<PAGE> 1
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, 2000.
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)
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DELAWARE 94-3161073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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25861 INDUSTRIAL BLVD.
HAYWARD, CA 94545
(Address of principal executive offices)
(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 May 3, 2000 was
11,361,359. The aggregate market value of the common stock of the registrant
held by non-affiliates as of May 3, 2000 was $263,013,281.
Page 1 of 16
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LYNX THERAPEUTICS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
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PAGE
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PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2000
and December 31, 1999.............................................. 3
Condensed Consolidated Statements of Operations - three months
ended March 31, 2000 and 1999...................................... 4
Condensed Consolidated Statements of Cash Flows - three months
ended March 31, 2000 and 1999...................................... 5
Notes to Condensed Consolidated Financial Statements............... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................... 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ........ 10
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................. 11
ITEM 2. Changes in Securities and Use of Proceeds.......................... 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
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999*
---------------------------
(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents $ 18,896 $ 18,050
Short-term investments 11,687 12,736
Accounts receivable 4,097 4,045
Other current assets 1,287 1,379
-------- --------
Total current assets 35,967 36,210
Property and equipment:
Leasehold improvements 10,361 10,347
Laboratory and other equipment 9,283 8,025
-------- --------
19,644 18,372
Less accumulated depreciation and amortization (6,155) (5,494)
-------- --------
Net property and equipment 13,489 12,878
Other non-current assets 762 2,550
-------- --------
$ 50,218 $ 51,638
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 758 $ 640
Accrued compensation 312 356
Deferred revenue - current portion 5,417 8,438
Notes payable - current portion 977 944
Other accrued liabilities 797 790
-------- --------
Total current liabilities 8,261 11,168
Deferred revenue 19,902 16,896
Notes payable 3,216 3,471
Other non-current liabilities 461 457
Stockholders' equity:
Common stock 75,289 74,606
Notes receivable from stockholders (293) (293)
Deferred compensation (2,201) (2,444)
Accumulated other comprehensive income (loss) (585) 1,128
Accumulated deficit (53,832) (53,351)
-------- --------
Total stockholders' equity 18,378 19,646
-------- --------
$ 50,218 $ 51,638
======== ========
</TABLE>
*The Balance Sheet amounts at December 31, 1999 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.
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LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
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Revenues:
Technology access and services fees $ 3,016 $ 654
-------- --------
Total revenues 3,016 654
Operating costs and expenses:
Cost of services fee revenue 445 --
Research and development 5,004 3,551
General and administrative 1,485 773
-------- --------
Total operating costs and expenses 6,934 4,324
-------- --------
Loss from operations (3,918) (3,670)
Interest income, net 314 334
Other income, net 3,183 178
-------- --------
Loss before provision for income taxes (421) (3,158)
Provision for income taxes 60 42
-------- --------
Net loss $ (481) $ (3,200)
======== ========
Basic and diluted net loss per share $ (0.04) $ (0.29)
======== ========
Shares used in per share computation 11,209 11,039
======== ========
</TABLE>
See accompanying notes.
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LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
-------- --------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (481) $ (3,200)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 661 481
Amortization of deferred compensation 243 305
Gain on sale of antisense program (3,119) --
Changes in operating assets and liabilities:
Accounts receivable (52) 1,265
Other current assets 92 45
Accounts payable 118 (4,852)
Accrued liabilities (37) (160)
Deferred revenue (15) 7,346
Non-current liabilities 4 84
-------- --------
Net cash used in operating activities (2,586) 1,314
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (1,002) (5,437)
Maturities of short-term investments 5,256 1,589
Leasehold improvements and equipment purchases (1,272) (2,124)
Notes receivable from officers and employees (11) (119)
-------- --------
Net cash provided by (used in) investing activities 2,971 (6,091)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from equipment loan -- 660
Repayments of equipment loan (221) --
Issuance of common stock 683 98
-------- --------
Net cash provided by financing activities 461 758
-------- --------
Net increase (decrease) in cash and cash equivalents 846 (4,019)
Cash and cash equivalents at beginning of period 18,050 16,170
-------- --------
Cash and cash equivalents at end of period $ 18,896 $ 12,151
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 27 $ 151
======== ========
Cash paid during the period for interest $ 123 $ 1
======== ========
</TABLE>
See accompanying notes.
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<PAGE> 6
LYNX THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. NATURE OF BUSINESS
Lynx Therapeutics, Inc. ("Lynx" or the "Company") is a leader in the
development and application of novel technologies for the discovery of gene
expression patterns and genomic variations important to the pharmaceutical,
biotechnology and agricultural industries. These technologies are based on
Megaclone(TM), Lynx's unique and proprietary cloning procedure, which transforms
a sample containing millions of DNA molecules into one made up of millions of
micro-beads, each of which carries approximately 100,000 copies of one of the
DNA molecules in the sample. Based on Megaclone(TM), Lynx has developed a suite
of applications that have the potential to enhance the pace, scale and quality
of genomics and genetics research programs. Currently, Lynx's principal
collaborators and customers are BASF AG, E.I. DuPont de Nemours and Company,
Aventis CropScience GmbH and Oxagen Limited.
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, 2000,
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 and transactions 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, 1999, included in its annual report on Form 10-K filed with the
SEC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues from technology access fees have generally resulted from upfront
payments from collaborators and customers who are provided access to Lynx's
technologies for specified periods. The Company receives service fees from
collaborators and customers for genomics discovery services performed by Lynx on
the biological samples they send to Lynx. Technology access fees are deferred
and recognized as revenue on a straight-line basis over the noncancelable term
of the agreement to which they relate. Payments for services and/or materials
provided by Lynx are recognized as revenues when earned over the period in which
the services are performed and/or materials are delivered, provided no other
obligations, refunds or credits exist to be applied to future work.
NET LOSS PER SHARE
The Company complies with Statement of Financial Accounting Standards No.
128 ("SFAS 128"), "Earnings Per Share" ("EPS"). SFAS 128 requires that companies
present two measures of earnings per share, basic and diluted. Basic EPS is
computed by dividing income or loss applicable to common stockholders 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 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 net loss per share is equivalent for
all periods presented herein due to the Company's net loss in all periods.
Options to purchase approximately 1,932,000 shares of common stock at a
weighted-average price of $10.32 per share have been excluded from the
calculation of diluted loss per share for 2000 because the effect of inclusion
would be antidilutive. The options will be included in the calculation at such
time as the effect is no longer antidilutive, as calculated using the treasury
stock method. Approximately 40,000 common shares which are outstanding but are
subject to the Company's right of repurchase which expires ratably over 5 years,
have been excluded from the calculation
Page 6 of 16
<PAGE> 7
of basic loss per share. The repurchasable shares will be included in the
calculation of diluted EPS at such time as the effect is no longer antidilutive.
COMPREHENSIVE INCOME
In 1998, Lynx adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes rules for the reporting and presentation of comprehensive income and
its components. The adoption of SFAS 130 had an immaterial impact on the
Company's net loss and stockholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
other accumulated comprehensive income (loss).
Total comprehensive loss during the three-month periods ended March 31,
2000 and 1999 was $2.2 million and $3.2 million, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires Lynx to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through net income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of assets,
liabilities or firm commitments through earnings or recognized in the other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings. SFAS 133 is effective for Lynx's year ending December
31, 2001. Lynx does not currently hold any derivatives and does not expect this
pronouncement to materially impact results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which must be adopted in the quarter ended June 30, 2000. SAB 101
summarizes certain areas of the Staff's views in applying generally accepted
accounting principles to revenue in financial statements and specifically
addresses revenue recognition for non-refundable technology access fees. Lynx
believes that its current revenue recognition principles comply with SAB 101 and
thus the adoption had no effect on results of operations.
4. CORPORATE COLLABORATIONS
In March 2000, Aventis CropScience renewed its nonexclusive access to
Lynx's genomics discovery services, limited to the agricultural field, for an
additional year. The renewal by Aventis CropScience includes their payment of a
fee for genomics discovery services to be performed by Lynx.
Page 7 of 16
<PAGE> 8
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 1999 audited financial statements and notes thereto included
in its 1999 Annual Report on Form 10-K. Operating results for the three months
ended March 31, 2000 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 1999 Annual Report on Form 10-K as filed with the SEC. 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 period ended March 31, 2000 and 1999 were $3.0
million and $0.7 million, respectively, earned primarily from technology access
and service fees paid to Lynx under certain of its agreements. Revenues for 2000
included technology access and service fees from DuPont, Aventis CropScience and
BASF AG. The 1999 revenues included technology access fees of $0.7 million from
DuPont and Aventis CropScience.
OPERATING EXPENSES
Total operating costs and expenses were $6.9 million for the three-month
period ended March 31, 2000, and $4.3 million for the three-month period ended
March 31, 1999. For the three-month period ended March 31, 2000, cost of
services fees were $0.4 million, and reflect the costs of providing our genomic
discovery services. Research and development expenses were $5.0 million for the
three-month period ended March 31, 2000, compared to $3.6 million in the
corresponding period in 1999. The increase between years was primarily due to
increased expenditures for scientific materials and supplies and increased
compensation expense resulting from higher headcount. Lynx expects research and
development expenses to increase substantially due to planned spending for
ongoing technology development and implementation, as well as new applications.
General and administrative expenses increased to $1.5 million for the
three-month period ended March 31, 2000, compared to $0.8 million in the
corresponding period in 1999. Contributing factors to the increase in expenses
between years include increased personnel-related expenses and the costs for
outside services and fees incurred in relation to Lynx's proposed follow-on
offering of common stock. The company withdrew the proposed offering in March
2000 due to unfavorable market conditions. Lynx expects general and
administrative expenses to increase in support of its research and development,
business development and commercialization efforts.
INTEREST INCOME, NET
Net interest income was $0.3 million in the three-month period ended March
31, 2000 and 1999. The 2000 period reflected an increase in interest income due
to a higher average investment balance, and higher interest expense, as compared
to the 1999 period.
OTHER INCOME, NET
Other income was $3.2 million in the three-month period ended March
31,2000, compared to other income of $0.2 million in the 1999 period. The 2000
income was primarily related to a $3.1 million gain recognized from the receipt
of 400,000 shares of common stock of Inex Pharmaceuticals Corporation pursuant
to the terms of a 1998 agreement for the sale of Lynx's antisense program to
Inex. The 1999 other income was attributable to a gain on the sale of certain
fixed assets no longer used in Lynx's operations.
INCOME TAXES
The provision for income taxes for the quarters ended March 31, 2000 and
1999 consist entirely of alternative minimum tax.
Page 8 of 16
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities of $2.6 million for the three-month
period ended March 31, 2000 differed from the net loss primarily due to the
receipt of common stock from the sale of our antisense program to Inex. Net cash
provided by investing activities related primarily to the maturity of short-term
investments and capital expenditures. Net cash provided by financing activities
related primarily to the issuance of common stock that was exercised through
stock option grants, partially offset by repayment of principal and interest
under an equipment loan arrangement. Cash, cash equivalents and short-term
investments were $30.6 million at March 31, 2000.
In late 1998, the Company entered into a financing agreement with a
financial institution under which we drew down $4.8 million during 1999 for the
purchase of equipment and certain other capital expenditures. Lynx granted the
lender a security interest in all items financed by it under this agreement.
Each draw down under the loan has a term of forty-eight months from the date of
the draw down. As of March 31, 2000, the principal balance under loans
outstanding under this agreement was approximately $4.2 million. The draw down
period under the agreement expired on March 31, 2000.
Lynx plans to use available funds for ongoing commercial and research and
development activities, working capital and other general corporate purposes and
capital expenditures. We expect capital investments during 2000 will be
comprised primarily of equipment purchases required in the normal course of
business and expenditures for leasehold improvements. We intend to invest our
excess cash in investment-grade, interest-bearing securities.
Lynx has obtained funding for its operations primarily through sales of
preferred and common stock to venture capital investors, institutional investors
and collaborators, revenues from contractual arrangements and interest income.
The cost, timing and amount of funds required for specific uses by us cannot be
precisely determined at this time and will be based upon the progress and the
scope of our collaborative and independent research and development projects;
payments received under collaborative agreements; our ability to establish and
maintain collaborative agreements; costs included in protecting intellectual
property rights; legal and administrative costs; 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 others, 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 at least the next twelve months.
ADDITIONAL BUSINESS RISKS
OUR TECHNOLOGIES ARE NEW AND UNPROVEN AND MAY NOT ALLOW US OR OUR COLLABORATORS
TO IDENTIFY GENES OR TARGETS FOR DRUG DISCOVERY.
Our technologies are new and unproven. The application of these
technologies is in too early a stage to determine whether it can be successfully
implemented. These technologies assume information about gene expression and
gene sequences may enable scientists to better understand complex biological
processes. Relatively few therapeutic products based on gene discoveries have
been successfully developed and commercialized. Our technologies may not enable
us or our collaborators to identify genes or targets for drug discovery. To
date, no targets for drug discovery have been identified based on our
technologies.
WE ARE DEPENDENT ON OUR COLLABORATIONS AND WILL NEED TO FIND ADDITIONAL
COLLABORATORS IN THE FUTURE TO DEVELOP AND COMMERCIALIZE DIAGNOSTIC OR
THERAPEUTIC PRODUCTS.
Our strategy for the development and commercialization of our technologies
and potential products includes entering into collaborations, subscription
arrangements or licensing arrangements with pharmaceutical, biotechnology and
agricultural companies. We do not have the resources to develop or commercialize
diagnostic or therapeutic products on our own. We cannot assure you that we will
be able to negotiate additional collaborative arrangements or contracts on
acceptable terms, or at all, or that such collaborations or relationships will
be successful.
Substantially all of our revenues have been derived from corporate
collaborations and agreements. Revenues from collaborations and related
agreements depend upon continuation of the collaborations, the achievement of
milestones and royalties derived from future products developed from our
research and technologies. If we are unable to successfully achieve milestones
or our collaborators fail to develop successful products, we will not earn the
revenues contemplated under such collaborative agreements. If existing
agreements are not renewed, or if we are unable to enter into new collaborative
agreements on commercially acceptable terms, our revenues may decrease, and our
activities may fail to lead to commercialized products.
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Our dependence on collaborative arrangements with third parties subjects us
to a number of risks. We have limited or no control over the resources that our
collaborators may choose to devote to our joint efforts. Our collaborators may
breach or terminate their agreements with us or fail to perform their
obligations thereunder. Further, our collaborators may elect not to develop
products arising out of our collaborative arrangements or may fail to devote
sufficient resources to the development, manufacture, market or sale of such
products. Some of our collaborators could also become our competitors in the
future. Our business could be harmed if our collaborators:
o do not develop commercially successful products using our
technologies;
o develop competing products;
o preclude us from entering into collaborations with their competitors;
o fail to obtain necessary regulatory approvals; or
o terminate their agreements with us.
WE ARE AN EARLY STAGE COMPANY, SO OUR PROFITABILITY IS UNCERTAIN AND THERE IS A
HIGH RISK OF FAILURE.
You must evaluate us in light of the uncertainties and complexities
affecting an early stage genomics company. Our products and services are still
in the early stages of commercialization. Our technologies depend on the
successful integration of independent technologies, each of which has its own
development risks. We cannot assure you that our technologies will continue to
be successfully developed, that our services will continue to be sought by
customers or that any products developed from our technologies will prove to be
commercially successful. Further, we cannot assure you that we will be
successful in expanding the scope of our research into new areas of
pharmaceutical, biotechnology or agricultural research. Significant research and
development, financial resources and personnel will be required to capitalize on
our technologies. Commercialization of our technologies, whether through the
sales of services, royalties or other arrangements, may not generate sufficient
or sustainable revenues to enable us to be profitable.
WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES, AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred net losses each year since our inception in 1992,
including net losses of approximately $10.8 million in 1997, $4.3 million in
1998 and $6.7 million in 1999. As of March 31, 2000, we had an accumulated
deficit of approximately $53.8 million. We expect these losses to continue for
at least the next several years. The size of these net losses will depend, in
part, on the rate of growth, if any, in our revenues and on the level of our
expenses. Our research and development expenditures and general and
administrative costs have exceeded our revenues to date, and we expect research
and development expenses to increase substantially due to planned spending for
ongoing technology development and implementation, as well as new applications.
As a result, we expect our operating expenses will increase significantly in the
near term, and consequently, we will need to generate significant additional
revenues to achieve profitability. Even if we do increase our revenues and
achieve profitability, we may not be able to sustain profitability.
Our ability to generate revenues and achieve profitability is dependent on
many factors, including:
o our ability to enter into additional corporate collaborations and
agreements;
o our ability to discover genes and targets for drug discovery;
o our collaborators' ability to develop diagnostic and therapeutic
products from our drug discovery targets; and
o the successful clinical testing, regulatory approval and
commercialization of such products.
The time required to reach profitability is highly uncertain, and we cannot
assure you that we will be able to achieve profitability on a sustained basis,
if at all.
WE MAY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE, WHICH MAY NOT BE AVAILABLE
TO US.
We have invested significant capital in our infrastructure and in our
scientific and business development activities. We expect our capital and
operating expenditures to increase over the next several years as we expand our
operations. Our future capital requirements will depend on many factors,
including:
o the progress and scope of our collaborative and independent research
and development projects;
o payments received under collaborative agreements;
o our ability to establish and maintain collaborative arrangements;
o the progress of the development and commercialization efforts under
our collaborations and corporate agreements;
o the costs associated with obtaining access to samples and related
information; and
o the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other intellectual property rights.
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<PAGE> 11
Changes to our current operating plan may require us to consume available
capital resources significantly sooner than we expect. We may be unable to raise
sufficient additional capital when we need it, on favorable terms, or at all. If
our capital resources are insufficient to meet future capital requirements, we
will have to raise additional funds. The sale of equity or convertible debt
securities in the future would be dilutive to our stockholders. If we are unable
to obtain adequate funds on reasonable terms, we may be required to curtail
operations significantly or to obtain funds by entering into financing or
collaborative agreements on unattractive terms.
OUR REVENUES DEPEND ON A SMALL NUMBER OF COLLABORATORS AND CUSTOMERS.
To date, we have received a significant portion of our revenues from a
small number of collaborators and customers. For the three-months ended March
31, 2000, revenues from three collaborators and customers accounted for 46%, 31%
and 23% of our total revenues. For the three-months ended March 31, 1999,
revenues from two collaborators and customers accounted for 76% and 24% of our
total revenues. Our operating results may be harmed, if we lose one of these
collaborators or customers and we are not able to attract new collaborators or
customers.
WE DEPEND ON A SOLE SUPPLIER TO MANUFACTURE FLOW CELLS USED IN OUR MPSS
TECHNOLOGY.
The flow cells used in our MPSS technology are obtained from a single
supplier. Our reliance on outside vendors generally, and this sole supplier in
particular, involves several risks, including:
o the inability to obtain an adequate supply of required components due
to manufacturing capacity constraints, a discontinuance of a product
by a third-party manufacturer or other supply constraints;
o reduced control over quality and pricing of components; and
o delays and long lead times in receiving materials from vendors.
THE GENOMICS INDUSTRY IS INTENSELY COMPETITIVE AND EVOLVING RAPIDLY, AND OUR
COMPETITORS MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS OBSOLETE.
The biotechnology industry is highly fragmented and is characterized by
rapid technological change. In particular, the area of genomics research is a
rapidly evolving field. Competition among entities attempting to identify genes
associated with specific diseases and to develop products based on such
discoveries is intense. Many of our competitors have substantially greater
research and product development capabilities and financial, scientific, and
marketing resources than we do.
We face, and will continue to face, competition from pharmaceutical,
biotechnology and agricultural companies, as well as academic research
institutions, clinical reference laboratories and government agencies. Some of
our competitors:
o are attempting to identify and patent randomly sequenced genes and
gene fragments;
o are pursuing a gene identification, characterization and product
development strategy based on positional cloning; and
o are using a variety of different gene expression analysis
methodologies, including the use of chip-based systems, to attempt to
identify disease-related genes.
In addition, numerous pharmaceutical, biotechnology and agricultural
companies are developing genomic research programs, either alone or in
partnership with our competitors. Our future success will depend on our ability
to maintain a competitive position with respect to technological advances. Rapid
technological development by others may result in our technologies and future
products becoming obsolete.
Any products that are developed through our technologies will compete in
highly competitive markets. Our competitors may be more effective at using their
technologies to develop commercial products. Further, we cannot assure you that
our competitors will not obtain intellectual property rights that would limit
the use of our technologies or the ability to commercialize diagnostic or
therapeutic products using our technologies. As a result, our competitors may be
able to more easily develop technologies and products that would render our
technologies and products, and those of our collaborators, obsolete and
noncompetitive.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES, THIRD
PARTIES MAY BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO COMPETE IN THE MARKET.
Our success depends in part on our ability to obtain patents and maintain
adequate protection of the intellectual property related to our technologies and
products. The patent positions of biotechnology companies, including our patent
position, are generally uncertain and involve complex legal and factual
questions. We will be able to protect our proprietary rights from unauthorized
use by third parties only to the extent that our proprietary technologies are
covered by valid and
Page 11 of 16
<PAGE> 12
enforceable patents or are effectively maintained as trade secrets. The laws of
some foreign countries do not protect proprietary rights to the same extent as
the laws of the U.S., and many companies have encountered significant problems
in protecting and defending their proprietary rights in foreign jurisdictions.
We have applied and will continue to apply for patents covering our
technologies, processes and products as and when we deem appropriate. However,
these applications may be challenged or may fail to result in issued patents.
Our existing patents and any future patents we obtain may not be sufficiently
broad to prevent others from practicing our technologies or from developing
competing products. Furthermore, others may independently develop similar or
alternative technologies or design around our patents. In addition, our patents
may be challenged or invalidated or fail to provide us with any competitive
advantage.
We also rely on trade secret protection for our confidential and
proprietary information. We have taken security measures to protect our
proprietary information and trade secrets, but these measures may not provide
adequate protection. While we seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants, we cannot assure you that our proprietary information will not be
disclosed or that we can meaningfully protect our trade secrets. In addition,
our competitors may independently develop substantially equivalent proprietary
information or may otherwise gain access to our trade secrets, which could
adversely affect our ability to compete in the market.
LITIGATION OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY AND ADVERSELY AFFECT OUR ABILITY
TO DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES AND PRODUCTS.
Our commercial success depends in part on our ability to avoid infringing
patents and proprietary rights of third parties and not breaching any licenses
that we have entered into with regard to our technologies. Other parties have
filed, and in the future are likely to file, patent applications covering genes,
gene fragments, the analysis of gene expression and the manufacture and use of
DNA chips. We intend to continue to apply for patent protection for methods
relating to gene expression and for the individual disease genes and drug
discovery targets we discover. If patents covering technologies required by our
operations are issued to others, we may have to rely on licenses from third
parties. We cannot assure you that such licenses will be available on
commercially reasonable terms, or at all.
Third parties may accuse us of employing their proprietary technology
without authorization. In addition, third parties may obtain patents that relate
to our technologies and claim that use of such technologies infringes these
patents. Regardless of their merit, such claims could require us to incur
substantial costs, including the diversion of management and technical
personnel, in defending ourselves against any such claims or enforcing our
patents. In the event that a successful claim of infringement is brought against
us, we may be required to pay damages and obtain one or more licenses from third
parties. We may not be able to obtain these licenses at a reasonable cost, or at
all. Defense of any lawsuit or failure to obtain any of these licenses could
adversely affect our ability to develop and commercialize our technologies and
products.
WE HAVE LIMITED EXPERIENCE IN SALES AND MARKETING AND THUS MAY BE UNABLE TO
FURTHER COMMERCIALIZE OUR TECHNOLOGIES AND PRODUCTS.
Our ability to achieve profitability depends on attracting collaborators
and customers for our technologies and products. There are a limited number of
pharmaceutical, biotechnology and agricultural companies that are potential
collaborators and customers for our technologies and products. To market our
technologies and products, we must develop a sales and marketing group with the
appropriate technical expertise. We may not be able to build such a sales force.
We cannot assure you that our sales and marketing efforts will be successful or
that our technologies and products will gain market acceptance.
OUR SALES CYCLE IS LENGTHY, AND WE MAY SPEND CONSIDERABLE RESOURCES ON
UNSUCCESSFUL SALES EFFORTS OR MAY NOT BE ABLE TO ENTER INTO AGREEMENTS ON THE
SCHEDULE WE ANTICIPATE.
Our ability to obtain collaborators and customers for our technologies and
products depends in significant part upon the perception that our technologies
and products can help accelerate their drug discovery and genomics efforts. Our
sales cycle is typically lengthy because we need to educate our potential
collaborators and customers and sell the benefits of our products to a variety
of constituencies within such companies. In addition, we may be required to
negotiate agreements containing terms unique to each collaborator or customer.
We may expend substantial funds and management effort with no assurance that we
will successfully sell our technologies and products. Actual and proposed
consolidations of pharmaceutical companies have negatively affected, and may in
the future negatively affect, the timing and progress of our sales efforts.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We expect to continue to experience significant growth in the number of our
employees and the scope of our operations. This growth may place a significant
strain on our management and operations. As our operations expand, we expect
that we will need to manage additional relationships with various collaborators
and customers, suppliers and other third
Page 12 of 16
<PAGE> 13
parties. Our ability to manage our operations and growth effectively requires us
to continue to improve our operational, financial and management controls,
reporting systems and procedures. If we are unable to manage this growth
effectively, our business may be harmed.
THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD IMPAIR THE GROWTH OF OUR BUSINESS.
We are highly dependent on the principal members of our management and
scientific staff. The loss of any of these persons' services might adversely
impact the achievement of our objectives and the continuation of existing
collaborations. In addition, recruiting and retaining qualified scientific
personnel to perform future research and development work will be critical to
our success. There is currently a shortage of skilled executives and employees
with technical expertise, and this shortage is likely to continue. As a result,
competition for skilled personnel is intense and turnover rates are high.
Competition for experienced scientists from numerous companies, academic and
other research institutions may limit our ability to attract and retain such
personnel. We are dependent on our President and Chief Executive Officer, Norman
J.W. Russell, Ph.D., and Chairman, Sam Eletr, Ph.D., the loss of whose services
could have a material adverse effect on our business.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE
MATERIALS COULD BE TIME CONSUMING AND COSTLY.
Our research and development processes involve the controlled use of
hazardous materials, including chemicals, radioactive and biological materials.
Our operations produce hazardous waste products. We cannot eliminate the risk of
accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of hazardous materials. We may be
sued for any injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our insurance
coverage and our total assets. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development and production efforts.
ETHICAL, LEGAL AND SOCIAL ISSUES MAY LIMIT THE PUBLIC ACCEPTANCE OF, AND DEMAND
FOR, OUR TECHNOLOGIES AND PRODUCTS.
Our collaborators and customers may seek to develop diagnostic products
based on genes we discover. The prospect of broadly available gene-based
diagnostic tests raises ethical, legal and social issues regarding the
appropriate use of gene-based diagnostic testing and the resulting confidential
information. It is possible that discrimination by third-party payors, based on
the results of such testing, could lead to the increase of premiums by such
payors to prohibitive levels, outright cancellation of insurance or
unwillingness to provide coverage to individuals showing unfavorable gene
expression profiles. Similarly, employers could discriminate against employees
with gene expression profiles indicative of the potential for high
disease-related costs and lost employment time. Finally, government authorities
could, for social or other purposes, limit or prohibit the use of such tests
under certain circumstances. We cannot assure you that ethical, legal and social
concerns about genetic testing and target identification will not adversely
affect market acceptance of our technologies and products.
Although our technology is not dependent on genetic engineering, genetic
engineering plays a prominent role in our approach to product development. The
subject of genetically modified food has received negative publicity, which has
aroused public debate. Adverse publicity has resulted in greater regulation
internationally and trade restrictions on imports of genetically altered
agricultural products. Public attitudes may be influenced by claims that
genetically engineered products are unsafe for consumption or pose a danger to
the environment. Such claims may prevent genetically engineered products from
gaining public acceptance. The commercial success of our future products may
depend, in part, on public acceptance of the use of genetically engineered
products, including drugs and plant and animal products.
IF WE DEVELOP PRODUCTS WITH OUR COLLABORATORS, AND IF PRODUCT LIABILITY LAWSUITS
ARE SUCCESSFULLY BROUGHT AGAINST US, WE COULD FACE SUBSTANTIAL LIABILITIES THAT
EXCEED OUR RESOURCES.
We may be held liable if any product we develop with our collaborators
causes injury or is otherwise found unsuitable during product testing,
manufacturing, marketing or sale. Although we have general liability and product
liability insurance, this insurance may become prohibitively expensive or may
not fully cover our potential liabilities. Inability to obtain sufficient
insurance coverage at an acceptable cost or to otherwise protect us against
potential product liability claims could prevent or inhibit the
commercialization of products developed with our collaborators.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR RETURNS ON
DIAGNOSTIC OR THERAPEUTIC PRODUCTS THAT WE MAY DEVELOP WITH OUR COLLABORATORS.
If we are successful in validating targets for drug discovery, products
that we develop with our collaborators based on those targets may include
diagnostic or therapeutic products. The ability of our collaborators to
commercialize such products may depend, in part, on the extent to which
reimbursement for the cost of these products will be available from government
Page 13 of 16
<PAGE> 14
health administration authorities, private health insurers and other
organizations. In the U.S., third-party payors are increasingly challenging the
price of medical products and services. The trend towards managed healthcare in
the U.S., legislative healthcare reforms and the growth of organizations such as
health maintenance organizations that may control or significantly influence the
purchase of healthcare products and services, may result in lower prices for any
products our collaborators may develop. Significant uncertainty exists as to the
reimbursement status of newly approved healthcare products, and we cannot assure
you that adequate third-party coverage will be available to enable our
collaborators to maintain price levels sufficient to realize an appropriate
return on their investment in research and product development.
OUR FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE
OF AN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR
FACILITIES AND EQUIPMENT, WHICH COULD REQUIRE US TO CEASE OR CURTAIL OPERATION.
Our facilities are located near known earthquake fault zones and are
vulnerable to damage from earthquakes. We are also vulnerable to damage from
other types of disasters, including fire, floods, power loss, communications
failures and similar events. If any disaster were to occur, our ability to
operate our business at our facilities would be seriously, or potentially
completely, impaired. In addition, the unique nature of our research activities
could cause significant delays in our programs and make it difficult for us to
recover from a disaster. The insurance we maintain may not be adequate to cover
our losses resulting from disasters or other business interruptions.
Accordingly, an earthquake or other disaster could materially and adversely harm
our ability to conduct business.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
The trading price of our common stock is subject to significant
fluctuations. The market prices of the common stock of many publicly held, early
stage biotechnology companies have in the past been, and can in the future be
expected to be, especially volatile. In addition, the securities markets have
from time to time experienced significant price and volume fluctuations that may
be unrelated to the operating performance of particular companies. The following
factors and events may have a significant and adverse impact on the market price
of our common stock:
o fluctuations in our operating results;
o announcements of technological innovations or new commercial products
by us or our competitors;
o release of reports by securities analysts;
o developments or disputes concerning patent or proprietary rights;
o developments in our relationships with current or future collaborators
or customers; and
o general market conditions.
Many of these factors are beyond our control. These factors may cause a decrease
in the market price of our common stock, regardless of our operating
performance.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY, EITHER OF WHICH COULD
ADVERSELY AFFECT OUR STOCK PRICE.
Under our certificate of incorporation, our board of directors has the
authority, without further action by the holders of our common stock, to issue
2,000,000 additional shares of preferred stock from time to time in series and
with preferences and rights as it may designate. These preferences and rights
may be superior to those of the holders of our common stock. For example, the
holders of preferred stock may be given a preference in payment upon our
liquidation or for the payment or accumulation of dividends before any
distributions are made to the holders of common stock.
Although we have no present intention to authorize or issue any additional
series of preferred stock, any authorization or issuance, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could also have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock. The preferred
stock may have other rights, including economic rights senior to those of our
common stock, and, as a result, an issuance of additional preferred stock could
adversely affect the market value of our common stock. Provisions of Delaware
law may also discourage, delay or prevent someone from acquiring or merging with
us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the Company's investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company invests in highly liquid
and high-quality debt securities. The Company's investments in debt securities
are subject to interest rate risk. To minimize the exposure due to adverse
shifts in interest rates, the Company invests in short-term securities and
maintains an average maturity of less than one year. As a result, Lynx believes
it is not subject to significant interest rate risks.
Page 14 of 16
<PAGE> 15
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:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
b) Reports on Form 8-K - No reports on Form 8-K were filed during the
three-month period ended March 31, 2000.
Page 15 of 16
<PAGE> 16
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/ Norman J.W. Russell
-------------------------------------------
By: Norman J.W. Russell, Ph.D.
President and Chief Executive Officer
Date: May 15, 2000
/s/ Edward C. Albini
-------------------------------------------
By: Edward C. Albini
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 15, 2000
Page 16 of 16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<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, 2000.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 18,896
<SECURITIES> 11,687
<RECEIVABLES> 4,097
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,967
<PP&E> 19,644
<DEPRECIATION> 6,155
<TOTAL-ASSETS> 50,218
<CURRENT-LIABILITIES> 8,261
<BONDS> 0
0
0
<COMMON> 75,289
<OTHER-SE> (56,911)
<TOTAL-LIABILITY-AND-EQUITY> 50,218
<SALES> 0
<TOTAL-REVENUES> 3,016
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123
<INCOME-PRETAX> (421)
<INCOME-TAX> 60
<INCOME-CONTINUING> (481)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (481)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
