<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] 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] No [ ]
COMMON STOCK OUTSTANDING ON NOVEMBER 2, 1999: 13,035,134
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HYSEQ, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999, and December 31, 1998............ 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1999 and 1998................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998................................................................... 5
Notes to Condensed Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 9
Part II Other Information
Item 1. Legal Proceedings............................................................................. 9
Item 2. Change in Securities and Use of Proceeds...................................................... 10
Item 3. Defaults Upon Senior Securities............................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders........................................... 10
Item 5. Other Information............................................................................. 11
Item 6. Exhibits and Reports on Form 8-K.............................................................. 11
Signature............................................................................................................ 12
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HYSEQ, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998*
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 16,369 $ 21,555
Short-term investments 13,501 24,880
Accounts receivable 2,404 651
Other current assets 1,012 1,118
------------ ------------
Total current assets 33,286 48,204
Cash on deposit 2,106 2,106
Equipment and leasehold improvements, net 8,909 6,902
Patents, licenses and other assets, net 767 702
------------ ------------
Total assets $ 45,068 $ 57,914
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,743 $ 1,905
Accrued professional fees 1,187 1,575
Other current liabilities 895 1,025
Current portion of lease and loan obligations 1,865 1,354
------------ ------------
Total current liabilities 5,690 5,859
Noncurrent portion of lease and loan obligations 5,216 4,479
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 82,344 82,341
Notes receivable from stockholders (3,503) (3,503)
Deferred compensation (44) (126)
Accumulated other comprehensive loss (45) (14)
Accumulated deficit (44,590) (31,122)
------------ ------------
Total stockholders' equity 34,162 47,576
------------ ------------
Total liabilities and stockholders' equity $ 45,068 $ 57,914
============ ============
</TABLE>
* The condensed consolidated balance sheet at December 31, 1998 has been
derived from the audited financial statements at that date.
See accompanying notes.
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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,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contract revenues $ 1,490 $ 1,352 $ 5,285 $ 6,715
Operating expenses:
Research and development 4,389 4,969 14,143 13,984
General and administrative 1,757 2,601 5,718 7,091
---------- ---------- ---------- ----------
Total operating expenses 6,146 7,570 19,861 21,075
---------- ---------- ---------- ----------
Loss from operations (4,656) (6,218) (14,576) (14,360)
Interest income, net 324 750 1,108 2,286
---------- ---------- ---------- ----------
Net loss $ (4,332) $ (5,468) $ (13,468) $ (12,074)
========== ========== ========== ==========
Basic and diluted net loss per share $ (0.33) $ (0.42) $ (1.04) $ (0.94)
========== ========== ========== ==========
Shares used in computing basic and
diluted net loss per share 13,016 12,926 12,993 12,809
========== ========== ========== ==========
</TABLE>
See accompanying notes.
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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,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,468) $ (12,074)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of patents and licenses 1,980 1,293
Amortization of deferred compensation 82 239
Unrealized loss on short-term investments (31) 13
Changes in assets and liabilities:
Accounts receivable (1,753) (340)
Other current assets 106 (306)
Other assets (85) (60)
Accounts payable (162) (281)
Accrued professional fees (388) 437
Other current liabilities (130) (33)
------------ ------------
Net cash used in operating activities (13,849) (11,112)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (3,967) (4,221)
Purchases of short term investments (11,421) (37,094)
Maturities of short term investments 22,800 39,062
------------ ------------
Net cash provided by/(used in) investing activities 7,412 (2,253)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of stockholders' notes receivable -- 155
Principal payments on capital lease and loan obligations (1,069) (262)
Proceeds from financing loan 2,317 281
Proceeds from issuance of common stock 34 545
Issuance of common stock for ESPP 84 --
Re-purchase of common stock from stockholder (115) --
------------ ------------
Net cash provided by financing activities 1,251 719
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,186) (12,646)
Cash and cash equivalents at beginning of period 21,555 23,204
------------ ------------
Cash and cash equivalents at end of period $ 16,369 $ 10,558
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Interest Paid $ 495 $ 98
============ ============
</TABLE>
See accompanying notes.
5
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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, 1999, statements of operations for the three and nine months ended September
30, 1999 and 1998 and statements of cash flows for the nine months ended
September 30, 1999 and 1998 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 subsidiaries. The
results of operations for the interim periods shown herein are not necessarily
indicative of operating results expected for the entire year.
2. Changes in Accounting Standards
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed For or Obtained For Internal Use" (the "SOP
98-1"). Effective January 1, 1999, the Company adopted SOP 98-1. SOP 98-1
requires the capitalization of certain costs incurred after the date of adoption
in connection with developing or obtaining software for internal use. The
Company previously expensed such costs as incurred. The adoption of SOP 98-1
resulted in capitalization of approximately $1.1 million for the nine months
ended September 30, 1999.
3. Comprehensive Loss
During the nine months ended September 30, 1999 and 1998, the Company's
comprehensive loss amounted to $13,499,000 and $12,061,000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995 concerning existing and
potential collaboration arrangements, royalties and other payments under
existing and potential collaboration arrangements, product development and sales
and other statements. Such statements are based
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on Management's current expectations and 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 discussed herein and from
time to time in the Company's filings with the Securities and Exchange
Commission ("SEC"), including but not limited to, the following: 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
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.
Hyseq is a registered trademark and service mark of the Company. HyX, HyChip,
HyProfile, HyPace and HyBrow are trademarks and HyGenomics, HyGnostics, HyPace,
Global Expression Technology, GET and ProbeSure are service marks of the
Company.
GeneSolutions and GeneSolutions.com are trademarks and service marks of
GeneSolutions Inc., a wholly-owned subsidiary of the Company.
RESULTS OF OPERATIONS
Contract revenues were $1.5 million and $5.3 million for the three and nine
months ended September 30, 1999, compared to $1.4 million and $6.7 million for
the same periods in 1998. Revenues recorded during the three months ended
September 30, 1999 included $1.4 million from Chiron Corporation and $0.1
million as a reimbursement from PE Corporation. The Company recognizes payments
under its collaboration agreement with Chiron as revenue either ratably over the
collaboration term based on the guaranteed minimum funding requirement, which is
$5.5 million for the third year of the collaboration (June 1, 1999 to May 31,
2000), or as earned based on performance levels for each period if in excess of
minimum funding levels. The Company expects revenues from its collaboration with
Chiron to remain at the same level of minimum funding of approximately $1.4
million during the fourth quarter of 1999. In the fourth quarter, the Company
expanded its relationship with PE Corporation which may provide
additional revenues of up to $1.35 million through the end of 2000. The amount
of revenues the Company recognizes will vary from quarter to quarter and may
result in significant fluctuations in operating results from quarter to quarter.
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.
Total operating expenses, consisting of research and development expenses and
general and administrative expenses, were $6.1 million and $19.9 million for the
three and nine months ended September 30, 1999, respectively, compared to $7.6
million and $21.1 million for the same periods in 1998. The research and
development component of operating expenses decreased to $4.4 million during the
three months ended September 30, 1999 from $5.0 million during the same period
of 1998 due primarily to lower material consumption costs resulting from
decreased sequencing production levels in the third quarter of 1999 as the
Company was completing build out of its facilities, partially offset by higher
salaries and increased depreciation expense. For the nine months ended September
30, 1999, research and development expenses were relatively unchanged at $14.1
million compared to $14.0 million for the same period in 1998 as lower material
consumption and capitalization of internal software development costs were
offset by higher salaries, increased investment in the Company's intellectual
property, costs related to continuing development and recent enhancements of the
HyChip universal sequencing chip product, and increased depreciation and rental
expenses associated with the expansion of the Company's facilities. The general
and administrative component of operating expenses decreased to $1.8 million and
$5.7 million during the three and nine months ended September 30, 1999,
respectively, from $2.6 million and $7.1 million during the same periods of
1998, primarily due to lower legal costs partially offset by increased staffing
and other costs associated with business development and startup costs
associated with the launching of Hyseq's new www.GeneSolutions.com website.
Lower legal expenses resulted in part due to decreased activity while awaiting
the results of the November 1998 claims construction hearing known as a
"Markman" hearing and the setting of a trial date in the Company's litigation
against Affymetrix. The results of the Markman hearing were made public on
October 27, 1999. The Company expects that total operating expenses will
increase in the fourth quarter due to additional commercialization costs related
to GeneSolutions Inc. and due to higher litigation expenses. Litigation expenses
are expected to increase due to accelerated activity in the Company's litigation
with Affymetrix.
The magnitude of the increases or decreases 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 expand its internal sequencing
effort and to support its efforts to recruit new collaboration partners. 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 a material adverse effect on the Company's operating
results.
Net interest income decreased to $0.3 million and $1.1 million during the three
and nine months ended September 30, 1999 from $0.8 million and $2.3 million for
the same periods in 1998. The decrease in interest income resulted from lower
cash and investment balances held by the Company and higher interest expense
from increased financing activities.
Since inception, the Company has incurred operating losses and, as of September
30, 1999, had an accumulated deficit of $44.6 million. The Company incurred a
net loss for the three and nine months ended September 30, 1999 of $4.3 million
and $13.5 million, respectively, compared to a net loss of $5.5 million and
$12.1 million in the same periods of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had $32.0 million in cash and investments,
which includes $29.9 million in cash, cash equivalents and short-term
investments and $2.1 million in a restricted cash on deposit account, compared
to $48.5 million at December 31, 1998. This decrease was a result of $13.8
million net cash used in operating activities, $4.0 million of capital
expenditures, partially offset by financing proceeds of $1.3 million. During the
second quarter of 1999, the Company obtained a $5.0 million asset-backed
financing commitment to cover its expected capital needs through the end of the
year. As of September 30, 1999 the Company had borrowed $2.3 million under this
financing commitment. This current asset-backed finance commitment expires on
December 31, 1999. The Company is evaluating its future needs for equipment
financing and may seek to extend its existing financing commitment or obtain
new financing. There is no assurance that its existing financing commitment can
be extended or that new financing will be available on favorable terms, if at
all.
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All of the Company's investments in marketable securities are considered
available-for-sale and as such are classified as short-term investments. Cash
equivalents and investments are currently held in investment-grade commercial
paper, bank certificates of deposit 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. In
addition, the Company has $2.1 million in a cash on deposit account with the
Company's bank as security for a letter of credit in conjunction with a facility
lease. The letter of credit and the cash collateralizing it will be reduced by
$0.5 million commencing in 2001 and will be further reduced by $0.5 million each
year thereafter subject to certain conditions. The cash on deposit at any time
in conjunction with this letter of credit is restricted and cannot be withdrawn,
however the Company controls the investment of the cash and receives the
interest earned thereon.
Net cash used in operating activities increased to $13.8 million during the nine
months ended September 30, 1999 from $11.1 million in the same period of 1998.
The increase in cash usage from operations for the first nine months of 1999
compared to the same period in 1998 was due primarily to a significant increase
in the accounts receivable balance and a decrease in interest income.
The Company's investing activities, other than the purchase and sales of
short-term investments, consist of capital expenditures which totaled $4.0
million for the nine months ended September 30, 1999 as compared to $4.2 million
for the same period of 1998. Capital expenditures slightly decreased in the
first nine months of 1999 primarily due to lower expenditures related to the
facilities expansion compared to the first nine months of 1998, partially offset
by the capitalization of internal software costs as a result of the Company's
adoption of SOP 98-1. See Note 2 of Notes to Condensed Consolidated Financial
Statements. The Company expects to finance additional capital expenditures
required during the fourth quarter of 1999.
Net cash provided by financing activities was $1.3 million for the nine months
ended September 30, 1999 as compared to $0.7 million for the same period in
1998. The net cash provided in the first nine months in 1999 was primarily due
to proceeds from asset-backed financing, partially offset by higher payments on
loan obligations. For the corresponding period in 1998, the net cash provided by
financing activities was primarily a result of the Company receiving payments on
notes held by stockholders and issuance of common stock related to the exercise
of options and warrants.
The Company expects that existing capital resources, anticipated revenue from
existing collaborative partners, and its capital financing commitment will be
sufficient to support the Company's operations at least through the first half
of 2001 as the Company expects to substantially complete many aspects of its
internal gene discovery efforts by year end and continue to focus on product
development. 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, the magnitude of those programs, the ability
of the Company to establish new 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 revenues from existing collaboration partners, financing
commitments, cash, cash equivalents and short-term investments, will be adequate
to fund the Company's operations. 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.
YEAR 2000 COMPLIANCE
The Year 2000 compliance problem or "Y2K" issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's or its vendors' or collaborators' computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process data
or engage in certain business activities.
Based on ongoing assessments, the Company believes that substantially all of its
critical bioinformatics software and internal information technology systems are
Y2K compliant. The Company has developed most of its bioinformatics software
in-house during the last three years and has been aware of the Y2K issue. As a
result, the Company believes that its proprietary software is Y2K
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compliant. Certain software used by the Company's wholly owned subsidiary
GeneSolutions Inc. was developed during the third quarter of 1999 during which
time the Company was aware of the Y2K issue. GeneSolutions also uses certain
third party software and hardware, which, based on representations of
manufacturers, the Company believes are Y2K complaint. As a result, the Company
believes that the computer related systems used by GeneSolutions Inc. are Y2K
compliant. The Company believes that it has completed substantially all of its
assessment of the status of its third-party software and hardware, including
embedded chips, used in its production line, and believes that all systems that
may have been affected have been replaced, or will be replaced before the year
2000, or have been retired from use in the ordinary course of business. The
Company does not believe that a Y2K issue, if any, occurring with this equipment
would have a material adverse effect on its ongoing operations.
Due to the recent upgrade of the Company's accounting and human resource systems
and software, and based on representations of the manufacturers, the Company
believes that its accounting and human resource systems are Y2K compliant.
The Company has sent letters to its vendors, collaborators and other third
parties regarding their Y2K compliance. To date, the Company has identified
areas that are supplied by third-party vendors that may not be Y2K compliant
based on the representations of such vendors. The Company has independently
tested these systems and is also evaluating the cost to upgrade or replace these
systems, if necessary. However, the Company does not believe the failure to
upgrade or replace these systems would have a material adverse effect on the
Company's business, financial condition and results of operations.
Given the information known at this time about the Company's systems, coupled
with the Company's ongoing efforts to upgrade and maintain business systems as
necessary, it is currently anticipated that the Y2K issue or related costs will
not have a material adverse effect on the Company's business, financial
condition and results of operations. The cost of any required modifications
likely to be found in this process is expected not to exceed $50,000. However,
disruptions in the economy generally resulting from Y2K issues could materially
adversely affect the Company. The amount of potential liability and loss of
revenue cannot be reasonably estimated at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RATE RISK
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company does not use
derivative financial instruments in its investment portfolio. The Company places
its investments with high quality issuers and, by policy, limits the amount of
credit exposure to any one issuer. The Company is averse to principal loss and
ensures the safety and preservation of its invested funds by limiting default,
market and reinvestment risk. The Company classifies its cash equivalents and
marketable securities as "fixed-rate" if the rate of return on such instruments
remains fixed over their term. These "fixed-rate" investments include U.S.
government securities, commercial paper, corporate bonds, certificates of
deposit, and all such investments held in the Company's portfolio as of
September 30, 1999 mature in 1999 and 2000. The Company classifies its cash
equivalents and marketable securities as "variable-rate" if the rate of return
on such investments varies based on the change in a predetermined index or set
of indices during their term. These "variable-rate" investments primarily
include money market accounts. The table below presents the amounts and related
weighted interest rates of the Company's investment portfolio as of September
30, 1999:
<TABLE>
<CAPTION>
AVERAGE INTEREST RATE COST FAIR VALUE
--------------------- ---- ----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT INTEREST RATES)
Cash equivalents
Variable rate 4.67% $ 4,772 $ 4,772
Fixed rate 5.41% $11,609 $11,597
Marketable securities
Fixed rate 5.11% $13,534 $13,501
</TABLE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 3, 1997, the Company brought suit against Affymetrix, Inc. in the U.S.
District Court for the Northern District of California, San Jose Division,
alleging infringement by Affymetrix of the Company's U.S. Patents No. 5,202,231
and 5,525,464 (Hyseq, Inc. v. Affymetrix, Inc., Case No. C 97-20188 RMW ENE)
("Hyseq I"). On May 5, 1997, the Company filed an Amended Complaint. On
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December 9, 1997, the Company filed a second lawsuit against Affymetrix alleging
infringement by Affymetrix of the Company's U.S. Patent No. 5,695,940 (Hyseq,
Inc. v. Affymetrix, Inc., Case No. C-97 4469 THE) ("Hyseq II"). On April 22,
1998 the two cases were consolidated.
The consolidated suits allege that Affymetrix willfully infringed, and continues
to infringe, the Company's patents covering SBH technology. Through the lawsuit,
the Company seeks both to enjoin Affymetrix from infringing its patents covering
SBH technology and an award of monetary damages for Affymetrix' past
infringement. On May 19, 1997, Affymetrix filed an Answer and Affirmative
Defenses to the First Amended Complaint in Hyseq I and also filed a counterclaim
against the Company. The counterclaim seeks a declaratory judgment of invalidity
and non-infringement with respect to the two patents asserted in Hyseq I. On
September 9, 1997, the Company filed a reply to the counterclaim in which it
denied the allegations of invalidity and non-infringement. A similar answer and
counterclaim was filed by Affymetrix in Hyseq II on December 28, 1997, and a
similar reply to the counterclaim was filed by the Company on January 29, 1998.
On August 1, 1997 (Hyseq I), and on March 28, 1998 (Hyseq II), initial case
management conferences were held in each case in which the Court entered a
pre-trial schedule. The Court held a claims construction hearing on November 17
and 18, 1998 in Hyseq I and II. On July 12, 1999, Affymetrix filed an amended
answer and counterclaim that alleges the additional defense that the patents
were obtained through inequitable conduct. On October 27, 1999, the Court issued
its claims construction order and is expected to set a trial date in this case
at a hearing to be held in December 1999. The Company and Affymetrix are
currently engaged in pretrial discovery during which documents are being
exchanged and depositions are being taken. While the Company believes it has
made valid claims and has meritorious defenses to the counterclaims, this
litigation is at an early stage and there can be no assurance that the Company
will prevail in the action.
On August 18, 1998, Affymetrix filed suit against the Company alleging that the
Company infringed two of Affymetrix' U.S. patents, No. 5,795,716 and 5,744,305
(Case No. C-98 013192 WHA (MEJ)). This action is being heard in the U.S.
District Court for the Northern District of California, San Francisco Division.
Affymetrix filed an amended complaint on September 1, 1998 alleging infringement
of its U.S. Patent No. 5,800,992. On August 19, 1999, the case was reassigned to
Judge William H. Alsup. On October 12, 1999, the Court decided on its own
volition to consolidate the technology tutorial and the claims construction
hearing in the case of Affymetrix, Inc. v. Hyseq, Inc. with those in case of
Affymetrix, Inc. v. Synteni, Inc. and Incyte Pharmaceuticals, Inc. These are
scheduled to be held on January 26, 2000 and February 15, 2000, respectively.
The Court has set separate trial dates for the two cases, with the Hyseq case
currently scheduled to be tried in October 2000, after the trial of Affymetrix
v. Synteni et al. The Company believes that Affymetrix' allegations are without
merit and intends to vigorously defend the action. However, the litigation is at
a very early stage and it is impossible to predict the ultimate outcome of this
matter.
On October 26, 1999, the Company filed a lawsuit against Affymetrix in the U.S.
District Court for the Northern District of California, San Francisco Division
(Case No. C-99 4735 MJJ), alleging infringement by Affymetrix of the Company's
recently-issued U.S. Patent No. 5,972,619 (the "619 Patent"). Hyseq also alleges
that Affymetrix' U.S. Patent No. 5,795,716 is invalid because the subject matter
was first invented and is claimed and covered by Hyseq's `619 Patent. Hyseq has
filed a notice in the case of Affymetrix, Inc. v. Hyseq, Inc. that this new case
is related to that case.
The Company has incurred substantial costs and expended substantial personnel
time in asserting the Company's patent rights and defending its technology
against Affymetrix and may continue to incur such costs in asserting its patent
rights and defending its technology against Affymetrix or others. There can be
no assurance that the Company will be successful in asserting these efforts.
Failure to successfully enforce its patent rights or the loss of these patent
rights covering SBH technology also could remove a legal obstacle to competitors
in designing platforms with similar competitive advantages.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10
<PAGE> 11
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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,
1999.
11
<PAGE> 12
SIGNATURE
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)
By: /s/ Mark E. Gitter
------------------------------------
Mark E. Gitter
Chief Financial Officer
Date: November 12, 1999
12
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,369
<SECURITIES> 13,501
<RECEIVABLES> 2,404
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,286
<PP&E> 13,821
<DEPRECIATION> 4,912
<TOTAL-ASSETS> 45,068
<CURRENT-LIABILITIES> 5,690
<BONDS> 0
0
0
<COMMON> 82,344
<OTHER-SE> (43,885)
<TOTAL-LIABILITY-AND-EQUITY> 45,068
<SALES> 0
<TOTAL-REVENUES> 5,285
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,861
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 495
<INCOME-PRETAX> (13,468)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,468)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,468)
<EPS-BASIC> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
