<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, 1997
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)
(281) 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 29, 1997, there were outstanding 13,831,309 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
PAGE NO.
--------
COVER PAGE....................................................................1
TABLE OF CONTENTS.............................................................2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of September 30, 1997 and December 31, 1996............3
Statements of Operations for the three and nine months ended September
30, 1997 and September 30, 1996, and for the period from inception
(January 2, 1992) through September 30, 1997.............................4
Statements of Cash Flows for the nine months ended September 30, 1997
and September 30, 1996, and for the period from inception
(January 2, 1992) through September 30, 1997.............................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
Page 2 of 11
<PAGE>
<TABLE>
<CAPTION>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<S> <C> <C>
September 30, December 31,
1997 1996
------------ ------------
ASSETS (unaudited)
------
Current Assets:
Cash and cash equivalents............................................ $ 2,258,359 $ 2,145,404
Short-term investments............................................... 24,715,833 28,726,602
Prepaid expenses and other........................................... 325,888 170,453
------------ ------------
Total current assets................................................. 27,300,080 31,042,459
------------ ------------
Equipment, furniture and leasehold improvements, net.................... 3,373,040 2,998,416
Deposits and other assets............................................... 9,195 8,395
------------ ------------
Total Assets............................................................ $ 30,682,315 $ 34,049,270
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities............................. $ 920,135 $ 1,352,762
Deferred revenue..................................................... 139,489 179,489
Notes payable and current portion of capital lease obligations....... 287,830 408,387
------------ ------------
Total current liabilities.......................................... 1,347,454 1,940,638
------------ ------------
Long-term Liabilities:
Deferred contract revenue............................................ 2,669,970 1,919,970
Capital lease obligations, net of current portion.................... 90,516 259,393
------------ ------------
Total long-term liabilities....................................... 2,760,486 2,179,363
------------ ------------
Commitments
Stockholders' Equity:
Convertible preferred stock, $.001 par value; 20,000,000 shares
authorized; 3,750,000 issued and outstanding........................ 3,750 3,750
Common stock, $.001 par value; 40,000,000 shares authorized;
13,803,404 and 13,077,369 shares issued and outstanding............. 13,803 13,077
Additional paid in capital........................................... 70,060,586 65,485,846
Deferred compensation................................................ (174,937) (465,803)
Deficit accumulated during the development stage..................... (43,328,827) (35,107,601)
------------ ------------
Total stockholders' equity......................................... 26,574,375 29,929,269
------------ ------------
Total Liabilities and Stockholders' Equity.............................. $ 30,682,315 $ 34,049,270
============ ============
Page 3 of 11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
(unaudited)
Inception
Three months ended Nine months ended (January 2, 1992)
September 30, September 30, through
--------------------------------- ---------------------------------- September 30,
1997 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue............... $ 1,000,000 $ 1,000,000 $ 3,500,000 $ 3,000,000 $ 11,180,000
Research and development
grant revenue................. 120,000 - 509,000 81,000 1,356,644
Interest income................ 406,143 451,646 1,272,552 1,412,349 5,336,231
------------ ------------ ------------ ------------ ------------
Total revenues.............. 1,526,143 1,451,646 5,281,552 4,493,349 17,872,875
Expenses:
Research and development....... 3,299,805 3,332,244 10,068,103 10,083,517 45,431,038
General and administrative..... 1,192,736 833,784 3,384,489 2,672,944 15,286,725
Interest expense............... 13,394 22,759 50,186 81,774 483,939
------------ ------------ ------------ ------------ ------------
Total expenses.............. 4,505,935 4,188,787 13,502,778 12,838,235 61,201,702
------------ ------------ ------------ ------------ ------------
Net loss......................... $ (2,979,792) $ (2,737,141) $ (8,221,226) $ (8,344,886) $(43,328,827)
============ ============ ============ ============ ============
Loss per share................... $ (0.22) $ (0.21) $ (0.60) $ (0.66)
============ ============ ============ ============
Shares used in computing
loss per share.................. 13,800,544 12,943,509 13,656,360 12,665,290
============ ============ ============ ============
Page 4 of 11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GENEMEDICINE, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Inception
Nine months ended (January 2, 1992)
September 30, through
------------------------------- September 30,
1997 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss.................................................................. $ (8,221,226) $ (8,344,886) $ (43,328,827)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization............................................. 727,924 594,731 2,543,689
Issuance of convertible debt for noncash consideration.................... - - 905,000
Issuance of stock for noncash consideration............................... - - 21,050
Purchases of short-term investments....................................... - - (3,997,171)
Compensation expense related to stock plans............................... 290,866 295,708 1,819,588
Loss on equipment retirements............................................. - - 5,293
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and other assets................. (156,235) 141,426 (231,956)
Increase (decrease) in accounts payable and accrued liabilities.......... (432,627) (196,524) 920,135
Increase in deferred revenue and deferred contract revenue............... 710,000 1,471,133 2,809,459
-------------- ------------- -------------
Net cash used in operating activities................................... (7,081,298) (6,038,412) (38,533,740)
-------------- ------------- -------------
Cash flows used in investing activities:
Purchase of equipment, furniture and leasehold improvements............... (1,102,548) (494,260) (5,925,149)
Sales (purchases) of short-term investments............................... 4,010,769 6,106,013 (20,718,662)
Purchase of certificates of deposit....................................... - - (100,000)
-------------- ------------- -------------
Net cash used in investing activities................................... 2,908,221 5,611,753 (26,743,811)
-------------- ------------- -------------
Cash flows from financing activities:
Prceeds from notes payable and capital lease obligations.................. - - 2,030,823
Repayment of notes payable and capital lease obligations.................. (289,434) (307,050) (1,521,477)
Advance on line of credit................................................. - - 750,000
Proceeds from issuance of preferred stock, net............................ - - 22,264,465
Proceeds from issuance of common stock, net............................... 4,575,466 4,365,245 44,012,099
-------------- ------------- -------------
Net cash provided by financing activities............................... 4,286,032 4,058,195 67,535,910
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents....................... 112,955 3,631,536 2,258,359
Cash and cash equivalents, beginning of period............................. 2,145,404 15,420,772 -
-------------- ------------- -------------
Cash and cash equivalents, end of period................................... $ 2,258,359 $ 19,052,308 $ 2,258,359
============== ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................................. $ 50,186 $ 81,774 $ 483,239
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
Page 5 of 11
</TABLE>
<PAGE>
GENEMEDICINE, INC.
(A Delaware Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION:
GeneMedicine, Inc. ("GeneMedicine" or 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 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 ability to establish and maintain collaborative arrangements for
research, development and commercialization of products 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 on Form 10-K for the year
ended December 31, 1996.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". The Company will
adopt the provisions of the new statement, changing from its current method of
accounting for net loss per share as set forth in APB Opinion No. 15, for
interim and annual periods ending after December 15, 1997. Adoption of Statement
No. 128 will require retroactive revision of the presentation of net loss per
share in historical financial statements. The Company's net loss per share
amounts presented in the accompanying financial statements as calculated under
the provisions of APB Opinion No. 15 would have remained unchanged had basic net
loss per share under Statement No. 128 been presented. Additionally, net loss
per share amounts as presented herein would also have remained unchanged had
diluted net loss per share under the provisions of Statement No. 128 been
presented, since the Company's outstanding stock options would not have been
included in the calculation because their effect would have been anti-dilutive.
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. Actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include, but
are not limited to, the early stage of GeneMedicine, Inc.'s development and
technological uncertainty, dependence on collaborative partners and licenses,
the failure of existing or future partnerships to be successful, future capital
needs and uncertainty of additional funding, uncertainty of patent protection,
uncertainty of government regulatory requirements, level of competition and
rapid technological change, as well as those set forth in this section and in
the section entitled "Risk Factors" and elsewhere in the Company's Form 10-K for
the year ended December 31, 1996.
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 to date 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,
1997, the Company's accumulated deficit was approximately $43.3 million.
RESULTS OF OPERATIONS
Revenues of $1.5 million and $5.3 million were recorded for the three and
nine months ended September 30, 1997, respectively, which consisted primarily of
contract revenue of $1.0 million and $3.5 million, and interest income of $0.4
million and $1.3 million, respectively. These results compare with revenues of
$1.5 million and $4.5 million 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. Contract revenues in respective periods resulted from a corporate
partnership with Boehringer Mannheim Group, a part of Corange International Ltd.
("Boehringer Mannheim") to develop certain non-viral gene medicines to treat
selected cancer indications. The increase in contract revenue in the first nine
months of 1997 compared to the same period in 1996 was due to the receipt of a
$0.5 million milestone payment from Boehringer Mannheim for achieving clearance
from the U.S. Food and Drug Administration to commence a Phase I clinical trial
using the Company's IL-2 Gene Medicine which GeneMedicine is developing for the
treatment of head and neck cancer.
The Company's research and development expenses for the three and nine
months ended September 30, 1997were $3.3 million and $10.1 million,
respectively. Research and development expenses for the three and nine months
ended September 30, 1997 remained relatively unchanged compared to the same
periods in 1996. The Company anticipates that research and development
expenditures will increase over the next several years as it continues to expand
its research and product development efforts.
General and administrative expenses increased to $1.2 million for the
quarter ended September 30, 1997, from $0.8 million for the same period in 1996,
and to $3.4 million for the nine months ended September 30, 1997, from $2.7
million for the same period in 1996. These increases were due to the combination
of (i) costs associated with the recruitment and relocation of two of the
Company's officers, and (ii) increased professional fees related to business
development and investor relations efforts.
Page 7 of 11
<PAGE>
Losses per share for the three and nine months ended September 30, 1997
were $0.22 and $0.60, respectively, as compared to losses per share of $0.21 and
$0.66 for the same periods in 1996. The decrease in the Company's loss per share
for the nine months ended September 30, 1997 was primarily the result of an
increased average number of shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through private and public sales of its equity securities and contract research
payments from its corporate alliance with Boehringer Mannheim. Through September
30, 1997, the Company had received approximately $67 million in net proceeds
from sales of its equity securities and $13.9 million in contract research and
milestone payments from its corporate alliance with Boehringer Mannheim. At
September 30, 1997, the Company had working capital of $26.0 million and cash,
cash equivalents and short-term investments of $27.0 million. In addition, in
October 1997 the Company received a $1.25 million contract research payment from
Boehringer Mannheim.
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 the ability to establish and maintain
collaborative arrangements for research, development and commercialization of
products with corporate partners, continued scientific progress in the Company's
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 the ability to establish and maintain 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 Boehringer Mannheim, will be sufficient to meet the
Company's operating expenses and capital requirements into the second half of
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 research and
development arrangements with potential corporate partners, public or private
financing, 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 may also 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, uncertainty associated with obtaining and enforcing
patents and risks associated with dependence on corporate partners. 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
Page 8 of 11
<PAGE>
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.
Further, there can be no assurance that any collaboration will be continued or
result in successfully commercialized products.
Page 9 of 11
<PAGE>
GENEMEDICINE, INC.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
Page 10 of 11
<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: 11/5/97 By: /s/ JOHN M. DODSON
-------- ---------------------------
John M. Dodson
Director, Finance & Accounting
(on behalf of the Registrant and
as the Registrant's Chief Accounting
Officer)
Page 11 of 11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,258,359
<SECURITIES> 24,715,833
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,300,080
<PP&E> 3,373,040
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,682,315
<CURRENT-LIABILITIES> 1,347,454
<BONDS> 0
0
3,750
<COMMON> 13,803
<OTHER-SE> 26,556,822
<TOTAL-LIABILITY-AND-EQUITY> 30,682,315
<SALES> 0
<TOTAL-REVENUES> 5,281,552
<CGS> 0
<TOTAL-COSTS> 13,452,592
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,186
<INCOME-PRETAX> (8,221,226)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,221,226)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
