<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 2000 Commission File No. 000-30981
GENAISSANCE PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 06-1338846
(State of Incorporation) (I.R.S. Employer Identification Number)
FIVE SCIENCE PARK, NEW HAVEN, CONNECTICUT 06511
(Address of Principal Executive Offices)
(203) 773-1450
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES__________________ NO_________X____________
Number of shares outstanding of the registrant's Common Stock as of August 25,
2000:
Common Stock, par value $.001 21,708,476 shares outstanding
<PAGE>
GENAISSANCE PHARMACEUTICALS, INC.
For the Quarter Ended June 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Balance Sheets as of December 31, 1999 and June 30, 2000
and June 30, 2000 pro forma..........................................................................1-2
Statements of Operations for the three months ended June 30, 2000 and 1999
and for the six months ended June 30, 2000 and 1999....................................................3
Statement of Stockholders' Equity and Comprehensive Loss for the six months
ended June 30, 2000....................................................................................4
Statements of Cash Flows for the six months ended June 30, 2000 and 1999.................................5
Notes to Unaudited Financial Statements..................................................................6-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................................10
Item 3 - Quantitative and Qualitative Disclosures about Market Risk.......................................13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................................................14
Item 2 - Changes in Securities and Use of Proceeds........................................................14
Item 3 - Defaults upon Senior Securities..................................................................14
Item 4 - Submission of Matters to a Vote of Security Holders..............................................14
Item 5 - Other Information................................................................................14
Item 6(a) - Exhibits......................................................................................14
Item 6(b) - Reports on Form 8-K...........................................................................14
Signature.................................................................................................15
</TABLE>
<PAGE>
Part I: Financial Information
Item 1 - Financial Statements:
GENAISSANCE PHARMACEUTICALS, INC.
Balance Sheets
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30,
2000
DECEMBER 31, JUNE 30, PRO FORMA
1999 2000 (NOTE 3)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 3,666 $ 28,025 $ 110,991
Marketable securities........................... - 19,112 19,112
Other current assets............................ 206 494 494
-------------- ----------- -------------
Total current assets...................... 3,872 47,631 130,597
PROPERTY AND EQUIPMENT, net........................ 7,224 13,696 13,696
DEFERRED FINANCING COSTS, net of
accumulated amortization of $96 and
$176 at December 31, 1999 and
June 30, 2000, respectively..................... 251 778 778
OTHER ASSETS....................................... 167 307 307
-------------- ----------- -------------
Total assets.............................. $ 11,514 $ 62,412 $ 145,378
============== =========== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current portion of long-term debt............... $ 1,020 $ 705 $ 705
Current portion of capital lease obligations.... 1,200 2,449 2,449
Accounts payable................................ 821 711 711
Accrued expenses................................ 487 890 890
-------------- ----------- -------------
Total current liabilities................. 3,528 4,755 4,755
-------------- ----------- -------------
Long-Term Liabilities:
Long-term debt, including amounts due to related
parties of $950 and $1,841 at December 31,
1999 and June 30, 2000, respectively,
less current portion.......................... 2,287 3,665 3,665
Capital lease obligations, less current portion. 3,842 6,964 6,964
Deferred revenue................................ 461 2,442 2,442
Royalty obligations............................. 300 300 300
Convertible promissory notes.................... 3,500 - -
Accrued preferred stock dividends............... 1,056 3,103 1,158
-------------- ----------- -------------
Total long-term liabilities............... 11,446 16,474 14,529
-------------- ----------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
GENAISSANCE PHARMACEUTICALS, INC.
Balance Sheets
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30,
2000
DECEMBER 31, JUNE 30, PRO FORMA
1999 2000 (NOTE 3)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
(Continued)
COMMITMENTS AND CONTINGENCIES (Note 8)
REDEEMABLE CONVERTIBLE PREFERRED STOCK,
10,000,000 authorized shares at December 31,
1999 and 30,000,000 authorized shares at
June 30, 2000:
Series A and KBL; $.001 par value, 2,437,500
shares issued and outstanding at December 31,
1999 and June 30, 2000 and no shares
pro forma....................................... 11,247 11,957 -
Series B and KBH; $.001 par value,
8,727,273 shares issued and outstanding at
June 30, 2000 and no shares pro forma........... - 44,635 -
Series C $.001; par value, 1,539,393 shares
issued and outstanding at June 30, 2000
and no shares pro forma......................... - 11,927 -
PUTTABLE WARRANT..................................... 125 459 -
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, 10,000,000 authorized shares
at December 31, 1999 and 22,000,000 authorized
shares at June 30, 2000, $.001 par value,
2,809,680, and 2,832,135 shares issued and
outstanding at December 31, 1999 and June 30,
2000, respectively, and 22,498,746 shares
pro forma....................................... 3 3 22
Additional paid-in capital........................ 4,819 62,889 216,274
Accumulated deficit............................... (19,654) (90,186) (90,186)
Deferred offering costs........................... - (485) -
Net unrealized investment gains (losses).......... - (16) (16)
-------------- ----------- ------------
Total stockholders' equity (deficit)........ (14,832) (27,795) 126,094
-------------- ----------- ------------
Total liabilities and stockholders'
equity (deficit).......................... $ 11,514 $ 62,412 $ 145,378
============== =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
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GENAISSANCE PHARMACEUTICALS, INC.
Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenue:
Grant research revenue..................... $ - $ 242 $ - $ 517
License revenue............................ 57 30 120 39
------------- ------------- ------------ -------------
Total revenue.............................. 57 272 120 556
------------- ------------- ------------ -------------
Operating Expenses:
Sublicense royalty obligations............. 1 7 515 7
Research and development................... 4,840 1,135 7,831 2,242
Selling, general and administrative........ 1,909 610 3,255 1,077
Stock based compensation................... 715 79 4,347 136
------------- ------------- ------------ -------------
Total operating expenses................... 7,465 1,831 15,948 3,462
------------- ------------- ------------ -------------
Loss from operations....................... (7,408) (1,559) (15,828) (2,906)
Interest income................................ 829 12 1,157 156
Interest expense............................... (400) (117) (957) (223)
------------- ------------- ------------ -------------
Net loss................................... (6,979) (1,664) (15,628) (2,973)
Preferred stock dividends and accretion........ (3,115) (613) (4,724) (1,041)
Beneficial conversion feature of Series B,
KBH and C preferred stock.................. - - (50,180) -
------------- ------------- ------------ -------------
Net loss attributable to common shareholders... $ (10,094) $ (2,277) $ (70,532) $ (4,014)
============= ============= ============ =============
Net loss per common shareholder, basic
and diluted................................ $ (3.57) $ (.86) $ (25.05) $ (1.47)
============= ============= ============ =============
Weighted average shares used in computing
net loss per common share.................. 2,827 2,644 2,815 2,734
============= ============= ============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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GENAISSANCE PHARMACEUTICALS, INC.
Statements of Stockholders' Equity (Deficit) and Comprehensive Loss (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
NET UNREALIZED TOTAL
ADDITIONAL INVESTMENT COMMON OTHER
------COMMON STOCK------ PAID-IN ACCUMULATED GAINS STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT (LOSSES) DEFICIT LOSS
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999.............. 2,809,680 $ 3 $ 4,819 $ (19,654) $ - $ (14,832)
Issuance of common stock from exercise
of stock options...................... 22,455 - 73 - - 73
Stock based compensation............... - - 4,347 - - 4,347
Warrants issued in connection with
debt financing and preferred stock
offering.............................. - - 3,470 - - 3,470
Accretion in carrying value of
redeemable preferred stock............ - - - (4,724) - (4,724)
Beneficial conversion feature of Series
B, KBH and C preferred stock.......... - - 50,180 (50,180) - -
Net change in unrealized investment
loss.................................. - - - - (16) (16) $ (16)
Conversion of preferred stock in
connection with initial public
offering, pro forma.................. 12,704,166 13 70,451 - - 70,464
Cashless exercise of warrants in
connection with initial public
offering, pro forma.................. 62,445 - 459 - - 459
Sale of common stock in connection
with initial public offering,
net of estimated offering costs,
pro forma............................. 6,900,000 6 82,475 - - 82,481
Net loss............................... - - - (15,628) - (15,628) (15,628)
------------
Total comprehensive loss.................. $(15,644)
----------- --------- ---------- ------------ ---------- ----------- ============
Balance, June 30, 2000, pro forma......... 22,498,746 $ 22 $ 216,274 $ (90,186) $ (16) $ 126,094
=========== ========= ========== ============ ========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
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GENAISSANCE PHARMACEUTICALS, INC.
Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,628) $ (2,973)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................ 1,257 239
Loss on disposal of equipment............................................ 55 -
Stock based compensation................................................. 4,347 136
Non-cash interest expense................................................ 334 83
Warrants issued in exchange for services................................. 14 -
Changes in assets and liabilities -
Other current assets.................................................. (289) (146)
Other assets.......................................................... (140) (100)
Accounts payable...................................................... (110) (62)
Accrued expenses...................................................... 409 (146)
Deferred revenue...................................................... 1,982 (42)
Due to related party.................................................. (6) (45)
------------- -------------
Net cash used in operating activities........................... (7,775) (3,056)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................................... (2,363) (666)
(Investment in) proceeds from marketable securities......................... (19,129) 556
------------- ------------
Net cash used in investing activities........................... (21,492) (110)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock............................... 53,925 -
Net proceeds from issuance of common stock.................................. 73 257
Proceeds from (repayment of) long-term debt, net............................ (778) 1,564
Proceeds from long-term debt due to related parties......................... 1,841 141
Repayment of capital leases................................................. (950) (110)
Deferred offering costs..................................................... (485) -
------------- ------------
Net cash provided by financing activities....................... 53,626 1,852
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,359 (1,314)
CASH AND CASH EQUIVALENTS, beginning of period................................. 3,666 4,189
------------ ------------
CASH AND CASH EQUIVALENTS, end of period....................................... $ 28,025 $ 2,875
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH:
Financing Activities:
Conversion of liabilities into common or preferred stock................. $ 3,561 $ -
Acquisition of equipment pursuant to capital lease obligations........... 5,322 1,888
Issuance of warrants in connection with financing agreements............. 3,470 105
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
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GENAISSANCE PHARMACEUTICALS, INC.
Notes to Unaudited Financial Statements
For the Quarter Ended June 30, 2000
(1) BASIS OF PRESENTATION
Genaissance Pharmaceuticals, Inc. is a leader in developing technology
for applying population genomics and informatics to improve the
development, marketing and prescribing of drugs. We apply population
genomics, the analysis of genomic variation within diverse groups of
people, to discover proprietary markers that are predictive of which
patients will respond effectively to a drug. Currently, we are marketing
our technology to the pharmaceutical industry as a complete solution for
developing "smarter" clinical trials and for improving the sales of
approved drugs. We have funded our operations, including our research and
development activities, through revenue derived from licensing and
research agreements, U.S. Federal grants and the proceeds from equity and
debt offerings.
We have prepared the accompanying financial statements without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. 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. These financial statements should be read in
conjunction with our audited financial statements and related footnotes
for the year ended December 31, 1999 thereto included in our registration
statement on Form S-1 (File No. 333-35314), as declared effective by the
Securities and Exchange Commission on August 1, 2000. The unaudited
financial statements include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary
to present fairly our financial position as of June 30, 2000, and the
results of our operations for the three and six month periods ended June
30, 1999 and 2000. The results of operations for such interim periods are
not necessarily indicative of the results to be achieved for the full
year.
(2) INITIAL PUBLIC OFFERING
In August 2000, we completed the initial public offering of 6,900,000
shares of our common stock at a price of $13.00 per share, all of which
shares were issued and sold by us for aggregate proceeds of $82.5
million, net of underwriting discounts and commissions and expenses of
approximately $7.2 million. Upon closing of the initial public offering,
all issued and outstanding shares of Series A, KBL, B, KBH, and C
preferred stock were converted into shares of common stock (Note 7).
(3) UNAUDITED PRO FORMA PRESENTATION
The unaudited pro forma balance sheet and statement of stockholder's
equity (deficit) and comprehensive loss as of and for the period ended
June 30, 2000 reflects the automatic conversion of all outstanding shares
of redeemable preferred stock into an aggregate of 12,704,166 shares of
common stock, the exercise of certain warrants (which required cashless
exercise upon an initial public offering) into 62,445 shares of common
stock, and the receipt of net proceeds of approximately $82.5 million
from the sale of 6,900,000 shares of common stock, all of which occurred
in connection with the initial public offering (Note 2).
(4) REVENUE RECOGNITION
We recognize grant research revenue as the related expenses for
development activities are incurred and the related work is performed
under the terms of the grants.
6
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We have also entered into a sublicense agreement with a third party (the
"Licensor"). Through June 30, 2000, in consideration of entering into
such sublicense agreement, we have received approximately $2.6 million of
consideration from the Licensor. We are recognizing such payments by
amortizing the payments into revenue, on a straight-line basis, over the
term of the sublicense. In addition, we recognize royalties received on
the licensed product as revenue when earned.
(5) NET LOSS AND PRO FORMA NET LOSS PER COMMON SHARE
We compute and present net loss per common share in accordance with SFAS
No. 128, "Earnings Per Share". There is no difference in basic and
diluted net loss per common share as the effect of convertible preferred
stock, stock options and warrants would be anti-dilutive for all periods
presented. The outstanding convertible preferred stock, stock options and
warrants (prior to application of the treasury stock method) would
entitle holders to acquire 3,678,095 and 15,665,762 shares of common
stock at December 31, 1999 and June 30, 2000, respectively.
Upon the consummation of the initial public offering (see Note 2), all of
our preferred stock automatically converted into common stock and certain
of the outstanding common stock warrants were automatically exercised.
The following table sets forth a pro forma net loss per share for the
three and six months ended June 30, 2000 to reflect the conversion of
outstanding shares of preferred stock (using the "as if" method) and the
automatic exercise of such warrants (using the treasury stock method)
from their original date of issuance (in thousands, except per share
data):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 2000
<S> <C> <C>
Numerator -
Net loss applicable to common
shareholders..................... $ (10,094) $ (70,532)
Preferred stock dividends and
accretion........................ 3,115 4,724
Puttable warrant interest expense.... 51 334
------------ ------------
Pro Forma net loss applicable to
common shareholders.................. $ (6,928) $ (65,474)
============= =============
Denominator -
Weighted average common shares....... 2,827 2,815
Weighted average effect of pro forma
securities -
Preferred stock
Series A..................... 2,438 2,438
Series B..................... 8,727 6,123
Series C..................... 1,539 949
Warrants....................... 87 65
------------ ------------
Denominator for Pro Forma basic and
diluted calculation.................. 15,618 12,390
============ ============
Pro Forma net loss per share........... $ (.44) $ (5.28)
============= ============
</TABLE>
7
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(6) FINANCING ARRANGEMENTS
In December 1999, we obtained a commitment from Connecticut Innovations,
Inc. ("CII") to provide an additional $2.72 million of funding for the
continued expansion of our facility. During the six months ended June 30,
2000, we borrowed approximately $1.8 million under this commitment.
Availability under this commitment was approximately $900,000 as of June
30, 2000.
During the six months ended June 30, 2000, we entered into agreements for
an additional $18.9 million of capital lease financing for equipment
purchases with interest rates ranging from approximately 12.1% to 13.1%.
As of June 30, 2000, we had approximately $13.9 million of borrowing
capacity available under these agreements, in the aggregate. In
connection with entering into these leasing arrangements, we granted the
lessors warrants to purchase 85,120 shares of common stock at a weighted
average exercise price of $9.39 per share. Deferred financing costs of
$564,481, which approximated the fair value of these warrants at the date
of issuance, will be amortized over the term of the related leases.
(7) PREFERRED STOCK
In February and March 2000, we sold 8,543,524 shares of Series B
Preferred Stock and 183,749 shares of Series KBH Preferred Stock
(8,727,273 shares in aggregate, collectively "Series B") for $5.50 per
share resulting in proceeds of approximately $42.1 million, net of cash
issuance costs of approximately $2.4 million and net of the conversion of
$3.5 million of convertible promissory notes (and related interest) which
were issued in 1999 which were converted into 636,364 shares of Series B
based upon a per share conversion price of $5.50 per share. In connection
with this offering, the placement agent was issued a warrant (which is
exercisable through February 2005) to purchase 400,000 shares of common
stock at $6.05 per share. Issuance costs of $2.9 million, which
approximates the fair value of the warrant at the date of issuance, are
in addition to the $2.4 million of cash issuance expenses noted above.
In March 2000, we sold 1,539,393 shares of Series C Redeemable
Convertible Preferred Stock at $8.25 per share resulting in proceeds of
approximately $11.9 million, net of issuance expenses of approximately
$817,000 ("Series C").
In connection with the sale of Series B and Series C during the six
months ended June 30, 2000, we recorded a charge to accumulated deficit
of $50.2 million. This amount represents the beneficial conversion
feature of this stock. This amount has been accounted for as a non-cash
dividend to these preferred stockholders and as a result, increased our
paid in capital, net loss applicable to common shareholders and the
related net loss per share.
Our outstanding Series A, Series B and Series C preferred stock earned
cumulative dividends at 8% per annum. However, dividends that accrued
subsequent to the Series B issuance dates were not payable if we
consummated an initial public offering with proceeds of at least $40
million before February 2003 with a per share price of not less than
$8.25 per share ("Qualified IPO"). Accrued dividends of $1,158,750, which
were earned on the Series A prior to the issuance of the Series B, are
payable even if we did consummate a Qualified IPO. The accompanying pro
forma June 30, 2000 balance sheet (Note 3) reflects the amount of
dividends that we are obligated to pay subsequent to the initial public
offering.
Our preferred stock was automatically converted into common stock upon
the completion of the initial public offering (Note 2).
8
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(8) STOCK BASED COMPENSATION
During the six months ended June 30, 2000, options to purchase 1,248,780
shares of common stock were granted to our employees and consultants at a
weighted average exercise price of $11.02 per share. Total compensation
expense recorded in the accompanying statement of operations associated
with employee stock options is approximately $178,000 and $79,000 for the
six months ended June 30, 2000 and 1999, respectively. Deferred
compensation at June 30, 2000 related to these options was approximately
$976,000.
During the six months ended June 30, 2000, we elected to fully vest all
unvested options previously granted to scientific advisory board members.
Accordingly, we recorded a compensation charge in the six months ended
June 30, 2000 based upon the incremental fair value and previously
recognized compensation expense associated with these options at the time
of vesting. Total compensation expense recorded in the accompanying
statements of operations associated with these consultants' options is
approximately $1,609,000 and $57,000 for the six months ended June 30,
2000 and 1999, respectively.
In 1996, in connection with a change in our management, our current Chief
Executive Officer and Chief Financial Officer (the "Officers") entered
into a stock purchase agreement ("Officer Stock Purchase Agreement") with
an officer and one of our major shareholders ("Former CEO"). The Officer
Stock Purchase Agreement permitted the Officers to purchase shares of
common stock from the Former CEO in exchange for notes payable
aggregating $320,000 ("Officer Stock Notes"). We have recognized this
transaction as a compensatory arrangement between us and the Officers and
accordingly, have recognized a non-cash compensation expense of
$2,560,000 during the six months ended June 30, 2000 based upon the
increase in the fair value of our stock.
In April 2000, our board of directors elected to assume the $320,000 of
Officer Stock Notes in exchange for notes from the Officers payable
directly to us, provided that we successfully completed our initial
public offering. Upon completion of the initial public offering, we
issued these promissory notes. In addition, the board of directors
provided that if the Officers were still employed by us as of December
31, 2000, we would forgive the $320,000 of promissory notes.
In April 2000, our board of directors approved an increase of 2,000,000
shares of common stock issuable under our stock option plan and in July
2000, our stockholders approved this increase and adopted the 2000
amended and restated equity incentive plan.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and the results
of operations should be read in conjunction with the financial statements and
related notes appearing elsewhere in this quarterly report on Form 10-Q. This
report on Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, that involve
risks and uncertainties. All statements other than statements of historical
information provided herein are forward-looking statements and may contain
information about financial results, economic conditions, trends and known
uncertainties. Our actual results could differ materially from those discussed
in the forward-looking statements as a result of a number of factors, which
include those discussed in the "Risk Factor" section of our registration
statement on Form S-1 (File No. 333-35314) filed with the Securities and
Exchange Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis, judgement,
belief or expectation only as of the date hereof.
OVERVIEW
Since our inception, we have incurred significant operating losses, and, as of
June 30, 2000, we had an accumulated deficit of $90.2 million. Approximately
$50.2 million of this deficit resulted from a one-time, non-cash charge related
to the beneficial conversion feature associated with our Series B, KBH, and C
preferred stock. The majority of our operating losses have resulted from costs
we incurred developing our HAP TM Technology, and we expect to dedicate a
significant portion of our resources for the foreseeable future to further
develop and maintain our HAP Technology. To date, our revenues have been
primarily from licensing fees pursuant to a sublicensing agreement with Visible
Genetics, Inc. and government grants. We expect that it will be several years,
if ever, before we generate significant revenues.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue consists primarily of proceeds received in connection with research
grants and through the sublicensing of a patent. Revenue decreased to
approximately $57,000 in the three months ended June 30, 2000 from approximately
$272,000 in the three months ended June 30, 1999. The revenue during the quarter
ended June 30, 2000 consists of royalties received and the amortization, over
the remaining life of the sublicensed patent, of upfront payments received. The
decrease resulted from a $242,000 decrease in grant research revenue. The
decrease in grant research revenue occurred because we decided not to pursue
research grant funding but to focus instead on commercializing our HAP
Technology and obtaining equity financing.
Sublicense royalty expense represents royalties incurred by us on sublicensing
fees received.
Research and development expenses consist primarily of payroll and benefits for
research and development personnel, material and reagent costs, depreciation and
maintenance costs for equipment used for HAPTM Marker discovery and HAPTM
Typing, and facility related costs. We expense our research and development
costs as incurred. Research and development expenditures increased to
approximately $4.8 million in the three months ended June 30, 2000 from $1.1
million in the three months ended June 30, 1999. The increase in expenditures is
attributable to the significant increase in the discovery of HAP Markers during
2000 and the initiation of our HAP Typing process. The increased HAP Marker
discovery required additional personnel, materials and reagents and additional
equipment, which resulted in additional depreciation expense. Payroll costs also
increased in connection with the development of our propriety DECOGEN-TM-
informatics system. We expect research and development costs to continue to
increase significantly over the next few years as we continue to increase our
HAP Marker discovery, our HAP Typing capacity, our MEDNOSTICS-TM- program and as
we continue to invest in ongoing product development efforts related to our
DECOGEN informatics system.
Selling, general and administrative expenses consist primarily of payroll and
benefits for executive, business development, legal, finance and other
administrative personnel, as well as business development efforts, facility
related costs and outside professional fees incurred in connection with legal
and financial matters. Selling, general
10
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and administrative expenses increased to approximately $1.9 million in the three
months ended June 30, 2000 from approximately $610,000 in the three months ended
June 30, 1999. The increase is primarily attributable to an increase in business
development, legal and administrative personnel to support our continued growth
and our expanded business development efforts related to our HAP Technology. In
addition, facility related costs increased as a result of our relocation to a
larger facility. We expect selling, general and administrative costs to continue
to increase over the next few years to support our growth, to broaden the
marketing of our products and to pay the costs of operating as a public company.
Stock based compensation expense relates to options granted to employees,
options granted to scientific advisory board members and a sale of stock, in
exchange for a note, between two of our officers and a major shareholder. The
accounting for options granted to employees is accounted for in accordance with
APB No. 25. The accounting for scientific advisory board members requires us to
record periodic charges for unvested options based on an increase in the fair
value of our common stock and the related vesting of the options. The accounting
for the stock sale between our officers and our major shareholder required us to
record periodic charges, through the date of the initial public offering, based
on an increase in the fair value of our common stock to recognize the benefit
obtained by us as a result of this stock sale. Stock based compensation
increased to approximately $715,000 in the three months ended June 30, 2000 from
approximately $79,000 in the three months ended June 30, 1999. The increase for
the three months ended June 30, 2000 is primarily due to the granting of options
to employees and the increase in the fair value of our stock at the end of the
period.
Interest income results primarily from investing proceeds raised through the
issuance of equity securities. Interest income increased to approximately
$829,000 in the three months ended June 30, 2000 from approximately $12,000 in
the three months ended June 30, 1999. The increase is the result of our
investment of the proceeds raised in connection with our issuance of preferred
stock in February and March 2000.
Interest expense results from capital lease obligations, other long-term debt,
and our adjustment of an outstanding puttable warrant to its fair value.
Interest expense increased to approximately $400,000 in the three months ended
June 30, 2000 from approximately $117,000 in the three months ended June 30,
1999. The increase is due to additional capital lease and other debt obligations
resulting from our significant investment in equipment to support the increased
discovery of our HAP Markers, as well as costs incurred in connection with the
expansion of our facility.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue decreased to approximately $120,000 in the six months ended June 30,
2000 from approximately $556,000 in the six months ended June 30, 1999. The
decrease resulted from a $517,000 decrease in grant research revenue. The
decrease in grant research revenue occurred because we decided not to pursue
research grant funding. During the six months ended June 30, 2000, we amended
our sublicensing agreement with Visible Genetics, Inc. which generated a
nonrefundable fee of approximately $2.1 million. We will recognize the
nonrefundable fee by amortizing such payments into revenue over the remaining
term of the sublicensing agreement.
Sublicense royalty expense represents royalties incurred by us on sublicensing
fees received. The increase in the six months ended June 30, 2000 sublicense
royalty expense relates primarily to the nonrefundable cash payment received in
connection with the sublicensing agreement.
Research and development expenses increased to approximately $7.8 million in the
six months ended June 30, 2000 from $2.2 million in the six months ended June
30, 1999. The increase was attributable to the increased production of HAP
Markers, the initiation of our HAP Typing process and the development of our
proprietary DECOGEN informatics system.
Selling, general and administrative expenses increased to approximately $3.3
million in the six months ended June 30, 2000 from approximately $1.1 in the six
months ended June 30, 1999. The increase was attributable to an increase in
personnel from our expanded operations, additional business development costs
from marketing our products and higher operating costs from our move to a larger
facility.
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Stock based compensation expense increased to approximately $4.3 million in the
six months ended June 30, 2000 from approximately $136,000 in the six months
ended June 30, 1999. The increase is primarily due to our decision in March 2000
to vest fully all unvested options previously granted to scientific advisory
board members, which resulted in a one-time expense of approximately $1.4
million, as well as the recording of approximately $2.6 million of expense
related to the stock purchase agreement due to the increase in the fair value of
our stock during the period.
Interest income increased to approximately $1.2 million in the six months ended
June 30, 2000 from approximately $156,000 in the six months ended June 30, 1999.
The increase is the result of our investment of the proceeds raised in
connection with our issuance of preferred stock in February and March 2000.
Interest expense increased to approximately $957,000 in the six months ended
June 30, 2000 from approximately $223,000 in the six months ended June 30, 1999.
The increase was due primarily to additional capital lease and other debt
obligations, as well as the increase in fair value of our outstanding puttable
warrant.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through the private sale of common and
preferred stock, government research grants, payments under licensing
agreements, loans and capital leases. From inception through June 30, 2000, we
have received aggregate gross proceeds of approximately $73.1 million from
issuance of common and preferred stock. In addition, through June 30, 2000, we
had received $4.5 million of government grant funding and $3.9 million from
license fees, royalties and research contracts. We also have received $10.9
million from capital lease financing and $3.6 million from other loans. The
proceeds from capital lease financing and other loans have been used to acquire
$15.8 million of property and equipment. On June 30, 2000, we had available
borrowing capacity of $15.2 million under capital lease agreements and $.9
million under long-term loans for facility improvement costs. We are using the
$15.2 million available under capital lease agreements to finance equipment
purchases. It is our intention to continue to expand production and office
facilities and to acquire state-of-the art equipment to continue to accelerate
the discovery of HAP Markers for all pharmaceutically relevant genes and
increase the throughput of our HAP Typing.
Cash used in operations for the six months ended June 30, 2000 was $7.8 million
compared with $3.1 for the same period in 1999. A net loss of $15.6 million for
the first six months of 2000 was partially offset by non-cash charges of $4.3
million for stock based compensation expense, $2.0 million of deferred revenue,
$1.3 million of non-cash charges for depreciation and amortization expense and
an increase of $.4 million in accrued expenses. During the six months ended June
30, 2000, we received net proceeds of $53.9 million from the issuance of
preferred stock, of which $19.1 million was invested in marketable securities.
On June 30, 2000, cash, cash equivalents and short-term investments totaled
$47.1 million compared to approximately $3.7 million at December 31, 1999. Our
cash reserves are held in interest-bearing high-grade corporate bonds and money
market accounts. In August 2000, we completed the initial public offering of
6,900,000 shares of common stock at a price of $13.00 per share, for net
proceeds of $82.5 million. We believe that our existing cash reserves, the
proceeds from our initial public offering and our available borrowing capacity
will be sufficient to support our planned operations for at least 24 months.
Our cash requirements will vary depending upon a number of factors, many of
which are beyond our control, including:
- the demand for our HAP Technology;
- the efforts and success of our HAP 2000 partnership program;
- the results of our MEDNOSTICS programs;
- the level of competition we face;
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- our ability to develop, market and license new technology; and
- our ability to effectively manage operating expenses.
INCOME TAXES
We have not generated any taxable income to date and, therefore, have not paid
any federal income taxes since inception. At December 31, 1999, we had available
unused net operating loss carryforwards of approximately $12.7 million and $12.5
million which may be available to offset future federal and state taxable
income, respectively. Use of our federal and state net operating loss
carryforwards, which will begin to expire in 2007 and 2000, respectively, may be
subject to limitations. The future utilization of these carryforwards may be
limited due to changes within our current and future ownership structure as
defined within the income tax code. We have recorded a full valuation allowance
against our deferred tax asset, which consists primarily of net operating loss
carryforwards, because of uncertainty regarding its recoverability, as required
by Financial Accounting Standard No. 109 "Accounting for Income Taxes."
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition," was issued. The revenues included in the accompanying statements
of operations, for all periods presented, are in accordance with the provisions
of SAB 101.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Financial Instruments and for Hedging Activities"
(SFAS No. 133) which provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. SFAS No. 133
is effective for fiscal years beginning after January 1, 2001. We do not believe
that the adoption of SFAS No. 133 will have an impact on our results of
operations or financial condition as we hold no derivative financial instruments
and we do not engage in hedging activities.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is principally confined to our cash equivalents
and investments, all of which have maturities of less than two years. We
maintain a non-trading investment portfolio of investment grade, liquid debt
securities that limit the amount of credit exposure to any one issue, issuer
or type of instrument. In view of the nature and mix of our total portfolio,
a 10% movement in market interest rates would not have a significant impact
on the total value of our investment portfolio as of June 30, 2000.
At June 30, 2000, we had aggregate fixed rate debt of approximately $13.8
million, including borrowings outstanding under term loans and capital lease
obligations. A 10% change in interest rates would cause a corresponding increase
in our annual expense of approximately $150,000.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS - NONE
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS FROM REGISTERED SECURITIES
CHANGES IN SECURITIES
During the three months ended June 30, 2000, we granted options to purchase
an aggregate of 1,175,780 shares of our common stock, which are exercisable
over the next four years, at a weighted average exercise price of $11.42 per
share. During the same period, four individuals exercised options to purchase
an aggregate of 14,555 shares of our common stock for an aggregate purchase
price of $49,215. These grants and issuances were made in reliance upon Rule
701 under the Securities Act of 1933, as amended. On June 20, 2000, in
connection with a leasing arrangement, we issued a warrant to FINOVA Capital
Corporation exercisable for 41,666 shares of our common stock at $12.00 per
share expiring on June 20, 2005. Upon completion of our initial public
offering, this warrant was replaced with a warrant exercisable for 18,462
shares of our common stock at $16.25 per share expiring on August 7, 2005.
The issuance of these warrants was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
USE OF PROCEEDS
On August 1, 2000, the Securities and Exchange Commission declared our
Registration Statement on Form S-1 (File No. 333-35314) effective in connection
with the initial public offering of our common stock. Deutsche Banc Alex. Brown,
Bear, Stearns & Co. Inc., Salomon Smith Barney and UBS Warburg LLC served as
managing underwriters of the offering.
On August 7, 2000, we sold 6,000,000 shares of our common stock (excluding the
underwriters' overallotment option) at $13.00 per share to the underwriters. We
received net proceeds in the initial public offering of approximately
$71,600,000, reflecting gross proceeds of $78,000,000, net of underwriting
discounts and commissions of approximately $5,460,000 and other offering costs
of approximately $940,000.
On August 31, 2000, we sold 900,000 shares of our common stock (in connection
with the exercise of the underwriters' overallotment option) at $13.00 per share
to the underwriters. We received net proceeds of approximately $10,881,000,
reflecting gross proceeds of $11,700,000, net of underwriting discounts and
commissions of approximately $819,000.
As the offering took place after June 30, 2000, we have not used any of the
offering proceeds during the reported period.
ITEMS 3-5 - None
ITEM 6(a) - Exhibits
EXHIBITS DESCRIPTION
27 Financial Data Schedule
ITEM 6(b) - Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this report
is filed.
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GENAISSANCE PHARMACEUTICALS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
GENAISSANCE PHARMACEUTICALS, INC.
Date: September 1, 2000 By: /s/ Kevin L. Rakin
------------------------------
Kevin L. Rakin
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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GENAISSANCE PHARMACEUTICALS, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
16
