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 JUNE 30, 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 July 31, 1997,
were: 3,207,670; 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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Lynx Therapeutics, Inc.
INDEX
<CAPTION>
PART I FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Condensed Consolidated Balance Sheets - June 30, 1997
and December 31, 1996............................................................... 3
Condensed Consolidated Statements of Operations - three and six months
ended June 30, 1997 and 1996....................................................... 4
Condensed Consolidated Statements of Cash Flows - six months
ended June 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....................................... 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 10
Item 2. Changes in Securities................................................................... 10
Item 3. Defaults Upon Senior Securities......................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders..................................... 10
Item 5. Other Information....................................................................... 10
Item 6. Exhibits and Reports on Form 8-K........................................................ 10
Signatures ........................................................................................ 11
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
June 30, December 31,
1997 1996*
---------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,718 $ 12,109
Short-term investments -- 1,973
Accounts receivable 191 118
Other current assets 67 158
---------------------------------------------
Total current assets 6,976 14,358
Property and equipment:
Leasehold improvements 3,749 3,193
Laboratory and other equipment 3,663 2,976
---------------------------------------------
7,412 6,169
Less accumulated depreciation and amortization (2,921) (2,290)
---------------------------------------------
Net property and equipment 4,491 3,879
Notes receivable from employees 189 175
---------------------------------------------
$ 11,656 $ 18,412
=============================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 349 $ 429
Accrued compensation and vacation 311 394
Accrued professional fees 107 169
Deferred revenue from related parties - current 3,125 3,875
Other accrued liabilities 365 373
---------------------------------------------
Total current liabilities 4,257 5,240
Deferred revenue from related parties - long-term 916 2,292
Other noncurrent liabilities 164 148
Stockholders' equity:
Preferred stock 27,189 27,189
Common stock 17,469 17,361
Notes receivable from stockholders (460) (210)
Deferred compensation (1,650) (2,092)
Unrealized gain/(loss) on marketable securities (2) 3
Accumulated deficit (36,227) (31,519)
---------------------------------------------
Total stockholders' equity 6,319 10,732
---------------------------------------------
$ 11,656 $ 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>
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<TABLE>
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
Revenues from collaborative arrangements
with related parties 1,224 375 2,287 750
Other revenues 98 87 170 204
-------------------------------------------------------------------
Total revenues 1,322 462 2,457 954
Operating expenses:
Research and development 3,377 2,929 6,452 5,334
General and administrative 591 628 1,017 1,167
-------------------------------------------------------------------
Total operating expenses 3,968 3,557 7,469 6,501
-------------------------------------------------------------------
Loss from operations (2,646) (3,095) (5,012) (5,547)
Interest income 133 143 304 330
-------------------------------------------------------------------
Net loss (2,513) (2,952) (4,708) (5,217)
===================================================================
Net loss per share (0.79) (1.26) (1.49) (2.23)
===================================================================
Shares used in per share computation 3,198,205 2,338,815 3,171,416 2,336,820
===================================================================
<FN>
See accompanying notes.
</FN>
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Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1997 1996
---- ----
Cash flows from operating activities
<S> <C> <C>
Net loss $ (4,708) $ (5,217)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 631 457
Deferred compensation 293 ---
Changes in operating assets and liabilities:
Accounts receivable (73) (12)
Other current assets 91 (145)
Accounts payable (80) (65)
Accrued liabilities (153) 246
Deferred revenue from related parties (2,126) (750)
Other noncurrent liabilities 16 29
---------------------------------
Net cash used in operating activities (6,109) (5,457)
Cash flows from investing activities
Purchases of short-term investments -- (995)
Maturities of short-term investments 1,968 994
Purchases of property and equipment (1,243) (1,006)
Notes receivable from employees (264) (230)
---------------------------------
Net cash provided by (used in) investing activities 461 (1,237)
Cash flows from financing activities
Issuance of common stock 257 13
---------------------------------
Net cash provided by financing activities 257 13
---------------------------------
Net decrease in cash and cash equivalents (5,391) (6,681)
Cash and cash equivalents at beginning of period 12,109 13,779
---------------------------------
Cash and cash equivalents at end of period $ 6,718 $ 7,098
=================================
<FN>
See accompanying notes.
</FN>
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<PAGE>
Lynx Therapeutics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
1. Company Overview
Lynx has developed a unique, proprietary technology for the analysis of
DNA called Massively Parallel Signature Sequencing, or MPSS. MPSS, the Company
believes, is the only technology available today that can analyze and identify,
simultaneously, very large numbers of DNA molecules or fragments from a single
biological sample. Lynx's technology has three major applications and each of
these can be applied to the genomes of man, pathogenic organisms and
commercially important plants and animals. These three major applications are
gene expression analysis, genomic sequencing and high resolution genomic maps.
In 1995, Lynx launched an internal biology-based drug discovery program
to establish the concepts, strategies and techniques necessary for the
identification of drug targets based on the analysis of differential gene
expression. This program is designed to capitalize eventually on the power of
MPSS but in its early phase it is utilizing know-how and intermediate
technologies currently resident within Lynx. The initial projects are centered
on the medically important field of neurovascular diseases that are particularly
well suited to analyses with the Company's gene sequencing and target discovery
(MPSS) technologies.
Lynx was originally formed in late 1992 to target inappropriate gene
expression in disease with synthetic DNA fragments designed to bind to, and
functionally block, genes whose inappropriate expression could be correlated
with disease. Lynx's early efforts at identifying and targeting gene function in
disease were based on the research of academic collaborators using conventional
techniques. The research efforts have resulted in a compound (LR-3280) now in
Phase II clinical trials for the prevention of coronary artery restenosis.
Lynx's early efforts in this area have formed the foundation and understanding
for the development of its new genetic technologies.
2. Basis of presentation
The 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. The financial
statements include all accounts of the Company and, in the opinion of
management, 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 three and six months ended June 30, 1997, are not
necessarily indicative of the results for the full year.
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.
3. Net loss per share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share"
("EPS"). SFAS 128 requires that companies
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present two measures of earnings per share, basic and diluted. Basic earnings
per share is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period, while
diluted EPS reflects the potential dilution of securities that could share in
the earnings of the company. SFAS 128 is effective for interim and annual
periods ending after December 15, 1997. The Company does not believe the
adoption of SFAS 128 will have a material impact on its loss per share
calculations.
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
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 additional development of its
MPSS technology. 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 technology 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 $1.3 million and $462,000 for
the quarters ended June 30, 1997 and 1996, respectively. The 1997 revenue was
comprised of approximately $1.2 million earned under collaborative agreements
with corporate partners, $85,000 in product revenue and $13,000 earned under a
government grant. The 1996 revenue was comprised of $375,000 earned under a
collaborative agreement with a corporate partner and $87,000 earned from a
government grant.
Lynx had revenues of approximately $2.5 million and $954,000 in the six
months ended June 30, 1997 and 1996, respectively. The 1997 revenue consisted of
approximately $2.3 million in collaborative
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revenue, $85,000 in product revenue and $85,000 in grant revenue. The 1996
revenue was comprised of $750,000 in collaborative revenue and $204,000 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 $3.4 million and $2.9 million in
the three months ended June 30, 1997 and 1996, respectively. For the six-month
periods ending on June 30, 1997 and 1996, research and development expenses were
$6.5 million and $5.3 million, respectively. The increases were due to the costs
associated with increased levels of research and development personnel, and the
amortization of deferred compensation recorded in conjunction with the Agreement
of Merger between Lynx and its majority owned subsidiary, Spectragen, Inc. in
November 1996. The increases were partially offset by reduced company-funded
sponsored research. 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 $591,000 for the quarter ended
June 30, 1997, compared to $628,000 for the quarter ended June 30, 1996. The
decrease was due to lower outside professional fees, and slightly lower
headcount-related expenses.
General and administrative expenses were $1.0 million for the six
months ended June 30, 1997, compared to $1.2 million for the six months ended
June 30, 1996. The decrease was due to lower headcount-related expenses and to
lower investor relations costs compared to 1996. Investor relations costs in
1996 reflected the costs of the reverse stock split. Lynx expects to continue to
incur substantial administrative expenses in support of its research and
development efforts.
Interest Income
Interest income was $133,000 and $143,000 for the three months ended
June 30, 1997 and 1996, respectively. For the six months ended June 30, 1997 and
1996, interest income was $304,000 and $330,000, respectively.
Liquidity and Capital Resources
Net cash used in operating activities of approximately $6.1 million for
the six months ended June 30, 1997 differs from the net loss for the same period
primarily due to current period recognition of a portion of previously deferred
revenue, offset in part by 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
purchases of capital equipment and the expansion of laboratory facilities. Lynx
expects that future capital expenditures will be commensurate with growth in the
employee base and the development of its MPSS and other technologies. At June
30, 1997, Lynx's cash and cash equivalents were $6.7 million.
Lynx is currently utilizing its available funds to support development
of its MPSS and other technologies, and to fund preclinical research and
clinical trials. 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.
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. The cost, 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
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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 collaborations and other arrangements, and the
availability of alternate methods of financing. Lynx may receive additional
collaborative research payments from its existing partners (Hoechst, Tanabe,
Schwarz Pharma and BASF) and equity investments from Hoechst, subject to
achieving the milestones set forth in the various agreements. Lynx may also seek
to raise additional funding through the sale of its equity securities or through
corporate collaborations and other arrangements 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. The failure to obtain such financing may cause the Company to seek
other sources of capital or reevaluate its operating plans. Lynx believes that
its current cash and cash equivalents and interest income thereon will enable it
to maintain its current operations through the end of 1997.
Page 9 of 11
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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
At the annual meeting of shareholders held May 13, 1997,
shareholders voted on the following:
(1) Election of Directors:
Nominee For Withheld
------- --- --------
Sam Eletr 1,942,842 133,610
Sydney Brenner 1,942,893 95,844
Kathleen D. La Porte 1,942,893 95,653
William K. Bowes 1,942,842 95,704
James C. Kitch 1,937,007 101,539
Craig C. Taylor 1,942,902 95,644
(2) Ratification of Selection of Independent Auditors:
For Against Non-Vote
--- ------- --------
2,036,025 1,303 --
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 June 30, 1997.
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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: August 12, 1997
/s/ Edward C. Albini
------------------------------------
By: Edward C. Albini
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 12, 1997
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE FORM 10-Q PERIOD ENDED JUNE 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,718
<SECURITIES> 0
<RECEIVABLES> 191
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,976
<PP&E> 7,412
<DEPRECIATION> (2,921)
<TOTAL-ASSETS> 11,656
<CURRENT-LIABILITIES> 4,257
<BONDS> 0
0
27,189
<COMMON> 17,469
<OTHER-SE> (38,339)
<TOTAL-LIABILITY-AND-EQUITY> 11,656
<SALES> 0
<TOTAL-REVENUES> 2,457
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,708)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,708)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,708)
<EPS-PRIMARY> (1.49)
<EPS-DILUTED> (1.49)
</TABLE>
