ORKA

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, for Hyseq Pharmaceuticals, Inc. (d/b/a Hyseq, Inc.). The company is a biopharmaceutical firm focused on developing therapeutic protein-based products and operating a subsidiary, Callida Genomics, Inc., for DNA sequencing technology. The filing includes unaudited condensed consolidated financial statements.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Contract revenues increased to $11.0 million for the quarter (from $5.9 million in 2001) and $22.9 million for the nine-month period (from $17.5 million in 2001). This was driven by accelerated collaboration revenues with BASF Plant Science and amortization of a license payment from Affymetrix.
• Operating Expenses: Total operating expenses decreased to $12.0 million for the quarter (from $15.8 million in 2001) but increased to $50.6 million for the nine-month period (from $42.2 million in 2001). The nine-month increase was primarily due to a $10.0 million non-cash charge for warrants granted to Amgen, Inc. in Q1 2002.
• Net Loss: The net loss for the quarter improved significantly to $1.4 million (from $10.0 million in 2001). However, the nine-month net loss widened to $28.5 million (from $25.1 million in 2001) due to the Amgen warrant charge and increased R&D costs.
• Liquidity: Cash balances decreased from $12.3 million at year-end 2001 to $4.3 million at September 30, 2002, reflecting a net cash decrease of $8.1 million.

Guidance, Outlook, and Risks

• Product Development: The company is advancing alfimeprase, a thrombolytic agent for Peripheral Arterial Occlusion (PAO), in collaboration with Amgen. Phase I clinical trials were initiated in Q2 2002. Management expects R&D costs for alfimeprase to be approximately $3.0 million in 2002, with substantial increases expected in 2003 if trials proceed.
• Revenue Outlook: Revenues for 2003 are expected to decrease substantially as the collaboration with BASF Plant Science is scheduled to accelerate completion by January 31, 2003.
• Capital Needs: The company anticipates needing additional funding in 2003 to continue biopharmaceutical research and clinical trials. Management has implemented cost-control measures, including a partial hiring freeze and deferral of facility expansion.
• Subsequent Events:
  • On October 1, 2002, Callida Genomics announced a collaboration with SurroMed, Inc., partially funded by a $3.2 million NIST grant.
  • On October 25, 2002, the company terminated its lease for Humboldt Court properties and secured a six-month option to purchase them for $15.3 million. This required a $5.4 million termination fee and a $4.5 million option fee.
  • The company drew down an additional $6.0 million from its Chairman's line of credit in October and November 2002.
• Risks: Significant risks include the inability to secure additional financing, the high cost and uncertainty of clinical trials, dependence on collaboration partners, and potential delisting from Nasdaq if stockholders' equity falls below $10 million or stock price drops below $1.00.

Investor Verification Checklist

• Verify the status and funding adequacy for the Phase I clinical trials of alfimeprase.
• Confirm the timeline and financial impact of the BASF collaboration completion in January 2003.
• Assess the company's ability to raise capital given the $4.3 million cash balance and $28.5 million nine-month net loss.
• Review the terms of the lease termination and purchase option for the Humboldt Court properties and the associated cash outflows.
• Monitor the company's compliance with Nasdaq listing requirements regarding stockholders' equity and stock price.