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 December 31,
1997.
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., Suite FD 1, Boulder, CO 80301-2857
(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
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 __
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 20,921,839
Class Outstanding at January 19, 1998
There are a total of 12 pages included in this document.
Somatogen, Inc., the Somatogen logo and Optro(R) are tradenames and/or
trademarks of the Company. All other brand names or trademarks appearing in this
Form 10-Q are the property of their respective holders.
<PAGE> 2
SOMATOGEN, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Consolidated Balance Sheet -
December 31, 1997 and June 30, 1997 3
Consolidated Statement of Operations-
for the three and six-month periods
ended December 31, 1997 and 1996
and the period from July 10, 1985 (inception) to
December 31, 1997 4
Consolidated Statement of Cash Flows -
for the six-month periods ended December 31, 1997 and
1996 and the period from July 10, 1985 (inception) to
December 31, 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-10
PART II. OTHER INFORMATION 11
SIGNATURES 12
<PAGE> 3
<TABLE>
<CAPTION>
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share amounts)
ASSETS
December 31, June 30,
1997 1997
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,560 $ 24,868
Short-term investments 21,078 19,158
Other receivables 519 483
Prepaid expenses and other current assets 163 382
----------- -----------
Total current assets 37,320 44,891
Property and equipment, at cost, net of
accumulated depreciation and amortization 3,832 3,842
Assets held for sale 5,758 5,942
Other assets, net 1,393 1,356
----------- -----------
$ 48,303 $ 56,031
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,170 $ 1,363
Accrued payroll 571 543
Other accrued liabilities 537 527
----------- -----------
Total current liabilities 2,278 2,433
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized at December 31, 1997,
no shares issued or outstanding -- --
Common stock, $.001 par value; 35,000,000 shares
authorized, 20,921,839 and 20,865,362 shares
issued and outstanding at December 31, 1997 and
June 30, 1997, respectively 21 21
Additional paid-in capital 205,997 205,652
Deficit accumulated during the development stage (159,758) (151,888)
Deferred compensation related to grant of options (235) (187)
----------- -----------
Total stockholders' equity 46,025 53,598
----------- -----------
$ 48,303 $ 56,031
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Period from
Three-months ended Six-months ended July 10, 1985
December 31, December 31, (inception) to
---------------------- --------------------
1997 1996 1997 1996 December 31, 1997
---- ---- ---- ---- -----------------
<S> <C> <C> <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 3,903 5,320 7,653 10,201 128,984
Reimbursements from Lilly -- (1,315) -- (2,984) (15,577)
Reimbursements to Lilly -- 195 -- 1,035 4,483
---------- -------- --------- --------- ----------
Research and development, net 3,903 4,200 7,653 8,252 117,890
General, administrative and marketing 699 799 1,522 1,809 32,894
Writedown of manufacturing
facility assets -- -- -- -- 29,194
---------- -------- --------- --------- ----------
Total operating expenses 4,602 4,999 9,175 10,061 179,978
---------- -------- --------- --------- ----------
Operating loss (4,602) (4,999) (9,175) (10,061) (173,390)
Interest and other income, net 706 635 1,305 1,320 18,550
---------- -------- --------- --------- ----------
Loss from continuing operations (3,896) (4,364) (7,870) (8,741) (154,840)
Discontinued operations:
Loss from operations of subsidiary -- -- -- -- (1,225)
Gain on sale of subsidiary -- -- -- -- 300
---------- -------- --------- --------- ----------
Net loss $ (3,896) $ (4,364) $ (7,870) $ (8,741) $ (155,765)
========== =========== =========== ========== ==========
Basic and diluted net loss per share $ (0.19) $ (0.21) $ (0.38) $ (0.42)
========== =========== ========== ==========
Shares used in calculating
per share data 20,889,000 20,727,000 20,880,000 20,715,000
========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
SOMATOGEN, INC.
(A Corporation in the Development Stage)
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands - unaudited)
Period from
Six-months ended July 10, 1985
December 31, (inception) to
1997 1996 December 31, 1997
---- ---- -----------------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss $ (7,870) $ (8,741) $ (155,765)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 716 814 17,168
Writedown of manufacturing facility assets -- -- 29,194
Other, net 90 201 1,303
Changes in assets and liabilities:
Receivables (36) 772 (357)
Prepaid expenses and other current assets 219 111 (138)
Accounts payable and accrued liabilities (155) (1,688) 2,429
Other, net -- -- 335
----------- ---------- ------------
Net cash used in operating activities (7,036) (8,531) (105,831)
----------- ---------- ------------
Cash flows provided by (used in) investing activities:
Purchase of short-term investments (23,988) (27,982) (332,667)
Proceeds from sale of short-term investments 22,068 24,732 311,589
Purchases of property and equipment (580) (831) (24,091)
Proceeds from sale of property and equipment 210 244 3,520
Additions to construction-in-progress -- -- (18,956)
Other, net (111) (234) (9,399)
----------- ---------- ------------
Net cash used in investing activities (2,401) (4,071) (70,004)
------------ ----------- ------------
Cash flows provided by (used in) financing activities:
Payments of capital lease obligations and long-
term debt -- (158) (10,467)
Net proceeds from issuance of stock and warrants 129 375 198,343
Other -- -- 3,519
----------- ---------- ------------
Net cash provided by financing activities 129 217 191,395
----------- ---------- ------------
Net increase (decrease) in cash and cash equivalents (9,308) (12,385) 15,560
Cash and cash equivalents at beginning of period 24,868 29,541 --
----------- ---------- ------------
Cash and cash equivalents at end of period $ 15,560 $ 17,156 $ 15,560
=========== ========== ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 6 $ 12 $ 2,405
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
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 6
SOMATOGEN, INC.
(A Corporation in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
(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 December 31, 1997 and the consolidated results of
operations and of cash flows for the three and six-month periods ended December
31, 1997 and 1996, and for the period from July 10, 1985 (inception) to December
31, 1997. 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, 1997. The information set
forth in the accompanying consolidated balance sheet as of June 30, 1997, 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, 1997.
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, the Company entered into a global strategic alliance (the
"Alliance") with Eli Lilly and Company ("Lilly") to co-develop Optro, the
Company's lead development compound. The Alliance was terminated in May 1997, at
which time all rights to Optro reverted back to the Company, except the
marketing rights to Optro in Scandinavia which Pharmacia & Upjohn Inc. received
under its 1991 agreement with the Company. In accordance with the termination
provision of the Alliance, the Company received a one-time termination payment
of $6,000,000 in May 1997 and in July 1997, the Company and Lilly executed a
revolving credit agreement which provides that the Company may borrow up to
$8,000,000 from Lilly.
Note 3. Net Loss Per Share
Basic loss per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock options
are excluded from the computation of diluted net loss per share as their effect
is antidilutive.
<PAGE> 7
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 and those
discussed in the Company's Annual Report on Form 10-K for the year ended June
30, 1997.
Since 1987, Somatogen has been a development stage Company and has
devoted substantially all of its efforts and resources to research and
development related to its recombinant hemoglobin technology. No revenue has
been generated by Somatogen to date from commercial product sales, and such
sales are not expected to commence for several years, if at all. To achieve
sustained profitable operations, Somatogen must successfully develop, obtain
regulatory approval for, manufacture and market its products. The time-frame
necessary to achieve market success for any individual product is long and
uncertain. There can be no assurance that the Company will be able to achieve
profitability at all or on a sustained basis.
For the period from its inception to December 31, 1997, the Company
incurred a cumulative net loss of $155,765,000. The operating loss for the
remainder of fiscal 1998 is expected to remain relatively consistent with the
level experienced during the six-month period ended December 31, 1997. However,
the Company expects to incur substantial and increasing operating losses for the
next several years as the Company's products will require significant additional
research and development including extensive preclinical and clinical testing,
before the Company will be able to apply for and obtain approval from the FDA or
corresponding foreign authorities for any indication, if at all. There can be no
assurance that the Company's research and development efforts will be
successful, that any of the Company's products under development, including
Optro, will prove to be safe or effective in clinical trials, that the Company
will be able to obtain regulatory approval to sell any products, that the
products can be manufactured at an acceptable cost and with appropriate quality,
or that any products, if and when approved, could be successfully marketed.
Results of Operations
Revenue
The Company did not recognize any revenue for the three or six-month
periods ended December 31, 1997 or 1996.
Operating Expenses
Total operating expense decreased by 8% to $4,602,000 during the
quarter ended December 31, 1997 from $4,999,000 for the comparable period in the
previous fiscal year. For the six-month period ended December 31, 1997, total
operating expense decreased by 9% to $9,175,000 from $10,061,000 for the
comparable period in the previous fiscal year.
<PAGE> 8
Net research and development expense for the quarter ended December 31,
1997 decreased by 7% to $3,903,000 from $4,200,000 for the comparable period in
the previous fiscal year. This decrease in net research and development expense
was primarily due to lower personnel and laboratory supply expenditures,
partially offset by a decrease in reimbursements from Eli Lilly and Company
("Lilly"). For the six-month period ended December 31, 1997, net research and
development expense decreased by 7% to $7,653,000 from $8,252,000 for the
comparable period in the previous fiscal year. This decrease was primarily due
to lower personnel and laboratory supply expenditures, partially offset by an
increase in clinical and preclinical trial expenditures and a decrease in
reimbursements from Lilly.
General, administrative and marketing expense decreased by 13% to
$699,000 for the quarter ended December 31, 1997 from $799,000 for the
comparable quarter in the previous fiscal year. This decrease was primarily due
to lower personnel expense. For the six-month period ended December 31, 1997,
general, administrative and marketing expense decreased by 16% to $1,522,000
from $1,809,000 for the comparable period in previous fiscal year. This decrease
was primarily due to lower personnel, consulting and legal expenses.
Interest and Other Income, Net
Interest and other income increased to $706,000 for the quarter ended
December 31, 1997 from $635,000 for the comparable period in the previous fiscal
year. This increase was primarily due to an increase in other income recognized
from a retroactive adjustment to a research and development agreement, partially
offset by a decrease in interest income due to lower average investment
balances. For the six-month period ended December 31, 1997, interest and other
income decreased to $1,305,000 from $1,320,000 for the comparable period in the
previous fiscal year. This decrease is a result of lower interest income due to
lower average investment balances, partially offset by an increase in other
income from a retroactive adjustment to a research and development agreement.
Net Loss
The net loss for the quarter ended December 31, 1997 was $3,896,000 (or
$0.19 per share) compared to $4,364,000 (or $0.21 per share) for the same period
in fiscal 1997. For the six-month periods ended December 31, 1997 and 1996, the
net loss totaled $7,870,000 (or $0.38 per share) and $8,741,000 (or $0.42 per
share), respectively.
Liquidity and Capital Resources
Somatogen's operations to date have consumed substantial amounts of
cash. During the remainder of fiscal 1998, negative cash flow from operations is
expected to remain relatively comparable to the levels experienced during the
six-month period ended December 31, 1997. However, negative cash flow from
operations is expected to increase in subsequent fiscal years as the clinical
studies for Optro increase in scope and the preclinical and clinical studies of
new products are undertaken. 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. The Company has relied
primarily on public and private offerings of equity and cost sharing and equity
investments pursuant to the Lilly strategic 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.
<PAGE> 9
At December 31, 1997 the Company had cash, cash equivalents and
short-term investments of $36,638,000. The Company's cash, cash equivalents and
short-term investments decreased approximately $7,388,000 during the six-month
period ended December 31, 1997. This decrease was primarily a result of the use
of cash for operations.
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 strategic 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 $5,758,000 are classified in Somatogen's
balance sheet as assets held for sale. During the six-month period ended
December 31, 1997, the Company realized approximately $171,000 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.
The Company historically has leased a significant portion of the
equipment used in its laboratory and pilot manufacturing facilities. As of
December 31, 1997, the Company had aggregate future operating lease obligations
of approximately $2,013,000, which excludes approximately $116,000 related to
operating leases which were renewed and converted into capital leases effective
January 1, 1998. There were no capital lease obligations as of December 31,
1997; however, effective January 1, 1998, certain operating leases were renewed
and converted into capital leases with minimum lease payments aggregating
$597,000. The Company spent $580,000 during the six-month period ended December
31, 1997 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 expanded
preclinical and clinical studies, expenditures associated with commercial
manufacturing, as well as general, administrative, marketing and distribution
expenses.
<PAGE> 10
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 strategic alliances. The Company is currently
engaged in preliminary discussions with potential strategic partners. However,
there can be no assurance that the Company will be able to enter into any
strategic relationships and/or raise additional financing. There can be no
assurance that any strategic relationship which the Company may enter into will
be on terms favorable to the Company, 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> 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of stockholders, which was held on
October 28, 1997, the Company's stockholders elected the following
seven persons as directors, each to serve until the next annual
meeting of stockholders or until his/her successor is elected and
qualified: Andre de Bruin, Bernadine Healy, Carlos A. Ferrer, Gene
I. Miller, George B. Rathmann, Jack W. Schuler and Ralph Snyderman.
The following votes were cast by the stockholders with respect to
the election of directors named in the Proxy Statement:
<TABLE>
<CAPTION>
Shares Shares Voted
Director Voted For Against/Withheld
<S> <C> <C>
Andre de Bruin 17,338,437 176,458
Carlos A. Ferrer 17,338,795 176,100
Bernadine Healy 17,339,325 175,570
Gene I. Miller 17,338,481 176,414
George B. Rathmann 17,339,326 175,569
Jack W. Schuler 17,339,726 175,169
Ralph Snyderman 17,339,425 175,470
</TABLE>
The stockholders also approved an amendment to the Company's
Non-Employee Director Stock Option Plan ("Directors' Plan"), to
increase the aggregate number of shares of Common Stock authorized
for issuance under the Directors' Plan by 200,000 shares, to
increase the non-discretionary option grants under the Directors'
Plan, to accelerate the vesting of options granted under the
Directors' Plan upon certain changes in control of the Company,
and to incorporate a directors' deferred fee option grant
provision. Voting in favor were 16,533,691, opposed were 852,619,
abstaining were 128,585 and broker non-votes were zero.
The stockholders also ratified the selection of Price Waterhouse
LLP as the Company's independent accountants for the fiscal year
ending June 30, 1998. Voting in favor were 17,349,093, opposed
were 117,039, abstaining were 48,763 and broker non-votes were
zero.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.1 - Financial Data Schedule (submitted to the SEC only in
electronic format).
b) Reports on Form 8-K
None
<PAGE> 12
SOMATOGEN, INC.
SIGNATURES
The financial information furnished herein has not been audited by
independent accountants; however, in the opinion of management all adjustments
necessary for a fair presentation for the three and six-month periods ended
December 31, 1997 and 1996, 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: January 21, 1998 SOMATOGEN, INC.
Andre de Bruin
Chairman of the Board, President
and Chief Executive Officer
(Authorized Signatory)
Timothy D. Hoogheem
Senior Vice President of Finance
and Administration, Chief Financial
Officer, Treasurer and Assistant Secretary
(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 DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 15,560
<SECURITIES> 21,078
<RECEIVABLES> 519
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,320
<PP&E> 18,304
<DEPRECIATION> 14,472
<TOTAL-ASSETS> 48,303
<CURRENT-LIABILITIES> 2,278
<BONDS> 0
<COMMON> 21
0
0
<OTHER-SE> 46,004
<TOTAL-LIABILITY-AND-EQUITY> 48,303
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,653
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (7,870)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,870)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,870)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
