or $0.6 million.

 

*Costof Service Revenue.*    Costof service revenue decreased during the three and nine months ended September 30,2009, as compared to the same periods in 2008, primarily due to personnelreductions resulting from divested product lines and the strategic businessunit consolidation we implemented in the third quarter of 2008.  Inaddition, during the nine months ended September 30, 2009, cost of servicerevenue decreased by $0.8 million related to reduced spending within our invitro services business primarily related to improved pricing and reducedpurchases of materials.

 

*Costof License Revenue.*    Costof license revenue decreased during the three and nine months ended September 30,2009, compared to the same periods in 2008, due primarily to the decrease innon-recurring microfluidic license revenues which carry a royalty obligation tocertain third parties.

 

*GrossMargins.*    Grossmargin on product revenue was 43% for the three months ended September 30,2009, which was an improvement of 3%, compared to the same period in2008.  The improvement was driven by favorable product mix (i.e.,instruments with lower cost relative to average selling price) and the benefitof volume leverage of fixed costs and ongoing sourcing initiatives to lower ourmaterial costs.  Gross margin on servicerevenue was 34% for the three months ended September 30, 2009, as comparedto 38% for the same period in 2008. This decreased service margin resultedprimarily from lower in vitro government services revenues within our CDASunit.

 

Gross margin on productrevenue was 41% for the nine months ended September 30, 2009, which was animprovement of 2%, compared to the same period in 2008, also driven by thefavorable mix and volume leverage discussed above.  Gross margin onservice revenue was 31% for the nine months ended September 30, 2009, ascompared to 34% for the same period in 2008. This decreased service marginresulted primarily from the reduced leverage within the CDAS in vitro servicesbusiness during the first nine months of 2009.  This decrease was partlyoffset by reduced service costs within the instrument services business, as aresult of the strategic business unit realignment in 2008, and other costreduction initiatives.

 

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***Expenses***

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **September 30,**           | ** ** | **September 30,**      | ** ** |
| ** **                           | ** ** | **2009**                         | ** ** | **2008**                    | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                           | ** ** | **(In thousands)**          | ** ** |
| Research  and development            |       | $                                | 4,221      |                        | $          | 4,953 |   | $ | (732 | ) | (15 | )% | $ | 13,406 |   | $ | 15,526 |   | $ | (2,120 | ) | (14 | )% |
| Selling,  general and administrative |       | 10,786                           |       | 10,256                      |       | 530 |   | 5 | % | 33,235 |   | 36,945 |   | (3,710 | ) | (10 | )% |
| Amortization  of intangible assets   |       | 1,548                            |       | 1,742                       |       | (194 | ) | (11 | )% | 4,662 |   | 6,721 |   | (2,059 | ) | (31 | )% |
| Restructuring  charges, net          |       | 1,044                            |       | 2,686                       |       | (1,642 | ) | (61 | )% | 1,096 |   | 2,666 |   | (1,570 | ) | (59 | )% |
|                                      |            |                                  |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Researchand Development Expenses.*    Research and development spending decreased by$0.7 million during the three months ended September 30, 2009, compared tothe same period in 2008, primarily as a result of $0.4 million in reducedfacility costs related to the consolidation of facilities in 2008 and a $0.4million reduction in materials and supplies consumed, offset by a $0.1 millionnet increase in personnel related costs.

 

Research and developmentspending decreased by $2.1 million during the nine months ended September 30,2009, compared to the same period in 2008, primarily as a result of $0.7million in reduced facilities costs, relating to the consolidation and costreduction efforts initiated in 2008, $0.7 million in reduced material andoperating supplies, a $0.4 million reduction in severance costs which relatedto actions taken in the first quarter of 2008 and a decrease in all other costsof $0.3 million.

 

*Selling,General and Administrative Expenses.*    Selling, general andadministrative expenses increased by $0.5 million during the three monthsended September 30, 2009, compared to the same period in 2008, dueprimarily to a $1.0 million credit in 2008 related to a one time settlement ofprior litigation matters.  Excluding theone time credit, all other selling, general and administrative expensesdecreased $0.5 million on a net basis from headcount reductions as a result ofthe divested product lines and cost reduction initiatives that occurred in 2008and 2009.

 

Selling, general andadministrative expenses decreased by $3.7 million during the nine monthsended September 30, 2009, compared to the same period in 2008 dueprimarily to reduced headcount and related personnel costs and a $1.0 millionreduction in travel costs.  Selling andmarketing expenses decreased by $3.2 million during the nine months ended September 30,2009, as compared to the same period in 2008, primarily due to a $0.9 million reductionin salaries and related costs due to reduced headcount from the divestedproduct lines as well as cost reduction initiatives in 2008 to align ourbusiness along strategic business units, a $0.9 million reduction in travel andrelated costs, a $0.6 million reduction in costs relating to office andoperating supplies and a reduction of $0.8 million in all other costs. General and administrative expenses decreased by $0.5 million during the ninemonths ended September 30, 2009, as compared to the same period in 2008,primarily due to a reduction in consulting and accounting costs.

 

*Amortizationof Intangible Assets.*  The amortization of intangible assets for the three andnine months ended September 30, 2009 relates to assets acquired in ourprevious business combinations. Amortization is computed based upon theestimated timing of the undiscounted cash flows used to value each respectiveasset over the estimated useful life of the particular intangible asset, orusing the straight-line method over the estimated useful life of the intangibleasset when the pattern of cash flows is not necessarily reflective of the trueconsumption rate of the particular intangible asset.  The decrease inamortization during the three and nine months ended September 30, 2009 isthe result of certain intangibles from our acquisition of Zymark Corporation inJuly 2003 that had a five-year life and therefore were fully amortized asof July 13, 2008.

 

*RestructuringCharges.*    Weincurred restructuring charges in prior periods related to acquisition andintegration activities that are more fully discussed in Note 7 to theaccompanying financial statements.  During the three months ended September 30,2008, we recorded a restructuring charge of $2.7 million related to the WestCoast consolidation and the related abandonment of approximately 36,500 squarefeet of space in Mountain View, California.  We estimate that ongoingfacility cash outflow, primarily rent payments net of sublease income, will bespread over the 5.1 years remaining on our Mountain View, California lease.

 

In July 2009, weabandoned approximately 19,000 square feet of our Hopkinton, Massachusettsfacilities.  This facility consolidation was enabled by the product linedivestitures completed in the fourth quarter of 2008 and continued efforts toreduce operating costs.  We recorded a restructuring charge ofapproximately $1.0 million related to this action in the third quarter of2009.  The lease term expires on December 31, 2015.

 

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***Interest and Other Income (Expense), Net***

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** | **September 30,**      | ** ** |
| **(In thousands)** | ** ** | **2009**                         | ** ** | **2008**                    | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Interest  expense, net  |       | $                                | (144       | )                           | $          | (227 | ) | $ | 83 |   | 37 | % | $ | (535 | ) | $ | (584 | ) | 49 |   | 8 | % |
| Other  expense, net     |       | (85                              | )          | (411                        | )          | 326 |   | 79 | % | (202 | ) | (92 | ) | (110 | ) | (120 | )% |
|                         |            |                                  |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*InterestExpense, Net.*    Netinterest expense decreased during the three months ended September 30,2009, compared to the same period in 2008, as a result of a decrease in theweighted average outstanding credit facility borrowing to $5.2 million duringthe quarter ended September 30, 2009, from $14.9 million during thequarter ended September 30, 2008 as a result of payments made within 2009to reduce interest costs. Net interest expense decreased during the nine monthsended September 30, 2009, compared to the same period in 2008, as a resultof lower interest expense of $0.2 million, net of reduced interest income fromour investments.

 

*OtherIncome (Expense), Net.*    Net other expense decreased in the three-monthand nine-month periods ended September 30, 2009, compared to the sameperiods in 2008, due primarily to a reduction in transaction losses on foreigndenominated accounts receivable resulting from a weaker U.S. dollar, on averagefor both the three-month and nine-month periods ended September 30, 2009,in comparison to primarily the Euro, Japanese Yen and the British Pound. Duringthe three months ended September 30, 2009, we incurred a $0.4 millionreduction in foreign currency transaction losses, compared to the same periodin 2008.

 

During the nine monthsended September 30, 2009, we incurred foreign currency transaction lossesof approximately $0.2 million, compared to losses of approximately $0.1million for the same period in 2008.

 

**Liquidityand Capital Resources**

 

As of September 30,2009, we had $26.5 million in cash, cash equivalents and marketablesecurities, as compared to $26.7 million as of December 31, 2008.

 

On March 6, 2009, weentered into the Credit Facility, which permits us to borrow up to$25 million in the form of revolving loan advances, including up to$5 million in the form of letters of credit. Principal borrowings underthe Credit Facility accrue interest at a floating annual rate equal to the BaseRate (as defined below) plus one percent if our unrestricted cash held at thebank exceeds or is equal to $20 million, or the Base Rate plus two percentif our unrestricted cash held at the bank is below $20 million.  TheBase Rate is the greater of:  (i) the bank’s announced “prime rate”and (ii) four and one-half of one percent (4.5%).   Under theCredit Facility, we are permitted to borrow up to $25 million, subject toa borrowing base limit consisting of (a) 80% of eligible accountsreceivable plus (b) the lesser of 70% of our unrestricted cash at the bankor $12 million; provided that on each of the first three business days andeach of the last three business days of each fiscal quarter, the borrowingbase is (a) 80% of eligible accounts receivable plus (b) the lesserof 90% of our unrestricted cash at the bank or $12 million. Eligibleaccounts receivable do not include internationally billed receivables, unbilledreceivables, and receivables aged over 90 days from invoice date. TheCredit Facility matures on November 30, 2010. As of September 30,2009, $14.9 million was outstanding under the Credit Facility. The CreditFacility serves as a source of capital for ongoing operations and workingcapital needs.

 

The Credit Facilityincludes customary lending and reporting covenants, including certain financialcovenants regarding our required levels of liquidity and earnings that aretested as of the last day of each quarter. The Credit Facility also includes anet liquidity clause.  Under this clause, if our total cash, cashequivalents and marketable securities held at the bank, net of debt outstandingunder the Credit Facility, are less than $0.5 million (the Net LiquidityLimit), then the bank will apply all of our accounts receivable collections,received within our lockbox arrangement with the bank, to the outstandingprincipal. Such amounts would be eligible to be re-borrowed by us subject tothe borrowing base limit. Based on our current forecast, we do not expect tofall below the net liquidity limit during the second half of 2009. As of September 30,2009, we were in compliance with our covenants. We expect to remain in compliancewith the covenants through the Credit Facility’s maturity date based on currentforecasts.

 

The Credit Facility alsoincludes certain rights for the bank to accelerate the maturity date of thedebt, modify the borrowing base or stop making advances upon the occurrence ofcertain customary events of default, some of which may be viewed asdeterminable based on the bank’s discretion. We do not believe the bank willexercise these rights as long as we are meeting our covenants and are achievingour forecasts. The Credit Facility also includes customary events of default,such as payment default, material adverse change conditions and insolvencyconditions, that could cause interest to be charged at the interest rate ineffect as of the date of default plus two percentage points, or in the event ofany uncured events of default (including non-compliance with liquidity andearnings financial covenants), that could result in the bank’s right to declareall outstanding obligations immediately due and payable. Should an event ofdefault occur, including the occurrence of a material adverse change, and basedon such default the bank were to either (i) declare all outstandingobligations immediately due and payable, (ii) reduce our borrowing base,or (iii) stop making credit advances to us, we may be required tosignificantly reduce our costs and expenses, sell additional equity or debtsecurities, or restructure portions of our business, which could involve thesale of certain assets. In such case, the sale of additional 

 

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equity or convertibledebt securities may result in additional dilution to our stockholders.  Webelieve, based on our current projections that the bank will continue to lendto us subject to the terms and conditions of the Credit Facility. Furthermore,additional capital may not be available on terms favorable to us, if at all. Inthis circumstance, if we could not significantly reduce our costs and expenses,obtain adequate financing on acceptable terms when such financing is requiredor restructure portions of our business, our business would be adverselyaffected. In addition, the amount of available capital that we are able toaccess under the Credit Facility at any particular time is dependent upon theborrowing base formula, which relies on the ability of our business to generateaccounts receivable that are eligible according to the Credit Facility. Ifeconomic conditions worsen and our business performance is weaker thananticipated, then we could experience an event of default or a reduction inborrowing capacity under the Credit Facility, which if not cured to the bank’ssatisfaction, could have a material adverse impact on our ability to accesscapital under our Credit Facility in order to fund operations. If such eventswere to occur, our business would be adversely affected.

 

We believe our cashbalance, working capital on hand at September 30, 2009 and access toavailable capital under our Credit Facility will be sufficient to fundcontinuing operations through at least November 30, 2010.  Nevertheless, our actual cash needs couldvary considerably, depending on opportunities and circumstances that arise overtime. If, at any time, cash generated by operations is insufficient to satisfyour liquidity requirements, we may need to reduce our costs and expenses, selladditional equity or debt securities or draw down on our current Credit Facilityif we have borrowing capacity. The inability to obtain additional financing mayforce other actions, such as the sale of certain assets, or, ultimately, causeus to cease operations.

 

On November 21,2007, we filed, and the SEC subsequently declared effective, a universal shelfregistration statement on Form S-3 that will permit us to raise up to$100 million of any combination of common stock, preferred stock, debtsecurities, warrants or units, either individually or in units. The sale ofadditional equity or convertible debt securities may result in additionaldilution to our stockholders. Furthermore, additional capital may not beavailable on terms favorable to us, if at all. Accordingly, no assurances canbe given that we will be successful in these endeavors.

 

We maintain cash balancesin many subsidiaries through which we conduct our business. The repatriation ofcash balances from certain of our subsidiaries could have adverse taxconsequences. However, these cash balances are generally available withoutlegal restrictions to fund ordinary business operations. We have transferred,and will continue to transfer, cash from our subsidiaries to us and to otherinternational subsidiaries when it is cost effective to do so.

 

***Cash Flows***

 
| ** **                  | ** ** | **Nine  Months Ended September 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands)**     | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **$ Change** | ** ** |
| Cash  provided by (used in) |       |                                                |       |   |   |   |   |
| Operating  Activities       |       | $                                                   | 152        |   | $ | (10,008 | ) | $ | 10,160 |   |
| Investing  Activities       |       | 281                                                 |       | (1,765 | ) | 2,046 |   |
| Financing  Activities       |       | 270                                                 |       | 2,928 |   | (2,658 | ) |
|                             |            |                                                     |            |  |  |  |  |  |  |  |

 

*OperatingActivities.*    Duringthe nine months ended September 30, 2009, we generated $0.2 millionof cash for operating activities, which included the use of $1.5 million ofcash related to lease payments for our idle facilities.  We generatedapproximately $1.6 million of cash to fund operations and working capitalneeds, which primarily related to materials used in production, salaries andrent obligations for our current facilities. The ability to generate operating cash during the period was largely dueto efforts to reduce and optimize inventory levels in relation to customerdemand needs, reduced spending from recent cost control initiatives and strongcollection cycles within the period.

 

*InvestingActivities.*    Duringthe nine months ended September 30, 2009, net proceeds of marketablesecurities generated $0.7 million of cash. In addition, within the period,we received $0.7 million from the funds being held in escrow related to thesale of the PDQ product line to Sotax in November 2008.  Our other primary investing activity was thepurchase of property and equipment of $1.2 million primarily related tofacility improvements and information systems.

 

*FinancingActivities.*    Duringthe nine months ended September 30, 2009, net financing cash proceeds wererelated to proceeds from option exercises and investments within our employeestock purchase plan.  During the three months ended September 30,2009, we made payments against our credit facility to reduce our interestexpense, which were re-borrowed at the end of the period.

 

**ContractualObligations**

 

Our commitments underleases and other obligations are described in our Management’s Discussion andAnalysis of Financial Condition and Results of Operations and in the Notes tothe Consolidated Financial Statements included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008 filed with the SEC on March 13,2009.  There has been no material change during the nine months ended September 30,2009 in the contractual obligations disclosed as of December 31, 2008.

 

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***Capital Requirements***

 

Our capital requirementsdepend on numerous factors, including market acceptance of our products, theresources we devote to developing and supporting our products, andacquisitions. We expect to devote substantial capital resources to continuingour research and development efforts, expanding our support and productdevelopment activities, and for other general corporate activities. Our futurecapital requirements will depend on many factors, including:

 

·                             continued market acceptance of our invivo imaging, microfluidic and lab automation products and services;

·                             the magnitude and scope of our researchand product development programs;

·                             our ability to maintain existing, andestablish additional, corporate partnerships;

·                             the time and costs involved in expandingand maintaining our manufacturing facilities;

·                             the potential need to develop, acquire orlicense new technologies and products; and

·                             other factors not within our control.

 

**Item 3.****                                                        ****Quantitative andQualitative Disclosures About Market Risk**

 

***Interest Rate Sensitivity***

 

Our primary market riskexposures are foreign currency exchange rate fluctuation and interest ratesensitivity. During the nine months ended September 30, 2009, there havebeen no material changes to the information included under Item 7A, “Quantitativeand Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008 filed with the SEC on March 13,2009.

 

**Item 4.****                                                        ****Controls and Procedures**

 

*Evaluationof disclosure controls and procedures.  *  We have establisheddisclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to provide reasonable assurance thatinformation required to be disclosed in our reports filed under the SecuritiesExchange Act of 1934, such as this Quarterly Report on Form 10-Q, is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms. Disclosure controls are also designed to providereasonable assurance that such information is accumulated and communicated toour management, including the principal executive officer and principalfinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

Based on their evaluationas of September 30, 2009, our principal executive officer and principalfinancial officer have concluded that our disclosure controls and proceduresare effective to ensure that information we are required to disclose in reportsthat we file or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in SEC’s rules andforms.

 

*Limitationson the Effectiveness of Disclosure Controls and Procedures.*    Our management,including our principal executive officer and principal financial officer, doesnot expect that our disclosure controls and procedures will prevent all errorand all fraud. A control system can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within Caliper have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people or by management override ofthe control. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected.

 

*Changesin internal controls.*    There were no changes in our internal controlover financial reporting, identified in connection with the evaluation of suchinternal control that occurred during the third quarter of 2009 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**Part II—OTHER INFORMATION**

 

**Item 1.****                                                        ****Legal Proceedings**

 

Commencing on June 7,2001, Caliper and three of its then officers and directors (David V. Milligan,Daniel L. Kisner and James L. Knighton) were named as defendants in threesecurities class action lawsuits filed in the United States District Court forthe Southern District of New York. The cases have been consolidated under thecaption, In re Caliper Technologies Corp. Initial Public Offering SecuritiesLitigation, 01 Civ. 5072 (SAS) (GBD). Similar complaints were filed againstapproximately 300 other public companies that conducted initial publicofferings of their common stock during the late 1990s (the “IPO Lawsuits”). On August 8,2001, the IPO Lawsuits were consolidated for pretrial purposes before UnitedStates Judge Shira Scheindlin of the Southern District of New York. Together,those cases are denominated In re Initial Public Offering Securities Litigation,21 MC 92(SAS). On April 19, 2002, a Consolidated Amended Complaint wasfiled alleging claims against Caliper and the individual defendants underSections 11 and 15 of the Securities Act of 1933, and underSections 10(b) and 20(a) of the Securities Exchange Act of 1934,as well as Rule 10b-5 promulgated thereunder. The Consolidated AmendedComplaint also names certain underwriters of Caliper’s December 1999initial public offering of common stock as defendants. The Complaint allegesthat these underwriters charged excessive, undisclosed commissions to investorsand entered into improper agreements with investors relating to aftermarkettransactions. The Complaint seeks an unspecified amount of money damages.Caliper and the other issuers named as defendants in the IPO Lawsuits moved on July 15,2002, to dismiss all claims on multiple grounds. By Stipulation and Order datedOctober 9, 2002, the claims against Messrs. Milligan, Kisner andKnighton were dismissed without prejudice. On February 19, 2003, the Courtgranted Caliper’s motion to dismiss all claims against it. Plaintiffs were notgiven the right to replead the claims against Caliper. In March 2009, allof the plaintiffs, underwriters and issuers involved in this litigation enteredinto a new global settlement agreement.  The hearing for final approval ofthe settlement was held on September 10, 2009. On October 5, 2009,Judge Scheindlin issued her opinion and order approving the settlementagreement. When Judge Scheindlin’s order becomes final, the settlement willprovide Caliper with a release of all claims against it, and will not requireany payments from Caliper. The final resolution of this litigation is notexpected to have a material impact on Caliper.

 

On January 23, 2009,Caliper filed a patent infringement suit against Shimadzu Corporation and itsU.S. subsidiary, Shimadzu Scientific Instruments, Inc., in the UnitedStates District Court for the Eastern District of Texas. The complaint waspromptly served upon Shimadzu’s U.S. subsidiary, and subsequently served onShimadzu Corporation in Japan.  In this suit, Caliper alleges thatShimadzu’s MCE-202 MultiNA instrument system, which performs electrophoreticseparations analysis of nucleic acids, infringes 11 different U.S. patentsowned by Caliper. In its answer to this complaint, Shimadzu denied infringementof any valid claim of any of the 11 patents asserted against Shimadzu byCaliper, and alleged that each patent asserted by Caliper is invalid and/orunenforceable.  Caliper filed its preliminary infringement contentionswith the Court on February 10, 2009, and Shimadzu filed its preliminaryinvalidity contentions with the Court on July 23, 2009.  The Markmanhearing for this case has been scheduled by the Court to be held in May 2010.

 

On July 13, 2009,HandyLab, Inc., a private company based in Ann Arbor, Michigan, filed acomplaint against Caliper in United States District Court for the EasternDistrict of Michigan, Southern Division, seeking declaratory judgment thateither (i) HandyLab’s RaiderTM and JaguarTM systems and related consumableproducts do not infringe 13 patents owned or licensed by Caliper and/or (ii) theclaims of the 13 patents identified in HandyLab’s complaint are invalid. The complaint filed by HandyLab did not contain any other claims againstCaliper.  On August 6, 2009, HandyLab and Caliper entered into aStandstill and Tolling Agreement pursuant to which the parties agreed topostpone the formal service of the complaint filed by HandyLab or the filing orcommencement of new claims concerning HandyLab’s products or either party’smicrofluidic technology for an agreed upon period of time while the partiesdiscuss a potential licensing arrangement.

 

From time to time Caliperis involved in litigation arising out of claims in the normal course ofbusiness.  Based on the information presently available, managementbelieves that there are no outstanding claims or actions pending or threatenedagainst Caliper, the ultimate resolution of which will have a material adverse effecton our financial position, liquidity or results of operations, although theresults of litigation are inherently uncertain, and adverse outcomes arepossible.

 

**Item 1A.****                                               ****Risk Factors**

 

Our risk factors aredescribed in Part I, Item 1A of our Annual Report on Form 10-K forthe year ended December 31, 2008 filed with the SEC on March 13,2009. There have been no material changes in the risks affecting Caliper sincethe filing of such Annual Report on Form 10-K.

 

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**Item 2.****                                                        ****Unregistered Sales ofEquity Securities and Use of Proceeds**

 

None.

 

**Item 3.****                                                        ****Defaults Upon SeniorSecurities**

 

None.

 

**Item 4.****                                                        ****Submission of Matters toa Vote of Security Holders**

 

None.

 

**Item 5.****                                                        ****Other Information**

 

None.

 

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** Item 6.****                                                     ****Exhibits**

 
| **Exhibit********Number** | ** ** | **Description of document**                                                                                                                                                                                                   |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                    |
| 31.1                      |       | Certification of Chief  Executive Officer Required Under Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended,  and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                      |       |                                                                                                                                                                                                                                    |
| 31.2                      |       | Certification of Chief  Financial Officer Required Under Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended,  and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                      |       |                                                                                                                                                                                                                                    |
| 32.1*                     |       | Certification of Chief  Executive Officer Required Under Rule 13a-14(b) or  Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended,  and 18 U.S.C. Section 1350.                                    |
|                      |       |                                                                                                                                                                                                                                    |
| 32.2*                     |       | Certification of Chief  Financial Officer Required Under Rule 13a-14(b) or  Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended,  and 18 U.S.C. Section 1350.                                    |

 

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** *The certifications attached as Exhibits32.1 and 32.2 accompany this Quarterly Report on Form 10-Q pursuant to Section 906of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by Caliperfor purposes of Section 18 of the Securities Exchange Act of 1934, asamended.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                         | CALIPER LIFE SCIENCES,  INC. |
|------------------------------|------------------------------|
|                         |                         |   |
| Date: November 9,  2009 |                         |   |
|                         | By:                          | /s/  E. KEVIN  HRUSOVSKY |
|                         |                         | E. Kevin Hrusovsky |
|                         |                         | Chief Executive Officer  and President |
|                         |                         |   |
| Date: November 9,  2009 |                         |   |
|                         | By:                          | /s/  PETER F.  MCAREE |
|                         |                         | Peter F. McAree |
|                         |                         | Senior Vice President  and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| **Exhibit********Number** | ** ** | **Description of document**                                                                                                                                                                                                   |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                    |
| 31.1                      |       | Certification of Chief  Executive Officer Required Under Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended,  and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                      |       |                                                                                                                                                                                                                                    |
| 31.2                      |       | Certification of Chief  Financial Officer Required Under Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended,  and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|                      |       |                                                                                                                                                                                                                                    |
| 32.1*                     |       | Certification of Chief  Executive Officer Required Under Rule 13a-14(b) or  Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended,  and 18 U.S.C. Section 1350.                                    |
|                      |       |                                                                                                                                                                                                                                    |
| 32.2*                     |       | Certification of Chief  Financial Officer Required Under Rule 13a-14(b) or  Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended,  and 18 U.S.C. Section 1350.                                    |

 

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** *The certifications attached as Exhibits32.1 and 32.2 accompany this Quarterly Report on Form 10-Q pursuant to Section 906of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by Caliperfor purposes of Section 18 of the Securities Exchange Act of 1934, asamended.

 

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