<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 24572
GENEMEDICINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0355802
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8301 New Trails Drive, The Woodlands, Texas 77381-4248
(Address of principal executive office) (zip code)
(713) 364-1150
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of August 6, 1996, there were outstanding 12,961,326 and 3,750,000 shares
of Common Stock and Series B Preferred Stock, par value $.001, respectively,
of the registrant.
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
COVER PAGE....................................................................... 1
TABLE OF CONTENTS................................................................ 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of June 30, 1996 and December 31, 1995.................... 3
Statements of Operations for the three and six months ended June 30, 1996
and June 30, 1995, and for the period from inception (January 2, 1992)
through June 30, 1996....................................................... 4
Statements of Cash Flows for the six months ended June 30, 1996 and
June 30, 1995, and for the period from inception (January 2, 1992)
through June 30, 1996....................................................... 5
Notes to Financial Statements............................................... 6
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 7
PART II. OTHER INFORMATION...................................................... 10
SIGNATURES....................................................................... 12
</TABLE>
Page 2 of 12
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------------- --------------
(unaudited)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................... $ 14,393,826 $ 15,420,772
Short-term investments.................................................. 20,145,141 19,776,723
Prepaid expenses and other.............................................. 250,089 420,154
-------------- --------------
Total current assets............................................ 34,789,056 35,617,649
-------------- --------------
Equipment, furniture and leasehold improvements, net............................ 3,142,459 3,135,697
Deposits and other assets....................................................... 6,845 6,845
-------------- --------------
Total Assets.................................................................... $ 37,938,360 $ 38,760,191
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities................................ $ 1,103,342 $ 1,117,243
Current portion of notes payable........................................ 6,944 79,344
Current portion of capital lease obligations............................ 328,786 308,641
-------------- --------------
Total current liabilities....................................... 1,439,072 1,505,228
-------------- --------------
Long-term Liabilities:
Deferred contract revenue............................................... 1,419,970 919,970
Capital lease obligations, net of current portion....................... 498,270 667,781
-------------- --------------
Total long-term liabilities..................................... 1,918,240 1,587,751
-------------- --------------
Stockholders' Equity:
Convertible preferred stock, $.001 par value; 20,000,000 shares
authorized: 3,750,000 issued and outstanding at June 30,
1996 and December 31, 1995, respectively....................... 3,750 3,750
Common stock, $.001 par value; 40,000,000 shares authorized;
12,881,729 and 12,036,415 shares issued and outstanding at
June 30, 1996 and December 31, 1995, respectively.............. 12,882 12,036
Additional paid in capital............................................. 65,289,125 60,965,612
Deferred compensation.................................................. (662,335) (859,557)
Deficit accumulated during the development stage....................... (30,062,374) (24,454,629)
-------------- --------------
Total stockholders' equity..................................... 34,581,048 35,667,212
-------------- --------------
Total Liabilities and Stockholders' Equity..................................... $ 37,938,360 $ 38,760,191
============== ==============
</TABLE>
Page 3 of 12
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Inception
Three months ended Six months ended (January 2, 1992)
June 30, June 30, through
----------------------------- -------------------------- June 30,
1996 1995 1996 1995 1996
----------- ---------- ------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue................ $ 1,000,000 $ 1,008,000 $ 2,000,000 $ 1,680,000 $ 5,680,000
Research and development
grant revenue................. - - 81,000 - 206,000
Interest income................. 469,242 284,632 960,703 593,047 3,162,564
------------ ------------ ------------ ------------ ---------------
Total revenues................ 1,469,242 1,292,632 3,041,703 2,273,047 9,048,564
Expenses:
Research and development........ 3,189,612 2,786,696 6,751,273 5,094,342 28,386,621
General and administrative...... 898,721 773,519 1,839,160 1,711,889 10,335,736
Interest expense................ 28,106 41,400 59,015 71,216 388,581
------------ ------------ ------------ ------------ ---------------
Total expenses............... 4,116,439 3,601,615 8,649,448 6,877,447 39,110,938
------------ ------------ ------------ ------------ ---------------
Net loss.......................... $ (2,647,197) $ (2,308,983) $ (5,607,745) $ (4,604,400) $ (30,062,374)
============ ============ ============ ============ ===============
Loss per share.................... $ (0.21) $ (0.27) $ (0.45) $ (0.55)
============ ============ ============ ============
Shares used in computing
loss per share.................. 12,717,884 8,405,254 12,524,652 8,389,165
============ ============ ============ ============
</TABLE>
Page 4 of 12
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Inception
June 30, (January 2, 1992)
------------------------------ through
1996 1995 June 30, 1996
------------- ----------- ---------------------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss...................................................... $ (5,607,745) $ (4,604,400) $ (30,062,374)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization............................... 378,525 297,692 1,385,881
Issuance of convertible debt for noncash consideration...... - - 905,000
Issuance of stock for noncash consideration................. - - 21,050
Purchase of short-term investments.......................... - - (3,997,171)
Compensation expense related to stock options............... 197,222 196,050 1,332,190
Loss on equipment retirements............................... - - 3,980
Changes in assets and liabilities:
Decrease (increase) in prepaid and other assets........... 170,065 126,381 (153,807)
Increase (decrease) in accounts payable and accrued
liabilities............................................... (13,901) (412,682) 1,103,342
Increase in deferred contract revenue..................... 500,000 419,985 1,419,970
-------------- ------------- ----------------
Net cash used in operating activities................... (4,375,834) (3,976,974) (28,041,939)
-------------- ------------- ----------------
Cash flows used in investing activities:
Purchases of short-term investments........................... (368,418) (2,995,802) (16,147,970)
Purchase of equipment, furniture, leasehold improvements
and other................................................... (385,287) (852,133) (4,535,447)
Purchase of certificates of deposit........................... - - (100,000)
-------------- ------------ ---------------
Net cash used in investing activities................... (753,705) (3,847,935) (20,783,417)
-------------- ------------ ---------------
Cash flows from financing activities:
Proceeds from notes payable and capital lease obligation...... - 723,990 2,030,823
Repayment of notes payable and capital lease obligation....... (221,766) (200,180) (1,065,823)
Advance on line of credit..................................... - - 750,000
Proceeds from issuance of preferred stock..................... - - 22,264,465
Proceeds from issuance of common stock........................ 4,324,359 200,362 39,239,717
-------------- ------------ ---------------
Net cash provided by financing activities............... 4,102,593 724,172 63,219,182
-------------- ------------ ---------------
Net increase (decrease) in cash and cash equivalents............ (1,026,946) (7,100,737) 14,393,826
Cash and cash equivalents, beginning of period.................. 15,420,772 18,175,356 -
-------------- ------------ ---------------
Cash and cash equivalents, end of period........................ $ 14,393,826 $ 11,074,619 $ 14,393,826
============== ============ ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest...................... $ 59,015 $ 71,216 $ 387,881
Supplemental schedule of noncash financing activity:
Issuance of convertible debt for technology................... $ - $ - $ 905,000
Conversion of debt to preferred and common stock.............. $ - $ - $ 1,786,000
</TABLE>
Page 5 of 12
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
GeneMedicine, Inc. (the "Company") is a Delaware corporation in the
development stage. The Company is developing non-viral gene therapies that may
provide unique clinical benefits in the treatment of a number of human diseases.
The Company's initial research programs are based on inventions by leading
scientists at Baylor College of Medicine ("Baylor") and the University of
California, San Francisco. The Company intends to develop its products through
alliances with major pharmaceutical and biotechnology companies.
The Company is a development stage company which has devoted substantially
all of its efforts to research and product development and has not yet generated
any revenues from the sale of products, nor is there any assurance of future
product revenues. In addition, the Company expects to continue to incur losses
for the foreseeable future, and there can be no assurance that the Company will
successfully complete the transition from a development stage company to
successful operations. The research and development activities engaged in by the
Company involve a high degree of risk and uncertainty. The ability of the
Company to successfully develop, manufacture and market its proprietary products
is dependent upon many factors. These factors include, but are not limited to,
the need for additional financing, the reliance on collaborative arrangements
for research and contractual agreements with corporate partners, and the ability
to develop or access manufacturing, sales and marketing experience. Additional
factors include uncertainties as to patents and proprietary technologies,
technological change and risk of obsolescence, development of products,
competition, government regulations and regulatory approval, and product
liability exposure. As a result of the aforementioned factors and the related
uncertainties, there can be no assurance of the Company's future success.
The accompanying interim financial statements are unaudited and reflect
all adjustments which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. These financial
statements should be read in conjunction with the Company's audited financial
statements included with the Company's Annual Report to Stockholders for the
year ended December 31, 1995.
Page 6 of 12
<PAGE>
GENEMEDICINE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to differences include,
but are not limited to, those discussed in this section and the Company's Form
10-K for the year ended December 31, 1995.
Since its inception in January 1992, GeneMedicine has devoted its
resources primarily to fund its research and development programs. The Company
has been unprofitable since inception and has not received any revenues from the
sale of products. No assurance can be given that the Company will be able to
generate sufficient product revenues to attain profitability on a sustained
basis or at all. The Company expects to incur substantial losses for the next
several years as it continues to invest in product research and development,
preclinical studies, clinical trials and regulatory compliance. At June 30,
1996, the Company's deficit accumulated during the development stage was
approximately $30.1 million.
RESULTS OF OPERATIONS
Revenues of $1.5 million and $3.0 million were recorded for the three and
six months ended June 30, 1996, respectively, which consisted primarily of
contract revenue of $1.0 million and $2.0 million, and interest income of $0.5
million and $1.0 million, respectively. These results compare with revenues of
$1.3 million and $2.3 million for the three and six months ended June 30, 1995,
which consisted of contract revenue of $1.0 million and $1.7 million, and
interest income of $0.3 million and $0.6 million, respectively. The contract
revenues in respective periods resulted from a corporate partnership with
Boehringer Mannheim, effective February 1995, to develop certain non-viral gene
medicines for application in the field of cancer. The increases in interest
income in 1996 compared to the same periods in 1995 were primarily the result of
higher average cash balances in 1996 due to the Company's follow-on public
offering in October 1995.
The Company's research and development expenses for the quarter ended June
30, 1996 were $3.2 million compared to $2.8 million for the second quarter of
1995. For the six months ended June 30, 1996, research and development expenses
increased to $6.8 million from $5.1 million for the same period in 1995. These
increases were generally due to the expansion of the Company's research and
development activities resulting in staffing increases and the related salary
and benefit costs, as well as additional laboratory supplies and other support
costs. The expansion of research and development activities is driven by
increased efforts in the cancer and insulin-like growth factor-I (IGF-I)
programs. The Company anticipates that expenditures will increase over the next
several years as it expands its research and product development efforts.
General and administrative expenses increased to $0.9 million for the
quarter ended June 30, 1996, from $0.8 million for the same period in 1995, and
to $1.8 million for the six months ended June 30, 1996, from $1.7 million for
the same period in 1995. These increases are due to the addition of
administrative support personnel in the fourth quarter of 1995.
Page 7 of 12
<PAGE>
Losses per share for the three and six months ended June 30, 1996 were
$0.21 and $0.45, respectively, as compared to losses per share of $0.27 and
$0.55 for the same periods in 1995. These decreases in loss per share are due to
an increase in average shares outstanding in 1996 primarily due to the Company's
follow-on public offering of three million shares in October 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through private sales of its equity securities, its initial and follow-on public
offerings and revenues from corporate alliances. Through June 30, 1996, the
Company had received approximately $61.3 million in net proceeds from sales of
its equity securities and $7.1 million from contract research payments. At June
30, 1996, the Company had working capital of $33.3 million and cash, cash
equivalents and short-term investments of $34.5 million.
The Company expects its cash requirements to increase significantly in
future periods. The Company will require substantial funds to conduct research
and development programs, preclinical studies and clinical trials of its
potential products, and to market with its partners any products that are
developed. In addition, the Company currently plans to manufacture clinical
scale quantities of its products, which will require the Company to expend
substantial additional capital. The Company's future capital requirements will
depend on many factors, including continued scientific progress in its research
and development programs, the scope and results of preclinical testing and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the costs involved in filing, prosecuting and enforcing patent claims, competing
technological developments, the cost of manufacturing and scale-up and effective
commercialization activities and arrangements. Based on its current plans, the
Company believes that its available cash, including proceeds from projected
interest income and committed funding from corporate partners, will be
sufficient to meet the Company's operating expenses and capital requirements
through mid-1999. 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 such
resources before such time. The Company intends to seek additional funding
through public or private financing, research and development arrangements with
potential corporate partners, or from other sources. There can be no assurance
that additional financing will be available on favorable terms, if at all. In
the event that adequate funding is not available, the Company may be required to
delay, reduce or eliminate one or more of its research or development programs,
or obtain funds through arrangements with corporate collaborators or others that
may require the Company to relinquish greater or all rights to product
candidates at an earlier stage of development or on less favorable terms than
the Company would otherwise seek. Insufficient financing also may require the
Company to relinquish rights to certain of its technologies that the Company
would otherwise develop or commercialize itself.
The Company's business is subject to significant risks, including, without
limitation, uncertainties associated with the length and expense of the
regulatory approval process and with obtaining and enforcing patents. Although
the Company's products may appear promising at an early stage of development,
they may not be successfully commercialized for a number of reasons, such as the
possibility that the potential products will be determined to be ineffective
during clinical trials, fail to receive necessary approvals, be uneconomical to
manufacture or market, or be precluded from commercialization by proprietary
rights of third parties. In addition, the failure by the Company to obtain
patent protection for its products may make certain of its products commercially
unattractive.
Page 8 of 12
<PAGE>
In October 1994, the Company became a party to a class action suit in the
U.S. District Court for the Southern District of New York (the "Court") which
alleged violations of certain federal laws primarily arising out of activities
of David Blech and D. Blech & Company, Inc. in connection with the public
offerings of certain securities, including that of the Company. Four class
action complaints were filed by different plaintiffs relating to the same
subject matter. GeneMedicine was named as a defendant in three of these actions.
The four complaints were superseded by an Amended Consolidated Class Action
Complaint (the "Amended Complaint") which was filed on or about March 27, 1995.
In June 1995, the Company and the other named defendants, including David Blech,
D. Blech & Company, Inc., the former chairman of the Board of the Company and 10
other biotechnology companies, moved to dismiss the Amended Complaint. On
November 9, 1995, oral argument on the motions to dismiss was heard by the
Court. In June 1996, the Court issued an opinion granting the Company's motion
to dismiss the complaint against it and granting plaintiffs leave to replead
within 20 days. Plaintiffs have since filed a second Amended Consolidated Class
Action Complaint which does not name the Company as a defendant.
Page 9 of 12
<PAGE>
GENEMEDICINE, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In October 1994, the Company became a party to a class action suit in the
U.S. District Court for the Southern District of New York (the "Court") which
alleged violations of certain federal laws primarily arising out of activities
of David Blech and D. Blech & Company, Inc. in connection with the public
offerings of certain securities, including that of the Company. Four class
action complaints were filed by different plaintiffs relating to the same
subject matter. GeneMedicine was named as a defendant in three of these actions.
The four complaints were superseded by an Amended Consolidated Class Action
Complaint (the "Amended Complaint") which was filed on or about March 27, 1995.
In June 1995, the Company and the other named defendants, including David Blech,
D. Blech & Company, Inc., the former chairman of the Board of the Company and 10
other biotechnology companies, moved to dismiss the Amended Complaint. On
November 9, 1995, oral argument on the motions to dismiss was heard by the
Court. In June 1996, the Court issued an opinion granting the Company's motion
to dismiss the complaint against it and granting plaintiffs leave to replead
within 20 days. Plaintiffs have since filed a second Amended Consolidated Class
Action Complaint which does not name the Company as a defendant.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of GeneMedicine, Inc. was held
on May 17, 1996.
(b) The matters voted upon at the meeting and the voting of
stockholders with respect thereto are as follows:
Proposal 1
The election of six directors to the Board of Directors to hold
office for the term specified pursuant to the proposal concerning
classified board of directors and until his successor is elected
and has qualified, or until such director's earlier death,
resignation or removal:
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
Edward L. Cahill 11,963,397 317,704
Stanley T. Crooke 11,963,397 317,704
David F. J. Leathers 11,963,397 317,704
Arthur M. Pappas 11,963,397 317,704
Eric Tomlinson 11,963,397 317,704
W. Leigh Thompson 11,963,397 317,704
</TABLE>
Page 10 of 12
<PAGE>
Proposal 2
Approval of the Company's Certificate of Incorporation and By-laws, as
amended, to provide for a classified Board of Directors and to limit the
ability of stockholders to remove a director without cause.
<TABLE>
<CAPTION>
<S> <C>
Votes in favor: 7,362,848
Votes against: 2,254,132
Abstentions: 98,450
</TABLE>
Proposal 3
Approval of the Company's Certificate of Incorporation and By-laws, as
amended, to eliminate the stockholder power to call special stockholders'
meetings and actions by written consent of the stockholders.
<TABLE>
<CAPTION>
<S> <C>
Votes in favor: 7,243,125
Votes against: 2,192,347
Abstentions: 263,659
</TABLE>
Proposal 4
Approval of Article IV of the Company's Certificate of Incorporation, as
amended, to add a Fair Price Provision relating to certain business
combinations.
<TABLE>
<CAPTION>
<S> <C>
Votes in favor: 7,544,189
Votes against: 2,150,856
Abstentions: 112,550
</TABLE>
Proposal 5
Ratification of the selection of Arthur Andersen, LLP as independent
auditors of the Company for its fiscal year ending December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Votes in favor: 12,276,281
Votes against: 23,260
Abstentions: 9,260
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
Page 11 of 12
<PAGE>
GENEMEDICINE, INC.
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.
GENEMEDICINE, INC.
Date: 08/08/96 By: /s/ John M. Dodson
____________________________
John M. Dodson
Director, Finance & Accounting
(on behalf of the Registrant and as the Registrant's
Principal Accounting Officer)
Page 12 of 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 14,393,826
<SECURITIES> 20,145,141
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,789,056
<PP&E> 3,142,459
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,938,360
<CURRENT-LIABILITIES> 1,439,072
<BONDS> 0
0
3,750
<COMMON> 12,882
<OTHER-SE> 34,564,416
<TOTAL-LIABILITY-AND-EQUITY> 37,938,360
<SALES> 0
<TOTAL-REVENUES> 3,041,703
<CGS> 0
<TOTAL-COSTS> 8,649,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,015
<INCOME-PRETAX> (5,607,745)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,607,745)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> 0
</TABLE>
