<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 September 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 October 21, 1996, there were outstanding 12,995,600 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 September 30, 1996 and December 31, 1995................ 3
Statements of Operations for the three and nine months ended September 30, 1996
and September 30, 1995, and for the period from inception (January 2, 1992)
through September 30, 1996................................................... 4
Statements of Cash Flows for the nine months ended September 30, 1996 and
September 30, 1995, and for the period from inception (January 2, 1992)
through September 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........................................................................ 11
</TABLE>
Page 2 of 11
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- ----------------
ASSETS (unaudited)
--------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................... $ 19,052,308 $ 15,420,772
Short-term investments.................................................. 13,670,710 19,776,723
Prepaid expenses and other.............................................. 277,178 420,154
------------ ------------
Total current assets............................................ 33,000,196 35,617,649
------------ ------------
Equipment, furniture and leasehold improvements, net............................ 3,035,226 3,135,697
Deposits and other assets....................................................... 8,395 6,845
------------ ------------
Total Assets.................................................................... $ 36,043,817 $ 38,760,191
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities................................ $ 920,719 $ 1,117,243
Deferred revenue........................................................ 721,133 --
Current portion of notes payable........................................ -- 79,344
Current portion of capital lease obligations............................ 373,679 308,641
------------ -----------
Total current liabilities....................................... 2,015,531 1,505,228
------------ -----------
Long-term Liabilities:
Deferred contract revenue............................................... 1,669,970 919,970
Capital lease obligations, net of current portion....................... 375,037 667,781
------------ -----------
Total long-term liabilities.................................... 2,045,007 1,587,751
------------ -----------
Stockholders' Equity:
Convertible preferred stock, $.001 par value; 20,000,000 shares
authorized; 3,750,000 issued and outstanding at September 30,
1996 and December 31, 1995, respectively........................ 3,750 3,750
Common stock, $.001 par value; 40,000,000 shares authorized;
12,990,314 and 12,036,415 shares issued and outstanding at
September 30, 1996 and December 31, 1995, respectively.......... 12,990 12,036
Additional paid in capital.............................................. 65,329,903 60,965,612
Deferred compensation................................................... (563,849) (859,557)
Deficit accumulated during the development stage........................ (32,799,515) (24,454,629)
---------- -----------
Total stockholders' equity...................................... 31,983,279 35,667,212
---------- -----------
Total Liabilities and Stockholders' Equity...................................... $ 36,043,817 $ 38,760,191
========== ===========
</TABLE>
Page 3 of 11
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
THREE MONTHS ENDED NINE MONTHS ENDED (JANUARY 2, 1992)
SEPTEMBER 30, SEPTEMBER 30, THROUGH
------------------------ --------------------- SEPTEMBER 30,
1996 1995 1996 1995 1996
------ ------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue............... $ 1,000,000 $ 999,999 $ 3,000,000 $ 2,679,999 $ 6,680,000
Research and development grant
revenue...................... -- -- 81,000 -- 206,000
Interest income................ 451,646 310,006 1,412,349 903,053 3,614,210
----------- ---------- ----------- ----------- ------------
Total revenues............. 1,451,646 1,310,005 4,493,349 3,583,052 10,500,210
Expenses:
Research and development....... 3,332,244 2,765,332 10,083,517 7,859,674 31,718,865
General and administrative..... 833,784 799,240 2,672,944 2,511,129 11,169,520
Interest expense............... 22,759 42,914 81,774 114,130 411,340
----------- ----------- ----------- ----------- ------------
Total expenses.............. 4,188,787 3,607,486 12,838,235 10,484,933 43,299,725
----------- ----------- ----------- ----------- ------------
Net loss.......................... $(2,737,141) $(2,297,481) $(8,344,886) $(6,901,881) $(32,799,515)
=========== =========== =========== =========== ============
Loss per share.................... $ (0.21) $ (0.26) $ (0.66) $ (0.81)
=========== =========== =========== ===========
Shares used in computing loss
per share....................... 12,943,509 8,872,592 12,665,290 8,552,079
=========== =========== =========== ===========
</TABLE>
Page 4 of 11
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED INCEPTION
SEPTEMBER 30, (JANUARY 2, 1992)
--------------------------- THROUGH
1996 1995 SEPTEMBER 30,
-------------- ------------ -------------------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss........................................................ $ (8,344,886) $ (6,901,881) $ (32,799,515)
Adjustment to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization.................................. 594,731 460,516 1,602,087
Issuance of convertible debt for noncash consideration......... - - 905,000
Issuance of stock for noncash consideration.................... - - 21,050
Purchase of short-term investments............................. - (2,007,202) (3,997,171)
Compensation expense related to stock options.................. 295,708 294,554 1,430,676
Loss on equipment retirements.................................. - - 3,980
Changes in assets and liabilities:
Decrease (increase) in prepaid and other assets.............. 141,426 (35,309) (182,446)
Increase (decrease) in accounts payable and accrued
liabilities................................................ (196,524) (236,612) 920,719
Increase in deferred revenue and deferred contract revenue... 1,471,133 669,985 2,391,103
---------- ---------- ----------
Net cash used in operating activities...................... (6,038,412) (7,755,949) (29,704,517)
---------- ---------- ----------
Cash flows used in investing activities:
Sales (purchases) of short-term investments..................... 6,106,013 - (9,673,539)
Purchase of equipment, furniture, leasehold improvements
and other...................................................... (494,260) (1,067,036) (4,644,420)
Purchase of certificates of deposit............................. - - (100,000)
---------- ---------- ----------
Net cash used in investing activities...................... 5,611,753 (1,067,036) (14,417,959)
---------- ---------- ----------
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......... (307,050) (304,777) (1,151,107)
Advance on line of credit....................................... - - 750,000
Proceeds from issuance of preferred stock....................... - - 22,264,465
Proceeds from issuance of common stock.......................... 4,365,245 3,920,268 39,280,603
---------- ---------- ----------
Net cash provided by financing activities.................. 4,058,195 4,339,481 63,174,784
--------- ---------- ----------
Net increase (decrease) in cash and cash equivalents............ 3,631,536 (4,483,504) 19,052,308
Cash and cash equivalents beginning of period................... 15,420,772 18,175,356 -
---------- ---------- ----------
Cash and cash equivalents, end of period........................ $ 19,052,308 $ 13,691,852 $ 19,052,308
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest....................... $ 81,774 $ 114,130 $ 410,640
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 11
<PAGE>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 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 11
<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, the Company 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
September 30, 1996, the Company's deficit accumulated during the development
stage was approximately $32.8 million.
RESULTS OF OPERATIONS
Revenues of $1.5 million and $4.5 million were recorded for the
three and nine months ended September 30, 1996, respectively, which consisted
primarily of contract revenue of $1.0 million and $3.0 million, and interest
income of $0.5 million and $1.4 million, respectively. These results compare
with revenues of $1.3 million and $3.6 million for the three and nine months
ended September 30, 1995, which consisted of contract revenue of $1.0 million
and $2.7 million, and interest income of $0.3 million and $0.9 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 September 30, 1996 were $3.3 million compared to $2.8 million for the
second quarter of 1995. For the nine months ended September 30, 1996,
research and development expenses increased to $10.1 million from $7.9
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 the progression of clinical
development 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.
For the quarter ended September 30, 1996, general and administrative
expenses of $0.8 million were flat compared to the same period in 1995.
General and administrative expenses of $2.7 million for the nine months ended
September 30, 1996 increased from $2.5 million for the same period in 1995.
This increase is due to higher general and administrative support costs in the
first and second quarters of 1996.
Page 7 of 11
<PAGE>
Losses per share for the three and nine months ended September 30,
1996 were $0.21 and $0.66, respectively, as compared to losses per share of
$0.26 and $0.81 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
completed 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
September 30, 1996, the Company had received approximately $61.4 million in
net proceeds from sales of its equity securities and $8.4 million from
contract research payments. At September 30, 1996, the Company had working
capital of $31.0 million and cash, cash equivalents and short-term investments
of $32.7 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 11
<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. The Company 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 11
<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. The Company 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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
Page 10 of 11
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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: 10/25/96 By: John M. Dodson
--------- -----------------------------------
John M. Dodson
Director, Finance & Accounting
(on behalf of the Registrant and as the
Registrant's Principal Accounting Officer)
Page 11 of 11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 19,052,308
<SECURITIES> 13,670,710
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,000,196
<PP&E> 3,035,226
<DEPRECIATION> 0
<TOTAL-ASSETS> 36,043,817
<CURRENT-LIABILITIES> 2,015,531
<BONDS> 0
0
3,750
<COMMON> 12,990
<OTHER-SE> 31,966,539
<TOTAL-LIABILITY-AND-EQUITY> 36,043,817
<SALES> 0
<TOTAL-REVENUES> 4,493,349
<CGS> 0
<TOTAL-COSTS> 12,838,235
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,774
<INCOME-PRETAX> (8,344,886)
<INCOME-TAX> 0
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<NET-INCOME> (8,344,886)
<EPS-PRIMARY> (0.66)
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