<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 September 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____________X__________ NO______________________
Number of shares outstanding of the registrant's Common Stock as of October 31,
2000:
Common Stock, par value $.001 22,647,194 shares outstanding
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GENAISSANCE PHARMACEUTICALS, INC.
For the Quarter Ended September 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 September 30, 2000...................................... 1-2
Statements of Operations for the three months ended September 30, 2000 and 1999
and for the nine months ended September 30, 2000 and 1999..............................................3
Statement of Stockholders' Equity and Comprehensive Loss for the nine months
ended September 30, 2000...............................................................................4
Statements of Cash Flows for the nine months ended September 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 1: Financial Information
Item 1 - Financial Statements:
GENAISSANCE PHARMACEUTICALS, INC.
Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 3,666 $ 82,895
Marketable securities........................... - 38,386
Other current assets............................ 206 921
-------------- -----------
Total current assets...................... 3,872 122,202
PROPERTY AND EQUIPMENT, net........................ 7,224 28,391
DEFERRED FINANCING COSTS, net...................... 251 593
OTHER ASSETS....................................... 167 652
-------------- -----------
Total assets.............................. $ 11,514 $ 151,838
============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt............... $ 1,020 $ 762
Current portion of capital lease obligations.... 1,200 5,328
Accounts payable................................ 821 1,277
Accrued expenses................................ 487 3,204
-------------- -----------
Total current liabilities................. 3,528 10,571
-------------- -----------
Long-Term Liabilities:
Long-term debt, including amounts due to
related parties of $950 and $4,005 at
December 31, 1999 and September 30, 2000,
respectively, less current portion............ 2,287 4,653
Capital lease obligations, less current portion. 3,842 15,974
Deferred revenue................................ 461 2,390
Royalty obligations............................. 300 300
Convertible promissory notes.................... 3,500 -
Accrued preferred stock dividends............... 1,056 1,159
-------------- -----------
Total long-term liabilities............... 11,446 24,476
-------------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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GENAISSANCE PHARMACEUTICALS, INC.
Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(Continued)
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK,
10,000,000 authorized shares at
December 31, 1999 :
Series A and KBL; $.001 par value,
2,437,500 and 0 shares issued and outstanding at
December 31, 1999 and September 30, 2000,
respectively.................................... 11,247 -
PUTTABLE WARRANT..................................... 125 -
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, 10,000,000 authorized shares
at December 31, 1999 and 58,000,000
authorized shares at September 30, 2000, $.001
par value, 2,809,680, and 22,647,194
shares issued and outstanding at
December 31, 1999 and September 30, 2000,
respectively.................................... 3 23
Additional paid-in capital........................ 4,819 218,322
Accumulated deficit............................... (19,654) (101,594)
Net unrealized investment gains .................. - 40
-------------- -----------
Total stockholders' equity (deficit)........ (14,832) 116,791
-------------- -----------
Total liabilities and stockholders'
equity.................................... $ 11,514 $ 151,838
============== ===========
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
Grant research revenue...................... $ - $ 30 $ - $ 547
License revenue............................. 67 30 187 69
------------- ------------- ------------ -------------
Total revenue............................... 67 60 187 616
------------- ------------- ------------ -------------
Operating Expenses:
Sublicense royalty obligations.............. - 6 515 13
Research and development.................... 7,813 1,613 15,645 3,855
Selling, general and administrative......... 2,451 791 5,706 1,868
Stock based compensation.................... 754 552 5,101 688
------------- ------------- ------------ -------------
Total operating expenses.................... 11,018 2,962 26,967 6,424
------------- ------------- ------------ -------------
Loss from operations........................ (10,951) (2,902) (26,780) (5,808)
Interest income................................. 1,520 61 2,677 217
Interest expense................................ (374) (150) (1,330) (373)
------------- ------------- ------------ -------------
Net loss.................................... (9,805) (2,991) (25,433) (5,964)
Preferred stock dividends and accretion......... (1,603) (526) (6,327) (1,567)
Beneficial conversion feature of Series B,
KBH and C preferred stock................... - - (50,180) -
------------- ------------- ------------ -------------
Net loss attributable to common shareholders.... $ (11,408) $ (3,517) $ (81,940) $ (7,531)
============= ============= ============ ==============
Net loss per common shareholder, basic
and diluted................................. $ (.74) $ (1.27) $ (11.68) $ (2.80)
============= ============ ============ ==============
Weighted average shares used in computing
net loss per common share................... 15,437 2,780 7,013 2,689
============= ============= ============ =============
Pro forma net loss per share, basic and diluted. $ (.49) (5.05)
============= ============
Pro forma weighted average shares outstanding,
basic and diluted........................... 19,877 14,889
============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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GENAISSANCE PHARMACEUTICALS, INC.
Statements of Stockholders' Equity and Comprehensive Loss (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
ADDITIONAL
----------COMMON STOCK---------- PAID-IN
SHARES AMOUNT CAPITAL
<S> <C> <C>
Balance at December 31, 1999 2,809,680 $ 3 $ 4,819
Issuance of common stock from exercise of stock options 72,685 - 404
Issuance of common stock from exercise of warrants 98,218 - 230
Stock based compensation - - 4,781
Warrants issued in connection with debt financing and preferred stock
Offering - - 3,320
Accretion in carrying value of redeemable preferred stock - - -
Beneficial conversion feature of Series B, KBH and C preferred stock - - 50,180
Conversion of preferred stock in connection with initial public offering 12,704,166 13 72,054
Cashless exercise of warrants in connection with initial public offering 62,445 - 501
Sale of common stock in connection with initial public offering,
net of $7,660 offering costs 6,900,000 7 82,033
Net change in unrealized investment gain - - -
Net loss - - -
Total comprehensive loss
--------------- ---------------- --------------
Balance at September 30, 2000 22,647,194 $ 23 $ 218,322
=============== ================ ==============
<CAPTION>
NET UNREALIZED
ACCUMULATED INVESTMENT
DEFICIT GAINS
<S> <C> <C>
Balance at December 31, 1999 $ (19,654) $ -
Issuance of common stock from exercise of stock options - -
Issuance of common stock from exercise of warrants
Stock based compensation - -
Warrants issued in connection with debt financing and preferred stock
Offering - -
Accretion in carrying value of redeemable preferred stock (6,327) -
Beneficial conversion feature of Series B, KBH and C preferred stock (50,180) -
Conversion of preferred stock in connection with initial public offering - -
Cashless exercise of warrants in connection with initial public offering - -
Sale of common stock in connection with initial public offering,
net of $7,660 offering costs - -
Net change in unrealized investment gain - 40
Net loss (25,433) -
Total comprehensive loss
---------------- -------------
Balance at September 30, 2000 $ (101,594) $ 40
================= ============
<CAPTION>
TOTAL
COMMON OTHER
STOCKHOLDERS' COMPREHENSIVE
EQUITY LOSS
<S> <C> <C>
Balance at December 31, 1999 $ (14,832)
Issuance of common stock from exercise of stock options 404
Issuance of common stock from exercise of warrants 230
Stock based compensation 4,781
Warrants issued in connection with debt financing and preferred stock
Offering 3,320
Accretion in carrying value of redeemable preferred stock (6,327)
Beneficial conversion feature of Series B, KBH and C preferred stock -
Conversion of preferred stock in connection with initial public offering 72,067
Cashless exercise of warrants in connection with initial public offering 501
Sale of common stock in connection with initial public offering,
net of $7,660 offering costs 82,040
Net change in unrealized investment gain 40 $ 40
Net loss (25,433) (25,433)
-------------
Total comprehensive loss $ (25,393)
----------------- =============
Balance at September 30, 2000 $ 116,791
===============
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (25,433) $ (5,964)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................ 2,225 434
Loss on disposal of equipment............................................ 55 -
Stock based compensation................................................. 4,781 688
Non-cash interest expense................................................ 376 125
Warrants issued in exchange for services................................. 14 -
Changes in assets and liabilities -
Other current assets.................................................. (715) (127)
Other assets.......................................................... (485) (247)
Accounts payable...................................................... 456 232
Accrued expenses...................................................... 2,723 209
Deferred revenue...................................................... 1,929 (51)
Due to related party.................................................. (6) (49)
--------------- -------------
Net cash used in operating activities........................... (14,080) (4,750)
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................................... (5,173) (855)
(Investment in) proceeds from marketable securities......................... (38,346) 2,725
--------------- ------------
Net cash used in investing activities........................... (43,519) 1,870
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock............................... 53,925 -
Net proceeds from issuance of common stock.................................. 634 8
Net proceeds from initial public offering, net of issuance costs............ 82,040 -
Proceeds from (repayment of) long-term debt, net............................ (947) 1,826
Proceeds from long-term debt due to related parties......................... 3,055 141
Repayment of capital leases................................................. (1,879) (237)
Deferred offering costs..................................................... - (40)
--------------- -------------
Net cash provided by financing activities....................... 136,828 1,698
--------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 79,229 (1,182)
CASH AND CASH EQUIVALENTS, beginning of period................................. 3,666 4,189
--------------- ------------
CASH AND CASH EQUIVALENTS, end of period....................................... $ 82,895 $ 3,007
=============== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH:
Financing Activities:
Conversion of liabilities into common or preferred stock................. $ 3,561 $ 160
Acquisition of equipment pursuant to capital lease obligations........... 18,139 2,530
Issuance of warrants in connection with financing agreements............. 3,320 105
</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 September 30, 2000
(1) BASIS OF PRESENTATION
Genaissance Pharmaceuticals, Inc. is a leader in applying population
genomics, informatics and clinical data to the development of
personalized medicines. 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. We market our technology to the biopharmaceutical
industry as a complete solution for improving the development, marketing
and prescribing of 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 September 30, 2000, and
the results of our operations for the three and nine month periods ended
September 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 $82.0
million, net of underwriting discounts and commissions and expenses of
approximately $7.7 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 6).
(3) 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
<PAGE>
We have also entered into a sublicense agreement with a third party (the
"Licensor"). Through September 30, 2000, in consideration for 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.
(4) 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 stock options and
warrants would be anti-dilutive for all periods presented. The
outstanding convertible preferred stock (converted in August 2000), stock
options and warrants (prior to application of the treasury stock method)
would entitle holders to acquire 3,678,095 and 3,046,777 shares of common
stock at December 31, 1999 and September 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 the pro forma net loss per share for the
three and nine months ended September 30, 2000, assuming conversion of
outstanding shares of preferred stock and automatic exercise of warrants
from date of original issuance. The pro forma net loss per share for the
nine months ended September 30, 2000, includes the beneficial conversion
charge of $50.2 million or $3.37 per share (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
<S> <C> <C>
Numerator -
Net loss applicable to common
shareholders $ (11,408) $ (81,940)
Preferred stock dividends and
accretion 1,603 6,327
Puttable warrant interest expense 42 376
------------ ------------
Pro Forma net loss applicable to
common shareholders $ (9,763) $ (75,237)
============= =============
Denominator -
Weighted average common shares 15,437 7,013
Weighted average effect of pro forma
securities -
Preferred Stock
Series A 848 1,904
Series B 3,036 5,114
Series C 535 809
Warrants 21 49
------------------ ------------------
Denominator for Pro Forma basic and
diluted calculation 19,877 14,889
============ ============
Pro Forma net loss per share $ (.49) $ (5.05)
============= ============
</TABLE>
7
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(5) 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 nine months ended
September 30, 2000, we borrowed the entire balance available under this
commitment. In July 2000, we obtained an additional $1.5 million of
funding from CII for further expansion of our facility. During the nine
months ended September 30, 2000, we borrowed approximately $337,000 under
this commitment.
During the nine months ended September 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 September 30, 2000, we had approximately $1.3 million of
borrowing capacity available under these agreements. In connection with
entering into these leasing arrangements, we granted the lessors warrants
to purchase 61,916 shares of common stock at a weighted average exercise
price of $9.67 per share. Deferred financing costs of $414,481, which
approximated the fair value of these warrants at the date of issuance,
will be amortized over the term of the related leases.
(6) 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
issuance costs of approximately $2.4 million and net of 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 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 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 preferred stock was automatically converted into common stock upon
the completion of the initial public offering (Note 2).
8
<PAGE>
(7) STOCK BASED COMPENSATION
During the nine months ended September 30, 2000, options to purchase
1,648,530 shares of common stock were granted to our employees and
consultants at a weighted average exercise price of $11.76 per share.
Total compensation expense recorded in the accompanying statement of
operations associated with employee stock options is approximately
$247,000 and $82,000 for the nine months ended September 30, 2000 and
1999, respectively. Deferred compensation at September 30, 2000 related
to these options was approximately $963,000.
During the nine months ended September 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 nine
months ended September 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 $1,654,000 and $286,000 for the nine months
ended September 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
Officer Stock Purchase Agreement as a compensatory arrangement between us
and the Officers and accordingly, have recognized a non-cash compensation
expense of $2,880,000 and $320,000 during the nine months ended September
30, 2000 and 1999, respectively 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, the obligation to the former CEO was
satisfied, and no further compensation expense will be recognized from
this stock purchase agreement. 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 Officer Notes. We have
recognized a compensation expense of $320,000 during the three months
ended September 30, 2000 as a result of the successful completion of our
initial public offering. Such forgiveness is included in stock based
compensation in the accompanying Statement of Operations.
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 management's current
expectations regarding financial results, economic conditions, trends and
known uncertainties. These expectations are based on certain assumptions
regarding our research and development activities, projected expenditures,
the ability of our technologies to improve the drug development process and
other factors relating to our growth. These expectations may not materialize
if development efforts are delayed or suspended or if other assumptions prove
incorrect. These factors are more fully 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 September 30, 2000, we had an accumulated deficit of $101.6 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-TM- 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 SEPTEMBER 30, 2000 AND 1999
Revenue consists primarily of proceeds received in connection with research
grants and through the sublicensing of a patent. Revenue increased to
approximately $67,000 in the three months ended September 30, 2000 from
approximately $60,000 in the three months ended September 30, 1999. The
revenue during the quarter ended September 30, 2000 consists of royalties
received and the amortization, over the remaining life of the sublicensed
patent, of upfront payments received. The increase resulted from a $37,000
increase in license revenue and a $30,000 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-TM- 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 HAP-TM- Marker
discovery and HAPtyping-TM-, and facility related costs. We expense our
research and development costs as incurred. Research and development
expenditures increased to approximately $7.8 million in the three months
ended September 30, 2000 from $1.6 million in the three months ended
September 30, 1999. The increase in expenditures is attributable to the
significant increase in the discovery of HAP-TM- Markers during 2000 and the
initiation of our HAPtyping-TM- process. The increased HAP-TM- 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-TM-
10
<PAGE>
Marker discovery, our HAPtyping-TM- capacity, our MEDNOSTICS-TM- program and
as we continue to invest in ongoing product development efforts related to
our DECOGEN-TM- informatics system.
Selling, general and administrative expenses consist primarily of payroll and
benefits for executive, business development, 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 and administrative expenses increased
to approximately $2.5 million in the three months ended September 30, 2000
from approximately $791,000 in the three months ended September 30, 1999. The
increase is primarily attributable to an increase in business development,
legal and administrative personnel to support our continued growth, our
expanded business development efforts related to our HAP-TM- 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 and other non-cash 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 a 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 $754,000 in the three months ended September 30, 2000 from
approximately $552,000 in the three months ended September 30, 1999. The
increase for the three months ended September 30, 2000 is primarily due to
the $320,000 of expense related to the stock purchase agreement due to the
increase in fair value of the stock during the period and the $320,000
compensation charge in connection with the loans payable by two officers.
This was partially off set by a decline in expense associated with options
granted to scientific advisory board members due to the accelerated vesting
of all previously unvested options to scientific advisory board members
during the first quarter of 2000.
Interest income results primarily from investing proceeds raised through the
issuance of equity securities. Interest income increased to approximately
$1.5 million in the three months ended September 30, 2000 from approximately
$61,000 in the three months ended September 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 and our initial public
offering in August 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 $374,000 in the three
months ended September 30, 2000 from approximately $150,000 in the three
months ended September 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-TM- Markers, as well
as costs incurred in connection with the expansion of our facility.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue decreased to approximately $187,000 in the nine months ended
September 30, 2000 from approximately $616,000 in the nine months ended
September 30, 1999. The decrease resulted from a $547,000 decrease in grant
research revenue. The decrease in grant research revenue occurred because we
decided not to pursue research grant funding. This decrease was partially
offset by an increase of approximately $118,000 in license revenue. During
the nine months ended September 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.
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Sublicense royalty expense represents royalties incurred by us on
sublicensing fees received. The increase in the nine months ended September
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 $15.6 million in
the nine months ended September 30, 2000 from $3.9 million in the nine months
ended September 30, 1999. The increase was attributable to the increased
production of HAP-TM- Markers, the initiation of our HAPtyping-TM- process and
the development of our proprietary DECOGEN-TM- informatics system.
Selling, general and administrative expenses increased to approximately $5.7
million in the nine months ended September 30, 2000 from approximately $1.9
in the nine months ended September 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.
Stock based compensation expense increased to approximately $5.1 million in
the nine months ended September 30, 2000 from approximately $688,000 in the
nine months ended September 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 $2.9
million of expense related to the officer stock purchase agreement due to the
increase in the fair value of our stock during the period.
Interest income increased to approximately $2.7 million in the nine months
ended September 30, 2000 from approximately $217,000 in the nine months ended
September 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 and the initial public offering in August 2000.
Interest expense increased to approximately $1.3 million in the nine months
ended September 30, 2000 from approximately $373,000 in the nine months ended
September 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 September 30,
2000, we have received aggregate gross proceeds of approximately $162.8
million from issuance of common and preferred stock. In addition, through
September 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 $23.8 million from capital lease financing and $5.1 million
from other loans. The proceeds from capital lease financing and other loans
have been used to acquire $31.5 million of property and equipment. On
September 30, 2000, we had available borrowing capacity of $1.3 million under
capital lease agreements and $1.2 million under long-term loans for facility
improvement costs. We are using the $1.3 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
-TM-Markers for all pharmaceutically relevant genes and increase the throughput
of our HAPtyping-TM-.
Cash used in operations for the nine months ended September 30, 2000 was
$14.1 million compared with $4.8 for the same period in 1999. A net loss of
$25.4 million for the first nine months of 2000 was partially offset by
non-cash charges of $4.8 million for stock based compensation expense, $1.9
million of deferred revenue, $2.2 million of non-cash charges for
depreciation and amortization expense and an increase of $2.7 million in
accrued expenses. During the nine months ended September 30, 2000, we
received net proceeds of $136.6 million from the issuance of common and
preferred stock, of which $38.4 million was invested in marketable securities.
On September 30, 2000, cash, cash equivalents and short-term investments
totaled $121.3 million compared to approximately $3.7 million at December 31,
1999. Our cash reserves are held in interest-bearing high-grade
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<PAGE>
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 $82.0 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-TM- Technology;
- the efforts and success of our HAP-TM- 2000 partnership program;
- the number of Mednostics programs we commence;
- the results of our MEDNOSTICS-TM- programs;
- the level of competition we face;
- 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 a 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 September 30, 2000.
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<PAGE>
At September 30, 2000, we had aggregate fixed rate debt of approximately
$26.7 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 $270,000.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDS - NONE
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS FROM REGISTERED SECURITIES
CHANGES IN SECURITIES
During the three months ended September 30, 2000, individuals exercised
options to purchase an aggregate of 50,230 shares of our common stock for an
aggregate purchase price of $330,755. These issuances were made in reliance
upon Rule 701 under 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 $71,100,000, reflecting gross proceeds of $78,000,000, net of
underwriting discounts and commissions of approximately $5,460,000 and other
offering costs of approximately $1.4 million.
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 of approximately $819,000.
The proceeds from our initial public offering have been invested in
interest-bearing high-grade corporate bonds and money market accounts.
ITEMS 3-5 - None
ITEM 6(a) - Exhibits
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
<S> <C>
10.1* Promissory Note issued by Gualberto Ruano, dated
August 7, 2000
10.2* Promissory Note issued by Kevin Rakin, dated
August 7, 2000
10.3* Employment Agreement with Kenneth Kashkin, dated
September 13, 2000
10.4* Promissory Note issued by Kenneth Kashkin, dated
August 1, 2000
27 Financial Data Schedule
</TABLE>
* Indicates a management contract.
15
<PAGE>
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.
16
<PAGE>
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: November 14, 2000 By: /s/ Kevin L. Rakin
----------------------------
Kevin L. Rakin
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<PAGE>
GENAISSANCE PHARMACEUTICALS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
10.1* Promissory Note issued by Gualberto Ruano, dated
August 7, 2000
10.2* Promissory Note issued by Kevin Rakin, dated
August 7, 2000
10.3* Employment Agreement with Kenneth Kashkin, dated
September 13, 2000
10.4* Promissory Note issued by Kenneth Kashkin, dated
August 1, 2000
27 Financial Data Schedule
</TABLE>
* Indicates a management contract.
18
