<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act Of 1934
For the Quarterly Period ended June 30, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act Of 1934
Commission file number 0-27150
PATHOGENESIS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 91-1542150
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 Elliott Avenue West
Seattle, Washington 98119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (206) 476-8100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports,
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
At August 9, 1996, the number of shares outstanding of the registrant's Common
Stock, par value $.001 per share, was 13,756,857 shares.
<PAGE> 2
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 11,664,600 $ 575,297
Investment securities 59,946,420 36,871,537
Interest receivable 265,242 765,216
Grants receivable 122,304 --
Prepaid expenses 321,392 671,711
------------- -------------
Total current assets 72,319,958 38,883,761
------------- -------------
Property and equipment, at cost:
Leasehold improvements 6,566,104 6,435,336
Furniture and equipment 5,469,619 5,338,435
------------- -------------
12,035,723 11,773,771
Less accumulated depreciation and amortization 4,491,013 3,702,152
------------- -------------
Net property and equipment 7,544,710 8,071,619
------------- -------------
Other assets, net 5,178 7,758
------------- -------------
Total assets $ 79,869,846 $ 46,963,138
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 850,007 $ 1,635,711
Compensation and benefits 476,700 859,462
Clinical development costs 1,443,335 876,132
Other accrued expenses 333,247 81,473
------------- -------------
Total current liabilities 3,103,289 3,452,778
------------- -------------
Long-term liability 245,683 461,986
Stockholders' equity:
Preferred stock $.01 par value. Authorized 1,000,000 shares; -- --
issued and outstanding none
Common stock $.001 par value. Authorized 20,000,000 shares;
issued and outstanding 13,738,894 shares 13,739 10,898
Additional paid-in capital 133,109,534 89,520,221
Unrealized gain (loss) on investment securities (102,824) 38,458
Deficit accumulated during the development stage (56,499,575) (46,521,203)
------------- -------------
Total stockholders' equity 76,520,874 43,048,374
------------- -------------
Total liabilities and stockholders' equity $ 79,869,846 $ 46,963,138
============= =============
</TABLE>
<PAGE> 3
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
December 10,
1991
(Incorporation)
Three Months Ended Six Months Ended Through
June 30, June 30, June 30,
---------------------------- ----------------------------------------------
1996 1995 1996 1995 1996
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenue:
Grant revenue $ 122,304 $ -- 122,304 $ -- $ 122,304
Operating expenses:
Research and development 5,006,197 4,156,541 9,497,155 7,708,535 46,925,644
General and administrative 1,090,202 1,168,999 1,923,507 1,904,374 15,059,693
------------ ------------ ------------ ------------ ------------
Total operating expenses 6,096,399 5,325,540 11,420,662 9,612,909 61,985,337
------------ ------------ ------------ ------------ ------------
Operating loss (5,974,095) (5,325,540) (11,298,358) (9,612,909) (61,863,033)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Investment income, net 800,940 328,773 1,347,228 634,150 5,528,493
Other expense (14,800) (10,518) (27,242) (20,038) (165,035)
------------ ------------ ------------ ------------ ------------
Net other income 786,140 318,255 1,319,986 614,112 5,363,458
============ ============ ============ ============ ============
Net loss $ (5,187,955) $ (5,007,285) $ (9,978,372) $ (8,998,797) $ 56,499,575
============ ============ ============ ============ ============
Net loss per common share $ (0.41) $ (0.63) $ (0.84) $ (1.14)
============ ============ ============ ============
Weighted average common shares outstanding 12,757,392 7,897,626 11,816,125 7,880,338
============ ============ ============ ============
</TABLE>
<PAGE> 4
PATHOGENESIS CORPORATION
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of
common Price Additional
shares per Common paid -in
Date Description outstanding share Stock capital
----------- ----- ------ ----------
<S> <C> <C> <C> <C> <C>
Feb to Mar 1992 Shares issued for cash 1,870,000 $ 0.08 1,870 147,730
June to Dec 1992 Shares issued for cash net of issue costs of $744,966 4,308,500 10.00 4,309 42,335,725
November 1992 Repurchase of common stock through forgiveness
of note receivable (25,000) 10.00 (25) (249,975)
Repurchase of common stock for cash (46,875) 0.08 (47) (3,703)
Net loss for the period ended December 31, 1992
---------------------------------------------------
Balances at December 31, 1992 6,106,625 6,107 42,229,777
October 1993 Shares issued in payment of license fees 50,000 10.00 50 499,950
Net loss for the year ended December 31, 1993
---------------------------------------------------
Balances at December 31, 1993 6,156,625 6,157 42,729,727
March 1994 Shares issued for cash net of issue costs of $1,251,739 1,690,677 12.00 1,690 19,093,694
Unrealized loss on investment securities
Net loss for the year ended December 31, 1994
---------------------------------------------------
Balances at December 31, 1994 7,847,302 7,847 61,823,421
March 1995 Shares issued in payment of license fees 50,000 12.00 50 599,950
April to Aug 1995 Exercise of stock options for cash 413 10.00 1 4,124
November 1995 Shares issued for cash net of issue costs of $2,904,274 3,000,000 10.00 3,000 27,092,726
Unrealized loss on investment securities
Net loss for the year ended December 31, 1995
---------------------------------------------------
Balances at December 31, 1995 10,897,715 10,898 89,520,221
Jan to June 1996 Exercise of stock options 4,974 16.94 5 29,667
Jan to June 1996 Redemption of fractional shares (45) 12.00 (0) (540)
February 1996 Shares issued in payment of license fees 6,250 10.00 6 62,494
February 1996 Repurchase of common stock for cash (45,000) 0.08 (45) (3,555)
May 1996 Shares issued for cash net of issue costs of $3,214,628 2,875,000 16.25 2,875 43,501,247
Unrealized loss on investment securities
Net loss for the period ended June 30, 1996
---------------------------------------------------
Balances at June 30, 1996 13,738,894 13,739 133,109,534
===================================================
</TABLE>
<TABLE>
<CAPTION>
Deficit
accumulated
Unrealized during the Total
gain (loss) on development Stockholders'
Date Description investments stage equity
----------- ----------- ------------
<S> <C> <C> <C> <C>
Feb to Mar 1992 Shares issued for cash 149,600
June to Dec 1992 Shares issued for cash net of issue costs of $744,966 42,340,034
November 1992 Repurchase of common stock through forgiveness
of note receivable (250,000)
Repurchase of common stock for cash (3,750)
Net loss for the period ended December 31, 1992 (2,930,285) (2,930,285)
-------------------------------------------------
Balances at December 31, 1992 (2,930,285) 39,305,599
October 1993 Shares issued in payment of license fees 500,000
Net loss for the year ended December 31, 1993 (10,804,878) (10,804,878)
-------------------------------------------------
Balances at December 31, 1993 (13,735,163) 29,000,721
March 1994 Shares issued for cash net of issue costs of $1,251,739 19,095,384
Unrealized loss on investment securities (172,809) (172,809)
Net loss for the year ended December 31, 1994 (14,762,117) (14,762,117)
-------------------------------------------------
Balances at December 31, 1994 (172,809) (28,497,280) 33,161,179
March 1995 Shares issued in payment of license fees 600,000
April to Aug 1995 Exercise of stock options for cash 4,125
November 1995 Shares issued for cash net of issue costs of $2,904,274 27,095,726
Unrealized gain on investment securities 211,267 211,267
Net loss for the year ended December 31, 1995 (18,023,923) (18,023,923)
-------------------------------------------------
Balances at December 31, 1995 38,458 (46,521,203) 43,048,374
Jan to June 1996 Exercise of stock options 29,672
Jan to June 1996 Redemption of fractional shares (540)
February 1996 Shares issued in payment of license fees 62,500
February 1996 Repurchase of common stock for cash (3,600)
May 1996 Shares issued for cash net of issue costs of $3,214,628 43,504,122
Unrealized loss on investment securities (141,282) (141,282)
Net loss for the period ended June 30, 1996 (9,978,372) (9,978,372)
-------------------------------------------------
Balances at June 30, 1996 (102,824) (56,499,575) 76,520,874
=================================================
</TABLE>
<PAGE> 5
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 10,
1991
(Incorporation)
Six Months Ended Through
June 30, June 30,
1996 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,978,372) $(8,998,797) $(56,499,575)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 789,955 778,836 4,606,536
Amortization of investment premiums (321,846) (177,080) 50,504
Common stock issued in payment of license fees - 600,000 1,159,000
Loss on sale of furniture and equipment 315 63,174
Change in certain assets and liabilities:
Interest receivable 499,974 55,869 (265,242)
Prepaid expenses 350,319 (8,069) (321,392)
Grants receivable (122,304) -- (122,304)
Other assets, net 2,580 (691) (5,178)
Accounts payable (785,704) 711,960 850,007
Compensation and benefits (382,763) (122,521) 536,699
Clinical development costs 567,204 (625,733) 1,443,336
Other accrued expenses 251,774 (18,305) 333,247
Long-term liability (153,803) 538,635 308,183
------------- ------------- --------------
Net cash used in operating activities (9,282,671) (7,265,896) (47,863,005)
------------- ------------- --------------
Cash flows from investing activities:
Purchases of investment securities (53,314,351) (9,121,814) (187,820,002)
Sales of investment securities 30,420,032 18,760,090 127,720,254
Purchases of furniture and equipment (263,461) (208,227) (12,314,520)
Proceeds from sale of furniture and equipment 100 - 40,100
Issuance of note receivable - - (250,000)
------------- ------------- --------------
Net cash (used) provided in investing activities (23,157,680) 9,430,049 (72,624,168)
------------- ------------- --------------
Cash provided by financing activities
net proceeds from issuance of common stock 43,529,654 3,875.00 132,151,773
------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents 11,089,303 2,168,028 11,664,600
Cash and cash equivalents at beginning of period 575,297 2,873,792
------------- ------------- --------------
Cash and cash equivalents at end of period $ 11,664,600 $ 5,041,820 $ 11,664,600
============= ============= ==============
Supplemental schedule of noncash investing and financing activities:
Stock issued to extinguish long term-liability 62,500 62,500
Repurchase of common stock through forgiveness of
note receivable 250,000
</TABLE>
<PAGE> 6
PATHOGENESIS CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996
(1) BASIS OF PRESENTATION
The accompanying financial statements and related notes have been
prepared pursuant to Securities and Exchange Commission rules and regulations
for interim financial statements. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The accompanying financial statements
and related notes should be read in conjunction with the audited financial
statements for the year ended December 31, 1995.
The information furnished reflects, in the opinion of management, all
adjustments necessary for a fair presentation of the results for the interim
periods presented. Interim results are not necessarily indicative of results for
a full year.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Statements in this Quarterly Report on Form 10-Q that are not historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All such forward-looking statements
involve risks and uncertainties, including, without limitation, relating to the
Company's limited operating history and anticipated future losses,
uncertainties relating to the Company's future profitability and ability to
meet its capital needs, product development, FDA approval, government
regulation, competition, market acceptance and other risks detailed in the
Company's Prospectus dated April 25, 1996 filed with the Securities and
Exchange Commission pursuant to Rule 424(b).
RESULTS OF OPERATIONS
Overview
The Company develops drugs for the treatment of serious human infectious
diseases where there is a significant need for improved therapy. Since its
incorporation in December 1991, the Company has been engaged in research and
development, clinical trials and administrative activities. The Company's most
advanced drug candidate, TOBI(TM) (tobramycin for inhalation), is a stable,
premixed, proprietary formulation of the antibiotic tobramycin for delivery by
inhalation. In March 1996, the Company completed enrollment for its Phase III
clinical trials of TOBI for the treatment of chronic pseudomonal lung infections
in patients with cystic fibrosis. The Company's second drug candidate, PA-1648,
a novel derivative of the antibiotic rifampin, is being developed for the
treatment of MAC, a tuberculosis-like disease, in AIDS patients, and
tuberculosis. PathoGenesis received approval for its Investigational New Drug
application for PA-1648 and initiated Phase I clinical trials in April 1995.
The Company is developing PA-824, a proprietary antibiotic, as a potential drug
candidate for tuberculosis.
Financial results for the first six months of 1996 reflect a planned
increase in operating expenses for activities related to advancing potential
products through the development process. Such activities include product
development and clinical trials. The Company expects to invest in additional
clinical, regulatory and product development efforts over the next few years.
The Company currently has no sources of operating revenue, has incurred
losses since its inception and has an accumulated deficit through June 30, 1996
of $56,499,575. The Company expects that operating losses will continue and
increase for at least the next few years as total costs and expenses continue to
increase due principally to the advancement of the Company's clinical
development programs through various phases of clinical trials and, if
successful, the cost of commercializing its first products. The Company's
results of operation may vary significantly from period to period depending on
several factors, such as the timing of certain expenses and the progress of the
Company's research and development efforts.
In May 1996, the Company completed a public offering of 2,875,000
shares of Common Stock, including 375,000 shares of Common Stock issued upon
the exercise of the underwriters' over-allotment option. The net proceeds from
the offering, including those from the exercise of the over-allotment option,
were approximately $43.5 million.
Revenue
In April 1996, the Company was awarded a competitive grant of
$470,000 over two years by the United States Food and Drug Administration Office
of Orphan Products Development to support the Company's ongoing Phase III
clinical trials of TOBI for the treatment of chronic lung infections in cystic
fibrosis patients. Revenue of $122,304 was earned from this grant in the
quarter ended June 30, 1996.
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Total operating expenses for the quarter ended June 30, 1996 increased
by $770,859 to $6,096,399 from $5,325,540 for the quarter ended June 30, 1995.
Research and development expense for the second quarter increased by $849,656
to $5,006,197 in 1996 from $4,156,541 for the comparable period in 1995. Such
increase was due primarily to increases in clinical development activity.
General and administrative expense for the second quarter decreased by $78,797
to $1,090,202 in 1996 from $1,168,999 for the comparable period in 1995. This
decrease was due primarily to compensation expense resulting from an agreement
with the Company's former Chairman of the Board, which was partially offset by
the reversal in 1995 of discretionary bonuses accrued in 1994 but not awarded
by the Board in 1995. Excluding these compensation related items in 1995,
general and adminstrative expneses would have increased by $477,874. This
increase was due to higher personnel and professtional costs relating to
marketing, investor relations and higher premiums for directors' and officers'
liability insurance in the current quarter.
Other income primarily represents investment income from the Company's
investment securities. In the second quarter of 1996, investment income, net
increased by $467,885 to $786,140 from $318,255 for the comparable period in
1995. This increase was due primarily to higher average invested cash balances.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Total operating expenses for the six months ended June 30, 1996
increased by $1,807,753 to $11,420,662 from $9,612,909 for the six months ended
June 30, 1995. Research and development expense for the six months ended June
30, 1996 increased by $1,788,620 to $9,497,155 from $7,708,535 for the
comparable period in 1995. This increase resulted primarily from the planned
increase in product development and clinical trials. General and
administration expense for the six months ended June 30, 1996 increased by
$19,133 to $1,923,507 from $1,904,374 for the comparable period in 1995. This
increase was due to higher personnel and professional costs relating to
marketing and investor relations.
Other income primarily represents investment income from the
Company's investment securities. In the six months ended June 30, 1996,
investment income, net increased by $705,874 to $1,319,986 from $614,112 for
the comparable period in 1995. This increase was due primarily to higher
average invested cash balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily by
the issuance of equity securities. Through June 30, 1996, the Company has raised
$61,331,268 from private sales of Common Stock and $70,599,848 from two public
offerings of Common Stock. Through June 30, 1996, the Company has earned net
interest and investment income of $5,363,458 from investments.
7
<PAGE> 8
The Company's combined cash, cash equivalents and investment securities
totaled $71,611,020 at June 30, 1996, an increase of $34,164,186 from the
balance at December 31, 1995. This increase was due primarily to the net
proceeds from the public offering of 2,875,000 shares of Common Stock in May
1996. The primary uses of cash during the quarter ended June 30, 1996, were to
finance the Company's operations and working capital requirements. From the
Company's inception through June 30, 1996, the Company purchased approximately
$12.3 million of property and equipment.
The Company plans to continue its policy of investing excess funds in
government securities and investment grade, interest-bearing securities
primarily with a maturity of one and one half years or less.
The Company anticipates that its existing capital resources should be
sufficient to meet its capital requirements through the second quarter of 1998.
Until such time as the Company can generate sufficient levels of cash from
operations, the Company will have to continue to finance future cash needs
through some or all of the sources previously used or through other means. The
Company does not expect to generate a positive internal cash flow for at least a
few years due to the expected increase of spending for research and clinical
development programs and the expected cost of commercializing its first
products. The Company may need to arrange additional financing for the future
operation of the business, including the commercialization of its drug
candidates currently under development. There can be no assurances that such
additional financing can be obtained, and if obtained, at reasonable terms.
8
<PAGE> 9
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Legal Proceedings None.
Item 2. Changes in Securities None.
Item 3. Defaults Upon Senior Securities None.
Item 4. Submission of Matters to a Vote of Security-
Holders None.
Item 5. Other Information None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K None.
</TABLE>
9
<PAGE> 10
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.
PATHOGENESIS CORPORATION
Date: August 14, 1996 By: /s/ Wilbur H. Gantz
----------------------
Wilbur H. Gantz
President and Chief Executive Officer
Date: August 14, 1996 By: /s/ Alan R. Meyer
--------------------
Alan R. Meyer
Senior Vice President and Chief Financial
Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-01-1996
<CASH> 11,664,600
<SECURITIES> 59,946,420
<RECEIVABLES> 586,634
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 72,319,958
<PP&E> 12,035,723
<DEPRECIATION> 4,491,013
<TOTAL-ASSETS> 79,869,846
<CURRENT-LIABILITIES> 3,103,289
<BONDS> 0
0
0
<COMMON> 13,739
<OTHER-SE> 76,507,135
<TOTAL-LIABILITY-AND-EQUITY> 79,869,846
<SALES> 0
<TOTAL-REVENUES> 786,140
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,096,399
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,187,955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,187,955
<EPS-PRIMARY> (.41)
<EPS-DILUTED> 0
</TABLE>
