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, 1998.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO
___________.
Commission File Number 0-22570
Lynx Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3161073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3832 Bay Center Place
Hayward, CA 94545
(Address of principal executive offices) (Zip Code)
(510) 670-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares of Common Stock outstanding as of April 30, 1998, was
11,099,718. The aggregate market value of the common stock of the Registrant
held by non-affiliates as of April 30, 1998 was $87,186,929.
Page 1 of 13
Lynx Therapeutics, Inc.
INDEX
PART I FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Balance Sheets - March 31, 1998
and December 31, 1997........................................ 3
Condensed Consolidated Statements of Operations - three months
ended March 31, 1998 and 1997............................... 4
Condensed Consolidated Statements of Cash Flows - three months
ended March 31, 1998 and 1997................................ 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................10
Item 2. Changes in Securities............................................10
Item 3. Defaults Upon Senior Securities..................................10
Item 4. Submission of Matters to a Vote of Security Holders..............10
Item 5. Other Information................................................10
Item 6. Exhibits and Reports on Form 8-K.................................10
Signatures .................................................................11
Page 2 of 13
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1998 1997*
-------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 15,379 $ 8,798
Short-term investments 8,720 16,132
Accounts receivable 350 244
Other current assets 163 199
-------------------------------
Total current assets 24,612 25,373
Property and equipment:
Leasehold improvements 3,803 3,795
Laboratory and other equipment 2,807 3,562
-------------------------------
6,610 7,357
Less accumulated depreciation and amortization (2,709) (3,588)
-------------------------------
Net property and equipment 3,901 3,769
Notes receivable from employees 49 125
Long-term investments 1,747 --
-------------------------------
$ 30,309 $ 29,267
===============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,299 $ 210
Accrued compensation 177 289
Accrued professional fees 151 179
Deferred revenue from related parties 1,604 2,292
Other accrued liabilities 437 528
-------------------------------
Total current liabilities 3,668 3,498
Other noncurrent liabilities 187 179
Stockholders' equity:
Preferred stock -- 27,189
Common stock 74,357 46,640
Notes receivable from stockholders (460) (460)
Deferred compensation (5,064) (5,394)
Accumulated other comprehensive income (loss) (31) (45)
Accumulated deficit (42,348) (42,340)
-------------------------------
Total stockholders' equity 26,454 25,590
===============================
$ 30,309 $ 29,267
===============================
<FN>
* The Balance Sheet amounts at December 31, 1997 have been derived from audited financial statements at that date but do not
include all of the information and footnotes required by generally accepted accounting principles for complete financial
statements.
See accompanying notes.
</FN>
Page 3 of 13
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
--------------------
1998 1997
------- -------
Net revenues:
Revenues from collaborative arrangements with $ 688 $ 1,063
related parties
Other revenues 126 72
--------------------
Total revenues 814 1,135
Operating expenses:
Research and development 3,842 3,075
General and administrative 492 425
--------------------
Total operating expenses 4,334 3,500
--------------------
Loss from operations (3,520) (2,365)
Interest income 336 171
Gain on sale of Antisense Business 3,176 --
--------------------
Net loss $ (8) $(2,194)
====================
Basic and diluted net loss per share $ (0.00) $ (0.80)
====================
Shares used in per share computation 5,729 2,759
====================
See accompanying notes.
Page 4 of 13
Lynx Therapeutics, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
---------------------------
1998 1997
-------- --------
Cash flows from operating activities
Net loss $ (8) $ (2,194)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 355 300
Amortization of deferred compensation 330 180
Non-cash consideration received and costs incurred on the sale of the
Antisense Business, net (417) --
Changes in operating assets and liabilities:
Accounts receivable (106) 46
Other current assets 36 67
Accounts payable 1,089 74
Accrued liabilities (231) (191)
Deferred revenue from related party (688) (1,063)
Other noncurrent liabilities 8 8
---------------------------
Net cash provided by (used in) operating activities 368 (2,773)
Cash flows from investing activities
Purchases of short-term investments (5,667) --
Maturities of short-term investments 13,093 1,975
Purchases of long-term investments (865) --
Purchases of property and equipment (697) (865)
Notes receivable from employees (9) (5)
---------------------------
Net cash provided by investing activities 5,855 1,105
Cash flows from financing activities
Issuance (repurchase) of common stock 358 (32)
---------------------------
Net cash provided by (used in) financing activities 358 (32)
---------------------------
Net increase (decrease) in cash and cash equivalents 6,581 (1,700)
Cash and cash equivalents at beginning of period 8,798 12,109
---------------------------
Cash and cash equivalents at end of period $ 15,379 $ 10,409
===========================
<FN>
See accompanying notes.
</FN>
Page 5 of 13
Lynx Therapeutics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. Ownership and Nature of Business
Lynx Therapeutics, Inc. ("Lynx" or the "Company"), was incorporated in
February 1992 under the laws of the State of Delaware. Lynx has spent the last
several years developing unique, proprietary technologies designed to enable the
simultaneous identification and analysis of all (or nearly all) the DNA
molecules or fragments in a single biological sample. Utilizing its massively
parallel solid phase cloning, massively parallel hybridization arrays, and
massively parallel sequencing technologies, Lynx expects eventually to probe for
genetic and genomic information in a much more efficient manner than current
technologies. The proposed applications of Lynx's massively parallel
technologies include gene discovery, gene expression, high resolution genome
mapping and the identification of genetic variations. Lynx expects its
technologies will be applicable to the genomes of man, pathogenic organisms, and
commercially important plants and animals. Lynx believes that its technologies
will open new avenues to understanding genetics and the relationships between
gene function and the various states from health to disease.
2. Basis of Presentation
The accompanying condensed consolidated financial statements included
herein have been prepared by the Company without audit, pursuant to the rules
and regulations promulgated by the Securities and Exchange Commission (the
"Commission"). Certain prior year amounts have been reclassified to conform with
current year presentation. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to Commission rules and
regulations; nevertheless, the Company believes that the disclosures are
adequate to make the information presented not misleading. In the opinion of
management, the financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows of the Company for the interim
periods presented. The results of operations for the quarter ended March 31,
1998, are not necessarily indicative of the results for the full year.
The unaudited condensed consolidated financial statements include all
accounts of the Company and its wholly owned subsidiary, Lynx GmbH, formed under
the laws of the Federal Republic of Germany. All significant intercompany
balances have been eliminated.
These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the Company's
year ended December 31, 1997, included in its annual report on Form 10-K filed
with the Securities and Exchange Commission.
3. Summary of Significant Accounting Policies
Net Loss Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS" 128), "Earnings Per
Share" ("EPS"), effective for periods ending after December 15, 1997. SFAS 128
requires that companies present two measures of earnings per share, basic and
diluted.
Basic loss per share is calculated by dividing net income or loss
applicable to common shareholders by the weighted average number of common
shares outstanding, net of certain common shares outstanding which are subject
to continued vesting and the Company's right of repurchase, while diluted EPS
reflects the potential dilution of securities that could share in the earnings
of the company, to the extent such securities are dilutive. Basic and diluted
loss per share are equivalent for all periods presented herein due to the
Company's net loss. The Company has adopted SFAS 128 for annual and interim
financial statements issued after December 15, 1997, and has calculated and
restated EPS in accordance with SFAS 128 for each period in which an income
statement is reported. The following have been excluded from the calculation of
loss per share because the effect of inclusion would be antidilutive:
approximately 270,000 common shares which are outstanding but are subject to the
Company's right of repurchase which expires ratably over 5 years, and options to
purchase approximately 1,400,000 shares of common stock at a weighted average
price of $4.67 per share. Additionally, all periods prior to March 31, 1998
Page 6 of 13
exclude approximately 500,000 shares of Series B, C, and D convertible preferred
stock. On March 31, 1998, the preferred stock converted to common stock on a
ten-for-one basis. The converted shares are, and will be, included in the
calculations of basic EPS in all periods including, and subsequent to, March 31,
1998. (See Note 5)
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards, No. 130 ("SFAS 130"), Comprehensive Income. SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of SFAS 130.
During the first quarter of 1998 and 1997, total comprehensive loss
amounted to $39,000 and $2.2 million, respectively.
4. Sale of the Antisense Business
On March 10, 1998, Lynx sold its portfolio of phosphorothioate
antisense patents and licenses, and its therapeutic oligonucleotide
manufacturing facility (collectively, the "Antisense Business"), to Inex
Pharmaceuticals Corporation ("Inex") a Canadian company. As partial
consideration in this transaction, Lynx received $3 million in cash and will
receive 1.2 million shares of Inex common stock, in three equal installments,
with the first 400,000 shares received on the above date, and the second and
third installments of stock to be received no later than two and three years,
respectively, from the closing date of the transaction. The Inex common stock
received by Lynx is subject to certain restrictions on trading for specific
periods of time following receipt by Lynx. Lynx is also entitled to receive
royalties on future sales of phosphorothioate antisense products. In addition,
Lynx has agreed to a royalty-bearing license to Inex for its phosphoroamidate
chemistry for certain therapeutic applications in the fields of cancer and
inflammation that will be defined later.
The gain on the sale of the Antisense Business is based on the cash and
the first installment of the Inex common stock received on the transaction date,
net of the book value of the assets transferred to Inex and certain other costs
associated with the transaction and incurred by Lynx. The Inex common stock is
classified in long term assets.
5. Conversion of Preferred Stock to Common Stock
On March 31, 1998, pursuant to the Amended and Restated Certificate of
Designation dated September 30, 1997, all of the shares of Series B, Series C,
and Series D preferred stock were converted into common stock on a ten-for-one
basis. The inclusion of these shares in both the basic and diluted earnings per
share will have a significant impact on the earnings per share amounts in 1998
and subsequent years. The net loss per share for the quarter ending March 31,
1998, would have been $(0.00) if the Series B, Series C and Series D preferred
stock were converted to common stock on January 1, 1998.
6. New Facility Lease
On February 27, 1998, the Company entered into a noncancelable lease
for additional facilities space. The term of the lease commences on December 15,
1998 and expires on December 14, 2008. Under the terms of the lease, the monthly
rental payments are fixed for the first twenty-four months. Thereafter, the
monthly rental payments increase, and are subject to annual Consumer Price
Index-based adjustments, with minimum and maximum limits. The Company has the
option to extend the lease for an additional five year period, subject to
certain conditions, with payments to be determined at the time of the exercise
of such option. Additionally, the Company has an option (the "Expansion
Option"), exercisable on or prior to January 1, 2000, to lease additional
building space for expansion purposes. In return for the Expansion Option, the
Company may be subject to a nominal carrying cost on the additional space,
depending on the timing of the exercise of such option, if ever.
Page 7 of 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the Company's annual report (Form 10-K) filed with the Securities and Exchange
Commission for the fiscal year ended December 31, 1997.
Overview
Results of Operations
Revenue
Revenue was $0.8 million and $1.1 million for the quarters ended March
31, 1998 and 1997, respectively. Revenues for 1998 included $0.7 million earned
under a collaborative agreement with BASF AG ("BASF"), and approximately $0.1
million in other revenue, primarily compound for use in clinical trials. The
1997 revenues included $0.7 million from BASF and $0.4 million from Hoechst AG
and Hoechst Marion Roussel (collectively, "Hoechst") earned under collaborative
agreements. Revenue will continue to fluctuate based on activity with current
and potential corporate partners and achievement of milestones.
Operating Expenses
Research and development expenses were $3.8 million and $3.1 million in
the quarters ended March 31, 1998 and 1997, respectively. The increase was due
to the building of production capacity for the anticipated commercial
application of the Company's novel, proprietary massively parallel technologies,
and to higher amortization of deferred compensation related to the grant of
stock options, partially offset by reduced funding to various laboratories under
collaborative research agreements. Lynx expects to incur substantial and
increasing research and development expenses due to planned spending for ongoing
technology development and implementation, and new research applications.
General and administrative expenses were $492,000 for the quarter ended
March 31, 1998, compared to $425,000 for the quarter ended March 31, 1997. The
increase was due to higher headcount-related expenses. Lynx expects to continue
to incur substantial administrative expenses in support of its research and
development efforts.
Interest Income
Interest income was $336,000 and $171,000 for the quarters ended March
31, 1998 and 1997 respectively. The increase was due to a higher average cash
balance in the quarter ended March 31, 1998 than in the same quarter in 1997.
Gain on Sale of Antisense Business
Other income of $3.2 million for the quarter ended March 31, 1998 was
comprised of the gain on the sale of Lynx's portfolio of phosphorothioate
antisense patents and licenses, and its therapeutic oligonucleotide
manufacturing facility (collectively, the "Antisense Business") to Inex
Pharmaceuticals Corporation ("Inex"). As partial consideration in this
transaction, Lynx received $3 million in cash and will receive 1.2 million
shares of Inex common stock, in three equal installments, with the first 400,000
shares received on March 10, 1998, and the second and third installments of
stock to be received no later than two and three years, respectively, from the
closing date of the transaction. The Inex common stock received by Lynx is
subject to certain restrictions on trading for specific periods of time
following receipt by Lynx.
The gain on the sale of the Antisense Business reflects on the cash and
the first installment of the Inex common stock received on the transaction date,
net of the book value of the assets transferred to Inex and certain other costs
associated with the transaction and incurred by Lynx.
Page 8 of 13
Liquidity and Capital Resources
Net cash provided by operating activities of $367,000 for the quarter
ended March 31, 1998, differed from the net loss for the same period in 1997,
primarily due to increases in payables, the non-cash consideration received and
costs incurred on the sale of the Antisense Business, current period recognition
of a portion of previously deferred revenue, depreciation and amortization, and
deferred compensation expense. Net cash provided by investing activities related
to maturities of short-term investments partially offset by purchases of capital
equipment. Net cash provided by financing activities related to the exercise of
stock options by employees. Cash and equivalents were $15.4 million at March 31,
1998.
Lynx plans to use available funds for the development and
implementation of its massively parallel technologies and to build capacity for
their early commercial uses. Pending such uses as described above, Lynx intends
to invest its excess cash in short-term, investment grade, interest-bearing
securities or certificates of deposit.
Since commencing operations as an independent company, Lynx has
obtained funding for its operations through sales of preferred and common stock
to venture capital investors, institutional investors, and collaborative
partners; revenue from collaborative research and development arrangements,
interest income, product sales, and government grants. The cost, timing, and
amount of funds required for specific uses by Lynx cannot be precisely
determined at this time and will be based upon Lynx's progress in its research
and development, administrative and legal costs, the establishment of corporate
collaborations and other arrangements, and the availability of alternate methods
of financing.
Lynx expects to incur substantial and increasing research and
development expenses and intends to seek additional financing, as needed,
through contractual arrangements with corporate partners and equity or debt
offerings. There can be no assurance that any additional financing required by
Lynx will be available or, if available, will be on terms favorable to Lynx. The
Company believes that, at current spending levels, its existing capital
resources and interest income thereon will enable it to maintain its current and
planned operations at least through mid-1999.
Impact of Year 2000
The Company has completed an assessment of its computer operating
systems and related software and, with only a few minor exceptions, has found
them to be Year 2000 compliant. The Company's exposure is limited due to the
fact that most of its computers and software were acquired within the past five
years and were Year 2000 compliant at purchase. The Company plans to replace the
operating systems on the few non-compliant computers before 2000 and expects
that the cost will be immaterial. The Company believes that even if such
modifications are not made, there will be no adverse impact on operations.
However, Year 2000 problems may affect the computer systems of the Company's
business partners, vendors, customers, and financial service organizations with
which the Company interacts. The Company is in the process of developing a plan
to determine the impact that third parties which are not Year 2000 compliant may
have on the operations of the Company. There can be no assurance that such plan
will be able to address fully, or at all, the "Year 2000 issue" which could have
a material adverse effect upon the Company's business, financial condition and
results of operations.
Page 9 of 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits - The following documents are filed as
Exhibits to this report:
Exhibit
Number Description
------ -----------
10.35* Lease, dated as of February 27, 1998,
between the Company and SimFirst, L.P.
limited partnership
27.1 Financial Data Schedule
*Portions of this agreement have been deleted pursuant
to our request for confidential treatment.
b) The Company filed a Current Report on Form 8-K on
March 24, 1998, reporting under Item 2 that the
Company had sold its portfolio of phosphorothioate
antisense patents and licenses, and its therapeutic
oligonucleotide manufacturing facility, to Inex
Pharmaceuticals Corporation of Vancouver, Canada.
Page 10 of 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LYNX THERAPEUTICS, INC.
/s/ Sam Eletr
------------------------------------
By: Sam Eletr, Ph.D.
Chief Executive Officer and
Chairman of the Board
Date: May 13, 1998
/s/ Edward C. Albini
------------------------------------
By: Edward C. Albini
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 13, 1998
Page 11 of 13