<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-22873
Hyseq, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 36 - 3855489
------ ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
670 Almanor Avenue, Sunnyvale, CA 94086
----------------------------------------
(Address of principal executive offices, including zip code)
(408) 524-8100
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X [as to (1)] No X [as to (2)]
--- ---
COMMON STOCK OUTSTANDING ON NOVEMBER 3, 1997: 12,726,159
Page 1 of 19
Exhibit Index on Page 17
<PAGE>
HYSEQ, INC.
-----------
INDEX
<TABLE>
<CAPTION>
PART I Financial Information PAGE
--------------------- ----
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996............... 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1997 and 1996............................ 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and
1996................................................... 5
Notes to Condensed Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................................... 8
PART II Other Information
-----------------
Item 1. Legal Proceedings...................................... 13
Item 2. Change in Securities................................... 13
Item 3. Defaults Upon Senior Securities........................ 13
Item 4. Submission of Matters to a Vote of
Security Holders....................................... 14
Item 5. Other Information...................................... 14
Item 6. Exhibits and Reports on Form 8-K....................... 15
SIGNATURES............................................................................. 16
EXHIBIT INDEX.......................................................................... 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HYSEQ, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996*
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 39,357 $ 6,707
Short-term investments 22,957 -
Accounts receivable 2,360 147
Prepaid expenses and other current assets 499 312
--------- --------
Total current assets 65,173 7,166
Property and equipment, net 3,232 1,639
Patents, licenses and assets, net 565 561
--------- --------
$ 68,970 $ 9,366
========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 1,814 $ 572
Accrued professional fees 790 89
Other current liabilities 1,017 285
Current portion of capital lease and loan obligations 329 265
Deferred revenue 75 -
--------- --------
Total current liabilities 4,025 1,211
Noncurrent portion of capital lease and loan obligations 701 791
Stockholders' equity:
Series A preferred stock - 14,780
Series B preferred stock - -
Common stock 81,732 2,033
Notes receivable from stockholders (3,795) (1,237)
Deferred compensation (525) -
Accumulated deficit (13,168) (8,212)
-------- --------
Total stockholders' equity 64,244 7,364
-------- --------
$ 68,970 $ 9,366
======== ========
</TABLE>
*The condensed consolidated balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date.
See accompanying notes.
<PAGE>
HYSEQ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
------------------ -----------------
<S> <C> <C> <C> <C>
Contract and other revenues $ 2,360 $ 43 $ 3,766 $ 206
Operating expenses:
Research and development 3,285 956 6,433 2,723
General and administrative 1,234 443 2,960 1,218
------- ------- ------- ------
Total operating expenses 4,519 1,399 9,393 3,941
------- ------- ------- ------
Loss from operations (2,159) (1,356) (5,627) (3,735)
Interest income (expense), net 537 88 671 138
------- ------- ------- ------
Net loss $(1,622) $(1,268) $(4,956) $(3,597)
======= ======= ======= =======
Net loss per share $ (0.18) $(0.16) $ (0.72) $ (0.45)
======= ======= ======= =======
Shares used in computing net
loss per share 8,902 7,909 6,916 7,914
======= ======= ======= =======
Pro forma net loss per share $ (0.15) $ (0.51)
======= =======
Shares used in computing pro
forma net loss per share 10,941 9,625
======= =======
</TABLE>
See accompanying notes.
<PAGE>
HYSEQ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------------
1997 1996
---------------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,956) $(3,597)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 602 299
Amortization of deferred compensation 170 -
Shares of common stock issued for services and equipment 116 -
Changes in assets and liabilities:
Accounts receivable (2,213) 110
Notes receivable from officers - 120
Prepaid expenses and other current assets (187) (2)
Other assets (76) (24)
Accounts payable 1,242 342
Accrued professional fees 701 (301)
Other current liabilities 732 154
Deferred revenue 75 -
------- -------
Net cash used in operating activities (3795) (2,899)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,122) (689)
Purchases of short-term investments (22,964) -
------- -------
Net cash used in investing activities (25,086) (689)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of stockholders' notes receivable 112 -
Cash proceeds from issuance of:
Series A preferred stock - 9,860
Series B preferred stock 17,500 -
Net proceeds from issuance of common stock 43,948 369
Cash used to repurchase common stock (2) (4)
Cash proceeds from sale leaseback - 369
Principal payments on capital lease (97) (96)
Proceeds from financing loan 181 -
Principal payments on financing loan (111) -
------- -------
Net cash provided by financing activities 61,531 10,498
------- -------
Net increase in cash and cash equivalents 32,650 6,910
Cash and cash equivalents at beginning of period 6,707 750
------- -------
Cash and cash equivalents at end of period $ 39,357 $ 7,660
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Interest paid $ 122 $ 32
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Issuance of 15,728 shares of common stock in exchange for legal services $ 102 $ -
======= =======
Issuance of 1,142 shares of common stock in exchange for equipment $ 14 $ -
======= =======
Conversion of Series A and Series B preferred stock to common stock $ 32,280 $ -
======= =======
</TABLE>
See accompanying notes.
<PAGE>
HYSEQ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The condensed consolidated balance sheet as of September
30, 1997, statements of operations for the three and nine months ended September
30, 1997 and 1996 and statements of cash flows for the nine months ended
September 30, 1997 and 1996 are unaudited, but include all adjustments
(consisting of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position, operating results
and cash flows for the periods presented. The condensed consolidated financial
statements include the accounts of the Company's wholly-owned subsidiary. The
results of operations for the interim periods shown herein are not necessarily
indicative of operating results expected for the entire year.
The accompanying condensed consolidated financial statements should be read in
conjunction with the financial statements contained in the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on June 12, 1997, as amended.
2. CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
As of September 30, 1997, short term investments are classified as available-
for-sale securities and are carried at fair market value with unrealized gains
and losses reported in stockholders' equity. The following is a summary of
available-for-sale securities as of September 30, 1997:
<TABLE>
<CAPTION>
Estimated
Fair
Value
---------
<S> <C>
Money market funds $24,065
Commercial paper 20,227
Certificate of deposits 17,998
Cash 24
-------
$62,314
=======
Amounts included in:
Cash and cash equivalents $39,357
Short term investments 22,957
-------
$62,314
=======
</TABLE>
At September 30, 1997, the difference between cost and fair value of available-
for-sale securities was not significant.
<PAGE>
3. NET LOSS PER SHARE
Net loss per share is computed using the weighted-average number of shares of
Common Stock outstanding. Common equivalent shares are excluded from the
computation as their effect is anti-dilutive, except that, pursuant to the
Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, common
stock and common equivalent shares (stock options and warrants) issued during
the 12-month period prior to the initial public offering at prices below the
public offering price have been included in the calculation as if they were
outstanding for all periods through March 31, 1997 (using the treasury stock
method).
Pro forma net loss per share has been computed as described above and also gives
effect to the conversion of convertible preferred shares not included above that
automatically converted upon completion of the Company's initial public offering
(using the if-converted method) from the original date of issuance.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), which
is required to be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements of calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The impact is not expected to result in a change in primary earnings
per share for the three and nine months periods ended September 30, 1997 and
1996 as the Company incurred net losses in those periods and, accordingly, the
calculation of earnings per share for those periods excluded stock options
(except those required to be included by the SEC as discussed above) as their
effect was anti-dilutive.
4. COMMON AND PREFERRED STOCK
The Company's initial public offering of 3,000,000 shares of common stock, which
generated net proceeds of approximately $38.0 million, was effective August 7,
1997. In September 1997, the Company's underwriters exercised their option to
purchase 450,000 additional shares at $14.00 per share to cover over-allotments,
for additional net proceeds to the Company of $5.9 million. Concurrently with
the initial public offering, the Company completed a private placement of
555,144 shares of its common stock to Chiron and Perkin-Elmer for net proceeds
of $2.5 million and $5.0 million, respectively.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of September 30, 1997 and for the three and nine month
periods ended September 30, 1997 and 1996 should be read in conjunction with the
sections of the Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on June 12, 1997, as amended, entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Risk Factors." Hyseq is a registered trade and service mark of
the Company; HyChip, HyGenomics, HyGnostics and HyX are trade and service
marks of the Company.
Certain statements contained in this Form 10-Q that are not historical,
including, but not limited to, statements concerning potential collaboration
arrangements, royalties and other payments under potential collaboration
agreements, and product development and sales and other statements, are forward-
looking statements, which statements involve risks and uncertainties. Actual
results and performance could differ materially from those projected in the
forward-looking statements as a result of many factors, including but not
limited to, the scientific progress of the Company's programs; the ability of
the Company to establish additional collaborative and licensing arrangements;
the extent to which the Company engages in development of products without
collaboration partners; the time and cost involved in obtaining regulatory
approvals for its diagnostics products; the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims; competing technological
and market developments; and whether conditions to milestone payments are met
and the timing of such payment or payments. These forward looking statements
speak only as of the date hereof. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
OVERVIEW
Hyseq, Inc. (the "Company"), a Nevada corporation, applies the proprietary
DNA array technology of its HyX Platform to develop gene-based therapeutic
product candidates and diagnostic products and tests. The Company believes that
its HyGenomics Database of partial gene sequences is one of the largest
proprietary human gene databases in the world. The Company presently is
collaborating with Chiron Corporation ("Chiron") to develop therapeutics,
diagnostic molecules and vaccines relating to cancer and with The Perkin-Elmer
Corporation ("Perkin-Elmer") to commercialize HyChip products. The Company
intends to establish additional collaborations in targeted disease categories.
The Company is marketing its HyGnostics Module for DNA testing of genetic and
infectious disease and cancer to clinical reference laboratories. The Company
has an initial agreement with Quest Diagnostics, Inc. relating to evaluation of
the HyGnostics Module for commercial-scale diagnostic testing.
In August 1997, the Company completed an initial public offering of
3,000,000 shares of its common stock, for net proceeds of approximately $38.0
million. In September 1997, the Company's underwriters exercised their option
to purchase 450,000 additional shares at $14.00 per share to cover over-
allotments, for additional net proceeds of $5.9 million. Concurrently with
completion of the initial public offering, the Company privately placed 555,144
shares of its common stock for net proceeds of $5.0 million from Perkin-Elmer
and $2.5 million from Chiron (the "Private Placement").
<PAGE>
The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, including, but not limited to, changes in
the demand for the Company's products; the nature, size and timing of
collaborative arrangements and products provided to or developed with the
Company's current and future collaboration partners, changes in the research and
development budgets of the Company's current and future collaboration partners;
capital expenditures and other costs related to the expansion of the Company's
operations; litigation and other costs associated with defending its proprietary
rights; changes in government regulations; and the introduction of competitive
technologies.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 and 1996
---------------------------------------------
Contract and Other Revenues. Contract and other revenues were $2.4 million
---------------------------
and $3.8 million for the three and nine months ended September 30, 1997,
compared to less than $0.1 million and $0.2 million for the same periods in
1996. Contract and other revenues earned during the nine months ended September
30, 1997 included $3.1 million of revenues received from Chiron (including the
$1.0 million licensing fee received from Chiron in June 1997) and revenues
related to the Company's NIST grant. Revenues in the comparable periods of 1996
related to the Company's NIST grant. The Company recognizes revenues under its
NIST grant as research is performed. The Company receives research payments
under its collaboration agreement with Chiron which are recognized as revenue as
the related costs are incurred over the term of the agreement. The recognition
of revenues may vary from quarter to quarter and may result in significant
fluctuations in operating results from year to year. There can be no assurance
that the Company will be able to maintain existing collaborations or obtain
additional collaboration partners. The failure to maintain existing
collaboration partners or the inability to enter into additional collaborative
arrangements could have a material adverse effect on the Company's revenues and
operating results.
Operating Expenses. Total operating expenses, consisting of research and
------------------
development expenses and general and administrative expenses, were $4.5 million
and $9.4 million for the three and nine months ended September 30, 1997,
respectively, compared to $1.4 million and $3.9 million in the same periods of
1996. As the Company expands its commercialization efforts, operating expenses
are expected to increase as a result of several factors including: (i) the
continued expansion of sequencing operations, software development and
enhancements and increased work on gene discovery in connection with development
of potential therapeutic product candidates and diagnostic tests; (ii) the
continued expansion of its HyGenomics Database; (iii) expanded research into new
applications of its technologies; (iv) the expansion of marketing capabilities
with respect to its HyGnostics Module and collaborations; and (v) new technology
development expenses relating to the HyChip Module and related products.
The magnitude of the increases in the Company's operating expenses will be
significantly affected by the Company's ability to secure new collaboration
partners. At times, the Company may choose to increase sequencing production and
analysis capabilities in order to support its efforts to recruit new
collaboration partners. However, if the Company does not obtain additional
collaboration partners in a timely manner, it may not be able to adjust
significantly its level of expenditures in any such period, which could have an
adverse effect on the Company's operating results.
Research and development expenses increased to $3.3 million and $6.4
million for the three and nine months ended September 30, 1997 from $1.0 million
and $2.7 million in the same periods of 1996. This increase resulted primarily
from expanded internal sequencing production and expanded sequencing production
in connection with the collaboration with Chiron, software and database
development, the addition of scientific personnel and costs associated with
protecting and maintaining the Company's
<PAGE>
intellectual property. The Company expects to continue research and product
development efforts in support of its gene sequencing and database development
programs. Under the terms of the Company's collaboration agreement with Perkin-
Elmer, the Company is also obligated to commit an aggregate of $5.0 million over
the next two years for the development of the chip component of the HyChip
system.
General and administrative expenses were $1.2 million and $3.0 million for
the three and nine months ended September 30, 1997 compared to $0.4 million and
$1.2 million in the corresponding periods of 1996. This increase resulted from
increased marketing and business development expenses, as well as the addition
of management personnel and administrative staff to support the continued
expansion of the Company's sequencing production and data analysis capabilities.
In addition, during the nine months ended September 30, 1997, the Company's
legal expenses increased by approximately $1.0 million, due primarily to its
suit filed against Affymetrix, Inc. in March 1997 and other corporate legal
matters. Legal expenses relating to the Company's litigation with Affymetrix,
Inc. are expected to remain at approximately the same level over the next three
months. As the Company expands operations, general and administrative expenses
in support of such expansion are expected to increase.
Interest Income, Net. Net interest income increased to $0.7 million in the
--------------------
nine months ended September 30, 1997 from $0.1 million in the same period of
1996. The increase in interest income for the nine months ended September 30,
1997 as compared to the nine months ended September 30, 1996 results from larger
cash and investment balances held by the Company primarily due to the
realization of net proceeds of the Company's $10.0 million private placement of
Series B preferred stock in the second quarter of 1997 and the net proceeds of
the Company's initial public offering and concurrent private placement of common
stock completed in the third quarter of 1997.
Net Loss. The Company incurred net losses for the three and nine months
--------
ended September 30, 1997 of $1.6 million and $5.0 million respectively, compared
to $1.3 million and $3.6 million in the same periods of 1996. Since inception,
the Company has incurred operating losses, and as of September 30, 1997, had an
accumulated deficit of $13.2 million. As of December 31, 1996, the Company had
a net operating loss carryover for federal income tax purposes of approximately
$7.4 million, the majority of which expires, if unused, in the year 2011.
Utilization of the net operating loss carryover is expected to be subject to a
substantial annual limitations because of the "change in ownership" provisions
of the Internal Revenue Code of 1986, as amended. The annual limitation may
result in the expiration of net operating losses before utilization.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had $62.3 million in cash, cash
equivalents and short term investments, compared to $6.7 million as of December
31, 1996. This increase reflects the net proceeds of the Company's initial
public offering and its private placements with Chiron and Perkin-Elmer,
payments received under the Company's NIST grant and fees received from Chiron,
partially offset by net cash used in operations of $3.8 million and capital
expenditures of $2.1 million during the nine months ended September 30, 1997.
The Company has classified all of its investments as short-term as of
September 30, 1997, as the Company's investments all mature in less than one
year. Cash and investments are held currently in investment-grade commercial
paper, bank CD's and other interest-bearing securities and are invested in
accordance with the Company's investment policy with primary objectives of
liquidity, safety of principal and diversity of investments.
<PAGE>
Net cash used in operating activities increased from $2.9 million for the
nine months ended September 30, 1996 to $3.8 million for the comparable period
of 1997 due to increased costs associated with the expansion of the Company's
sequencing producing and data analysis capabilities and increased legal costs
associated with protection and maintenance of intellectual property and the
litigation with Affymetrix. Higher revenues for the nine months ended
September 30, 1997 as compared to the nine month period of 1996 were due to
payments received in those periods pursuant to collaborative arrangements and
receipt of revenues from the Company's NIST grant.
The Company's investing activities, other than the purchase and sales of
cash equivalent investments, have consisted of capital expenditures, which
totaled $2.1 million for the nine months ended September 30, 1997 as compared to
$0.7 million for the comparable period of 1996. Capital expenditures increased
in 1997 primarily due to the addition of capital equipment necessary for the
Company's expanded sequencing production and software development activities.
Net cash provided by financing activities increased to $61.5 million for
the nine months ended September 30, 1997 from $10.5 million in the comparable
period of 1996. Net cash provided by financing activities for the nine months
ended September 30, 1996 reflects primarily the $9.9 million in net proceeds
from its private placement of Series A Preferred Stock in the first half of
1996. Net cash provided by financing activities of $61.5 million for the nine
months ended September 30, 1997 reflects primarily the $44.0 million in net
proceeds from the IPO and $17.5 million from its private placements with Chiron
and Perkin-Elmer.
The Company expects its cash requirements to increase significantly in
future periods because of the planned expansion of its sequencing operations,
software development and refinement efforts, increased work on gene discovery
and new technology development expenses relating to the HyChip Module and
related products. In addition, the Company expects to expend additional cash in
1998 and beyond for capital improvements and to acquire a larger facility and
the associated lease expenses related thereto. The Company expects to spend
approximately $2.5 million for its anticipated facility expansion and for
additional capital equipment to increase sequencing capacity through 1998.
Future operations are expected to be funded with revenues from existing
collaborations in addition to using its current cash, cash equivalents and
investments when necessary. The Company intends to partially fund development
of HyChip products with funds received under its NIST grant and the proceeds of
its June 1997, $5.0 million private placement with Perkin-Elmer.
In August 1997, the Company completed an initial public offering of its
common stock. The Company sold 3,000,0000 shares at $14.00 per share, for net
proceeds of approximately $38.0 million. In September 1997, the Company's
underwriters exercised their option to purchase 450,000 additional shares at
$14.00 per share to cover over-allotments, for additional net proceeds of $5.9
million. Concurrently with completion of the initial public offering, the
Company completed its Private Placement in which it sold an additional 555,144
shares of common stock to Chiron and Perkin-Elmer for net proceeds of $2.5
million and $5.0 million, respectively.
The Company expects that the net proceeds from its initial public offering
and the Private Placement completed in August and September 1997, together with
existing capital resources, will be sufficient to support the Company's
operations at least through 1999. The Company's estimate of the time period for
which cash funds will be adequate to fund its operations is a forward-looking
estimate subject to risks and uncertainty, and actual results may differ
materially. The Company's future capital requirements and the adequacy of its
available funds will depend on many factors, including, but not limited to,
scientific progress in its research and development programs and the magnitude
of those programs, the ability of the
<PAGE>
Company to establish collaborative and licensing arrangements and the financial
commitments involved in such arrangements.
There can be no assurance that the Company will be able to establish
additional collaborations or that such collaborations will produce revenues,
which together with the Company's cash, cash equivalents and marketable
securities, will be adequate to fund the Company's operations and capital
requirements. The Company's cash requirements depend on numerous factors,
including the ability of the Company to attract collaboration partners; the
Company's research and development activities; competing technological and
market developments; the cost of filing, prosecuting, defending and enforcing
patent claims and other intellectual property rights; and the purchase of
additional capital equipment, including capital equipment necessary to insure
that the Company's sequencing operation remains competitive. There can be no
assurance that additional funding, if necessary, will be available on favorable
terms, if at all.
<PAGE>
PART II
HYSEQ, INC.
(A NEVADA CORPORATION)
Item 1. LEGAL PROCEEDINGS.
On October 6, 1997, the U.S. District Court for the Southern District of New
York granted a motion to dismiss filed by the Company in response to a suit
filed in May 1996 by Sands Brothers & Co., Ltd. ("Sands") against the Company
arising out of the Company's prior engagement of Sands to act as a placement
agent in a private placement. Sands has until October 31, 1997 to submit an
affidavit of a claim for unpaid expenses incurred in connection with the prior
engagement. As there was an overall $35,000 cap on such expenses and the
Company has paid all invoices submitted by Sands, such expenses, if any, are
expected to be de minimus.
----------
On April 23, 1997, Affymetrix filed a motion to dismiss or, in the alternative,
for a more definitive statement. On May 5, 1997, the Company filed an Amended
Complaint. On May 19, 1997, Affymetrix filed an Answer and Affirmative Defenses
to the First Amended Complaint and also filed a counterclaim against the
Company. The counterclaim seeks a declaratory judgment of invalidity and non-
infringement with respect to these SBH patents that are the basis for the
infringement allegation. On June 9, the Company filed a reply to the
counterclaim in which it denied the allegation of invalidity and non-
infringement. On September 29, 1997, the judge hearing the case entered a Case
Management Order (the "CMO") which schedules a series of pre-trial events. Under
the CMO, over the next several months the Company and Affymetrix are each
required to make disclosures and engage in discovery related to the claims of
infringement and any defenses to those claims. The CMO has further set November
17 and 18, 1998 as a date for a hearing on construction of the claims contained
in the Company's patents at issue in this litigation.
Item 2. CHANGES IN SECURITIES.
(a) Not applicable.
(b) Not applicable.
(c) During the three months ended September 30, 1997, pursuant to the
Company's Stock Option Plan, the Company issued qualified options to purchase
7,000 shares of its common stock at an exercise price of $14.00 per share, to
two employees. The options (and the underlying common stock) were issued in
reliance upon exemption from registration provided by Rule 701 promulgated under
the Securities Act of 1933, as amended.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
Item 5. OTHER INFORMATION.
Not applicable.
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 11.1 Statement of Computation of Net Loss per Share
Exhibit 27.0 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
September 30, 1997.
<PAGE>
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hyseq, Inc.
(Registrant)
Date: November 3, 1997 By: /s/ Christopher R. Wolf
-------------------------
Christopher R. Wolf
Executive Vice President and
Chief Financial Officer
<PAGE>
HYSEQ, INC.
EXHIBIT INDEX
Page No.
11.1 Statement of Computation of Net Loss per Share 18
27.0 Financial Data Schedule 19
<PAGE>
Exhibit 11.1
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net loss $(1,622) $(1,268) $(4,956) $(3,597)
======= ======= ======= =======
Weighted average shares of common
stock outstanding: 8,902 4,460 5,766 5,630
Shares related to staff accounting
bulletin
topic 4D:
Stock options and warrants - 797 266 797
Preferred stock - 2,652 884 1,487
------- ------- ------- -------
Shares used in computing net loss per
share: 8,902 7,909 6,916 7,914
======= ======= ======= =======
Net loss per share $ (0.18) $ (0.16) $ (0.72) $ (0.45)
======= ======= ======= =======
Calculation of shares outstanding for
computing pro forma net loss per share:
Shares used in computing net loss
per share 8,902 7,909 6,916 7,914
Adjusted to reflect the effect of
the assumed conversion of
preferred stock from the
date of issuance 2,039 1,515 2,709 1,515
------- ------- ------- -------
Shares used in computing pro forma net
loss per share 10,941 9,424 9,625 9,429
======= ======= ======= =======
Pro forma net loss per share $ (0.15) $ (0.13) $ (0.51) $ (0.38)
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 1 OF
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 39,357
<SECURITIES> 22,957
<RECEIVABLES> 2,360
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 65,173
<PP&E> 4,265
<DEPRECIATION> 1,033
<TOTAL-ASSETS> 68,970
<CURRENT-LIABILITIES> 4,025
<BONDS> 0
0
0
<COMMON> 81,732
<OTHER-SE> (17,488)
<TOTAL-LIABILITY-AND-EQUITY> 68,970
<SALES> 0
<TOTAL-REVENUES> 3,766
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,393
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 671
<INCOME-PRETAX> (4,956)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,956)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,956)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.51)
</TABLE>
