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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 MARCH 31, 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 May 2, 2001 was
11,665,494.
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LYNX THERAPEUTICS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
PART I FINANCIAL INFORMATION (UNAUDITED) PAGE
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets --- March 31, 2001
and December 31, 2000................................................................... 3
Condensed Consolidated Statements of Operations - three months
ended March 31, 2001 and 2000........................................................... 4
Condensed Consolidated Statements of Cash Flows - three months
ended March 31, 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........................................... 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 15
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................................... 16
ITEM 2. Changes in Securities and Use of Proceeds............................................... 16
ITEM 3. Defaults Upon Senior Securities......................................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders..................................... 16
ITEM 5. Other Information....................................................................... 16
ITEM 6. Exhibits and Reports on Form 8-K........................................................ 16
SIGNATURES ...................................................................................... 17
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2001 2000*
-------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 4,141 $ 7,875
Short-term investments ..................................... 7,730 10,923
Accounts receivable ........................................ 939 1,539
Other current assets ....................................... 3,214 2,270
-------- --------
Total current assets .......................................... 16,024 22,607
Property and equipment:
Leasehold improvements ..................................... 12,003 11,718
Laboratory and other equipment ............................. 14,744 13,364
-------- --------
26,747 25,082
Less accumulated depreciation and amortization ............. (10,323) (9,263)
-------- --------
Net property and equipment .................................... 16,424 15,819
Other non-current assets ...................................... 791 789
-------- --------
$ 33,239 $ 39,215
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 1,344 $ 1,640
Accrued compensation ....................................... 996 614
Deferred revenues --- current portion ...................... 6,407 7,219
Notes payable --- current portion .......................... 1,354 1,319
Other accrued liabilities .................................. 811 928
-------- --------
Total current liabilities ..................................... 10,912 11,720
Deferred revenues ............................................. 16,406 17,467
Notes payable ................................................. 2,743 3,077
Other non-current liabilities ................................. 766 729
Stockholders' equity:
Common stock ............................................... 76,265 75,851
Notes receivable from stockholders ......................... (271) (263)
Deferred compensation ...................................... (1,218) (1,557)
Accumulated other comprehensive income (loss) .............. (14) (1,157)
Accumulated deficit ........................................ (72,350) (66,652)
-------- --------
Total stockholders' equity .................................... 2,412 6,222
-------- --------
$ 33,239 $ 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
MARCH 31,
-----------------------
2001 2000
-------- --------
Revenues:
Technology access and service fees and other ..... $ 3,395 $ 3,016
-------- --------
Total revenues ...................................... 3,395 3,016
Operating costs and expenses:
Cost of service fee revenues and other ........... 656 445
Research and development ......................... 5,956 5,004
General and administrative ....................... 2,001 1,485
-------- --------
Total operating costs and expenses .................. 8,613 6,934
-------- --------
Loss from operations ................................ (5,218) (3,918)
Interest income, net ................................ 6 314
Other income (loss), net ............................ (486) 3,183
-------- --------
Loss before provision for income taxes .............. (5,698) (421)
Provision for income taxes .......................... -- 60
-------- --------
Net loss ............................................ $ (5,698) $ (481)
======== ========
Basic and diluted net loss per share ................ $ (0.50) $ (0.04)
======== ========
Shares used in per share computation ................ 11,470 11,209
======== ========
See accompanying notes.
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LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................................. $ (5,698) $ (481)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization ....................................... 1,117 661
Amortization of deferred compensation ............................... 339 243
(Gain) loss on sale of antisense business ........................... 545 (3,119)
Changes in operating assets and liabilities
Accounts receivable ............................................. 600 (52)
Other current assets ............................................ (944) 92
Accounts payable ................................................ (296) 118
Accrued liabilities ............................................. 265 (37)
Deferred revenues ............................................... (1,873) (15)
Other non-current liabilities .................................. 37 4
-------- --------
Net cash used in operating activities .................................... (5,908) (2,586)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments ...................................... (1,804) (1,002)
Maturities of short-term investments ..................................... 5,593 5,256
Leasehold improvements and equipment purchases, net of retirements ....... (1,722) (1,272)
Notes receivable from officers and employees ............................. (8) (11)
-------- --------
Net cash provided by investing activities ................................ 2,059 2,971
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of equipment loan .............................................. (299) (222)
Issuance of common stock ................................................. 414 683
-------- --------
Net cash provided by financing activities ................................ 115 461
-------- --------
Net increase (decrease) in cash and cash equivalents ..................... (3,734) 846
Cash and cash equivalents at beginning of period ......................... 7,875 18,050
-------- --------
Cash and cash equivalents at end of period ............................... $ 4,141 $ 18,896
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid ..................................................... $ -- $ 27
======== ========
Interest paid ......................................................... $ 120 $ 123
======== ========
See accompanying notes.
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LYNX THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
1. NATURE OF BUSINESS
Lynx Therapeutics, Inc. ("Lynx" or the "Company") is a leader in the
development and application of novel technologies for the discovery of gene
expression patterns and genomic variations important to the pharmaceutical,
biotechnology and agricultural industries. These technologies are based on
Megaclone(TM), Lynx's unique and proprietary cloning procedure. Megaclone(TM)
transforms a sample containing millions of DNA molecules into one made up of
millions of micro-beads, each of which carries approximately 100,000 copies of
one of the DNA molecules in the sample. Based on Megaclone(TM), Lynx has
developed a suite of applications that have the potential to enhance the pace,
scale and quality of genomics and genetics research programs. Currently, Lynx's
principal collaborators and customers are BASF AG, E.I. DuPont de Nemours and
Company, Aventis CropScience GmbH, 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.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements included
herein have been prepared by the Company without audit, pursuant to the rules
and regulations promulgated by the Securities and Exchange Commission (the
"SEC"). Certain prior year amounts have been reclassified to conform to current
year presentation. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to SEC rules and regulations;
nevertheless, the Company believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of management, the
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows of the Company for the interim periods
presented. The results of operations for the three months ended March 31, 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, customers and licensees 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. Milestone payments are recognized as
revenues upon the achievement of the related milestone and the satisfaction of
any related obligations. 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
which are subject to continued vesting and the Company's right of repurchase.
Diluted EPS reflects the potential dilution of securities that could share in
the earnings of the Company, to the extent such securities are dilutive. Basic
and diluted net loss per share is equivalent for all periods presented herein
due to the Company's net loss in all periods. At March 31, 2001, options to
purchase approximately 2,521,000 shares of common stock at a weighted-average
price of $13.65 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 March 31,
2001, approximately 11,000 shares of common stock outstanding, but subject to
the Company's right of repurchase that 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 basic EPS at such time as the
Company's right of repurchase lapses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board 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. This statement 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 Therapeutics 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.
COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss): (in thousands)
Three Months Ended March 31,
2001 2000
-------- --------
Net income (loss) $ (5,698) $ (481)
Net unrealized gain (loss) on available-for-sale
securities (22) (1,713)
Comprehensive income (loss) $ (5,720) $ (2,194)
The components of accumulated other comprehensive income (loss) relate entirely
to unrealized losses on available-for-sale securities and are $14,000 at March
31, 2001 and $1.2 million at December 31, 2000.
4. CORPORATE COLLABORATIONS
Phytera
In January 2001, the Company entered into a collaboration with Phytera,
Inc. to identify genes from plants involved in the biosynthesis of anti-oxidant
polyphenols, naturally occurring compounds with nutraceutical and pharmaceutical
activity. Phytera will select plant species from its culture libraries and apply
its proprietary ExPAND(R) manipulation technology to regulate the expression of
the metabolic pathways and genes responsible for the production of specific
anti-oxidant polyphenolic compounds. Lynx will then use its proprietary
Megasort(TM) technology to identify genes activated after target compounds are
induced. Lynx and Phytera intend to validate gene targets and jointly
commercialize the genes with other partners in the nutraceutical and
pharmaceutical sectors.
Celera
In March 2001, the Company entered into two agreements with Celera
Genomics. The first agreement involves the integration of sets of Lynx's
high-resolution gene expression data, derived from normal human tissues analyzed
using Lynx's MPSS technology, into Celera's database products for distribution
to Celera's customers through the Celera Discovery System (CDS). Under a second
agreement, Lynx will apply its MPSS technology to perform additional gene
expression analyses on various tissues for Celera and to help supplement the
Lynx database offering.
AstraZeneca
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In March 2001, the Company entered into a collaboration with AstraZeneca to
apply Lynx's Megatype(TM) technology for genome-wide scans to discover single
nucleotide polymorphisms, or SNPs, associated with asthma. AstraZeneca will
provide to Lynx DNA samples from asthma-affected and control individuals, which
will then be analyzed using Megatype(TM) technology. The resulting SNP markers
are expected to provide leads with which to discover asthma-related loci on the
human genome. The data resulting from the collaborative research agreement are
expected to provide insight into the genetic components of asthma.
UroGene
In March 2001, the Company entered into a collaboration with UroGene S.A.
to discover differentially expressed genes associated with prostate cancer,
benign prostatic hypertrophy, renal carcinoma and bladder cancer. Lynx will
apply its Megasort(TM) technology to samples provided by UroGene to identify
differentially expressed genes by comparing normal and diseased tissues in the
various disorders. UroGene plans to incorporate the findings into its overall
research in the area of prostate disorders and oncology.
5. SUBSEQUENT EVENTS
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 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 MegatypeTM technology for 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.
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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 months
ended March 31, 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 three-month periods ended March 31, 2001 and 2000 were
$3.4 million and $3.0 million. Revenues for 2001 included technology access fees
and service fees of $3.3 million and other revenues of $0.1 million. Revenues
for 2000 consisted entirely of technology access and service fees.
OPERATING COSTS AND EXPENSES
Total operating costs and expenses were $8.6 million for the three-month
period ended March 31, 2001, and $6.9 million for the three-month period ended
March 31, 2000. For the three-month period ended March 31, 2001, cost of
services fees were $0.7 million, compared to $0.4 million in the corresponding
period in 2000, and reflect the costs of providing our genomics discovery
services. Research and development expenses were $6.0 million for the
three-month period ended March 31, 2001, compared to $5.0 million in the
corresponding period in 2000. The increase between years was primarily due to an
increase in personnel and facilities-related expenses and an increase in
materials consumed in research and development efforts, including 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 technology.
General and administrative expenses increased to $2.0 million for the
three-month period ended March 31, 2001, compared to $1.5 million in the
corresponding period in 2000. Contributing factors to the increase in expenses
between years include increased personnel and facilities-related expenses. 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 $6,000 in the three-month period ended March 31,
2001, compared to $0.3 million in the 2000 period. The 2001 period reflects a
decrease in interest income due to lower average cash, cash equivalents and
investment balances, partially offset by lower interest expense incurred on
equipment-related debt, as compared to the 2000 period.
OTHER INCOME (LOSS), NET
The other loss amount was $0.5 million in the three-month period ended
March 31, 2001, compared to other income of $3.2 million in the 2000 period. The
2001 loss was related primarily to a writedown in the carrying value of our
equity investment in Inex Pharmaceuticals Corporation, net of a gain recorded
from the receipt of shares of common stock from Inex in the 2001 quarter as part
of the proceeds related to the March 1998 sale of Lynx's former antisense
program. The 2000 other income amount was primarily related to a $3.1 million
gain recognized from the receipt of shares of common stock of Inex.
INCOME TAXES
There was not a provision for income taxes for the quarter ended March 31,
2001. The provision for income taxes for the quarter ended March 31, 2000
consisted entirely of alternative minimum tax.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $5.9 million for the quarter
ended March 31, 2001, as compared to net cash used in operating activities of
$2.6 million for the same period in 2000. This change was primarily due to the
decrease in deferred revenue, a higher loss from operations in the 2001 period
and an increase in other current assets, offset partially by the decrease in
accounts receivable and higher depreciation and amortization expense for fixed
assets and leasehold improvements. Net cash used in operating activities of $5.9
million for the 2001 quarter differed from the net loss primarily due to a
decrease in deferred revenue and an increase in other current assets, offset
partially by depreciation and amortization expense, the decrease in accounts
receivable and the loss related to the equity investment in Inex common stock.
Net cash provided by investing activities related primarily to net maturities of
short-term investments, offset partially by capital expenditures. Net cash
provided by financing activities related primarily to the issuance of common
stock from the exercise of employee stock options, offset partially by repayment
of principal under an equipment loan arrangement. Cash, cash equivalents,
short-term investments and marketable securities were $11.9 million at March 31,
2001.
In late 1998, we entered into a financing agreement with a financial
institution under which we drew down $4.8 million during 1999 for the purchase
of equipment and certain other capital expenditures. Lynx granted the lender a
security interest in all items financed by it under this agreement. Each draw
down under the loan has a term of 48 months from the date of the draw down. As
of March 31, 2001, the principal balance under loans outstanding under this
agreement was approximately $4.1 million. The draw down period under the
agreement expired on March 31, 2001.
Lynx plans to use available funds for ongoing commercial and research and
development activities, working capital and other general corporate purposes and
capital expenditures. We expect capital investments during 2001 will be
comprised primarily of equipment purchases required in the normal course of
business and expenditures for leasehold improvements. We intend to invest our
excess cash in investment-grade, interest-bearing securities.
Lynx has obtained funding for its operations primarily through sales of
preferred and common stock to venture capital investors, institutional investors
and collaborators, payments under contractual arrangements with customers,
collaborators and licensees and interest income. The cost, timing and amount of
funds required for specific uses by us cannot be precisely determined at this
time and will be based upon the progress and the scope of our collaborative and
independent research and development projects; payments received under customer,
collaborative and license agreements; our 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
Lynx's business faces significant risks. These risks include those described
below and may include additional risks of which Lynx is not currently aware or
which Lynx currently does not believe are material. If any of the events or
circumstances described in the following risks actually occurs, our business,
financial condition or results of operations could be materially adversely
affected. These risks should be read in conjunction with the other information
set forth in this report.
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.
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Our strategy for the development and commercialization of our technologies
and potential products includes entering into collaborations, subscription
arrangements or licensing arrangements with pharmaceutical, biotechnology and
agricultural companies. We do not have the resources to develop or commercialize
diagnostic or therapeutic products on our own. We cannot assure you that we will
be able to negotiate additional collaborative arrangements or contracts on
acceptable terms, or at all, or that such collaborations or relationships will
be successful.
Substantially all of our revenues have been derived from corporate
collaborations and agreements. Revenues from collaborations and related
agreements depend upon continuation of the collaborations, the achievement of
milestones and royalties derived from future products developed from our
research and technologies. If we are unable to successfully achieve milestones
or our collaborators fail to develop successful products, we will not earn the
revenues contemplated under such collaborative agreements. If existing
agreements are not renewed, or if we are unable to enter into new collaborative
agreements on commercially acceptable terms, our revenues may decrease, and our
activities may fail to lead to commercialized products.
Our dependence on collaborative arrangements with third parties subjects us
to a number of risks. We have limited or no control over the resources that our
collaborators may choose to devote to our joint efforts. Our collaborators may
breach or terminate their agreements with us or fail to perform their
obligations thereunder. Further, our collaborators may elect not to develop
products arising out of our collaborative arrangements or may fail to devote
sufficient resources to the development, manufacture, market or sale of such
products. Some of our collaborators could also become our competitors in the
future. Our business could be harmed if our collaborators:
o do not develop commercially successful products using our
technologies;
o develop competing products;
o preclude us from entering into collaborations with their competitors;
o fail to obtain necessary regulatory approvals; or
o terminate their agreements with us.
WE ARE AN EARLY STAGE COMPANY, SO OUR PROFITABILITY IS UNCERTAIN AND THERE IS A
HIGH RISK OF FAILURE.
You must evaluate us in light of the uncertainties and complexities
affecting an early stage genomics company. Our products and services are still
in the early stages of commercialization. Our technologies depend on the
successful integration of independent technologies, each of which has its own
development risks. We cannot assure you that our technologies will continue to
be successfully developed, that our services will continue to be sought by
customers or that any products developed from our technologies will prove to be
commercially successful. Further, we cannot assure you that we will be
successful in expanding the scope of our research into new areas of
pharmaceutical, biotechnology or agricultural research. Significant research and
development, financial resources and personnel will be required to capitalize on
our technologies. Commercialization of our technologies, whether through the
sales of services, royalties or other arrangements, may not generate sufficient
or sustainable revenues to enable us to be profitable.
WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES, AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have incurred net losses each year since our inception in 1992,
including net losses of approximately $4.3 million in 1998, $6.7 million in 1999
and $13.3 million in 2000. As of March 31, 2001, we had an accumulated deficit
of approximately $72.3 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 is dependent on
many factors, including:
o our ability to enter into additional corporate collaborations and
agreements;
o our ability to discover genes and targets for drug discovery;
o our collaborators' ability to develop diagnostic and therapeutic
products from our drug discovery targets; and
o the successful clinical testing, regulatory approval and
commercialization of such products.
The time required to reach profitability is highly uncertain, and we cannot
assure you that we will be able to achieve profitability on a sustained basis,
if at all.
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WE MAY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE, WHICH MAY NOT BE AVAILABLE
TO US.
We have invested significant capital in our infrastructure and in our
scientific and business development activities. We expect our capital and
operating expenditures to increase over the next several years as we expand our
operations. Our future capital requirements will depend on many factors,
including:
o the progress and scope of our collaborative and independent research
and development projects;
o payments received under collaborative agreements;
o our ability to establish and maintain collaborative arrangements;
o the progress of the development and commercialization efforts under
our collaborations and corporate agreements;
o the costs associated with obtaining access to samples and related
information; and
o the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other intellectual property rights.
Changes to our current operating plan may require us to consume available
capital resources significantly sooner than we expect. We may be unable to raise
sufficient additional capital when we need it, on favorable terms, or at all. If
our capital resources are insufficient to meet future capital requirements, we
will have to raise additional funds. The sale of equity or convertible debt
securities in the future would be dilutive to our stockholders. If we are unable
to obtain adequate funds on reasonable terms, we may be required to curtail
operations significantly or to obtain funds by entering into financing or
collaborative agreements on unattractive terms.
OUR REVENUES DEPEND ON A SMALL NUMBER OF COLLABORATORS AND CUSTOMERS.
To date, we have received a significant portion of our revenues from a
small number of collaborators and customers. For the three-months ended March
31, 2001, revenues from four collaborators and customers accounted for 36%, 25%,
19% and 10% of our total revenues. For the three-months ended March 31, 2000,
revenues from three collaborators and customers accounted for 46%, 31% and 23%
of our total revenues. Our operating results may be harmed, if we lose one of
these collaborators or customers and we are not able to attract new
collaborators or customers.
WE DEPEND ON A SOLE SUPPLIER TO MANUFACTURE FLOW CELLS USED IN OUR MPSS
TECHNOLOGY.
The flow cells used in our MPSS technology are obtained from a single
supplier. Our reliance on outside vendors generally, and this sole supplier in
particular, involves several risks, including:
o the inability to obtain an adequate supply of required components due
to manufacturing capacity constraints, a discontinuance of a product
by a third-party manufacturer or other supply constraints;
o reduced control over quality and pricing of components; and
o delays and long lead times in receiving materials from vendors.
THE GENOMICS INDUSTRY IS INTENSELY COMPETITIVE AND EVOLVING RAPIDLY, AND OUR
COMPETITORS MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS OBSOLETE.
The biotechnology industry is highly fragmented and is characterized by
rapid technological change. In particular, the area of genomics research is a
rapidly evolving field. Competition among entities attempting to identify genes
associated with specific diseases and to develop products based on such
discoveries is intense. Many of our competitors have substantially greater
research and product development capabilities and financial, scientific, and
marketing resources than we do.
We face, and will continue to face, competition from pharmaceutical,
biotechnology and agricultural companies, as well as academic research
institutions, clinical reference laboratories and government agencies. Some of
our competitors:
o are attempting to identify and patent randomly sequenced genes and
gene fragments;
o are pursuing a gene identification, characterization and product
development strategy based on positional cloning; and
o are using a variety of different gene expression analysis
methodologies, including the use of chip-based systems, to attempt to
identify disease-related genes.
In addition, numerous pharmaceutical, biotechnology and agricultural
companies are developing genomic research programs, either alone or in
partnership with our competitors. Our future success will depend on our ability
to maintain a
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competitive position with respect to technological advances. Rapid technological
development by others may result in our technologies and future products
becoming obsolete.
Any products that are developed through our technologies will compete in
highly competitive markets. Our competitors may be more effective at using their
technologies to develop commercial products. Further, we cannot assure you that
our competitors will not obtain intellectual property rights that would limit
the use of our technologies or the ability to commercialize diagnostic or
therapeutic products using our technologies. As a result, our competitors may be
able to more easily develop technologies and products that would render our
technologies and products, and those of our collaborators, obsolete and
noncompetitive.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES, THIRD
PARTIES MAY BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO COMPETE IN THE MARKET.
Our success depends in part on our ability to obtain patents and maintain
adequate protection of the intellectual property related to our technologies and
products. The patent positions of biotechnology companies, including our patent
position, are generally uncertain and involve complex legal and factual
questions. We will be able to protect our proprietary rights from unauthorized
use by third parties only to the extent that our proprietary technologies are
covered by valid and enforceable patents or are effectively maintained as trade
secrets. The laws of some foreign countries do not protect proprietary rights to
the same extent as the laws of the U.S., and many companies have encountered
significant problems in protecting and defending their proprietary rights in
foreign jurisdictions. We have applied and will continue to apply for patents
covering our technologies, processes and products as and when we deem
appropriate. However, these applications may be challenged or may fail to result
in issued patents. Our existing patents and any future patents we obtain may not
be sufficiently broad to prevent others from practicing our technologies or from
developing competing products. Furthermore, others may independently develop
similar or alternative technologies or design around our patents. In addition,
our patents may be challenged or invalidated or fail to provide us with any
competitive advantage.
We also rely on trade secret protection for our confidential and
proprietary information. We have taken security measures to protect our
proprietary information and trade secrets, but these measures may not provide
adequate protection. While we seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants, we cannot assure you that our proprietary information will not be
disclosed or that we can meaningfully protect our trade secrets. In addition,
our competitors may independently develop substantially equivalent proprietary
information or may otherwise gain access to our trade secrets, which could
adversely affect our ability to compete in the market.
LITIGATION OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY AND ADVERSELY AFFECT OUR ABILITY
TO DEVELOP AND COMMERCIALIZE OUR TECHNOLOGIES AND PRODUCTS.
Our commercial success depends in part on our ability to avoid infringing
patents and proprietary rights of third parties and not breaching any licenses
that we have entered into with regard to our technologies. Other parties have
filed, and in the future are likely to file, patent applications covering genes,
gene fragments, the analysis of gene expression and the manufacture and use of
DNA chips. We intend to continue to apply for patent protection for methods
relating to gene expression and for the individual disease genes and drug
discovery targets we discover. If patents covering technologies required by our
operations are issued to others, we may have to rely on licenses from third
parties. We cannot assure you that such licenses will be available on
commercially reasonable terms, or at all.
Third parties may accuse us of employing their proprietary technology
without authorization. In addition, third parties may obtain patents that relate
to our technologies and claim that use of such technologies infringes these
patents. Regardless of their merit, such claims could require us to incur
substantial costs, including the diversion of management and technical
personnel, in defending ourselves against any such claims or enforcing our
patents. In the event that a successful claim of infringement is brought against
us, we may be required to pay damages and obtain one or more licenses from third
parties. We may not be able to obtain these licenses at a reasonable cost, or at
all. Defense of any lawsuit or failure to obtain any of these licenses could
adversely affect our ability to develop and commercialize our technologies and
products.
WE HAVE LIMITED EXPERIENCE IN SALES AND MARKETING AND THUS MAY BE UNABLE TO
FURTHER COMMERCIALIZE OUR TECHNOLOGIES AND PRODUCTS.
Our ability to achieve profitability depends on attracting collaborators
and customers for our technologies and products. There are a limited number of
pharmaceutical, biotechnology and agricultural companies that are potential
collaborators and customers for our technologies and products. To market our
technologies and products, we must develop a
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sales and marketing group with the appropriate technical expertise. We may not
be able to build such a sales force. We cannot assure you that our sales and
marketing efforts will be successful or that our technologies and products will
gain market acceptance.
OUR SALES CYCLE IS LENGTHY, AND WE MAY SPEND CONSIDERABLE RESOURCES ON
UNSUCCESSFUL SALES EFFORTS OR MAY NOT BE ABLE TO ENTER INTO AGREEMENTS ON THE
SCHEDULE WE ANTICIPATE.
Our ability to obtain collaborators and customers for our technologies and
products depends in significant part upon the perception that our technologies
and products can help accelerate their drug discovery and genomics efforts. Our
sales cycle is typically lengthy because we need to educate our potential
collaborators and customers and sell the benefits of our products to a variety
of constituencies within such companies. In addition, we may be required to
negotiate agreements containing terms unique to each collaborator or customer.
We may expend substantial funds and management effort with no assurance that we
will successfully sell our technologies and products. Actual and proposed
consolidations of pharmaceutical companies have negatively affected, and may in
the future negatively affect, the timing and progress of our sales efforts.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We expect to continue to experience significant growth in the number of our
employees and the scope of our operations. This growth may place a significant
strain on our management and operations. As our operations expand, we expect
that we will need to manage additional relationships with various collaborators
and customers, suppliers and other third parties. Our ability to manage our
operations and growth effectively requires us to continue to improve our
operational, financial and management controls, reporting systems and
procedures. If we are unable to manage this growth effectively, our business may
be harmed.
THE LOSS OF KEY PERSONNEL OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD IMPAIR THE GROWTH OF OUR BUSINESS.
We are highly dependent on the principal members of our management and
scientific staff. The loss of any of these persons' services might adversely
impact the achievement of our objectives and the continuation of existing
collaborations. In addition, recruiting and retaining qualified scientific
personnel to perform future research and development work will be critical to
our success. There is currently a shortage of skilled executives and employees
with technical expertise, and this shortage is likely to continue. As a result,
competition for skilled personnel is intense and turnover rates are high.
Competition for experienced scientists from numerous companies, academic and
other research institutions may limit our ability to attract and retain such
personnel. We are dependent on our President and Chief Executive Officer, Norman
J.W. Russell, Ph.D., the loss of whose services could have a material adverse
effect on our business.
WE USE HAZARDOUS CHEMICALS AND RADIOACTIVE AND BIOLOGICAL MATERIALS IN OUR
BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE
MATERIALS COULD BE TIME CONSUMING AND COSTLY.
Our research and development processes involve the controlled use of
hazardous materials, including chemicals 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. We cannot assure you that ethical, legal and social
concerns about genetic testing and target identification will not adversely
affect market acceptance of our technologies and products.
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Although our technology is not dependent on genetic engineering, genetic
engineering plays a prominent role in our approach to product development. The
subject of genetically modified food has received negative publicity, which has
aroused public debate. Adverse publicity has resulted in greater regulation
internationally and trade restrictions on imports of genetically altered
agricultural products. Public attitudes may be influenced by claims that
genetically engineered products are unsafe for consumption or pose a danger to
the environment. Such claims may prevent genetically engineered products from
gaining public acceptance. The commercial success of our future products may
depend, in part, on public acceptance of the use of genetically engineered
products, including drugs and plant and animal products.
IF WE DEVELOP PRODUCTS WITH OUR COLLABORATORS, AND IF PRODUCT LIABILITY LAWSUITS
ARE SUCCESSFULLY BROUGHT AGAINST US, WE COULD FACE SUBSTANTIAL LIABILITIES THAT
EXCEED OUR RESOURCES.
We may be held liable if any product we develop with our collaborators
causes injury or is otherwise found unsuitable during product testing,
manufacturing, marketing or sale. Although we have general liability and product
liability insurance, this insurance may become prohibitively expensive or may
not fully cover our potential liabilities. Inability to obtain sufficient
insurance coverage at an acceptable cost or to otherwise protect us against
potential product liability claims could prevent or inhibit the
commercialization of products developed with our collaborators.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR RETURNS ON
DIAGNOSTIC OR THERAPEUTIC PRODUCTS THAT WE MAY DEVELOP WITH OUR COLLABORATORS.
If we are successful in validating targets for drug discovery, products
that we develop with our collaborators based on those targets may include
diagnostic or therapeutic products. The ability of our collaborators to
commercialize such products may depend, in part, on the extent to which
reimbursement for the cost of these products will be available from government
health administration authorities, private health insurers and other
organizations. In the U.S., third-party payors are increasingly challenging the
price of medical products and services. The trend towards managed healthcare in
the U.S., legislative healthcare reforms and the growth of organizations such as
health maintenance organizations that may control or significantly influence the
purchase of healthcare products and services, may result in lower prices for any
products our collaborators may develop. Significant uncertainty exists as to the
reimbursement status of newly approved healthcare products, and we cannot assure
you that adequate third-party coverage will be available to enable our
collaborators to maintain price levels sufficient to realize an appropriate
return on their investment in research and product development.
OUR FACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE
OF AN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR
FACILITIES AND EQUIPMENT, WHICH COULD REQUIRE US TO CEASE OR CURTAIL OPERATION.
Our facilities are located near known earthquake fault zones and are
vulnerable to damage from earthquakes. We are also vulnerable to damage from
other types of disasters, including fire, floods, power loss, communications
failures and similar events. If any disaster were to occur, our ability to
operate our business at our facilities would be seriously, or potentially
completely, impaired. In addition, the unique nature of our research activities
could cause significant delays in our programs and make it difficult for us to
recover from a disaster. The insurance we maintain may not be adequate to cover
our losses resulting from disasters or other business interruptions.
Accordingly, an earthquake or other disaster could materially and adversely harm
our ability to conduct business.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE.
The trading price of our common stock is subject to significant
fluctuations. The market prices of the common stock of many publicly held, early
stage biotechnology companies have in the past been, and can in the future be
expected to be, especially volatile. In addition, the securities markets have
from time to time experienced significant price and volume fluctuations that may
be unrelated to the operating performance of particular companies. The following
factors and events may have a significant and adverse impact on the market price
of our common stock:
o fluctuations in our operating results;
o announcements of technological innovations or new commercial products
by us or our competitors;
o release of reports by securities analysts;
o developments or disputes concerning patent or proprietary rights;
o developments in our relationships with current or future collaborators
or customers; and
o general market conditions.
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Many of these factors are beyond our control. These factors may cause a decrease
in the market price of our common stock, regardless of our operating
performance.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY, EITHER OF WHICH COULD
ADVERSELY AFFECT OUR STOCK PRICE.
Under our certificate of incorporation, our board of directors has the
authority, without further action by the holders of our common stock, to issue
2,000,000 additional shares of preferred stock from time to time in series and
with preferences and rights as it may designate. These preferences and rights
may be superior to those of the holders of our common stock. For example, the
holders of preferred stock may be given a preference in payment upon our
liquidation or for the payment or accumulation of dividends before any
distributions are made to the holders of common stock.
Although we have no present intention to authorize or issue any additional
series of preferred stock, any authorization or issuance, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could also have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock. The preferred
stock may have other rights, including economic rights senior to those of our
common stock, and, as a result, an issuance of additional preferred stock could
adversely affect the market value of our common stock. Provisions of Delaware
law may also discourage, delay or prevent someone from acquiring or merging with
us.
RECENT PRONOUNCEMENTS COULD IMPACT OUR FINANCIAL POSITION AND RESULTS OF
OPERATIONS.
In June 1998, the Financial Accounting Standards Board 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. This statement 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. We believe the adoption of
SFAS 133 on January 1, 2001 had no material effect on the financial statements,
since we currently do not invest in derivative instruments and engage in hedging
activities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the Company's investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company invests in highly liquid
and high-quality debt securities. The Company's investments in debt securities
are subject to interest rate risk. To minimize the exposure due to adverse
shifts in interest rates, the Company invests in short-term securities and
maintains an average maturity of less than one year. As a result, Lynx believes
it is not subject to significant interest rate risks.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits - The following documents are filed as Exhibits to this
report:
EXHIBIT NUMBER DESCRIPTION
None.
b) Reports on Form 8-K --- No reports on Form 8-K were filed during
the three-month period ended March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LYNX THERAPEUTICS, INC.
/s/ Norman J.W. Russell
--------------------------------------------
By: Norman J.W. Russell, Ph.D.
President and Chief Executive Officer
Date: May 14, 2001
/s/ Edward C. Albini
--------------------------------------------
By: Edward C. Albini
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 14, 2001
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