<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10Q
[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.
[_] 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 _________
MEGABIOS CORP.
(Exact name of registrant as specified in its charter)
Delaware 94-3156660
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
863A Mitten Rd., Burlingame, CA 94010
- ------------------------------- -----
(Address of principal offices) (Zip Code)
650-697-1900
- -------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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 [_] No [X]
The number of outstanding shares of the registrant's Common Stock , $.001 par
value, was 12,247,699 as of October 30, 1997.
----------
<PAGE>
MEGABIOS CORP.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Page
Item 1: Condensed Balance Sheets ................................................... 3
Condensed Statements of Operations.......................................... 4
Condensed Statements of Cashflows .......................................... 5
Notes to Condensed Financial Statements .................................... 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................ 8
PART II: OTHER INFORMATION
Item 1: Legal Proceedings .......................................................... 11
Item 2: Changes in Securities and Use of Proceeds .................................. 11
Item 3: Defaults Upon Senior Securities ............................................ 11
Item 4: Submission of Matters to a Vote of Security Holders ........................ 11
Item 5: Other Information .......................................................... 12
Item 6: Exhibits and Reports on Form 8-K ........................................... 13
Signatures ................................................................. 14
Exhibit Index .............................................................. 15
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS
MEGABIOS CORP.
CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 40,307 $ 9,044
Short-term investments 13,798 15,225
Other receivables 393 238
Prepaid expenses and other current assets 506 390
-------- --------
Total current assets 55,004 24,897
-------- --------
Property and equipment, net 5,471 4,733
Other receivables 26 27
Deposits and other assets 323 321
-------- --------
$ 60,824 $ 29,978
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 336 694
Accrued compensation 114 170
Accrued construction-in-progress - 249
Other accrued liabilities 196 35
Deferred revenue 701 887
Current portion of long-term debt 1,294 1,233
-------- --------
Total current liabilities 2,641 3,268
Long-term debt 1,964 1,487
Commitments
Stockholders' equity:
Preferred stock, no par value, issuable in series; 10,000,000
and 11,333,333 shares authorized at September 30,1997 and June 30,
1997, respectively; 0 and 8,420,720 and convertible shares issued and
outstanding at September 30, 1997 and June 30, 1997, respectively;
aggregate liquidation preference of $51,200 at June 30, 1997 - 44,700
Common stock, $.001 par value; 30,000,000 and 15,000,000 shares
authorized at September 30, 1997 and June 30, 1997, respectively;
12,661,767 and 1,567,727 shares issued and outstanding at September
30, 1997 and June 30, 1997, respectively 78,617 1,410
Deferred compensation, net of amortization (1,344) (679)
Accumulated deficit (21,054) (20,208)
-------- --------
Total stockholders' equity 56,219 25,223
-------- --------
$ 60,824 $ 29,978
======== ========
</TABLE>
See accompanying notes
Page 3 of 16
<PAGE>
MEGABIOS CORP.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
Collaborative research and development revenue $ 2,287 $ 1,471
Operating expenses:
Research and development 2,758 1,870
General and administrative 675 573
--------- ---------
Total operating expenses 3,433 2,443
--------- ---------
Loss from operations (1,146) (972)
Interest income 398 63
Interest expense (98) (98)
--------- ---------
Net loss $ (846) $ (1,007)
========= =========
Net loss per share $ (0.29) $ (0.23)
========= =========
Shares used in computing net loss per share 2,902 4,375
========= =========
Net loss per pro forma share $ (0.08) $ (0.10)
========= =========
Shares used in computing net loss
per pro forma share 10,082 9,863
========= =========
</TABLE>
See accompanying notes
Page 4 of 16
<PAGE>
MEGABIOS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (846) $ (1,007)
Adjustments to reconcile net loss to net cash used in operations
Depreciation 425 301
Amortization of deferred compensation 73 -
Changes in operating assets and liabilities:
Other receivables (155) (688)
Prepaid expenses and other assets (116) 49
Deferred revenues (186) 625
Accounts payable (607) (14)
Accrued liabilities 105 (2)
-------- --------
Net cash used in operating activities (1,307) (736)
-------- --------
Cash flows from investing activities
Purchase of property and equipment (1,163) (70)
Deposits and other assets (2) (3)
Purchases of short-term investments (4,073) -
Maturities of short-term investments 5,500 -
-------- --------
Net cash provided by (used in) investing activities 262 (73)
-------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt 872 252
Payments on long-term debt (334) (274)
Proceeds from issuance of convertible preferred stock, net - 9,998
Subscription receivable for issuance of convertible preferred stock - (9,449)
Proceeds from issuance of common stock, net 31,770 3
-------- --------
Net cash provided by financing activities 32,308 530
-------- --------
Net increase (decrease) in cash and cash equivalents 31,263 (279)
Cash and cash equivalents, beginning of period 9,044 5,253
-------- --------
Cash and cash equivalents, end of period 40,307 4,974
======== ========
Supplemental disclosure of cash flow information
Interest paid 98 97
======== ========
</TABLE>
See accompanying notes
Page 5 of 16
<PAGE>
MEGABIOS CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed financial statements are unaudited and have been
prepared by the Company in accordance with the rules and regulations of the
Securities and Exchange Commission for interim financial information and in
accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain information and footnote disclosures normally included in the
Company's annual financial statements as required by generally accepted
accounting principles have been condensed or omitted. The interim financial
statements, in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair statement of the results for the
interim periods ended September 30, 1997 and 1996.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year,
although the Company expects to incur a substantial loss for the year ended
June 30, 1998. These interim financial statements should be read in conjunction
with the audited financial statements for the year ended June 30, 1997, which
are contained in the Company's Registration Statement on Form S-1 (No.
333-32593) dated September 15, 1997 filed with the Securities and Exchange
Commission.
2. REVENUE RECOGNITION
Revenue related to collaborative research agreements with the Company's
corporate partners is recognized over the related funding periods for each
contract. The Company is required to perform research and development
activities as specified in each respective agreement on a best-efforts basis.
The Company is reimbursed based on the costs associated with the number of full
time equivalent employees working on each specific contract.
3. NET LOSS PER COMMON SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares are excluded from the computation
as their effect is antidilutive, except that, pursuant to the Securities and
Exchange Commission ("SEC") Staff Accounting Bulletins, common and common
equivalent shares (stock options and convertible preferred stock) issued during
the 12-month period prior to the filing of a registration statement in
connection with the Company's initial public offering at prices below the public
offering price of $12.00 have been included in the calculation as if they were
outstanding for all periods presented through June 30, 1997 (using the treasury
stock method for stock options at the estimated public offering price, and the
"if-converted" method for convertible preferred stock).
Page 6 of 16
<PAGE>
Net loss per pro forma share for the three months ended September 30,
1997 and 1996 has been computed as described above and also gives effect to
the conversion of convertible preferred shares not included above that
automatically converted upon completion of the Company's initial public
offering (using the "if converted" method) from original date of issuance.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share", which modifies
the way in which earnings per share are calculated and disclosed. SFAS is
effective for financial statements for periods ending after December 15, 1997.
The adoption of SFAS 128 is not expected to have a material impact on the
Company's earnings per share calculation.
4. PUBLIC OFFERING OF COMMON STOCK
On September 15, 1997, the Company completed an initial public offering
of 2,500,000 shares of its common stock at $12.00 per share. On September 29,
1997, the underwriters of the initial public offering exercised their
over-allotment option and purchased an additional 375,000 shares at $12.00 per
share. The Company anticipates using the net proceeds of $31.4 million (after
deducting underwriting discounts and offering expenses) to fund research and
development programs, leasehold improvements to its facility, capital equipment
purchases, working capital and general corporate purposes. Concurrent with the
Company's initial public offering, all shares of preferred stock then
outstanding were converted into common stock.
Page 7 of 16
<PAGE>
ITEM II.
MEGABIOS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" in
the Company's Registration Statement on Form S-1, File no. 333-32593, filed
September 15, 1997.
Megabios Corp. (the "Company") develops proprietary gene delivery
systems and provides preclinical development expertise to create gene-based
therapeutics designed for the treatment or prevention of genetic and acquired
diseases. The Company has developed several in vivo, non-viral gene delivery
systems to address a number of potential therapeutic applications using a
variety of therapeutic genes. The Company's clinical development and
commercialization strategy is to enter into corporate partnerships with
pharmaceutical and biotechnology companies. The Company has established
corporate partnerships with Glaxo Wellcome plc ("Glaxo"), Pfizer Inc
("Pfizer") and Eli Lilly and Company ("Lilly"). To date, substantially all
revenue has been generated by collaborative research and development revenue
from corporate partners, and no revenue has been generated from product sales.
Under its corporate partnerships the Company receives research and development
funding on a quarterly basis in advance of payment of associated research and
development costs. The Company expects that future revenue will be derived in
the short-term from research and development revenue and milestone payments
and in the long-term from royalties on product sales.
The Company has incurred significant losses since inception and expects
to incur substantial losses for the foreseeable future, primarily due to the
expansion of its research and development programs and because the Company does
not expect to generate revenue from the sale of products in the foreseeable
future, if at all. The Company expects that operating results will fluctuate
from quarter to quarter and that such fluctuations may be substantial. As of
September 30, 1997, the Company's accumulated deficit was approximately $21.1
million.
Page 8 of 16
<PAGE>
RESULTS OF OPERATIONS
The Company's revenue from corporate partnerships was approximately $2.3
million and $1.5 million for the three months ended September 30, 1997 and
1996, respectively. The 1997 revenue was attributable to amounts earned for
research and development performed under the Company's corporate partnerships
with Pfizer and Lilly. The 1996 revenue was attributable to amounts earned for
research and development performed under the Company's corporate partnerships
with Glaxo and Pfizer. No revenue from milestones have been earned under any
corporate partnership to date.
Research and development expenses increased to $2.8 million in the three
months ended September 30, 1997 from $1.9 million for the same period in 1996.
The increase was primarily attributable to increases in personnel and payroll
expenses, increased purchases of laboratory supplies and materials, increased
depreciation from additional equipment and leasehold improvements and the
increased use of consultants and other services to support the Company's
increased research and development activities. The Company expects research
and development expenses to increase as the Company continues to expand its
research and development programs.
General and administrative expenses increased to $675,000 in the three
months ended September 30, 1997 from $573,000 for the same period in 1996. The
increase was primarily attributable to increased consulting, legal,
professional, travel and other expenses associated with increased business
development activities. The Company expects general and administrative
expenses to increase due to business development activities and to expenses
incurred as a publicly-traded company.
Interest income increased to $398,000 in the three months ended September
30, 1997 from $63,000 for the same period in 1996. Increase in interest income
resulted from the increase in average cash and investment balances primarily
as a result of the proceeds from the Company's recent private financings and
the initial public offering. Interest expense was $98,000 for the three months
ended September 30, 1997 consistent with $98,000 for the same period in
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the sale of equity securities, research and development funding provided under
corporate partnerships and equipment and leasehold improvement financing. The
Company's near-term operating requirements include increased research and
development expenditures associated with the expansion of its research and
development programs. The Company's capital spending program includes planned
leasehold improvements to the Company's facilities and the purchase of capital
equipment to be used primarily in the Company's pilot manufacturing facility.
The Company expects to finance these cash needs with its existing cash and
investments, together with interest thereon, future payments to be received
under its existing corporate partnerships, and facilities and equipment
financing.
Page 9 of 16
<PAGE>
Net cash used in the Company's operations increased to $1.3 million for the
three months ended September 30, 1997 from $736,000 for the same period in 1996.
The increase was primarily due to an increase in research and development
activities. The Company's capital expenditures for the three months ended
September 30, 1997 was $1.2 million and $70,000 for the same period in 1996.
As of September 30, 1997, the Company had $54.1 million in cash, cash
equivalents and short-term investments compared to $24.3 million as of June 30,
1997.
On September 15, 1997, the Company completed its initial public offering
of 2,500,000 shares of common stock at $12.00 per share. In addition, on
September 29, 1997, the Company's underwriters exercised their over-allotment
option and purchased an additional 375,000 shares of the Company's common
stock at $12.00 per share. The combined net proceeds raised from the offering
was $31.4 million.
The Company anticipates that its existing resources, including the net
proceeds of this offering, committed funding from existing corporate
partnerships and projected interest income, will enable the Company to
maintain its current and planned operations through fiscal 1999. However,
there can be no assurance that the Company will not require additional funding
prior to such time. The Company's future capital requirements will depend on
many factors, including scientific progress in its research and development
programs, the size and complexity of such programs, the scope and results of
preclinical studies and clinical trials, the ability of the Company to
establish and maintain corporate partnerships, the time and costs involved in
obtaining regulatory approvals, the time and costs involved in filing,
prosecuting and enforcing patent claims, competing technological and market
developments, the cost of manufacturing preclinical and clinical materials and
other factors not within the Company's control. There can be no assurance that
additional financing to meet the Company's funding requirements will be
available on acceptable terms or at all. If additional funds are raised by
issuing equity securities, substantial dilution to existing stockholders may
result. Insufficient funds may require the Company to delay, scale back or
eliminate some or all of its research or development programs or to relinquish
greater or all rights to products at an earlier stage of development or on
less favorable terms than the Company would otherwise seek to obtain.
Page 10 of 16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings:
------------------
None
ITEM 2. Changes in Securities and Use of Proceeds:
------------------------------------------
The effective date of the Company's registration statement, filed on
Form S-1 filed under the Securities Act of 1933 (No. 333-32593), was
September 15, 1997 (the "Registration Statement"). The class of
securities registered was Common Stock. The offering commenced on
September 15, 1997 and all securities were sold in the offering. The
managing underwriters for the offering were Montgomery Securities and
Hambrecht & Quist LLC.
Pursuant to the Registration Statement, the Company sold 2,875,000
shares of its Common Stock for an aggregate offering price of
$34,500,000.
The Company incurred expenses of approximately $3.1 million of which
$2.4 million represented underwriting discounts and commissions and
$700,000 represented other expenses. All such expenses were direct or
indirect payments to others. The net offering proceeds to the Company
after total expenses was $31.4 million.
The Company has not used any of the net proceeds from the offering.
All net proceeds have been invested in cash, cash equivalents and
short-term investments. The use of the proceeds from the offering
does not represent a material change in the use of the proceeds
described in the prospectus.
ITEM 3. Defaults Upon Senior Securities:
--------------------------------
None
ITEM 4. Submission of Matters to a Vote of Security Holders:
----------------------------------------------------
In September 1997, in connection with the preparation for its initial
public offering (the "IPO"), the Company solicited the written consent
of its shareholders with respect to various matters. The matters for
which shareholder consent was solicited were as follows:
PROPOSAL 1: The amendment of the Company's Fifth Amended and Restated
Articles of Incorporation (the "Restated Articles") prior to the IPO to
effectuate a 1-for-3 reverse stock split of the outstanding shares of
the Company's Capital Stock.
Page 11 of 16
<PAGE>
PROPOSAL 2: Approval of the amendment and restatement of the Company's
1993 Stock Option Plan (the "Stock Plan") to increase the number of
shares reserved under the Stock Plan and adopt certain other changes to
address recent development in the federal securities and tax laws.
PROPOSAL 3: Approval of the adoption of the Company's Employee Stock
Purchase Plan.
PROPOSAL 4: The reincorporation of the Company from California to
Delaware in connection with its IPO and approval of the Company's
Certificate of Incorporation, as amended, to be effective upon the
closing of the IPO, to effectuate the following: (i) eliminate the
provisions relating to the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock following the conversion
of such Preferred Stock to Common Stock upon the closing of the IPO;
(ii) decrease the total number of authorized shares of the Company's
Preferred Stock from 11,333,000 to 10,000,000; and (iii) adopt certain
shareholder protection measures.
PROPOSAL 5: Approval of the Company's Delaware Bylaws to be effective
upon the closing of the IPO to include shareholder protection measures
that correspond to those set forth in the Certificate of Incorporation,
as amended above, and to effect certain other changes.
PROPOSAL 6: Approval of the form of indemnity agreement to be entered
into between the Company and its officers and directors.
The voting of shareholders with respect to each of the foregoing
proposals was as follows:
CONSENTS RECEIVED CONSENTS NOT RECEIVED
----------------- ---------------------
24,513,764 4,789,580
---
ITEM 5. Other Information:
------------------
None
Page 12 of 16
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K:
---------------------------------
a. Exhibits
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant in effect after the closing of the Initial
Public Offering.
3.2(1) Bylaws of the Registrant.
4.2(1) Specimen Stock Certificate.
11.1 Computation of Net Loss Per Share.
27 Financial Data Schedule (Exhibit 27 is submitted as an
exhibit only in the electronic format of this Quarterly
Report on Form 10-Q submitted to the Securities and
Exchange Commission).
b. Reports on Form 8-K
None
- -------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-32593)
Page 13 of 16
<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.
Megabios Corp.
Date: November 13, 1997 /s/ Patrick G. Enright
------------------------
Patrick G. Enright
CFO and Senior Vice President
(Principal Financial and Accounting
Officer)
Page 14 of 16
<PAGE>
MEGABIOS CORP.
EXHIBIT INDEX
Page
11.1 Statement Re: Computation of Earnings Per Share 16
27 Financial Data Schedule (Exhibit 27 is submitted
as an exhibit only in the electronic format of
this Quarterly Report on Form 10-Q submitted to
the Securities and Exchange Commission).
Page 15 of 16
<PAGE>
Exhibit 11.1
MEGABIOS CORP.
STATEMENT RE CALCULATION OF NET LOSS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1997 1996
-------- --------
<S> <C> <C>
Net Loss $ (846) $ (1,007)
======== ========
Weighted average shares of common stock outstanding: 2,902 1,372
Shares related to staff accounting bulletin topic 4D:
Stock option - 336
Preferred stock - 2,667
-------- --------
Shares used in computing net loss per share: 2,902 4,375
======== ========
Net loss per share $ (0.29) $ (0.23)
======== ========
Calculation of shares outstanding for computing pro
forma net loss per share:
Shares used in computing net loss per share 2,902 4,375
Adjustment to reflect the effect
of the assumed conversion of preferred
stock from the date of issuance 7,180 5,488
-------- --------
Shares used in computing net loss per pro forma share 10,082 9,863
======== ========
Net loss per pro forma share $ (0.08) $ (0.10)
======== ========
Page 16 of 16
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 40,307
<SECURITIES> 13,798
<RECEIVABLES> 393
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55,004
<PP&E> 9,071
<DEPRECIATION> 3,600
<TOTAL-ASSETS> 60,824
<CURRENT-LIABILITIES> 2,641
<BONDS> 0
0
0
<COMMON> 78,617
<OTHER-SE> (22,398)
<TOTAL-LIABILITY-AND-EQUITY> 60,824
<SALES> 0
<TOTAL-REVENUES> 2,287
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,433
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> (846)
<INCOME-TAX> 0
<INCOME-CONTINUING> (846)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (846)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> 0
</TABLE>
