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 December 31, 1998
-----------------
[_] 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: 0-26642
-------
MYRIAD GENETICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0494517
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
320 Wakara Way, Salt Lake City, UT 84108
- ---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 584-3600
--------------
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 [ ]
As of February 10, 1999, the registrant had 9,411,888
shares of common stock outstanding.
MYRIAD GENETICS, INC.
INDEX TO FORM 10-Q
Page
----
PART I - Financial Information
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of December 31, 1998 (unaudited)
and June 30, 1998 3
Condensed Consolidated Statements of Operations for the three months and
six months ended December 31, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three months and
six months ended December 31, 1998 and 1997 (unaudited) 5
Notes to Condensed Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II - Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE(S) 16
2
MYRIAD GENETICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Dec. 31, 1998
(Unaudited) June 30, 1998
---------------- ----------------
Assets
------
Current assets:
Cash and cash equivalents $ 17,302,845 $ 14,595,034
Marketable investment securities 4,692,829 16,267,156
Prepaid expenses 722,049 266,679
Trade accounts receivables, less allowance for doubtful
accounts of $87,000 at December 31, 1998, $66,000 at
June 30, 1998
Non-trade receivables 80,251 117,053
---------------- ----------------
Total current assets 23,581,461 31,717,249
---------------- ----------------
Equipment and leasehold improvements:
Equipment 12,096,432 16,049,721
Leasehold improvements 2,863,618 2,288,241
---------------- ----------------
14,960,050 18,337,962
Less accumulated depreciation and amortization 5,757,091 5,902,926
---------------- ----------------
Net equipment and leasehold improvements 9,202,959 12,435,036
Long-term marketable investment securities 25,415,036 22,247,303
Other assets 908,010 992,384
---------------- ----------------
$ 59,107,466 $ 67,391,972
================ ================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 3,241,081 $ 5,121,279
Accrued liabilities 1,672,508 1,938,722
Deferred revenue 1,734,686 2,722,115
Current portion of notes payable -- 128,843
---------------- ----------------
Total current liabilities 6,648,275 9,910,959
---------------- ----------------
Stockholders' equity
Common stock, $0.01 par value, 15,000,000 shares authorized;
issued and outstanding 9,411,888 at December 31, 1998 and 9,337,501
at June 30, 1998 94,119 93,375
Additional paid-in capital 92,286,329 91,907,034
Fair value adjustment on available-for-sale marketable investment (34,530) 1,477
Deferred compensation (389,539) (576,446)
Accumulated deficit (39,497,188) (33,944,427)
---------------- ----------------
Net stockholders' equity 52,459,191 57,481,013
---------------- ----------------
$ 59,107,466 $ 67,391,972
================ ================
See accompanying notes to condensed consolidated financial statements.
3
MYRIAD GENETICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- -------------- ------------- --------------
Revenues:
Research revenue $ 4,536,512 $ 4,563,890 $ 9,183,028 $ 10,078,932
Genetic testing revenue 1,210,959 524,918 2,124,429 934,463
--------------- -------------- ------------- --------------
Total revenues 5,747,471 5,088,808 11,307,457 11,013,395
--------------- -------------- ------------- --------------
Expenses:
Research and development expense 5,681,806 5,005,520 11,499,295 11,206,159
Selling, general and administrative
expense 2,760,301 2,869,428 5,315,717 5,006,656
Genetic testing cost of revenue 778,936 305,587 1,381,808 541,585
--------------- -------------- ------------- --------------
Total costs and expenses 9,221,043 8,180,535 18,196,820 16,754,400
--------------- -------------- ------------- --------------
Operating loss (3,473,572) (3,091,727) (6,889,363) (5,741,005)
Other income (expense):
Interest income 579,471 836,555 1,275,690 1,701,359
Interest expense (3,908) (9,449) (6,279) (20,897)
Gain on sale of assets 47,750 - 67,191 121
--------------- -------------- ------------- --------------
623,313 827,106 1,336,602 1,680,583
--------------- -------------- ------------- --------------
Net loss ($2,850,259) ($2,264,621) ($5,552,761) ($4,060,422)
=============== ============== ============= ==============
Basic and diluted loss per share ($0.30) ($0.24) ($0.59) ($0.44)
=============== ============== ============= ==============
Basic and diluted weighted average shares outstanding
9,391,844 9,279,892 9,367,393 9,259,025
See accompanying notes to condensed consolidated financial statements.
4
MYRIAD GENETICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- ------------- ------------- ---------------
Cash flows from operating activities:
Net loss ($2,850,259) ($2,264,621) ($5,552,761) ($4,060,422)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 909,487 804,825 1,750,082 1,573,941
Loss (gain) on sale of equipment 464 - 12,401 (121)
Bad debt expense 12,000 - 21,000 -
Increase in trade receivables (125,543) (125,687) (333,159) (128,997)
Decrease (increase) in non-trade receivables 4,858 (12,579) 36,800 85,797
Decrease (increase) in prepaid expenses 37,267 (115,844) (455,370) 173,318
Decrease in other assets 42,187 - 84,375 -
Increase (decrease) in accounts payable
and accrued expenses (696,723) 301,124 (2,146,413) 627,618
Decrease in deferred revenue (398,013) (349,230) (987,429) (623,727)
--------------- ------------- ------------- ---------------
Net cash used in operating activities (3,064,275) (1,762,012) (7,570,474) (2,352,593)
--------------- ------------- ------------- ---------------
Cash flows from investing activities:
Capital expenditures (912,957) (715,454) (1,897,878) (1,441,865)
Proceeds from sale of equipment 3,551,784 - 3,554,379 901
Net change in marketable investment securities 8,232,833 (1,122,564) 8,370,588 4,921,840
--------------- ------------- ------------- ---------------
Net cash provided by (used in) investing
activities 10,871,660 (1,838,018) 10,027,089 3,480,876
--------------- ------------- ------------- ---------------
Cash flows from financing activities:
Net payments of notes payable (37,376) (84,388) (128,843) (166,904)
Net proceeds from issuance of common stock 302,264 245,948 380,039 371,615
--------------- ------------- ------------- ---------------
Net cash provided by financing activities 264,888 161,560 251,196 204,711
--------------- ------------- ------------- ---------------
Net increase (decrease) in cash and cash
equivalents 8,072,273 (3,438,470) 2,707,811 1,332,994
Cash and cash equivalents at beginning of period 9,230,572 20,447,227 14,595,034 15,675,763
--------------- ------------- ------------- ---------------
Cash and cash equivalents at end of period $17,302,845 $17,008,757 $17,302,845 $17,008,757
=============== ============= ============= ===============
See accompanying notes to condensed consolidated financial statements.
5
MYRIAD GENETICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying condensed unaudited consolidated financial statements
have been prepared by Myriad Genetics, Inc. (the "Company") in
accordance with generally accepted accounting principles for interim
financial information and pursuant to the applicable rules and
regulations of the Securities and Exchange Commission. The condensed
unaudited consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in
consolidation. In the opinion of management, the accompanying
financial statements contain all adjustments (consisting of normal and
recurring accruals) necessary to present fairly all financial
statements. The financial statements herein should be read in
conjunction with the Company's audited consolidated financial
statements and notes thereto for the fiscal year ended June 30, 1998,
included in the Company's Annual Report on Form 10-K for the year
ended June 30, 1998. Operating results for the three and six month
periods ended December 31, 1998 may not necessarily be indicative of
the results to be expected for any other interim period or for the
full year.
(2) Leases
------
On December 31, 1998, the Company entered into a Master Lease
Agreement with General Electric Capital Corporation ("G.E. Capital").
Under this agreement, the Company sold equipment with a value, net of
depreciation, of $3,551,784 ("net book value") to G.E. Capital. The
Company received proceeds from G.E. Capital equal to the net book
value of the equipment. The Company in turn will lease back the
equipment from G.E. Capital over a 48 month period. Future minimum
lease payments under this noncancelable operating lease as of December
31, 1998 are as follows:
Fiscal year ending:
1999 $ 466,111
2000 932,221
2001 932,221
2002 932,221
2003 466,111
----------
$3,728,885
Under the Master Lease Agreement, the Company is subject to certain
financial covenants. As of December 31, 1998, the Company was fully
compliant.
(3) Collaborative Research Agreements
---------------------------------
In October 1998, the Company entered into a five-year collaboration
with Schering AG, Germany, to utilize the Company's protein
interaction technology ("ProNet") for drug discovery and development.
Under the agreement, the Company will have an option to co-promote all
new therapeutic products in North America and receive 50 percent of
the profits from North American sales of all new drugs discovered with
ProNet. This collaboration may provide the Company with licensing
fees, subscription fees, option payments and milestone fees with a
value of up to $51,000,000.
In November 1998, the Company entered into a 15 month collaboration
with Monsanto Company ("Monsanto"), to utilize ProNet for drug
discovery and development. Under the agreement, Monsanto has the
option to extend the research term for a period of twelve months. If
the anticipated milestones, option payments, license fees and upfront
payments are achieved, the value
6
of the agreement may reach up to $15,000,000. The Company will also receive
royalties on worldwide sales of drugs resulting from the discovery of novel
targets found through use of the ProNet/TM/ technology.
In December 1998, the Company announced an expansion of its collaborative
research and development arrangement with Bayer. The expanded collaboration
may provide the Company with additional research funding and potential
milestone payments of up to $12,000,000. The Company is entitled to receive
royalties from sales of therapeutic products sold by Bayer.
(4) Comprehensive Earnings (Loss)
-----------------------------
The Company adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income", effective July 1, 1998. SFAS
130 establishes standards for reporting and displaying comprehensive
earnings (loss) and its components in financial statements. The components
of the Company's comprehensive earnings (loss) are as follows:
Three Months Ended Six Months Ended
------------------------ ------------------------
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997
(unaudited) (unaudited) (unaudited) (unaudited)
------------------------- ----------------------- ----------------------- -----------------------
Net loss ($2,850,259) ($2,264,621) ($5,552,761) ($4,060,422)
Unrealized gain (loss) on
available-for-sale
marketable investment
securities (129,085) 2,171 (36,007) (3,120)
------------------------- ----------------------- ----------------------- -----------------------
Comprehensive loss ($2,979,344) ($2,262,450) ($5,588,768) ($4,063,542)
========================= ======================= ======================= =======================
(5) Net Loss Per Common and Common Equivalent Share
-----------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128).
SFAS 128 became effective for financial statements with interim and annual
periods ending after December 15, 1997. Accordingly, the Company has
adopted SFAS 128.
SFAS 128 establishes a different method of computing earnings (loss) per
common and common-equivalent share than was previously required under the
provisions of Accounting Principles Board Opinion No. 15. SFAS 128 requires
the presentation of basic and diluted earnings (loss) per share. Basic is
the amount of net income (loss) for the period available to each share of
common stock outstanding during the reporting period. Diluted earnings per
share is the amount of net income (loss) for the period available to each
share of common stock outstanding during the reporting period and to each
share that would have been outstanding assuming the issuance of common
shares for all dilutive potential common shares outstanding during the
period.
In calculating earnings (loss) per common and common-equivalent share the
net income (loss) and the weighted average common and common-equivalent
shares outstanding were the same for both the basic and diluted
calculation.
As of December 31, 1998 and December 31, 1997, there were antidilutive
common stock equivalents of 1,894,699 and 1,373,356, respectively.
Accordingly, these common stock equivalents were not included in the
computation of diluted earnings per share for the periods presented, but
may be dilutive to future basic and diluted earnings per share.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Since inception, the Company has devoted substantially all of its resources to
maintaining its research and development programs, establishing and operating a
genetic testing laboratory, and supporting collaborative research agreements.
Revenues received by the Company primarily have been payments pursuant to
collaborative research agreements and sales of genetic tests. The Company has
been unprofitable since its inception and, for the quarter ended December 31,
1998, the Company had a net loss of $2,850,259 and as of December 31, 1998 had
an accumulated deficit of $39,497,188.
In April 1995, the Company commenced a five-year collaborative research and
development arrangement with Novartis Corporation ("Novartis"). This
collaboration may provide the Company with an equity investment, research
funding and potential milestone payments of up to $60,000,000. The Company is
entitled to receive royalties from sales of therapeutic products sold by
Novartis. The Company recognized $1,378,185 in revenue under this agreement for
the quarter ended December 31, 1998.
In September 1995, the Company commenced a five-year collaborative research and
development arrangement with Bayer Corporation ("Bayer"). This collaboration
may provide the Company with an equity investment, research funding and
potential milestone payments of up to $71,000,000. In November 1997 and again
in December 1998, the Company announced expansions of its collaborative research
and development arrangement with Bayer. The expanded collaboration may provide
the Company with additional research funding and potential milestone payments of
up to $54,000,000 and $12,000,000, respectively or a total potential of up to
$137,000,000. The Company is entitled to receive royalties from sales of
therapeutic products sold by Bayer. The Company recognized $2,341,660 in
revenue under this agreement for the quarter ended December 31, 1998.
In October 1996, the Company announced the introduction of BRACAnalysis/TM/, a
comprehensive BRCA1 and BRCA2 gene sequence analysis for susceptibility to
breast and ovarian cancer. In January 1998, the Company announced the
introduction of CardiaRisk/TM/ which may assist physicians both in (i)
identifying which hypertensive patients are at a significantly increased risk of
developing cardiovascular disease and (ii) identifying which patients are likely
to respond to low salt diet therapy and antihypertensive drug therapy. The
Company, through its wholly owned subsidiary Myriad Genetic Laboratories, Inc.,
recognized genetic testing revenues, primarily from BRACAnalysis/TM/, of
$1,210,959 for the quarter ended December 31, 1998.
In April 1997, the Company commenced a three-year collaborative research and
development arrangement with Schering Corporation ("Schering"). The three-year
term may be extended for two additional one-year periods. This collaboration
may provide the Company with an equity investment, license fees, research
funding and potential milestone payments totalling up to $60,000,000. The
Company is entitled to receive royalties from sales of therapeutic products sold
by Schering. The Company recognized $750,000 in revenue under this agreement
for the quarter ended December 31, 1998.
In October 1998, the Company entered into a five-year collaboration with
Schering AG, Germany, to utilize the Company's protein interaction technology
("ProNet/TM/") for drug discovery and development. Under the agreement, the
Company will have an option to co-promote all new therapeutic products in North
America and receive 50 percent of the profits from North American sales of all
new drugs discovered with ProNet/TM/. This collaboration may provide the Company
with licensing fees, subscription fees, option payments and milestone fees with
a value of up to $51,000,000.
In November 1998, the Company entered into a 15 month collaboration with
Monsanto Company ("Monsanto"), to utilize ProNet/TM/ for drug discovery and
development. Under the agreement, Monsanto has the option to extend the
research term for a period of twelve months. If the anticipated milestones,
option payments, license fees and upfront payments are achieved, the value of
the agreement may reach up to $15,000,000. The Company will also receive
royalties on worldwide sales of drugs resulting from the discovery of novel
targets found through use of the ProNet/TM/
8
technology. The Company recognized $66,667 in revenue under this agreement for
the quarter ended December 31, 1998.
The Company intends to enter into additional collaborative relationships to
locate and sequence genes associated with other common diseases as well as
continuing to fund internal research projects. There can be no assurance that
the Company will be able to enter into additional collaborative relationships on
terms acceptable to the Company. The Company expects to incur losses for at
least the next several years, primarily due to expansion of its research and
development programs, increased staffing costs and expansion of its facilities.
Additionally, the Company expects to incur substantial sales, marketing and
other expenses in connection with building its genetic testing business. The
Company expects that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial.
Results of Operations for the Three Months Ended December 31, 1998 and 1997
Research revenues for the quarter ended December 31, 1998 were $4,536,512 as
compared to $4,563,890 for the same quarter of 1997. Greater research revenue
recognized during the quarter ended December 31, 1997 versus the current quarter
is the result of a $950,000 contract expansion payment from Bayer received by
the Company in 1997. Excluding the contract expansion payment, the Company's
ongoing research revenue increased $922,622 for the quarter ended December 31,
1998 versus the same quarter of 1997. This increase is primarily the result of
the expanded scope of the Bayer agreement. Research revenue from the research
collaboration agreements is recognized as related costs are incurred.
Consequently, as these programs progress and costs increase, revenues increase
proportionately.
Genetic testing revenues of $1,210,959 were recognized in the quarter ended
December 31, 1998, an increase of 131% or $686,041 over the same quarter of the
prior year. Genetic testing revenue is comprised of sales of diagnostic tests
resulting from the Company's discovery of the BRCA1 and BRCA2 breast and ovarian
cancer genes. Sales and marketing efforts since that time have given rise to
the increased revenues for the quarter ended December 31, 1998. There can be no
assurance, however that genetic testing revenues will continue to increase at
the historical rate.
Research and development expenses for the quarter ended December 31, 1998
increased to $5,681,806 from $5,005,520 for the same quarter of 1997. This
increase was primarily due to an increase in research activities as a result of
the progress in the Company's collaborations with Novartis, Bayer, Schering and
Monsanto as well as those programs funded by the Company. The increased level
of research spending includes ongoing development of ProNet/TM/, third-party
research programs, increased depreciation charges related to purchasing
additional research equipment, the hiring of additional research personnel and
the associated increase in use of laboratory supplies and reagents. Such
expenses will likely increase to the extent that the Company enters into
additional research agreements with third parties.
Selling, general and administrative expenses for the quarter ended December 31,
1998 decreased $109,127 from the same quarter of 1997. During the quarter ended
December 31, 1997, the Company was initiating a plan to dramatically increase
its sales force. Start-up expenses for the sales staff included training,
relocation, and sales supplies. For the quarter ended December 31, 1998, the
company maintained a steady, well-trained sales force which resulted in fewer
selling expenses. The Company expects its general and administrative expenses
will continue to fluctuate as needed in support of its genetic testing business
and its research and development efforts.
Interest income for the quarter ended December 31, 1998 decreased to $579,471
from $836,555 for the same quarter of 1997. Cash, cash equivalents, and
marketable investment securities were $59,485,471 at December 31, 1997 as
compared to $47,410,710 at December 31, 1998. This decrease in cash and
investments, attributable to expenditures incurred in the ordinary course of
business, has resulted in reduced interest income. Interest expense for the
quarter ended December 31, 1998, amounting to $3,908, was due entirely to
borrowings under the Company's equipment financing facility. The gain on sale
of assets of $47,750 in the quarter ended December 31, 1998 is the result of the
sale of out-dated equipment and realized gains on disposition of marketable
investment securities.
Results of Operations for the Six Months Ended December 31, 1998 and 1997
Research revenues for the six months ended December 31, 1998 were $9,183,028 as
compared to $10,078,932 for
9
the same quarter of 1997. Greater research revenue recognized during the six
month period ended December 31, 1997 versus the current period is the result of
a $2,000,000 milestone payment from Schering and a $950,000 contract expansion
payment from Bayer received by the Company in 1997. Excluding the milestone and
contract expansion payment, the Company's ongoing research revenue increased
$2,054,096 for the six months ended December 31, 1998 versus the same period of
1997. This increase is primarily the result of the expanded scope of the Bayer
agreement. Research revenue from the research collaboration agreements is
recognized as related costs are incurred. Consequently, as these programs
progress and costs increase, revenues increase proportionately.
Genetic testing revenues of $2,124,429 were recognized in the six months ended
December 31, 1998, an increase of $1,189,966 over the same six month period of
1997. Genetic testing revenue is comprised of sales of diagnostic tests
resulting from the Company's discovery of the BRCA1 and BRCA2 breast and ovarian
cancer genes. Sales and marketing efforts since that time have given rise to
the increased revenues for the six months ended December 31, 1998. There can be
no assurance, however that genetic testing revenues will continue to increase at
the historical rate.
Research and development expenses for the six months ended December 31, 1998
increased to $11,499,295 from $11,206,159 for the prior year. This increase was
primarily due to an increase in research activities as a result of the Company's
collaborations with Novartis, Bayer, Schering, and Monsanto, as well as those
programs funded by the Company. The increased level of research spending
includes ongoing development of ProNet/TM/, third party research programs,
increased depreciation charges related to purchasing additional equipment, the
hiring of additional research personnel and the associated increase in use of
laboratory supplies and reagents. Such expenses will likely increase to the
extent that the Company enters into additional research agreements with third
parties.
Selling, general and administrative expenses for the six months ended December
31, 1998 increased by $309,061 to $5,315,717 from $5,006,656 in the six month
period in the prior year. The increase was primarily attributable to costs
associated with the ongoing promotion of BRACAnalysis/TM/ as well as additional
administrative, sales, marketing and education personnel, market research
activities, educational material development, and facilities-related costs. The
Company expects its general and administrative expenses will continue to
fluctuate as needed in support of its genetic testing business and its research
and development efforts.
Interest income for the first six months of fiscal year 1999 decreased to
$1,275,690 from $1,701,359 for the first six months of fiscal year 1998. Cash,
cash equivalents, and marketable investment securities were $59,485,471 at
December 31, 1997 as compared to $47,410,710 at December 31, 1998. This
decrease in cash and investments, attributable to expenditures incurred in the
ordinary course of business, has resulted in reduced interest income. Interest
expense for the six months ended December 31, 1998, amounting to $6,279, was due
entirely to borrowings under the Company's equipment financing facility. The
gain on sale of assets of $67,191 in the six months ended December 31, 1998 is
the result of the sale of out-dated equipment and realized gains on disposition
of marketable investment securities.
Liquidity and Capital Resources
Net cash used in operating activities was $3,064,275 during the quarter ended
December 31, 1998 and $1,762,012 during the same quarter of the prior fiscal
year. Cash used in operating activities is comprised of changes in the
following financial statement accounts: depreciation and amortization, loss on
sale of assets, bad debt expense, trade receivables, non-trade receivables,
prepaid expenses, other assets, accounts payable and accrued expenses, and
deferred revenue. Trade receivables for the three months ended December 31,
1998 increased $125,543. This increase is primarily attributable to the 33%
increase in genetic testing revenue for the quarter ended December 31, 1998 as
compared to testing revenue for the quarter ended September 30, 1998. Prepaid
expenses decreased $37,267, from $759,316 to $722,049, during the quarter ended
December 31, 1998. The decrease is primarily due to advanced royalties and
insurance premiums being expensed during the quarter. Accounts payable and
accrued expenses decreased by $696,723 between September 30, 1998 and December
31, 1998 primarily as a result of a large order of lab materials which was
included as payable on September 30, 1998 and paid for during the quarter ended
December 31, 1998. Deferred revenue, representing the difference in
collaborative payments received and research revenue recognized, decreased from
$2,132,699 to $1,734,686 during the quarter ended December 31, 1998.
10
The Company's investing activities provided cash in the amount of $10,871,660 in
the three months ended December 31, 1998 and used cash of $1,838,018 in the
three months ended December 31, 1997. Investing activities were comprised
primarily of capital expenditures for research equipment, office furniture, and
facility improvements and marketable investment securities. During the quarter
ended December 31, 1998, the Company entered into a Master Lease Agreement with
General Electric Capital Corporation ("G.E. Capital"). Under this agreement,
the Company sold equipment with a value, net of depreciation, of $3,551,784
("net book value") to G.E. Capital. The Company received proceeds from G.E.
Capital equal to the net book value of the equipment. Also during the quarter
ended December 31, 1998, the Company shifted a portion of its investment in
marketable securities from longer term investments to cash and cash equivalents
in order to take advantage of more favorable interest rates.
Financing activities provided $264,888 during the quarter ended December 31,
1998. The Company reduced the amount of principal owing on its equipment
financing facility by $37,376. This use of cash was more than offset by cash
proceeds from the exercise of options. Financing activities provided $161,560
during the quarter ended December 31, 1997 primarily as a result of payments to
reduce the principal on its equipment financing facility in the amount of
$84,388, offset by cash proceeds from the exercise of options.
The Company anticipates that its existing capital resources will be adequate to
maintain its current and planned operations for at least the next two years,
although no assurance can be given that changes will not occur that would
consume available capital resources before such time. The Company's future
capital requirements will be substantial and will depend on many factors,
including progress of the Company's research and development programs, the
results and cost of clinical correlation testing of the Company's genetic tests,
the costs of filing, prosecuting and enforcing patent claims, competing
technological and market developments, payments received under collaborative
agreements, changes in collaborative research relationships, the costs
associated with potential commercialization of its gene discoveries, if any,
including the development of manufacturing, marketing and sales capabilities,
the cost and availability of third-party financing for capital expenditures and
administrative and legal expenses. Because of the Company's significant long-
term capital requirements, the Company intends to raise funds when conditions
are favorable, even if it does not have an immediate need for additional capital
at such time.
Impact of the Year 2000 Issue
The Year 2000 Issue
The Year 2000 Issue is the result of computer programs using a two-digit format,
as opposed to four digits, to indicate the year. Any of the Company's computer
programs or other information systems that have time-sensitive software or
embedded microcontrollers 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.
State of Readiness and Costs to Address the Year 2000 Issue
During fiscal 1998, the Company completed an initial review ("Phase I") of its
information and non-information technology systems. This review included its
existing and planned computer software and hardware. The Company has made an
initial determination, based on its Phase I review, that the costs and/or
consequences associated with the Year 2000 issue are not expected to have a
material effect on its business, operations or future financial condition.
A second, more in-depth analysis ("Phase II") is currently ongoing. Internally,
Phase II will include the testing of internally developed systems. The internal
portion of Phase II, although well underway, is not expected to be completed
until the end of its 1999 fiscal year. The Company presently believes that with
modifications to existing software and conversions to new software and systems,
the Year 2000 Issue will not pose significant operational problems for its
computer and other information systems. If required, the Company will utilize
both internal and external resources to reprogram, or replace, and test the
software and systems for Year 2000 modifications. Externally, Phase II of the
Company's preparations for the Year 2000 Issue will consist of soliciting and
obtaining certification of Year 2000 compliance from third-party software
vendors and determining the readiness of its significant suppliers and
customers.
Risks of the Year 2000 Issue
11
If such modifications, conversions and/or replacements are not made, are not
completed timely, or if any of the Company's suppliers or customers do not
successfully deal with the Year 2000 Issue, the Year 2000 Issue could have a
material impact on the operations of the Company. The Company could experience
delays in receiving or sending its genetic testing products that would increase
its costs and that could cause the Company to lose business and even customers
and could subject the Company to claims for damages. Problems with the Year
2000 Issue could also result in delays in the Company invoicing its genetics
testing customers or in the Company receiving payments from them. In addition,
the Company's research and development efforts which rely heavily on the storage
and retrieval of electronic information could be interrupted resulting in
significant delays in discovering genes, the loss of current collaborations, and
the impairment of the Company's ability to enter into new collaborations. The
severity of these possible problems would depend on the nature of the problem
and how quickly it could be corrected or an alternative implemented, which is
unknown at this time. In the extreme, such problems could bring the Company to
a standstill.
While management has not yet specifically determined the costs associated with
its Year 2000 readiness efforts, monitoring and managing the Year 2000 Issue
will result in additional direct and indirect costs to the Company. Direct
costs include potential charges by third-party software vendors for product
enhancements, costs involved in testing software products for Year 2000
compliance and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. Indirect costs
will principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans. Such costs have not been material to date.
Both direct and indirect costs of addressing the Year 2000 Issue will be charged
to earnings as incurred.
Contingency Plan
After evaluating its internal compliance efforts as well as the compliance of
third parties as described above, the Company will develop during calendar year
1999 appropriate contingency plans to address situations in which various
systems of the Company, or of third parties with which the Company does
business, are not Year 2000 compliant. Some risks of the Year 2000 Issue,
however, are beyond the control of the Company and its suppliers and customers.
For example, no preparations or contingency plan will protect the Company from a
downturn in economic activity caused by the possible ripple effect throughout
the entire economy caused by the Year 2000 Issue.
Certain Factors That May Affect Future Results of Operations
The Company believes that this report on Form 10-Q contains certain forward-
looking statements as that term is defined in the Private Securities Litigation
Reform Act of 1995. Such statements are based on management's current
expectations and are subject to a number of factors and uncertainties which
could cause actual results to differ materially from those described in the
forward-looking statements. The Company cautions investors that there can be no
assurance that actual results or business conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors, including, but not limited to, the following: the timely
implementation by the Company of its plan to prepare its computer systems for
the Year 2000, the costs to the Company of such preparation, and the timely
conversion by other parties on which the Company's business relies; intense
competition related to the discovery of disease-related genes and the
possibility that others may discover, and the Company may not be able to gain
rights with respect to, genes important to the establishment of a successful
genetic testing business, difficulties inherent in developing genetic tests once
genes have been discovered; the Company's limited experience in operating a
genetic testing laboratory; the Company's limited marketing and sales experience
and the risk that tests which the Company has or may develop may not be able to
be marketed at acceptable prices or receive commercial acceptance in the markets
that the Company is targeting or expects to target; uncertainty as to whether
there will exist adequate reimbursement for the Company's services from
government, private healthcare insurers and third-party payors; and
uncertainties as to the extent of future government regulation of the Company's
business. As a result, the Company's future development efforts involve a high
degree of risk. For further information, refer to the more specific risks and
uncertainties disclosed throughout this Quarterly Report on Form 10-Q.
12
PART II - Other Information
Item 1. Legal Proceedings.
The Company is not a party to any legal proceedings.
Item 2. Changes in Securities.
(c) Sales of Unregistered Securities
--------------------------------
During the three months ended December 31, 1998, the Company issued a total of
2,200 shares of Common Stock to a consultant of the Company pursuant to the
exercise of stock options at a weighted average price of $.028 per share.
No person acted as an underwriter with respect to the transactions set forth
above. In each of the foregoing instances, the Company relied on Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act") or Rule 701
promulgated under the Securities Act for the exemption from the registration
requirements of the Securities Act, since no public offerings were involved.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On November 12, 1998, the Company held its Annual Meeting of Shareholders (the
"Annual Meeting"). A quorum of 6,269,227 shares of Common Stock of the Company
(of a total 9,345,535 outstanding shares, or approximately 67.1%) was
represented at the Annual Meeting in person or by proxy, which was held to vote
on the following proposals:
1. To elect two members to the Board of Directors. Nominees for Directors
were Peter D. Meldrum and Mark H. Skolnick, Ph.D.
2. To consider and act upon a proposal to ratify the appointment of KPMG Peat
Marwick LLP as the Company's independent public accountants for the fiscal
year ending June 30, 1999.
Each of the proposals was adopted, with the vote totals as follows:
Proposal 1:
- -----------
FOR WITHHELD
--------- --------
Peter D. Meldrum 6,231,093 38,134
Mark H. Skolnick, Ph.D. 6,227,758 41,469
Michael J. Berendt, Ph.D., Alan J. Main, Ph.D., and Dale A. Stringfellow, Ph.D.
continue to serve as Directors for terms which expire in 2000 and Walter
Gilbert, Ph.D., Arthur H. Hayes, Jr., M.D. and John J. Horan continue to serve
as Directors for terms which expire in 1999 and until their successors are duly
elected and qualified.
13
Proposal 2:
- -----------
For 6,231,370
Against 21,887
Abstain 15,970
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
The following is a list of exhibits filed as part of this Quarterly Report on
Form 10-Q.
Exhibit
Number Description
- ------ -----------
10.1 Master Lease Agreement dated December 31, 1998 between General
Electric Capital Corporation and the Company.
10.2 Addendum No. 1 to Master Lease Agreement dated December 31, 1998
between General Electric Capital Corporation and the Company.
10.3 Addendum No. 2 to Master Lease Agreement dated December 31, 1998
between General Electric Capital Corporation and the Company.
10.4 Biotech Equipment Schedule Schedule No. 001 dated December 31,
1998 to Master Lease Agreement dated December 31, 1998 between
General Electric Corporation and the Company.
10.5 Annex A to Equipment Schedule No. 001 to Master Lease Agreement
dated December 31, 1998 between General Electric Corporation and
the Company.
10.6 Annex B to Equipment Schedule No. 001 to Master Lease Agreement
dated December 31, 1998 between General Electric Corporation and
the Company.
10.7 Addendum to Schedule No. 001 to Master Lease Agreement dated as
of December 31, 1998 between General Electric Corporation and
the Company.
10.8 Collaborative Research, License and Co-Promotion Agreement dated
as of October 5, 1998 between Schering Aktiengesellschaft and
the Company. The Company has excluded from this Exhibit 10.8
portions of the Collaborative Research, License and Co-Promotion
Agreement for which the Company has requested confidential
treatment from the Securities and Exchange Commission. The
portions of the Collaborative Research, License and Co-Promotion
Agreement for which confidential treatment has been requested
are marked "[ ]" and such confidential portions have been filed
separately with the Securities and Exchange Commission.
10.9 Collaborative ProNet Research and License Agreement dated as of
November 11, 1998 between Monsanto Company and the Company. The
Company has excluded from this Exhibit 10.9 portions of the
Collaborative ProNet Research and License Agreement for which
the Company has requested confidential treatment from the
Securities and Exchange Commission. The portions of the
Collaborative ProNet Research and License Agreement for which
confidential treatment has been requested are marked "[ ]" and
such confidential portions have been filed separately with the
Securities and Exchange Commission.
14
10.10 Letter Amendment to the Collaborative Research and License Agreement
dated as of November 30, 1998 between Bayer Corporation and the Company.
The Company has excluded from this Exhibit 10.10 portions of the Letter
Amendment to the Collaborative Research and License Agreement for which
the Company has requested confidential treatment from the Securities and
Exchange Commission. The portions of the Letter Amendment to the
Collaborative Research and License Agreement for which confidential
treatment has been requested are marked "[ ]" and such confidential
portions have been filed separately with the Securities and Exchange
Commission.
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Date Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended December 31, 1998.
15
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.
MYRIAD GENETICS, INC.
Date: February 12, 1999 By: /s/ Peter D. Meldrum
------------------ -------------------------------------
Peter D. Meldrum
President and Chief Executive Officer
Date: February 12, 1999 /s/ Jay M. Moyes
------------------ ------------------------------------------
Jay M. Moyes
Vice President of Finance
(principal financial and accounting officer)
16
MYRIAD GENETICS, INC.
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.1 Master Lease Agreement dated December 31, 1998 between General
Electric Capital Corporation and the Company.
10.2 Addendum No. 1 to Master Lease Agreement dated December 31, 1998
between General Electric Capital Corporation and the Company.
10.3 Addendum No. 2 to Master Lease Agreement dated December 31, 1998
between General Electric Capital Corporation and the Company.
10.4 Biotech Equipment Schedule Schedule No. 001 dated December 31,
1998 to Master Lease Agreement dated December 31, 1998 between
General Electric Corporation and the Company.
10.5 Annex A to Equipment Schedule No. 001 to Master Lease Agreement
dated December 31, 1998 between General Electric Corporation and
the Company.
10.6 Annex B to Equipment Schedule No. 001 to Master Lease Agreement
dated December 31, 1998 between General Electric Corporation and
the Company.
10.7 Addendum to Schedule No. 001 to Master Lease Agreement dated as
of December 31, 1998 between General Electric Corporation and
the Company.
10.8 Collaborative Research, License and Co-Promotion Agreement dated
as of October 5, 1998 between Schering Aktiengesellschaft and
the Company. The Company has excluded from this Exhibit 10.8
portions of the Collaborative Research, License and Co-Promotion
Agreement for which the Company has requested confidential
treatment from the Securities and Exchange Commission. The
portions of the Collaborative Research, License and Co-Promotion
Agreement for which confidential treatment has been requested
are marked "[ ]" and such confidential portions have been filed
separately with the Securities and Exchange Commission.
10.9 Collaborative ProNet Research and License Agreement dated as of
November 11, 1998 between Monsanto Company and the Company. The
Company has excluded from this Exhibit 10.9 portions of the
Collaborative ProNet Research and License Agreement for which
the Company has requested confidential treatment from the
Securities and Exchange Commission. The portions of the
Collaborative ProNet Research and License Agreement for which
confidential treatment has been requested are marked "[ ]" and
such confidential portions have been filed separately with the
Securities and Exchange Commission.
10.10 Letter Amendment to the Collaborative Research and License
Agreement dated as of November 30, 1998 between Bayer
Corporation and the Company. The Company has excluded from this
Exhibit 10.10 portions of the Letter Amendment to the
Collaborative Research and License Agreement for which the
Company has requested confidential treatment from the Securities
and Exchange Commission. The portions of the Letter Amendment to
the Collaborative Research and License Agreement for which
confidential treatment has been requested are marked "[ ]" and
such confidential portions have been filed separately with the
Securities and Exchange Commission.
17
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Date Schedule
18