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 SEPTEMBER 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 November 1, 2001 was
13,769,477.
LYNX THERAPEUTICS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
PAGE
----
PART I FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2001
and December 31, 2001 and 2000.......................................... 3
Condensed Consolidated Statements of Operations - three and nine months
ended September 30, 2001 and 2000....................................... 4
Condensed Consolidated Statements of Cash Flows - nine months
ended September 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 ............. 18
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................... 19
ITEM 2. Changes in Securities and Use of Proceeds............................... 19
ITEM 3. Defaults Upon Senior Securities......................................... 19
ITEM 4. Submission of Matters to a Vote of Security Holders..................... 19
ITEM 5. Other Information....................................................... 19
ITEM 6. Exhibits and Reports on Form 8-K........................................ 19
SIGNATURES ....................................................................... 20
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2001 2000*
------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,771 $ 7,875
Short-term investments 4,179 10,923
Accounts receivable 878 1,539
Other current assets 2,654 2,270
-------- --------
Total current assets 14,482 22,607
Property and equipment:
Leasehold improvements 12,173 11,718
Laboratory and other equipment 18,728 13,364
-------- --------
30,901 25,082
Less accumulated depreciation and amortization (13,054) (9,263)
-------- --------
Net property and equipment 17,847 15,819
Other non-current assets 5,036 789
-------- --------
$ 37,365 $ 39,215
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 688 $ 1,640
Accrued compensation 618 614
Deferred revenues - current portion 5,426 7,219
Notes payable - current portion 1,420 1,319
Other accrued liabilities 564 928
-------- --------
Total current liabilities 8,716 11,720
Deferred revenues 18,968 17,467
Notes payable 2,047 3,077
Other non-current liabilities 829 729
Stockholders' equity:
Common stock 88,085 75,851
Notes receivable from stockholders (250) (263)
Deferred compensation (898) (1,557)
Accumulated other comprehensive income (loss) 483 (1,157)
Accumulated deficit (80,615) (66,652)
-------- --------
Total stockholders' equity 6,805 6,222
-------- --------
$ 37,365 $ 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.
3
LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Technology access and service fees and other $ 5,764 $ 3,425 $ 13,516 $ 9,275
Operating costs and expenses:
Cost of service fees revenues and other 1,137 1,166 2,910 2,564
Research and development 6,670 5,868 18,492 14,634
General and administrative 1,630 1,568 5,639 4,593
-------- -------- -------- --------
Total operating costs and expenses 9,437 8,602 27,041 21,791
-------- -------- -------- --------
Loss from operations (3,673) (5,177) (13,525) (12,516)
Interest income, net (17) 202 (1) 797
Other income (loss), net 100 9 (338) 3,225
-------- -------- -------- --------
Loss before provision for income taxes (3,590) (4,966) (13,864) (8,494)
Provision for income taxes 100 -- 100 119
-------- -------- -------- --------
Net loss $ (3,690) $ (4,966) $(13,964) $ (8,613)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.27) $ (0.44) $ (1.12) $ (0.76)
======== ======== ======== ========
Shares used in per share computation 13,449 11,399 12,441 11,315
======== ======== ======== ========
See accompanying notes.
4
LYNX THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,964) $ (8,613)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 3,791 2,589
Amortization of deferred compensation 659 691
Gain on sale of antisense program (566) (3,119)
Loss on writedown of equity investment 1,605 --
Changes in operating assets and liabilities:
Accounts receivable 661 (86)
Other current assets (384) (326)
Accounts payable (950) 1,030
Accrued liabilities (360) (108)
Deferred revenues (292) (4,164)
Other non-current liabilities 100 225
-------- --------
Net cash used in operating activities (9,700) (11,881)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (3,807) (10,081)
Maturities of short-term investments 11,152 12,354
Leasehold improvements and equipment purchases, net of retirements (5,819) (4,986)
Notes receivable from officers and employees 124 54
Other non-current assets (4,360) --
-------- --------
Net cash provided by (used in) investing activities (2,710) (2,660)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of equipment loan -- 922
Repayment of equipment loan (929) (728)
Issuance of common stock 12,235 1,065
-------- --------
Net cash provided by financing activities 11,306 1,259
-------- --------
Net increase (decrease) in cash and cash equivalents (1,104) (13,281)
Cash and cash equivalents at beginning of period 7,875 18,050
-------- --------
Cash and cash equivalents at end of period $ 6,771 $ 4,769
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ -- $ 137
======== ========
Interest paid $ 335 $ 108
======== ========
See accompanying notes.
5
LYNX THERAPEUTICS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 for 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 Axaron Bioscience AG, formerly
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 nine months ended
September 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, as
amended, filed with the SEC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
6
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. Revenues from the sales of products
are recognized upon shipment to the customer.
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 September 30, 2001, options to
purchase approximately 2,784,000 shares of common stock at a weighted-average
price of $12.86 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 September 30, 2001, approximately 6,000 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 Company's
financial statements, since the Company currently does not invest in derivative
instruments or 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. Lynx expects to
adopt this statement during the first quarter of fiscal 2002 and does not
believe that SFAS 141 will have a material effect on its 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. Lynx expects to
adopt this statement during the first quarter of fiscal 2002 and does not
believe that SFAS 142 will have a material effect on its operating results or
financial position.
In August 2001, the FASB issued Statement of Financial Accounting
Standard No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143").
SFAS 143 requires entities to record the fair value of a
7
liability for an asset retirement obligation in the period in which it is
incurred. Lynx expects to adopt this statement during the first quarter of
fiscal 2002 and does not believe that SFAS 143 will have a material effect on
its operating results or financial position.
In October 2001, the FASB issued Statement of Financial Accounting
Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which supersedes FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 144 establishes a single accounting model for long-lived assets to be
disposed of and is applicable to financial statements issued for fiscal years
beginning after December 15, 2001 (January 2002 for calendar year-end companies)
with transition provisions for certain matters. Lynx expects to adopt this
statement during the first quarter of fiscal 2002 and does not believe that SFAS
144 will have a material effect on its operating results or financial position.
COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss): (in thousands)
Three Months Ended
September 30,
--------------------
2001 2000
------- -------
Net loss $(3,690) $(4,966)
Net unrealized gain (loss) on available-for-sale securities (570) 1,015
------- -------
Comprehensive loss $(4,260) $(3,951)
======= =======
Nine Months Ended
September 30,
----------------------
2001 2000
-------- --------
Net loss $(13,964) $ (8,613)
Net unrealized loss on available-for-sale securities (1,640) (332)
-------- --------
Comprehensive loss $(12,326) $ (8,945)
======== ========
The components of accumulated other comprehensive income (loss) relate entirely
to unrealized gains (losses) on available-for-sale securities and are $ 483,000
at September 30, 2001 and $(1.2) million at December 31, 2000.
4. SUBSEQUENT EVENT
In connection with the Collaboration Agreement, dated as of October 1,
2000, between Takara Shuzo Co., Ltd. ("Takara") and the Company, on October 1,
2001, the Company issued and sold 320,512 shares of common stock, at a purchase
price of $3.12 per share, to Takara in a private placement pursuant to the
terms and conditions of a Common Stock Purchase Agreement, dated as of October
1, 2001.
8
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, as amended. Operating results for the
three and nine months ended September 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 amended, 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 quarter and nine-month period ended September 30, 2001,
were $5.8 million and $13.5 million, respectively, and for the corresponding
quarter and nine-month period of 2000, were $3.4 million and $9.3 million,
respectively. These revenues consist primarily of technology access and service
fees from Lynx's customers, collaborators and licensees.
OPERATING COSTS AND EXPENSES
Total operating costs and expenses were $9.4 million for the quarter
ended September 30, 2001, compared to $8.6 million in the corresponding period
in the previous year. For the nine-month period ended September 30, 2001,
operating costs and expenses were $27.0 million, compared to $21.8 million in
the corresponding period in 2000.
For the quarter and nine-month period ended September 30, 2001, cost of
service fees were $1.1 million and $2.9 million, respectively, as compared to
$1.2 million and $2.6 million, respectively, for the corresponding quarter and
nine-month period of 2000. These amounts reflect the costs of providing our
genomics discovery services.
Research and development expenses were $6.7 million for the quarter
ended September 30, 2001, compared to $5.9 million in the corresponding period
in 2000. For the nine-month period ended September 30, 2001, research and
development expenses were $18.5 million, compared to $14.6 million in the
corresponding period in 2000. The increase in research and development expenses
in the quarter and nine-month period ended September 30, 2001 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, including the continuing development of the
Megatype(TM) and Protein ProFiler(TM) technologies and 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 $18.5 million for the
nine-month period ended September 30, 2001 are comprised of $5.8 million in
research expenses, including costs related to internal discovery projects, and
$12.7 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 September 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
9
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.
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's
Protein ProFiler(TM) technology aims to provide high-resolution analysis of
complex mixtures of proteins from cells or tissues. Lynx 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.
General and administrative expenses were $1.6 million for the quarters
ended September 30, 2001 and 2000. For the nine-month period ended September 30,
2001, general and administrative expenses increased to $5.6 million, compared to
$4.6 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 expense was $17,000 and $1,000 for the quarter and
nine-month period ended September 30, 2001, respectively, compared to net
interest income of $202,000 and $797,000 for the same respective periods in
2000. The 2001 periods reflect a decrease in interest income due to lower
average cash, cash equivalents and investment balances and lower investment
rates.
OTHER INCOME (LOSS), NET
Other income was $0.1 million in the quarter ended September 30, 2001,
compared to other income of $9,000 in the 2000 period. The 2001 period amount
primarily reflects a gain from the sale of shares of common stock from Lynx's
equity investment in Inex Pharmaceuticals Corporation ("Inex"). For the
nine-month period ended September 30, 2001, the other loss was $0.3 million,
compared to other income of $3.2 million in the same period in 2000. The other
loss for the nine-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, 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. The
other income for the nine-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 the March 1998 sale of Lynx's antisense program to
Inex.
INCOME TAXES
The provision for income taxes for the quarter and nine-month period
ended September 30, 2001 consists entirely of foreign withholding tax on a
payment received from one of our customers, collaborators and licensees. The
provision for income taxes for the quarter and nine-month periods ended
September 30, 2000 consists entirely of our estimated alternative minimum tax
amounts.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $9.7 million for the
nine-month period ended September 30, 2001, as compared to net cash used in
operating activities of $11.9 million for the same period in 2000. This decrease
in net cash used in operating activities was due primarily to the change in
deferred revenue and the difference between the 2001 loss and the 2000 gain
related to Lynx's investment in the common stock of Inex, partially offset by
the higher net loss in the 2001 period. Net cash used in operating activities of
$9.7 million for the nine-month period in 2001 differed from the net loss for
the same period in 2000 primarily due to depreciation and amortization expense.
10
Net cash used in investing activities of $2.7 million for the nine-month
period ended September 30, 2001 related to expenditures for capital assets and
an increase in other non-current assets, due primarily to Lynx's equity
investment in Axaron Bioscience AG, formerly BASF-LYNX Bioscience AG
("BASF-LYNX"), offset partially by the net maturities of short-term investments.
Net cash provided by financing activities of $11.3 million for the nine-month
period ended September 30, 2001 related primarily to the issuance of common
stock pursuant to a common stock purchase agreement between the Lynx and certain
investors, partially offset by repayment of principal under an equipment loan
arrangement. Cash, cash equivalents, short-term investments and marketable
securities were $11.0 million at September 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 Lynx 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 filed with the
Securities and Exchange Commission a resale registration statement related to
the privately placed securities.
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, Lynx 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 September 30, 2001, the
principal balance under loans outstanding under this agreement was approximately
$3.5 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 anticipates that its current cash and cash equivalents, short-term
investments and funding to be received from customers, collaborators and
licensees will enable Lynx to maintain its currently planned operations for at
least the next 12 months. Changes to Lynx's current operating plan may require
it to consume available capital resources significantly sooner than Lynx
expects. If Lynx's capital resources are insufficient to meet its future capital
requirements, Lynx will have to raise additional funds through arrangements with
customers, collaborators and licensees and equity or debt offerings. Lynx does
not know if it will be able to raise sufficient additional capital on acceptable
terms, or at all.
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 September 30, 2001,
11
we had an accumulated deficit of approximately $80.6 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:
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. 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 scientific and business
development activities. Our future capital requirements will be substantial as
we expand our operations, and will depend on many factors, including:
o the progress and scope of our collaborative and independent
research and development projects;
o payments received under customer, collaborative and licensing
agreements;
o our ability to establish and maintain customer, collaborative and
licensing 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.
We anticipate that our current cash and cash equivalents, short-term
investments and funding to be received from customers, collaborators and
licensees 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,
12
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 customers, collaborators and licensees. For
the nine months ended September 30, 2001, revenues from DuPont, BASF, Takara and
the Institute of Molecular and Cell Biology accounted for 36%, 20%, 13% and 14%,
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 Axaron Bioscience AG (formerly 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 customers, collaborators or licensees do
not renew existing agreements, we lose one of these customers, collaborators or
licensees and we do not attract new customers, collaborators or licensees or we
are unable to enter into new 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:
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. 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
13
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:
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.
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:
o attempting to identify and patent randomly sequenced genes and
gene fragments;
o 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
o 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.
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.
14
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 customers,
collaborators and licensees for our technologies and products. There are a
limited number of pharmaceutical, biotechnology and agricultural companies that
are potential customers, collaborators and licensees 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 customers, collaborators and licensees 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 customers, collaborators and licensees 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 customer, collaborator or licensee. 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
customers,
15
collaborators and licensees, 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
customer, collaborator, or license arrangements. 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 customers, collaborators and licensees 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.
16
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 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 September 30, 1999 to
2001, the closing sales price of our common stock as quoted on the Nasdaq
National Market fluctuated from a low of $2.38 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:
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
customers, collaborators or licensees; and
o 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.
17
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 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.
18
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 1, 2001, we sold 320,512 newly issued shares of our
common stock at a purchase price of $3.12 per share to Takara Shuzo
Co., Ltd. in a private placement, for an aggregate purchase price
of approximately $1 million. We issued the shares of common stock
in connection with the Collaboration Agreement, dated as of October
1, 2000, with Takara and 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits - The following documents are filed as Exhibits to
this report:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.22.2+ First Amendment to Joint Venture Agreement, by and
between the Company and BASF Aktiengesellschaft,
dated as of August 14, 2001.
10.24 Common Stock Purchase Agreement, by and between
the Company and Takara Shuzo Co., Ltd., dated as
of October 1, 2001.
(+) Portions of this agreement have been deleted pursuant to our request for
confidential treatment.
b) Reports on Form 8-K -- No reports on Form 8-K were filed
during the three-month period ended September 30, 2001.
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: November 13, 2001
/s/ Edward C. Albini
---------------------------------------------
By: Edward C. Albini
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 13, 2001
20
\
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
10.22.2+ First Amendment to Joint Venture Agreement, by and between
the Company and BASF Aktiengesellschaft, dated as of
August 14, 2001.
10.24 Common Stock Purchase Agreement, by and between the
Company and Takara Shuzo Co., Ltd., dated as of October 1,
2001.
(+) Portions of this agreement have been deleted pursuant to our request for
confidential treatment.
21