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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27264
GenStar Therapeutics Corporation
(formerly Urogen Corp.)
(Exact name of registrant as specified in its charter)
DELAWARE
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(State or other jurisdiction of
incorporation or organization)
33-0687976
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(I.R.S. Employer
Identification no.)
10835 Altman Row, Suite 150, San Diego, CA, 92121
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code: (858) 450-5949
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
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The number of shares of the Common Stock of the registrant outstanding as of
July 28, 2000, was 22,260,166.
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GenStar Therapeutics Corporation
(Formerly UroGen Corp.)
(A Development Stage Enterprise)
INDEX TO FORM 10QSB
PART I. FINANCIAL INFORMATION
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Page No.
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2000 (Unaudited) and December 31, 1999........... 2
Condensed Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 2000 and
1999 and the period from July 1, 1991 (inception)
to June 30, 2000........................................... 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2000 and
1999 and the period from July 1, 1991 (inception)
to June 30, 2000........................................... 4
Notes to Unaudited Condensed Consolidated
Financial Statements....................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 6
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings.......................................... 9
Item 2. Changes in Securities...................................... 9
Item 3. Defaults Upon Senior Securities............................ 9
Item 4. Submission of Matters to a Vote
of Security Holders........................................ 9
Item 5. Other Information.......................................... 9
Market For Registrant's Common Equity
Item 6. Exhibits and Reports on Form 8-K........................... 10
Signatures................................................. 10
1
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GENSTAR THERAPEUTICS CORPORATION
(Formerly UroGen Corp.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- ----------------
(unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24,215,542 $ 921,994
Accounts receivable 1,507 114,208
Other current assets 94,155 9,461
-------------- ----------------
Total current assets 24,311,204 1,045,663
Property and equipment, net 1,272,754 569,121
Investments underlying deferred compensation 157,603 134,308
Other assets 134,160 77,821
-------------- ----------------
$ 25,875,721 $ 1,826,913
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 344,402 $ 399,485
Accrued employee benefits 172,691 73,915
Other accrued liabilities 162,692 81,856
Current portion of notes payable 229,897 -
Current portion of capital lease obligation 74,331 42,696
-------------- ----------------
Total current liabilities 984,013 597,952
Notes payable, net of current portion 493,372 -
Capital lease obligation, net of current portion 92,586 51,314
Deferred compensation 278,404 206,962
Advance from related party 4,106,454 1,876,003
Commitments
Stockholders' equity (deficit):
Preferred Stock - $0.01 par value, 5,000,000 shares authorized:
Series A Preferred Stock, 5,830 and 5,830 shares
issued and outstanding 58 58
Series B Preferred Stock, 2,998 and 2,998 shares
issued and outstanding 30 30
Common Stock - $0.001 par value, 40,000,000
shares authorized; 22,288,130 and 12,104,101
issued and outstanding 22,288 12,104
Additional paid-in capital 36,981,791 11,606,880
Deficit accumulated during development stage (17,083,275) (12,524,390)
-------------- ----------------
Total stockholders' equity (deficit) 19,920,892 (905,318)
-------------- ----------------
$ 25,875,721 $ 1,826,913
============== ================
</TABLE>
NOTE: The balance sheet at December 31, 1999 is derived from the audited balance
sheet at that date, but does not include all of the footnote disclosures
required by generally accepted accounting principles.
See accompanying notes.
2
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GENSTAR THERAPEUTICS CORPORATION
(Formerly UroGen Corp.)
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended July 1, 1991
------------------ ----------------
(inception) to
June 30, June 30, June 30, June 30, June 30,
2000 1999 2000 1999 2000
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $ 40,262 $ 50,812 $ 73,133 $ 50,812 $ 1,032,380
------------ ----------- ------------- ------------ --------------
Costs and expenses:
Cost of Sales - - - - 821,878
Research and development 1,438,565 607,708 2,424,106 1,146,984 10,569,695
Write-off of acquired in-process
technology 1,633,205 - 1,633,205 - 7,088,710
General and administrative 669,650 210,577 1,003,371 406,026 3,167,435
------------ ----------- -------------- ---------------- --------------
Total costs and expenses 3,741,420 818,285 5,060,682 1,553,010 21,647,718
------------ ----------- -------------- ---------------- --------------
Loss from operations (3,701,158) (767,473) (4,987,549) (1,502,198) (20,615,338)
Other income (expense) (17,253) - (17,194) 905 (24,867)
Interest expense (31,620) (290,051) (51,961) (348,890) (718,484)
Interest income 336,544 5,149 497,819 7,838 549,621
------------ ----------- -------------- ---------------- --------------
Net loss $ (3,413,487) $(1,052,375) $ (4,558,885) $ (1,842,345) $ (20,809,068)
============ =========== ============== ================ ==============
Basic and diluted loss per share $ (0.16) $ (0.11) $ (0.23) $ (0.20)
============ =========== ============== ================
Number of shares used in the
computation of basic and
diluted loss per share 21,609,347 9,480,755 19,447,187 9,420,079
============ =========== ============== ================
</TABLE>
See accompanying notes.
3
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GENSTAR THERAPEUTICS CORPORATION
(Formerly UroGen Corp.)
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
July 1, 1999
For the six months ended (inception) to
June 30, June 30,
2000 1999 2000
---- ---- ----
<S> <C> <C> <C>
Net loss $(4,558,885) $(1,842,345) $(20,809,068)
Adjustments to reconcile net loss to net cash used
in operating activities:
Write-off of in-process technology acquired with stock 1,519,500 - 6,975,005
Expenses paid via advances from related party - - 695,557
Depreciation and amortization 138,432 57,333 789,284
Distribution of common stock for services - 2,900 21,050
Accrued interest paid through issuance of common stock - 42,563 40,245
Non-cash expense related to stock awards and stock
options issued 145,340 - 251,340
Loss (gain) on disposal of fixed assets 363 - (81,444)
Amortization of debt discount - 305,428 574,296
Change in assets and liabilities:
Accounts receivable 112,701 - (1,507)
Other current assets (84,694) 7,630 (94,155)
Other assets (79,634) (85,799) (291,763)
Accounts payable (55,083) (125,949) 344,402
Amounts due to stockholder - (315,000) -
Other current liabilities 118,833 (32,320) 317,300
Deferred compensation 71,442 75,699 278,404
----------- ----------- ------------
Net cash used in operating activities (2,671,685) (1,909,860) (10,991,054)
Cash flows from investing activities:
Purchase of property and equipment (739,190) (38,130) (1,488,108)
----------- ----------- ------------
Net cash used in investing activities (739,190) (38,130) (1,488,108)
Cash flows from financing activities:
Advances from related party 2,230,451 1,440,664 6,408,897
Repayment of note receivable from stockholder - 20,000 20,000
Proceeds from notes payable 750,000 400,000 2,180,000
Repayment of capital lease and notes payable (57,059) - (67,700)
Proceeds from issuance of common stock upon exercise
of options and warrants 355,053 1,511 427,282
Proceeds from sale of common stock, net of issuance costs 23,425,978 - 23,342,760
Net advances from Medstone - - 3,883,465
Capital contribution by Medstone - - 500,000
----------- ----------- ------------
Net cash provided by financing activities 26,704,423 1,862,175 36,694,704
----------- ----------- ------------
Net increase (decrease) in cash and equivalents 23,293,548 (85,815) 24,215,542
Cash and equivalents, beginning of period 921,994 314,983 -
----------- ----------- ------------
Cash and equivalents, end of period $24,215,542 $ 229,168 $ 24,215,542
=========== =========== ============
</TABLE>
See accompanying notes.
4
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GENSTAR THERAPEUTICS CORPORATION
(Formerly UroGen Corp.)
(A Development Stage Enterprise)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
1. The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments, consisting only of normal recurring
adjustments, which are necessary to state fairly the consolidated financial
position, results of operations, and cash flows of GenStar Therapeutics
Corporation as of and for the periods indicated. GenStar presumes that
users of the interim financial information have read or have access to the
Company's audited consolidated financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
for the year ended December 31, 1999 and that the adequacy of additional
disclosure needed for a fair presentation, except in regard to material
contingencies or recent significant events, may be determined in that
context. Accordingly, footnote and other disclosures which would
substantially duplicate the disclosures contained in Form 10-KSB for the
year ended December 31, 1999 filed on March 30, 2000 by the Company have
been omitted. The financial information herein is not necessarily
representative of a full year's operations.
2. In accordance with the Financial Accounting Standards Board's Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, net
loss per share is based on the average number of shares of common stock
outstanding during the six-month periods ended June 30, 2000 and 1999.
Equivalent shares arising from convertible preferred stock, convertible
debt, warrants for Common Stock and outstanding stock options have not been
included in the computation of net loss per share as their effect would be
antidilutive.
3. In January and February 2000, the Company issued 8,362,801 shares of Common
Stock and warrants to purchase an additional 1,773,899 shares of Common
Stock for total gross proceeds of $25,309,000. The warrants are exercisable
for five years and have an exercise price of $0.75 per share.
4. On May 15, 2000 the Company acquired all of the outstanding shares of
Allegro Cell Systems, Inc. (Allegro) in exchange for 288,000 shares of
GenStar common stock, and an obligation to issue an additional 12,000
shares of common stock. Allegro has a license to certain technologies for
the treatment and prevention of AIDS and for lentiviral gene therapy.
Allegro has no products, revenues, employees, facilities or other assets.
The shares issued to acquire the technologies were valued at $1,633,000
based on the fair market value of our common stock on the date of the
agreement and was charged to acquired in-process technology due to the
early stage of development of the technology.
5
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GENSTAR THERAPEUTICS CORPORATION
(Formerly UroGen Corp.)
(A Development Stage Enterprise)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
OVERVIEW
GenStar Therapeutics Corporation changed its name from UroGen Corp. in March
2000. GenStar commenced operations as a stand-alone entity in January 1996 and
has been in the development stage since inception. Our original mission was to
develop products to treat diseases in urology, with a particular interest in
prostate cancer. We had licensed technology that uses the IL-3 gene to treat
several types of cancer, but did not have the technology to deliver the gene. On
July 8, 1998, we entered into an agreement with Baxter Healthcare Corporation in
which we acquired the exclusive rights to gene delivery technologies and
laboratory equipment. The gene delivery technology will be used to enhance our
existing technology and to develop products to deliver other genes. We believe
that the gene delivery technology provides a higher level of expression of the
gene being delivered compared to other gene therapy approaches. Prior to our
license of the technology, Baxter had been developing this technology for the
treatment of hemophilia and cancer and has continued to fund the development of
our Factor VIII product for hemophilia.
In exchange for the exclusive license to the gene delivery technology and
equipment, we issued 1,841,219 shares of common stock and 5,830 shares of Series
A Preferred Stock to Baxter. The assets acquired from Baxter were valued based
on the fair market value of our common stock on the date of the agreement. We
obtained an appraisal of the value of the equipment acquired. Based upon the
very early stage of development of the technology, the value of the technology
was charged to acquired in-process technology.
In May 2000, we acquired all of the outstanding shares of Allegro Cell Systems,
Inc. (Allegro) in exchange for 288,000 shares of GenStar Common Stock, and an
obligation to issue an additional 12,000 shares of common stock. Allegro has a
license to certain technologies for the treatment and prevention of AIDS and for
lentiviral gene therapy. Allegro has no products, revenues, employees,
facilities or other assets. Based upon the very early stage of development of
the technology, the value of the technology was charged to acquired in-process
technology.
The technology for the treatment of AIDS is based upon vaccination with a
genetically modified HIV virus. The modified virus is incapable of replication
and suitable for administration to humans. The modified virus is still capable
of infecting cells and expressing HIV genes resulting in the generation of
immune responses that eradicate HIV infected cells. The lentiviral gene therapy
delivery technology was designed for therapeutic applications.
Our current activities consist of the development of the gene transfer system in
our Factor VIII Mini-Ad product for hemophilia, our tumor killing IL-3 viral
vector product for prostate cancer, and AIDS and lentiviral gene therapy
development work. We anticipate defining additional uses for our vector
technology and potentially acquiring other technologies. We expect to incur
increasing research and development expenditures as we focus our efforts on
further development of these products. We expect no product revenues in the near
future and to incur significant losses for at least the next five years.
6
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RESULTS OF OPERATIONS
Revenues
GenStar has generated revenues to date of $1,032,000 from contract research
agreements and grants. Total revenues for the six months ended June 30, 1999 and
2000 were $51,000 and $73,000, respectively, and for the three months ended June
30, 1999 and 2000 were $51,000 and $40,000, respectively. All revenue during
1999 and 2000 was from grants. We anticipate seeking additional research
agreements and grants to help fund research and development efforts; however, we
do not expect that contract research will result in significant revenues in the
future. We do not anticipate revenues from products for at least five years.
Research and development and acquired in-process technology
Research and development and acquired in-process technology expenses increased
$2,910,000 to $4,057,000 during the six months ended June 30, 2000 compared to
$1,147,000 for the six months ended June 30, 1999. During the three months ended
June 30, 2000 research and development and acquired in-process technology
increased $2,464,000 to $3,072,000 compared to $608,000 for the three months
ended June 30, 1999. Research and development and acquired in-process technology
expenses increased in both the first six months and the second quarter of 2000
compared to the same periods of 1999 due principally to the acquisition of
Allegro, which resulted in a charge to write-off acquired in-process technology
of $1,633,000 during the second quarter of 2000. Additionally, research and
development costs have increased due to an increase in research and development
activity and the commencement of operations of our manufacturing facility in the
first quarter of 2000. We anticipate increasing research and development
expenditures in the future as we conduct preclinical and clinical testing
necessary to bring our products to market and to establish manufacturing
capabilities.
General and administrative expense
General and administrative expense increased $597,000 during the six months
ended June 30, 2000 to $1,003,000 compared to $406,000 for the six months ended
June 30, 1999. During the three months ended June 30, 2000 general and
administrative expense increased $459,000 to $670,000 compared to $211,000 for
the three months ended June 30, 1999. General and administrative expenses
include the costs of our administrative personnel and consultants, office lease
expenses and other overhead costs, including legal and accounting costs. General
and administrative expenses have increased related to the increased level of
operations, and we expect general and administrative expenses to continue to
increase to support our increasing research and development activities.
Interest income and expense
Interest income increased $490,000 during the six months ended June 30, 2000 to
$498,000 compared to $8,000 for the six months ended June 30, 1999. During the
three months ended June 30, 2000 interest income increased $332,000 to $337,000
compared to $5,000 for the three months ended June 30, 1999. Interest income is
a result of the investment of excess cash in money market accounts and U.S.
Government Bonds. Interest expense decreased $297,000 for the six months ended
June 30, 2000 to $52,000 compared to $349,000 for the six months ended June 30,
1999. During the three months ended June 30, 2000 interest expense decreased
$258,000 to $32,000 compared to $290,000 for the three months ended June 30,
1999. Interest expense in 1999 related to convertible notes payable which were
converted to Common Stock in June 1999. Interest expense in 2000 relates to
equipment financing.
7
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LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities during the six months ended June 30, 1999
and 2000 was $1,910,000 and $2,672,000, respectively. Net cash used by operating
activities consists primarily of GenStar's net loss increased by non-cash
expenses. Net cash used by investing activities during the six months ended June
30, 1999 and 2000 of $38,000 and $739,000, respectively, and consists of the
purchase of furniture and equipment. Net cash provided by financing activities
during the six months ended June 30, 1999 of $1,862,000 consists primarily of
$1,441,000 paid by Baxter under the credit agreement for development of the
hemophilia product and $400,000 of proceeds from convertible notes payable. Net
cash provided by financing activities of $26,704,000 for the six months ended
June 30, 2000 consists primarily of net proceeds from the sale of common stock
and warrants for common stock of $23,781,000, proceeds from convertible notes
payable of $750,000 and $2,230,000 paid by Baxter under the aforementioned
credit agreement.
GenStar's future capital requirements will depend on many factors, including
scientific progress in our research and development programs, our ability to
establish collaborative arrangements with others for drug development, progress
with preclinical and clinical trials, the time and costs involved in obtaining
regulatory approvals and effective commercialization activities. Medstone
International, Inc. funded all of GenStar's operations from July 1, 1991
(inception) through and ending with a $500,000 capital contribution of cash on
February 9, 1996. In July 1998, we completed an offering of 8% Convertible
Subordinated Notes due June 30, 1999, which raised $1,030,000, which was
converted to common stock on June 22, 1999. In April 1999, we completed another
offering of Convertible Subordinated Notes due March 30, 2000, which raised
$400,000, which was converted to common stock on June 22, 1999. During the
quarter ended March 31, 2000, we completed the private placement of 8,362,801
shares of common stock and warrants to purchase an additional 1,773,899 shares
of common stock. Net proceeds from these financings was $23,426,000. GenStar has
incurred net losses of $20,809,000 since its inception and has never been
profitable during its existence. We expect to incur significant additional
operating losses over the next several years as our research and development
efforts expand. Our ability to achieve profitability depends upon our ability,
alone or with others, to successfully complete development of products, obtain
required regulatory approvals and manufacture and market products. We cannot
assure you that we will be successful or that we will attain significant
revenues or profitability. Our operations to date have consumed substantial
amounts of cash. The negative cash flow from operations is expected to continue
and to accelerate for at least the next five years. The development of our
products will require a commitment of substantial funds to conduct the costly
and time-consuming research, preclinical and clinical testing necessary to bring
our products to market and to establish manufacturing and marketing
capabilities.
Under the terms of our Developmental Collaboration Agreement and Credit
Agreements with Baxter, Baxter is required to provide funding for development of
the hemophilia product until we commence a Phase I Clinical Trial for the
hemophilia product, at which time a milestone payment of $2,000,000 is due from
Baxter. The funding provided by Baxter is in the form of a note payable, which
can be converted to Series B Preferred Stock at our option on December 31 of
each year of the agreement. The $2,000,000 milestone payment is in the form of a
purchase of Series C Preferred Stock.
We anticipate our existing capital resources, including funds received from
Baxter under the Developmental Collaboration Agreement, will enable us to
maintain our current and planned operations for at least the next two years. We
will need to raise substantial additional capital to fund future operations. We
intend to seek additional funding either through collaborative arrangements or
through public or private equity or debt financings. Additional financing may
not be available on acceptable terms or at all. If adequate funds are not
available, we may be required to delay or reduce the scope of our operations or
to obtain funds through arrangements with collaborative partners or others that
may require
8
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us to relinquish rights we may otherwise have.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2000, the Company's cash and cash equivalents were invested in
liquid checking and money market accounts, and will not change significantly in
value if interest rates change. Accordingly, an immediate 10% change in interest
rates would not have a material impact on our financial condition or results of
operations.
The Company does not conduct business with foreign entities, and does not have
any foreign exchange risk.
PART II. OTHER INFORMATION
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Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
1) In May 2000, the Company registered 5,316,832 shares of Common
Stock, $.001 par value per share of GenStar Therapeutics, Inc.,
to be issued pursuant to the Company's 1999 Stock Plan, 1995
Stock Plan and 1995 Director's Option Plan.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
Market for Registrant's Common Equity
None of the shares of capital stock of the Company issued in the
Distribution or otherwise, or acquired through the exercise of stock
options could be sold prior to December 31, 1997 except for the following
transfers: (i) transfers by gift, will, bequest or the applicable laws of
descent and distribution; (ii) non-sale distributions by partnerships,
corporations or trusts to their partners, shareholders or beneficiaries;
(iii) transfers to the Company; and (iv) transfers pursuant to qualified
domestic relations order as defined by the Code or the rules thereunder. In
the case of any such permitted transfers, the shares in the hands of the
transferees will continue to be subject to the same transfer restriction.
No market for the Company's shares of
9
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capital stock existed prior to January 1, 1998. The Company trades under
the symbol GNT on the American Stock Exchange.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this Report to be signed on its behalf by the undersigned, hereunto duly
authorized.
GENSTAR THERAPEUTICS CORPORATION
--------------------------------
A Delaware Corporation
Date: August 4, 2000 /s/ Carin D. Sandvik
-----------------------
Carin D. Sandvik
Controller, Chief Accounting Officer &
Secretary
(Principal financial and accounting
officer)
10
