<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
(X) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. For the quarterly period ended
September 30, 1996.
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. For the transition period
from ____ to _____.
Commission File Number
0-19423
SOMATOGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-0991858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2545 Central Ave., Boulder, CO 80301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 440-9988
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock $.001 par value 20,709,732
Class Outstanding at November 11, 1996
Somatogen, the Somatogen logo and Optro(TM) are trademarks of the
Company. All other brand names or trademarks appearing in this 10-Q
are the property of their respective holders.
<PAGE> 2
SOMATOGEN, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Consolidated Balance Sheet -
September 30, 1996 and June 30, 1996.................. 3-4
Consolidated Statement of Operations-
for the three-month periods ended September 30,
1996 and 1995 and the period from July 10, 1985
(inception) to September 30, 1996..................... 5
Consolidated Statement of Cash Flows -
for the three-month periods ended September 30, 1996 and
1995 and the period from July 10, 1985 (inception) to
September 30, 1996.................................... 6-7
Notes to Consolidated Financial Statements................ 8-9
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................. 10-13
PART II. OTHER INFORMATION............................... 14
SIGNATURES.................................................. 15
<PAGE> 3
SOMATOGEN, INC.
(A Corporation in the Development Stage)
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS September 30, June 30,
1996 1996
----------- ----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................ $33,753 $29,541
Short-term investments............................ 16,502 24,735
Receivable from Lilly............................. 1,702 1,852
Other receivables................................. 704 1,013
Prepaid expenses and other current assets......... 293 444
------- -------
Total current assets........................ 52,954 57,585
Property and equipment, at cost, net of
accumulated depreciation and amortization....... 3,934 4,042
Assets held for sale.................................. 6,352 6,446
Other assets, net..................................... 1,121 1,088
------- -------
$64,361 $69,161
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 1,421 $ 1,826
Accrued payroll................................... 946 801
Payable to Lilly.................................. 2,131 2,454
Other accrued liabilities......................... 720 606
Current portion of capital lease obligations...... 84 159
------- -------
Total current liabilities..................... 5,302 5,846
Capital lease obligations, less current portion....... 9 11
------- -------
Total liabilities..................................... 5,311 5,857
------- -------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 4
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED BALANCE SHEET (continued)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
----------- ----------
(unaudited)
<S> <C> <C>
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized at September 30, 1996,
no shares issued or outstanding............... -- --
Common stock, $.001 par value; 35,000,000 shares
authorized, 20,706,757 and 20,684,970 shares
issued and outstanding at September 30, 1996
and June 30, 1996, respectively............... 21 21
Additional paid-in capital........................ 204,611 204,518
Deficit accumulated during the development stage.. (145,325) (140,948)
Deferred compensation related to grant of options. (257) (287)
-------- --------
Total stockholders' equity.................... 59,050 63,304
-------- --------
$ 64,361 $ 69,161
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three-months ended Period From
September 30, July 10, 1995
-------------------- (inception) to
1996 1995 September 30, 1996
---- ---- ------------------
<S> <C> <C> <C>
Revenue:
Technology disclosure and license fees... $ -- $ -- $ 4,904
Research and development grants
and contracts........................ -- -- 1,684
-------- --------- --------
Total revenue.................... -- -- 6,588
-------- --------- --------
Operating expenses:
Research and development................. 4,881 4,608 106,133
Reimbursements from Lilly................ (1,669) (1,325) (11,841)
Reimbursements to Lilly.................. 840 -- 4,190
-------- --------- --------
Research and development, net............ 4,052 3,283 98,482
General, administrative and marketing.... 1,010 937 28,777
Writedown of manufacturing
facility assets...................... -- -- 29,194
-------- --------- --------
Total operating expenses......... 5,062 4,220 156,453
-------- --------- --------
Operating loss........................... (5,062) (4,220) (149,865)
Interest and other income, net........... 685 600 9,458
-------- --------- --------
Loss from continuing operations.......... (4,377) (3,620) (140,407)
Discontinued operations:
Loss from operations of subsidiary....... -- -- (1,225)
Gain on sale of subsidiary............... -- -- 300
-------- --------- --------
Net loss................................. $ (4,377) $ (3,620) $(141,332)
======== ========= ========
Net loss per share....................... $ (0.21) $ (0.19)
Shares used in calculating
per share data 20,703,000 18,727,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 6
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(In thousands - unaudited)
<TABLE>
<CAPTION>
Period from
Three-months ended July 10, 1985
September 30, (inception) to
1996 1995 September 30, 1996
---- ---- ------------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss............................................... $ (4,377) $ (3,620) $(141,332)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization...................... 400 537 15,167
Writedown of manufacturing facility assets......... -- -- 29,194
Other, net 30 74 992
Changes in assets and liabilities:
Receivables........................................ 459 828 (2,244)
Prepaid expenses and other current assets.......... 151 101 (268)
Accounts payable and accrued liabilities........... (466) 163 5,369
Other, net......................................... -- (6) 328
-------- -------- --------
Net cash used in operating activities............ (3,803) (1,923) (92,794)
-------- -------- --------
Cash flows provided by (used in) investing activities:
Purchase of short-term investments..................... (5,246) (8,018) (254,207)
Proceeds from sale of short-term investments........... 13,479 11,374 237,705
Purchases of property and equipment.................... (272) (625) (22,527)
Proceeds from sale of property and equipment........... 102 121 2,880
Additions to construction-in-progress.................. -- -- (18,956)
Other ....................... (61) (178) (8,947)
-------- -------- ---------
Net cash provided by (used in)
investing activities............................. 8,002 2,674 (64,052)
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 7
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands - unaudited)
<TABLE>
<CAPTION>
Period from
Three-months ended July 10, 1985
September 30, (inception) to
1996 1995 September 30, 1996
---- ---- ------------------
<S> <C> <C> <C>
Cash flows provided by (used in) financing activities:
Payments of capital lease obligations and long-
term debt ......................................... (80) (321) (10,374)
Net proceeds from issuance of stock and warrants....... 93 2,365 197,454
Other.................................................. -- -- 3,519
------- ------- -------
Net cash provided by financing activities.............. 13 2,044 190,599
------- ------- -------
Net increase in cash and cash equivalent................... 4,212 2,795 33,753
Cash and cash equivalents at beginning of period........... 29,541 26,376 --
------- ------- -------
Cash and cash equivalents at end of period................. $33,753 $29,171 $33,753
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest................................. $ 7 $ 42 $ 2,387
Capital lease obligations incurred for purchase
of property and equipment.......................... -- -- 5,318
Equipment deposits transferred to net
property, plant and equipment...................... -- -- 3,423
Net property, plant and equipment transferred
to assets held for sale............................ -- -- 9,541
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 8
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
Note 1--STATEMENT OF ACCOUNTING PRESENTATION
In the opinion of the Company, the accompanying unaudited
consolidated financial statements include all adjustments (consisting
only of normal recurring accruals) necessary to fairly state the
Company's consolidated financial position as of September 30, 1996 and
the consolidated results of operations and of cash flows for the
three-month periods ended September 30, 1996 and 1995, and for
the period from July 10, 1985 (inception) to September 30, 1996. The
accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1996.
The information set forth in the accompanying consolidated balance sheet
as of June 30, 1996, has been derived from the audited consolidated
balance sheet included in the Company's Annual Report on Form 10-K for
the year ended June 30, 1996.
Interim results are not necessarily indicative of the results for
the full year.
Note 2--STRATEGIC ALLIANCE AND RESEARCH AND DEVELOPMENT ARRANGEMENT
In June 1994, Somatogen entered into a global strategic
alliance with Eli Lilly and Company ("Lilly") whereby Lilly is co-
developing Optro (the "Lilly Alliance") and in September 1995,
Somatogen and Lilly agreed to amend certain terms of the Lilly
Alliance. Under the terms of the Lilly Alliance, Lilly is responsible
for establishing manufacturing facilities to supply Optro for Phase
III clinical trials and for global commercialization. In North America,
the Company's expanded Phase II and Phase III trials for Optro will be
performed in conjunction with Lilly's clinical and research groups, and
Lilly and Somatogen will co-promote the product, splitting the
development costs and sharing equally in the profits. Outside North
America, except in Scandinavia, Lilly will be responsible for clinical
development of Optro and related costs, and will have exclusive
marketing rights. Lilly will pay Somatogen a royalty on product sales
outside North America. Lilly has invested $30,000,000 in exchange for
Somatogen Common Stock. The Lilly Alliance originally contemplated a
March 1996 determination date at which Lilly would have made a decision
whether to proceed with the clinical development and commercialization
of Optro. The September 1995 amendment to the Lilly Alliance
<PAGE> 9
SOMATOGEN, INC.
accelerated $7,000,000 of the $10,000,000 equity investment which Lilly
would have made at such determination date. Pursuant to the amendment,
Lilly made such $7,000,000 equity investment in October 1995. In
addition, the amendment eliminated the March 1996 determination date
and combined all remaining milestone equity investments into a single
$7,000,000 milestone equity investment to be made if the joint
Somatogen-Lilly steering committee for the alliance determines that
certain conditions have been met. The amendment also modified the
termination provisions of the alliance, which provide for payment of
certain financial consideration by Lilly to Somatogen in the event that
the alliance is terminated under certain circumstances. Pharmacia &
Upjohn, Inc. has the marketing rights to Optro in Scandinavia under its
1991 agreement with Somatogen.
In accordance with the terms of the Lilly Alliance, Somatogen and
Lilly share certain clinical development costs and effective January 1,
1996, Somatogen and Lilly began to share certain process improvement
costs. Expense reimbursements from Lilly and payable to Lilly are
disclosed as a separate component of research and development on the
Consolidated Statement of Operations.
Note 3. Net Loss Per Share
Net loss per share is computed using the weighted average number
of shares of common stock outstanding. Common equivalent shares from
stock options and warrants are excluded from the computation as their
effect is antidilutive.
<PAGE> 10
SOMATOGEN, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Except for the historical information contained herein, the
following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ
materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those
discussed in this section, those discussed in the Company's Annual
Report on Form 10-K for the year ended June 30, 1996, and those
discussed in the Company's Registration Statement on Form S-3 as
declared effective on October 12, 1995.
RESULTS OF OPERATIONS
Revenue
The Company did not recognize any revenue for the three-month
periods ended September 30, 1996 or 1995.
Operating Expenses
Total operating expenses increased by 20% to $5,062,000 during
the quarter ended September 30, 1996 from $4,220,000 for the comparable
period in the previous fiscal year.
Net research and development expense for the quarter ended
September 30, 1996 increased by 23% to $4,052,000 from $3,283,000 for
the comparable period in the previous fiscal year.
Excluding Lilly reimbursements, research and development
expense for the quarter ended September 30, 1996 increased by 6% to
$4,881,000 from $4,608,000 for the comparable period in the previous
fiscal year. This increase is primarily a result of increased product
and process development expenditures.
For the quarter ended September 30, 1996, reimbursements from
Lilly increased by 26% to $1,669,000 from $1,325,000 for the comparable
period in the previous fiscal year. The increase in reimbursements
from Lilly are primarily a result of increased reimbursable clinical
development expenditures and from the September 1995 amendment to the
Lilly Alliance which provided that certain process development
expenditures would be reimbursable beginning January 1, 1996.
<PAGE> 11
SOMATOGEN, INC.
Reimbursements to Lilly aggregated $840,000 for the three-
months ended September 30, 1996. There were no reimbursements to Lilly
in the comparable period of the previous fiscal year. Reimbursements
to Lilly for the quarter and three-months ended September 30, 1996
result from the sharing of clinical development costs and from sharing
process development costs which began January 1, 1996.
Reimbursements attributable to the Lilly Alliance may vary
significantly from quarter to quarter.
General, administrative and marketing expense increased to
$1,010,000 for the quarter ended September 30, 1996 from $937,000 for
the comparable quarter in the previous fiscal year. This increase is
primarily a result of increases in consulting fees.
Interest Income and Other, Net
Interest and other income increased to $685,000 for the
quarter ended September 30, 1996 from $600,000 for the quarter ended
September 30, 1995. The increase in interest and other income for
the quarter ended September 30, 1996 as compared to the quarter ended
September 30, 1995 is primarily a result of increased average
investment balances and a decrease in interest expense, partially
offset by a decrease in other income.
Net Loss
The net loss for the quarter ended September 30, 1996 was
$4,377,000 (or $0.21 per share) compared to $3,620,000 (or $0.19 per
share) for the same period in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Somatogen's operations to date have consumed substantial
amounts of cash. It is expected that negative cash flow from
operations will increase during the remainder of fiscal 1997 and in
future years, from the level experienced during the three-month period
ended September 30, 1996. Such increase is expected as preclinical
and clinical studies of new products are undertaken, as clinical
trials for Optro increase in scope and as additional product and
process improvement costs are incurred. Somatogen will need to raise
significant additional funds in order to fund the Company's future
operations and capital expenditures prior to commercialization of the
Company's products.
<PAGE> 12
SOMATOGEN, INC.
The Company has relied primarily on public and private
offerings of equity and cost sharing and equity investments pursuant
to the Lilly Alliance to fund its operations and upon equipment
leasing arrangements to finance the acquisition of capital equipment
for the Company's laboratory and pilot manufacturing facilities.
At September 30, 1996 the Company had cash, cash equivalents
and short-term investments of $50,255,000. The Company's cash, cash
equivalents and short-term investments decreased approximately
$4,021,000 during the three-month period ended September 30, 1996.
This decrease is primarily a result of the use of cash for operations.
The Company believes that capital resources existing at September 30,
1996 will be adequate to meet its needs through at least December
1997.
Under the terms of its agreement with Somatogen, Lilly has
made equity investments in Somatogen totaling $30,000,000. The
agreement provides for Lilly to make an additional $7,000,000
milestone equity investment if the joint Somatogen-Lilly steering
committee determines that certain conditions have been met.
Furthermore, the agreement provides that Lilly will be responsible
for providing manufacturing facilities to supply Optro for Phase III
clinical trials and global commercialization thus eliminating the
need for Somatogen to build commercial scale manufacturing
facilities for Optro, which the Company estimates would have
cost more than $150,000,000.
In September 1992, the Company commenced construction of a
clinical manufacturing facility. The Company had also acquired land
for, and begun the design of, a larger commercial manufacturing
facility. In conjunction with entering into the Lilly Alliance, an
evaluation of the Company's future manufacturing requirements was
completed and construction of the clinical manufacturing facility was
discontinued. During the fourth quarter of fiscal 1994, the Company
recognized a non-recurring charge, which was principally non-cash,
associated with the writedown of its clinical and commercial
manufacturing assets of $29,200,000. The components of the charge
included approximately $21,000,000 for the clinical manufacturing
facility, $6,000,000 for related manufacturing equipment and
$2,200,000 for engineering design costs for the proposed commercial
manufacturing facility.
Land and building related to manufacturing facilities and the
related manufacturing equipment aggregating $6,352,000 are classified
in Somatogen's balance sheet as assets held for sale. During the
three-months ended September 30, 1996, the Company realized $94,000 in
proceeds from the sale of assets held for sale. The Company believes
the aggregate carrying value of all assets held for sale approximates
the assets' net realizable value; however, the Company continues to
monitor estimated realizable values on a quarterly basis. There can
be no assurances that the Company will realize the aggregate carrying
value of assets held for sale. Proceeds from such asset sales are
being used for general corporate purposes.
<PAGE> 13
SOMATOGEN, INC.
The Company historically has leased a significant portion of
the equipment used in its laboratory and pilot manufacturing
facilities. As of September 30, 1996, the Company had outstanding
capital lease obligations of $93,000. Additionally, the Company had
aggregate future operating lease obligations of approximately
$1,392,000 at September 30, 1996. The Company spent $272,000 during
the three-months ended September 30, 1996 for the purchase of capital
equipment and leasehold improvements.
The Company's near term operating requirements include
increased research and development expenditures, including costs
related to clinical trials and new product development and
manufacturing. The Company's capital spending program includes
purchases of additional equipment for its research and development
laboratories and pilot manufacturing facility. In subsequent fiscal
years, the Company's operating requirements are expected to include
continuing increases in research and development funding to cover the
costs of manufacturing process improvements, expanded clinical trials
and new product development, as well as general, administrative,
marketing and distribution expenses.
In order to meet its long-term financing requirements, the
Company may pursue a number of financing alternatives, including
public and/or private offerings of securities and additional strategic
alliances. However, there can be no assurance that the Company will
be able to raise additional financing from any of such sources, or
that any additional funding which may become available to the Company
will be on acceptable terms. The Company's ability to raise
additional financing may be dependent on many factors beyond the
Company's control, including the state of the capital markets and the
rate of progress of the Company's clinical trials. Any additional
financing that the Company may be able to obtain could result in
substantial dilution to existing stockholders. If adequate funds are
not available, the Company will be required to significantly curtail
operations. Any such action could impact the Company's research and
development programs, including the Company's clinical trial program.
Any of these events could adversely affect the Company's ability to
commercialize its products.
Cash requirements for the Company may vary materially from
those now planned due to results of research and development, results
of clinical testing, changes in focus and direction of the Company's
research and development programs, manufacturing processes,
competitive and technological advances, the FDA regulatory process,
changes in the Company's marketing and distribution strategy and other
factors.
<Page 14>
SOMATOGEN, INC.
PART II. OTHER INFORMATION
Item 6.--Exhibits and Reports on Form 8-K
a) Exhibits
(27) Financial Data Schedule (submitted to the SEC only
in electronic format)
b) Reports on Form 8-K
None
<PAGE> 15
SOMATOGEN, INC.
SIGNATURES
The financial information furnished herein has not been audited
by independent auditors; however, in the opinion of management all
adjustments necessary for a fair presentation for the three-month
periods ended September 30, 1996 and 1995, have been included.
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: November 13, 1996 SOMATOGEN, INC.
Andre de Bruin
-------------------------
President and Chief Executive
Officer (Authorized Signatory)
Timothy D. Hoogheem
-------------------------
Senior Vice President of Finance
and Administration, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Conrad A. McCarty
-------------------------
Corporate Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30,
1996 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE-
MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 33,753
<SECURITIES> 16,502
<RECEIVABLES> 1,702
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 52,954
<PP&E> 17,182
<DEPRECIATION> 13,248
<TOTAL-ASSETS> 64,361
<CURRENT-LIABILITIES> 5,302
<BONDS> 9
<COMMON> 21
0
0
<OTHER-SE> 59,029
<TOTAL-LIABILITY-AND-EQUITY> 64,361
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (4,377)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,377)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> 0
</TABLE>
