e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarterly period ended June 30, 2005
OR
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o |
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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
Solexa, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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94-3161073
(I.R.S. Employer
Identification No.) |
25861 Industrial Blvd.
Hayward, CA 94545
(Address of principal executive offices)
(510) 670-9300
(Registrants 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of common stock outstanding as of August 16, 2005 was 26,092,488.
Solexa, Inc.
FORM 10-Q
For the Quarter Ended June 30, 2005
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Solexa, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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June 30, |
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December 31, |
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2005 |
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2004 |
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(unaudited) |
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See Note 1 |
ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
3,637 |
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$ |
10,463 |
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Accounts receivable |
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124 |
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25 |
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Inventory |
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914 |
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Loan receivable from Lynx Therapeutics, Inc. |
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2,500 |
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Other current assets |
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914 |
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1,875 |
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Total current assets |
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5,589 |
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14,863 |
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Property and equipment, net |
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7,087 |
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1,009 |
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Intangible assets, net |
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3,836 |
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1,943 |
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Goodwill |
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22,221 |
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Other non-current assets |
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255 |
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Total assets |
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$ |
38,988 |
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$ |
17,815 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
1,291 |
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$ |
840 |
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Accrued compensation |
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797 |
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207 |
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Accrued professional fees |
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322 |
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Deferred revenue, current portion |
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770 |
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Equipment financing, current portion |
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43 |
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23 |
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Other accrued liabilities |
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692 |
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391 |
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Deferred rent, current portion |
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663 |
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Note payable, current portion |
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2,964 |
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Total current liabilities |
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7,542 |
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1,461 |
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Deferred revenues |
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1,219 |
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Equipment financing, net of current portion |
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60 |
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4 |
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Deferred rent |
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2,830 |
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Stockholders equity: |
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Series B preferred redeemable convertible shares |
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15,919 |
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A convertible ordinary shares |
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20 |
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Ordinary shares |
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9 |
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Common stock |
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201 |
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Additional paid-in capital |
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62,002 |
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20,385 |
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Deferred compensation |
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(428 |
) |
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Accumulated other comprehensive income |
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2,887 |
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2,697 |
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Accumulated deficit |
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(37,325 |
) |
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(22,680 |
) |
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Total stockholders equity |
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27,337 |
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16,350 |
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Total liabilities and stockholders equity |
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$ |
38,988 |
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$ |
17,815 |
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See accompanying notes.
3
Solexa, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
Service revenue |
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$ |
1,399 |
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$ |
24 |
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$ |
2,004 |
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$ |
41 |
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Operating costs and expenses: |
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Cost of service fees |
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1,738 |
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2,278 |
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Research and development |
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4,362 |
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1,675 |
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7,094 |
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3,035 |
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Sales, general and administrative |
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4,006 |
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575 |
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6,600 |
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1,335 |
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Restructuring charge |
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333 |
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333 |
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Total operating costs and expenses |
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10,439 |
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2,250 |
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16,305 |
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4,370 |
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Loss from operations |
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(9,040 |
) |
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(2,226 |
) |
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(14,301 |
) |
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(4,329 |
) |
Interest income (expense), net |
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(340 |
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36 |
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(337 |
) |
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113 |
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Other (expense), net |
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(5 |
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(7 |
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Net loss |
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(9,385 |
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(2,190 |
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(14,645 |
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(4,216 |
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Dividends to
A ordinary and B preferred shares |
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(522 |
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Net loss attributable to common shareholders |
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$ |
(9,385 |
) |
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$ |
(2,190 |
) |
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$ |
(15,167 |
) |
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$ |
(4,216 |
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Basic and diluted net loss per common share Attributable to common shareholders |
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$ |
(0.48 |
) |
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$ |
(2.11 |
) |
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$ |
(1.19 |
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$ |
(4.07 |
) |
Weighted
average shares used to compute basic and diluted net loss per common share |
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19,354 |
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1,036 |
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12,717 |
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1,036 |
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See accompanying notes.
4
Solexa, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended |
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June 30, |
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2005 |
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2004 |
Operating activities: |
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Net loss |
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$ |
(14,645 |
) |
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$ |
(4,216 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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1,941 |
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356 |
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Stock based compensation expense |
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47 |
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Business
combination engagement fees |
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987 |
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Amortization of warrant value related to note |
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139 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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319 |
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(57 |
) |
Inventory |
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389 |
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Other current assets |
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(178 |
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Prepaid expenses and other current assets |
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1,201 |
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Accounts payable |
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(2,741 |
) |
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(93 |
) |
Other accrued liabilities |
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352 |
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Deferred revenues |
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(872 |
) |
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Non-current liabilities |
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(185 |
) |
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Net cash used in operating activities |
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(13,068 |
) |
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(4,188 |
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Investing activities: |
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Purchases of property and equipment |
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(791 |
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(2,112 |
) |
Cost
associated with a patent purchase |
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(75 |
) |
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Costs in
connection with the business combination paid, not received |
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(642 |
) |
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Net cash used in investing activities |
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(1,508 |
) |
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(2,112 |
) |
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Financing activities: |
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Proceeds from exercise of stock options |
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308 |
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Issuance of common stock, net of repurchases and issuance costs |
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7,813 |
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Repayment of equipment loans |
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(13 |
) |
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Proceeds
from equipment sale and leaseback |
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93 |
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Net cash provided by financing activities |
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8,201 |
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Net decrease in cash and cash equivalents |
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(6,375 |
) |
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(6,300 |
) |
Effect of exchange rate differences on cash and cash equivalents |
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(451 |
) |
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196 |
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Cash and cash equivalents at beginning of period |
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10,463 |
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8,906 |
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Cash and cash equivalents at end of period |
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$ |
3,637 |
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$ |
2,802 |
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See accompanying notes.
5
Solexa, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
1. Nature of Business
Solexa, Inc. (Solexa, or the Company) is in the business of developing and
commercializing genetic analysis technologies. We are currently developing and preparing to
commercialize a novel instrumentation system for genetic analysis based on our
Sequencing-by-Synthesis, or SBS, chemistry and the DNA cluster technology we acquired in 2004.
This platform is expected to support many types of genetic analysis, including DNA sequencing, gene
expression, and micro-RNA analysis. We believe that this technology, which can
potentially generate over a billion bases of DNA sequence from a single experiment with a single
sample preparation, will dramatically reduce the cost, and improve the practicality, of human
re-sequencing relative to conventional technologies. We anticipate introducing our first generation
whole-genome sequencing system by the end of 2005. We believe our new DNA sequencing system will
enable us to implement a new business model based primarily on the sales of genetic analysis
equipment, reagents and other consumables and services to end user customers. Our longer-term goal is to further reduce
the cost of human re-sequencing to a few thousand dollars for use in a wide range of applications
from basic research through clinical diagnostics.
Unless specifically noted otherwise, as used throughout these consolidated financial
statements, Lynx Therapeutics, or Lynx refers to the business, operations and financial results
of Lynx Therapeutics, Inc. prior to the business combination on March 4, 2005, Solexa Limited
refers to the business of Solexa Limited, a privately-held United Kingdom company, prior to the
business combination and Solexa or we refers to the business of the combined company after the
business combination, as the context requires.
2. Basis of Presentation
On March 4, 2005, Solexa Limited, a United Kingdom company, completed a business combination
transaction with Lynx Therapeutics, Inc. (Lynx), a Delaware company listed on the Nasdaq SmallCap
market. In connection with this transaction, Lynx changed its name to Solexa, Inc. and its symbol on
the Nasdaq SmallCap Market to SLXA. The accounting acquirer in the business combination was Solexa
Limited, and the historical financial statements prior to the business combination reflect those of
Solexa Limited. The audited financial statements of Lynx as of
December 31, 2004 and for each of the three years in the
period ended December 31, 2004 are included in the Solexa, Inc. Annual Report
on Form 10-K filed with the Securities and Exchange Commission. The audited financial statements of Solexa Limited as of December 31, 2004, for
each of the three years in the period ended December 31, 2004, and for the period from inception
(September 2, 1998) to December 31, 2004 are included in
Solexas Current Report on Amendment No. 1 on Form 8-K/A filed with Securities and Exchange Commission (the
SEC) on May 20, 2005 (See Note 6).
The accompanying unaudited condensed consolidated financial statements included herein have
been prepared by Solexa without audit, pursuant to the rules and regulations promulgated by the
SEC. Certain prior year amounts have been reclassified to conform to the 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, Solexa 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 for the interim
periods presented. Revenues, expenses, assets and liabilities can vary during each quarter of the
year. Therefore, the results and trends in these interim consolidated condensed financial
statements may not be indicative of results for any other interim period or for the entire year.
Our unaudited condensed consolidated financial statements have been presented on a basis that
contemplates the realization of assets and satisfaction of liabilities in the normal course of
business. We have experienced losses since our inception, including a net loss for the six months
ended June 30, 2005. We expect to continue to incur net losses as we proceed with the
commercialization and development of our technologies and related
products and services. The magnitude of these losses will depend on
the rate of growth, if any, in our revenues and on the level of our expenses. Our cash and cash
equivalents have decreased from $10.5 million as of December 31, 2004 to $3.6 million as of June
30, 2005. On April 21, 2005, we entered into a definitive agreement for a private placement of
common stock and warrants to purchase common stock which raised approximately $31.0 million, net of
expenses. Pursuant to this agreement, on April 25, 2005 we received gross proceeds of approximately
$8.5 million, and on July 12, 2005 we received gross proceeds of approximately $24.0 million. We will need to raise additional capital in order to satisfy our projected capital needs through 2006. The
accompanying consolidated financial statements have been prepared assuming that we will continue as
a going concern.
6
The unaudited condensed consolidated financial statements include all accounts of Solexa and
our wholly owned subsidiaries, Solexa Limited and Lynx Therapeutics GmbH. All significant
intercompany balances and transactions have been eliminated.
Solexa Limited was a development stage company prior to the business combination transaction
with Lynx. As a result of the business combination, Solexa, Inc. is
no longer considered to be a
development stage company.
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ from those
estimates.
Foreign Currency Translation
Assets and liabilities of our wholly-owned foreign subsidiaries are translated to the US
dollar from their local currency, which is the functional currency, at exchange rates in effect at
the balance sheet date for certain assets and liabilities, and revenues and expenses are translated at average exchange rates
prevailing during the period. The resulting translation adjustments are reflected as a separate
component of stockholders equity.
Concentration of Credit Risk and Other Concentrations
Financial instruments that potentially subject us to concentration of credit risk consist
principally of cash equivalents and trade receivables. We invest our excess cash in deposits with
major banks and in money market and short-term debt securities of companies with strong credit
ratings from a variety of industries. These securities generally mature within 365 days and,
therefore, bear minimal interest-rate risk. Our investment policy limits the amount of credit
exposure to any one issuer and to any one type of investment.
Pharmaceutical companies and research institutions account for a substantial portion of our
trade receivables. Accounts receivable are stated as amounts billed to customers. We provide credit
in the normal course of business to our customers and collateral for these receivables is generally
not required. We monitor the creditworthiness of our customers to which we grant credit terms in
the normal course of business. We have not experienced significant credit losses to date.
Fair Value of Financial Instruments
The carrying value of our cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximates their fair value because of the short-term nature of these
financial instruments. The fair value of other short-term and long-term obligations is estimated
based on current interest rates available to us for debt instruments with similar terms, degrees of
risk and remaining maturities. The carrying values of these obligations approximate their fair
values.
Property and Equipment
Property and equipment are stated at original cost and are depreciated using the straight-line
method over the estimated useful lives of the assets, which are generally three years to four
years. Leasehold improvements are amortized over the shorter of the useful life of the asset or the
remaining term of the facility lease.
Revenue Recognition
Revenues are related to service fees for services that we perform on the biological samples we
receive from our customers. We recognize revenue when persuasive evidence of an arrangement exists;
services have been rendered and materials are delivered; the fee is fixed and determinable; and
collectibility is reasonably assured. Determination of whether persuasive evidence of an
arrangement exists and whether our services have been rendered are based on managements judgments
regarding the fixed nature of the fee charged for the analysis performed and the collectibility of
those fees. Should changes in conditions cause management to determine these criteria are not met
for certain transactions then such amounts are recorded as deferred revenue.
7
Inventory
Inventory is stated at the lower of cost (which approximates first-in, first-out cost) or
market. The balances at June 30, 2005 were classified as raw materials and work in process. There
was no inventory at December 31, 2004 as Solexa Limited was in the development stage prior to the
business combination transaction with Lynx, and its primary activity was research
and development. Raw material inventories consist primarily of reagents and other chemicals
utilized while performing genomics services. Work in process inventories consists of accumulated
cost of experiments not completed. Inventory used in providing genomics services and for reagent
sales is charged to cost of service fees. Reagents and chemicals purchased for internal development
purposes are charged to research and development expenses upon receipt or as consumed.
Inventory consisted of the following (in thousands):
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|
June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
Raw materials |
|
$ |
350 |
|
|
$ |
|
|
Work in process |
|
|
564 |
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$ |
914 |
|
|
$ |
|
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Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net tangible and
identifiable intangible assets acquired in the business combination. Other intangibles include
patents, acquired technology rights and developed technology and are being amortized using the
straight-line method over estimated useful lives of seven to ten years.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141,
Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Under Statement
No. 141, all business combinations initiated after June 30, 2001 must be accounted for using the
purchase method. Under Statement No. 142, goodwill and intangible assets with indefinite lives are
no longer amortized but are reviewed annually (or more frequently if there are indicators such
assets may be impaired) for impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their estimated useful lives (but with no
maximum life). The amortization provisions of Statement No. 142 apply to goodwill and intangible
assets acquired after June 30, 2001. We have adopted these statements and are not amortizing
goodwill but will test it for impairment annually or whenever events or circumstances suggest that
the carrying value may not be recoverable.
We
conduct a quarterly review for impairment indicators relating to the carrying value of intangibles
assets, developed product technology and
capitalized patent costs. Indicators of impairment include, but are
not limited to a significant adverse change in the business or legal factors; an adverse action or assessment by a
regulator; and unanticipated competition or loss of key personnel. We concluded that there were no
indicators of impairment of goodwill and other intangible assets as of June 30, 2005.
Pension Costs
We operate a defined contribution pension plan for employees of our Solexa Limited subsidiary.
Contributions are charged to the statement of operations as they become payable into the
individuals pension plans in accordance with the rules of the plan.
Net Loss Per Share
Basic net loss per share has been computed using the weighted-average number of shares of
common stock outstanding for 2005 and ordinary shares for 2004 during the respective periods.
Common stock equivalents including options and warrants to purchase common shares, A ordinary stock and B convertible redeemable preferred
stock, were not included in the computation of diluted net loss per share, as their effect was
anti-dilutive for the periods presented. Therefore, both the basic and diluted net loss per share
computations resulted in the same number and there were no reconciling items. The options, A
ordinary stock and Series B convertible redeemable preferred stock will be included in the
calculation at such time as the effect is no longer anti-dilutive, as calculated using the treasury
stock method. Upon the consummation of the business combination transaction, all ordinary, A
ordinary, and Bconvertible redeemable preferred stock, were converted to Solexa, Inc. common
stock.
8
Stock-Based Compensation
We grant stock options to employees for a fixed number of shares with an exercise price equal
to the fair value of the shares on the date of grant. We account for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25), and
related Interpretations. Under APB 25, when the exercise price of employee stock options equals or
exceeds the market price of the underlying stock on the date of grant, no compensation expense is
recognized.
All stock option awards to non-employees are accounted for at the fair value of the equity
instrument issued, as calculated using the Black-Scholes model, in accordance with FASB Statement
No. 123, Accounting for Stock-based Compensation, or Statement 123, and Emerging Issues Task Force
Consensus No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. The option arrangements are subject
to periodic re-measurement over their vesting terms.
We estimate the fair value of stock options
at the date of grant using the Black-Scholes options valuation model with the following weighted average assumptions
for the three- and six-months ended June 30, 2005 and 2004:
risk-free interest rate of 4.11% and 3.62% in
2005 and 2004, respectively; an expected life of six years; volatility factor of the
expected market price of common stock of 106% in 2005 and 1.00% in 2004; and a dividend yield of zero.
Pro forma information regarding net loss and net loss per share required by SFAS 123, as
amended by SFAS 148, is presented below and has been determined as if we had accounted for awards
under our stock option and employee stock purchase plans using the fair value method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net loss, as reported |
|
$ |
(9,385 |
) |
|
$ |
(2,190 |
) |
|
$ |
(15,167 |
) |
|
$ |
(4,216 |
) |
Add: Stock-based employee compensation as reported |
|
|
34 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
Deduct: Stock-based employee compensation as if fair value
method applied to all awards |
|
|
(2,043 |
) |
|
|
(14 |
) |
|
|
(2,057 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, pro forma as if fair value method applied to all awards |
|
$ |
(11,394 |
) |
|
$ |
(2,204 |
) |
|
$ |
(17,177 |
) |
|
$ |
(4,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net
loss per common share, as reported |
|
$ |
(0.48 |
) |
|
$ |
(2.11 |
) |
|
$ |
(1.19 |
) |
|
$ |
(4.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net
loss per common share, pro forma as if fair value method
applied to all awards |
|
$ |
(0.59 |
) |
|
$ |
(2.13 |
) |
|
$ |
(1.35 |
) |
|
$ |
(4.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
In accordance with SFAS No. 130, Reporting Comprehensive Income, all components of
comprehensive income (loss), including net income (loss), are reported in the financial statements
in the period in which they are recognized. Net income (loss) and other comprehensive income
(loss), including foreign currency translation adjustments, are reported, net of any related tax
effect, to arrive at comprehensive income (loss).
4. Restructuring
On May 17, 2005, the Board of Directors of Solexa approved a workforce
restructuring plan designed to reflect Solexas ongoing transition from its MPSS technology to the
development and commercialization of its next-generation genetic analysis instrument system. The
restructuring plan, which was initiated on May 18, 2005, involved a workforce reduction of
approximately 17% and left Solexa with a post-reduction workforce of approximately 116 U.S. and
U.K. employees. The workforce reduction included positions in most functional areas of Solexa.
Accordingly, we recognized a restructuring charge of $333,000 during
the second quarter for severance and benefits related to the involuntary termination of
approximately 24 employees.
The following table sets forth an analysis of the components of the second quarter
restructuring charges (in thousands):
|
|
|
|
|
|
|
Severance and Benefits |
|
|
|
Restructuring provision: |
|
|
|
|
Severance and benefits |
|
$ |
333 |
|
Cash paid |
|
|
(328 |
) |
|
|
|
|
|
Reserve balance at June 30, 2005 |
|
$ |
5 |
|
|
|
|
|
|
We anticipate that the remaining reserve balance of $5,000 will be paid out by the third
quarter of 2005.
9
5. Recent Accounting Pronouncements
In December 2004, the FASB issued a revision of Statement 123, Accounting for Stock-Based
Compensation. The revision is referred to as Statement 123R Share-Based Payment, effective for
fiscal years beginning after June 15, 2005. Statement 123R supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, (APB 25) and will require companies to recognize
compensation expense, using a fair-value based method, for costs related to share-based payments
including stock options and stock issued under our employee stock purchase plans. We expect to
adopt Statement 123R using the modified prospective method on January 1, 2006. We are currently
evaluating option valuation methodologies and assumptions in light of Statement 123R; the
methodologies and assumptions we ultimately use to adopt Statement 123R may be different than those
currently used. We currently expect that our adoption of Statement 123R will have a material impact
on our consolidated results of operations.
6. Business combination and name change
On March 4, 2005, Solexa Limited, a privately held United Kingdom company and Lynx
Therapeutics, Inc., a Delaware corporation listed on the Nasdaq SmallCap Market, closed a business
combination transaction which enabled Solexa Limited to apply Lynxs expertise in designing genetic
analytical instrumentation to automate Solexas novel DNA sequencing technology. Solexa Limited has become a
wholly-owned subsidiary of Lynx as a result of the transaction.
However, because immediately following the business combination
transaction the former Solexa
Limited shareholders owned approximately 80% of the shares of the common stock, Solexa Limiteds designees to the combined companys board of directors
represent a majority of the combined companys directors and Solexa Limiteds senior management
represented a majority of the senior management of the combined company, Solexa Limited is deemed to be the acquiring company for accounting purposes.
Accordingly, the assets and liabilities of Lynx were recorded, as of the date of the business
combination, at their respective fair values and added to those of Solexa Limited. Reported results
of operations of the combined company issued for the six months ended June 30, 2005, reflect those
of Solexa Limited, to which the operations of Lynx were added from the date of the consummation of
the business combination. The operating results of the combined company reflect purchase accounting
adjustments. Additionally, historical financial condition and results of operations shown for
comparative purposes in this Form 10-Q reflect those of Solexa Limited.
Total
consideration is as follows (in thousands):
|
|
|
|
|
Common stock |
|
$ |
15,922 |
|
Estimated fair value of Lynx stock options assumed |
|
|
851 |
|
Loans from Solexa to Lynx and related interest |
|
|
2,719 |
|
Direct transaction costs of Solexa |
|
|
1,076 |
|
|
|
|
|
|
Total |
|
$ |
20,568 |
|
|
|
|
|
|
Lynx issued approximately 13.8 million shares of common stock in exchange for all of the
outstanding share capital of Solexa Limited and issued options to purchase approximately 910,000
shares of its common stock in exchange for all of Solexa Limiteds outstanding share options.
Based on the average of the closing prices for a range of trading days (September 24, 2004
through September 30, 2004, inclusive) around and including the announcement date of the business
combination transaction between Lynx and Solexa Limited, the fair value of the outstanding Lynx
shares was $4.23 per share or approximately $15.9 million. The total purchase price of $20.6 million
includes the fair value of the outstanding Lynx common stock of approximately $15.9 million, the
fair value of Lynx outstanding stock options of approximately $0.9 million, the fair value of a
loan and related interest from Solexa Limited to Lynx of $2.7 million and direct transaction costs
of approximately $1.1 million.
The net book value of acquired assets and liabilities, which approximated fair value as of
March 4, 2005, was as follows (in thousands):
|
|
|
|
|
Assets: |
|
|
|
|
Cash and cash equivalents |
|
$ |
199 |
|
Other current assets |
|
|
2,269 |
|
Fixed assets |
|
|
7,090 |
|
Other non-current assets |
|
|
256 |
|
|
|
|
|
|
Total assets |
|
$ |
9,814 |
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Current liabilities |
|
$ |
7,263 |
|
Deferred revenue |
|
|
2,861 |
|
Long-term liabilities |
|
|
3,678 |
|
|
|
|
|
|
Total liabilities |
|
$ |
13,802 |
|
|
|
|
|
|
Net book value of acquired assets and liabilities |
|
$ |
(3,988 |
) |
|
|
|
|
|
10
Based in part upon an independent third-party valuation of the intangible assets acquired, we
have allocated the total purchase price on March 4, 2005 as follows (in thousands):
|
|
|
|
|
Net liabilities |
|
$ |
(3,988 |
) |
Goodwill |
|
|
22,221 |
|
Intangible assets |
|
|
1,700 |
|
Deferred compensation |
|
|
635 |
|
|
|
|
|
|
|
|
$ |
20,568 |
|
|
|
|
|
|
Information regarding our acquisition-related intangible assets as of June 30, 2005 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
|
Amount |
|
Amortization |
|
Amount |
Patents and developed technology |
|
$ |
1,700 |
|
|
$ |
57 |
|
|
$ |
1,643 |
|
Amortization
expense of acquisition-related intangible assets was $43,000 and
$57,000 for the three- and six-months
ended June 30, 2005. The patents and developed technology are being amortized on a straight-line
basis over a ten-year period.
For fiscal years ending December 31, estimated amortization expense of acquisition-related
intangible assets for the business combination is as follows (in thousands):
|
|
|
|
|
Remainder of 2005 |
|
$ |
85 |
|
2006 |
|
|
170 |
|
2007 |
|
|
170 |
|
2008 |
|
|
170 |
|
2009 |
|
|
170 |
|
Thereafter |
|
|
878 |
|
|
|
|
|
|
|
|
$ |
1,643 |
|
|
|
|
|
|
Pro Forma Results of Operations
The results of operations of Lynx are included in Solexas condensed consolidated financial
statements from the date of the business combination transaction as of March 4, 2005. The following
table presents pro forma results of operations and gives effect to the business combination
transaction as if the business combination transaction were consummated at the beginning of the
period presented. The unaudited pro forma results of operations are not necessarily indicative of
what would have occurred had the business combination transaction been completed at the beginning
of the period or of the results that may occur in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
Service revenue |
|
$ |
1,399 |
|
|
$ |
1,577 |
|
|
$ |
2,900 |
|
|
$ |
2,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(9,385 |
) |
|
|
(6,009 |
) |
|
|
(22,712 |
) |
|
|
(12,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share-basic and diluted |
|
$ |
(0.48 |
) |
|
$ |
(5.80 |
) |
|
$ |
(1.79 |
) |
|
$ |
(12.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Comprehensive Loss
The following are the components of comprehensive loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net loss |
|
$ |
(9,385 |
) |
|
$ |
(2,190 |
) |
|
$ |
(15,167 |
) |
|
$ |
(4,216 |
) |
Currency translation |
|
|
199 |
|
|
|
(128 |
) |
|
|
190 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) |
|
$ |
(9,186 |
) |
|
$ |
(2,318 |
) |
|
$ |
(14,977 |
) |
|
$ |
(4,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
8. Note Payable
On December 28, 2004, Lynx entered into a loan and security agreement (the Loan Agreement)
with Silicon Valley Bank (SVB) under which SVB advanced a loan to Lynx in the aggregate principal
amount of $3,000,000, which was assumed in the business combination and which remains outstanding
at June 30, 2005. The loan bears interest at 10% per annum and is due on the earlier to occur of
fifteen days after our receipt of gross proceeds in the amount of $10 million for the issuance of
equity in a private placement transaction or July 31, 2005. Under the Loan Agreement, SVB was granted
a security interest in substantially all of Lynxs assets, including but not limited to all of its
goods, equipment, inventory, contract rights, licenses and intellectual property rights. The Loan
Agreement includes negative covenants that, among other things, restrict us from paying dividends,
acquiring all or substantially all of the capital stock of another person, or having a material
change in our ownership or management, without the prior written consent of SVB, which consent
shall not be unreasonably withheld. Under the Loan Agreement, the business combination transaction
required, and received, the prior written consent of SVB. On
July 14, 2005 we repaid the aggregate principal amount and
accrued interest to SVB.
In connection with the Loan Agreement, Lynx issued to SVB a warrant to purchase 47,770 shares
of its common stock at an exercise price of $6.28 per share. The value of the warrant has been
reflected as a financing cost that is being amortized as interest expense over the life of the
loan. The warrant is exercisable until December 27, 2007 and is
still outstanding at June 30, 2005.
9. Commitments and Contingencies
We
lease facilities and certain equipment under non-cancellable operating
leases with various expiration dates through 2008. Future minimum lease payments under
non-cancellable operating leases as of June 30, 2005 are as follows (in thousands):
|
|
|
|
|
|
|
Operating |
|
|
Leases |
Remaining portion of Fiscal 2005 |
|
$ |
(1,345 |
) |
Fiscal 2006 |
|
|
(2,527 |
) |
Fiscal 2007 |
|
|
(2,526 |
) |
Fiscal 2008 and thereafter |
|
|
(2,463 |
) |
Total
minimum payments |
|
$ |
(8,859 |
) |
|
|
|
|
|
10. Redeemable Convertible Preferred Stock and Shareholders Equity
Series B redeemable convertible preferred shareholders were entitled to receive a fixed
dividend of 8% per annum of the subscription price of the shares. The shares together with accrued
dividends were classified as a liability in the balance sheet at December 31, 2004 since the shares
carried certain redemption privileges that were outside of our control. Upon the
closing of the business combination transaction, all outstanding shares of Series B redeemable
convertible preferred stock were exchanged for common stock of Solexa, Inc.
Upon
the closing of the business combination transaction, all outstanding
shares of Series A
ordinary shares were exchanged for common stock of Solexa, Inc.
11. Related-Party Transactions
Axaron Bioscience AG
Solexa holds an equity investment in Axaron Bioscience AG, or Axaron, a company owned
primarily by BASF AG and Solexa, that was originally acquired by Lynx. As of June 30, 2005, we held
approximately a 42% ownership interest in Axaron.
We have a technology licensing agreement with Axaron, which allows Axaron to use our
proprietary MPSS and Megasort technologies non-exclusively in Axarons neuroscience, toxicology and
microbiology programs until December 31, 2007. Lynx
12
received from Axaron a $5.0 million technology license fee, which was recorded as deferred
revenue and was being recognized on a straight-line basis over the non-cancelable term of the
agreement. As part of the purchase accounting related to the business combination, the deferred
revenue balance was reduced to zero since Lynx had no further legal performance obligation related
to the Axaron contract. In accordance with APB 18, we do not apply the equity method as our
investment in Axaron has been reduced to zero and no pro-rata share of Axaron losses has been
reflected in the Condensed Consolidated Statement of Operations for the six months ended June 30,
2005.
Other Transactions with Related Parties
Dr. Shankar Balasubramanian, a director of Solexa Limited, received $19,000 for consulting
services during the first six months of 2005. As of June 30, 2005, no amounts were payable to Dr. Balasubramanian.
Dr. Timothy Rink, a director of Solexa Limited, earned $20,000 for consulting services
provided during the first six months of 2005. As of June 30, 2005, $ 4,000 was outstanding.
Dr. Stephen Allen is a director of Solexa Inc. and Solexa Limited. Dr. Allen earned $9,000 in
director fees from Solexa Limited during the first six months of 2005. As of June 30, 2005, no
amounts were payable to Dr. Allen. Solexa Limited also incurred a liability of $137,000 for consulting services provided during the first six months of 2005, by i2r Ltd, a private
company of which Dr. Allen is a shareholder and a director. As of June 30, 2005, $47,000 was
outstanding under this arrangement.
During
the six-month period ended June 31, 2005 Solexa Limited incurred liabilities of
$54,000 to Abingworth Management Inc. and $26,000 to Abingworth Management Ltd, members of a group
of companies that manages funds that are collectively significant holders of Solexa, Inc. common
stock. These liabilities were incurred for salary and expenses of John West in respect of his
services as a director and Chief Executive Officer of Solexa Limited and for consulting services provided by Abingworth Management Ltd. As of
June 30, 2005, no amounts were outstanding and these arrangements have been discontinued.
12. Purchase of Intangible Assets
In April 2004, Solexa Limited and Lynx jointly acquired from Manteia SA, a company established
under the laws of Switzerland, or Manteia, the rights to proprietary technology assets for DNA
colony generation. The acquired technology assets feature a process to enable parallel
amplification of millions of DNA fragments, each from a single DNA molecule, to create DNA colonies
or clusters. The clusters are dense collections of DNA molecules on a surface, which has enabled
fast and simplified preparation of biological samples for analysis with our SBS technology. We
have incorporated the cluster technology assets into our DNA sequencing process.
In the second quarter of 2005, we purchased intellectual property rights related to our core technology
with a value of $525,000. Pursuant to this arrangement, paid cash of $75,000 and we issued 66,175 shares of common stock with a fair market value of
$450,000. The amount has been capitalized as an intangible asset and
the value is being amortized over 10 years. The Company believes that their technology contains alternative future uses.
13.
Equity Related Transaction
In
June 2005, as part of settling a $1.7 million balanced owed to a consultant, we paid cash of $997,000 and issued a common stock
and warrants valued at$1.7 million. As a result of this transaction, we recorded $987,000 of additional expense in the current
quarter, representing the difference between the amount owed and the amount paid to the consultant.
14.
Subsequent Events
On July 2, 2005, following receipt of stockholder approval at the Solexa 2005 annual meeting
of stockholders, Solexa issued approximately 6,005,000 shares of common stock and warrants to
purchase approximately 3,002,000 shares of common stock to institutional investors receiving gross
proceeds of $24.0 million. We had previously raised $8.5 million of gross proceeds in an initial
closing of the financing on April 25, 2005. In aggregate, we
raised a total of $31.0 million net of
issuance costs.
On July 14, 2005 Solexa repaid, in full, $3.0 million due to SVB under the Loan Agreement.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis should be read in conjunction with our financial statements and
accompanying notes included in this report and our 2004 audited financial statements and notes
thereto included in our Form 8-K, as amended, filed May 20, 2005.
Operating results for the three and six months ended June 30, 2005 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. Our 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. We
undertake no obligation to update any of the forward-looking statements contained herein to reflect
any future events or developments.
Overview
We are in the business of developing and commercializing genetic analysis technologies. We are
currently developing and preparing to commercialize a novel instrumentation system for genetic
analysis based on our Sequencing-by-Synthesis, or SBS, chemistry and the DNA cluster technology
we acquired in 2004. This single platform is expected to support many types of genetic analysis,
including DNA sequencing, gene expression and micro-RNA analysis. We believe that this
technology, which can potentially generate over a billion bases of DNA sequence from a single
experiment with a single sample preparation, will dramatically reduce the cost, and improve the
practicality, of human re-sequencing relative to conventional technologies. We anticipate launching
our first generation whole-genome sequencing system by the end of 2005. We believe our new DNA
sequencing system will enable us to implement a new business model based primarily on the sales of
genetic analysis equipment, reagents and other consumables and services to end user customers. Our longer-term goal is to
further reduce the cost of human re-sequencing to a few thousand dollars for use in a wide range of
applications from basic research through clinical diagnostics.
On March 4, 2005, Solexa Limited, a privately-held United Kingdom company, and Lynx
Therapeutics, Inc., a Delaware corporation, closed a business combination. Solexa Limited became a
wholly-owned subsidiary of Lynx as a result of the transaction, and Lynx changed its name to Solexa,
Inc.. However, because immediately following the business combination transaction the former Solexa
Limited shareholders owned approximately 80% of the shares of the common stock of Lynx, Solexa
Limiteds designees to the combined companys board of
directors represented a majority of the
combined companys directors and Solexa Limiteds senior management represented a majority of the
senior management of the combined company, Solexa Limited is deemed to be the acquiring company for
accounting purposes. Accordingly, the assets and liabilities of Lynx were recorded, as of the date
of the business combination, at their respective fair values and added to those of Solexa Limited.
Reported results of operations of the combined company issued for the three and six months ended
June 30, 2005, reflect those of Solexa Limited, to which the operations of Lynx were added from the
date of the consummation of the business combination. The operating results of the combined company
reflect purchase accounting adjustments, including increased amortization and depreciation expense
for acquired assets. Additionally, historical financial condition and results of operations shown
for comparative purposes in this Form 10-Q reflect those of Solexa Limited.
In connection with this business combination transaction, Lynx changed its name to Solexa,
Inc. and its symbol on the Nasdaq SmallCap Market to SLXA. Unless specifically noted otherwise, as
used throughout these Consolidated Financial Statements, Lynx Therapeutics, and Lynx refers to
the business, operations and financial results of Lynx Therapeutics, Inc. prior to the business
combination on March 4, 2005, Solexa Limited refers to the business of Solexa Limited, a
privately-held United Kingdom company, prior to the business combination and Solexa or we
refers to the business of the combined company after the business combination, as the context
requires.
On May 17, 2005, the Board of Directors of Solexa, Inc. approved a workforce restructuring
plan designed to reflect Solexas ongoing transition from its MPSS technology to the development
and commercialization of its next-generation genetic analysis instrument system. The restructuring
plan, which was initiated on May 18, 2005, involved a workforce reduction of approximately 17% and
left Solexa with a post-reduction workforce of approximately 116 U.S. and U.K. employees. We
incurred restructuring charges of approximately $333,000 in the second quarter of 2005 primarily
associated with employee severance costs. The workforce reduction included positions in most
functional areas of Solexa.
Solexa Limited has incurred net losses each year since its inception in 1998, including a net
loss for the three and six months ended June 30, 2005. As of June 30, 2005, we had an accumulated
deficit of approximately $37.3 million. We expect to continue to incur net losses as we proceed
with the commercialization and additional development of our technologies. The size of these
losses will depend on the rate of growth, if any, in our revenues and on the level of our expenses.
Our cash and cash equivalents have decreased from $10.5 million as of December 31, 2004 to $3.6
million as of June 30, 2005. On April 21, 2005, we entered into a definitive agreement for a
private placement of common stock and warrants to purchase common stock that raised approximately
$31.0 million, net of expenses. On April 25, 2005 we
received net proceeds of approximately $7.8 million pursuant to this agreement. Following the end of the quarter, on July 12, 2005, we
received that balance of net proceeds of approximately $23.2 million pursuant to this agreement.
We will need to raise additional capital in order to satisfy our projected capital needs through
2006. The accompanying consolidated financial statements have been prepared assuming that we will
continue as a going concern.
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Prior to the business combination with Lynx, Solexa Limited was a development stage company
with minimal revenue. As a result of the business combination, Solexa
Limited is no longer a
development stage company. Until our new genetic analysis instrument system is completed, our
primary revenue source will be from our genomics services business, formerly of Lynx. Lynx
historically received and we expect to continue to receive in the future, a significant portion of
our genomics services revenues from a small number of customers.
Revenues from the service business in each quarterly and annual period have in the past, and
could in the future, fluctuate due to: the timing and amount of any technology access fees and the
period over which the revenue is recognized; the level of service
fees; which is tied to the number
and timing of biological samples received from our customers, as well as our
performance of the related genomics services on the samples; the timing of achievement of
milestones and the amount of related payments to us; the sale of instruments, if any, and the
number, type and timing of new, and the termination of existing, agreements with customers.
Our operating costs and expenses, include service fees, research and development
expenses, restructuring costs and sales, general and administrative expenses. Cost of service fees includes primarily the
costs of direct labor, materials and supplies, outside expenses, equipment and overhead incurred by
us in performing our genomics services for, and the costs of reagents
and other consumables and instruments sold to, our
customers. Research and development expenses include the costs of personnel, materials and
supplies, outside expenses, equipment and overhead incurred by us in research and development
related to our genetic analysis instrument systems and process improvements related to our services
business. Research and development expenses are expected to increase due to spending for ongoing
technology development and implementation, as well as increased headcount from the business
combination. Sales, general and administrative expenses include the costs of personnel, materials and
supplies, outside expenses, equipment and overhead incurred by us primarily in our administrative,
sales and marketing, legal and investor relations activities. Sales, general and administrative expenses
are expected to increase in support of our research and development
and commercial efforts, as well as increased headcount from the business combination. Restructuring expenses include severance cost.
Critical Accounting Policies and Estimates
Revenue Recognition
Revenues are related to service fees for services that we perform on the biological samples we
receive from our customers. We recognize revenue when persuasive evidence of an
arrangement exists; services have been rendered and materials are delivered; the fee is fixed and
determinable; and collectibility is reasonably assured. Determination of whether persuasive
evidence of an arrangement exists and whether or not services have been rendered are based on
managements judgments regarding the fixed nature of the fee charged for the analysis performed and
the collectibility of those fees. Should changes in conditions cause management to determine these
criteria are not met for certain transactions then such amounts are deferred.
Inventory
Inventory is stated at the lower of cost (which approximates first-in, first-out cost) or
market. The balances at June 30, 2005 were classified as raw materials and work in process. There
was no inventory at December 31, 2004 as Solexa Limited was in the development stage prior to the
business combination transaction with Lynx and its primary activity was research and development.
Raw material inventories consist primarily of reagents and other chemicals utilized while
performing genomics services. Work in process inventories consists of accumulated cost of
experiments not completed. Inventory used in providing genomics services and reagent sales is
charged to cost of service fees. Reagents and chemicals purchased for internal development purposes
are charged to research and development expense.
Goodwill and Other Intangible Assets
Goodwill represents the difference between the purchase price and the fair value of net
tangible and identifiable intangible assets acquired in the business combination. Other intangibles
include patents, acquired technology rights and developed technology and are being amortized using
the straight-line method over estimated useful lives of seven to ten years.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. Under SFAS No. 141, all business combinations initiated after June 30,
2001 must be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently
if there are indicators
15
such assets may be impaired) for impairment. Separable intangible assets that are not deemed
to have indefinite lives will continue to be amortized over their estimated useful lives (but with
no maximum life). The amortization provisions of SFAS No. 142 apply to goodwill and intangible
assets acquired after June 30, 2001. We have adopted these statements and is not amortizing
goodwill but will test it for impairment annually or whenever events or circumstances suggest that
the carrying value may not be recoverable.
Stock-Based Compensation
We grant stock options to employees for a fixed number of shares with an exercise price equal
to the fair value of the shares on the day prior to the date of grant. We account for stock option
grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25,
and related Interpretations. Under APB 25, when the exercise price of employee stock
options equals or exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
All stock option awards to non-employees are accounted for at the fair value of the equity
instrument issued, as calculated using the Black-Scholes model, in accordance with SFAS No.123,
Accounting for Stock-based Compensation, or SFAS 123, and Emerging Issues Task Force Consensus No.
96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services. The option arrangements are subject to periodic
re-measurement over their vesting terms.
We estimate the fair value of stock options at the date of grant using the Black-Scholes
options valuation model with the following assumptions for the three-
and six-months ended June 30, 2005 and 2004; risk-free interest rate of 4.11% and 3.62% in 2005 and 2004, weighted average
respectively; an expected life of six years; volatility factor of the expected market price of common stock of 106% in 2005
and 1.00% in 2004; and a dividend yield of zero.
Recent Accounting Pronouncements
In December 2004, the FASB issued a revision of FAS No. 123, Accounting for Stock-Based
Compensation. The revision is referred to as FAS 123R Share-Based Payment, effective for
reporting periods beginning after June 15, 2005. On April 14, 2005, the Securities and Exchange
Commission (SEC) adopted a rule amendment that delayed the compliance dates for FAS 123R such
that we are now allowed to adopt the new standard no later than January 1, 2006. FAS 123R
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) and will
require companies to recognize compensation expense, using a fair-value based method, for costs
related to share-based payments including stock options and stock issued under our employee stock
purchase plans. We expect to adopt FAS 123R using the modified prospective method on January 1,
2006. We are currently evaluating option valuation methodologies and assumptions in light of FAS
123R; the methodologies and assumptions we ultimately use to adopt FAS 123R may be different than
those currently used. We currently expect that our adoption of FAS 123R will have a material impact
on our consolidated results of operations.
Results of Operations
Revenues
Revenues for the three-month and six-month periods ended June 30, 2005 were approximately $1.4
million, and $2.0 million respectively. Revenues for the three-month and six-month periods ended
June 30, 2004 were approximately $24,000 and $41,000 respectively. The increase was primarily due
to revenue generated by the service business we acquired in the business combination because we
were a development stage company prior to that time. Through the rest of 2005, we expect revenues
attributable to our
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genomics services business to vary from period to period based in part on the
timing of receipt of biological samples, variability in outstanding contracts, and the presence of
non-service fee revenues, including sales of reagents and other consumables. Near the end of 2005,
when we plan to introduce our SBS-cluster based technology in our genomics services business, our
revenues could vary due to interruptions in service production as the new instrumentation is
brought on line as well as due to variable customer demand until the new technology has
demonstrated equivalence or superiority to the MPSS technology.
Operating Costs and Expenses
Total operating costs and expenses were approximately $10.4 million and $16.3 million for the
three- and six-month periods ended June 30, 2005 respectively, compared to approximately $2.2
million and $4.3 million for the three- and six-month period ended June 30, 2004 respectively.
Cost of service fees reflect primarily the costs of providing our genomics services. For the
three- and six-month period in 2005, cost of service fees were approximately $1.7 million and $2.3
million, respectively, compared to zero for the corresponding periods in 2004, respectively. The
increase in cost of service fees was due to not having sales revenue in the prior year comparative periods.
Research and development expenses were approximately $4.4 million and $7.1 million for the
three- and six-month periods ended June 30, 2005 respectively, compared to approximately $1.7
million and $3.0 million for the corresponding periods in 2004. The increase in the period ended
June 30, 2005 were primarily due to materials and supplies, consulting and other outside services
and the increase in research and development support by the service production group. The increase
in research and development expenses over the same periods in 2004 were primarily due to increases
in headcount at Solexa Limited during 2004 and as a result of the business combination on March 4,
2005, as well as increases in material expenses. Research and development expenses are expected to
increase during the rest of 2005 due to the full effect of the increase in headcount resulting from
the business combination, as well as increased spending for ongoing technology development and
implementation.
Sales, general and administrative expenses were approximately $4.0 million and $6.6 million for
the three-month and six-month periods ended June 30, 2005 respectively, compared to $0.6 million
and $1.3 million for the corresponding periods in 2004. The increases for the period ended June
30, 2005 were primarily due to business combination expenses associated with a stock-based compensation charge representing the fair value
of common stock and warrants issued to a consultant, personnel related expenses, offset with business combination
fees.
In the three-month period ended June 30, we recognized a restructuring charge of
approximately $333,000. The restructuring charge included $333,000 of severance and benefits
related to the involuntary termination of approximately 24 employees compared to zero for the
corresponding period in 2004.
Interest
Income (Expense), Net
Interest expense, net was approximately $340,000 for the three-month and $337,000 for the
six-month periods ended June 30, 2005. Interest income was approximately $36,000 and $113,000 for
the three- and $ six-month period ended June 30, 2004, respectively. The interest expense, net
remained flat over the three- and six-month periods in 2005. The increase in interest expense over
the same periods in 2004 was due to the borrowing of approximately $2.8 million, the write off of
an idle facility and lower average cash balances.
Liquidity and Capital Resources
Cash and cash equivalents have decreased from approximately $10.5 million, as of December 31,
2004, to $3.6 million, as of June 30, 2005. Net cash used in operating activities was approximately
$14.9 million for the six- months ended June 30, 2005, as compared to $4.2 million for the same
period in 2004. The increase in cash used in operating activities for the six-months ended June 30, 2005 was
primarily due to the net loss, primarily offset by a decrease in other current assets. Additionally
there was a non-cash charge for the fair market value of common shares and warrants issued in
connection with business combination fees. Net cash used in operating activities for the six-month
period in 2004 was primarily due to the net loss.
Net cash used in investing activities of $384,000 for the six-month period of 2005, was
primarily due to purchases of property and equipment. Net cash used in investing activities of $2.1
million for the six-month period of 2004 was due to purchases of property and equipment.
Net cash from financing activities of $8.9 million for the six-month period of 2005, consisted
of $8.5 million received pursuant to a private placement of common stock, net of financing cost, and the proceeds
from the exercise of stock options and the sale and leaseback of equipment. There were no financing
activities for the six-month period of 2004.
We plan 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 the remainder of 2005 will be approximately $1.4
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million and will be comprised of
expenditures for capital equipment required in the normal course of business. We intend to invest
our excess cash in investment-grade, interest-bearing securities.
Solexa Limited incurred net losses each year since its inception in 1998 through March 5,
2005, and Solexa has continued to incur losses since the business combination with Lynx. As of June
30, 2005, we had an accumulated deficit of $37.3 million. Net losses may continue for the next
several years as we proceed with the development and commercialization of our technologies. The
presence and size of these potential net losses will depend, in part, on the rate of growth, if
any, in our revenues and on the level of our expenses.
On April 21, 2005, we entered into a definitive agreement for a private placement of common
stock and warrants to purchase common stock that raised approximately $31.0 million, net of
issuance costs. Pursuant to this agreement, on April 25, 2005 we received gross proceeds of
approximately $8.5 million, and on July 12, 2005 we received gross proceeds of $24.0 million. We
will need to raise additional capital in order to satisfy our projected capital needs through 2006.
The accompanying consolidated financial statements have been prepared assuming that we will
continue as a going concern.
Additional Business Risks
Our business faces significant risks. These risks include those described below and may
include additional risks of which we are not currently aware or which we currently do 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 or this
report.
We have a history of net losses, expect to continue to incur net losses and may not achieve or
maintain profitability.
We have incurred net losses each year since our inception, including a net loss for
the three months and six months ended June 30, 2005. As
of June 30, 2005, we had an
accumulated deficit of approximately $37.3 million. Net losses for the combined company may
continue for the next several years as the combined company proceeds with the development and
commercialization of its technologies. The presence and size of these potential net losses will
depend, in part, on the rate of growth, if any, in revenues and on the level of expenses. Research
and development expenditures and sales, general and administrative costs have exceeded revenues to date,
and these expenses may increase in the future. We will need to generate significant revenues to
achieve profitability, and even if we are successful in achieving profitability, there is no
assurance we will be able to sustain profitability.
We will need to raise additional funding, which may not be available on favorable terms, if at all.
We will need to raise additional capital through public or private equity or debt financings
in order to satisfy our projected capital needs through 2006.
The amount of additional capital we will need to raise depends on many factors, including:
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We cannot be certain that additional capital will be available when and as needed or that our
actual cash requirements will not be greater than anticipated. If we require additional capital at
a time when investment in biotechnology companies or in the marketplace in general is limited due
to the then prevailing market or other conditions, we may not be able to raise such funds at the
time that we desire or any time thereafter. If we are unable to obtain financing on terms favorable
to us, we may be unable to execute our business plan and may be required to cease or reduce
development or commercialization of our products, to sell some of all of our technology or assets
or to merge with another entity.
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We may not realize the benefits we expect from the combination of Solexa Limited and Lynx.
The integration of Solexa Limited and Lynx has been and will be complex, time consuming and
expensive, and may disrupt our business. We will need to overcome significant challenges in order
to realize any benefits or synergies from the combination of Solexa Limited and Solexa. These
challenges include the timely, efficient and successful execution of a number of tasks related
generally to the transaction and in particular to product development programs.
We may not succeed in addressing these risks or any other problems encountered in connection
with the combination. The inability to successfully integrate the operations, technology and
personnel of Solexa Limited and Lynx, or any significant delay in achieving integration, could
hurt our business and, as a result, the market price of our common stock.
If management is unable to effectively manage the increased size and complexity of the combined
company, our operating results will suffer.
As of June 30, 2005, the 60 employees of Solexa Limited,
our UK subsidiary, are based near Cambridge, UK and our
57 U.S. employees are based in Hayward, California. As a result we face challenges inherent in
efficiently managing and coordinating the activities of our increased number of employees located
in different countries, including the need to implement appropriate systems, financial controls,
policies, standards and benefits and compliance programs. The inability to successfully manage the
substantially larger and internationally diverse organization, or any significant delay in
achieving successful management, could hurt our business.
We have a new management team that may not be able to define or execute on our business plan.
Effective March 4, 2005, John West was named our chief executive officer. Mr. West has been
the chief executive officer of Solexa Limited since August 2004. Effective March 10, 2005, Peter
Lundberg was named our vice president and chief technical officer. Effective March 31, 2005, Linda
Rubinstein was named our vice president and chief financial officer. Several additional senior
staff members have been hired as well. While Mr. West has experience managing private scientific
instrument companies and large genomics teams within a public U.S. company, he has not previously
been chief executive of a public company in the U.S. Mr. West anticipates dividing his time between
our operations in California and our operations in the U.K. for the foreseeable future. These
executives are new to our company and may not be effective, individually or as a group, in
executing our business plan, and our operating results may suffer as a result.
We could lose key personnel, which could materially affect our business and require us to incur
substantial costs to recruit replacements for lost personnel.
As a result of the combination, current and prospective employees of the combined company
could experience uncertainty about their future roles within the combined company. Any of our key
personnel could terminate their employment, sometimes without notice, at any time. People key to
the operation and management of the combined company are John West,
our chief executive officer, Peter Lundberg, our vice president and chief technical officer, Linda Rubinstein, our vice
president and chief financial officer, and Tony Smith, our vice president and chief scientific
officer. We are also highly dependent on the principal members of our scientific staff. The loss of
any of these persons services might adversely impact the achievement of our objectives and the
continuation of existing customer agreements. 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.
Our companys officers, and directors and their affiliated entities have substantial control over
the company.
As
August 11, 2005, our companys executive officers, directors and entities affiliated with
them, in the aggregate, beneficially own approximately 58% of the combined company, including
warrants exercisable within 60 days of August 11, 2005. These stockholders, if acting
together, would be able to influence significantly all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers or other changes in
corporate control.
We intend to implement a business model that is unproven and different from our former business
model.
Our
current business model is based primarily on the planned sales of
genetic analysis instruments and future sales of reagents and other
consumables and services to support customers in their use of that
equipment. Our historical business model was based on providing genomics services using our MPSS
technology and supplying customers with DNA sequences and other information that result from
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experiments. A change in emphasis from our former business model may cause our current
customers to delay, defer or cancel any purchasing decisions with respect to new or existing
agreements. To date, we have not been contacted by any current customer with respect to any such
delay, deferral or cancellation of any existing agreement. There is no assurance that we will be
successful in changing the emphasis of our business model from providing genomics services to
selling instruments, consumables and support services to new or existing customers.
It is uncertain whether we will be able to successfully develop and commercialize our new products
or to what extent we can increase our revenues or become profitable.
We set out to develop new DNA sequencing technologies and we are now using those technologies
to develop new instruments, consumables and services. If our strategy does not result in the development
of products that we can commercialize, we will be unable to generate significant revenues. Although
we have developed DNA sequencing machines and provide gene expression services to customers with
our machines, these were based on the MPSS technology that we previously developed rather than the
new technologies under development. We cannot be certain that we can successfully develop any new
products or that they will receive commercial acceptance, in which case we may not be able to
recover our investment in the product development.
We will need to develop manufacturing capacity by ourselves or with a partner.
If
we are successful in achieving market acceptance for our new genetic
analysis instruments, we
will need either to build internal manufacturing capacity or to contract with a manufacturing
partner. There is no assurance that we will be able to build manufacturing capacity internally, or
to find a manufacturing partner, to meet both the volume and quality requirements necessary to be
successful in the market. Any delay in establishing or inability to expand our manufacturing
capacity could hurt our business.
Our technology platform is at the development stage and is unproven for market acceptance.
While some of our gene expression technology has been commercialized and is currently in use,
we are developing additional technologies to generate information about gene sequences that may
enable scientists to better understand complex biological processes. These technologies are still
in development, and we may not be able to successfully complete development of these technologies
or to commercialize them. Our success depends on many factors, including:
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You must evaluate us in light of the uncertainties and complexities affecting an early stage
genetic analysis systems company. The application of our technologies is in too early a stage to
determine whether they can be successfully implemented. Our technologies also depend on the
successful integration of independent technologies, each of which has its own development risks.
Furthermore, we are anticipating that, if our technology is able to successfully reduce the cost of
genetic analysis relative to existing providers, our technology may be able to displace current
technology as well as to expand the market for genetic analysis to include new applications that
are not practical with current technology. There is no guarantee, even if our technology is able to
successfully reduce the cost of genetic analysis relative to existing providers, that we will be
able to induce customers with installed bases of conventional genetic analysis instruments to
purchase our system or to expand the market for genetic analysis to include new applications.
Furthermore, if we are able to successfully commercialize our genetic analysis systems only as a
replacement for existing technology, we may face a much smaller market.
We are dependent on our genomics services customers and will need to find additional genetic
analysis customers in the future.
Our strategy for the development and commercialization of our technologies and potential
genetic analytical instrument systems includes entering into customer agreements in which we
provide genomics services to research institutes and pharmaceutical, biotechnology and agricultural
companies. At present, our genomics services business generates substantially all of our revenues.
After we have developed our new genetic analytical instrument systems, it is our intention to
deploy these systems over time to
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replace the instruments currently used in our genomics services business, which operate based
on our MPSS technology. If we are successful in commercializing our
genetic analysis instrument
systems, we anticipate continuing to provide genomics services after
the commercial launch in order to meet particular customer
requirements and, to support
the marketing of our instruments by, for example, allowing potential systems customers to
understand how our instrumentation performs on their samples of interest. There is no guarantee,
however, that our genomics services business will generate positive cash flow or become profitable.
Prior to our business combination with Solexa Limited, Lynx derived substantially all of its
revenues from customer agreements, collaborations and licenses related to our genomics services
business. This continues to be the case for Solexa since the business combination. A significant
portion of our revenues comes from a small number of customers. Thus,
unless and until we are able to commercialize our new genetic
analysis instrument systems under development, we will be dependent on a
small number of customers to continue our current genomics services
business, and the loss of one or more of those
customers could harm our results of operations.
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 areas of genetic analysis platforms and genomics research are rapidly
evolving fields. Competition among entities developing genetic analysis systems is intense. Many of
our competitors have substantially greater research and product development capabilities and
financial, scientific and marketing resources than we do.
In our genomics services business, we face, and will continue to face, competition primarily
from biotechnology companies, such as Affymetrix, Inc., Celera Genomics Group, Gene Logic, Inc.,
and Agencourt Biosciences, academic and research institutions and government agencies, both in the
United States and abroad. We are aware that certain entities are using a variety of gene
expression analysis methodologies, including chip-based systems, to attempt to identify
disease-related genes and to perform clinical diagnostic tests. A number of large companies offer
DNA sequencing equipment including Applera Corporation, Beckman Coulter, Inc., and the Amersham
Biosciences business of General Electric. A number of other smaller companies are also in the
process of developing novel techniques for DNA sequencing. These companies include, among others,
454 Corporation, Helicos Biosciences, Nanofluidics, Visigen and Genovoxx. In order to successfully
compete against existing and future technologies, we will need to demonstrate to potential
customers that our technologies and capabilities are superior to those of our competitors.
In addition, numerous pharmaceutical, biotechnology and agricultural companies are developing
genomics 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.
Moreover, some of our competitors have, and others may, introduce novel genetic analysis platforms before we do so, which, if
adopted by customers, could eliminate the market for our new genetic analysis systems. 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
obsolete or noncompetitive.
We have limited experience in sales and marketing and thus may be unable to further commercialize
our genetic analysis instrument systems and services.
Our ability to achieve profitability depends on attracting customers for our genetic analysis
instrument systems and services. There are a limited number of research institutes and
pharmaceutical, biotechnology and agricultural companies that are potential customers for our
products and services. To market our products, we intend to develop a sales and marketing group
with the appropriate technical expertise. We may not successfully build such a sales force. In
addition, we may seek to enlist a third party to assist with sales and distribution globally or in
certain regions of the world. There is no guarantee, if we do seek to enter into such an
arrangement, that we will be successful in attracting a desirable sales and distribution partner,
or that we will be able to enter into such an arrangement on favorable terms. If our sales and
marketing efforts, or those of any third-party sales and distribution partner, are not successful,
our technologies and products may not to gain market acceptance.
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Our sales cycle for our genomics services business 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 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 for our genomics services business is typically lengthy, up to
approximately nine months, because we need to educate our potential customers and sell the benefits
of our products to a variety of constituencies within such entities. In addition, we may be
required to negotiate agreements containing terms unique to each customer. We may expend
substantial funds and management effort without any 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 currently utilize a single supplier to purchase PacI, an enzyme used in our MPSS service.
PacI is a restriction enzyme used to digest the PCR product that is loaded onto 5-micron beads
prior to MPSS sequencing. We currently purchase PacI from New England BioLabs under a supply
agreement, the term of which is scheduled to expire on May 25, 2006. Our reliance on a sole vendor
involves several risks, including:
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the inability to obtain an adequate supply due to manufacturing capacity constraints, a
discontinuance of a product by a third-party manufacturer or other supply constraints; |
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the potential lack of leverage in contract negotiations with the sole vendor; |
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reduced control over quality and pricing of components; and |
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delays and long lead times in receiving materials from vendors. |
We do not believe, however, that our business is dependent substantially on PacI or the
intellectual property associated with PacI. We believe that we would be able to purchase
alternative enzymes from other providers without incurring significant additional expenses or time
delays should the need arise. In addition, if we are able to successfully implement new SBS
sequencing technologies under development in our genetic services business, we will no longer
require PacI or an alternative enzyme. We intend to seek to extend or renew our contract with New
England Biolabs and believe we can extend or renew the contract without unreasonable effort or
expense.
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. 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. Federal, state and local laws and regulations govern the
use, manufacture, storage, handling and disposal of hazardous materials. Compliance with
environmental laws and regulations may be expensive, and current or future environmental
regulations may impair our research, development and production efforts.
If we fail to adequately protect our proprietary technologies, third parties may be able to use our
technologies, 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
genetic analysis instrument, consumables and other reagents sales and services companies and other biotechnology companies,
including us, 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
22
these applications may fail to result in issued patents. Our existing patents and any future
patents we obtain may not be sufficiently broad to prevent others from practicing our technologies
or from developing competing products. Furthermore, others may independently develop similar or
alternative technologies or design around our patents. In addition, our patents may be challenged
or invalidated or fail to provide us with any competitive advantage.
We also rely on trade secret protection for our confidential and proprietary information.
However, trade secrets are difficult to protect. We protect our proprietary information and
processes, in part, with confidentiality agreements with employees 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 imaging, image analysis, fluid delivery, DNA arrays on solid surfaces,
chemical and biological reagents for DNA sequencing, genes, gene fragments, proteins, the analysis
of gene sequence, gene expression and protein 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. 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 need 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.
Ethical, legal and social issues may limit the public acceptance of, and demand for, our
technologies and products.
Our customers may seek to develop diagnostic products based on genes or proteins. 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 or protein expression profiles. Similarly, employers could discriminate against employees
with gene or protein 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. Claims that genetically engineered products are unsafe for consumption or
pose a danger to the environment may influence public attitudes and 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.
23
Our facilities in Hayward, California 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 operations.
Our facilities in Hayward, California 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 price 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 period from April 1, 2004 to
June 30, 2005, the closing sales price of our common stock as quoted on the Nasdaq SmallCap Market fluctuated from a low of $2.96 to a high of $19.99 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:
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fluctuations in our operating results; |
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announcements of technological innovations or new commercial products by us or our competitors; |
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release of reports by securities analysts; |
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developments or disputes concerning patent or proprietary rights; |
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developments in our relationships with current or future customers; and |
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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.
Our common stock is listed on the Nasdaq SmallCap Market, which subjects us to various statutory
requirements and may have adversely affected the liquidity of our common stock, and a failure to us
to meet the listing maintenance standards of the Nasdaq SmallCap Market could result in delisting
from the Nasdaq SmallCap Market.
Effective May 22, 2003, a Nasdaq Qualifications Panel terminated our Nasdaq National Market
Listing and transferred our securities to the Nasdaq SmallCap Market. In order to maintain the
listing of our securities on the Nasdaq SmallCap Market, we must be able to demonstrate compliance
with all applicable listing maintenance requirements. In the event we are unable to do so, our
securities will be delisted from the Nasdaq Stock Market.
With our securities listed on the Nasdaq SmallCap Market, we face a variety of legal and other
consequences that will likely negatively affect our business including, without limitation, the
following:
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we may have lost our exemption from the provisions of Section 2115 of the California
Corporations Code, which imposes aspects of California corporate law on certain
non-California corporations operating within California. As a result, (i) our stockholders
may be entitled to cumulative voting and (ii) we may be subject to more stringent
stockholder approval requirements and more stockholder-favorable dissenters rights in
connection with certain strategic transactions; |
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the state securities law exemptions available to us are more limited, and, as a result,
future issuances of our securities may require time-consuming and costly registration
statements and qualifications; |
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due to the application of different securities law exemptions and provisions, we have
been required to amend our stock option plan, suspend our stock purchase plan and must
comply with time-consuming and costly administrative procedures; |
24
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we have been unable to obtain coverage of our company by securities analysts; and |
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we may lose current or potential investors. |
In addition, we are required to satisfy various listing maintenance standards for our
common stock to be quoted on the Nasdaq SmallCap Market. If we fail to meet such standards, our
common stock would likely be delisted from the Nasdaq SmallCap Market and trade on the
over-the-counter bulletin board. This alternative is generally considered to be a less efficient
market and would seriously impair the liquidity of our common stock and limit our potential to
raise future capital through the sale of our common stock, which could materially harm our
business.
Anti-takeover provisions in our charter documents and under Delaware law may make it more
difficult to acquire us or to effect a change in our management, even though an acquisition or
management change may be beneficial to our stockholders.
Under our certificate of incorporation, our board of directors has the authority, without
further action by the holders of our common stock, to issue 2,000,000 additional shares of
preferred stock from time to time in series and with preferences and rights as it may designate.
These preferences and rights may be superior to those of the holders of our common stock. For
example, the holders of preferred stock may be given a preference in payment upon our liquidation
or for the payment or accumulation of dividends before any distributions are made to the holders of
common stock.
Any authorization or issuance of preferred stock, while providing desirable flexibility in
connection with financings, 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
Risks
Short-Term Investments
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. Our investments in debt securities are subject
to interest rate risk. To minimize the exposure due to adverse shifts in interest rates, we invest
in short-term securities and maintain an average maturity of less than one year. As a result, we do
not believe we are subject to significant interest rate risk.
Foreign Currency Rate Fluctuations
On March 4, 2005, as a result of the business combination between Solexa Limited and Lynx,
Solexa Limited became our wholly-owned subsidiary. The functional currency for Solexa Limited is
the British pound. Its accounts are translated from the British pound to the U.S. dollar using the
current exchange rate in effect at the balance sheet date, for balance sheet accounts, and using
the average exchange rate during the period, for revenues and expense accounts. The effects of
translation are recorded as a separate component of stockholders equity. Exchange gains and losses
arising from these transactions are recorded using the actual exchange differences on the date of
the transaction. We have not taken any action to reduce our exposure to changes in foreign currency
exchange rates, such as options or futures contracts, with respect to transactions between us and
Solexa Limited.
The functional currency for our German subsidiary (the operations of which substantially
ceased at the end of 2003) is the Euro. Our German subsidiarys accounts are translated from the
Euro to the U.S. dollar using the current exchange rate in effect at the balance sheet date, for
balance sheet accounts, and using the average exchange rate during the period, for revenues and
expense accounts. The effects of translation are recorded as a separate component of stockholders
equity. Exchange gains and losses arising from these transactions are recorded using the actual
exchange differences on the date of the transaction. We did not take any action to reduce our
exposure to changes in foreign currency exchange rates, such as options or futures contracts, with
respect to transactions with our German subsidiary. Transactions with our European customers are denominated in U.S. dollars.
25
Item 4. Controls and Procedures
Based on their evaluation as of June 30, 2005, our chief executive officer and vice president
and chief financial officer, have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were
ineffective in providing reasonable assurance that the information required to be disclosed by us
in this report on Form 10-Q was recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and Form 10-Q.
A material weakness is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. Management has identified the following
material weakness. As of June 30, 2005, we did not maintain effective controls over the application
of generally accepted accounting principles (GAAP) related to the financial reporting process. We
currently have limited financial personnel and they do not have sufficient depth, skills and
experience to ensure that all transactions are accounted for in accordance with GAAP. Additionally,
we have insufficient formalized procedures to assure that transactions receive adequate review by
accounting personnel with sufficient technical accounting expertise.
These control deficiencies resulted in numerous adjustments that were required to
bring our 2004 audited financial statements and our 2005 quarterly unaudited financial statements into compliance with US GAAP. The impact of these
adjustments did not require the restatement of any of our financial statements.
The ineffective control over the application of GAAP related to the financial reporting
process could result in a material misstatement to our annual or interim financial statements that
may not be prevented or detected. As a result, management has determined that this control
deficiency constituted a material weakness in internal controls over financial reporting as of June
30, 2005.
Changes in Internal Controls over Financial Reporting
Between May 2005 and July 2005 the accounting personnel employed by Solexa, Inc. prior to the
business combination departed the Company, and we are in the process of hiring replacements. On
April 26, 2005, we hired a U.S. controller. In addition, we are in the process of reviewing our control
procedures surrounding monthly account reconciliations, support for manual journal vouchers and the
review of the monthly close to determine any additional steps necessary to remediate the material
weaknesses.
Except
as discussed above, there were no changes in our internal control over financial reporting
during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our chief executive officer and vice president and chief financial
officer, does not expect that our disclosure controls and procedures or our internal controls will
prevent all errors and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The design of any system
of controls also is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of
the inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and not be detected.
26
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 29, 2005, we issued 66,175 shares of common stock to certain individuals
pursuant to that certain Asset Purchase Agreement dated
April 29, 2005, in exchange for certain patents that were
transferred and assigned to us.
On May 6, 2005, we issued to Seven Hills Partners LLC 180,000 shares of common stock and a
warrant to purchase up to 90,000 shares of common stock at an exercise price of $5.00 per share
pursuant to a letter agreement, dated April 29, 2005, and as payment of a portion of the fees owed
for services rendered by Seven Hills Partners LLC in connection with the business combination
between Lynx and Solexa Limited.
We relied on Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act,
and/or Regulation D of the Securities Act, for transactions by an issuer not involving a public
offering in connection with the sale and issuance of common stock and warrants in these
transactions.
Item 6. Exhibits
We incorporate by reference all exhibits filed in connection with our Annual Report on Form
10-K for the year ended December 31, 2004.
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Exhibit |
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Number |
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Description |
2.2.2
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Amendment No. 2 to Acquisition Agreement, dated as of May 6, 2005, by and between the Company and Solexa
Limited, incorporated by reference to the indicated exhibit of the Companys Current Report on Form 8-K filed
on May 11, 2005. |
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10.57
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Indemnity Agreement, dated as of April 5, 2005, by and between Solexa, Inc. and Linda M. Rubinstein,
incorporated by reference to the indicated exhibit of the Companys Current Report on Form 8-K filed on April
8, 2005. |
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10.58
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Securities Purchase Agreement, dated April 21, 2005, by and among the Company and the individuals and
entities identified on the signature pages thereto, incorporated by reference to the indicated exhibit of the
Companys Current Report on Form 8-K filed on April 26, 2005. |
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10.59
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Form of Warrant issued by the Company in favor of each investor except SF Capital Partners, Ltd.,
incorporated by reference to the indicated exhibit of the Companys Current Report on Form 8-K filed on April
26, 2005. |
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10.60
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Form of Warrant issued by the Company in favor of SF Capital Partners, Ltd., incorporated by reference to the
indicated exhibit of the Companys Current Report on Form 8-K filed on April 26, 2005. |
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10.61
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Letter Agreement, dated April 21, 2005, between the Company and ValueAct Capital Master Fund, L.P.,
incorporated by reference to the indicated exhibit of the Companys Current Report on Form 8-K filed on April
26, 2005. |
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10.62
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Warrant issued by the Company to Seven Hills Partners LLC on May 6, 2005, incorporated by reference to the
indicated exhibit of the Companys Current Report on Form 8-K filed on May 11, 2005. |
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10.63
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Solexa, Inc. 2005 Equity Incentive Plan, incorporated by reference to the indicated exhibit of the Companys
Current Report on Form 8-K filed on June 9, 2005. |
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10.64
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Form of Stock Option Agreement, incorporated by reference to the indicated exhibit of the Companys Current
Report on Form 8-K filed on June 9, 2005. |
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10.65
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Non-Executive Director Compensation Program, incorporated by reference to the indicated exhibit of the
Companys Current Report on Form 8-K filed on June 9, 2005. |
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10.66
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Executive Employment Agreement, dated June 23, 2005, by and between John S. West and Solexa, Inc.,
incorporated by reference to the indicated exhibit of the Companys Current Report on Form 8-K filed on June
28, 2005. |
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10.67
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Indemnity Agreement, dated June 23, 2005, by and between John West and Solexa, Inc., incorporated by
reference to the indicated exhibit of the Companys Current Report on Form 8-K filed on June 28, 2005. |
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31.1
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Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
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31.2
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Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended |
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32.1
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Certification required by Rule 13a-14(a) or Rule 15d-14(a) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. 1350). |
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* |
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This certification accompanies the Quarterly Report on Form 10-Q to which it relates,
pursuant to Section 906 of the Sarbanes Oxley Act of 2002, and is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by reference into any filing
of Solexa, Inc. under the Securities Act or the Exchange Act (whether made before or after the
date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language
contained in such filing. |
27
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.
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SOLEXA, INC.
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/s/ John West
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By: |
John West |
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Chief Executive Officer
(Principal Executive Officer) |
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Date: August 22, 2005
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/s/ Linda Rubinstein
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By: |
Linda Rubinstein |
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Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
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Date: August 22, 2005
28
Exhibit Index
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Exhibit |
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Number |
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Description |
2.2.2
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Amendment No. 2 to Acquisition Agreement, dated as of May 6, 2005, by and between the Company and Solexa
Limited, incorporated by reference to the indicated exhibit of the Companys Current Report on Form 8-K filed
on May 11, 2005. |
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10.57
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Indemnity Agreement, dated as of April 5, 2005, by and between Solexa, Inc. and Linda M. Rubinstein,
incorporated by reference to the indicated exhibit of the Companys Current Report on Form 8-K filed on April
8, 2005. |
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10.58
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Securities Purchase Agreement, dated April 21, 2005, by and among the Company and the individuals and
entities identified on the signature pages thereto, incorporated by reference to the indicated exhibit of the
Companys Current Report on Form 8-K filed on April 26, 2005. |
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10.59
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Form of Warrant issued by the Company in favor of each investor except SF Capital Partners, Ltd.,
incorporated by reference to the indicated exhibit of the Companys Current Report on Form 8-K filed on April
26, 2005. |
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10.60
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Form of Warrant issued by the Company in favor of SF Capital Partners, Ltd., incorporated by reference to the
indicated exhibit of the Companys Current Report on Form 8-K filed on April 26, 2005. |
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10.61
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Letter Agreement, dated April 21, 2005, between the Company and ValueAct Capital Master Fund, L.P.,
incorporated by reference to the indicated exhibit of the Companys Current Report on Form 8-K filed on April
26, 2005. |
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10.62
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Warrant issued by the Company to Seven Hills Partners LLC on May 6, 2005, incorporated by reference to the
indicated exhibit of the Companys Current Report on Form 8-K filed on May 11, 2005. |
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10.63
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Solexa, Inc. 2005 Equity Incentive Plan, incorporated by reference to the indicated exhibit of the Companys
Current Report on Form 8-K filed on June 9, 2005. |
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10.64
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Form of Stock Option Agreement, incorporated by reference to the indicated exhibit of the Companys Current
Report on Form 8-K filed on June 9, 2005. |
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10.65
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Non-Executive Director Compensation Program, incorporated by reference to the indicated exhibit of the
Companys Current Report on Form 8-K filed on June 9, 2005. |
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10.66
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Executive Employment Agreement, dated June 23, 2005, by and between John S. West and Solexa, Inc.,
incorporated by reference to the indicated exhibit of the Companys Current Report on Form 8-K filed on June
28, 2005. |
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10.67
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Indemnity Agreement, dated June 23, 2005, by and between John West and Solexa, Inc., incorporated by
reference to the indicated exhibit of the Companys Current Report on Form 8-K filed on June 28, 2005. |
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31.1
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Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
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31.2
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Certification required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended |
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32.1
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Certification required by Rule 13a-14(a) or Rule 15d-14(a) and Section 1350 of Chapter 63 of Title 18 of the
United States Code (18 U.S.C. 1350). |
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* |
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This certification accompanies the Quarterly Report on Form 10-Q to which it relates,
pursuant to Section 906 of the Sarbanes Oxley Act of 2002, and is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by reference into any filing
of Solexa, Inc. under the Securities Act or the Exchange Act (whether made before or after the
date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language
contained in such filing. |
29