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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1999
OR
[ ] 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: 0-20859
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GERON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 75-2287752
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
</TABLE>
230 CONSTITUTION DRIVE, MENLO PARK, CA 94025
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 473-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.001 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.
Class: Common Stock $0.001 par value Outstanding at August 11, 1999: 16,487,446
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GERON CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
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Item 1: Financial Statements........................................................... 3
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998.............................................................. 3
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 1999 and 1998................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998......................................................... 5
Notes to Financial Statements.................................................. 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 9
Item 3: Quantitative and Qualitative Disclosures About Market Risk..................... 26
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.................................................................. 26
Item 2: Changes In Securities and Use of Proceeds...................................... 26
Item 3: Defaults upon Senior Securities................................................ 26
Item 4: Submission of Matters to a Vote of Security Holders............................ 26
Item 5: Other Information.............................................................. 27
Item 6: Exhibits and Reports on Form 8-K............................................... 27
SIGNATURES............................................................................... 27
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GERON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 19,419 $ 16,360
Short-term investments................................. 6,407 8,109
Interest and other receivables......................... 623 661
Other current assets................................... 1,402 685
-------- --------
Total current assets........................... 27,851 25,815
Long-term investments.................................... 13,310 15,954
Property and equipment, net.............................. 3,921 2,336
Intangibles.............................................. 16,709 --
Deposits and other assets................................ 431 351
-------- --------
$ 62,222 $ 44,456
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 1,696 $ 1,184
Accrued liabilities.................................... 2,975 1,220
Current portion of accrued research
funding commitment................................... 2,001 --
Deferred revenue....................................... -- 244
Current portion of capital lease obligations and
equipment loans...................................... 1,082 906
-------- --------
Total current liabilities...................... 7,754 3,554
Noncurrent portion of capital lease obligations and
equipment loans........................................ 1,887 1,300
Accrued research funding commitment...................... 14,322 --
Convertible debentures................................... 9,559 6,801
Commitments
Redeemable convertible preferred stock................... -- 3,610
Stockholders' equity:
Common stock............................................. 14 13
Additional paid-in-capital............................... 118,013 88,055
Notes receivable from stockholders....................... (13) (4)
Deferred compensation.................................... (1,118) (1,383)
Accumulated deficit...................................... (87,971) (57,520)
Accumulated other comprehensive (loss)/income............ (148) 30
Cumulative translation adjustment........................ (77) --
--------- --------
Total stockholders' equity..................... 28,700 29,191
-------- --------
$ 62,222 $ 44,456
======== ========
</TABLE>
See accompanying notes.
3
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GERON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from collaborative agreements..... $ 1,250 $ 1,494 $ 2,744 $ 3,719
License fees and royalties................. 96 17 97 42
---------- ---------- ---------- ----------
Total revenues........................ 1,346 1,511 2,841 3,761
Operating expenses:
Research and development................. 4,519 3,765 8,945 7,434
Acquired research technology............. 23,403 -- 23,403 --
General and administrative............... 1,420 994 2,362 1,820
---------- ---------- ---------- ----------
Total operating expenses.............. 29,342 4,759 34,710 9,254
---------- ---------- ---------- ----------
Loss from operations....................... (27,996) (3,248) (31,869) (5,493)
Interest and other income.................. 976 908 1,653 1,367
Interest and other expense................. (980) (84) (1,127) (166)
---------- ---------- ---------- ----------
Net loss................................... $ (28,000) $ (2,424) $ (31,343) $ (4,292)
Accretion of redemption value of redeemable
convertible preferred stock............... (22) -- (73) --
---------- ---------- ---------- ----------
Net loss applicable to common stockholders. $ (28,022) $ (2,424) $ (31,416) $ (4,292)
========== ========== ========= ==========
Basic and diluted net loss per share....... $ (1.87) $ (0.22) $ (2.19) $ (0.39)
========== ========== ========== ==========
Weighted average shares used in computing basic
and diluted net loss per share............ 14,965,549 11,171,256 14,314,748 11,034,468
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
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GERON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CHANGE IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $(31,343) $ (4,292)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................ 641 541
Interest from convertible debentures ................. 618 --
Issuance of common and preferred stock in exchange for
services rendered ................................... 443 77
Deferred compensation ................................ 265 144
Changes in assets and liabilities:
Other current and noncurrent assets .................. (281) 603
Other current and noncurrent liabilities ............. 2,128 (222)
-------- --------
Net cash used in operating activities ..................... (27,529) (3,149)
Cash flows from investing activities:
Capital expenditures .................................... (2,063) (267)
Purchases of securities available-for-sale .............. (12,948) (21,613)
Proceeds from sales/calls of securities
available-for-sale..................................... 2,004 --
Proceeds from maturities of securities available-for-sale 15,112 8,640
Issuance of common stock in acquisition for purchased
research............................................... 24,731 --
Accrued research funding payments ....................... (946) --
-------- --------
Net cash provided by (used in) investing activities ....... 25,890 (13,240)
Cash flows from financing activities:
Proceeds from equipment loans ........................... 1,430 267
Payments of obligations under capital leases and
equipment loans........................................ (667) (541)
Redemption of preferred stock ........................... (3,683) --
Proceeds from issuance of common and preferred stock, net 118 19,203
Proceeds from issuance of debentures .................... 7,500 --
-------- --------
Net cash provided by financing activities ................. 4,698 18,929
-------- --------
Net increase in cash and cash equivalents ................. 3,059 2,540
Cash and cash equivalents at the beginning of the period .. 16,360 4,122
-------- --------
Cash and cash equivalents at the end of the period ........ $ 19,419 $ 6,662
======== ========
</TABLE>
See accompanying notes.
5
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GERON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated unaudited balance sheet as of June
30, 1999 and condensed consolidated statements of operations for the three and
six month periods ended June 30, 1999 and 1998 have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. These financial statements should be read in
conjunction with the financial statements for the year ended December 31, 1998,
included in the Company's Annual Report on Form 10-K.
The consolidated financial statements include the accounts of Geron
Corporation, and its wholly owned subsidiary, Geron Bio-Med Ltd., a UK company.
All material intercompany accounts, transactions, and expenses have been
eliminated in consolidation.
The financial statements of the Company's subsidiary outside the United
States are measured using the local currency as the functional currency. Assets
and liabilities of this subsidiary are translated at the rates of exchange at
the balance sheet date. The resultant translation adjustments are included in
the cumulative translation adjustment, a separate component of stockholders'
equity. Income and expense items are translated at average monthly rates of
exchange.
Certain reclassifications of prior year amounts have been made to conform
to current year presentation.
Net Loss Per Share
Basic earnings per share is calculated using the weighted average number of
common shares outstanding. Because the Company is in a net loss position,
diluted earnings per share is also calculated using the weighted average number
of common shares outstanding and excludes the effects of options, warrants and
convertible securities which are antidilutive. Had the Company been in a net
income position, diluted earnings per share would have included the shares used
in the computation of basic net loss per share as well as an additional
1,412,565 and 1,676,186 shares related to outstanding options and warrants not
included above (as determined using the treasury stock method at the estimated
average market value) for 1999 and 1998, respectively.
2. CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
places its cash and cash equivalents in interest-bearing money market funds,
municipal notes and commercial paper. As of June 30, 1999, the Company's
investments consisted primarily of corporate notes with maturities ranging from
three to 19 months.
3. CONVERTIBLE DEBENTURES
On December 10, 1998, the Company entered into an agreement to sell $15.0
million in convertible zero coupon debentures to investment funds managed by
three institutional investors. The debentures are convertible at any time by the
holders at a fixed conversion price of $10.00 per share. One-half of the
proceeds were funded upon signing
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the agreement, at which time $7.5 million of series A convertible debentures
were issued. The debentures convert at the Company's option when the Common
Stock has traded at a certain premium to the fixed conversion price for five
consecutive trading days.
In connection with the issuance of the series A convertible debentures, the
Company also issued warrants to purchase 625,000 shares of Common Stock at
$12.00 per share to the holders of series A debentures. These warrants are
exercisable at any time through June 2000. The value of these warrants was
determined to be approximately $719,000. The proceeds of $7.5 million from the
issuance of the series A convertible debentures were allocated between the
series A convertible debentures and the warrants. The series A convertible
debentures, which were recorded at a discount, are being accreted to the
redemption amount over the three year term using the interest method.
During the second quarter of 1999, an aggregate principal amount of $4.5
million of series A convertible debentures were converted into 450,000 shares of
Geron Common Stock at $10.00 per share. As of June 30, 1999, $3.0 million of
series A convertible debentures remained outstanding.
In June 1999, $7.5 million of series B convertible debentures were issued.
The price and terms of the series B convertible debentures were identical to the
series A convertible debentures. In connection with the issuance of the series B
convertible debentures, the Company recorded approximately $562,500 in interest
expense for the difference between the fair value of the Common Stock on the
date of signing and the conversion price of the debentures. The Company also
issued warrants to purchase an additional 625,000 shares of Common Stock at
$12.00 per share to the holders of series B convertible debentures. These
warrants are exercisable at any time through November 2000. The value of the
warrants was determined to be approximately $719,000. The $7.5 million proceeds
from the series B convertible debentures were allocated between the series B
convertible debentures and the warrants. The series B convertible debentures,
which were recorded at a discount, are being accreted to the redemption amount
over the three year term using the interest method.
4. CONVERTIBLE PREFERRED STOCK
On March 27, 1998, the Company completed a private placement with two
institutional investors for the sale of 15,000 shares of Series A Convertible
Preferred Stock with a stated value of $1,000 per share resulting in proceeds of
$15.0 million. On November 6, 1998, 11,548 shares of Series A Preferred Stock
were converted into 2,173,446 shares of Common Stock. The number of shares of
Common Stock issued in November 1998 met the maximum threshold of shares of
Common Stock that could be issued without obtaining stockholder approval under
NASD regulations. The 6% premium on the outstanding shares of Series A Preferred
Stock was accreted to the value of the outstanding Series A Preferred Stock.
During the second quarter of 1999, the Company redeemed the remaining 3,452
shares of Series A Preferred Stock. The total redemption value of $3.7 million
included the 6% premium on the outstanding book value of the Series A Preferred
Stock. As of June 30, 1999, no shares of Series A Preferred Stock remained
outstanding.
5. ACQUISITION
On May 4, 1999, the Company announced the acquisition of Roslin Bio-Med
Ltd., a privately held company formed by the Roslin Institute in Midlothian,
Scotland. In addition, the Company formed a research collaboration with the
Roslin Institute and has committed approximately $20.0 million in research
funding over six years which has a net present value of $17.2 million. The
Company issued 1,891,371 shares of its Common Stock with a fair value of $22.2
million in exchange for all of the outstanding shares of Roslin Bio-Med Ltd. In
addition, the Company assumed Roslin Bio-Med Ltd.'s fully vested stock options,
which when exercised, would amount to an aggregate of 208,629 shares of Geron
Common Stock with a fair value of $2.2 million. The total purchase price of
$44.4 million also included acquisitions costs of $2.9 million. Under the terms
of the agreement, Roslin Bio-Med Ltd. became a wholly owned UK subsidiary of
Geron and is known as Geron Bio-Med Ltd.
The transaction was accounted for using the purchase method of accounting.
The purchase price was allocated among the acquired basic research in the form
of a license in the nuclear transfer technology, the research
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agreement with the Institute and the net tangible assets of Roslin Bio-Med Ltd.
The value of the nuclear transfer technology of $23.4 million has been reflected
as acquired research expense and the value of the research agreement of $17.2
million has been capitalized as an intangible asset.
6. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in its fiscal year ended December 31, 1998. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's chief decision
maker, as defined under SFAS 131, is the Chief Executive Officer. To date, the
Company has viewed its operations as principally one segment, the discovery and
development of therapeutic and diagnostic products for the treatment of cancer
and other age-related degenerative diseases. As a result, the financial
information disclosed herein materially represents all of the financial
information related to the Company's principal operating segment.
7. SUBSEQUENT EVENTS
In July 1999, $500,000 in aggregate principal amount of series A
convertible debentures were converted into 50,000 shares of Geron Common Stock
at $10.00 per share. Subsequent to this conversion, $2.5 million in aggregate
principal amount of series A convertible debentures remain outstanding.
In July 1999, $500,000 in aggregate principal amount of series B
convertible debentures were converted into 50,000 shares of Geron Common Stock
at $10.00 per share. Subsequent to this conversion, $7.0 million in aggregate
principal amount of series B convertible debentures remain outstanding.
8. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of operations data for the
six months ended June 30, 1999 set forth below gives effect to the acquisition
of Roslin Bio-Med Ltd. as if it occurred on January 1, 1999. The unaudited pro
forma consolidated statement of operations data for the six months ended June
30, 1998 set forth below gives effect to the acquisition of Roslin Bio-Med Ltd.
as if it occurred on January 1, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, 1999 JUNE 30, 1998
-------------------- -----------------
<S> <C> <C>
Revenues.................................. $ 2,840 $ 3,761
Net loss.................................. $(34,332) $ (30,081)
Basic and diluted net loss per share...... $ (2.18) $ (2.32)
</TABLE>
9. CONSOLIDATED STATEMENT OF CASH FLOW DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS) JUNE 30, 1999 JUNE 30, 1998
------------------- -----------------
<S> <C> <C>
Supplementary investing and financing activities
Common stock issued under purchase plan.......... $ 105 $ 75
Notes receivable from stockholders............... $ (10) $ --
Valuation of warrants issued with convertible
debentures....................................... $ 719 $ --
Accretion of premium on convertible preferred
stock............................................ $ 73 $ --
Accrued research funding commitment.............. $ 17,187 $ --
Conversion of convertible debentures, net........ $ 4,138 $ --
Net unrealized gain (loss) on available-for-sale
securities....................................... $ (177) $ (12)
</TABLE>
8
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GERON CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. You should not rely on these forward-looking statements. We use
words such as "anticipates", "believes", "plans", "expects", "future", "intends"
and similar expressions to identify forward-looking statements. These statements
appear throughout the Form 10-Q and are statements regarding our intent, belief,
or current expectations, primarily with respect to our operations and related
industry developments. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-Q.
Our actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks faced by us and
described under the heading "Risk Factors" in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, in the section of this
Item 2 titled "Additional Factors That May Affect Future Results," and elsewhere
in this Form 10-Q.
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.
Geron Corporation (the "Company" or "Geron") is a biopharmaceutical company
focusing on discovering, developing and commercializing therapeutic and
diagnostic products to treat cancer and other age-related chronic degenerative
diseases. Geron's technology platform includes the discovery of small molecule
inhibitors of telomerase for cancer therapy; telomere and telomerase-based
research and diagnostic tools; telomerase activation to extend the replicative
lifespan of normal cells; and complementary stem cell, gene therapy and nuclear
transfer approaches to restore the function of degenerating organs.
On May 4, 1999, the Company announced the acquisition of Roslin Bio-Med
Ltd. ("Roslin Bio-Med") a privately held company formed by the Roslin Institute
in Midlothian, Scotland. In addition, the Company formed a research
collaboration with the Roslin Institute and has committed approximately $20.0
million in research funding over six years which has a net present value of
$17.2 million. The Company issued 1,891,371 shares of its Common Stock with a
fair value of $22.2 million in exchange for all of the outstanding shares of
Roslin Bio-Med. In addition, the Company assumed Roslin Bio-Med's fully vested
stock options, which when exercised, would amount to an aggregate of 208,629
shares of Geron Common Stock with a fair value of $2.2 million. The total
purchase price of $44.4 million also included acquisitions costs of $2.9
million. Under the terms of the agreement, Roslin Bio-Med became a wholly owned
UK subsidiary of Geron and is known as Geron Bio-Med Ltd.
The transaction was accounted for using the purchase method of accounting.
The purchase price was allocated among the acquired basic research in the form
of a license in the nuclear transfer technology, the research agreement with the
Roslin Institute and the net tangible assets of Roslin Bio-Med. The value of the
nuclear transfer technology of $23.4 million has been reflected as acquired
research expense and the value of the research agreement of $17.2 million has
been capitalized as an intangible asset.
The Company's results of operations have fluctuated from period to period
and may continue to fluctuate in the future based upon the timing and
composition of funding under various collaborative agreements, as well as the
progress of its research and development efforts. Results of operations for any
period may be unrelated to results of operations for any other period. In
addition, historical results should not be viewed as indicative of future
operating results. Geron is subject to risks common to companies in its industry
and at its stage of development, including risks inherent in its research and
development efforts, reliance upon collaborative partners, enforcement of patent
and proprietary rights, need for future capital, potential competition and
uncertainty of regulatory approvals or clearances. In order for a product to be
commercialized based on the Company's research, it will be necessary for Geron
and its collaborators to conduct preclinical tests and clinical trials,
demonstrate efficacy and safety of the Company's product candidates, obtain
regulatory approvals or clearances and enter into manufacturing, distribution
and marketing arrangements, as well as obtain market acceptance. The Company
does not expect to receive
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revenues or royalties based on therapeutic products for a period of years. See
"Additional Factors That May Affect Future Results."
RESULTS OF OPERATIONS
REVENUES
Contract revenues were $1.3 million and $2.7 million for the three and six
months ended June 30, 1999, respectively, compared to $1.5 million and $3.7
million for the comparable periods in 1998. Contract revenues in 1999 were from
research support payments under the Company's collaborative agreement with
Pharmacia & Upjohn (the "Pharmacia & Upjohn Agreement"). Contract revenues in
1998 were from research support payments under the Pharmacia & Upjohn Agreement
and the Kyowa Hakko Agreement. Research support payments of $1.25 million per
quarter are required to be made under the Pharmacia & Upjohn Agreement until
January 2000. Research support payments under the Kyowa Hakko Agreement expired
in April 1998 in accordance with the terms of the Kyowa Hakko Agreement. The
Company recognizes revenue as related research and development costs are
incurred under the collaborative agreements.
The Company receives license payments and royalties from license and
marketing agreements with various diagnostic collaborators. A license fee
payment of $50,000 was received in April 1999 from Clontech Laboratories. No
license fee payments were received in 1998. Royalties of $46,000 and $47,000,
for the three and six months ended June 30, 1999, respectively, were received
from licensees, including Kyowa Medex Co., Ltd, Intergen and PharMingen (a
Becton Dickinson company) on the sale of diagnostic kits to the
research-use-only market, compared to $17,000 and $42,000 for the comparable
periods in 1998.
RESEARCH AND DEVELOPMENT EXPENSES AND ACQUIRED RESEARCH EXPENSES
Research and development expenses were $4.5 million and $8.9 million for
the three and six months ended June 30, 1999, respectively, compared to $3.8
million and $7.4 million for the comparable periods in 1998. The increase in
research and development expenses in the 1999 periods from the comparable 1998
periods reflected the Company's continued development of its research programs.
The Company expects research and development expense to increase in the future
as a result of the additional research funding commitment to the Roslin
Institute and increases in the activities of other research programs.
Acquired research expenses were the result of the acquisition of Roslin
Bio-Med. The acquisition was accounted using the purchase method of accounting.
The purchase price was allocated among the acquired basic research in the form
of a license in the nuclear transfer technology, the research agreement with the
Institute and the net tangible assets of Roslin Bio-Med. The value of the
nuclear transfer technology of $23.4 million has been reflected as acquired
research expense and the value of the research agreement of $17.2 million has
been capitalized as an intangible asset. The total purchase price of $44.4
million also included acquisitions costs of $2.9 million.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1.4 million and $2.4 million for
the three and six months ended June 30, 1999, respectively, compared to $994,000
and $1.8 million for the comparable periods in 1998. The increase in general and
administrative expenses in 1999 from 1998 was due to the addition of
administrative personnel in Scotland as a result of the acquisition of Roslin
Bio-Med. The Company expects that general and administrative expenses will
increase in the future as a result of integrating it new overseas operations.
INTEREST AND OTHER INCOME
Interest income was $528,000 and $1.1 million for the three months and six
months ended June 30, 1999, respectively, compared to $560,000 and $890,000 for
the comparable periods in 1998. The slight decrease for the three months ended
June 30, 1999 was due to the increased use of cash for the acquisition costs of
acquiring Roslin Bio-Med and the redemption of the remaining shares of Series A
Preferred Stock. However, overall cash balances were higher in 1999 than 1998 as
a result of the Company acquiring approximately $4.0 million of cash from Roslin
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Bio-Med and the sale of debentures in December 1998 and June 1999. Interest
earned in the future will depend on the Company's funding cycles and prevailing
interest rates. The Company also received $448,000 and $568,000 in research
payments under government grants for the three and six months ended June 30,
1999, respectively, compared to $348,000 and $477,000 for the comparable periods
in 1998. The Company does not expect income from government grants to be
significant in the foreseeable future.
INTEREST AND OTHER EXPENSE
Interest and other expense was $980,000 and $1.1 million for the three
months and six months ended June 30, 1999, respectively, compared to $84,000 and
$166,000 for the comparable periods in 1998. In connection with the issuance of
the series B convertible debentures, the Company recorded approximately $563,000
in interest expense for the difference between the fair value of the Common
Stock on the date of signing and the conversion price of the debentures. The
Company expects interest and other expense to remain consistent with current
levels.
NET LOSS
Net loss was $28.0 million and $31.3 million for the three and six months
ended June 30, 1999, respectively, compared to $2.4 million and $4.3 million for
the comparable periods in 1998. The increase was due primarily to the increases
in research and development and general and administrative expenses associated
with the acquisition of Roslin Bio-Med. Excluding the effect of the expense of
the Roslin Bio-Med purchase in the current periods, the Company continues to
expect net loss to increase from the current levels as a result of the addition
of research and development funding commitments to the Roslin Institute and
other programs.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investments at June 30, 1999 were $39.1 million
compared to $40.4 million at December 31, 1998. The decrease in cash, cash
equivalents and investments in the six months ended June 30, 1999 was the net
result of issuance of the series B convertible debentures, the redemption of the
remaining shares of the Series A Preferred Stock and the costs incurred for the
acquisition of Roslin Bio-Med. It is the Company's investment policy to invest
these funds in liquid, investment-grade securities, such as interest-bearing
money market funds, commercial paper and federal agency notes.
Net cash used in operations increased to $27.5 million for the six months
ended June 30, 1999 compared to $3.1 million for the comparable period in 1998.
The increase resulted primarily from a higher net loss recognized in 1999. As
discussed previously, less revenue was recognized from the Kyowa Hakko and
Pharmacia & Upjohn collaborative agreements in 1999, while operating expenses
increased.
For the six months ended June 30, 1999, additions of equipment and
leasehold improvements totaled approximately $2.0 million, most of which were
financed through equipment financing arrangements. Minimum annual payments due
under the equipment financing facility are expected to total $913,000, $726,000,
$374,000 and $200,000 in 1999, 2000, 2001 and 2002, respectively. As of June 30,
1999, the Company had approximately $950,000 available for borrowing under its
equipment financing facility. The drawdown period under the equipment financing
facility expired on July 31, 1999. In August 1999, the Company renewed its
equipment financing facility for an additional $1.5 million. The new facility
expires in August 2000. The Company expects the new facility to be able to fund
current and future equipment purchases.
The Company maintains agreements with academic and research institutions to
fund certain scientific research. Minimum annual payments due under these
agreements, other than the Roslin Institute, are expected to total approximately
$1.6 million and $405,000 in 1999 and 2000, respectively. In May 1999, the
Company formed a research collaboration with the Roslin Institute and has
committed approximately $20.0 million in research funding over the next six
years. The Company expects quarterly payments to increase in the future as a
result of its new commitment to that facility.
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During the second quarter of 1999, the Company redeemed the remaining 3,452
shares of Series A Preferred Stock. The total redemption value of $3.7 million
included the 6% premium on the outstanding book value of the Series A Preferred
Stock. As of June 30, 1999, no shares of Series A Preferred Stock remained
outstanding.
The Company has funded its operations primarily through public and private
debt and equity financings. The Company has also received additional funding
from collaborative agreements, grant revenues, interest income and equipment
financing. The Company will seek additional funding through other strategic
collaborations, public or private equity financings, or other financing sources.
The Company estimates that its existing capital resources, payments under
the Pharmacia & Upjohn collaborative agreement, interest income and equipment
financing will be sufficient to fund its current level of operations to the end
of the year 2000. There can be no assurance, however, that changes in the
Company's research and development plans or other changes affecting the
Company's operating expenses will not result in the expenditure of available
resources before such time, and in any event, the Company will need to raise
substantial additional capital to fund its operations in future periods. The
Company intends to seek additional funding through strategic collaborations,
public or private equity financings, capital lease transactions or other
financing sources that may be available.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or laboratory equipment that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions in
operations, including, among other things, a temporary inability to process
transactions, send checks, perform research and development activities or engage
in similar normal business activities.
Based on a recent assessment, the Company has determined that it will be
required to modify or replace certain portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. These software programs include the Company's accounting package
and voicemail system. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 issue will not
pose significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed in a timely
manner, the Year 2000 issue could have a material impact on the operations of
the Company.
The Company has initiated formal communications with all of its significant
suppliers, service providers and corporate partners to determine the extent to
which the Company's interface systems are vulnerable to those third parties'
failure to remediate their own Year 2000 issues. The Company's total Year 2000
project cost and estimated time to complete include the estimated costs and time
associated with the impact of third party Year 2000 issues and is based on
presently available information. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be upgraded
or converted and will not have an adverse effect on the Company's systems. Such
suppliers, service providers and corporate partners include the Company's
payroll service provider, local financial institutions and website maintenance
organization.
The Company will utilize both internal and external resources to replace
and test software for Year 2000 modifications. Approximately 75% of the
Company's Year 2000 (Y2K) scheduled work is complete. The remaining work is
scheduled to be completed by the end of the third quarter of 1999, which is
prior to any anticipated impact on its operating systems. The Y2K project phases
include: (1) inventorying and prioritizing business critical systems; (2) Y2K
compliance analysis; (3) remediation activities including repairing or replacing
identified systems; (4) testing; and (5) developing contingency plans. An
inventory of business critical financial, informational and operational systems,
including laboratory equipment, has been completed. Compliance analysis is
approximately 90% complete for these systems. Remediation activities vary by
department, however, on the average, remediation activities are approximately
75% complete. Testing of the Company's information technology infrastructure is
90% complete. Testing of business critical application programs is 90% complete.
The Company believes that with the completed modifications, the Y2K issue will
not pose significant operational problems for its
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computer systems and equipment. However, if such modifications and conversions
are not made, or are not completed in a timely fashion, the Year 2000 issue
could have a material impact on the operations of the Company, the precise
degree of which cannot be known at this time.
The total cost of the Year 2000 project is estimated at $200,000 and is
being funded through current cash holdings. Of the total project cost,
approximately $100,000 is attributable to the purchase of new software and
equipment, which will be capitalized. The remaining $100,000, which will be
expensed as incurred, is not expected to have a material effect on the Company's
results of operations. To date, the Company has incurred approximately $150,000
($75,000 capitalized for new systems and $75,000 expensed), related to the
assessment of, and preliminary efforts on, its Year 2000 project.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
Although the Company does not believe that it will incur any material costs
or experience material disruptions in its business associated with preparing its
internal systems for the year 2000, there can be no assurance that the Company
will not experience serious unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
internal systems, which are composed of third party software and third party
hardware that contains embedded software. The most reasonably likely worst case
scenarios would include: (i) corruption of data contained in the Company's
internal information systems, (ii) hardware failure, and (iii) the failure of
infrastructure services provided by government agencies and other third parties
(e.g., electricity, phone service, water, transport, Internet services, etc.).
The Company is in the process of implementing action plans for the remediation
of high risk areas and is scheduled to implement remediation plans for medium to
low risk areas during the remainder of fiscal 1999. The Company expects its
contingency plans to include, among other things, manual "work-arounds" for
software and hardware failures, finding alternate vendors for supplies and
equipment as well as substitution of systems, if necessary.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. You should carefully consider
these risk factors, together with all of the other information included in this
Form 10-Q, before you decide whether to purchase shares of our common stock.
OUR PRODUCT DEVELOPMENT PROGRAMS ARE AT AN EARLY STAGE AND MAY NOT RESULT IN ANY
COMMERCIALLY VIABLE PRODUCTS; FAILURE TO DEVELOP ANY COMMERCIALLY VIABLE
PRODUCTS MAY IMPAIR OUR ABILITY TO ATTRACT FUTURE FUNDING AND OUR ABILITY TO
SUSTAIN OPERATIONS
The study of the mechanisms of cellular aging and cellular immortality,
including telomere biology and telomerase, the study of human pluripotent stem
cells, and the process of nuclear transfer are relatively new areas of research.
While our development efforts are at different stages for different products, we
cannot assure you that we will successfully develop any products or that we will
not abandon some or all of our proposed research programs. In the long term, for
any of our cancer treatments or other discoveries to be proven commercially
viable, we will need to demonstrate to the health care community that the
treatment or products are:
o safe;
o effective;
o reliable; and
o not subject to other problems that would affect commercial viability.
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If and when potential lead drug compounds or product candidates are
identified through our research programs, they will require significant
preclinical and clinical testing prior to regulatory approval in the United
States and elsewhere. In addition, we will also need to determine whether any of
these potential products can be manufactured in commercial quantities at an
acceptable cost. Our efforts may not result in a product that can be marketed.
Because of the significant scientific, regulatory and commercial milestones that
must be reached for any of our research programs to be successful, any program
may be abandoned, even after significant resources have been expended.
Our inability to identify an effective compound for inhibiting telomerase
may prevent us from developing a viable cancer treatment product, which
would adversely impact our future business prospects
As a result of our drug discovery efforts to date, we have identified
compounds in laboratory studies that demonstrate potential for inhibiting
telomerase in humans. However, additional development efforts will be required
before we select a lead compound for preclinical development and clinical trials
as a telomerase inhibitor for cancer. We will have to conduct additional
research before we can select a compound and we may never identify a compound
that will enable us to fully develop a commercially viable treatment for cancer.
If and when selected, a lead compound may prove to have undesirable and
unintended side effects or other characteristics affecting its safety or
effectiveness that may prevent or limit its commercial use. In terms of safety,
our discoveries may result in cancer treatment solutions that cause unacceptable
side effects for the human body. Our discoveries may also not be as effective as
is necessary to market a commercially viable product for the treatment of
cancer. For example, we expect that telomerase inhibition may have delayed
effectiveness as telomeres resume normal shortening. As a result, telomerase
inhibition may need to be used in conjunction with other cancer therapies.
Accordingly, it may become extremely difficult for us to proceed with
preclinical and clinical development, to obtain regulatory approval or to market
a telomerase inhibitor for the treatment of cancer. If we abandon our research
for cancer treatment for any of these reasons or for other reasons, our business
prospects would be materially and adversely affected.
Our research related to the treatment of age-related degenerative diseases
has not yet identified a compound that has potential as a therapeutic agent
and failure to do so would lead to the termination of this program
The research resulting from our telomerase activation and expression
program has shown us that the activation of telomerase can extend cell lifespan
in normal human cells. While telomere length and replicative capacity have been
extended in laboratory studies, we may not discover a compound that will
modulate telomere length or increase replicative capacity effectively for
clinical use. We have yet to identify any lead compounds that have been
demonstrated to modulate gene expression in human cells and we cannot guarantee
that we will be able to discover or develop the necessary compound.
There is currently insufficient clinical data to determine the full utility
of our cancer diagnostic tests and negative data could cause cancellation
of the program
There is, as yet, insufficient clinical data to confirm the full utility of
our proprietary telomerase detection technology to diagnose, prognose, monitor
patient status and screen for cancer. Although Intergen, Roche Diagnostics,
Kyowa Medex and PharMingen, our licensees, have begun to sell kits for research
use, additional development work and regulatory consents will be necessary prior
to the introduction of tests for clinical use.
Our research on human pluripotent stem cells is at an early stage and may
not result in any commercially viable products
Our pluripotent stem cell therapies program is also at an early stage.
While human pluripotent stem cells have been derived and allowed to expand and
differentiate into numerous cell types, our efforts to direct differentiation of
human pluripotent stem cells and develop products from our research may not
result in any commercial applications.
Our research related to nuclear transfer may not result in any commercially
viable products
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Nuclear transfer techniques are still in the process of being fully
understood. The research collaboration between the Roslin Institute and us will
focus at its most fundamental level on understanding the molecular mechanisms
used by egg cell cytoplasm to reprogram adult cells. Our goal is to confer
reprogramming capability to the cytoplasm of any mature cell in order to produce
transplantable tissue-matched cells for an intended transplant recipient.
However, our research in this area is in its early stages and may not result in
any commercially viable products for human health or agriculture.
WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE FUTURE LOSSES; CONTINUED
LOSSES COULD IMPAIR OUR ABILITY TO SUSTAIN OPERATIONS
We have incurred net operating losses every year since our operations began
in 1990. Losses have resulted principally from costs incurred in connection with
our research and development activities and from general and administrative
costs associated with our operations. We expect to incur additional operating
losses over the next several years as our research and development efforts and
preclinical testing activities are expanded. Substantially all of our revenues
to date have been research support payments under the collaborative agreements
with Kyowa Hakko and Pharmacia & Upjohn. Research support payments under the
agreement with Kyowa Hakko expired in April 1998. Research payments under the
agreement with Pharmacia & Upjohn expire in January 2000. We are unable to
estimate at this time the level of revenue to be received from the sale of
diagnostic products, and do not expect to receive significant revenues from the
sale of research-use-only kits. Our ability to achieve profitability is
dependent on our ability, alone or with others, to:
o continue to have success with our research and development efforts;
o select therapeutic compounds for development;
o obtain the required regulatory approvals; and
o manufacture and market resulting products.
We cannot assure you when or if we will receive material revenues from
product sales or achieve profitability. Failure to generate significant
additional revenues and achieve profitability could impair our ability to
sustain operations.
WE DEPEND ON OUR COLLABORATIVE PARTNERS TO HELP US COMPLETE THE PROCESS OF
DEVELOPING AND TESTING OUR PRODUCTS AND OUR ABILITY TO DEVELOP AND COMMERCIALIZE
PRODUCTS MAY BE IMPAIRED OR DELAYED IF OUR COLLABORATIVE PARTNERSHIPS ARE
UNSUCCESSFUL
Our strategy for the development, clinical testing and commercialization of
our products requires entering into collaborations with corporate partners,
licensors, licensees and others. We are dependent upon the subsequent success of
these other parties in performing their respective responsibilities and the
continued cooperation of our partners. We cannot assure you that our partners
will cooperate with us or perform their obligations under our agreements with
them. We cannot control the amount and timing of our collaborators' resources
that will be devoted to our research activities related to our collaborative
agreements with them. Our collaborators may choose to pursue existing or
alternative technologies in preference to those being developed in collaboration
with us.
Our ability to successfully develop and commercialize telomerase inhibition
products depends on our corporate partnerships with Kyowa Hakko and Pharmacia &
Upjohn, and our ability to successfully develop and commercialize telomerase
diagnostic products depends on our corporate partnership with Roche Diagnostics.
Under our collaborative agreements with these partners, we rely significantly on
them, among other activities, to:
o design and conduct advanced clinical trials;
o fund research and development activities with us;
o pay us fees upon the achievement of milestones; and
o co-promote with us any commercial products that result from our
collaborations.
The development and commercialization of products from these collaborations
will be delayed if Kyowa Hakko, Pharmacia & Upjohn or Roche Diagnostics fail to
conduct these collaborative activities in a timely manner or at all. In
addition, Kyowa Hakko, Pharmacia & Upjohn or Roche Diagnostics could terminate
these agreements and we
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cannot assure you that we will receive any development or milestone payments. If
we do not receive research funds or achieve milestones set forth in the
agreements, or if Kyowa Hakko, Pharmacia & Upjohn or Roche Diagnostics or any of
our future partners breach or terminate collaborative agreements with us, our
business may be damaged significantly.
We are also, to a lesser extent, dependent upon collaborative partners
other than Kyowa Hakko, Pharmacia & Upjohn and Roche Diagnostics. For example,
we have entered into licensing arrangements with several diagnostic companies
for our telomerase detection technology. However, because these licenses are
limited to the research-use-only market, these arrangements are not expected to
generate significant commercial revenues, if at all.
UNEXPECTED COSTS AND OTHER DIFFICULTIES ARISING FROM OUR ACQUISITION OF ROSLIN
BIO-MED LTD. AND SIMULTANEOUS RESEARCH COLLABORATION WITH THE ROSLIN INSTITUTE
MAY DRAIN HUMAN AND FINANCIAL RESOURCES, OR OTHERWISE NEGATIVELY AFFECT OUR
OPERATIONS
With our acquisition of Roslin Bio-Med and formation of the research
collaboration with the Roslin Institute, the scope of our business and
operations has expanded. As a result, we may be presented with operational
issues that we have not previously faced as a company, but which generally
accompany acquisitions and research collaborations of this nature, including:
o the difficulty of assimilating Roslin Bio-Med's operations and
personnel;
o the potential disruption of ongoing business and distraction of
management;
o unanticipated expenses related to technology and research
integration;
o the difficulty of implementing and maintaining uniform standards,
controls, procedures and policies;
o the potential impairment of relationships with employees and
collaborators as a result of integration of new management personnel;
and
o the potential unknown liabilities associated with acquired
businesses.
We cannot assure you that we will be able to overcome any of these
obstacles, and our failure to do so could prevent us from achieving the
perceived benefits of the acquisition and collaboration as well as negatively
impact our research activities and results of operations.
THE ACQUISITION OF ROSLIN BIO-MED HAS SUBJECTED US TO THE UNCERTAINTY INHERENT
IN INTERNATIONAL OPERATIONS, AND WE HAVE LIMITED EXPERIENCE WITH INTERNATIONAL
OPERATIONS
To date, we have only limited experience in managing operations
internationally. Our acquisition of Roslin Bio-Med represents our first
experience in managing international operations. As a result of our
international expansion, we are now subject to the uncertainties inherent in
international operations, including:
o unexpected changes in regulatory requirements;
o compliance with international laws;
o difficulties in staffing and managing international operations
including those that arise as a result of distance, language and
cultural differences;
o currency exchange rate fluctuations;
o political instability;
o export restrictions; and
o potentially adverse tax consequences.
One or more of these factors could have a material adverse effect on our
future international operations, the success of our acquisition of Roslin
Bio-Med and, consequently, on our business, operating results, and financial
condition. Similarly, our collaborations with international partners such as the
Roslin Institute, Pharmacia & Upjohn, Kyowa Hakko and Roche Diagnostics could
also subject us to the above described international uncertainties.
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IF WE ARE UNABLE TO ENTER INTO COLLABORATIVE RELATIONSHIPS FOR MANUFACTURING,
MARKETING AND SALES, WE WILL NEED TO DEVELOP THESE CAPABILITIES ON OUR OWN WHICH
WOULD BE COSTLY AND WOULD SLOW OUR PRODUCT DEVELOPMENT EFFORTS
We currently have no manufacturing infrastructure and no marketing or sales
organization. As a result, we intend to rely almost entirely on our current and
future collaborative partners for manufacturing and principal marketing and
sales responsibilities for any potential products. To the extent that we choose
not to or are unable to establish these arrangements, we will require
substantially greater capital to develop our own manufacturing, marketing and
sales capabilities.
We cannot assure you that we will be able to negotiate additional strategic
arrangements in the future on acceptable terms, if at all, or that any potential
strategic arrangement will be successful. In the absence of these arrangements,
we may encounter significant delays in introducing any product or find that the
research, development, manufacture, marketing or sale of any product is
adversely affected. In the event we need to enter into strategic arrangements in
the future, but are unable to do so, our business will be significantly and
negatively impacted.
OUR RELIANCE ON THE RESEARCH ACTIVITIES OF OUR NON-EMPLOYEE SCIENTIFIC ADVISORS
AND OTHER RESEARCH INSTITUTIONS, WHOSE ACTIVITIES ARE NOT WHOLLY WITHIN OUR
CONTROL, MAY LEAD TO DELAYS IN TECHNOLOGICAL DEVELOPMENTS
We rely extensively and have relationships with scientific advisors at
academic and other institutions, some of whom conduct research at our request.
These scientific advisors are not our employees and may have commitments to, or
consulting or advisory contracts with, other entities that may limit their
availability to us. We have limited control over the activities of these
advisors and, except as otherwise required by our collaboration and consulting
agreements, can expect only limited amounts of their time to be dedicated to our
activities. If our scientific advisors are unable or refuse to contribute to the
development of any of our potential discoveries, our ability to generate
significant advances in our technologies will be significantly harmed.
In addition, we have formed research collaborations with many academic and
other research institutions throughout the world, including the Roslin
Institute. These research facilities may have commitments to other commercial
and non-commercial entities. We have limited control over the operations of
these laboratories and can expect only limited amounts of time to be dedicated
to our research goals.
IMPAIRMENT OF OUR INTELLECTUAL PROPERTY RIGHTS, WHICH ARE COSTLY AND DIFFICULT
TO PROTECT, MAY LIMIT OUR ABILITY TO PURSUE THE DEVELOPMENT OF OUR INTENDED
TECHNOLOGIES AND PRODUCTS
Our success will depend on our ability to obtain and enforce patents for
our discoveries; however, legal principles for biotechnology patents are
not firmly established and the extent to which we will be able to obtain
patent coverage is uncertain
Protection of our proprietary compounds and technology is critically
important to our business. Our success will depend in part on our ability to
obtain and enforce our patents and maintain trade secrets, both in the United
States and in other countries. The patent positions of pharmaceutical and
biopharmaceutical companies, including ours, are highly uncertain and involve
complex legal and technical questions for which legal principles are not firmly
established. We cannot assure you that we will continue to develop products or
processes that are patentable or that patents will issue from any of our pending
applications, including allowed patent applications. Further, we cannot assure
you that our current patents, or patents that issue on pending applications,
will not be challenged, invalidated or circumvented, or that our current or
future patent rights will provide proprietary protection or competitive
advantages to us. In the event that we are unsuccessful in obtaining and
enforcing patents, our business would be negatively impacted.
Patent applications in the United States are maintained in secrecy until
patents issue. Publication of discoveries in the scientific or patent literature
tends to lag behind actual discoveries by at least several months and sometimes
several years. Therefore, we cannot assure you that the persons or entities that
we or our licensors name as inventors in our patents and patent applications
were the first to invent the inventions disclosed in the patent applications or
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patents, or file patent applications for these inventions. As a result, we may
not be able to obtain patents from discoveries that we otherwise would consider
patentable and that we consider to be extremely significant to our future
success.
Patent prosecution or litigation may also be necessary to obtain patents,
enforce any patents issued or licensed to us or to determine the scope and
validity of our proprietary rights or the proprietary rights of another. We
cannot assure you that we would be successful in any patent prosecution or
litigation. Patent prosecution and litigation in general can be extremely
expensive and time consuming, even if the outcome is favorable to us. An adverse
outcome in a patent prosecution, litigation or any other proceeding in a court
or patent office could subject our business to significant liabilities to other
parties, require disputed rights to be licensed from other parties or require us
to cease using the disputed technology.
We may be subject to infringement claims that are costly to defend, and
which may limit our ability to use disputed technologies and prevent us
from pursuing research and development or commercialization of potential
products
Our commercial success depends significantly on our ability to operate
without infringing patents and proprietary rights of others. We cannot assure
you that our technologies do not and will not infringe the patents or
proprietary rights of others. In the event our technologies do infringe on the
rights of others, we may be prevented from pursuing research, development or
commercialization of potential products or may be required to obtain licenses to
these patents or other proprietary rights or develop or obtain alternative
technologies. We may not be able to obtain alternative technologies or any
required license on commercially favorable terms, if at all. If we do not obtain
the necessary licenses or alternative technologies, we may be delayed or
prevented from pursuing the development of some potential products. Our breach
of an existing license or failure to obtain alternative technologies or a
license to any technology that we may require to develop or commercialize our
products will significantly and negatively affect our business.
Patent law relating to the scope and enforceability of claims in the
technology fields in which we operate is still evolving, and the degree of
future protection for any of our proprietary rights is highly uncertain. In this
regard, we cannot assure you that independent patents will issue from any of our
patent applications, some of which include many interrelated applications
directed to common or related subject matter. As a result, our success may
become dependent on our ability to obtain licenses for using the patented
discoveries of others. We are aware of patent applications and patents that have
been filed by others with respect to telomerase and telomere length technology
and we may have to obtain licenses to use this technology. For example, there
are a number of issued patents and pending applications owned by others directed
to differential display, stem cell and other technologies relating to our
research, development and commercialization efforts. We may also become aware of
discoveries and technology controlled by third parties that are advantageous to
our other research programs. We cannot assure you that our discoveries and
treatments can be further developed and commercialized without a license to
these discoveries or technologies. Moreover, other patent applications may be
granted priority over patent applications that we or any of our licensors have
filed. Furthermore, others may independently develop similar or alternative
technologies, duplicate any of our technologies or design around the patented
technologies we have developed. In the event that we are unable to acquire
licenses to critical technologies that we cannot patent ourselves, we may be
required to expend significant time and resources to develop similar technology,
and we may not be successful in this regard. If we cannot acquire or develop
necessary technology, we may be prevented from pursuing some of our business
objectives. Moreover, one of our competitors could acquire or license the
necessary technology. Any of these events could have a material adverse effect
on our business.
We cannot assure you that we will not be subject to claims or litigation as
a result of entering into license agreements with third parties or infringing on
the patents of others. For example, we signed a licensing and sponsored research
agreement relating to our pluripotent stem cell therapies program with The Johns
Hopkins University School of Medicine in August 1997. Prior to signing this
agreement, we had been informed by a third party that we and Johns Hopkins
University would violate the rights of that third party and another academic
institution in doing so. After a review of the correspondence with the third
party and Johns Hopkins University, as well as related documents, including an
issued U.S. patent, we believe that both we and Johns Hopkins University have
substantial defenses to any claims that might be asserted by the third party. We
have agreed to provide
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indemnification to Johns Hopkins University relating to potential claims.
However, any litigation resulting from this matter may divert significant
resources, both financial and otherwise, from our research programs. We cannot
assure you that we would be successful if the matter is litigated. If the
outcome of litigation is unfavorable to us, our business could be materially and
adversely affected.
Much of the information and know-how that is critical to our business is
not patentable and we may not be able to prevent others from obtaining this
information and establishing competitive enterprises
We rely extensively on trade secrets to protect our proprietary technology,
especially in circumstances in which patent protection is not believed to be
appropriate or obtainable. We attempt to protect our proprietary technology in
part by confidentiality agreements with our employees, consultants and
contractors. We cannot assure you that these agreements will not be breached,
that we would have adequate remedies for any breach, or that our trade secrets
will not otherwise become known or be independently discovered by competitors,
any of which would harm our business significantly.
WE WILL NEED ADDITIONAL CAPITAL TO CONDUCT OUR OPERATIONS AND DEVELOP OUR
PRODUCTS, AND OUR ABILITY TO OBTAIN THE NECESSARY FUNDING IS UNCERTAIN
We will require substantial capital resources in order to conduct our
operations and develop our products. Based on current projections, we estimate
that our existing capital resources, payments under the Pharmacia & Upjohn
collaborative agreement, interest income and equipment financing will be
sufficient to fund our current level of operations to the end of the year 2000.
The timing and degree of any future capital requirements will depend on many
factors, including:
o the accuracy of the assumptions underlying our estimates for our
capital needs in 1999 and beyond;
o continued scientific progress in our research and development
programs;
o the magnitude and scope of our research and development programs;
o our ability to maintain and establish strategic arrangements for
research, development, clinical testing, manufacturing and marketing;
o our progress with preclinical and clinical trials;
o the time and costs involved in obtaining regulatory approvals;
o the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims; and
o the potential for new technologies and products.
We intend to acquire additional funding through strategic collaborations,
public or private equity financings and capital lease transactions. Additional
financing may not be available on acceptable terms, or at all. Additional equity
financings could result in significant dilution to stockholders. Further, in the
event that additional funds are obtained through arrangements with collaborative
partners, these arrangements may require us to relinquish rights to some of our
technologies, product candidates or products that we would otherwise seek to
develop or commercialize ourselves. If sufficient capital is not available, we
may be required to delay, reduce the scope of or eliminate one or more of our
research or development programs, each of which could have a material adverse
effect on our business.
SOME OF OUR COMPETITORS MAY DEVELOP TECHNOLOGIES THAT ARE SUPERIOR TO OR MORE
COST-EFFECTIVE THAN OURS, WHICH MAY IMPACT THE COMMERCIAL VIABILITY OF OUR
TECHNOLOGIES AND WHICH MAY SIGNIFICANTLY DAMAGE OUR ABILITY TO SUSTAIN
OPERATIONS
The pharmaceutical and biopharmaceutical industries are intensely
competitive. We believe that other pharmaceutical and biopharmaceutical
companies and research organizations currently engage in or have in the past
engaged in efforts related to the biological mechanisms of cell aging and cell
immortality, including the study of telomeres, telomerase, human pluripotent
stem cells, and nuclear transfer. In addition, other products and therapies that
could compete directly with the products that we are seeking to develop and
market currently exist or are being developed by pharmaceutical and
biopharmaceutical companies, and by academic and other research organizations.
Many companies are also developing alternative therapies to treat cancer and, in
this regard, are competitors of ours. The pharmaceutical companies developing
and marketing these competing products have significantly greater financial
resources and expertise than we do in:
19
<PAGE> 20
o research and development;
o manufacturing;
o preclinical and clinical testing;
o obtaining regulatory approvals; and
o marketing.
Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large and established
companies. Academic institutions, government agencies and other public and
private research organizations may also conduct research, seek patent protection
and establish collaborative arrangements for research, clinical development and
marketing of products similar to ours. These companies and institutions compete
with us in recruiting and retaining qualified scientific and management
personnel as well as in acquiring technologies complementary to our programs.
There is also competition for access to libraries of compounds to use for
screening. Should we fail to secure and maintain access to sufficiently broad
libraries of compounds for screening potential targets, our business would be
materially harmed. In addition to the above factors, we expect to face
competition in the following areas:
o product efficacy and safety;
o the timing and scope of regulatory consents;
o availability of resources;
o reimbursement coverage;
o price; and
o patent position, including potentially dominant patent positions of
others.
As a result of the foregoing, our competitors may develop more effective or
more affordable products, or achieve earlier patent protection or product
commercialization than us. Most significantly, competitive products may render
products that we develop obsolete.
THE LOSS OF KEY PERSONNEL COULD SLOW OUR ABILITY TO CONDUCT RESEARCH AND DEVELOP
PRODUCTS
Our future success depends to a significant extent on the skills,
experience and efforts of our executive officers and key members of our
scientific staff. The loss of any or all of these individuals could damage our
business and might significantly delay or prevent the achievement of research,
development or business objectives.
We also rely on consultants and advisors, including the members of our
Scientific Advisory Board, who assist us in formulating our research and
development strategy. We face intense competition for qualified individuals from
numerous pharmaceutical, biopharmaceutical and biotechnology companies, as well
as academic and other research institutions. We may not be able to attract and
retain these individuals on acceptable terms. Failure to do so would adversely
affect our business.
THE ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF THE PLURIPOTENT STEM CELL
THERAPIES AND NUCLEAR TRANSFER PROGRAMS COULD PREVENT US FROM DEVELOPING OR
GAINING ACCEPTANCE FOR COMMERCIALLY VIABLE PRODUCTS IN THIS AREA
Our pluripotent stem cell therapies program may involve the use of human
pluripotent stem cells that would be derived from human embryonic or fetal
tissue. The use of human pluripotent stem cells gives rise to ethical, legal and
social issues regarding the appropriate utilization of these cells. In the event
that our research related to human pluripotent stem cell therapies becomes the
subject of adverse commentary or publicity, our name and goodwill could be
adversely affected.
In addition, our nuclear transfer program involves the same techniques that
have previously been utilized to clone sheep. It is possible that these nuclear
transfer techniques could also be utilized in attempts to reproductively clone
living human beings, an application that we believe to be unnecessary and
unethical. Although we and the Roslin Institute support the current
international prohibitions on human reproductive cloning, the process of nuclear
transfer itself still gives rise to ethical, legal and social issues regarding
the appropriate nature of this type of research. In the event that our research
related to nuclear transfer becomes the subject of adverse commentary or
publicity, our name and goodwill could be adversely affected.
20
<PAGE> 21
We have established an Ethics Advisory Board comprised of independent and
recognized medical ethicists to advise us with respect to these issues. Indeed,
the use of human pluripotent stem cells and nuclear transfer techniques in
scientific research are issues of national interest. Many research institutions,
including several of our scientific collaborators, have adopted policies
regarding the ethical use of these types of human cells. These policies may have
the effect of limiting the scope of research conducted in this area. The United
States government currently does not fund research that involves the use of
human pluripotent cells or tissue and may in the future regulate or otherwise
restrict its use. The pluripotent stem cell therapies program would be
significantly harmed if we are prevented from conducting research on these cells
due to government regulation or otherwise. Also, in the event that regulatory
bodies ban nuclear transfer processes, our nuclear transfer program could be
cancelled and our business could be negatively affected.
OUR ABILITY TO EARN REVENUES FROM THE SALE OF MARKETABLE PRODUCTS IS PARTLY
DEPENDENT ON THE SCOPE OF GOVERNMENT REGULATION AND OUR SUCCESS IN OBTAINING
REGULATORY APPROVAL FOR OUR PRODUCTS
Our business is subject to intense government regulation and this
regulation may significantly impact our ability to create and market
commercially viable products
Federal, state and local governments in the United States and governments
in other countries have significant regulations in place that govern many of our
activities. The preclinical testing and clinical trials of the products that we
develop ourselves or that our collaborative partners develop are subject to
intense government regulation and may prevent us from creating commercially
viable products from our discoveries. In addition, the sale by us or our
collaborative partners of any commercially viable product will be subject to
government regulation from several standpoints, including the processes of:
o manufacturing;
o labeling;
o selling;
o distributing;
o marketing;
o advertising; and
o promoting.
We cannot assure you that we will be able to comply with these regulations
for any of our potentially marketable products. To the extent that we are
unable, our ability to earn revenues will be significantly and negatively
impacted.
The regulatory process, particularly for biopharmaceutical products like
ours, is uncertain, can take many years and requires the expenditure of
substantial resources
Any product that we or our collaborative partners develop must receive all
relevant regulatory agency approvals or clearances, if any, before it may be
marketed in the United States or other countries. Generally, biological drugs
and non-biological drugs are regulated more rigorously than medical devices. In
particular, human pharmaceutical therapeutic products, including a telomerase
inhibitor, are subject to rigorous preclinical and clinical testing and other
requirements by the Food and Drug Administration in the United States and
similar health authorities in foreign countries. The regulatory process, which
includes extensive preclinical testing and clinical trials of each product in
order to establish its safety and efficacy, is uncertain, can take many years
and requires the expenditure of substantial resources.
Data obtained from preclinical and clinical activities is susceptible to
varying interpretations that could delay, limit or prevent regulatory agency
approvals or clearances. In addition, delays or rejections may be encountered
based upon changes in regulatory agency policy during the period of product
development and/or the period of review of any application for regulatory agency
approval or clearance for a product. Delays in obtaining regulatory agency
approvals or clearances could:
21
<PAGE> 22
o significantly harm the marketing of any products that we or our
collaborative partners develop;
o impose costly procedures upon our activities or the activities of our
collaborative partners;
o diminish any competitive advantages that we or our collaborative
partners may attain; or
o adversely affect our ability to receive royalties and generate
revenues and profits.
Even if we commit the time and resources, both economic and otherwise, that
are necessary, the required regulatory agency approvals or clearances may not be
obtained for any products developed by or in collaboration with us. If
regulatory agency approval or clearance for a new product is obtained, this
approval or clearance may entail limitations on the indicated uses for which it
may be marketed that could limit the potential market for the product.
Furthermore, approved products and their manufacturers are subject to continual
review, and discovery of previously unknown problems with a product or its
manufacturer may result in restrictions on the product or manufacturer,
including withdrawal of the product from the market. Failure to comply with
regulatory requirements can result in severe civil and criminal penalties,
including but not limited to:
o recall or seizure of products;
o injunction against manufacture, distribution, sales and marketing;
and
o criminal prosecution.
The imposition of any of these penalties could significantly impair our
business.
TO BE SUCCESSFUL, OUR PRODUCTS MUST BE ACCEPTED BY THE HEALTH CARE COMMUNITY
THAT CAN BE VERY SLOW TO ADOPT OR UNRECEPTIVE TO NEW TECHNOLOGIES AND PRODUCTS
We cannot assure you that any products successfully developed by us or by
our collaborative partners, if approved for marketing, will achieve market
acceptance since physicians, patients or the medical community in general may
decide not to accept and utilize these products. The products that we are
attempting to develop may represent substantial departures from established
treatment methods and will compete with a number of traditional drugs and
therapies manufactured and marketed by major pharmaceutical companies. The
degree of market acceptance of any of our developed products will depend on a
number of factors, including:
o our establishment and demonstration to the medical community of the
clinical efficacy and safety of our product candidates;
o our ability to create products that are superior to alternatives
currently on the market;
o our ability to establish in the medical community the potential
advantage of our treatments over alternative treatment methods; and
o reimbursement policies of government and third-party payors.
If the health care community does not accept our products for any of the
foregoing reasons, our ability to generate revenues will be significantly
impaired.
THE REIMBURSEMENT STATUS OF NEWLY-APPROVED HEALTH CARE PRODUCTS IS UNCERTAIN AND
FAILURE TO OBTAIN REIMBURSEMENT APPROVAL COULD SEVERELY LIMIT THE USE OF OUR
PRODUCTS
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, including pharmaceuticals. If we fail to generate
adequate third party reimbursement for the users of our potential products and
treatments, then we may be unable to maintain price levels sufficient to realize
an appropriate return on our investment in product development.
In both domestic and foreign markets, sales of our products, if any, will
depend in part on the availability of reimbursement from third-party payors,
examples of which include:
o government health administration authorities;
o private health insurers;
o health maintenance organizations; and
o pharmacy benefit management companies.
22
<PAGE> 23
Both federal and state governments in the United States and foreign
governments continue to propose and pass legislation designed to contain or
reduce the cost of health care through various means. Legislation and
regulations affecting the pricing of pharmaceuticals and other medical products
may change or be adopted before any of our potential products are approved for
marketing. Cost control initiatives could decrease the price that we receive for
any product we may develop in the future. In addition, third-party payors are
increasingly challenging the price and cost-effectiveness of medical products
and services and any of our potential products and treatments may ultimately not
be considered cost effective by these third parties. Any of these initiatives or
developments could negatively impact our business.
OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND IMPROPER HANDLING OF THESE
MATERIALS BY OUR EMPLOYEES OR AGENTS COULD EXPOSE US TO SIGNIFICANT FINANCIAL
PENALTIES
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive compounds. As a
consequence, we are subject to numerous environmental and safety laws and
regulations. We may be required to incur significant costs to comply with
current or future environmental laws and regulations and may be adversely
affected by the cost of compliance with these laws and regulations. Although we
believe that our safety procedures for using, handling, storing and disposing of
hazardous materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be eliminated. In the event of an accident of this nature, our use of
these materials could be curtailed by state or federal authorities and we could
be held liable for any resulting damages. Should either of these contingencies
arise, our business could be materially and adversely affected.
WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN SUFFICIENT INSURANCE ON COMMERCIALLY
REASONABLE TERMS OR WITH ADEQUATE COVERAGE AGAINST POTENTIAL LIABILITIES IN
ORDER TO PROTECT OURSELVES AGAINST PRODUCT LIABILITY CLAIMS
Although we believe that we do not currently have any exposure to product
liability claims, our future business will expose us to potential product
liability risks that are inherent in the testing, manufacturing and marketing of
human therapeutic and diagnostic products. We currently have no clinical trial
liability insurance and we may not be able to obtain and maintain this type of
insurance for any of our clinical trials. In addition, we may not be able to
obtain or maintain product liability insurance in the future on acceptable terms
or with adequate coverage against potential liabilities.
THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK AND MAY RESULT
IN SIGNIFICANT DILUTION TO OUR CURRENT STOCKHOLDERS
Sales of a substantial number of shares of our common stock in the public
market in the future could significantly and negatively affect the market price
for our common stock. As of August 11, 1999, we had outstanding approximately
16,487,446 shares of common stock. As of August 11, 1999, we also have reserved
5,764,461 shares of common stock for issuance upon exercise of outstanding
warrants and options that we issued to our employees and other entities.
The conversion of the remaining unconverted series A and B convertible
debentures, and the exercise of the series A and B warrants would result in our
issuance of a minimum of 2,200,000 additional shares of common stock in the
aggregate. Of the aggregate principal amount of $7.5 million series A
convertible debentures, an aggregate principal amount of $2.5 million remain
outstanding which, if converted, would result in our issuance of an aggregate of
250,000 shares of common stock. If all of the series A warrants were exercised,
the series A warrants would be exercisable into an aggregate of 625,000 shares
of common stock. Of the aggregate principal amount of $7.5 million series B
convertible debentures, an aggregate principal amount of $7.0 million remain
outstanding which, if converted, would result in our issuance of an aggregate of
700,000 shares of common stock. If all of the series B warrants were exercised,
the series B warrants would be exercisable into an aggregate of 625,000 shares
of common stock. This number of shares could prove to be significantly greater,
and you would be increasingly diluted, in the event that the conversion or
exercise prices are reduced because we:
23
<PAGE> 24
o have a rights offering, or a similar offering of securities to all
investors, at less than the conversion or exercise price per share
respectively; or
o issue common stock or securities convertible into common stock, other
than related to our option plans or in connection with a strategic
joint venture, at a price less than the conversion price per share.
In connection with the acquisition of Roslin Bio-Med, we issued 1,891,371
shares of our common stock in exchange for all the outstanding shares of Roslin
Bio-Med and have assumed Roslin Bio-Med's fully vested options, which when
exercised would amount to an aggregate of 208,629 shares of our common stock. We
are contractually required to file a registration statement on Form S-3 within
120 days following May 3, 1999 covering the registration of these shares for
resale. Of the 2,100,000 total shares issued and issuable to Roslin Bio-Med
shareholders, 860,000 shares are held in escrow. Subject to claims against the
shares held in escrow, 545,000 of these shares will be released from escrow to
the former Roslin Bio-Med shareholders in November 1999 and the remaining
315,000 shares will be released from escrow to the former Roslin Bio-Med
shareholders in May 2000. Pursuant to a license agreement and a professional
services agreement, we have also agreed to issue and register for resale an
aggregate of an additional 195,000 shares of our common stock. Upon their
registration, which we expect to occur by the end of the third quarter of 1999,
all of these shares will also be eligible for sale and freely transferable in
the public market. Additionally, one of our current strategic partners and
shareholders, Pharmacia & Upjohn, has contractually agreed not to sell the
696,787 shares of common stock that it holds until April 2000, at which time
these shares will be eligible for sale and freely transferable in the public
market.
OUR STOCK PRICE MAY BE ADVERSELY IMPACTED AS A RESULT OF THE ACQUISITION OF
ROSLIN BIO-MED LTD. OR THE RESEARCH COLLABORATION WITH THE ROSLIN INSTITUTE IF
WE ARE UNABLE TO ACHIEVE THE PERCEIVED BENEFITS OF THE TRANSACTIONS
The market price of our common stock may decline as a result of the
acquisition of Roslin Bio-Med or the research collaboration with the Roslin
Institute if the integration of Roslin Bio-Med into our operations is
unsuccessful or if the combined company or the research collaboration does not
achieve the perceived benefits as rapidly or to the extent anticipated.
OUR STOCK PRICE HAS HISTORICALLY BEEN VERY VOLATILE, WHICH MAY MAKE IT MORE
DIFFICULT FOR YOU TO RESELL SHARES WHEN YOU WANT AT PRICES YOU FIND ATTRACTIVE
Stock prices and trading volumes for many biopharmaceutical companies
fluctuate widely for a number of reasons, including some reasons which may be
unrelated to their businesses or results of operations. This market volatility,
as well as general domestic or international economic, market and political
conditions, could materially and adversely affect the market price of our common
stock and your return on your investment.
Historically, our stock price has been extremely volatile. Between January
1998 and June 1999, our stock price traded as high as $24.50 per share and as
low as $3.50 per share. The significant market price fluctuations of our common
stock are due to a variety of factors, including:
o depth of the market for our common stock;
o the experimental nature of our prospective products;
o fluctuations in our operating results;
o market conditions relating to the biopharmaceutical and
pharmaceutical industries;
o any announcements of technological innovations, new commercial
products or clinical progress or lack thereof by us, our
collaborative partners or our competitors; or
o announcements concerning regulatory developments, developments with
respect to proprietary rights and our collaborations.
In addition, the stock market is subject to other factors outside our
control that can cause extreme price and volume fluctuations. Securities class
action litigation has often been brought against companies, including many
biotechnology companies, which then experience volatility in the market price of
their securities. Litigation brought against us could result in substantial
costs and a diversion of management's attention and resources, which could
adversely affect our business.
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<PAGE> 25
OUR UNDESIGNATED PREFERRED STOCK MAY INHIBIT POTENTIAL ACQUISITION BIDS; THIS
MAY ADVERSELY AFFECT THE MARKET PRICE FOR OUR COMMON STOCK AND THE VOTING RIGHTS
OF THE HOLDERS OF COMMON STOCK
Our certificate of incorporation provides our Board of Directors with the
authority to issue up to 3,000,000 shares of undesignated preferred stock and to
determine the rights, preferences, privileges and restrictions of these shares
without further vote or action by the stockholders. In March 1998, we designated
and issued 15,000 shares as series A preferred stock, all of which have since
been converted into common stock or redeemed. As of the date of this Form 10-Q,
the Board of Directors still has authority to designate and issue up to
2,985,000 shares of preferred stock. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of shares
of preferred stock may delay or prevent a change in control transaction without
further action by our stockholders. As a result, the market price of our common
stock may be adversely affected. The issuance of preferred stock may also result
in the loss of voting control by others.
PROVISIONS IN OUR CHARTER AND BYLAWS, AND PROVISIONS OF DELAWARE LAW, MAY
INHIBIT POTENTIAL ACQUISITION BIDS FOR US, WHICH MAY PREVENT HOLDERS OF OUR
COMMON STOCK FROM BENEFITING FROM WHAT THEY BELIEVE MAY BE THE POSITIVE ASPECTS
OF ACQUISITIONS AND TAKEOVERS.
In addition to the undesignated preferred stock, provisions of our charter
documents and bylaws may make it substantially more difficult for a third party
to acquire control of us and may prevent changes in our management, including
provisions that:
o prevent stockholders from taking actions by written consent;
o divide the board of directors into separate classes with terms of
office that are structured to prevent all of the directors from being
elected in any one year; and
o set forth procedures for nominating directors and submitting
proposals for consideration at stockholders' meetings.
Provisions of Delaware law may also inhibit potential acquisition bids for
us or prevent us from engaging in business combinations.
Either collectively or individually, these provisions may prevent holders
of our common stock from benefiting from what they may believe are the positive
aspects of acquisitions and takeovers, including the potential realization of a
higher rate of return on their investment from these types of transactions.
YEAR 2000 PROBLEMS COULD AFFECT OUR DAY-TO-DAY OPERATIONS AND CAUSE SIGNIFICANT
ECONOMIC LIABILITIES
Potential year 2000 problems are the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
our computer programs or laboratory equipment that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions in
operations, including, among other things, a temporary inability to:
o process transactions;
o send checks;
o perform research and development activities; or
o engage in similar normal business activities.
Based on a recent assessment, we have determined that we will be required
to modify or replace portions of our software so that our computer systems will
function properly with respect to dates in the year 2000 and beyond. These
software programs include our accounting package and voicemail system. We
presently believe that with modifications to existing software and conversions
to new software, potential year 2000 problems will not pose significant
operational problems for our computer systems. However, if these modifications
and conversions are not made, or are not completed timely, potential year 2000
problems could have a significant and negative impact on our operations.
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<PAGE> 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about Geron's market risk disclosures contains
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
Interest Rate Sensitivity. The fair value of Geron's investments in
marketable securities at June 30, 1999 was $34.6 million. Our investment policy
is to manage our marketable securities portfolio to preserve principal and
liquidity while maximizing the return on the investment portfolio through the
full investment of available funds. We diversify the marketable securities
portfolio by investing in multiple types of investment grade securities. We
primarily invest our marketable securities portfolio in short-term securities
with at least an investment grade rating to minimize interest rate and credit
risk as well as to provide for an immediate source of funds. Although changes in
interest rates may affect the fair value of the marketable securities portfolio
and cause unrealized gains or losses, such gains or losses would not be realized
unless the investments are sold.
Foreign Currency Exchange Risk. We participate in transactions primarily in
the United States and, to a lesser extent, in Europe and elsewhere throughout
the world. As a result, our financial results could be affected by various
factors, including changes in foreign currency exchange rates or weak economic
conditions in foreign markets. All transactions are currently made in U.S.
dollars. However, more frequents transactions in the future may be in pound
sterling. A weakening of the dollar or strengthening of the pound sterling could
make our transactions more costly.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Stockholders of the Company was held pursuant to
notice on May 28, 1999, at 9:00 a.m. local time at the Company headquarters
in Menlo Park, California. There were present at the meeting, in person or
represented by proxy, the holders of 11,092,009 shares of Common Stock. The
matters voted on at the meeting and the votes cast are as follows:
(a) As listed below, all of the nominees for Class III Directors were
elected at the meeting:
<TABLE>
<CAPTION>
NO. OF COMMON NO. OF COMMON
NAME OF NOMINEE VOTES IN FAVOR VOTES ABSTAINING
--------------- -------------- ----------------
<S> <C> <C>
Alexander E. Barkas, Ph.D. 10,792,322 299,677
Robert B. Stein 10,792,322 299,677
</TABLE>
(b) The approval of an amendment to the Company's 1996 Directors' Option
Plan to increase the number of shares reserved for issuance under such
Plan by 250,000 shares and to revise certain terms with respect to
stock options granted under such Plan. There were 5,185,941 shares of
Common Stock voting in favor, 885,426 shares of Common Stock voting
against and 126,715 shares of Common Stock abstaining.
(c) The approval of an amendment to the Company's 1992 Stock Option Plan to
increase the aggregate number of shares of Common Stock authorized for
issuance under such Plan by 600,000 shares. There were
26
<PAGE> 27
5,003,872 shares of Common Stock voting in favor, 1,053,251 shares of
Common Stock voting against and 140,959 shares of Common Stock
abstaining.
(d) The ratification of the appointment of Ernst & Young LLP as the
Company's independent accountants for the fiscal year ending December
31, 1999. There were 10,918,499 shares of Common Stock voting in favor,
104,130 shares of Common Stock voting against and 69,380 shares of
Common Stock abstaining.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
(i) The Company filed the following reports on Form 8-K related to the
Roslin Bio-Med Ltd. acquisition:
Form 8-K
Report Date: May 3, 1999
Filing Date: May 18, 1999
Item 5: Other Events
Item 7(c): Exhibits
Form 8-K/A
Report Date: May 3, 1999
Filing Date: May 21, 1999
Item 7(a): Financial Statement of Business Acquired
Item 7(b): Pro Forma Condensed Combined Financial Information
Form 8-K/A
Report Date: May 3, 1999
Filing Date: June 29, 1999
Item 7(a): Financial Statement of Business Acquired
Item 7(b): Pro Forma Condensed Combined Financial Information
SIGNATURES
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.
GERON CORPORATION
By: /s/ THOMAS B. OKARMA
-------------------------------------
Thomas B. Okarma
President and Chief Executive Officer
(Duly Authorized Signatory)
Date: August 13, 1999
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 19,419
<SECURITIES> 19,717
<RECEIVABLES> 623
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,851
<PP&E> 9,279
<DEPRECIATION> (5,357)
<TOTAL-ASSETS> 62,222
<CURRENT-LIABILITIES> 7,754
<BONDS> 9,559
0
0
<COMMON> 14
<OTHER-SE> 28,686
<TOTAL-LIABILITY-AND-EQUITY> 62,222
<SALES> 0
<TOTAL-REVENUES> 2,841
<CGS> 0
<TOTAL-COSTS> (34,710)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,127)
<INCOME-PRETAX> (31,343)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,343)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,343)
<EPS-BASIC> (2.19)
<EPS-DILUTED> (2.19)
</TABLE>
