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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 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
___________________.
COMMISSION FILE NUMBER 0-22570
LYNX THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3161073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25861 INDUSTRIAL BLVD.
HAYWARD, CA 94545
(Address of principal
executive offices)
(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 August 6, 2001 was
13,446,554.
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LYNX THERAPEUTICS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
PAGE
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets --- June 30, 2001
and December 31, 2000................................................... 3
Condensed Consolidated Statements of Operations - three and six months
ended June 30, 2001 and 2000............................................ 4
Condensed Consolidated Statements of Cash Flows - six months
ended June 30, 2001 and 2000............................................ 5
Notes to Condensed Consolidated Financial Statements.................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......................... 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ............. 17
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................... 18
ITEM 2. Changes in Securities and Use of Proceeds............................... 18
ITEM 3. Defaults Upon Senior Securities......................................... 18
ITEM 4. Submission of Matters to a Vote of Security Holders..................... 18
ITEM 5. Other Information....................................................... 18
ITEM 6. Exhibits and Reports on Form 8-K........................................ 18
SIGNATURES ........................................................................ 19
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2001 2000*
--------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 9,285 $ 7,875
Short-term investments 6,466 10,923
Accounts receivable 1,033 1,539
Other current assets 3,185 2,270
-------- --------
Total current assets 19,969 22,607
Property and equipment:
Leasehold improvements 12,069 11,718
Laboratory and other equipment 17,382 13,364
-------- --------
29,451 25,082
Less accumulated depreciation and amortization (11,784) (9,263)
-------- --------
Net property and equipment 17,667 15,819
Other non-current assets 811 789
-------- --------
$ 38,447 $ 39,215
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,004 $ 1,640
Accrued compensation 1,148 614
Deferred revenues -- current portion 5,479 7,219
Notes payable -- current portion 1,390 1,319
Other accrued liabilities 563 928
-------- --------
Total current liabilities 9,584 11,720
Deferred revenues 15,879 17,467
Notes payable 2,400 3,077
Other non-current liabilities 803 729
Stockholders' equity:
Common stock 86,959 75,851
Notes receivable from stockholders (250) (263)
Deferred compensation (1,054) (1,557)
Accumulated other comprehensive income (loss) 1,052 (1,157)
Accumulated deficit (76,926) (66,652)
-------- --------
Total stockholders' equity 9,781 6,222
-------- --------
$ 38,447 $ 39,215
======== ========
* The Balance Sheet amounts at December 31, 2000 have been derived from audited
financial statements at that date but do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
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LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Technology access and service fees
and other $ 4,357 $ 2,834 $ 7,752 $ 5,850
Operating costs and expenses:
Cost of service fees revenues and
other 1,117 953 1,773 1,398
Research and development 5,866 3,762 11,822 8,766
General and administrative 2,008 1,540 4,009 3,025
------- ------- -------- -------
Total operating costs and expenses 8,991 6,255 17,604 13,189
------- ------- -------- -------
Loss from operations (4,634) (3,421) (9,852) (7,339)
Interest income, net 10 281 16 595
Other income (loss), net 48 33 (438) 3,216
------- ------- -------- -------
Loss before provision for income taxes (4,576) (3,107) (10,274) (3,528)
Provision for income taxes -- 60 -- 119
------- ------- -------- -------
Net loss $(4,576) $(3,167) $(10,274) $(3,647)
======= ======== ======== =======
Basic and diluted net loss per share $ (0.37) $ (0.28) $ (0.86) $ (0.32)
======= ======= ======== =======
Shares used in per share computation 12,403 11,338 11,937 11,273
======= ======= ======== =======
See accompanying notes.
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LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,274) $(3,647)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,564 1,526
Amortization of deferred compensation 503 468
Gain on sale of antisense program (1,060) (3,119)
Loss on writedown of equity investment 1,605 --
Changes in operating assets and liabilities:
Accounts receivable 506 (127)
Other current assets (915) (1,659)
Accounts payable (636) 2,575
Accrued liabilities 169 134
Deferred revenues (3,328) (1,850)
Other non-current liabilities 74 249
-------- -------
Net cash used in operating activities (10,792) (5,450)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (2,807) (7,800)
Maturities of short-term investments 8,928 11,544
Leasehold improvements and equipment purchases, net of (4,412) (4,037)
retirements
Notes receivable from officers and employees (9) 10
-------- -------
Net cash provided by (used in) investing activities 1,700 (283)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of equipment loan (606) (487)
Issuance of common stock 11,108 952
-------- -------
Net cash provided by financing activities 10,502 465
-------- -------
Net increase (decrease) in cash and cash equivalents 1,410 (5,268)
Cash and cash equivalents at beginning of period 7,875 18,050
-------- -------
Cash and cash equivalents at end of period $ 9,285 $12,782
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
INCOME TAXES PAID $ -- $ 137
======== =======
INTEREST PAID $ 232 $ 212
======== =======
See accompanying notes.
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LYNX THERAPEUTICS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
1. NATURE OF BUSINESS
We believe that Lynx Therapeutics, Inc. ("Lynx" or the "Company") is a
leader in the development and application of novel technologies for the
discovery of gene expression patterns and genomic variations important to the
pharmaceutical, biotechnology and agricultural industries. Gene expression
patterns refer to the number of genes and the extent those genes are expressed
in a cell or tissue, and they represent a way to move beyond DNA sequence data
to understand the function of genes, the proteins that they encode and the role
they play in health and disease. Genomic variations refer to the differences in
the genetic sequences in the genomes of different organisms. Lynx's technologies
are based on Megaclone(TM), Lynx's unique and proprietary cloning procedure,
which transforms a sample containing millions of DNA molecules into one made up
of millions of micro-beads, which are microscopic beads of latex, each of which
carries approximately 100,000 copies of one of the DNA molecules in the sample.
Megaclone(TM) technology is the foundation of Lynx's analytical applications,
including: Massively Parallel Signature Sequencing, or MPSS(TM), technology,
which provides gene sequence information and high-resolution gene expression
data; Megasort(TM) technology, which provides differentially expressed gene
sets; and Megatype(TM) technology, which is expected to provide single
nucleotide polymorphism, or SNP, disease- or trait-association information. Lynx
is also developing a proteomics technology, Protein ProFiler(TM), which aims to
provide high-resolution analysis of complex mixtures of proteins from cells or
tissues.
Currently, Lynx's commercial collaborators and customers are BASF AG,
E.I. DuPont de Nemours and Company, Aventis CropScience GmbH, Oxagen Limited,
Hybrigenics S.A., Genomics Collaborative Inc., Molecular Engines Laboratories
S.A., the Institute of Molecular and Cell Biology, Phytera, Inc., Celera
Genomics, AstraZeneca, UroGene S.A., GenoMar ASA and AniGenics, Inc.
Additionally, Lynx has provided a license for the use of certain of its
technologies to Takara Shuzo Co. Ltd. and BASF-LYNX Bioscience AG.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements included
herein have been prepared by the Company without audit, pursuant to the rules
and regulations promulgated by the Securities and Exchange Commission (the
"SEC"). Certain prior year amounts have been reclassified to conform to current
year presentation. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to SEC rules and regulations;
nevertheless, the Company believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of management, the
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows of the Company for the interim periods
presented. The results of operations for the three and six months ended June 30,
2001, are not necessarily indicative of the results for the full year.
The unaudited condensed consolidated financial statements include all
accounts of the Company and its wholly-owned subsidiary, Lynx Therapeutics GmbH,
formed under the laws of the Federal Republic of Germany. All significant
intercompany balances and transactions have been eliminated.
These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the Company's
year ended December 31, 2000, included in its annual report on Form 10-K filed
with the SEC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues from technology access fees have generally resulted from
upfront payments from collaborators and customers who are provided access to
Lynx's technologies for specified periods. The Company receives service fees
from collaborators and customers for genomics discovery services performed by
Lynx on the biological samples they send to Lynx. Milestone payments are
recognized pursuant to collaborative agreements upon the achievement of
specified technology developments, representing the culmination of the earnings
process, for financial accounting purposes. Other revenues include product sales
and non-contract related revenues.
Technology access fees are deferred and recognized as revenues on a
straight-line basis over the noncancelable term of the agreement to which they
relate. Payments for services and/or materials provided by Lynx are recognized
as revenues when earned over the period in which the services are performed
and/or materials are delivered, provided no other obligations, refunds or
credits to be applied to future work exist. Revenues from the sales of products
are recognized upon shipment to the customer.
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NET LOSS PER SHARE
Basic Earnings Per Share ("EPS") is computed by dividing income or loss
applicable to common stockholders by the weighted-average number of common
shares outstanding for the period, net of certain common shares outstanding that
are subject to continued vesting and the Company's right of repurchase. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of the Company, to the extent such securities are dilutive. Basic and
diluted net loss per share are equivalent for all periods presented herein due
to the Company's net loss in all periods. At June 30, 2001, options to purchase
approximately 2,646,000 shares of common stock at a weighted-average price of
$13.31 per share and warrants to purchase 436,808 shares of common stock at an
exercise price of $9.2011 per share have been excluded from the calculation of
diluted loss per share for 2001 because the effect of inclusion would be
antidilutive. The options will be included in the calculation at such time as
the effect is no longer antidilutive, as calculated using the treasury stock
method. At June 30, 2001, approximately 8,000 common shares, which are
outstanding but are subject to the Company's right of repurchase which expires
ratably over five years, have been excluded from the calculation of basic loss
per share. The repurchasable shares will be included in the calculation of
diluted EPS at such time as the Company's right of repurchase lapses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is effective for the
year ending December 31, 2001. SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. Lynx believes the
adoption of SFAS 133 on January 1, 2001 had no material effect on the financial
statements, since the Company currently does not invest in derivative
instruments and engage in hedging activities.
In July 2001, the FASB issued Statement of Accounting Standard No. 141,
"Business Combinations" ("SFAS 141"). SFAS 141 establishes new standards for
accounting and reporting for business combinations initiated after June 30,
2001. Use of the pooling-of-interests method will be prohibited. We expect to
adopt this statement during the first quarter of fiscal 2002 and do not believe
that SFAS 141 will have a material effect on our operating results or financial
position.
In July 2001, the FASB issued Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
supercedes APB Opinion No. 17, "Intangible Assets". SFAS 142 establishes new
standards for goodwill, including the elimination of goodwill amortization to be
replaced with methods of periodically evaluating goodwill for impairment. We
expect to adopt this statement during the first quarter of fiscal 2002 and do
not believe that SFAS 142 will have a material effect on our operating results
or financial position.
COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss): (in thousands)
Three Months Ended June 30,
---------------------------
2001 2000
------- -------
Net income (loss) $(4,576) $(3,167)
Net unrealized gain (loss) on available-for-sale
securities 1,065 366
------- -------
Comprehensive income (loss) $(3,511) $(2,801)
======= =======
Six Months Ended June 30,
-------------------------
2001 2000
-------- -------
Net income (loss) $(10,274) $(3,647)
Net unrealized gain (loss) on available-for-sale
securities 1,043 (1,347)
-------- -------
Comprehensive income (loss) $ (9,231) $(4,994)
======== =======
The components of accumulated other comprehensive income (loss) relate entirely
to unrealized gains (losses) on available-for-sale securities and are $1.1
million at June 30, 2001 and $(1.2) million at December 31, 2000.
4. COMMON STOCK
In May 2001, Lynx completed a private placement of common stock and
warrants to purchase common stock. The financing included the sale of 1,747,248
newly issued shares of common stock at a purchase price of $6.37 per share
resulting in net proceeds of approximately $10.5 million, pursuant to a common
stock purchase agreement between the Company and certain investors. In
connection with this transaction, Lynx issued warrants to purchase up to 436,808
shares of common stock at an exercise price of $9.2011 per share. Lynx has filed
with the Securities and Exchange Commission a resale registration statement
related to the privately placed securities.
5. CORPORATE COLLABORATIONS AND LICENSE AGREEMENT
AstraZeneca
In April 2001, the Company entered into a collaboration with AstraZeneca
to identify genes that are differentially expressed between different human
tissues. AstraZeneca will provide DNA samples from certain human tissues, which
Lynx
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will analyze using its Megasort(TM) technology. The differences in the gene
expression patterns are expected to provide important information on the
physiological processes leading to diseases or conditions involving these tissue
types.
GenoMar
In April 2001, the Company entered into a collaboration with GenoMar ASA
to identify genes associated with saltwater tolerance in the tropical fin fish,
Tilapia. GenoMar will provide Lynx with RNA samples from Tilapia raised in
either freshwater or saltwater, which will then be compared using Lynx's
Megasort(TM) technology. Genes associated with growth in saltwater are expected
to provide economically important tools in improving the performance of farmed
fish through selective breeding.
AniGenics
In May 2001, the Company entered into a collaboration with AniGenics,
Inc. to identify genes associated with commercially valuable traits in certain
food animal species. AniGenics will provide Lynx with samples from animals
exhibiting desired traits. The samples will then be analyzed for differential
gene expression using Lynx's Megasort(TM) technology. AniGenics will also
provide animal samples to be analyzed using Lynx's Megatype(TM) technology for
single nucleotide polymorphism, or SNP, markers that could be used to identify
genes controlling the desired traits. The research collaboration seeks to create
gene expression profiles and to identify SNP markers that could impact
marker-assisted breeding and result in potentially reduced husbandry costs or
increased product differentiation in the supermarket.
BASF-LYNX Bioscience AG
In June 2001, the Company extended its technology licensing agreement
with BASF-LYNX Bioscience AG (BASF-LYNX), a joint venture company established in
Heidelberg, Germany, by Lynx and BASF AG in 1996. The license extends
BASF-LYNX's right to use Lynx's proprietary MPSS(TM) and Megasort(TM)
technologies non-exclusively in BASF-LYNX's neuroscience, toxicology and
microbiology programs until December 31, 2007. The agreement also uniquely
positions BASF-LYNX to apply Lynx's technologies to specific disorders in the
neuroscience field. Under the terms of the agreement, Lynx will receive from
BASF-LYNX a multi-million dollar technology license fee. Lynx will furnish
BASF-LYNX, initially without charge and later for a fee, with Megaclone(TM)
technology micro-beads, other reagents and additional MPSS(TM) technology
instruments for use in BASF-LYNX's research programs.
Separately, Lynx and BASF AG have agreed to continue their support of
BASF-LYNX's growth, including an increase of the capital reserves of BASF-LYNX,
Lynx's additional investment in BASF-LYNX will maintain Lynx's ownership
interest in BASF-LYNX at more than 40%.
6. EQUITY INVESTMENT
During 2001, Lynx incurred a loss of $0.5 million related to its equity
investment in Inex Pharmaceuticals Corporation (Inex). This loss was comprised
of a $1.6 million writedown for an other-than-temporary decline in the value of
its investment, net of a $1.1 million gain recorded from the receipt of shares
of common stock from Inex in the first quarter of 2001 as part of the proceeds
related to the March 1998 sale of Lynx's former antisense program.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with the
Company's financial statements and accompanying notes included in this report
and the Company's 2000 audited financial statements and notes thereto included
in its 2000 Annual Report on Form 10-K. Operating results for the three and six
months ended June 30, 2001 are not necessarily indicative of results that may
occur in future periods.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. When used herein, the words "believe," "anticipate," "expect,"
"estimate" and similar expressions are intended to identify such forward-looking
statements. There can be no assurance that these statements will prove to be
correct. Lynx'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 Lynx's 2000
Annual Report on Form 10-K as filed with the SEC. Lynx undertakes no obligation
to update any of the forward-looking statements contained herein to reflect any
future events or developments.
RESULTS OF OPERATIONS
REVENUES
Revenues for the second quarter and six-month period ended June 30,
2001, were $4.4 million and $7.8 million, respectively, and for the
corresponding second quarter and six-month period of 2000, were $2.8 million and
$5.9 million, respectively. These revenues consist primarily of technology
access and service fees from Lynx's customers and collaborators.
OPERATING COSTS AND EXPENSES
Total operating costs and expenses were $9.0 million for the quarter
ended June 30, 2001, compared to $6.3 million in the corresponding period in the
previous year. For the six-month period ended June 30, 2001, operating costs and
expenses were $17.6 million, compared to $13.2 million in the corresponding
period in 2000.
For the quarter and six-month period ended June 30, 2001, cost of
service fees were $1.1 million and $1.8 million, respectively, as compared to
$1.0 million and $1.4 million, respectively, for the corresponding quarter and
six-month period of 2000. These amounts reflect the costs of providing our
genomics discovery services.
Research and development expenses were $5.9 million for the quarter
ended June 30, 2001, compared to $3.8 million in the corresponding period in
2000. For the six-month period ended June 30, 2001, research and development
expenses were $11.8 million, compared to $8.8 million in the corresponding
period in 2000. The increase in research and development expenses in the 2001
quarter and six-month period over the corresponding periods in 2000 was due
primarily to higher personnel- and facilities-related expenses and an increase
in materials consumed in research and development efforts, primarily on the
continuing development of the Megatype(TM) and Protein ProFiler(TM) technologies
and on Lynx's internal discovery projects. Lynx expects research and development
expenses to increase due to planned spending for ongoing technology development
and implementation, as well as new applications for our technologies.
Lynx's research and development expenses of $11.8 million for the
six-month period ended June 30, 2001 are comprised of $3.2 million in research
expenses, including costs related to internal discovery projects, and $8.6
million in development expenses, including those related to the continuing
development of the Megatype(TM) and Protein ProFiler(TM) technologies.
Megatype(TM) technology for DNA analysis is in the late stages of
development. As of June 30, 2001, Lynx had provided commercial access to its
Megatype(TM) technology to five customers. When fully developed, Lynx believes
its Megatype(TM) technology will permit the comparison of collected genomes (all
of the DNA coded genetic material in chromosomes) of two populations.
Megatype(TM) technology is designed to enable the detection and recovery of DNA
fragments with disease- or trait-associated single nucleotide polymorphisms, or
SNPs, that distinguish these two populations. SNPs are single nucleotide
variations in the genetic code that are believed to occur, on average, about
every 1,000 bases along the three billion nucleotides in the human genome. Lynx
believes its Megatype(TM) technology, when fully developed, will deliver
information on the disease- or trait-association of SNPs, and should provide a
cost-effective approach to pharmacogenetics, which is the identification and
assessment of genes that are predictive of efficacy and toxicity of drug
compounds or that may correlate drug responses to individual genotypes (the
particular genetic pattern seen in the DNA of an individual). Lynx will continue
its development efforts and expects to enter additional commercial relationships
to provide access to its Megatype(TM) technology to customers and collaborators
during 2001.
Lynx's protein analysis or proteomics technology, Protein ProFiler(TM),
is in the late stages of development. Proteomics is the study of the number of
proteins and the extent to which they are expressed in cells or tissues. Lynx
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Protein ProFiler(TM) technology aims to provide high-resolution analysis of
complex mixtures of proteins from cells or tissues. Lynx's believes its Protein
ProFiler(TM) technology, when fully developed, will be used to discover drug
targets, validate candidate targets and correlate gene expression with protein
expression in cells. While advancing its development efforts, Lynx expects to
enter an initial commercialization phase with its Protein ProFiler(TM)
technology during 2001.
General and administrative expenses increased to $2.0 million for the
quarter ended June 30, 2001, compared to $1.5 million in the corresponding
period in the previous year. For the six-month period ended June 30, 2001,
general and administrative expenses increased to $4.0 million, compared to $3.0
million in the same period in 2000. Contributing factors to the increase in
expenses between years include increased personnel-related expenses and higher
outside service costs. Lynx expects general and administrative expenses to
increase in support of its research and development, commercial and business
development efforts.
INTEREST INCOME, NET
Net interest income was $10,000 and $16,000 for the quarter and
six-month periods ended June 30, 2001, respectively, compared to $281,000
and $595,000, respectively, in the corresponding periods in 2000. The 2001
periods reflect a decrease in interest income due lower average cash, cash
equivalents and investment balances and investment rates.
OTHER INCOME (LOSS), NET
Other income was $48,000 in the quarter ended June 30, 2001, compared to
other income of $33,000 in the 2000 period. These amounts are primarily related
to sublease rental income. For the six-month period ended June 30, 2001, the
other loss was $0.4 million, compared to other income of $3.2 million in the
same period in 2000. The other loss for the six-month period in 2001 was related
primarily to a $1.6 million writedown for an other-than-temporary decline in the
value of Lynx's equity investment in Inex Pharmaceuticals Corporation (Inex),
net of a $1.1 gain recorded from the receipt of shares of common stock from Inex
in the first quarter of 2001 as part of the proceeds related to the March 1998
sale of Lynx's former antisense program. The other income for the six-month
period in 2000 was primarily related to a $3.1 million gain recognized from the
receipt of 400,000 shares of common stock of Inex pursuant to the terms of a
1998 agreement for the sale of Lynx's antisense program to Inex.
INCOME TAXES
There were no provisions made for income taxes for the quarter and
six-month period ended June 30, 2001. The provision for income taxes for the
quarter and six-month period ended June 30, 2000 consists entirely of
alternative minimum tax.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $10.8 million for the
six-month period ended June 30, 2001, as compared to net cash used in operating
activities of $5.5 million for the same period in 2000. This change was
primarily due to a higher net loss in the 2001 period, the change in accounts
payable and the change in deferred revenues, partially offset by the difference
between the 2001 loss and the 2000 gain related to the common stock of Inex
received from the sale of Lynx's antisense program to Inex, and higher
depreciation and amortization expense for fixed assets and leasehold
improvements. Net cash used in operating activities of $10.8 million for the
six-month period in 2001 differed from the net loss for the same period in 2000
primarily due to the decrease in deferred revenues, offset partially by
depreciation and amortization expense.
Net cash provided by investing activities of $1.7 million for the
six-month period ended June 30, 2001 related primarily to the net maturities of
short-term investments, offset partially by expenditures for capital assets. Net
cash provided by financing activities of $10.5 million for the six-month period
ended June 30, 2001 related primarily to the issuance of common stock pursuant
to a common stock purchase agreement between the Company and certain investors,
partially offset by repayment of principal under an equipment loan arrangement.
Cash, cash equivalents, short-term investments and marketable securities were
$15.8 million at June 30, 2001.
In May 2001, Lynx completed a private placement of common stock and
warrants to purchase common stock. The financing included the sale of 1,747,248
newly issued shares of common stock at a purchase price of $6.37 per share
resulting in net proceeds of approximately $10.5 million, pursuant to a common
stock purchase agreement between the Company and certain investors. In
connection with this transaction, Lynx issued warrants to purchase up to 436,808
shares of common stock at an exercise price of $9.2011 per share. Lynx has filed
with the Securities and Exchange Commission a resale registration statement
related to the privately placed securities.
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Lynx expects to use the net proceeds from the financing to support ongoing
commercial, business development and research and development activities. Lynx's
research and development efforts will focus on the continuing development of the
Megatype(TM) and Protein ProFiler(TM) technologies, as well as internal
discovery projects.
In late 1998, the Company entered into a financing agreement with a
financial institution, Transamerica Business Credit Corporation, under which
Lynx drew down $4.8 million during 1999 for the purchase of equipment and
certain other capital expenditures. Lynx granted the lender a security interest
in all items financed by it under this agreement. Each draw down under the loan
has a term of 48 months from the date of the draw down. As of June 30, 2001, the
principal balance under loans outstanding under this agreement was approximately
$3.8 million. The draw down period under the agreement expired on March 31,
2000.
Lynx plans to use available funds for ongoing commercial and research
and development activities, working capital and other general corporate purposes
and capital expenditures. Lynx expects capital investments during 2001 will be
comprised primarily of equipment purchases required in the normal course of
business and expenditures for leasehold improvements. Lynx intends to invest its
excess cash in investment-grade, interest-bearing securities.
Lynx has obtained funding for its operations primarily through sales of
preferred and common stock to venture capital investors, institutional investors
and collaborators, payments under contractual arrangements with customers,
collaborators and licensees and interest income. 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 the progress and the scope of its collaborative and
independent research and development projects; payments received under customer,
collaborative and license agreements; Lynx's ability to establish and maintain
customer, collaborative and license agreements; costs of protecting intellectual
property rights; legal and administrative costs; additional facilities capacity
needs; and the availability of alternate methods of financing.
Lynx expects to incur substantial and increasing research and
development expenses and intends to seek additional financing, as needed,
through arrangements with customers, collaborators and licensees and equity or
debt offerings. There can be no assurance that any additional financing required
by Lynx will be available on favorable terms, or at all. The Company believes
that its existing capital resources, and interest income thereon, will enable it
to maintain its current and planned operations through at least the next 12
months.
ADDITIONAL BUSINESS RISKS
WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES, AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred net losses each year since our inception in 1992,
including net losses of approximately $4.3 million in 1998, $6.7 million in 1999
and $13.3 million in 2000. As of June 30, 2001, we had an accumulated deficit of
approximately $76.9 million. We expect these losses to continue for at least the
next several years. The size of these net losses will depend, in part, on the
rate of growth, if any, in our revenues and on the level of our expenses. Our
research and development expenditures and general and administrative costs have
exceeded our revenues to date, and we expect research and development expenses
to increase due to planned spending for ongoing technology development and
implementation, as well as new applications. As a result, we will need to
generate significant additional revenues to achieve profitability. Even if we do
increase our revenues and achieve profitability, we may not be able to sustain
profitability.
Our ability to generate revenues and achieve profitability depends on
many factors, including:
- our ability to enter into additional corporate collaborations and
agreements;
- our ability to discover genes and targets for drug discovery;
- our collaborators' ability to develop diagnostic and therapeutic
products from our drug discovery targets; and
- the successful clinical testing, regulatory approval and
commercialization of such products.
The time required to reach profitability is highly uncertain. We may not achieve
profitability on a sustained basis, if at all.
WE WILL NEED ADDITIONAL FUNDS IN THE FUTURE, WHICH MAY NOT BE AVAILABLE TO US.
We have invested significant capital in our scientific and business
development activities. Our future capital requirements will be substantial as
we expand our operations, and will depend on many factors, including:
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- the progress and scope of our collaborative and independent research
and development projects;
- payments received under collaborative agreements;
- our ability to establish and maintain collaborative arrangements;
- the progress of the development and commercialization efforts under
our collaborations and corporate agreements;
- the costs associated with obtaining access to samples and related
information; and
- the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims and other intellectual property rights.
We anticipate that our current cash and cash equivalents, short-term
investments and funding to be received from collaborators and customers will
enable us to maintain our currently planned operations for at least the next 12
months. Changes to our current operating plan may require us to consume
available capital resources significantly sooner than we expect. If our capital
resources are insufficient to meet future capital requirements, we will have to
raise additional funds. We do not know if we will be able to raise sufficient
additional capital on acceptable terms, or at all. If we raise additional
capital by issuing equity or convertible debt securities, our existing
stockholders may experience substantial dilution. If we are unable to obtain
adequate funds on reasonable terms, we may have to curtail operations
significantly or to obtain funds by entering into financing or collaborative
agreements on unattractive terms.
OUR TECHNOLOGIES ARE NEW AND UNPROVEN AND MAY NOT ALLOW US OR OUR COLLABORATORS
TO IDENTIFY GENES OR TARGETS FOR DRUG DISCOVERY.
Our technologies are new and unproven. The application of these
technologies is in too early a stage to determine whether it can be successfully
implemented. These technologies assume that information about gene expression
and gene sequences may enable scientists to better understand complex biological
processes. Relatively few therapeutic products based on gene discoveries have
been successfully developed and commercialized. Our technologies may not enable
us or our collaborators to identify genes or targets for drug discovery. To
date, no targets for drug discovery have been identified based on our
technologies.
WE ARE DEPENDENT ON OUR COLLABORATIONS AND WILL NEED TO FIND ADDITIONAL
COLLABORATORS IN THE FUTURE TO DEVELOP AND COMMERCIALIZE DIAGNOSTIC OR
THERAPEUTIC PRODUCTS.
Our strategy for the development and commercialization of our
technologies and potential products includes entering into collaborations,
subscription arrangements or licensing arrangements with pharmaceutical,
biotechnology and agricultural companies. We do not have the resources to
develop or commercialize diagnostic or therapeutic products on our own. If we
cannot negotiate additional collaborative arrangements or contracts on
acceptable terms, or at all, or such collaborations or relationships are not
successful, we may never become profitable.
Substantially all of our revenues have been derived from corporate
collaborations and agreements. Revenues from collaborations and related
agreements depend upon continuation of the collaborations, the achievement of
milestones and royalties derived from future products developed from our
research and technologies. To date, we have received a significant portion of
our revenues from a small number of collaborators and customers. For the six
months ended June 30, 2001, revenues from DuPont, BASF, Takara and the Institute
of Molecular and Cell Biology accounted for 36%, 22%, 17% and 10%, respectively,
of our total revenues. For the year ended December 31, 2000, revenues from
DuPont, BASF and Aventis CropScience accounted for 51%, 29% and 11%,
respectively, of our total revenues. For the year ended December 31, 1999,
revenues from DuPont, Aventis CropScience and BASF accounted for 81%, 13% and
5%, respectively, of our total revenues. For the year ended December 31, 1998,
revenues from BASF-LYNX Bioscience AG, BASF and DuPont accounted for 61%, 33%
and 5%, respectively, of our total revenues. If we are unable to successfully
achieve milestones or our collaborators fail to develop successful products, we
will not earn the revenues contemplated under such collaborative agreements. If
our collaborators or customers do not renew existing agreements, we lose one of
these collaborators or customers and we do not attract new collaborators or
customers or we are unable to enter into new collaborative agreements on
commercially acceptable terms, our revenues may decrease, and our activities may
fail to lead to commercialized products.
Our dependence on collaborative arrangements with third parties subjects
us to a number of risks. We have limited or no control over the resources that
our collaborators may choose to devote to our joint efforts. Our collaborators
may breach or terminate their agreements with us or fail to perform their
obligations thereunder. Further, our collaborators may elect not to develop
products arising out of our collaborative arrangements or may fail to devote
sufficient resources to the development, manufacture, marketing or sale of such
products. While we do not currently compete directly with any of our
collaborators, some of our collaborators could become our competitors in the
future if they internally develop DNA or protein analysis technologies or if
they acquire other genomics or proteomics companies and move into the genomics
and proteomics industries. We will not earn the revenues contemplated under our
collaborative arrangements, if our collaborators:
~ do not develop commercially successful products using our
technologies;
~ develop competing products;
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~ preclude us from entering into collaborations with their
competitors;
~ fail to obtain necessary regulatory approvals; or
~ terminate their agreements with us.
WE ARE AN EARLY STAGE COMPANY, SO OUR PROFITABILITY IS UNCERTAIN, AND THERE IS A
HIGH RISK OF FAILURE.
You must evaluate us in light of the uncertainties and complexities affecting an
early stage genomics company. Our products and services are still in the early
stages of commercialization. Our technologies depend on the successful
integration of independent technologies, each of which has its own development
risks. If we do not continue to successfully develop our technologies, our
services do not continue to be sought by customers or products developed from
our technologies do not prove to be commercially successful, we may fail to
achieve profitability. Further, we may not successfully expand the scope of our
research into new areas of pharmaceutical, biotechnology or agricultural
research. Development of commercially viable products from our technologies will
require significant research and development, financial resources and
personnel. Commercialization of our technologies, whether through the sales of
services, royalties or other arrangements, may not generate sufficient or
sustainable revenues to enable us to be profitable.
WE DEPEND ON A SOLE SUPPLIER TO MANUFACTURE FLOW CELLS USED IN OUR MPSS
TECHNOLOGY.
We use flow cells, which are glass plates that are micromachined to
create a grooved chamber for immobilizing microbeads in a planar microarray, in
our Massively Parallel Signature Sequencing, or MPSS, technology. We currently
purchase the flow cells used in our MPSS technology from a single supplier,
although the flow cells are potentially available from multiple suppliers. While
we believe that alternative suppliers for flow cells exist, identifying and
qualifying new suppliers could be an expensive and time-consuming process. Our
reliance on outside vendors involves several risks, including:
- the inability to obtain an adequate supply of required components
due to manufacturing capacity constraints, a discontinuance of a
product by a third-party manufacturer or other supply constraints;
- reduced control over quality and pricing of components; and
- delays and long lead times in receiving materials from vendors.
WE OPERATE IN AN INTENSELY COMPETITIVE INDUSTRY WITH RAPIDLY
EVOLVING TECHNOLOGIES, AND OUR COMPETITORS MAY DEVELOP PRODUCTS AND TECHNOLOGIES
THAT MAKE OURS OBSOLETE.
The biotechnology industry is highly fragmented and is characterized by
rapid technological change. In particular, the area of genomics research is a
rapidly evolving field. Competition among entities attempting to identify genes
associated with specific diseases and to develop products based on such
discoveries is intense. Many of our competitors have substantially greater
research and product development capabilities and financial, scientific, and
marketing resources than we do.
We face, and will continue to face, competition from pharmaceutical,
biotechnology and agricultural companies, as well as academic research
institutions, clinical reference laboratories and government agencies. Some of
our competitors, such as Affymetrix, Inc., Celera Genomics Group, Incyte
Genomics, Inc., Gene Logic, Inc., Genome Therapeutics Corporation and Hyseq,
Inc., may be:
- attempting to identify and patent randomly sequenced genes and
gene fragments;
- pursuing a gene identification, characterization and product
development strategy based on positional cloning; which uses disease
inheritance patterns to isolate the genes that are linked to the
transmission of disease from one generation to the next; and
- using a variety of different gene expression analysis
methodologies, including the use of chip-based systems, to attempt
to identify disease-related genes.
In addition, numerous pharmaceutical, biotechnology and agricultural
companies are developing genomic research programs, either alone or in
partnership with our competitors. Our future success will depend on our ability
to maintain a competitive position with respect to technological advances. Rapid
technological development by others may make our technologies and future
products obsolete.
Any products developed through our technologies will compete in highly
competitive markets. Our competitors may be more effective at using their
technologies to develop commercial products. Further, our competitors may obtain
intellectual property rights that would limit the use of our technologies or the
commercialization of diagnostic or therapeutic products using our technologies.
As a result, our competitors' products or technologies may render our
technologies and products, and those of our collaborators, obsolete or
noncompetitive.
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IF WE FAIL TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES, THIRD PARTIES MAY
BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD PREVENT US FROM COMPETING IN THE
MARKET.
Our success depends in part on our ability to obtain patents and
maintain adequate protection of the intellectual property related to our
technologies and products. The patent positions of biotechnology companies,
including our patent position, are generally uncertain and involve complex legal
and factual questions. We will be able to protect our proprietary rights from
unauthorized use by third parties only to the extent that our proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. The laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the U.S., and many
companies have encountered significant problems in protecting and defending
their proprietary rights in foreign jurisdictions. We have applied and will
continue to apply for patents covering our technologies, processes and products
as and when we deem appropriate. However, third parties may challenge these
applications, or these applications may fail to result in issued patents. Our
existing patents and any future patents we obtain may not be sufficiently broad
to prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patents. In addition, our patents may be
challenged or invalidated or fail to provide us with any competitive advantage.
We also rely on trade secret protection for our confidential and
proprietary information. However, trade secrets are difficult to protect. We
protect our proprietary information and processes, in part, with confidentiality
agreements with employees, collaborators and consultants. However, third parties
may breach these agreements, we may not have adequate remedies for any such
breach or our trade secrets may still otherwise become known by our competitors.
In addition, our competitors may independently develop substantially equivalent
proprietary information.
LITIGATION OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY AND ADVERSELY AFFECT OUR ABILITY
TO DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES AND PRODUCTS.
Our commercial success depends in part on our ability to avoid
infringing patents and proprietary rights of third parties and not breaching any
licenses that we have entered into with regard to our technologies. Other
parties have filed, and in the future are likely to file, patent applications
covering genes, gene fragments, the analysis of gene expression and the
manufacture and use of DNA chips or microarrays, which are tiny glass or silicon
wafers on which tens of thousands of DNA molecules can be arrayed on the surface
for subsequent analysis. We intend to continue to apply for patent protection
for methods relating to gene expression and for the individual disease genes and
drug discovery targets we discover. If patents covering technologies required by
our operations are issued to others, we may have to rely on licenses from third
parties, which may not be available on commercially reasonable terms, or at all.
Third parties may accuse us of employing their proprietary technology
without authorization. In addition, third parties may obtain patents that relate
to our technologies and claim that use of such technologies infringes these
patents. Regardless of their merit, such claims could require us to incur
substantial costs, including the diversion of management and technical
personnel, in defending ourselves against any such claims or enforcing our
patents. In the event that a successful claim of infringement is brought against
us, we may be required to pay damages and obtain one or more licenses from third
parties. We may not be able to obtain these licenses at a reasonable cost, or at
all. Defense of any lawsuit or failure to obtain any of these licenses could
adversely affect our ability to develop and commercialize our technologies and
products and thus prevent us from achieving profitability.
WE HAVE LIMITED EXPERIENCE IN SALES AND MARKETING AND THUS MAY BE UNABLE TO
FURTHER COMMERCIALIZE OUR TECHNOLOGIES AND PRODUCTS.
Our ability to achieve profitability depends on attracting collaborators
and customers for our technologies and products. There are a limited number of
pharmaceutical, biotechnology and agricultural companies that are potential
collaborators and customers for our technologies and products. To market our
technologies and products, we must develop a sales and marketing group with the
appropriate technical expertise. We may not be able to build such a sales force.
If our sales and marketing efforts are not successful, our technologies and
products may fail to gain market acceptance.
OUR SALES CYCLE IS LENGTHY, AND WE MAY SPEND CONSIDERABLE RESOURCES ON
UNSUCCESSFUL SALES EFFORTS OR MAY NOT BE ABLE TO ENTER INTO AGREEMENTS ON THE
SCHEDULE WE ANTICIPATE.
Our ability to obtain collaborators and customers for our technologies
and products depends in significant part upon the perception that our
technologies and products can help accelerate their drug discovery and genomics
efforts. Our sales cycle is typically lengthy because we need to educate our
potential collaborators and customers and sell the benefits of our products to a
variety of constituencies within such companies. In addition, we may be required
to negotiate agreements containing terms unique to each collaborator or
customer. We may expend substantial funds and management effort with no
assurance that we will successfully sell our technologies and products. Actual
and proposed consolidations of pharmaceutical companies have negatively
affected, and may in the future negatively affect, the timing and progress of
our sales efforts.
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WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We expect to continue to experience significant growth in the number of
our employees and the scope of our operations. This growth may place a
significant strain on our management and operations. As our operations expand,
we expect that we will need to manage additional relationships with various
collaborators and customers, suppliers and other third parties. Our ability to
manage our operations and growth effectively requires us to continue to improve
our operational, financial and management controls, reporting systems and
procedures. We may not be able to successfully implement improvements to our
management information and control systems in an efficient or timely manner and
may discover deficiencies in existing systems and controls.
THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD IMPAIR THE GROWTH OF OUR BUSINESS.
We are highly dependent on the principal members of our management and
scientific staff. The loss of any of these persons' services might adversely
impact the achievement of our objectives and the continuation of existing
collaborations. In addition, recruiting and retaining qualified scientific
personnel to perform future research and development work will be critical to
our success. There is currently a shortage of skilled executives and employees
with technical expertise, and this shortage is likely to continue. As a result,
competition for skilled personnel is intense and turnover rates are high.
Competition for experienced scientists from numerous companies, academic and
other research institutions may limit our ability to attract and retain such
personnel. We are dependent on our President and Chief Executive Officer, Norman
J.W. Russell, Ph.D., the loss of whose services could have a material adverse
effect on our business. Although we have executed an employment agreement with
Dr. Russell, currently we do not maintain key person insurance for him or any
other key personnel.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE
MATERIALS COULD BE TIME CONSUMING AND COSTLY.
Our research and development processes involve the controlled use of
hazardous materials, including chemicals and radioactive and biological
materials. Our operations produce hazardous waste products. We cannot eliminate
the risk of accidental contamination or discharge and any resultant injury from
these materials. Federal, state and local laws and regulations govern the use,
manufacture, storage, handling and disposal of hazardous materials. We may be
sued for any injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our insurance
coverage and our total assets. Compliance with environmental laws and
regulations may be expensive, and current or future environmental regulations
may impair our research, development and production efforts.
ETHICAL, LEGAL AND SOCIAL ISSUES MAY LIMIT THE PUBLIC ACCEPTANCE OF, AND DEMAND
FOR, OUR TECHNOLOGIES AND PRODUCTS.
Our collaborators and customers may seek to develop diagnostic products
based on genes we discover. The prospect of broadly available gene-based
diagnostic tests raises ethical, legal and social issues regarding the
appropriate use of gene-based diagnostic testing and the resulting confidential
information. It is possible that discrimination by third-party payors, based on
the results of such testing, could lead to the increase of premiums by such
payors to prohibitive levels, outright cancellation of insurance or
unwillingness to provide coverage to individuals showing unfavorable gene
expression profiles. Similarly, employers could discriminate against employees
with gene expression profiles indicative of the potential for high
disease-related costs and lost employment time. Finally, government authorities
could, for social or other purposes, limit or prohibit the use of such tests
under certain circumstances. These ethical, legal and social concerns about
genetic testing and target identification may delay or prevent market acceptance
of our technologies and products.
Although our technology does not depend on genetic engineering, genetic
engineering plays a prominent role in our approach to product development. The
subject of genetically modified food has received negative publicity, which has
aroused public debate. Adverse publicity has resulted in greater regulation
internationally and trade restrictions on imports of genetically altered
agricultural products. Public attitudes may be influenced by claims that
genetically engineered products are unsafe for consumption or pose a danger to
the environment. Such claims may prevent genetically engineered products from
gaining public acceptance. The commercial success of our future products may
depend, in part, on public acceptance of the use of genetically engineered
products, including drugs and plant and animal products.
IF WE DEVELOP PRODUCTS WITH OUR COLLABORATORS, AND IF PRODUCT LIABILITY LAWSUITS
ARE SUCCESSFULLY BROUGHT AGAINST US, WE COULD FACE SUBSTANTIAL LIABILITIES THAT
EXCEED OUR RESOURCES.
We may be held liable, if any product we develop with our collaborators
causes injury or is otherwise found unsuitable during product testing,
manufacturing, marketing or sale. Although we have general liability and product
liability insurance, this insurance may become prohibitively expensive or may
not fully cover our potential liabilities. Inability to obtain sufficient
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insurance coverage at an acceptable cost or to otherwise protect us against
potential product liability claims could prevent or inhibit the
commercialization of products developed with our collaborators.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR RETURNS ON
DIAGNOSTIC OR THERAPEUTIC PRODUCTS THAT WE MAY DEVELOP WITH OUR COLLABORATORS.
If we successfully validate targets for drug discovery, products that we
develop with our collaborators based on those targets may include diagnostic or
therapeutic products. The ability of our collaborators to commercialize such
products may depend, in part, on the extent to which reimbursement for the cost
of these products will be available from government health administration
authorities, private health insurers and other organizations. In the U.S.,
third-party payors are increasingly challenging the price of medical products
and services. The trend towards managed healthcare in the U.S., legislative
healthcare reforms and the growth of organizations such as health maintenance
organizations that may control or significantly influence the purchase of
healthcare products and services, may result in lower prices for any products
our collaborators may develop. Significant uncertainty exists as to the
reimbursement status of newly approved healthcare products. If adequate
third-party coverage is not available in the future, our collaborators may not
be able to maintain price levels sufficient to realize an appropriate return on
their investment in research and product development.
OUR FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES; AN EARTHQUAKE OR
OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR FACILITIES AND EQUIPMENT,
WHICH COULD REQUIRE US TO CEASE OPERATIONS.
Our facilities are located near known earthquake fault zones and are
vulnerable to damage from earthquakes. We are also vulnerable to damage from
other types of disasters, including fire, floods, power loss, communications
failures and similar events. If any disaster were to occur, our ability to
operate our business at our facilities would be seriously, or potentially
completely, impaired. In addition, the unique nature of our research activities
could cause significant delays in our programs and make it difficult for us to
recover from a disaster. The insurance we maintain may not be adequate to cover
our losses resulting from disasters or other business interruptions.
Accordingly, an earthquake or other disaster could materially and adversely harm
our ability to conduct business.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
We believe that the market prices of our common stock will remain highly
volatile and may fluctuate significantly due to a number of factors. The market
prices for securities of many publicly-held, early-stage biotechnology companies
have in the past been, and can in the future be expected to be, especially
volatile. For example, during the two-year period from June 30,1999 to 2001, the
closing sales price of our common stock as quoted on the Nasdaq National Market
fluctuated from a low of $5.01 to a high of $96.875 per share. In addition, the
securities markets have from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. The following factors and events may have a significant
and adverse impact on the market price of our common stock:
- fluctuations in our operating results;
- announcements of technological innovations or new commercial
products by us or our competitors;
- release of reports by securities analysts;
- developments or disputes concerning patent or proprietary rights;
- developments in our relationships with current or future
collaborators or customers; and
- general market conditions.
Many of these factors are beyond our control. These factors may cause a decrease
in the market price of our common stock, regardless of our operating
performance.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW MAY
MAKE IT MORE DIFFICULT TO ACQUIRE US OR TO EFFECT A CHANGE IN OUR MANAGEMENT,
EVEN THOUGH AN ACQUISITION OR MANAGEMENT CHANGE MAY BE BENEFICIAL TO OUR
STOCKHOLDERS.
Under our certificate of incorporation, our board of directors has the
authority, without further action by the holders of our common stock, to issue
2,000,000 additional shares of preferred stock from time to time in series and
with preferences and rights as it may designate. These preferences and rights
may be superior to those of the holders of our common stock. For example, the
holders of preferred stock may be given a preference in payment upon our
liquidation or for the payment or accumulation of dividends before any
distributions are made to the holders of common stock.
Although we have no present intention to authorize or issue any
additional series of preferred stock, any authorization or issuance, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could also have the effect of making it more difficult
for a third party to acquire a majority of our outstanding voting stock or
making
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it more difficult to remove directors and effect a change in management. The
preferred stock may have other rights, including economic rights senior to those
of our common stock, and, as a result, an issuance of additional preferred stock
could lower the market value of our common stock. Provisions of Delaware law may
also discourage, delay or prevent someone from acquiring or merging with us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we invest in highly liquid and
high-quality debt securities. Lynx's investments in debt securities are subject
to interest rate risk. To minimize the exposure due to adverse shifts in
interest rates, Lynx invests in short-term securities and maintains an average
maturity of less than one year. As a result, we believe that we are not subject
to significant interest rate risks.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On May 24, 2001, we sold 1,747,248 newly issued shares of our
common stock at a purchase price of $6.37 per share and warrants to
purchase up to 436,808 shares of our common stock at an exercise price
of $9.2011 per share to seven accredited investors in a private
placement, for an aggregate purchase price of approximately
$11,129,970. We issued the shares of common stock and the warrants in
reliance upon an exemption from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof and Regulation D
promulgated thereunder. We have filed a registration statement on Form
S-3 with the SEC related to the resale of the securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2001 Annual Meeting of Stockholders held
on May 24, 2001, stockholders voted on the following matters:
PROPOSAL I - The following seven directors were each elected for a
one-year term expiring at the Company's 2002 Annual Meeting of
Stockholders:
Nominee For Withheld
------- --- --------
Craig C. Taylor 8,902,411 249,773
Norman J.W. Russell 8,099,979 1,052,205
William K. Bowes, Jr. 7,733,262 1,418,922
Sydney Brenner 8,943,646 208,538
Leroy Hood 8,950,622 201,562
James C. Kitch 8,902,499 249,685
David C. U'Prichard 8,949,385 202,799
PROPOSAL II - Approval of the Company's 1992 Stock Option Plan, as
amended, to increase the aggregate number of shares of common stock
available for issuance under such plan by 700,000 shares:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
3,354,973 1,849,868 9,762 3,937,583
PROPOSAL III - Ratification of the selection of Ernst & Young LLP
as the Company's independent auditors for the fiscal year ended
December 31, 2001:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
9,117,235 29,047 5,902 --
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
-------------- -----------
10.15 Securities Purchase Agreement, dated as
of May 24, 2001, by and among Lynx
Therapeutics, Inc. and the investors
listed therein.(1)
10.16 Registration Rights Agreement, dated as
of May 24, 2001, by and among Lynx
Therapeutics, Inc. and the investors
listed therein.(1)
10.17 Form of Warrant issued by Lynx
Therapeutics, Inc. in favor of each
investor.(1)
10.18 Joint Venture Agreement, dated as of
June 29, 2001, by and between BASF
Aktiengesellschaft and Lynx
Therapeutics, Inc.**
10.19 Technology License Agreement, dated as
of June 1, 2001, by and between
BASF-LYNX Bioscience AG and Lynx
Therapeutics, Inc.**
--------------------
(1) Incorporated by reference from Lynx's Current Report on Form 8-K, filed
with the SEC on June 4, 2001.
** Confidential treatment requested for certain portions of this exhibit.
b) Reports on Form 8-K ---
The Company filed a Current Report on Form 8-K on June 4, 2001,
reporting under Item 5 that the Company completed an $11.1 million
private placement of common stock and warrants to purchase common
stock to seven accredited investors.
18
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LYNX THERAPEUTICS, INC.
/s/ Norman J.W. Russell
--------------------------------------------
By: Norman J.W. Russell, Ph.D.
President and Chief Executive Officer
Date: August 14, 2001
/s/ Edward C. Albini
--------------------------------------------
By: Edward C. Albini
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 14, 2001
19
20
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.15 Securities Purchase Agreement, dated as
of May 24, 2001, by and among Lynx
Therapeutics, Inc. and the investors
listed therein.(1)
10.16 Registration Rights Agreement, dated as
of May 24, 2001, by and among Lynx
Therapeutics, Inc. and the investors
listed therein.(1)
10.17 Form of Warrant issued by Lynx
Therapeutics, Inc. in favor of each
investor.(1)
10.18 Joint Venture Agreement, dated as of
June 29, 2001, by and between BASF
Aktiengesellschaft and Lynx
Therapeutics, Inc.**
10.19 Technology License Agreement, dated as
of June 1, 2001, by and between
BASF-LYNX Bioscience AG and Lynx
Therapeutics, Inc.**
--------------------
(1) Incorporated by reference from Lynx's Current Report on Form 8-K, filed
with the SEC on June 4, 2001.
** Confidential treatment requested for certain portions of this exhibit.