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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 000-30111
LEXICON GENETICS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0474169
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4000 RESEARCH FOREST DRIVE
THE WOODLANDS, TEXAS 77381
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES AND ZIP CODE)
(281) 364-0100
(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
--- ---
As of August 9, 2001, 51,848,452 shares of the registrant's common stock,
par value $0.001 per share, were outstanding.
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LEXICON GENETICS INCORPORATED
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS................................................................. 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - December 31, 2000 and June 30, 2001 (unaudited).................................... 3
Statements of Operations (unaudited) - Three and Six Months Ended June 30, 2000 and 2001............ 4
Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2000 and 2001...................... 5
Notes to Financial Statements (unaudited)........................................................... 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.......................................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................................................... 16
SIGNATURES .................................................................................................. 17
</Table>
The Lexicon name and logo and OmniBank(R) are registered trademarks and
LexVision(TM), Lexgen.com(TM), Internet Universal(TM) and e-Biology(TM) are
trademarks of Lexicon Genetics Incorporated.
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements.
These statements relate to future events or our future financial performance. We
have attempted to identify forward-looking statements by terminology including
"anticipate," "believe," "can," "continue," "could," "estimate," "expect,"
"intend," "may," "plan," "potential," "predict," "should" or "will" or the
negative of these terms or other comparable terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors," that
may cause our or our industry's actual results, levels of activity, performance
or achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by these
forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We are not under any duty to
update any of the forward-looking statements after the date of this quarterly
report on Form 10-Q to conform these statements to actual results, unless
required by law.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXICON GENETICS INCORPORATED
BALANCE SHEETS
<Table>
<Caption>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------ -----------------
2000 2001
------------------ -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 37,811,039 $ 43,585,316
Marketable securities ........................................... 164,869,291 140,224,465
Accounts receivable, net of allowance for doubtful accounts
of $100,000 .................................................. 2,814,707 16,037,920
Prepaid expenses and other current assets ....................... 536,480 3,669,213
----------------- -----------------
Total current assets ......................................... 206,031,517 203,516,914
Property and equipment, net of accumulated depreciation of
$5,708,366 and $7,567,449, respectively ......................... 14,477,235 16,856,415
Other assets ........................................................ 184,200 1,625,156
----------------- -----------------
Total assets ................................................. $ 220,692,952 $ 221,998,485
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................ $ 2,522,722 $ 6,458,185
Accrued liabilities ............................................. 3,023,725 1,973,811
Current portion of deferred revenue ............................. 4,671,818 12,041,994
Current portion of long-term debt ............................... 1,012,246 974,368
----------------- -----------------
Total current liabilities .................................... 11,230,511 21,448,358
Deferred revenue, net of current portion ............................ -- 5,000,000
Long-term debt, net of current portion .............................. 1,833,982 --
----------------- -----------------
Total liabilities ............................................ 13,064,493 26,448,358
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value; 120,000,000 shares authorized,
48,271,735 and 48,925,613 shares issued and outstanding ...... 48,272 48,926
Additional paid-in capital ...................................... 296,119,625 296,203,689
Deferred stock compensation ..................................... (33,636,725) (27,853,469)
Accumulated deficit ............................................. (54,902,713) (72,849,019)
----------------- -----------------
Total stockholders' equity ................................... 207,628,459 195,550,127
----------------- -----------------
Total liabilities and stockholders' equity ................... $ 220,692,952 $ 221,998,485
================= =================
</Table>
The accompanying notes are an integral part of these financial statements.
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LEXICON GENETICS INCORPORATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ----------------------------------
2000 2001 2000 2001
--------------- ---------------- --------------- ---------------
Revenues:
Subscription and license fees ...................... $ 434,574 $ 1,282,366 $ 2,058,052 $ 3,029,820
Collaborative research ............................. 1,989,299 2,199,742 3,634,057 3,723,326
Other revenue ...................................... 158,747 20,330 229,420 60,249
--------------- --------------- --------------- ---------------
Total revenues ................................... 2,582,620 3,502,438 5,921,529 6,813,395
Operating expenses:
Research and development, including stock-based
compensation of $1,460,499, $1,413,078,
$8,160,891 and $2,809,608, respectively .......... 5,590,315 10,693,165 15,858,643 20,555,507
General and administrative, including stock-based
compensation of $1,773,806, $1,310,599,
$6,981,722 and $2,652,383, respectively .......... 3,302,015 5,045,832 9,808,788 9,316,972
--------------- --------------- --------------- ---------------
Total operating expenses ........................... 8,892,330 15,738,997 25,667,431 29,872,479
--------------- --------------- --------------- ---------------
Loss from operations .................................. (6,309,710) (12,236,599) (19,745,902) (23,059,084)
Interest income ....................................... 2,922,316 2,426,919 3,050,158 5,322,810
Interest expense ...................................... 129,310 129,017 239,060 210,032
--------------- --------------- --------------- ---------------
Net loss .............................................. (3,516,704) (9,938,657) (16,934,804) (17,946,306)
Accretion on redeemable convertible preferred stock ... -- -- (133,854) --
--------------- --------------- --------------- ---------------
Net loss attributable to common stockholders .......... $ (3,516,704) $ (9,938,657) $ (17,068,658) $ (17,946,306)
=============== =============== =============== ===============
Net loss per common share, basic and diluted .......... $ (0.08) $ (0.20) $ (0.48) $ (0.37)
Shares used in computing net loss per common share,
basic and diluted .................................. 45,816,588 48,865,268 35,214,800 48,672,350
</Table>
The accompanying notes are an integral part of these financial statements.
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LEXICON GENETICS INCORPORATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
2000 2001
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................. $ (16,934,804) $ (17,946,306)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation ........................................................... 1,152,361 2,016,148
Amortization of deferred stock compensation ............................ 15,142,613 5,461,991
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable ........................... 1,907,566 (13,223,213)
(Increase) decrease in prepaid expenses and other current assets ..... 39,626 (3,132,733)
(Increase) decrease in other assets .................................. (12,758) (1,440,956)
Increase (decrease) in accounts payable and accrued liabilities ...... 474,552 2,885,549
Increase (decrease) in deferred revenue .............................. (1,223,962) 12,370,176
--------------- ---------------
Net cash provided by (used in) operating activities ................ 545,194 (13,009,344)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ...................................... (1,350,592) (4,395,328)
Purchases of marketable securities ....................................... (214,940,362) (210,244,673)
Maturities of marketable securities ...................................... 61,061,925 234,889,499
--------------- ---------------
Net cash provided by (used in) investing activities ................ (155,229,029) 20,249,498
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations .......................... (111,683) --
Proceeds from issuance of common stock ................................... 203,747,594 405,983
Repayment of debt borrowings ............................................. (1,345,140) (1,871,860)
--------------- ---------------
Net cash provided by (used in) financing activities ................ 202,290,771 (1,465,877)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents ........................ 47,606,936 5,774,277
Cash and cash equivalents at beginning of period ............................ 2,025,585 37,811,039
--------------- ---------------
Cash and cash equivalents at end of period .................................. $ 49,632,521 $ 43,585,316
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................................... $ 239,060 $ 198,271
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Conversion of redeemable convertible preferred stock into common stock ... $ 30,184,090 $ --
Conversion of related party note payable into common stock ............... $ 337,500 $ --
</Table>
The accompanying notes are an integral part of these financial statements.
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LEXICON GENETICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Lexicon Genetics
Incorporated (Lexicon or the Company) have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
2001 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2001.
For further information, refer to the financial statements and
footnotes thereto included in Lexicon's annual report on Form 10-K for the year
ended December 31, 2000, as filed with the SEC.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets". These statements, which Lexicon must
adopt for 2001, generally require that all business combinations initiated after
June 30, 2001, be accounted for using the purchase method. Additionally, any
resulting goodwill will not be amortized, rather it will be subject to at least
an annual impairment test. Acquired intangible assets must be separately
recognized and amortized over their useful lives. Management is currently
assessing the impact of these statements on its future financial position and
results of operations, which will reflect the July 2001 acquisition of
Coelacanth Corporation (see note 7).
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares of common stock outstanding during the applicable period. Shares
associated with stock options and warrants are not included because they are
antidilutive. There are no differences between basic and diluted net loss per
share for all periods presented.
3. DEFERRED STOCK COMPENSATION
Deferred stock compensation represents the difference between the
exercise price of stock options and the fair value of Lexicon's common stock at
the date of grant. Deferred stock compensation is amortized over the vesting
periods of the individual stock options for which it was recorded, generally
four years. For the six months ended June 30, 2000 and 2001, Lexicon amortized
$15.1 million and $5.5 million, respectively, of deferred stock compensation. If
vesting continues in accordance with the outstanding individual stock options,
Lexicon expects to record amortization expense for deferred stock compensation
as follows: $5.4 million during the last six months of 2001, $10.8 million
during 2002, $10.7 million during 2003 and $953,000 during 2004. The amount of
stock based compensation expense to be recorded in future periods may decrease
if unvested options for which deferred stock compensation
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expense has been recorded are subsequently canceled or forfeited or may increase
if additional options are granted to individuals other than employees or
directors.
4. INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK
In April 2000, Lexicon completed an initial public offering of
10,000,000 newly-issued shares of its common stock at a price of $22.00 per
share. Lexicon received $203.2 million in cash, net of underwriting discounts,
commissions and other offering costs.
Simultaneously with the closing of the initial public offering, the
4,244,664 shares of Redeemable Convertible Series A Preferred Stock then
outstanding were automatically converted into 12,733,992 shares of common stock.
5. RESTRICTED CASH
The Company is required to maintain restricted cash or investments to
the extent of borrowings made under the synthetic lease agreement. As of June
30, 2001, borrowings were $19.9 million as compared to $13.4 million as of
December 31, 2000.
6. FINANCING AND DEBT OBLIGATIONS
In June 1999, the Company entered into a $5.0 million financing
agreement for the purchase of property and equipment. As of June 30, 2001, the
Company had drawn down a total of approximately $4.2 million under this
arrangement. As of June 30, 2001, $974,000 was outstanding under this
arrangement. This facility accrues interest at a weighted-average rate of
approximately 11.7% and principal and interest is due in monthly installments
through 2003. The Company intends to retire this debt obligation by December 31,
2001, therefore the total obligation has been classified as current debt. A 3%
prepayment premium is required upon early extinguishment of the debt and is
being accrued as interest expense using the effective interest rate method until
the debt is retired.
7. SUBSEQUENT EVENT
On July 12, 2001, the Company completed the acquisition of Coelacanth
Corporation (Coelacanth) in a merger, under an Agreement and Plan of Merger
entered into on June 13, 2001. Under the terms of the merger agreement, the
Company issued an aggregate of 2,918,991 shares of common stock in exchange for
all of Coelacanth's outstanding capital stock. An aggregate of 10% of the shares
of common stock issued in the merger have been placed in escrow for one year to
satisfy claims, if any, that the Company may have for breaches of Coelacanth's
representations, warranties and covenants in the merger agreement. The Company
assumed Coelacanth's outstanding options and warrants in the merger. The Company
expects to record intangible assets and expense for in-process research and
development in the third quarter of 2001 in connection with the acquisition of
Coelacanth.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are defining the functions of genes for drug discovery using mice
whose DNA has been altered to disrupt, or "knock out," the function of the
altered gene. Our proprietary gene trapping and gene targeting technologies
enable us to rapidly generate these knockout mice by altering the DNA of genes
in a special variety of mouse cells, called embryonic stem (ES) cells, which can
be cloned and used to generate mice with the altered gene. We employ an
integrated platform of advanced medical technologies to systematically analyze
the functions and pharmaceutical relevance of the genes we have knocked out. Our
LexVision program captures the information resulting from this analysis for our
use, and use by our collaborators, to discover pharmaceutical products based on
genomics - the study of genes and their function.
We derive substantially all of our revenues from subscriptions to our
databases, functional genomics collaborations for the development and, in some
cases, analysis of the physiological effects of genes altered in knockout mice,
and technology licenses. To date, we have generated a substantial portion of our
revenues from a limited number of sources.
Since our inception, we have incurred significant losses and, as of
June 30, 2001, we had an accumulated deficit of $72.8 million. Our losses have
resulted principally from costs incurred in research and development, general
and administrative costs associated with our operations, and non-cash
stock-based compensation expense associated with stock options granted to
employees and consultants prior to our April 2000 initial public offering.
Research and development expenses consist primarily of salaries and related
personnel costs, material costs, legal expenses resulting from intellectual
property prosecution and other expenses related to our drug discovery and
LexVision programs, the expansion of our OmniBank library, the development and
analysis of knockout mice and our other functional genomics research efforts. We
expense our research and development costs as they are incurred. General and
administrative expenses consist primarily of salaries and related expenses for
executive, finance and other administrative personnel, professional fees and
other corporate expenses including business development and general legal
activities, as well as expenses related to our patent infringement litigation
against Deltagen, Inc. In connection with the expansion of our drug discovery
and LexVision programs, our OmniBank database and library and our functional
genomics research efforts, we expect to incur increasing research and
development and general and administrative costs. As a result, we will need to
generate significantly higher revenues to achieve profitability.
Deferred stock-based compensation represents the difference between the
exercise price of stock options granted and the fair value of our common stock
at the applicable date of grant. Stock-based compensation is amortized over the
vesting period of the individual stock options for which it was recorded,
generally four years. Assuming continued vesting of all outstanding stock
options in accordance with their terms, we expect to record amortization expense
for deferred stock-based compensation as follows: $5.4 million during the last
six months of 2001, $10.8 million during 2002, $10.7 million during 2003 and
$953,000 during 2004. The amount of stock-based compensation expense to be
recorded in future periods may decrease if unvested options for which deferred
stock compensation expense has been recorded are subsequently canceled or
forfeited or may increase if additional options are granted to non-employee
consultants or advisors.
Our quarterly operating results will depend upon many factors,
including our success in establishing new database subscription and research
contracts with collaborators, expirations of such
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contracts, the success rate of our discovery efforts leading to milestones and
royalties, the timing and willingness of collaborators to commercialize products
which may result in royalties, and general and industry-specific economic
conditions which may affect research and development expenditures. As a
consequence, our quarterly operating results have fluctuated in the past and are
likely to do so in the future.
RECENT DEVELOPMENTS
On July 12, 2001, we completed the acquisition of Coelacanth
Corporation in a merger, under an Agreement and Plan of Merger entered into on
June 13, 2001. Coelacanth, which uses proprietary chemistry technologies to
rapidly discover new chemical entities for drug development, forms the core for
our new Lexicon Pharmaceuticals division, based in Princeton, New Jersey. In
Lexicon Pharmaceuticals, we are combining our drug target discoveries with
Coelacanth's high performance chemistry technologies to discover potential new
drugs.
Under the terms of the merger agreement, the Company issued an
aggregate of 2,918,991 shares of common stock in exchange for all of
Coelacanth's outstanding capital stock. An aggregate of 10% of the shares of
common stock issued in the merger have been placed in escrow for one year to
satisfy claims, if any, that the Company may have for breaches of Coelacanth's
representations, warranties and covenants in the merger agreement. The Company
assumed Coelacanth's outstanding options and warrants in the merger.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 2001
Revenues. Total revenues increased 36% to $3.5 million in the three
months ended June 30, 2001 from $2.6 million in the corresponding period in
2000. Of the $920,000 increase, $848,000 was derived from increased database
subscription and technology license fees and $210,000 was derived from increased
revenues from collaborative research. This was offset by a $138,000 decrease in
other revenue.
In June 2001, we entered into a series of agreements with Incyte
Genomics, Inc. (Incyte), including a drug discovery alliance under which we and
Incyte will collaborate in the discovery and development of therapeutic proteins
and a separate agreement under which Incyte will have access to our LexVision
database and OmniBank database and library. In addition, as a result of our
acquisition of Coelacanth in July 2001, we obtained or have subsequently entered
agreements with pharmaceutical and biotechnology companies for access to
chemical libraries and optimization services. We have not yet recognized any
revenues under any of these agreements.
Research and Development Expenses. Research and development expenses,
including stock-based compensation expense, increased 91% to $10.7 million in
the three months ended June 30, 2001 from $5.6 million in the corresponding
period in 2000. Research and development expenses for the three months ended
June 30, 2001 and 2000 included $1.4 million and $1.5 million, respectively, of
stock-based compensation primarily relating to option grants made prior to our
April 2000 initial public offering. The increase of $5.2 million in research and
development expenses exclusive of stock-based compensation was primarily
attributable to increased personnel costs to support the expansion of our drug
discovery and LexVision programs, our OmniBank database and library, the
development and analysis of knockout mice and our other functional genomics
research efforts.
We expect to record expense for in-process research and development in
the third quarter of 2001 in connection with our acquisition of Coelacanth. In
addition, we expect to incur increased research and
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development expenses in the third quarter and subsequent periods as a result of
our acquisition of Coelacanth and agreements entered in June 2001 with Incyte
for access and license rights to Incyte's LifeSeq(R) Gold database
General and Administrative Expenses. General and administrative
expenses, including stock-based compensation expense, increased 53% to $5.0
million in the three months ended June 30, 2001 from $3.3 million in the
corresponding period in 2000. General and administrative expenses for the three
months ended June 30, 2001 and 2000 included $1.3 million and $1.8 million,
respectively, of stock-based compensation primarily relating to option grants
made prior to our April 2000 initial public offering. The increase of $2.2
million in general and administrative expenses exclusive of stock-based
compensation was due primarily to additional personnel costs for business
development and finance and administration, as well as expenses associated with
our patent infringement litigation against Deltagen, Inc. We expect to incur
increased general and administrative expenses in future periods as a result of
our acquisition of Coelacanth.
Interest Income and Interest Expense. Interest income decreased to $2.4
million in the three months ended June 30, 2001 from $2.9 million in the
corresponding period in 2000. This decrease resulted from lower interest rates
and decreased average cash and investment balances during the 2001 period.
Interest expense was $129,000 in each of the three-month periods ended June 30,
2001 and 2000, respectively.
Net Loss and Net Loss Per Common Share. Net loss attributable to common
stockholders increased to $9.9 million in the three months ended June 30, 2001
from $3.5 million in the corresponding period in 2000. Net loss per common share
increased to $0.20 in the three months ended June 30, 2001 from $0.08 in the
corresponding period of 2000. A portion of the net loss for the three months
ended June 30, 2001 and most of the net loss for the corresponding period in
2000 were attributable to stock-based compensation expense. Excluding
stock-based compensation expense, and assuming the conversion of the redeemable
convertible preferred stock into common stock occurred on the date of original
issuance (May 1998), we would have had a net loss of $7.2 million and $282,000
in the three months ended June 30, 2001 and 2000, respectively, and net loss per
common share of $0.15 and $0.01 in the three months ended June 30, 2001 and
2000, respectively.
Six Months Ended June 30, 2000 and 2001
Revenues. Total revenues increased 15% to $6.8 million in the six
months ended June 30, 2001 from $5.9 million in the corresponding period in
2000. Of the $892,000 increase, $972,000 was derived from increased database
subscription and technology license fees and $89,000 was derived from increased
revenues from collaborative research. This was offset by a $169,000 decrease in
other revenue.
Research and Development Expenses. Research and development expenses,
including stock-based compensation expense, increased 30% to $20.6 million in
the six months ended June 30, 2001 from $15.9 million in the corresponding
period in 2000. Research and development expenses for the six months ended June
30, 2001 and 2000 included $2.8 million and $8.2 million, respectively, of
stock-based compensation primarily relating to option grants made prior to our
April 2000 initial public offering. The increase of $10.0 million in research
and development expenses exclusive of stock-based compensation was primarily
attributable to increased personnel costs to support the expansion of our drug
discovery and LexVision programs, our OmniBank database and library, the
development and analysis of knockout mice and our other functional genomics
research efforts.
General and Administrative Expenses. General and administrative
expenses, including stock-based compensation expense, decreased 5% to $9.3
million in the six months ended June 30, 2001 from
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$9.8 million in the corresponding period in 2000. General and administrative
expenses for the six months ended June 30, 2001 and 2000 included $2.7 million
and $7.0 million, respectively, of stock-based compensation primarily relating
to option grants made prior to our April 2000 initial public offering. The
increase of $3.8 million in general and administrative expenses exclusive of
stock-based compensation was due primarily to additional personnel costs for
business development and finance and administration, as well as expenses
associated with our patent infringement litigation against Deltagen, Inc.
Interest Income and Interest Expense. Interest income increased to $5.3
million in the six months ended June 30, 2001 from $3.1 million in the
corresponding period in 2000. This increase resulted from increased average cash
and investment balances during the 2001 period as a result of our initial public
offering in April 2000. Interest expense decreased to $210,000 in the six months
ended June 30, 2001 from $239,000 in the corresponding period in 2000.
Net Loss and Net Loss Per Common Share. Net loss attributable to common
stockholders increased to $17.9 million in the six months ended June 30, 2001
from $17.1 million in the corresponding period in 2000. Net loss per common
share decreased to $0.37 in the six months ended June 30, 2001 from $0.48 in the
corresponding period of 2000. A portion of the net loss for the six months ended
June 30, 2001 and most of the net loss for the corresponding period in 2000 were
attributable to stock-based compensation expense. Excluding stock-based
compensation expense, and assuming the conversion of the redeemable convertible
preferred stock into common stock occurred on the date of original issuance (May
1998), we would have had a net loss of $12.5 million and $1.8 million in the six
months ended June 30, 2001 and 2000, respectively, and net loss per common share
of $0.26 and $0.04 in the six months ended June 30, 2001 and 2000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets". These statements, which Lexicon must
adopt for 2001, generally require that all business combinations initiated after
June 30, 2001, be accounted for using the purchase method. Additionally, any
resulting goodwill will not be amortized, but rather will be subject to at least
an annual impairment test. Acquired intangible assets will be separately
recognized and amortized over their useful lives. Management is currently
assessing the impact of these statements on its future financial position and
results of operations, which will reflect the July 2001 acquisition of
Coelacanth Corporation.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations from inception primarily through sales
of common and preferred stock, contract and milestone payments to us under our
database subscription and collaboration agreements and equipment financing
arrangements. From our inception through June 30, 2001, we had received net
proceeds of $241.8 million from issuances of common and preferred stock,
including $203.2 million of net proceeds from the initial public offering of our
common stock in April 2000. In addition, from our inception through June 30,
2001, we received $30.4 million in cash payments from database subscription and
technology license fees, functional genomics collaborations for the development
and analysis of knockout mice, sales of reagents and government grants, and have
recognized revenues of $29.5 million through June 30, 2001.
As of June 30, 2001, we had $183.8 million in cash, cash equivalents
and marketable securities, as compared to $202.7 million as of December 31,
2000. We used $13.0 million in operations in the six months ended June 30, 2001.
This consisted of the net loss for the six months ended June 30, 2001 of $17.9
million offset by non-cash charges of $5.4 million related to stock-based
compensation expense and
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$2.0 million related to depreciation expense, which in turn was offset by a $2.5
million net increase in other working capital accounts and long-term deferred
revenue. Investing activities provided $20.2 million in the six months ended
June 30, 2001, principally as a result of maturities of marketable securities.
In June 1999, we entered into a $5.0 million financing arrangement for
the purchase of property and equipment which is secured by the equipment
financed. We borrowed a total of approximately $4.2 million under this
arrangement, of which $974,000 remained outstanding at June 30, 2001. This
facility accrues interest at a weighted-average rate of approximately 11.7%, and
principal and interest is due in monthly installments through 2003. The debt is
being retired through prepayment beginning in the second quarter of 2001.
In October 2000, we entered into a synthetic lease agreement under
which the lessor purchased our current laboratory and office space and animal
facility and agreed to fund the construction of additional laboratory and office
space and a second animal facility. Including the purchase price for our
existing facilities, the synthetic lease provides for funding of up to $45.0
million in property and improvements. The term of the agreement is six years,
which includes the construction period and a lease period. Lease payments for
the new facilities will begin upon completion of construction, which is expected
in the fourth quarter of 2001. Lease payments are subject to fluctuation based
on LIBOR rates. At the end of the lease term, the lease may be extended for
one-year terms, up to seven additional terms, or we may purchase the properties
for a price including the outstanding lease balance. If we elect not to renew
the lease or purchase the properties, we must arrange for the sale of the
properties to a third party. Under the sale option, we have guaranteed a
percentage of the total original cost as the residual fair value of the
properties. The Company is required to maintain restricted cash or investments
to the extent of borrowings made under the synthetic lease agreement. As of June
30, 2001, borrowings were $19.9 million as compared to $13.4 million as of
December 31, 2000.
Our capital requirements depend on numerous factors, including our
ability to obtain database subscription and collaboration agreements, the amount
and timing of payments under such agreements, the level and timing of our
research and development expenditures, market acceptance of our products, the
resources we devote to developing and supporting our products and other factors.
We expect to devote substantial capital resources to continue our research and
development efforts, to expand our support and product development activities,
and for other general corporate activities. We believe that our current cash
balances, together with revenues to be derived from subscriptions to our
databases, functional genomics collaborations for the research, development and
analysis of the physiological effects of genes altered in knockout mice, will be
sufficient to fund our operations for at least the next several years. During or
after this period, if cash generated by operations is insufficient to satisfy
our liquidity requirements, we may need to sell additional equity or debt
securities or obtain additional credit arrangements. Additional financing may
not be available on terms acceptable to us or at all. The sale of additional
equity or convertible debt securities may result in additional dilution to our
stockholders.
IMPACT OF INFLATION
The effect of inflation and changing prices on our operations was not
significant during the periods presented.
DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk is confined to our cash and cash
equivalents which have maturities of less than three months. We maintain an
investment portfolio which consists of U.S. government debt obligations and
investment grade commercial paper that mature one to twelve months after June
30, 2001,
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which we believe are subject to limited credit risk. We currently do not hedge
interest rate exposure. Because of the short-term maturities of our investments,
we believe that changes in market rates would not have any negative impact on
the realized value of our investment portfolio.
We have operated primarily in the United States and substantially all
sales to date have been made in U.S. dollars. Accordingly, we have not had any
material exposure to foreign currency rate fluctuations.
RISK FACTORS
Our business is subject to certain risks and uncertainties, including
those referenced below:
Risks Related to Our Business
o we have a history of net losses, and we expect to continue to incur
net losses and may not achieve or maintain profitability
o our quarterly operating results have been and likely will continue to
fluctuate, and we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance
o we are an early-stage company with an unproven business strategy
o we face substantial competition in the discovery of the DNA sequences
of genes and their functions and in our drug discovery and product
development efforts
o we rely heavily on collaborators to develop and commercialize
pharmaceutical products based on genes that we identify as promising
candidates for development as drug targets
o any cancellation by or conflicts with our collaborators could harm our
business
o we have no experience in developing and commercializing pharmaceutical
products on our own
o we may engage in future acquisitions, which may be expensive and time
consuming and from which we may not realize anticipated benefits
o if we lose our key personnel or are unable to attract and retain
additional personnel, we may be unable to pursue collaborations or
develop our own products
o we may encounter difficulties in managing our growth, which could
increase our losses
o because our entire OmniBank mouse clone library is located at a single
facility, the occurrence of a disaster could significantly disrupt our
business
o we can provide no assurance that we will prevail in our claims against
Deltagen, Inc. or that, if we prevail, any damages or equitable
remedies awarded will be commercially valuable
o we may need additional capital in the future and, if it is not
available, we may have to curtail or cease operations
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Risks Related to Our Industry
o our ability to patent our discoveries is uncertain because patent laws
and their interpretation are highly uncertain and subject to change
o our patent applications may not result in enforceable patent rights
o if other companies and institutions obtain patents claiming the
functional uses of genes and gene products based upon gene sequence
information and predictions of gene function, we may be unable to
obtain patents for our discoveries of biological function in knockout
mice
o we are presently involved in patent litigation and may be involved in
future patent litigation and other disputes regarding intellectual
property rights, and can give no assurance that we will prevail in any
such litigation or other dispute
o issued patents may not fully protect our discoveries, and our
competitors may be able to commercialize products similar to those
covered by our issued patents
o our rights to the use of technologies licensed by third parties are
not within our control
o we may be unable to protect our trade secrets
o we may become subject to regulation under the Animal Welfare Act,
which could subject us to additional costs and permit requirements
o we and our collaborators are subject to extensive and uncertain
government regulatory requirements, which could increase our operating
costs or adversely affect our ability to obtain government approval of
products based on genes that we identify in a timely manner or at all
o security risks in electronic commerce or unfavorable internet
regulation may deter future use of our products and services
o we use hazardous chemicals and radioactive and biological materials in
our business; any disputes relating to improper handling, storage or
disposal of these materials could be time consuming and costly
o we may be sued for product liability
o public perception of ethical and social issues may limit or discourage
the use of our technologies, which could reduce our revenues
For additional discussion of the risks and uncertainties that affect
our business, see "Item 1. Business - Risk Factors" included in our annual
report on Form 10-K for the year ended December 31, 2000, as filed with the
Securities and Exchange Commission.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Disclosure about Market Risk" under "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations for
quantitative and qualitative disclosures about market risk.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 24, 2000, we filed a complaint against Deltagen, Inc. in U.S.
District Court for the District of Delaware alleging that Deltagen is willfully
infringing the claims of United States Patent No. 5,789,215, under which we hold
an exclusive license from GenPharm International, Inc. This patent covers
methods of engineering the animal genome, including methods for the production
of knockout mice by homologous recombination, using isogenic DNA technology. In
the complaint, we are seeking unspecified damages from Deltagen, as well as
injunctive relief. Deltagen has counterclaimed for a declaratory judgment that
the patent is invalid and unenforceable and is not infringed by Deltagen. On
November 14, 2000, Deltagen filed an amended counterclaim alleging antitrust
claims against us and GenPharm, for which Deltagen is seeking unspecified
damages. The Markman hearing with respect to the claims of the isogenic DNA
patent is currently scheduled for October 4, 2001.
On October 13, 2000, we filed a second complaint against Deltagen, Inc.
in U.S. District Court for the Northern District of California alleging that
Deltagen is willfully infringing the claims of United States Patents Nos.
5,464,764, 5,487,992, 5,627,059, and 5,631,153, under which also we hold
exclusive licenses from GenPharm International. These patents cover methods and
vectors for using positive-negative selection for producing gene targeted, or
"knockout," cells and animals, including the production of knockout mice by
homologous recombination. In the complaint, we are seeking unspecified damages
from Deltagen, as well as injunctive relief. Deltagen has counterclaimed for a
declaratory judgment that the patents are invalid and unenforceable and are not
infringed by Deltagen.
While we believe that our complaints against Deltagen are meritorious
and that Deltagen's counterclaims against us are without merit, we can provide
no assurance that we will prevail in our litigation against Deltagen or that, if
we prevail, any damages or equitable remedies awarded will be commercially
valuable. If Deltagen prevails in declaring our patents invalid or on its
antitrust claim against us, our business and financial position could be
adversely affected. Furthermore, we are likely to incur substantial costs and
expend substantial personnel time in pursuing our litigation against Deltagen.
We are not a party to any material legal proceedings other than the
Deltagen litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held on April 18, 2001 to
consider and vote upon the following proposals:
(1) The following individual was nominated and elected as a Class I
director, with the following numbers of shares voted for and
withheld for such director:
<Table>
<Caption>
NAME OF DIRECTOR FOR WITHHELD
---------------- --- --------
Robert J. Lefkowitz, M.D. 39,235,702 19,279
</Table>
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(2) The following additional matter was considered and approved,
with the following numbers of shares voted for, voted against
and abstaining with respect to such matter:
<Table>
<Caption>
MATTER FOR AGAINST ABSTAIN
------ --- ------- -------
Appointment of Arthur Andersen
LLP as our independent public
accountants for the fiscal year
ending December 31, 2001 39,208,234 39,821 6,926
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
10.1 -- Agreement and Plan of Merger, dated June 13, 2001, among
Lexicon Genetics Incorporated, Angler Acquisition Corp. and
Coelacanth Corporation (filed as Exhibit 10.1 to the company's
Current Report on Form 8-K dated June 13, 2001 and
incorporated by reference herein).
+10.2 -- LexVision Database and Collaboration Agreement, dated June 27,
2001, between Lexicon Genetics Incorporated and Incyte
Genomics, Inc.
+10.3 -- Therapeutic Protein Alliance Agreement, dated June 27, 2001,
between Lexicon Genetics Incorporated and Incyte Genomics,
Inc.
- ------------------------
+ Confidential treatment has been requested for a portion of this exhibit. The
confidential portions of this exhibit have been omitted and filed separately
with the Securities and Exchange Commission.
(b) Reports on Form 8-K:
On June 18, 2001, we filed a Current Report on Form 8-K dated June 13,
2001 relating to our execution of an Agreement and Plan of Merger providing for
our acquisition of Coelacanth Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEXICON GENETICS INCORPORATED
Date: August 14, 2001 By: /s/ ARTHUR T. SANDS
---------------------------------
Arthur T. Sands, M.D., Ph.D.
President and Chief
Executive Officer
Date: August 14, 2001 By: /s/ JULIA P. GREGORY
---------------------------------
Julia P. Gregory
Executive Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 -- Agreement and Plan of Merger, dated June 13, 2001, among
Lexicon Genetics Incorporated, Angler Acquisition Corp. and
Coelacanth Corporation (filed as Exhibit 10.1 to the company's
Current Report on Form 8-K dated June 13, 2001 and
incorporated by reference herein).
+10.2 -- LexVision Database and Collaboration Agreement, dated June 27,
2001, between Lexicon Genetics Incorporated and Incyte
Genomics, Inc.
+10.3 -- Therapeutic Protein Alliance Agreement, dated June 27, 2001,
between Lexicon Genetics Incorporated and Incyte Genomics,
Inc.
- ------------------------
+ Confidential treatment has been requested for a portion of this exhibit. The
confidential portions of this exhibit have been omitted and filed separately
with the Securities and Exchange Commission.
</Table>