<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended SEPTEMBER 30, 1997.
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 0-27976.
GalaGen Inc.
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(Exact name of registrant as specified in its charter)
Delaware 41-1719104
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 Lexington Avenue North
Arden Hills, Minnesota 55126
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(Address of principal executive offices) (Zip Code)
(612) 481-2105
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock,
$.01 par value-7,229,965 shares as of October 31, 1997.
1
<PAGE>
INDEX
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1997 and December 31, 1996...... 3
Statements of Operations - Three and Nine months ended
September 30, 1997 and September 30, 1996 and for the period
November 17, 1987 (inception) through September 30, 1997....... 4
Statements of Cash Flows - Nine months ended
September 30, 1997 and September 30, 1996 and for the period
November 17, 1987 (inception) through September 30, 1997. ..... 5
Notes to Financial Statements ................................. 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .............. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk .... 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ........... 12
Item 6. Exhibits and Reports on Form 8-K .............................. 12
SIGNATURES ............................................................ 16
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents..................................................... $ 2,120,077 $ 3,869,549
Available-for-sale securities................................................. 5,084,453 7,498,343
Prepaid expenses.............................................................. 50,100 87,274
------------ ----------
Total current assets............................................................. 7,254,630 11,455,166
Property, plant and equipment.................................................... 1,869,693 1,687,838
Less accumulated depreciation................................................. (254,827) (195,483)
------------ -----------
1,614,866 1,492,355
Deferred financing expenses...................................................... 73,875 11,944
------------ -----------
Total assets..................................................................... $ 8,943,371 $12,959,465
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 352,426 $ 1,486,928
Accrued expenses.............................................................. 69,618 192,633
Current portion of line-of-credit............................................. 237,630 -
------------ -----------
Total current liabilities........................................................ 659,674 1,679,561
Long-term portion of line-of-credit.............................................. 976,995 -
Other long-term liabilities...................................................... 45,000 45,000
Stockholders' equity:
Preferred Stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - none ...................................... - -
Common stock, $.01 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 7,189,342 at September 30, 1997 and
7,163,769 at December 31, 1996.......................................... 71,893 71,638
Additional paid-in capital.................................................... 59,053,294 58,926,654
Deficit accumulated during the development stage.............................. (51,500,357) (47,183,920)
Deferred compensation......................................................... (363,128) (579,468)
----------- ------------
Total stockholders' equity ................................................... 7,261,702 11,234,904
----------- ------------
Total liabilities and stockholders' equity.................................... $ 8,943,371 $12,959,465
----------- ------------
----------- ------------
See accompanying notes.
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
3
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17, 1987
THREE MONTHS ENDED NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30,
-----------------------------------------------------------------------------
1997 1996 1997 1996 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales...................... $ - $ - $ - $ - $ 1,449,593
Product royalties.................. - - - - 62,747
Research and development revenues.. - - - - 396,350
----------- ------------ ----------- ------------- ------------
- - - - 1,908,690
Operating costs and expenses:
Cost of goods sold................. - - - - 3,468,711
Research and development........... 902,283 1,659,079 3,057,849 3,444,800 26,253,385
General and administrative......... 436,673 493,226 1,545,768 1,405,896 15,594,363
----------- ------------ ----------- ------------- ------------
Operating loss....................... (1,338,956) (2,152,305) (4,603,617) (4,850,696) (43,407,769)
Interest income...................... 96,664 205,476 327,831 413,421 1,085,183
Interest expense..................... (40,651) (8,902) (40,651) (927,004) (2,486,348)
----------- ------------ ----------- ------------- ------------
Net loss before extraordinary gain... (1,282,943) (1,955,731) (4,316,437) (5,364,279) (44,808,934)
Extraordinary gain on extinguishment
of debt............................. - - - - 605,421
----------- ------------ ----------- ------------- ------------
Net loss for the period and deficit
accumulated during the development
stage............................... (1,282,943) (1,955,731) (4,316,437) (5,364,279) (44,203,513)
Less preferred stock dividends....... - - - (7,296,844) (7,296,844)
----------- ------------ ----------- ------------- ------------
Net loss applicable to common
stockholders........................ $(1,282,943) $(1,955,731) $(4,316,437) $(12,661,123) $(51,500,357)
----------- ------------ ----------- ------------- ------------
----------- ------------ ----------- ------------- ------------
Net loss per share applicable to
common stockholders
Primary............................ $ (0.18) $ (0.27) $ (0.60) $ (1.96) $ (23.44)
Fully diluted...................... $ (0.18) $ (0.27) $ (0.60) $ (1.96) $ (18.34)
Weighted average number of
common shares outstanding
Primary............................ 7,186,180 7,134,136 7,173,078 6,450,999 2,197,157
Fully diluted...................... 7,186,180 7,134,136 7,173,078 6,450,999 2,808,541
</TABLE>
See accompanying notes.
4
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GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17, 1987
NINE MONTHS ENDED SEPTEMBER 30 (INCEPTION) TO
------------------------------ SEPTEMBER 30,
1997 1996 1997
----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss....................................................... $(4,316,437) $(12,661,123) $(51,500,357)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization................................ 384,824 308,718 2,093,314
Preferred stock dividend..................................... - 7,296,844 7,296,844
Warrants issued, net......................................... - 768,064 907,064
Extraordinary gain on extinguishment of debt................. - - (605,421)
Equity/debt issued for services.............................. 3,953 - 2,980,177
Changes in operating assets and liabilities.................. (1,303,831) (943,457) 1,160,958
----------- ------------ ------------
Net cash used in operating activities.......................... (5,231,491) (5,230,954) (37,667,421)
----------- ------------ ------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment...................... (273,391) (834,490) (3,717,274)
Change in available-for-sale securities, net................... 2,413,890 (7,230,447) (5,084,453)
----------- ------------ ------------
Net cash provided by (used in) investing activities............ 2,140,499 (8,064,937) (8,801,727)
----------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from sale of stock, net of offering costs............. 126,895 19,083,346 32,381,377
Proceeds/payment from/on note payable.......................... 1,214,625 (6,404) 16,207,848
----------- ------------ ------------
Net cash provided by financing activities...................... 1,341,520 19,076,942 48,589,225
----------- ------------ ------------
(Decrease) increase in cash.................................... (1,749,472) 5,781,051 2,120,077
Cash and cash equivalents at beginning of period............... 3,869,549 509,339 -
----------- ------------ ------------
Cash and cash equivalents at end of period..................... $ 2,120,077 $ 6,290,390 $ 2,120,077
----------- ------------ ------------
----------- ------------ ------------
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Value of warrants issued with convertible debt................. $ - $ - $ 110,333
Deferred compensation recognized for employee options.......... - - 1,918,200
Conversion of convertible promissory notes plus related
accrued interest, net of financing costs...................... - 8,864,825 8,864,825
</TABLE>
See accompanying notes.
5
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of normal, recurring accruals) considered necessary
for fair presentation have been included. Operating results for the nine
months ended September 30, 1997, are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. These
financial statements should be read in conjunction with the audited financial
statements and accompanying notes contained in the Annual Report of GalaGen
Inc. (the "Company") on Form 10-K for the fiscal year ended December 31,
1996.
2. CASH AND CASH EQUIVALENTS
Cash equivalents include short-term highly liquid investments purchased
at cost, which approximate market, with original maturities of three months
or less.
3. INVESTMENTS
Investments in debt securities with a remaining maturity of more than
three months at the date of purchase are classified as available-for-sale
securities. Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of
each balance sheet date. The book value of the investments approximates their
estimated market value. The estimated market value of investments by security
type is as follows:
ESTIMATED MARKET VALUE
AS OF SEPTEMBER 30, 1997
------------------------
U.S. Government agency securities $1,013,507
U.S. Treasury securities 2,708,382
Commercial paper 1,159,866
Investment grade debt securities 202,698
----------
$5,084,453
----------
----------
All investments have a contractual maturity of one year or less.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided for on the straight line method. In July 1997,
construction-in-progress consisting of leasehold improvements and equipment
in connection with the Company's pilot plant manufacturing facility were
completed, transferred to their respective fixed asset category and commenced
depreciation. At September 30, 1997, property, plant and equipment consisted
of the following:
Furniture, fixtures and equipment $ 527,424
Leasehold improvements 1,342,269
----------
1,869,693
Less accumulated depreciation (254,827)
----------
$1,614,866
----------
----------
6
<PAGE>
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
5. LINE-OF-CREDIT
In June 1997, the Company established a $2,000,000 line-of-credit for
fixed assets with Transamerica Business Credit Corporation ("Transamerica")
which extends through June 1998. Terms of the line-of-credit include monthly
payments over four years equal to 2.5782% of each advance with a final
balloon payment of 12.5% at the end of the four year period. The
line-of-credit is secured by the Company's fixed assets. TransAmerica
received a warrant for 40,000 shares of common stock granted at the fair
market value on the date of grant. The warrant was valued at approximately
$79,000 and will be amortized over the expected term of the outstanding
line-of-credit. The Company drew approximately $1,319,000 of the
line-of-credit in July 1997.
6. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
shares of common stock outstanding during the periods presented. The fully
diluted loss per share assumes the conversion of preferred shares outstanding
prior to the Company's initial public offering (the "Offering") to common
shares as of the beginning of the period. The loss per share for periods
prior to the closing date of the Offering also gives effect to the
requirements of Staff Accounting Bulletin No. 83 (SAB 83).
7
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The information presented in this Item contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements are subject
to risks and uncertainties, including those discussed under "Risk Factors"
below, that could cause actual results to differ materially from those
projected. Because actual results may differ, readers are cautioned not to
place undue reliance on these forward-looking statements. Certain
forward-looking statements are indicated below by an asterisk.
RECENT DEVELOPMENTS
In August 1997, the Company announced it is increasing its development
efforts on Diffistat-G, its pharmaceutical product for the treatment of
antibiotic-associated diarrhea, and development efforts on its nutritional
products. At the same time, the Company announced that it was placing its
Sporidin-G clinical trial on hold due to continuing decline in the patient
population for the product's initial indication, AIDS-related CRYPTOSPORIDIUM
PARVUM infection. The decline was brought about by the effectiveness and
increased use of new AIDS therapies, including protease inhibitors and
earlier administration of combination therapy. The Company believes that its
research and development expenses and losses for the three months ended
December 31, 1997 and March 31, 1998 will increase due to the expenses
associated with increasing enrollment and data analysis associated with the
Diffistat-G Phase II clinical trial and expenses associated with clinical
trials, formulation and obtaining outside consulting expertise in conjunction
with nutritional product development.* Thereafter, the research and
development expenses and losses for the three month periods ended June 30,
1998 and September 30, 1998 are expected to decrease to levels experienced
for the three month period ended September 30, 1997 as expenses associated
with the Phase II clinical development efforts of Diffistat-G and initial
development expenses associated with nutritional products are concluded.* The
Company believes that significant expenses and losses will be incurred before
any material product revenues are generated.*
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30,1996
GENERAL. The net loss before preferred stock dividends decreased
$672,788, or 34.4%, for the three months ended September 30, 1997 to
$1,282,943 from $1,955,731 for the same period in 1996. The decrease was due
primarily to decreased research and development expenses associated with
placing the Sporidin-G clinical trial on hold and decreased general and
administrative expenses offset by decreased interest income.
RESEARCH AND DEVELOPMENT EXPENSES. Expenses for research and development
decreased $756,796, or 45.6%, to $902,283 for the three months ended
September 30, 1997 from $1,659,079 for the three months ended September 30,
1996. The decrease was due primarily to decreased clinical trial expenses
associated with Sporidin-G of approximately $959,000 offset by increases in
pilot plant and manufacturing expenses of approximately $207,000. As
discussed above, the Company expects the research and development expenses to
increase for the three month periods ended December 31, 1997 and March 31,
1998 due to the expenses associated with increasing enrollment and data
analysis associated with the Diffistat-G clinical trial and nutritional
product development, and thereafter the expenses for the three month periods
ended June 30, 1998 and September 30, 1998 are expected to decrease to levels
experienced for the three month period ended September 30, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $56,553, or 11.5%, to $436,673 for the three months ended September
30, 1997 from $493,226 for the same period in 1996. Approximately $46,000 of
the decrease was due to decreased use of outside legal services.
INTEREST INCOME. Interest income decreased to $96,664 for the three
months ended September 30, 1997 from $205,476 for the three months ended
September 30, 1996. This $108,812 decrease, or 53.0%, is attributable to the
Company's decreased amount of investable funds.
8
<PAGE>
INTEREST EXPENSE. Interest expense was $40,651 for the three months ended
September 30, 1997 and $8,902 for the three months ended September 30, 1996.
Interest expense in 1997 was due to the Transamerica line-of-credit and for
the applicable amortization of the valuation of the warrant associated with
the line-of-credit. The warrant was valued at approximately $79,000 and will
be amortized over the expected term of the outstanding line-of-credit. The
interest expense in 1996 was due to interim interest associated before
commencement of the operating lease for certain manufacturing equipment.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
GENERAL. The net loss before preferred stock dividends decreased
$1,047,842, or 19.5%, to $4,316,437 for the nine months ended September 30,
1997 from $5,364,279 for the nine months ended September 30, 1996. The
decrease was primarily due to decreased interest expense and research and
development expense offset by increased general and administrative expense
and decreased interest income.
RESEARCH AND DEVELOPMENT EXPENSES. Expenses for research and development
decreased $386,951, or 11.2%, to $3,057,849 for the nine months ended
September 30,1997 from $3,444,800 for the nine months ended September 30,
1996. The decrease was due primarily to decreased clinical trial expenses
associated with Sporidin-G of approximately $1,260,000 offset by increases of
approximately $472,000 associated with pilot plant operating and
manufacturing expenses, $238,000 relating to increased clinical trial
expenses associated with Diffistat-G, approximately $104,000 relating to
increased nutritional product development and approximately $59,000 relating
to the Company's other research and development activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $139,872, or 9.9%, to $1,545,768 for the nine months ended
September 30, 1997 from $1,405,896 for the nine months ended September 30,
1996. The increase was due to increased public reporting responsibilities and
shareholder relations expenses of approximately $148,000 and increased
personnel expenses of approximately $69,000 offset by decreased outside
consulting expenses of approximately $78,000.
INTEREST INCOME. Interest income decreased to $327,831 for the nine
months ended September 30, 1997 from $413,421 for the nine months ended
September 30, 1996. This $85,590 decrease, or 20.7%, is attributable to
decreased amounts of investable funds.
INTEREST EXPENSE. Interest expense was $40,651 for the nine months ended
September 30, 1997 and $927,004 for the nine months ended September 30, 1996.
Interest expense in 1997 was due to the Transamerica line-of-credit and for
the applicable amortization of the valuation of the warrant associated with
the line-of-credit. The warrant was valued at approximately $79,000 and will
be amortized over the expected term of the outstanding line-of-credit. The
interest expense in 1996 was due to interest associated with the Company's
Convertible Promissory Notes, which converted to Common Stock upon the
Offering, and to the value of warrants issued both to guarantors of a
line-of-credit for the Company and to purchasers of the Company's Convertible
Promissory Notes.
PREFERRED STOCK DIVIDENDS. The preferred stock dividend expense of
$7,296,844 for the nine months ended September 30, 1996 represents the value
of the additional shares issued during such period to holders of the Series
D, Series E and Series F-1 Preferred Stock upon conversion to Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company was incorporated in March 1992. On July 24, 1992, Procor
Technologies, Inc. ("Procor"), the Company's predecessor, was merged with
and into the Company (the "Procor-GalaGen Merger"). At the time of the
Procor-GalaGen Merger, Procor was a wholly-owned subsidiary of Land O'Lakes,
Inc. ("Land O'Lakes"). Since the Company's inception through September 30,
1997, investments in the Company have totaled approximately $51.6 million,
including approximately $7.1 million of inter-company obligations payable to
Land O'Lakes which were forgiven and recorded as contributed capital at the
time of the Procor-GalaGen Merger, $17.9 million from the Company's initial
public offering (the "Offering") (after deducting underwriting discounts
and offering expenses) and approximately $26.6 million from private
placements of equity and convertible debt and from conversion of accrued
interest on such debt and the exercise of stock options and warrants. The
Company has invested funds received in the Offering and these private
placements in investment-grade, interest-bearing obligations.
In June 1997, the Company established a $2,000,000 line-of-credit for
fixed assets with Transamerica Business
9
<PAGE>
Credit Corporation which extends through June 1998. Terms of the
line-of-credit include monthly payments over four years equal to 2.5782% of
each advance with a final balloon payment of 12.5% at the end of four years.
The line-of-credit is secured by the Company's fixed assets. The Company
currently has approximately $1,700,000 of fixed assets in which it can
receive advances against, and drew approximately $1,319,000 of the
line-of-credit in July 1997.
In August 1997, the Company announced it is increasing its development
efforts on Diffistat-G, its pharmaceutical product for the treatment of
antibiotic-associated diarrhea, and development efforts on its nutritional
products. At the same time, the Company announced that it was placing its
Sporidin-G clinical trial on hold due to continuing decline in the patient
population for the product's initial indication, AIDS-related CRYPTOSPORIDIUM
PARVUM infection. The decline was brought about by the effectiveness and
increased use of new AIDS therapies, including protease inhibitors and
earlier administration of combination therapy. The Company believes that its
research and development expenses and losses for the three months ended
December 31, 1997 and March 31, 1998 will increase due to the expenses
associated with increasing enrollment and data analysis associated with the
Diffistat-G Phase II clinical trial and expenses associated with clinical
trials, formulation and obtaining outside consulting expertise in conjunction
with nutritional product development.* Thereafter, the research and
development expenses and losses for the three month periods ended June 30,
1998 and September 30, 1998 are expected to decrease to levels experienced
for the three month period ended September 30, 1997 as expenses associated
with the Phase II clinical development efforts of Diffistat-G and initial
development expenses associated with nutritional products are concluded.* The
Company believes that significant expenses and losses will be incurred before
any material product revenues are generated.*
Cash used in operating activities increased by $537, or .01%, for the
nine months ended September 30, 1997 to $5,231,491 from $5,230,954 for the
same period in 1996. Cash used in operations for the nine month periods ended
September 30, 1997 and 1996 went primarily to fund operating losses and for
repayment of current liabilities.
For the nine months ended September 30, 1997, the Company redeemed
$2,413,890 of its available-for-sale securities. The Company invested
$210,036, net, in equipment and tenant improvements related to the Company's
pilot plant manufacturing facility for the nine months ended September 30,
1997 and $746,152 for the same period in 1996. The Company invested $63,355
for the nine months ended September 30, 1997 and $88,338 for the same period
in 1996 in lab equipment, computer equipment and software and furniture used
primarily to support the Company's operations.
The Company anticipates that its existing resources and interest thereon
will be sufficient to satisfy its anticipated cash requirements through
approximately the end of the third quarter 1998.*
The Company expects to incur significant additional research and
development and other costs, including costs related to clinical studies, as
well as capital expenditures necessary to obtain licensure of the existing
GMP pilot plant facility or establish additional commercial scale GMP
manufacturing relationships, before any material revenues are generated. The
Company will need to raise substantial additional funds for longer term
product development, manufacturing and marketing activities it plans to
undertake in the future. The Company's ability to continue funding its
planned operations beyond the end of the third quarter of 1998 is dependent
upon its ability to obtain additional funds through equity or debt financing,
strategic alliances, license agreements or from other financing sources. A
10
<PAGE>
lack of adequate funding could eventually result in the insolvency or
bankruptcy of the Company. At a minimum, if adequate funds are not available,
the Company may be required to delay or to eliminate expenditures for certain
of its product development efforts or to license to third parties the rights
to commercialize products or technologies that the Company would otherwise
seek to develop itself. Because of the Company's significant long-term
capital requirements, it may seek to raise funds when conditions are
favorable, even if it does not have an immediate need for such additional
capital at such time. If the Company has not raised funds prior to such time
as the Company's needs for funding become immediate, the Company may be
forced to raise funds when conditions are unfavorable which could result in
substantial dilution to the Company's current stockholders.
RISK FACTORS
Certain statements made above, including those indicated by an asterisk
(some of which are summarized below), are forward-looking statements that
involve risks and uncertainties, and actual results may differ. Factors that
could cause actual results to differ include those identified below.
EXPECTATION THAT RESEARCH AND DEVELOPMENT EXPENSES AND LOSSES WILL
INCREASE FOR THE THREE MONTH PERIODS ENDING DECEMBER 31, 1997 AND MARCH 31,
1998 AND THEREAFTER DECREASE FOR THE THREE MONTH PERIODS ENDING JUNE 30, 1998
AND SEPTEMBER 30, 1998 TO LEVELS EXPERIENCED DURING THE THREE MONTHS ENDED
SEPTEMBER 30, 1997. The Company's pharmaceutical products in development will
require additional research and development and extensive clinical testing
and regulatory approval prior to any commercial sales. The amount and timing
of expenses associated with product development may be affected by any
changes to trial protocols required by the U.S. Food and Drug Administration
("FDA"), the rate at which patients meeting trial criteria can be found and
enrolled, the impact of any new, competitive therapies on the target patient
population and any other problems encountered in clinical trials, some of
which could cause the Company or the FDA to suspend clinical trials. The
Company or the FDA may suspend clinical trials at any time if the subjects or
patients participating in such trials are thought to be exposed to
unacceptable health risks. The Company's nutritional products in development
will also require additional research and development expenses prior to
commercial sales. The amount and timing of these expenses may be affected by
compliance with the Dietary Supplement Health and Education Act, clinical
trials and formulation issues.
ANTICIPATED INCREASE IN DEVELOPMENT EFFORTS ON NUTRITIONAL PRODUCTS AND
ASSOCIATED EXPENSES. The Company has, under a license agreement with Land
O'Lakes, agreed not to compete for 15 years in the area of nutritional
products based on polyclonal antibody technology except in the area of infant
formula. Accordingly, the development of nutritional products would require
the consent of Land O'Lakes. In March 1997, Land O'Lakes granted rights to
the Company for the commercialization of nutritional kefir-based products. In
May 1997, the Company signed an agreement with Lifeway Foods, Inc. to
commercialize kefir-based products. No assurance can be given that such
consent would be given by Land O'Lakes in a particular case. The Company may
curtail proposed development efforts in nutritional foods if appropriate
consents are not obtained.
ABILITY OF THE COMPANY TO SATISFY ITS ANTICIPATED CASH REQUIREMENTS
THROUGH APPROXIMATELY THE END OF THE THIRD QUARTER OF 1998. The Company's
working capital and capital requirements will depend upon numerous factors,
including the progress of the Company's clinical trials and research and
development programs and the timing and cost of obtaining regulatory
approvals. The Company's capital requirements also will depend on the levels
of resources devoted to the development of manufacturing and marketing
capabilities, technological advances, the status of competitive products and
the ability of the Company to establish strategic alliances to provide
research and development funding to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a.) EXHIBITS
<TABLE>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
<C> <S> <C>
3.2 Restated Certificate of Incorporation of the Company.(3) Incorporated By
Reference
3.4 Restated Bylaws of the Company.(1) Incorporated By
Reference
4.1 Specimen Common Stock Certificate.(1) Incorporated By
Reference
4.2 Warrant to purchase 13,541 shares of Common Stock of the Incorporated By
Company issued to Piper Jaffray Inc., dated January 26, 1993.(1) Reference
4.3 Warrant to purchase 20,312 shares of Common Stock of the Incorporated By
Company issued to Gus A. Chafoulias, dated October 12, 1993.(1) Reference
4.4 Warrant to purchase 20,312 shares of Common Stock of the Incorporated By
Company issued to John Pappajohn, dated October 12, 1993.(1) Reference
4.5 Warrant to purchase 9,479 shares of Common Stock of the Incorporated By
Company issued to Cato Holding Company, dated June 21, 1994.(1) Reference
4.6 Form of Common Stock Warrant to purchase shares of Common Incorporated By
Stock of the Company, issued in connection with the sale of Reference
Convertible Promissory Notes.(1)
4.7 Warrant to purchase 17,144 shares of Series F-1 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.8 Warrant to purchase 42,856 shares of Series F-2 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.9 Warrant to purchase 60,000 shares of Series F-3 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.10 Warrant to purchase 80,000 shares of Series F-3 Convertible Incorporated By
Preferred Stock of the Company issued to Chiron Corporation, Reference
dated March 29, 1995.(1)
4.11 Warrant to purchase 18,250 shares of Common Stock of the Incorporated By
Company issued to IAI Investment Funds VI, Inc. (IAI Emerging Reference
Growth Fund), dated January 30, 1996.(1)
4.12 Warrant to purchase 6,250 shares of Common Stock of the Incorporated By
Company issued to IAI Investment Funds IV, Inc. (IAI Regional Reference
Fund), dated January 30, 1996.(1)
12
<PAGE>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
4.13 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to John Pappajohn, dated February 2, 1996.(1) Reference
4.14 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to Edgewater Private Equity Fund, L.P., dated Reference
February 2, 1996.(1)
4.15 Warrant to purchase 10,000 shares of Common Stock of the Incorporated By
Company issued to Joseph Giamenco, dated February 2, 1996.(1) Reference
4.16 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to Gus A. Chafoulias, dated February 2, 1996.(1) Reference
4.17 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to JIBS Equities, dated February 2, 1996.(1) Reference
4.18 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to Land O'Lakes, Inc., dated February 2, 1996.(1) Reference
#10.1 License Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
#10.2 Royalty Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
#10.3 Supply Agreement between the Company and Land O'Lakes dated Incorporated By
May 7, 1992.(1) Reference
10.4 Master Services Agreement between the Company and Land O'Lakes Incorporated By
dated May 7, 1992.(1) Reference
*10.5 GalaGen Inc. 1992 Stock Plan, as amended. (5) Incorporated By
Reference
10.7 Stock and Warrant Purchase Agreement between the Company and Incorporated By
Chiron Corporation dated March 20, 1995.(1) Reference
#10.8 License and Collaboration Agreement between the Company and Incorporated By
Chiron Corporation dated March 20, 1995.(1) Reference
*10.9 GalaGen Inc. Employee Stock Purchase Plan, as amended. (2) Incorporated By
Reference
10.10 Credit Agreement between the Company and Norwest Bank Incorporated By
Minnesota, N.A., dated as of January 24, 1996.(1) Reference
10.11 Commitment Letter between the Company and Cargill Leasing Incorporated By
Corporation, dated June 5, 1996. (2) Reference
10.12 Master Equipment Lease between the Company and Cargill Leasing Incorporated By
Corporation, dated June 6, 1996. (2) Reference
10.13 Agreement for Progress Payments between the Company and Cargill Incorporated By
Leasing Corporation, dated June 6, 1996. (2) Reference
13
<PAGE>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
----------- ----------- ----------------
10.14 Agreement for Lease between the Company and Land O'Lakes, Incorporated By
dated June 3, 1996. (2) Reference
*10.15 Letter agreement with John G. Watson dated September 14, Incorporated By
1996. (3) Reference
#10.16 Agreement with Colorado Animal Research Enterprises, Inc. dated Incorporated By
November 1, 1996. (4) Reference
*10.17 Letter agreement with Francois Lebel, M.D., dated December 27, Incorporated By
1996. (4) Reference
*10.18 Consulting agreement with Stanley Falkow, Ph.D., dated Incorporated By
January 15, 1997. (4) Reference
*10.19 GalaGen Inc. Annual Short Term Incentive Cash Compensation Incorporated By
Plan. (4) Reference
*10.20 GalaGen Inc. Annual Long Term Incentive Stock Option Incorporated By
Compensation Plan. (4) Reference
*10.21 GalaGen Inc. 1997 Incentive Plan (6) Incorporated By
Reference
10.22 Master Loan and Security Agreement with TransAmerica Business Incorporated By
Credit Corporation dated June 18, 1997. (7) Reference
11.1 Statement re: computation of per share earnings (loss). Electronic
Transmission
27 Financial Data Schedule. Electronic
Transmission
</TABLE>
- ---------------------------
(1) Incorporated herein by reference to the same numbered Exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1996 (File No. 0-27976).
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996 (File No. 0-27976).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended December 31, 1996
(File No. 0-27976).
(5) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997 (File No. 0-27976).
(6) Incorporated herein by reference to appendix A to the Company's 1997
Definitive Proxy Statement on Schedule 14A (File No. 0-27976).
(7) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997 (File No. 0-27976).
14
<PAGE>
* Management contract or compensatory plan or arrangement.
# Contains portions for which confidential treatment has been granted to
the Company.
(b.) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 1997.
15
<PAGE>
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.
GalaGen Inc.
------------
(Registrant)
Date: November 13, 1997 By: /s/ Robert A. Hoerr
-------------------
Robert A. Hoerr,
President and Chief Executive
Officer
(Principal Executive Officer)
Date: November 13, 1997 By: /s/ Gregg A. Waldon
-------------------
Gregg A. Waldon,
Vice President, Chief Financial
Officer,
Secretary and Treasurer
(Principal Financial and
Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<S> <C> <C>
3.2 Restated Certificate of Incorporation of the Company.(3) Incorporated By Reference
3.4 Restated Bylaws of the Company.(1) Incorporated By Reference
4.1 Specimen common stock Certificate.(1) Incorporated By Reference
4.2 Warrant to purchase 13,541 shares of common stock of the Company
issued to Piper Jaffray Inc., dated January 26, 1993.(1) Incorporated By Reference
4.3 Warrant to purchase 20,312 shares of common stock of the Company
issued to Gus A. Chafoulias, dated October 12, 1993.(1) Incorporated By Reference
4.4 Warrant to purchase 20,312 shares of common stock of the Company
issued to John Pappajohn, dated October 12, 1993.(1) Incorporated By Reference
4.5 Warrant to purchase 9,479 shares of common stock of the Company
issued to Cato Holding Company, dated June 21, 1994.(1) Incorporated By Reference
4.6 Form of common stock Warrant to purchase shares of common stock
of the Company, issued in connection with the sale of Convertible
Promissory Notes.(1) Incorporated By Reference
4.7 Warrant to purchase 17,144 shares of Series F-1 Convertible
Preferred Stock of the Company issued to Chiron Corporation,
dated March 29, 1995.(1) Incorporated By Reference
4.8 Warrant to purchase 42,856 shares of Series F-2 Convertible
Preferred Stock of the Company issued to Chiron Corporation,
dated March 29, 1995.(1) Incorporated By Reference
4.9 Warrant to purchase 60,000 shares of Series F-3 Convertible
Preferred Stock of the Company issued to Chiron Corporation,
dated March 29, 1995.(1) Incorporated By Reference
4.10 Warrant to purchase 80,000 shares of Series F-3 Convertible
Preferred Stock of the Company issued to Chiron Corporation,
dated March 29, 1995.(1) Incorporated By Reference
4.11 Warrant to purchase 18,250 shares of common stock of the Company
issued to IAI Investment Funds VI, Inc. (IAI Emerging Growth
Fund), dated January 30, 1996.(1) Incorporated By Reference
4.12 Warrant to purchase 6,250 shares of common stock of the Company
issued to IAI Investment Funds IV, Inc. (IAI Regional Fund),
dated January 30,1996.(1) Incorporated By Reference
4.13 Warrant to purchase 25,000 shares of common stock of the Company
issued to John Pappajohn, dated February 2, 1996.(1) Incorporated By Reference
<PAGE>
4.14 Warrant to purchase 25,000 shares of common stock of the Company
issued to Edgewater Private Equity Fund, L.P., dated
February 2, 1996.(1) Incorporated By Reference
4.15 Warrant to purchase 10,000 shares of common stock of the Company
issued to Joseph Giamenco, dated February 2, 1996.(1) Incorporated By Reference
4.16 Warrant to purchase 25,000 shares of common stock of the Company
issued to Gus A. Chafoulias, dated February 2, 1996.(1) Incorporated By Reference
4.17 Warrant to purchase 25,000 shares of common stock of the Company
issued to JIBS Equities, dated February 2, 1996.(1) Incorporated By Reference
4.18 Warrant to purchase 25,000 shares of common stock of the Company
issued to Land O'Lakes, Inc., dated February 2, 1996.(1) Incorporated By Reference
#10.1 License Agreement between the Company and Land O'Lakes dated
May 7, 1992.(1) Incorporated By Reference
#10.2 Royalty Agreement between the Company and Land O'Lakes dated
May 7, 1992.(1) Incorporated By Reference
#10.3 Supply Agreement between the Company and Land O'Lakes dated
May 7, 1992.(1) Incorporated By Reference
10.4 Master Services Agreement between the Company and Land O'Lakes
dated May 7, 1992.(1) Incorporated By Reference
*10.5 GalaGen Inc. 1992 Stock Plan, as amended.(5) Incorporated By Reference
10.7 Stock and Warrant Purchase Agreement between the Company and
Chiron Corporation dated March 20, 1995.(1) Incorporated By Reference
#10.8 License and Collaboration Agreement between the Company and
Chiron Corporation dated March 20, 1995.(1) Incorporated By Reference
*10.9 GalaGen Inc. Employee Stock Purchase Plan, as amended. (2) Incorporated By Reference
10.10 Credit Agreement between the Company and Norwest Bank
Minnesota, N.A., dated as of January 24, 1996.(1) Incorporated By Reference
10.11 Commitment Letter between the Company and Cargill Leasing
Corporation, dated June 5, 1996. (2) Incorporated By Reference
10.12 Master Equipment Lease between the Company and Cargill Leasing
Corporation, dated June 6, 1996. (2) Incorporated By Reference
10.13 Agreement for Progress Payments between the Company and Cargill
Leasing Corporation, dated June 6, 1996. (2) Incorporated By Reference
<PAGE>
10.14 Agreement for Lease between the Company and Land O'Lakes, dated
June 3, 1996. (2) Incorporated By Reference
*10.15 Letter agreement with John G. Watson dated September 14, 1996.(3) Incorporated By Reference
#10.16 Agreement with Colorado Animal Research Enterprises, Inc. dated
November 1, 1996. (4) Incorporated By Reference
*10.17 Letter agreement with Francois Lebel, M.D., dated December 27,
1996. (4) Incorporated By Reference
*10.18 Consulting agreement with Stanley Falkow, Ph.D., dated
January 15, 1997. (4) Incorporated By Reference
*10.19 GalaGen Inc. Annual Short Term Incentive Cash Compensation
Plan.(4) Incorporated By Reference
*10.20 GalaGen Inc. Annual Long Term Incentive Stock Option Compensation
Plan. (4) Incorporated By Reference
*10.21 GalaGen Inc. 1997 Incentive Plan (6) Incorporated By Reference
10.22 Master Loan and Security Agreement with TransAmerica Business
Credit Corporation dated June 18, 1997. (7) Incorporated By Reference
11.1 Statement re: computation of per share earnings (loss). Electronic Transmission
27 Financial Data Schedule. Electronic Transmission
</TABLE>
- ---------------------
(1) Incorporated herein by reference to the same numbered Exhibit to
the Company's Registration Statement on Form S-1
(Registration No. 333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1996 (File No. 0-27976).
(3) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996 (File No. 0-27976).
(4) Incorporated herein by reference to the same numbered Exhibit to the
Company's Annual Report on Form 10-K for the period ended December 31,
1996 (File No. 0-27976).
(5) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1997 (File No. 0-27976).
(6) Incorporated herein by reference to appendix A to the Company's 1997
Definitive Proxy Statement on Schedule 14A (File No. 0-27976).
(7) Incorporated herein by reference to the same numbered Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997 (File No. 0-27976).
* Management contract or compensatory plan or arrangement.
# Contains portions for which confidential treatment has been
granted to the Company.
<PAGE>
EXHIBIT 11.1---STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
GALAGEN INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
Period from
November 17,
For the Three months Ended For the Nine months Ended 1987 (inception) to
----------------------------- ---------------------------- -------------------
September 30, September 30, September 30, September 30, September 30,
1997 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Primary Loss Per Share:
Average shares outstanding 7,186,180 7,134,136 7,173,078 6,450,999 2,087,995
SAB No. 83 shares - for stock options
granted at exercise prices less than the
initial public offering price during the 12
months preceding the initial public
offering using the treasury method - - - - 109,163
---------------------------------------------------------------------------------
Total 7,186,180 7,134,136 7,173,078 6,450,999 2,197,157
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Net loss $(1,282,943) $(1,955,731) $(4,316,437) $(12,661,123) $(51,500,357)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Net loss per share $(0.18) $(0.27) $(0.60) $(1.96) $(23.44)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Fully Diluted Loss Per Share:
Average shares outstanding 7,186,180 7,134,136 7,173,078 6,450,999 2,087,995
SAB No. 83 shares - for stock options
granted at exercise prices less than the
initial public offering price during the 12
months preceding the initial public
offering using the treasury method - - - - 109,163
Assumed conversion of all series of
convertible preferred stock - - - - 611,383
---------------------------------------------------------------------------------
Total 7,186,180 7,134,136 7,173,078 6,450,999 2,808,541
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Net loss $(1,282,943) $(1,955,731) $(4,316,437) $(12,661,123) $(51,500,357)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Net loss per share $(0.18) $(0.27) $(0.60) $(1.96) $(18.34)
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PERIOD ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,120,077
<SECURITIES> 5,084,453
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,254,630
<PP&E> 1,869,693
<DEPRECIATION> (254,827)
<TOTAL-ASSETS> 8,943,371
<CURRENT-LIABILITIES> 659,674
<BONDS> 0
0
0
<COMMON> 71,893
<OTHER-SE> (363,128)
<TOTAL-LIABILITY-AND-EQUITY> 8,943,371
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (4,603,617)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (40,651)
<INCOME-PRETAX> (4,316,437)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,316,437)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,316,437)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
