===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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 outstanding as of October 30, 1998
was 11,124,662. The aggregate market value of the common stock of the
Registrant held by non-affiliates as of October 30, 1998 was $84,710,652.
<PAGE>
Lynx Therapeutics, Inc.
INDEX
PART I FINANCIAL INFORMATION (unaudited)
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1998
and December 31, 1997.......................................3
Condensed Consolidated Statements of Operations - three and nine
months ended September 30, 1998 and 1997....................4
Condensed Consolidated Statements of Cash Flows - nine months
ended September 30, 1998 and 1997...........................5
Notes to Condensed Consolidated Financial Statements............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............8
PART II OTHER INFORMATION..............................................11
Item 1. Legal Proceedings..............................................11
Item 2. Changes in Securities..........................................11
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
Signatures ................................................................12
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997*
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $9,954 $8,798
Short-term investments........................... 8,002 16,132
Accounts receivable.............................. 135 244
Other current assets............................. 321 199
------------ -----------
Total current assets................................ 18,412 25,373
------------ -----------
Property and equipment:
Leasehold improvements........................... 4,461 3,795
Laboratory and other equipment................... 3,335 3,562
------------ -----------
7,796 7,357
Less accumulated depreciation and amortization... (3,185) (3,588)
------------ -----------
Net property and equipment.......................... 4,611 3,769
Notes receivable from employees..................... 228 125
Long-term investments............................... 603 --
------------ -----------
$23,854 $29,267
============ ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................. $589 $210
Accrued compensation............................. 234 289
Accrued professional fees........................ 147 179
Deferred revenue from related party............ 229 2,292
Other accrued liabilities........................ 322 528
------------ -----------
Total current liabilities........................... 1,521 3,498
Other noncurrent liabilities........................ 193 179
Stockholders' equity:
Preferred stock.................................. -- 27,189
Common stock..................................... 74,213 46,640
Notes receivable from stockholders............... (435) (460)
Deferred compensation............................ (4,057) (5,394)
Accumulated other comprehensive income (loss).... (4) (45)
Accumulated deficit.............................. (47,577) (42,340)
------------ -----------
Total stockholders' equity.......................... 22,140 25,590
------------ -----------
$23,854 $29,267
============ ===========
</TABLE>
*The Balance Sheet amounts at December 31, 1997 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.
<PAGE>
Lynx Therapeutics, 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,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues:
Revenues from collaborative
arrangements with related parties. $687 $1,124 $2,062 $3,411
Other revenues...................... 4 100 134 270
--------- --------- --------- ---------
Total revenues......................... 691 1,224 2,196 3,681
Operating expenses:
Research and development............ 3,004 3,930 9,917 10,382
General and administrative.......... 347 427 1,348 1,444
--------- --------- --------- ---------
Total operating expenses.............. 3,351 4,357 11,265 11,826
--------- --------- --------- ---------
Loss from operations................... (2,660) (3,133) (9,069) (8,145)
Interest income........................ 276 82 936 386
Other income/(expense)................. (280) -- 2,896 --
--------- --------- --------- ---------
Net loss............................... ($2,664) ($3,051) ($5,237) ($7,759)
========= ========= ========= =========
Basic and diluted net loss per share... ($0.24) ($1.07) ($0.57) ($2.76)
========= ========= ========= =========
Shares used in per share computation... 10,959 2,857 9,190 2,810
========= ========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss............................................... ($5,237) ($7,759)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization..................... 831 964
Amortization of deferred compensation............. 1,337 429
Non-cash consideration received and costs
incurred on the sale of the
Antisense Business, net......................... (138) --
Changes in operating assets and liabilities:
Accounts receivable........................... 109 (38)
Other current assets.......................... (122) 60
Accounts payable.............................. 379 (76)
Accrued liabilities........................... (293) (9)
Deferred revenue from related party........... (2,063) (3,188)
Other noncurrent liabilities.................. 14 23
---------- ----------
Net cash provided by (used in) operating activities.... (5,183) (9,594)
---------- ----------
Cash flows from investing activities
Purchases of short-term investments.................... (21,357) --
Maturities of short-term investments................... 29,528 1,971
Purchases of property and equipment.................... (1,883) (1,060)
Other assets........................................... (188) (274)
---------- ----------
Net cash provided by (used in) investing activities.... 6,100 637
---------- ----------
Cash flows from financing activities:
Issuance of common stock............................... 214 266
Notes receivable from stockholders..................... 25 --
---------- ----------
Net cash provided by (used in) financing activities.... 239 266
---------- ----------
Net increase (decrease) in cash and cash equivalents... 1,156 (8,691)
Cash and cash equivalents at beginning of period....... 8,798 12,109
---------- ----------
Cash and cash equivalents at end of period............. $9,954 $3,418
========== ==========
Supplemental schedule of non-cash investing activities:
Following are the effects of the non-cash
transactions relating to the
sale of the Antisense Business
Assets sold, net of depreciation................. 210 $ --
========== ==========
Inex stock received.............................. $603 $ --
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Lynx Therapeutics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. Ownership and Nature of Business
Lynx Therapeutics, Inc. ("Lynx" or the "Company"), was
incorporated in February 1992 under the laws of the State of Delaware.
Lynx is developing its proprietary, highly parallel technologies for
the handling and characterization of DNA molecules and fragments. The
Company expects these technologies will contribute to a number of
applications including gene discovery, characterization of gene
function, identification of disease-associated genomic sequences such
as polymorphisms, and the study of non-human genomes such as
commercially important plants and animals.
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 and nine
months ended September 30, 1998, are not necessarily indicative of the
results for the full year.
The unaudited condensed consolidated financial statements include
all accounts of the Company and its wholly owned subsidiary, Lynx
Therapeutics GmbH, formed under the laws of the Federal Republic of
Germany. All significant intercompany balances have been eliminated.
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, 1997, included in its annual report
on Form 10-K filed with the Commission.
3. Summary of Significant Accounting Policies
Net Loss Per Share
Basic loss per share is calculated by dividing net loss
applicable to common shareholders by the weighted average number of
common shares outstanding, net of certain common shares outstanding
which are subject to continued vesting and the Company's right of
repurchase, while diluted EPS reflects the potential dilution of
securities that could share in the earnings of the Company, to the
extent such securities are dilutive. Basic and diluted loss per share
are equivalent for all periods presented herein due to the Company's
net losses for such periods. The Company has adopted SFAS 128 for
annual and interim financial statements issued after December 15, 1997,
and has calculated and restated EPS in accordance with SFAS 128 for
each period in which a statement of operations is reported. The
following have been excluded from the calculation of loss per share
because the effect of inclusion would be antidilutive: approximately
189,000 common shares which are outstanding but are subject to the
Company's right of repurchase which expires ratably over 5 years, and
options to purchase approximately 1,366,000 shares of common stock at a
weighted average price of $5.09 per share. Additionally, all periods
prior to March 31, 1998 exclude approximately 500,000 shares of Series
B, C, and D convertible preferred stock. On March 31, 1998, the
preferred stock converted to common stock on a ten-for-one basis. The
converted shares are included in the calculations of basic EPS in all
periods including, and subsequent to, March 31, 1998.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards, No. 130 ("SFAS 130"), "Comprehensive Income."
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in shareholders' equity, to
be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of
SFAS 130.
Total comprehensive loss during the quarters ended September 30,
1998 and 1997 was $2.7 and $3.1 million, respectively. During the nine
months ended September 30, 1998 and 1997, total comprehensive loss
amounted to $5.2 million and $7.8 million, respectively.
Subsequent Event
On October 29, 1998, the Company entered into a research
collaboration with E.I. DuPont De Nemours and Company ("DuPont") to
apply Lynx's technologies to the study of certain crop plants and their
protection. Under the terms of the agreement, Lynx could receive $60
million over a five-year period for certain analyses, the achievement
of specific technological milestones and the delivery of the genomic
map of a certain crop. An initial payment of $10 million was received
at the execution of the agreement, with an additional minimum of $12
million to be received by Lynx over the next three years.
The $10 million payment received by Lynx upon the execution of
the agreement will be recognized as revenue ratably over the initial
three years of the agreement. Future payments by DuPont to Lynx for
certain analyses will be recognized as revenue as the services are
performed or enabled by Lynx. Milestone payments by DuPont will be
recognized as revenue by Lynx as the related milestone events are
achieved by Lynx. The delivery to DuPont of genomic maps will trigger
payments to Lynx for such maps and the recognition of revenue by Lynx
at such time.
<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, 1997.
Overview
Results of Operations
Revenue
Revenues for the third quarter and nine-month period ending
September 30, 1998, were $0.7 million and $2.2 million, respectively, as
compared to $1.2 million and $3.7 million for the third quarter and
nine-month period ending September 30, 1997, respectively. Revenues for
1998 include $0.7 million in the third quarter and $2.1 million in the
nine-month period earned under an agreement with BASF AG ("BASF") for
access to gene expression analysis services to be performed by Lynx.
The 1997 revenue includes $0.7 million from BASF and $0.4 million from
Hoechst Marion Roussel, Inc. and its affiliates (collectively,
"Hoechst") in the third quarter and $2.1 million from BASF and $1.1
million from Hoechst in the nine-month period, earned under agreements
for access to gene expression analysis services.
Operating Expenses
Research and development expenses were $3.0 and $9.9 million in
the three- and nine-month periods ended September 30, 1998, compared to
$3.9 and $10.4 million in the same periods of 1997. Research and
development expenses were lower primarily due to the March 1998 sale of
the Company's portfolio of phosphorothioate antisense patents and
licenses, and its therapeutic oligonucleotide manufacturing facility
(collectively, the "Antisense Business"). Lynx expects to continue to
incur substantial research and development expenses due to planned
spending for ongoing technology development and to build production
capacity for the anticipated commercial application of its technologies.
General and administrative expenses were $0.3 and $1.3 million in
the three- and nine-month periods ended September 30, 1998, compared to
$0.4 and $1.4 million in the same periods of 1997. The decrease was
primarily the result of lower outside professional fees. Lynx expects to
continue to incur substantial administrative expenses in support of its
research and development efforts.
Interest Income
Interest income was $0.3 million and $0.9 million in the three and
nine months ended September 30, 1998, compared to $0.1 million and $0.4
million in the three and nine months ended September 30, 1997. The
increase was due to higher average cash and investment balances in 1998
than in the same periods in 1997.
Other Income and Expense
Other income of $2.9 million for the nine months ended September
30, 1998, was comprised of the gain on the sale of Lynx's Antisense
Business to Inex Pharmaceuticals Corporation ("Inex") in March 1998.
As partial consideration in this transaction, Lynx received $3.0 million
in cash and will receive 1.2 million shares of Inex common stock, in
three equal installments, with the first 400,000 shares received on
March 10, 1998, and the second and third installments of stock to be
received no later than two and three years, respectively, from the
closing date of the transaction. The Inex common stock received by Lynx
is subject to certain restrictions on trading for specific periods of
time following receipt by Lynx. Other expense of $0.3 million for the
quarter ended September 30, 1998 was comprised of an adjustment to the
carrying value of the Inex common stock.
Liquidity and Capital Resources
Net cash used in operating activities of $5.2 million for the nine
months ended September 30, 1998 differed from the net loss for the same
period in 1997 primarily due to current period recognition of a portion
of previously deferred revenue, deferred compensation expense,
depreciation and amortization, the non-cash consideration received and
costs incurred on the sale of the Antisense Business, and changes in
other current assets and liabilities. Net cash provided by investing
activities related to maturities of short-term investments was partially
offset by capital expenditures. Net cash provided by financing
activities related to the exercise of stock options by employees. Cash
and cash equivalents were $10.0 million at September 30, 1998.
Lynx plans to use available funds for the development and
implementation of its massively parallel technologies and to build
capacity for their early commercial uses. 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, institutional 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 development,
administrative and legal costs, the establishment of corporate
collaborations and other arrangements, and the availability of alternate
methods of financing.
On October 29, 1998, the Company entered into a research
collaboration with E.I. DuPont De Nemours and Company ("DuPont") to
apply Lynx's technologies to the study of certain crop plants and their
protection. Under the terms of the agreement, Lynx could receive $60
million over a five-year period for certain analyses, the achievement
of specific technological milestones and the delivery of the genomic
map of a certain crop. An initial payment of $10.0 million was
received at the execution of the agreement, with an additional minimum
of $12.0 million to be received by Lynx over the next three years.
Lynx expects to incur substantial and increasing research and
development expenses and intends to seek additional financing, as
needed, through contractual arrangements with corporate partners and
equity or debt offerings. 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 Company believes that, at current
spending levels, its existing capital resources, including the initial
payment of $10.0 million received by Lynx under the collaboration with
DuPont, and interest income thereon, will enable it to maintain its
current and planned operations through the end of 2000.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs having been
written using two digits rather than four to define the applicable year.
Any of the Company's 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 a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions, or engage in similar normal business activities.
Lynx is a relatively young company, founded in 1992, and most of
its Information Technology ("IT") and Non-IT systems were Year 2000
compliant when purchased. The Company believes, therefore, it will not
be required to implement significant modifications or replace
significant portions of its software and hardware in order to be Year
2000 compliant. The Company is, however, taking steps to ensure that
the Year 2000 Issue does not have a material impact on the operations of
the Company.
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment; remediation; testing; and
implementation. To date, Lynx has completed 50% of its assessment of
all systems that could be significantly affected by the Year 2000 Issue.
The Company expects that the assessment will be completed by December
31, 1998. Further, the Company expects to complete its remediation
efforts by March 31, 1999. Testing and implementation of affected
hardware and software is expected to be complete by June 30, 1999.
The Company's payroll system interfaces directly with a third
party service. The Company is in the process of working with the
service to ensure that the payroll system is Year 2000 compliant by
December 31, 1999. The Company does not have any other systems that
interface directly with any external entities.
The Company is in the process of contacting its significant
suppliers and subcontractors ("external agents"). At this time the
Company is not aware of any external agent with a Year 2000 issue that
would materially impact the Company's results of operations, liquidity,
or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The inability of external
agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-
compliance by external agents is not determinable.
The Company will use both internal and external resources to
reprogram or replace, test, and implement the hardware and software for
Year 2000 modifications. An estimate of the cost of achieving
compliance will be developed upon completion of the assessment.
However, the Company does not believe that cost will have a material
impact on the results of the Company. The Company has not, as yet,
incurred any significant costs related to the Year 2000 Issue.
The Company currently has no contingency plans in place in the
event it does not complete all phases of the Year 2000 program. The
Company plans to evaluate the status of completion in June 1999 and
determine whether such a plan is necessary.
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 documents are filed as Exhibits
to this report:
Exhibit Number Description
27.1 Financial Data Schedule
b) No reports on Form 8-K were filed during the quarter
ended September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LYNX THERAPEUTICS, INC.
/s/ Sam Eletr
By: Sam Eletr, Ph.D.
Chief Executive Officer and
Chairman of the Board
Date: November 13, 1998
/s/ Edward C. Albini
By: Edward C. Albini
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 13, 1998
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,954
<SECURITIES> 8,002
<RECEIVABLES> 135
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,412
<PP&E> 7,796
<DEPRECIATION> 3,185
<TOTAL-ASSETS> 23,854
<CURRENT-LIABILITIES> 1,521
<BONDS> 0
0
0
<COMMON> 74,213
<OTHER-SE> (52,073)
<TOTAL-LIABILITY-AND-EQUITY> 23,854
<SALES> 0
<TOTAL-REVENUES> 2,196
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,265
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,237)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,237)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,237)
<EPS-PRIMARY> ($0.57)
<EPS-DILUTED> ($0.57)
</TABLE>
