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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 March 31, 1999.
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.)
25861 Industrial Blvd.
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 April 30, 1999
was 11,147,167. The aggregate market value of the Common Stock of the
Registrant held by non-affiliates as of April 30, 1999 was $110,884,850.
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<PAGE>
Lynx Therapeutics, Inc.
INDEX
PART I FINANCIAL INFORMATION (unaudited)
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1999
and December 31, 1998
Condensed Consolidated Statements of Operations - three
months ended March 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows - three months
ended March 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998*
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $12,151 $16,170
Short-term investments........................... 11,520 7,692
Accounts receivable.............................. 4,051 5,316
Other current assets............................. 633 678
------------ -----------
Total current assets................................ 28,355 29,856
------------ -----------
Property and equipment:
Leasehold improvements........................... 10,532 9,510
Laboratory and other equipment................... 4,759 3,657
------------ -----------
15,291 13,167
Less accumulated depreciation and amortization... (4,011) (3,530)
------------ -----------
Net property and equipment.......................... 11,280 9,637
Other non-current assets............................ 960 841
------------ -----------
$40,595 $40,334
============ ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................. $250 $5,102
Accrued compensation............................. 234 295
Accrued professional fees........................ 65 136
Deferred revenue - current portion............... 3,846 3,000
Equipment loan - current portion................. 123 --
Other accrued liabilities........................ 461 489
------------ -----------
Total current liabilities........................... 4,979 9,022
Deferred revenue.................................... 14,167 7,667
Equipment loan...................................... 537 --
Other noncurrent liabilities........................ 272 188
Stockholders' equity:
Common stock..................................... 74,427 74,329
Notes receivable from stockholders............... (436) (436)
Deferred compensation............................ (3,437) (3,742)
Accumulated comprehensive income (loss).......... (27) (7)
Accumulated deficit.............................. (49,887) (46,687)
------------ -----------
Total stockholders' equity.......................... 20,640 23,457
------------ -----------
$40,595 $40,334
============ ===========
</TABLE>
* The Balance Sheet amounts at December 31, 1998, 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
March 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
Net revenues:
Technology access revenue........... $654 $814
--------- ---------
Total revenues......................... 654 814
Operating expenses:
Research and development............ 3,551 3,842
General and administrative.......... 773 492
--------- ---------
Total operating expenses............... 4,324 4,334
--------- ---------
Loss from operations................... (3,670) (3,520)
Interest income........................ 334 336
Other income/(expense)................. 178 3,176
--------- ---------
Loss before provision for income taxes. (3,158) (8)
Provision for income taxes............. (42) --
--------- ---------
Net loss............................... ($3,200) ($8)
========= =========
Basic and diluted net loss per share... ($0.29) ($0.00)
========= =========
Shares used in per share computation... 11,039 5,729
========= =========
</TABLE>
See accompanying notes.
<PAGE>
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... ($3,200) ($8)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization..................... 481 355
Amortization of deferred compensation............. 305 330
Non-cash consideration received and costs
incurred on the sale of the
antisense business, net......................... -- (417)
Changes in operating assets and liabilities:
Accounts receivable........................... 1,265 (106)
Other current assets.......................... 45 36
Accounts payable.............................. (4,852) 1,089
Accrued liabilities........................... (160) (231)
Deferred revenue.............................. 7,346 (688)
Other non-current liabilities................. 84 8
---------- ----------
Net cash provided by operating activities.............. 1,314 368
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments.................... (5,437) (5,667)
Maturities of short-term investments................... 1,589 13,093
Leasehold improvements and equipment purchases ........ (2,124) (865)
Other assets........................................... (119) (706)
---------- ----------
Net cash provided by (used in) investing activities.... (6,091) 5,855
---------- ----------
Cash flows from financing activities:
Proceeds from equipment loan 660 --
Issuance of common stock............................... 98 358
---------- ----------
Net cash provided by financing activities.............. 758 358
---------- ----------
Net increase (decrease) in cash and cash equivalents... (4,019) 6,581
Cash and cash equivalents at beginning of period....... 16,170 8,798
---------- ----------
Cash and cash equivalents at end of period............. $12,151 $15,379
========== ==========
Supplemental schedule of non-cash investing activities:
Effects of non-cash transactions relating to the
sale of the antisense business..................... $ -- $1,082
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the periiod for income taxes......... $151 $ --
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Lynx Therapeutics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. Ownership and Nature of Business
Lynx Therapeutics, Inc. ("Lynx" or the "Company"), has
developed, and continues to develop, unique, proprietary technologies
aimed at handling and/or analyzing, simultaneously, the DNA molecules or
fragments in complex biological samples. At the core of these
technologies is Lynx's MegacloneTM technology which allows both the
simultaneous cloning of millions of DNA molecules or fragments in a
sample, and the parallel probing, or assaying of the millions of
resulting clones, all without requiring prior separation, purification,
individual amplification, or identification of any of the templates.
Applications include the identification of genes differentially expressed
between samples, the characterization of gene expression within a sample,
and a novel, highly efficient means for scoring ("genotyping") large
numbers of genetic markers or single nucleotide polymorphisms ("SNPs"),
simultaneously, against very large numbers of genomes.
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 "SEC"). Certain prior year amounts have been
reclassified to conform to 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 SEC 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
three months ended March 31, 1999, 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, 1998, included in its annual report on
Form 10-K filed with the SEC.
3. Summary of Significant Accounting Policies
Net Loss Per Share
SFAS 128 requires that companies present two measures of earnings per
share, basic and diluted. Basic net loss per share is computed by dividing
loss applicable to common shareholders by the weighted average
number of common shares outstanding for the period, net of certain common
shares outstanding which are subject to continued vesting and the Company's
right of repurchase. Diluted loss per share 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 is equivalent for all periods presented herein due to the Company's
net losses for such periods. The following have been excluded from the
calculation of loss per share because the effect of inclusion would be
antidilutive: approximately 130,000 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 1,473,000
shares of common stock at a weighted average price of $5.70 per share.
The repurchasable shares and options will be included in the calculation
at such time as the effect is no longer antidilutive, as calculated using
the treasury stock method.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards, No. 130 "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes new rules for the reporting and
presentation of comprehensive income and its components; however, the
adoption of SFAS 130 had an immaterial impact on the Company's net loss
and shareholders' equity. 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 loss.
Total comprehensive loss during the three-month periods ended March
31, 1999 and 1998 was $3.2 million and $0, respectively.
4. Corporate Collaborations
On March 31, 1999, Lynx reached agreement with Hoechst Marion
Roussel, Inc. ("Hoechst") and the latter's affiliate, Hoechst Schering
AgrEvo GmbH ("AgrEvo"), to activate a subscription to Lynx services.
The activation of the agreement enables AgrEvo to access, for a fee and
minimum annual subscription payments,certain of Lynx technologies to
which Hoechst earlier had secured broad, non-exclusive access rights for
itself and its affiliates.
Hoechst's rights, which are covered by an existing agreement
enable Hoechst and its affiliates to access Lynx technologies
on a non-exclusive basis for all fields in return for an
access fee and subscription fees above and beyond the up-front payment
and the equity investment previously made by Hoechst. Lynx received
$2.0 million from Hoechst's AgrEvo affiliate for non-exclusive access to
the technologies, limited to the agricultural field. Additional payments
would be due under the agreement if Hoechst (or another affiliate)
activated its rights to access the technologies for use in the
pharmaceutical field.
In addition to the $2.0 million fee paid to activate the agreement,
the minimum subscription payments of $2.0 million per year to be received
by Lynx will cover Lynx's costs plus commercially reasonable profits for
analyses to be performed by Lynx on behalf of AgrEvo. This subscription
by AgrEvo may be extended for up to three years beyond an initial one-
year period.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion and analysis should be read in conjunction with the
Company's financial statements and accompanying notes included in this report
and the Company's 1998 audited financial statements and notes thereto
included in its 1998 Annual Report on Form 10-K. Operating results are not
necessarily indicative of results that may occur in future periods.
Except for the historical information contained herein, the
following discussion contains forward-looking statements that involve
risks and uncertainties. When used herein, the words "believe," "anticipate,"
"expect," "estimate" and similar expressions are intended to identify such
forward-looking statements. There can be no assurance that these statements
will prove to be correct. 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 1998 Annual
Report on Form 10-K. Lynx undertakes no obligation to update any of
the forward-looking statements contained herein to reflect any future
events or developments.
Results of Operations
Revenue
Revenues for the three-month periods ended March 31, 1999 and 1998
were $0.7 and $0.8 million, respectively. The 1999 revenue was comprised
of $0.5 million earned under agreement with E.I. DuPont De Nemours and
Company ("DuPont") and $0.2 million earned under the agreement with AgrEvo.
The 1998 revenues included $0.7 million earned under an agreement with BASF AG.
Operating Expenses
Research and development expenses were $3.6 and $3.8 million in the
three months ended March 31, 1999 and 1998, respectively. Expenses were
lower in the 1999 period than in the 1998 period due primarily to the
sale in March 1998 of Lynx's antisense business to Inex Pharmaceuticals
Corporation ("Inex"). Lynx expects to continue to incur substantial
research and development expenses as it focuses on building production
capacity for the anticipated commercial application of its genomic
technologies.
General and administrative expenses were $0.8 and $0.5 million in
the quarters ended March 31, 1999 and 1998, respectively. The increase
was primarily due to outside legal and administrative costs associated
with the Company's business development efforts and facilities expansion.
Lynx expects to continue to incur substantial administrative expenses in
support of its research and development and business development efforts.
Interest Income
Interest income was $0.3 million in the quarters ended March 31,
1999 and March 31, 1998. This was a result of a slightly higher rate of
interest earned in 1999 offset by slightly lower average investment
balances in the quarter ended March 31, 1999 as compared to the quarter
ended March 31, 1998.
Other Income and Expense
Other income was $0.2 million in the quarter ended March 31, 1999,
compared to $3.2 million in the quarter ended March 31, 1998. The 1999
income was attributable to a gain on the sale of certain fixed assets no
longer used in Lynx's operations. The 1998 income was comprised of the
gain from the March 1998 sale of Lynx's antisense program to Inex.
Liquidity and Capital Resources
Net cash provided by operating activities of $2.0 million for the
three months ended March 31, 1999 differed from the net loss primarily
due to an increase in deferred revenue partially offset by a decrease in
current liabilities. Net cash used in investing activities related to
purchases of short-term investments and capital expenditures. Net cash
provided by financing activities related to the exercise of stock options
by employees. Cash, cash equivalents, and short-term investments were
$23.7 million at March 31, 1999.
In late 1998, the Company entered into an agreement with a
financial institution ("Lender") whereby the Company may borrow up to
$5.0 million for the purchase of equipment and certain other capital
expenditures. The Lender will obtain a security interest in all items
financed by it under this agreement. The Company paid to the Lender a
fee that will be applied to loan transaction costs and expenses and to
payments due by the Company under its borrowings. As of March 31, 1999,
the Company had borrowed approximately $0.7 million under this agreement.
Lynx plans to use available funds for the development of, and
applications for, its technologies. 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.
Lynx has obtained funding for its operations through sales of
preferred and common stock to venture capital investors, institutional
investors, and contract partners; revenue from contractual 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, legal and administrative
costs, the establishment of corporate collaborations and other arrangements,
additional facilities capacity needs, and the availability of alternate
methods of financing.
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, and interest income thereon, will
enable it to maintain its current and planned operations through the
middle of the year 2000.
Impact of Year 2000
The Year 2000 ("Y2K") issue is the result of computer programs
using two rather than four digits to define the year. A company's
hardware or computer programs 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.
Lynx has established a team comprised of financial, information
technology ("IT") and scientific personnel to address the potential
exposure related to the impact of Y2K issues on its IT and non-IT
systems. Lynx's approach to the Y2K issue involves the following four
phases: assessment, remediation, testing, and implementation including
development of a contingency plan. As of March 1999, the Company had
completed assessment of almost all of its facilities, IT equipment and
systems, non-IT equipment and systems, third-party services, and vendors.
Facilities
In January 1999, the Company moved to a newly built facility with
building systems that are Y2K compliant.
IT Equipment and Systems
Most of Lynx's computers and computer software are either Y2K
compliant or can be made compliant with patches available from the vendors at
minimal cost. The IT staff is in the process of installing and testing
the patches. During the second quarter of 1999, the Company will install
new Y2K compliant software for accounting, purchasing, and human
resources applications. The decision to implement the new administrative
software was made as a result of overall Company need, irrespective of
Y2K issues.
Non-IT Equipment and Systems
Lynx's non-IT equipment consists primarily of laboratory equipment.
The majority of this equipment has no date function and will not be
affected by Y2K. Overall, the Company found the level of non-compliant
equipment to be minimal, although approximately 5% of the lab equipment
have yet to be assessed. It is not expected that a significant number of
the unassessed pieces of equipment will be found to be non-compliant.
Third Party Services and Vendors
Lynx has surveyed its primary suppliers, banks, investment
brokerages, and other third party service providers to
determine whether they are Y2K compliant. The Company has
determined that certain of the third parties use systems that are not Y2K
compliant, but all of the third parties surveyed have programs in place
to address these Y2K issues. The Company cannot guarantee that all of
the third parties will achieve Y2K compliance in a timely manner. The
failure of third parties to successfully address the Y2K issue could have
a material adverse effect on the Company's business, financial condition,
and results of operations.
Due to the relatively low level of Y2K non-compliance of Lynx's
facilities, equipment, and systems, Lynx expects the remediation and
testing process to be limited. As such, the Company to date has spent an
insignificant amount of funds addressing the Y2K issue, and expects that
the total costs associated with addressing the Y2K issue and attaining
compliance will be immaterial. Lynx expects the remediation and testing
phase of compliance to be completed by September 1999.
The Company is in the process of developing a contingency plan for
the IT and non-IT equipment and systems and third party service providers
and vendors, if any, for which Lynx determines Y2K compliance is
substantially at risk. Lynx expects to have completed the contingency
plan by September 1999.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
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 three-month
period ended March 31, 1999.
<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: May 17, 1999
/s/ Edward C. Albini
-------------------------------------------
By: Edward C. Albini
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 17, 1999
<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 MARCH 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,151
<SECURITIES> 11,520
<RECEIVABLES> 4,051
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,355
<PP&E> 15,291
<DEPRECIATION> 4,011
<TOTAL-ASSETS> 40,595
<CURRENT-LIABILITIES> 4,979
<BONDS> 0
0
0
<COMMON> 74,427
<OTHER-SE> (53,787)
<TOTAL-LIABILITY-AND-EQUITY> 40,595
<SALES> 0
<TOTAL-REVENUES> 654
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,158)
<INCOME-TAX> 42
<INCOME-CONTINUING> (3,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,200)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
