UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM_______TO_______.
Commission File Number 0-22570
Lynx Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3161073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3832 Bay Center Place
Hayward, CA 94545
(Address of principal executive offices) (Zip Code)
(510) 670-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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
----- -----
The number of shares of Common Stock, Series B Preferred Stock, Series C
Preferred Stock, and Series D Preferred Stock outstanding as of March 31, 1997,
were 3,140,672, 332,288, 123,299 and 40,000, respectively. The Series B, Series
C and Series D Preferred Stock are convertible into Common Stock on a
ten-for-one basis. Information regarding the aggregate market value of the
Registrant's voting stock is not included because there is currently no
established public trading market for the Company's voting stock.
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<PAGE>
Lynx Therapeutics, Inc.
<TABLE>
INDEX
<CAPTION>
PART I FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Condensed Consolidated Balance Sheets - March 31, 1997
and December 31, 1996........................................... 3
Condensed Consolidated Statements of Operations - three months
ended March 31, 1997 and 1996.................................. 4
Condensed Consolidated Statements of Cash Flows - three months
ended March 31, 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................... 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................... 9
Item 2. Changes in Securities............................................... 9
Item 3. Defaults Upon Senior Securities..................................... 9
Item 4. Submission of Matters to a Vote of Security Holders................. 9
Item 5. Other Information................................................... 9
Item 6. Exhibits and Reports on Form 8-K.................................... 9
Signatures .................................................................... 9
</TABLE>
Page 2 of 9
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
March 31, December 31,
1997 1996*
--------------------------------
Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,409 $ 12,109
Short-term investments -- 1,973
Accounts receivable 72 118
Other current assets 91 158
--------------------------------
Total current assets 10,572 14,358
Property and equipment:
Leasehold improvements 3,810 3,193
Laboratory and other equipment 3,224 2,976
--------------------------------
7,034 6,169
Less accumulated depreciation and amortization (2,590) (2,290)
--------------------------------
Net property and equipment 4,444 3,879
Notes receivable from employees 180 175
--------------------------------
$ 15,196 $ 18,412
================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 503 $ 429
Accrued compensation and vacation 365 394
Accrued professional fees 125 169
Deferred revenue from related parties - current 3,500 3,875
Other accrued liabilities 255 373
--------------------------------
Total current liabilities 4,748 5,240
Deferred revenue from related parties - long-term 1,604 2,292
Other noncurrent liabilities 156 148
Stockholders' equity:
Preferred stock 27,189 27,189
Common stock 17,329 17,361
Notes receivable from stockholders (210) (210)
Deferred compensation (1,912) (2,092)
Unrealized gain on marketable securities 5 3
Accumulated deficit (33,713) (31,519)
--------------------------------
Total stockholders' equity 8,688 10,732
--------------------------------
$ 15,196 $ 18,412
================================
<FN>
*The Balance Sheet amounts at December 31, 1996 have been derived from audited
financial statements at that date but do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
</FN>
</TABLE>
Page 3 of 9
<PAGE>
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended
March 31,
--------------------------
1997 1996
---- ----
Net revenues:
Revenues from collaborative arrangements with $ 1,063 $ 375
related parties
Other revenues 72 117
--------------------------
Total revenues 1,135 492
Operating expenses:
Research and development 3,075 2,405
General and administrative 425 544
--------------------------
Total operating expenses 3,500 2,949
--------------------------
Loss from operations (2,365) (2,457)
Interest income 171 187
--------------------------
Net loss $ (2,194) $ (2,270)
==========================
Net loss per share $ (0.70) $ (0.97)
==========================
Shares used in per share computation 3,144,627 2,334,826
==========================
See accompanying notes.
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<PAGE>
<TABLE>
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $ (2,194) $ (2,270)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 300 216
Deferred compensation 180 --
Changes in operating assets and liabilities:
Accounts receivable 46 (29)
Other current assets 67 (147)
Accounts payable 74 (432)
Accrued liabilities (191) (24)
Deferred revenue from related party (1,063) (375)
Other noncurrent liabilities 8 15
-------------------------
Net cash used in operating activities (2,773) (3,046)
Cash flows from investing activities
Purchases of short-term investments -- (994)
Maturities of short-term investments 1,975 --
Purchases of property and equipment (865) (318)
Notes receivable from employees (5) (190)
-------------------------
Net cash provided by (used in) investing activities 1,105 (1,502)
Cash flows from financing activities
Issuance (repurchase) of common stock (32) 7
-------------------------
Net cash provided by (used in) financing activities (32) 7
-------------------------
Net decrease in cash and cash equivalents (1,700) (4,541)
Cash and cash equivalents at beginning of period 12,109 13,779
-------------------------
Cash and cash equivalents at end of period $ 10,409 $ 9,238
=========================
<FN>
See accompanying notes.
</FN>
</TABLE>
Page 5 of 9
<PAGE>
Lynx Therapeutics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
1. Ownership and nature of business
Lynx was formed to discover and target inappropriate gene expression in
disease. The Company's early efforts relied on academic collaborations for the
discovery and understanding of altered or inappropriate gene function and on its
own expertise in synthetic DNA ("oligodeoxynucleotide" or "ODN") chemistry for
the development of compounds aimed at modulating undesirable gene expression.
These early collaborations resulted in a number of compounds aimed at the
prevention of restenosis following balloon angioplasty and certain leukemias and
cancers. The Company has recently initiated an internal biology-based drug
discovery program designed around in vitro and in vivo models of acute
biological stress or injury. This program is currently focused on models
relevant to diseases resulting from brain and spinal cord injuries. Its aim is
to better define and characterize gene function and inappropriate gene
expression in diseases of interest. The Company has also established a group to
focus on the development of new and proprietary DNA sequencing technologies that
would be capable of accelerating the discovery and validation of targets for
drug discovery. Foremost among these are the Massively Parallel Signature
Sequencing ("MPSS") and the Massively Parallel Genomic Sequencing ("MPGS")
technologies. The first is designed to enable researchers to identify a majority
of the genes expressed by living cells whether in culture or in a tissue of
interest. The second is designed to enable the simultaneous sequencing of up to
a million genomic fragments in order to arrive rapidly at genomic sequences. The
Company is currently refining various aspects of the biochemistries and
instrumentation needed to implement these technologies.
2. Basis of presentation
The accompanying condensed consolidated financial statements included
herein have been prepared by the Company without audit, pursuant to the rules
and regulations promulgated by the Securities and Exchange Commission (the
"Commission"). Certain prior year amounts have been reclassified to conform with
current year presentation. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to Commission rules and
regulations; nevertheless, the Company believes that the disclosures are
adequate to make the information presented not misleading. In the opinion of
management, the financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows of the Company for the interim
periods presented. The results of operations for the quarter ended March 31,
1997, are not necessarily indicative of the results for the full year.
The unaudited condensed consolidated financial statements include all
accounts of the Company. Lynx has dissolved its majority owned subsidiary,
LYNXNebraska, Inc., with no consequent impact on the financial statements of
Lynx.
These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the Company's
year ended December 31, 1996.
Page 6 of 9
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the Company's annual report (Form 10-K) filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1996.
Overview
Since its inception in July 1989 (as a division of Applied Biosystems,
Inc. or "ABI"), Lynx has devoted its efforts toward research, drug discovery,
and development programs. Lynx has been unprofitable since its inception and may
incur substantial losses for the next several years, due primarily to the
expansion of its research and development programs, including development of its
phosphoramidate chemistry, MPSS and MPGS technologies, as well as preclinical
studies and clinical trials. Lynx may generate revenues based on its agreements
with collaborative partners as a result of achievement of the milestones defined
in the agreements. However, there is no guarantee that the milestones will be
achieved or that the technologies will be proven successful. Lynx does not
anticipate that it will generate significant revenues and profits, if any, from
the commercial sale of its products and services for several years if not
longer. There can be no assurance that Lynx will ever successfully develop and
market any of its proposed products or that it will ever be able to achieve or
sustain profitability.
Lynx's business is subject to significant risks, including the risks
inherent in its research and development efforts, uncertainties associated with
obtaining and enforcing patents, the lengthy and expensive regulatory approval
process, and possible competition from other products. The MPSS program is
dependent upon the successful integration of independent technologies, each of
which has its own development risks. In addition, Lynx's MPSS and MPGS
technologies could face competition from the development of similarly efficient,
or better, combinations of novel cloning and sequencing techniques. Even if
Lynx's therapeutic compounds appear promising at an early stage of development,
they may not reach the market for a number of reasons. Such reasons include, but
are not limited to, the possibilities that the compounds are found to be toxic
or ineffective during clinical trials, the failure to receive necessary
regulatory approvals, the difficulty to manufacture on a large scale, or the
inability to market a compound due to proprietary rights of third parties.
Results of Operations
Revenue
Lynx had total revenues of approximately $1.1 million and $492,000 for
the quarters ended March 31, 1997 and 1996 respectively. The 1997 revenue was
comprised of $1,063,000 earned under collaborative agreements with corporate
partners and $72,000 earned from a government grant. The 1996 revenue was
comprised of $375,000 earned under a collaborative agreement with a corporate
partner and $117,000 earned from a government grant. Revenue will continue to
fluctuate based on activity with current and potential corporate partners,
achievement of milestones, and timing of government grant funding.
Operating Expenses
Research and development expenses were $3.1 million and $2.4 million in
the quarters ended March 31, 1997 and 1996, respectively. The increase was due
to the costs associated with increased research staffing, the amortization of
deferred compensation recorded in conjunction with the Agreement of Merger
between Lynx and its majority owned subsidiary, Spectragen, Inc. in November
Page 7 of 9
<PAGE>
1996, and clinical trial costs associated with the LR-3280 compound. Lynx
expects to incur substantial and increasing research and development expenses
due to planned spending for ongoing research and development activities and new
research applications.
General and administrative expenses were $425,000 for the quarter ended
March 31, 1997, compared to $544,000 for the quarter ended March 31, 1996. The
decrease was due to lower investor relations costs compared to the first quarter
of 1996 in which the costs of the reverse stock split were reflected, and to
lower headcount-related costs. Lynx expects to continue to incur substantial
administrative expenses in support of its research and corporate development
efforts.
Interest Income
Interest income was $171,000 and $187,000 for the quarters ended March
31, 1997 and 1996 respectively.
Liquidity and Capital Resources
Since commencing operations as an independent Company, Lynx has
obtained funding for its operations through sales of Preferred and Common Stock
to venture capital investors and collaborative partners, revenue from
collaborative research and development arrangements, interest income, product
sales, and government grants. Lynx may receive additional collaborative research
payments from its existing partners (Hoechst, Tanabe, Schwarz Pharma and BASF)
and an equity investment from Hoechst, subject to achieving the milestones set
forth in the various agreements.
Net cash used in operating activities of $2.8 million for the quarter
ended March 31, 1997, differs from the net loss for the same period primarily
due to current period recognition of a portion of previously deferred revenue,
depreciation and amortization, and deferred compensation expense. Net cash
provided by investing activities related to maturities of short-term investments
partially offset by costs associated with the expansion of laboratory facilities
and purchases of capital equipment. Lynx expects that future capital
expenditures will be commensurate with growth in the employee base. Cash and
equivalents were $10.4 million at March 31, 1997.
Lynx is currently utilizing its available funds for supporting
development of its MPSS technology, funding preclinical research and clinical
trials and the planned growth in Lynx's internal efforts toward research, drug
discovery, and development programs. Pending such uses as described above, Lynx
intends to invest its excess cash in short-term, investment grade,
interest-bearing securities or certificates of deposit.
The timing and amount of funds required for specific uses by Lynx
cannot be precisely determined at this time and will be based upon Lynx's
progress in its research and development, the scope and results of preclinical
research and clinical trials, the cost and timing of regulatory approvals,
administrative and legal costs, the establishment of corporate partnerships and
the availability of alternate methods of financing. Lynx believes that its
current capital resources and interest income thereon will enable it to maintain
its current and planned operations through at least 1997. From time to time,
Lynx may seek to raise additional funding through the sale of its equity
securities or through corporate collaborations with existing or potential
corporate partners. There can be no assurance that any additional financing
required by Lynx will be available or, if available, will be on terms favorable
to Lynx.
Page 8 of 9
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits - The following document is filed as an
Exhibit to this report:
Exhibit
Number Description
------ -----------
27.1 Financial Data Table
b) No reports on Form 8-K were filed during the quarter
ended March 31, 1997.
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.
LYNX THERAPEUTICS, INC.
/s/ Sam Eletr
-------------------------------------
By: Sam Eletr, Ph.D.
Chief Executive Officer and
Chairman of the Board
Date: May 9, 1997
/s/ Edward C. Albini
-------------------------------------
By: Edward C. Albini
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 9, 1997
Page 9 of 9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FORM 10-Q PERIOD ENDED
MARCH 31, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,409
<SECURITIES> 0
<RECEIVABLES> 72
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,572
<PP&E> 7,034
<DEPRECIATION> 2,590
<TOTAL-ASSETS> 15,196
<CURRENT-LIABILITIES> 4,748
<BONDS> 0
<COMMON> 17,329
0
27,189
<OTHER-SE> 35,830
<TOTAL-LIABILITY-AND-EQUITY> 15,196
<SALES> 0
<TOTAL-REVENUES> 1,135
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,194)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,194)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,194)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
