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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 JUNE 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 AUGUST 2, 1999: 13,021,146
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HYSEQ, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1999, and
December 31, 1998................................................................... 3
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1999 and 1998........................................ 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 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..................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................................. 11
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>
JUNE 30, DECEMBER 31,
1999 1998*
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,304 $ 21,555
Short-term investments 17,502 24,880
Accounts receivable 935 651
Other current assets 1,030 1,118
-------- --------
Total current assets 36,771 48,204
Cash on deposit 2,106 2,106
Equipment and leasehold improvements, net 7,796 6,902
Patents, licenses and other assets, net 765 702
-------- --------
Total assets $ 47,438 $ 57,914
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 723 $ 1,905
Accrued professional fees 1,001 1,575
Other current liabilities 923 1,025
Current portion of lease and loan obligations 1,623 1,354
-------- --------
Total current liabilities 4,270 5,859
Noncurrent portion of lease and loan obligations 4,750 4,479
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 82,303 82,341
Notes receivable from stockholders (3,503) (3,503)
Deferred compensation (51) (126)
Accumulated other comprehensive loss (73) (14)
Accumulated deficit (40,258) (31,122)
-------- --------
Total stockholders' equity 38,418 47,576
-------- --------
Total liabilities and stockholders' equity $ 47,438 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Contract revenues $ 1,043 $ 2,680 $ 3,795 $ 5,363
Operating expenses:
Research and development 4,152 4,921 9,754 9,015
General and administrative 1,773 2,414 3,961 4,490
-------- -------- -------- --------
Total operating expenses 5,925 7,335 13,715 13,505
-------- -------- -------- --------
Loss from operations (4,882) (4,655) (9,920) (8,142)
Interest income, net 348 737 784 1,536
-------- -------- -------- --------
Net loss $ (4,534) $ (3,918) $ (9,136) $ (6,606)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.35) $ (0.31) $ (0.70) $ (0.52)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share 12,996 12,769 12,982 12,751
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
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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>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,136) $ (6,606)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of patents and licenses 1,291 819
Amortization of deferred compensation 75 159
Unrealized loss on short-term investments (59) (11)
Changes in assets and liabilities:
Accounts receivable (284) (1,113)
Other current assets 88 167
Other assets (76) (39)
Accounts payable (1,182) (105)
Accrued professional fees (574) 718
Other current liabilities (102) (139)
-------- --------
Net cash used in operating activities (9,959) (6,150)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (2,172) (2,751)
Purchases of short term investments (11,422) (34,381)
Maturities of short term investments 18,800 31,025
-------- --------
Net cash provided by investing activities 5,206 (6,107)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of stockholders' notes receivable -- 155
Principal payments on capital lease and loan obligations (671) (166)
Proceeds from financing loan 1,211 21
Proceeds from issuance of common stock 33 543
Issuance of common stock for ESPP 44 --
Re-purchase of common stock from stockholder (115) --
-------- --------
Net cash (used in) provided by financing activities 502 553
-------- --------
Net (decrease) increase in cash and cash equivalents (4,251) (11,704)
Cash and cash equivalents at beginning of period 21,555 23,204
-------- --------
Cash and cash equivalents at end of period $ 17,304 $ 11,500
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Interest Paid $ 322 $ 31
======== ========
</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 June 30,
1999, statements of operations for the three and six months ended June 30, 1999
and 1998 and statements of cash flows for the six months ended June 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 subsidiary. 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 $0.6 million for the six months
ended June 30, 1999.
3. Comprehensive Loss
During the six months ended June 30, 1999 and 1998, the Company's comprehensive
loss amounted to $9,195,000 and $6,617,000, 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 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.
RESULTS OF OPERATIONS
Contract revenues were $1.0 million and $3.8 million for the three and six
months ended June 30, 1999, compared to $2.7 million and $5.4 million for the
same periods in 1998. Revenues recorded during the three months ended June 30,
1999 included $0.6 million from Chiron Corporation and $0.4 million as a
reimbursement from PE Corporation. The decrease in revenues in the second
quarter of 1999 from the same period in 1998 was primarily the result of the
acceleration of efforts with respect to the Company's collaboration with Chiron
Corporation into the first quarter of 1999 which allowed the Company time for
its planned expansion of its production capacity during the second quarter of
1999. 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
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the third year of the collaboration, or as earned based on performance levels
for each period in excess of minimum funding levels. The Company expects
revenues from its collaboration with Chiron to increase to at least $1.3 million
during the third quarter of 1999 as a result of the minimum funding requirement
in its collaboration with Chiron. The amount of revenues recognized 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 $5.9 million and $13.7 million for the
three and six months ended June 30, 1999, respectively, compared to $7.3 million
and $13.5 million for the same periods in 1998. The research and development
component of operating expenses decreased to $4.2 million during the three
months ended June 30, 1999 from $4.9 million during the same period of 1998.
This decrease in the research and development component of operating expenses
during the three months ended June 30, 1999 compared to the corresponding period
in 1998 was due primarily to lower material consumption costs resulting from the
acceleration of efforts with respect to the Company's collaboration with Chiron
Corporation into the first quarter of 1999 which allowed the Company time for
its planned expansion of its production capacity during the second quarter of
1999. For the six months ended June 30, 1999, research and development expenses
were $9.8 million compared to $9.0 million for the same period in 1998. This
increase was due primarily to the costs associated with the addition of
scientific and bioinformatic personnel, 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, partially offset by lower material consumption costs and the
capitalization of internal software development costs. The general and
administrative component of operating expenses decreased to $1.8 million and
$4.0 million during the three and six months ended June 30, 1999, respectively,
from $2.4 million and $4.5 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. Lower legal expenses resulted in part due
to the current status of Hyseq's litigation with Affymetrix which has resulted
in decreased activity until a trial date is set by the court. The Company
expects that total operating expenses will remain at approximately the second
quarter level through the end of the third quarter of 1999.
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, however, 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 $0.8 million during the three
and six months ended June 30, 1999 from $0.7 million and $1.5 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 June 30,
1999, had an accumulated deficit of $40.3 million. The Company incurred a net
loss for the three and six months ended June 30, 1999 of $4.5 million and $9.1
million, respectively, compared to a net loss of $3.9 million and $6.6 million
in the same periods of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had $36.9 million in cash and investments,
which includes $34.8 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 on-going
product development costs, patent-related costs including the Company's on-going
litigation against Affymetrix, Inc. and costs related to continuing development
and recent enhancements of the HyChip universal sequencing chip product,
partially offset by collection of accounts receivable and financing proceeds.
During the second quarter of 1999, the Company obtained a $5.0 million
asset-backed financing commitment to cover its expansion and expected capital
needs through the end of the year. As of June 30, 1999 the Company had borrowed
$1.2 million under this financing commitment.
The Company has classified all of its investments as short-term as of June 30,
1999 as the Company may decide not to hold its investments until maturity in
order to take advantage of favorable market conditions. Cash 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
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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. The Company controls the
investment of the cash and receives the interest earned thereon.
Net cash used in operating activities increased to $10.0 million during the six
months ended June 30, 1999 from $6.2 million in the same period of 1998. The
increase in cash usage from operations for the first half of 1999 was due
primarily to a significant reduction in accounts payable balance, higher
operating expenses, and a decrease in interest income. During the first half of
1998, the lower net cash usage from operations was due primarily to higher
revenue and interest income.
The Company's investing activities, other than the purchase and sales of
short-term investments, consist of capital expenditures which totaled $2.2
million for the six months ended June 30, 1999 as compared to $2.8 million for
the same period of 1998. Capital expenditures decreased in the first half of
1999 primarily due to lower expenditures related to the facilities expansion
compared to the first half 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 any additional capital expenditures required during the
second half of 1999.
Net cash provided by financing activities was $0.5 million for the six months
ended June 30, 1999 as compared to $0.6 million for the same period in 1998. The
net cash provided in the first half in 1999 was primarily due to proceeds from
asset-backed financing, partially offset by higher payments on capital leases
and 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 and 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 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 during second half of 1999, or
have been retired from use in the ordinary course of business. The
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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 is independently
testing 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. The Company
expects to complete its assessment during the third quarter of 1999.
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 issuee. 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 June 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 June 30, 1999:
<TABLE>
<CAPTION>
AVERAGE INTEREST RATE COST FAIR VALUE
--------------------- ------ ----------
(IN THOUSANDS, EXCEPT INTEREST RATES)
<S> <C> <C> <C>
Cash equivalents
Variable rate 4.60% 8,105 8,105
Fixed rate 5.01% 9,207 9,199
Marketable securities
Fixed rate 5.08% 17,567 17,502
</TABLE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 3, 1997, the Company brought suit against Affymetrix 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 Nos. 5,202,231
and 5,525,464 (Hyseq, Inc. v. Affymetrix, Inc., Case No. C 97-20188 RMW ENE,
U.S. District Court) ("Hyseq I"). On May 5, 1997, the Company filed an Amended
Complaint. On December 9, 1997, the Company filed a second lawsuit against
Affymetrix which alleges infringement by Affymetrix of the Company'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 suit alleges that Affymetrix willfully infringed, and continues to infringe,
upon the Company's patents covering SBH technology. Through the lawsuit, the
Company seeks both to enjoin Affymetrix from infringing upon the patents
covering SBH technology and an
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award of monetary damages for Affymetrix' past infringement. On May 19, 1997,
Affymetrix filed an Answer and Affirmative Defenses to the First Amended
Complaint to 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 in Hyseq I. On June 9, 1997, the Company filed a
reply to the counterclaim in which it denied the allegation 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), an initial case management conference for each case was
held by the Court and a pre-trial schedule was entered by the Court. A claims
construction hearing occurred on November 17 and 18, 1998, but the court has yet
to render its decision on those issues. On July 12, 1999, Affymetrix filed an
amended answer and counterclaim that alleges the additional defense that the
patents were obtained through inequitable conduct. 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 a meritorious defense to the counterclaim, this
litigation is at an early stage and there can be no assurance that the Company
will prevail in the claim.
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 FMS). This action was filed in the U.S. District Court for
the Northern District of California, San Jose Division. Affymetrix filed an
amended complaint on September 1, 1998 alleging infringement of another U.S.
Patent, No. 5,800,992. The Company believes that the suit is 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 June 30, 1999, the Court granted Hyseq's motion for a 120-day extension to
the case management schedule. On July 1, 1999, Judge Fern Smith, to whom the
case was assigned, began a planned leave of absence from the bench in the
Northern District. As a result, the parties have been informed that the case
will be reassigned to another judge in the Northern District. No reassignment
has been made as of this date.
The Company has incurred substantial costs and expended substantial personnel
time in asserting the Company's patent rights against Affymetrix and may
continue to incur such costs in asserting its patent rights against Affymetrix
or others. There can be no assurance that the Company will be successful in
asserting its patent rights. 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
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) On August 7, 1997, the Company's Registration Statement on Form S-1
(File No. 333-209091) was declared effective by the Securities and Exchange
Commission (the "Commission") and the Company's Registration Statement on Form
S-1 (File No. 333-13417) filed pursuant to Rule 462(b) of the Securities Act of
1933, as amended, was automatically effective upon filing (collectively, the
"IPO Registration Statements"). The IPO Registration Statements registered a
total of 3,450,000 shares of common stock, including the underwriters'
over-allotment which was exercised in full, all of which were issued and sold by
the Company (the "Offering"). All of the shares covered by the IPO Registration
Statements were sold upon termination of the Offering in September 1997 to an
underwriting syndicate managed by Lehman Brothers Inc. The shares sold by the
Company were sold at an aggregate price to public of $48,300,000, netting
$44,919,000 to the Company after underwriters' discount of $3,381,000. Since the
effective date of the IPO Registration Statements, the Company has incurred
approximately $949,000 in expenses in addition to the underwriters' discount
described above in connection with the registration, offering, issuance and sale
of the shares in the Offering, netting estimated proceeds from the Offering to
the Company of approximately $43,970,000 (the "Net Proceeds"). None of such
expenses were paid to any officer, director or 10% or greater stockholder of the
Company or an affiliate of any such persons. The Company believes that it has
applied substantially all of the Net Proceeds of the Offerings to the uses
identified in the IPO Registration Statements as follows: (i) development of
potential therapeutic product candidates and diagnostic tests and products and
expansion of its HyGenomics database, $21.7 million, (ii) development of the
HyChip system and related products, $5.1 million, (iii) investment in capital
equipment and leasing of additional space to increase sequencing capacity, $3.7
million, (iv) working capital and other general corporate purposes, $13.5
million.
10
<PAGE> 11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 24, 1999. At that
meeting, a quorum was present and two proposals were voted upon.
1. The following persons were nominees for election as Class III
Directors, each to hold office for a term as outlined in the
proxy statement or until his successor is duly elected and
qualified, and at the Annual Meeting of Stockholders on May 24,
1999, each such Director received the number of votes set
opposite his respective name and was elected as Class III
Directors for the term set forth in the proxy statement:
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NOMINEE FOR TOTAL VOTES WITHHELD TOTAL VOTES
------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Radoje T. Drmanac 6,735,180 85.68 1,125,343 14.32
Thomas N. McCarter, III 6,735,180 85.68 1,125,343 14.32
</TABLE>
2. The proposal to ratify the selection of Ernst & Young LLP as
independent auditors of the Company for the 1999 fiscal year was
approved at the Annual Meeting of Stockholders on May 24, 1999
by the following vote:
<TABLE>
<CAPTION>
PERCENTAGE OF
VOTES TOTAL VOTES
--------- -------------
<S> <C> <C>
For 7,818,138 99.46
Against 20,660 .26
Abstain 21,725 .28
</TABLE>
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 June 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: August 13, 1999
12
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,304
<SECURITIES> 17,502
<RECEIVABLES> 935
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,771
<PP&E> 12,026
<DEPRECIATION> 4,230
<TOTAL-ASSETS> 47,438
<CURRENT-LIABILITIES> 4,270
<BONDS> 0
0
0
<COMMON> 82,303
<OTHER-SE> (43,885)
<TOTAL-LIABILITY-AND-EQUITY> 47,438
<SALES> 0
<TOTAL-REVENUES> 3,795
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 322
<INCOME-PRETAX> (9,136)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,136)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,136)
<EPS-BASIC> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
