<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended JUNE 30, 1997
Commission file number 000-21215
PROGENITOR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1344193
(State or other jurisdiction (I.R.S.employer
of incorporation or organization) identification number)
4040 CAMPBELL AVENUE
MENLO PARK, CA 94025
(650) 617-0880
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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 ______ No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at September 15, 1997
----- ---------------------------------
<S> <C>
Common Stock, $.001 par value 13,401,731 shares
</TABLE>
<PAGE> 2
PROGENITOR, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets -
June 30, 1997 and September 30, 1996 3
Statements of Operations -
3 months and 9 months ended June 30, 1997 and June 30, 1996,
and May 8, 1992 (Date of Inception) to June 30, 1997 4
Statements of Cash Flows -
9 months ended June 30, 1997 and June 30, 1996,
and May 8, 1992 (Date of Inception) to June 30, 1997 5
Notes to 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 34
Item 2. Changes in Securities and Use of Proceeds 34
Item 3. Defaults upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
JUNE 30, 1997 SEPTEMBER 30,
(UNAUDITED) 1996
--------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49,907 $ 22,315
Accounts receivable 175,498 175,498
Prepaid expenses and other current assets 176,325 120,827
--------------------------------
Total current assets 401,730 318,640
--------------------------------
Property and equipment, at cost: 1,953,729 1,216,219
Less accumulated depreciation (896,001) (674,847)
--------------------------------
1,057,728 541,372
Notes receivable from officers, net 58,286 59,645
Convertible bridge promissory note 3,244,895 --
Deferred offering and acquisition costs 2,132,141 --
--------------------------------
Total assets $ 6,894,780 $ 919,657
================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 846,245 $ 446,915
Accrued expenses 2,239,375 1,361,615
Capital lease obligations - current 368,926 265,155
--------------------------------
Total current liabilities 3,454,546 2,073,685
--------------------------------
Note payable - parent 8,738,783 3,443,050
Convertible debenture - parent 504,949 475,677
Bridge loan - parent 3,246,834
Capital lease obligations 563,314 91,706
--------------------------------
Total liabilities 16,508,426 6,084,118
--------------------------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, Series A, $.01 par value: 2,120,000
shares authorized; 2,020,496 shares issued and
outstanding as of June 30, 1997 and September 30,
1996 20,205 20,205
Preferred stock, Series B, $.01 par value: 880,000
shares authorized; 349,000 shares issued and
outstanding as of June 30, 1997 and September 30,
1996 3,490 3,490
Common stock, Class A, $.001 par value: 39,000,000
shares authorized; 2,887,217 and 2,885,904 shares
issued and outstanding as of June 30, 1997 and
September 30, 1996, respectively 2,887 2,886
Additional paid-in capital 14,972,322 14,966,792
Deficit accumulated during development stage (24,612,550) (20,157,834)
--------------------------------
Total stockholders' deficit (9,613,646) (5,164,461)
--------------------------------
Total liabilities and stockholders' deficit $ 6,894,780 $ 919,657
================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 8, 1992
(DATE OF
THREE MONTHS ENDED NINE MONTHS ENDED INCEPTION)
JUNE 30, JUNE 30, TO JUNE 30,
--------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 232,120 $ 237,608 $ 1,091,487 $ 1,149,570 $ 5,245,239
Operating expenses:
Research and development 1,147,244 952,741 3,297,623 2,658,473 19,402,413
General and administrative 469,065 476,738 1,695,125 1,167,274 7,481,608
--------------------------------------------------------------------------------------------
Total operating expenses 1,616,309 1,429,479 4,992,748 3,825,747 26,884,021
--------------------------------------------------------------------------------------------
Nonrecurring expense 973,525
Interest expense:
Capital lease 17,317 12,896 39,648 48,188 205,937
Debt to parent 249,062 34,492 513,807 55,933 1,794,306
--------------------------------------------------------------------------------------------
Net loss $ (1,650,568) $ (1,239,259) $ (4,454,716) $ (2,780,298) $(24,612,550)
============================================================================================
Net loss per share $ (0.57) $ (0.43) $ (1.53) $ (0.97)
=========================================================================
Shares used in computing net
loss per share 2,919,982 2,885,544 2,919,326 2,856,962
=========================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 8, 1992 (DATE OF
JUNE 30, INCEPTION) TO JUNE 30,
-------------------------------------------------------
1997 1996 1997
-------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,454,716) $ (2,780,298) $(24,612,550)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 221,154 216,790 1,262,908
Gain on sale of equipment -- (30,729) (23,247)
Noncash expense for antidilution stock issuances -- -- 376,680
Changes in operating assets and liabilities:
Notes receivable officers, net 1,359 (33,488) (58,286)
Accounts receivable -- 6,134 (175,498)
Accounts receivable - parent -- 131,600 --
Prepaid expenses and other current assets (55,498) (151,440) (176,325)
Accounts payable 399,330 164,770 719,984
Accrued expenses (195,670) (284,130) 1,165,945
Accrued interest - parent 513,807 55,933 1,766,359
-------------------------------------------------------
Cash used in operating activities (3,570,234) (2,704,858) (19,754,030)
-------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (206,217) (73,599) (1,693,834)
Proceeds from sale of equipment -- 54,000 54,000
Advances under convertible bridge promissory note (3,244,895) -- (3,244,895)
-------------------------------------------------------
Cash used in investing activities (3,451,112) (19,599) (4,884,729)
=======================================================
Cash flows from financing activities:
Proceeds from note payable - parent 4,813,137 1,742,677 19,670,671
Proceeds from convertible debenture - parent -- -- 436,740
Proceeds from bridge loan - parent 3,244,895 -- 3,244,895
Deferred offering and acquisition costs (1,058,711) (450,252) (1,058,711)
Proceeds from issuance of stock, net 5,531 351,126 1,994,125
Proceeds from sale leaseback 295,381 117,325 1,163,079
Principal payments on capital lease obligation (251,295) (182,142) (762,133)
-------------------------------------------------------
Cash provided by financing activities 7,048,938 1,578,734 24,688,666
-------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 27,592 (1,145,723) 49,907
-------------------------------------------------------
Cash and cash equivalents, beginning of period 22,315 1,173,743 --
-------------------------------------------------------
Cash and cash equivalents, end of period $ 49,907 $ 28,020 $ 49,907
=======================================================
Supplemental disclosure of cash flow information:
Cash paid for interest, net $ 39,648 $ 48,188 $ 205,937
=======================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Basis of Presentation
Progenitor, Inc. ("Progenitor" or the "Company"), a Delaware
corporation, is a functional genomics company engaged in the discovery and
functional characterization of genes to identify therapeutic targets for the
treatment of major diseases.
The unaudited financial statements included herein have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
accompanying unaudited financial statements include all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows of the Company. The financial
statements included herein should be read in conjunction with the audited
financial statements and the notes thereto included in the Company's initial
public offering (the "Offering") prospectus dated August 6, 1997. Results for
the interim period are not necessarily indicative of the results for any other
interim period or for the full fiscal year.
The Company will adopt Statement of Financial Accounting Standards No.
128, Earnings per share ("SFAS 128") in the quarter ending December 31, 1997.
SFAS 128 requires the Company to change its method of computing, presenting and
disclosing earnings per share information. Upon adoption, all prior periods
presented will be restated to conform to the provisions of SFAS 128.
Management has not determined the effect of adopting SFAS 128.
2. Net Loss per Share
Net loss per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock
options and warrants are excluded from the computation as their effect is
anti-dilutive, except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin, common and common equivalent shares issued at prices
below the Offering price during the 12 months immediately preceding the filing
date of an Offering have been included in the calculation as if they were
outstanding for all periods presented prior to and including the date of the
Offering (using the treasury stock method and an Offering price of $7.00 per
unit, with $5.375 of such price allocated to each share of common stock).
3. Subsequent Events
In July 1997, the Company entered into an option agreement with
Interneuron Pharmaceuticals, Inc. ("Interneuron") on the Company's Del-1 gene
discovery. Under the agreement, Interneuron received a right of first refusal
to acquire an exclusive royalty-bearing
6
<PAGE> 7
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
right to manufacture, use and sell the technology on terms to be negotiated.
In the event the Company grants such rights to a third party, the Company must
share fees, milestone payments and royalties with Interneuron. Should the
Company develop and sell the technology independently, the Company will pay
Interneuron royalties on net sales. The option agreement terminates upon the
expiration of the last to expire of any issued patent that might issue relating
to the licensed technology, or upon the conclusion of a license agreement with
Interneuron. In exchange for receiving the option, Interneuron paid the
Company $1 and relinquished its right to receive certain minimum returns on its
Series A Preferred Stock through the quarter which ended April 7, 1997. This
relinquishment made by Interneuron may be deemed taxable to the Company.
In July 1997, the Company amended and restated its Certificate of
Incorporation to give effect to a 1-for-2 reverse-stock split. All references
to common shares, underlying stock options, warrants and per share data have
been restated to reflect the reverse stock split.
In August 1997, the Company and Interneuron entered into an agreement
whereby Interneuron agreed to forgive effective immediately prior to
consummation of the Offering a convertible debenture, a Note, and a Bridge Loan
payable to Interneuron. The total balance forgiven, including accrued interest,
was approximately $13.9 million. Interneuron also agreed to forgive effective
immediately prior to consummation of the Offering all remaining minimum
adjustments to the conversion ratio of the Company's Series A Preferred Stock
that had not been previously relinquished.
In August 1997, the Company purchased Mercator Genetics, Inc.
("Mercator") for approximately $22.0 million in common stock (the
"Acquisition"). The Acquisition occurred simultaneously in connection with the
Offering. A Convertible Bridge Promissory Note payable to the Company by
Mercator, with a balance of $3.8 million upon the date of the Acquisition,
became part of the purchase price consideration for Mercator. The Company
incurred approximately $1.9 million in legal, accounting, printing and related
costs to complete the Acquisition, and assumed approximately $3.0 million in
Mercator liabilities.
In August 1997, the Company completed an Offering for 2,750,000 units
at $7.00 per unit, resulting in net proceeds to the Company of approximately
$16.4 million. Each unit consists of one share of the Company's common stock,
par value $0.001 per share, and one Warrant to purchase one share of common
stock. The units separated immediately upon issuance. All outstanding shares
of Series A and B Preferred Stock were automatically converted into shares of
common stock upon the closing of the Offering. Simultaneously with the initial
closing of the Offering, the Company sold 1,023,256 shares of common stock to
Amgen Inc. for $5.375 per share, in exchange for $4.5 million in cash and a
$1.0 million promissory note, and sold 25,000 shares of common stock at $2.69
per share to the Ohio University Foundation for $67,000 in cash, pursuant to a
stock purchase right. In September 1997, the Underwriters exercised a portion
of the over-allotment option granted to them in connection with the Offering
and purchased an additional 125,000 units at $7.00 per unit, resulting in net
proceeds to the Company of approximately $800,000.
7
<PAGE> 8
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion is intended to assist in the understanding
and assessment of significant changes and trends related to the results of
operations and financial condition of Progenitor, Inc., ("Progenitor" or the
"Company"). This discussion and analysis should be read in conjunction with
the Company's Unaudited Financial Statements and Notes thereto included herein
and with the Financial Statements and Notes thereto included in the Company's
Prospectus dated August 6, 1997, relating to the Company's initial public
offering (the "Prospectus").
In addition to historical information, the following management's
discussion and analysis includes certain forward-looking statements regarding
events and financial trends which may affect the Company's future operating
results and financial position. These forward-looking statements include but
are not limited to statements regarding: future sources of revenue;
uncertainty of product development; uncertainty of additional funding; use of
the proceeds of the Offering; costs of the Acquisition; and liquidity and
capital resources. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
The forward-looking statements included herein are also subject to a
number of other risks and uncertainties that could cause the Company's actual
results and financial position to differ materially from those anticipated in
the forward-looking statements. Such risks and uncertainties include, but are
not limited to: uncertainties relating to the technological approaches of the
Company; history of operating losses and anticipation of future losses;
uncertainty of product development; need for additional capital and uncertainty
of additional funding; dependence on collaborators and licensees; intense
competition and rapid technological change; uncertainty of patents and
proprietary rights; management of growth, and risks of acquiring new
technologies; risks associated with the acquisition of Mercator; uncertainties
related to clinical trials; government regulation and uncertainty of obtaining
regulatory approval; dependence on key personnel; dependence on research
collaborators and scientific advisors; control of the Company by, and potential
conflicts of interest with, Interneuron; uncertainty of health care reform
measures and third-party reimbursement; risk of product liability; no trading
market prior to the Offering, no assurance of an active trading market and
potential volatility of trading prices; possible delisting from the Nasdaq
National Market and market illiquidity; redemption of Warrants; current
prospectus required to exercise the Warrants; anti-takeover considerations;
hazardous and radioactive materials and environmental matters; management
discretion as to use of proceeds of the Offering; and the absence of dividends.
Due to the foregoing factors, it is possible that in some future period the
Company's results of operations may be below the expectations of public market
analysts and investors. These and other risks and uncertainties related to the
Company's business are described in detail in the Prospectus and below in " --
Factors That May Affect the Company's Future Results and the Market Price of
the Company's Securities."
8
<PAGE> 9
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
A development stage company, Progenitor was incorporated in February
1992 and commenced operations in May 1992. Progenitor has devoted
substantially all of its resources since inception to research and development
programs. To date, all of Progenitor's revenues have resulted from payments
from collaborators and licensees and a grant from the U.S. Department of
Commerce's National Institute of Standards and Technology Advanced Technology
Program ("ATP") that was awarded to Progenitor in November 1994. Royalties,
payments from collaborators, license fees, payments under governmental grants
and investment income, in each case, if any, are expected to be the only
sources of revenue for the foreseeable future. Certain payments under
collaborative and license arrangements are contingent upon the Company meeting
certain milestones. Payments under collaborative or licensing arrangements, if
any, will be subject to significant fluctuation in both timing and amount and
therefore the Company's results of operations for any period may not be
comparable to the results of operations for any other period. The Company has
not yet received any royalties or other revenues from the sale of products or
services and does not expect to receive any revenues from sales of products for
the next several years, if at all. As of June 30, 1997, Progenitor had a total
stockholders' deficit of $9.6 million, including an accumulated deficit of
$24.6 million.
Significant discovery, research and development efforts will be
required prior to the time any of the Company's gene discoveries may lead to
product candidates or result in products that may be brought to the market, if
at all. Products, if any, resulting from the Company's research and
development programs are not expected to be commercially available for a number
of years, if at all, even if any are successfully developed and proven safe and
effective. Significant additional research and development efforts and
extensive preclinical studies and clinical trials will be required prior to
submission of any regulatory application for commercial use. See
" -- Factors That May Affect the Company's Future Results and the Market Price
of the Company's Securities -- Uncertainty of Product Development."
Interneuron Pharmaceuticals, Inc. ("Interneuron") provided the initial
funding of Progenitor and had invested $21.9 million in Progenitor in equity
and debt financings through June 30, 1997. Interneuron has no obligation to
invest any additional funds in the Company, and the Company does not expect
Interneuron to do so. Progenitor raised an additional $1.6 million in net
proceeds through a private placement of Preferred Stock in fiscal 1995. In
August 1997, the Company completed an initial public offering (the "Offering")
of 2,750,000 units (the "Units"). Each Unit consists of one share of the
Company's Common Stock, par value $0.001 per share ("Common Stock"), and one
Warrant to purchase one share of Common Stock ("Warrant"). The Units separated
immediately upon issuance. Simultaneously with the closing of the Offering,
the Company sold 1,023,256 shares of Common Stock to Amgen Inc. (the "Amgen
Shares") for $5.375 per share pursuant to a stock purchase agreement, and
25,000 shares of Common Stock to The Ohio University Foundation for $2.69 per
share, pursuant to a stock
9
<PAGE> 10
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
purchase right. See " -- The Offering." The Company intends to seek
additional funding through public or private equity or debt financing and
collaborative and license arrangements. There can be no assurances, however,
that additional financing will be available when needed, or that, if available,
such financing will be available on terms acceptable to the Company. See " --
Factors That May Affect the Company's Future Results and the Market Price of
the Company's Securities -- Need For Additional Capital; Uncertainty of
Additional Funding."
On February 14, 1997, Progenitor entered into an Agreement and Plan of
Reorganization (the "Acquisition Agreement") with Mercator Genetics, Inc.
("Mercator"), whereby a wholly-owned subsidiary of Progenitor was to merge with
and into Mercator (the "Acquisition"). The Acquisition was completed in August
1997, simultaneously with the closing of the Offering. Pursuant to the
Acquisition, Progenitor issued 3,443,337 shares of Common Stock in exchange for
all outstanding shares of Mercator stock.
The Offering
In August 1997, the Company completed the Offering. The net proceeds
to the Company of the Offering were approximately $16.4 million. In addition,
in September 1997, the Underwriters of the Offering exercised a portion of the
over-allotment option granted to them in connection with the Offering and
purchased an additional 125,000 Units, resulting in net proceeds to the Company
of approximately $800,000. The Company intends to use the net proceeds of the
Offering, together with the $4.6 million in cash proceeds received from sale of
the Amgen Shares and the sale of 25,000 shares of Common Stock to The Ohio
University Foundation, primarily for research and development. In addition,
the Company intends to use a portion of such net proceeds as follows: (i)
approximately $1.0 million to pay expenses relating to employee benefit and
retention plans relating to the Acquisition; and (ii) approximately $1.0
million relating to legal, accounting and other costs relating to the
Acquisition and related Form S-4 registration statement. The Company expects
to consolidate its operations in California, and, in connection with such
consolidation, to use approximately $2.5 million of such net proceeds to
facilitate employee relocation, and $500,000 of such net proceeds for other
costs such as benefit costs, the consolidation of operations, the elimination
of duplicate systems and facilities, and other integration costs. The Company
anticipates using the balance of such net proceeds for the expansion or upgrade
of facilities, acquisition of equipment and for working capital and other
general corporate purposes. The Company also may use such proceeds for other
purposes, including the acquisition of technology rights, products, equipment,
businesses or assets of other companies.
The Company's Series A and Series B Preferred Stock was automatically
converted into Common Stock upon the Closing of the Offering into a total of
3,074,767 shares of Common Stock. The terms of the Series A and Series B
Preferred Stock provided that, upon such an offering, the conversion ratio
would be adjusted so that the holders would receive a minimum return of 35%
annually, commencing July 7, 1995.
10
<PAGE> 11
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Interneuron relinquished its right to seven minimum return adjustments
on its shares of Series A Preferred Stock, of which it is the sole holder, in
exchange for an option agreement dated as of July 2, 1997 related to the
Company's Del-1 protein discovery ("Del-1"). As a result of the option
agreement, Interneuron relinquished its right to receive minimum return
adjustments on its Series A Preferred Stock through April 7, 1997. See "--
Interneuron Option Agreement."
Interneuron also agreed to recapitalize a portion of its investment in
the Company such that (i) Interneuron was not be entitled to receive the
remaining minimum return adjustments to the conversion ratio of the Company's
Series A Preferred Stock; and (ii) Interneuron contributed to the Company's
capital all outstanding balances of intercompany loans from Interneuron to
Progenitor.
In addition to these agreements, Interneuron purchased 500,000 Units in
the Offering. As a result, Interneuron beneficially owns approximately 37% of
the Company's Common Stock. Accordingly, Interneuron is and may continue to be
the Company's largest stockholder. See "-- Factors That May Affect the
Company's Future Results and the Market Price of the Company's Securities --
Control of Company By, and Potential Conflicts of Interest With, Interneuron."
Upon the closing of the Offering, the minimum return adjustments on
the Series A and Series B Preferred Stock were treated for accounting purposes
as a dividend to the preferred holders in the form of 435,121 additional shares
of Common Stock to be issued, and 1,850,163 shares of Common Stock the issuance
of which was relinquished or contributed to the capital of the Company by
Interneuron. In accordance with generally accepted accounting principles, this
dividend will increase the net loss attributable to holders of Common Stock by
approximately $12.3 million for the year ended September 30, 1997.
Effects of Acquisition and Offering
In connection with the Acquisition, the Company expects to incur
several nonrecurring charges in the quarter ended September 30, 1997, which in
the aggregate are currently estimated to be approximately $31.0 million,
including the write-off of $27.0 million in costs related to the purchase of
in-process research and development, $1.0 million for severance, retention and
bonus programs, $2.5 million to facilitate employee relocation, and $500,000
for other costs such as benefit costs, the consolidation of operations, the
elimination of duplicate systems and facilities, and other integration costs.
Factors that could increase such costs include any unexpected employee
turnover, unforeseen delays in consolidating duplicate facilities once the
Acquisition has been completed and the associated costs of hiring temporary
employees and consultants, and
11
<PAGE> 12
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
any additional fees and charges to obtain consents, regulatory approvals or
permits. As a result of the Acquisition, the Company added approximately 35
new employees, and therefore expects substantial increases in the costs of
salaries, benefits, laboratory supplies and incidental items in future periods.
In addition, the Company will likely incur material additional costs associated
with being a public reporting entity. Such increases in costs will primarily
relate to communication with stockholders, insurance and annual financial
reporting costs. See " -- Factors That May Affect the Company's Future Results
and the Market Price of the Company's Securities -- Risks Associated with the
Acquisition of Mercator."
Interneuron Option Agreement
Interneuron relinquished its right to seven minimum return adjustments
on its shares of Series A Preferred Stock, of which it is the sole holder, in
exchange for an option agreement dated as of July 2, 1997 related to Del-1.
Pursuant to this option agreement, Interneuron received a right of first
refusal to acquire an extensive, worldwide license to manufacture, use and sell
certain technology related to Del-1 on terms to be negotiated. In the event
that Progenitor grants such rights to a third party, the Company must share
fees, milestone payments and royalties with Interneuron. Should the Company
develop and sell the technology independently, the Company will pay Interneuron
royalties on net sales. Thus, should the Company license or sell the
technology to a third party, royalty payments will be paid to Interneuron.
Because the amount of revenue to be shared or royalties to be paid depends upon
the future development and success of the technology and the structure of any
future sale or license agreement, it is not currently possible to estimate the
future effect of the option on the Company. The Company is not required to
pursue the development of Del-1 and does not expect the payments to be made to
Interneuron if Del-1 is successfully developed to be material to its total cost
of developing Del-1. In addition, Del-1 is only one of a number of discoveries
generated from the Company's genomics system.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1997
Revenues for the three months ended June 30, 1996 and 1997 were
$238,000 and $232,000, respectively. These revenues consist primarily of
revenues recognized under the Company's ATP grant.
Research and development expense increased from $953,000 to $1.1
million for the three months ended June 30, 1996 as compared to the three months
ended June 30, 1997. The increase is largely due to costs associated with
additional sponsored research agreements entered into during the three months
ended June 30, 1997, as well as due to the addition of scientific staff and
annual salary increases.
12
<PAGE> 13
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General and administrative expenses decreased slightly from $477,000
for the three months ended June 30, 1996 to $469,000 for the three months ended
June 30, 1997. The decrease is due to legal fees that were incurred related to
the Offering that were capitalized. In addition, legal fees incurred related
to general corporate activities were lower.
Interest expense increased from $47,000 for the three months ended
June 30, 1996 to $266,000 for the three months ended June 30, 1997. The
increase is due to the increased borrowings under the promissory note payable
to Interneuron.
Nine Months Ended June 30, 1996 and 1997
Revenues for the nine months ended June 30, 1996 and 1997 were $1.1
million. For the first nine months of 1996, Progenitor recognized $500,000 in
revenues pursuant to the collaboration agreement with Chiron, and also
recognized revenues totaling $576,000 under the Company's ATP grant. For the
first nine months of fiscal 1997, Progenitor recognized $500,000 in revenue as a
result of entering into a license agreement with Amgen, and $527,000 of revenues
related to Progenitor's ATP grant.
Research and development expense increased from $2.7 million for the
nine months ended June 30, 1996 to $3.3 million for the nine months ended June
30, 1997. The increase was due to the addition of scientific staff and related
recruiting costs, annual salary increases, costs associated with additional
sponsored research agreements entered into during September 1996, and increased
costs and expenses associated with patent filings and license and collaborative
agreements in process.
General and administrative expenses increased from $1.2 million for
the nine months ended June 30, 1996 to $1.7 million for the nine months ended
June 30, 1997. The increase is due primarily to new administrative personnel,
and overall salary increases.
Interest expense increased from $104,000 for the nine months ended
June 30, 1996 to $553,000 for the nine months ended June 30, 1997, primarily as
a result of increased borrowings under the promissory note payable to
Interneuron.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had cash balances of $50,000. Since
inception, the Company has received revenues of approximately $5.2 million from
corporate collaborators, licensees and government grants. In addition, the
company raised approximately $2.0 million in private financings, and $1.2
million in sale-leaseback transactions. The remainder of the Company's cash
needs of $21.9 million have been satisfied by debt and equity financings from
Interneuron, provided on an as-needed basis. As a result of the Offering and
the sale of the Amgen Shares, the Company has available cash balances of
approximately $20.9 million as of
13
<PAGE> 14
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
September 15, 1997. The Company has not received financing from Interneuron
since the Offering, nor does it expect to receive additional financing from
Interneuron in the future.
The Company expects negative cash flow from operations to continue for
the foreseeable future. The Company will require substantial additional funds
to continue research and development, conduct preclinical studies and clinical
trials, conduct activities relating to commercialization of rights it has
retained in collaborative or license agreements, if any, and expand
administrative capabilities. The Company estimates that, at its planned rate
of spending, its existing cash and cash equivalents, together with the net
proceeds from the Offering, the proceeds from the sale of the Amgen Shares, and
the interest income earned on such proceeds (collectively, the "Proceeds"),
will be sufficient to meet its funding requirements for approximately the next
17 months. In order to achieve this result, however, the Company will need to
closely manage the rate of expenditures for all of its research programs.
Although the Company anticipates that such Proceeds will be sufficient to meet
its funding requirements for its primary research programs for approximately
the next 17 months, the Company will be required to curtail the expansion of,
or to reduce the level of expenditures for, certain of its other research
programs, in the future or to seek corporate collaborations with respect to
such programs at an earlier stage than would be required if the Company had
greater financial resources or obtain other funding. There can be no assurance
that any such corporate collaboration will be obtained on terms favorable to
the Company or at all or that any such funding will be available on terms
favorable to the Company or at all. There can be no assurance, however, that
the Company's assumptions regarding its future levels of expenditures and
operating losses will prove accurate. The Company's future funding
requirements will depend on many factors, including any expansion or
acceleration of the Company's research and development programs; the results of
research and development, preclinical studies and clinical trials conducted by
the Company or its collaborative partners or licensees, if any; the acquisition
and licensing of products and technologies or businesses, if any; the Company's
ability to establish and maintain corporate relationships and academic
collaborations; the Company's ability to integrate the operations of Mercator;
the Company's ability to manage growth; competing technological and market
developments; the time and costs involved in filing, prosecuting, defending and
enforcing patent and intellectual property claims; the receipt of licensing or
milestone fees from any current or future collaborative and licensing
arrangements, if established; the continued funding of governmental research
grants; the timing of regulatory approvals, if any; and other factors. To the
extent undertaken by the Company, the time and costs involved in conducting
preclinical studies and clinical trials, seeking regulatory approvals, and
scaling-up manufacturing and commercialization activities also would increase
the Company's funding requirements.
The Company will need to raise substantial additional capital to fund
operations. Prior to the Offering, Interneuron funded substantially all of
Progenitor's operations. Interneuron, however, is under no obligation to
provide, and the Company does not expect that Interneuron will provide, any
additional funds in the future. The Company intends to seek additional funding
through public or private equity or debt financing and collaborative
arrangements. There can be
14
<PAGE> 15
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
no assurance that additional financing will be available when needed, or that,
if available, such financing will be available on terms acceptable to the
Company. If additional funds are raised by issuing equity securities, dilution
to existing stockholders will result. In addition, in the event that
additional funds are obtained through collaborative or license arrangements,
such arrangements may require the Company to relinquish rights to certain of
its technologies or potential products that it would otherwise seek to develop
or commercialize itself. If funding is insufficient at any time in the future,
the Company may be required to delay, scale back or eliminate some or all of
its research and development programs or cease operations. See
" -- Factors That May Affect the Company's Future Results and the Market Price
of the Company's Securities -- Need For Additional Capital; Uncertainty of
Additional Funding."
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting
for Stock-Based Compensation," which establishes an alternative method of
accounting for employee stock compensation plans based on a fair value
methodology. However, the statement allows an entity to continue to use the
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company will adopt the disclosure requirements of SFAS No. 123
in fiscal year 1997, but will elect to continue to measure compensation cost
following the accounting prescribed in APB Opinion No. 25.
FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS AND THE MARKET PRICE OF
THE COMPANY'S SECURITIES
Uncertainties Relating to the Technological Approaches of the Company.
To date, the Company has not developed or commercialized any products. There
can be no assurance that the Company's genomics approaches will enable it to
discover genes with functions relevant to the treatment of diseases. There is
limited scientific understanding relating to the role of genes in diseases and
relatively few products based on genetic discoveries have been developed and
commercialized to date. Accordingly, even if the Company is successful in
identifying genes associated with specific diseases, there can be no assurance
that the Company will be successful in marketing its discoveries to
biopharmaceutical firms for use in the development of therapeutic and
diagnostic products or that any such resulting products will be commercialized
successfully.
The development of products based on the Company's discoveries also
will be subject to the risks of failure inherent in the development of products
based on new technologies. These risks include the possibility that any such
products will be found to be ineffective or toxic, or otherwise fail to receive
necessary regulatory approvals; that any such products will be difficult to
manufacture on a commercial scale or will be uneconomical to market; that
proprietary rights of third parties will preclude the Company or its licensees
and collaborators from marketing any such products; or that third parties will
market superior or equivalent products. As a result, there can be no assurance
that the Company's research and development activities or those of its
15
<PAGE> 16
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
licensees and collaborators will result in any commercially viable products.
See "-- Uncertainty of Patents and Proprietary Rights."
Genomics, biotechnology, developmental biology, disease genetics and
pharmaceutical technologies have undergone and are expected to continue to
undergo rapid and significant change. The Company's future success will depend
in large part on its ability to maintain a competitive position with respect to
these technologies. Rapid technological developments by the Company or others
may result in the Company's technologies becoming obsolete before the Company
recovers any expenses it incurs in connection with its related development
programs. See "--Intense Competition; Rapid Technological Change."
History of Operating Losses; Anticipation of Future Losses.
Progenitor is a development stage company that commenced operations in May
1992. As of June 30, 1997, Progenitor had an accumulated deficit of
approximately $24.6 million and a working capital deficit of approximately $3.1
million and is continuing to incur losses. In connection with the Acquisition,
the Company expects to incur several nonrecurring charges in the quarter and
fiscal year ending September 30, 1997 which in the aggregate are currently
estimated to be approximately $31.0 million, including the write-off of costs
related to the purchase of in-process research and development, severance,
employee retention and relocation, other employee benefit costs, the
consolidation of operations, the elimination of duplicate systems and
facilities, and other integration costs. These amounts are preliminary
estimates only and could be materially higher. Factors that could increase
such costs include any unexpected employee turnover, unforeseen delays in
addressing duplicate facilities once the Acquisition has been completed and the
associated costs of hiring temporary employees and consultants, and any
additional fees and charges to obtain consents, regulatory approvals or
permits. In addition, there can be no assurance that the Company will not
incur additional charges in subsequent periods to reflect other costs
associated with the Acquisition or from the integration of operations after the
Acquisition. Neither the Company nor any of its collaborative partners or
licensees has yet developed products that have generated any revenues to the
Company or entered clinical trials that would lead to revenues to the Company
if successful. To date, all of the Company's revenues have resulted from
payments from collaborative and license agreements and a development grant from
a governmental agency. The Company expects to incur substantial additional
losses over the next several years as it expands its research and development
activities. Payments from collaborators and licensees, payments under
governmental grants and investment income are expected to be the only sources
of revenue for the foreseeable future. The Company has not yet generated any
revenues from the achievement of milestones under its corporate agreements.
Royalties or other revenues from commercial sales of products, if any, are not
expected for a number of years. To achieve profitable operations, the Company,
alone or with others, must successfully discover and functionally characterize
medically relevant genes and thereafter use these discoveries to develop
products, conduct preclinical studies and clinical trials, obtain required
regulatory approvals and successfully manufacture, introduce and market such
products. There can be no assurance that any of these requirements will be
met. The time
16
<PAGE> 17
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
required to reach or sustain profitability is highly uncertain and there can be
no assurance that the Company will be able to achieve profitability on a
sustained basis, if at all. Moreover, if profitability is achieved, the level
of profitability cannot be predicted and may vary significantly from quarter to
quarter. See " -- Risks Associated with the Acquisition of Mercator."
Uncertainty of Product Development. Significant discovery, research
and development efforts will be required prior to the time any of the Company's
gene discoveries may lead to product candidates or result in products that may
be brought to the market. Products, if any, resulting from the Company's
research and development programs are not expected to be commercially available
for a number of years. Significant additional research and development efforts
and extensive preclinical studies and clinical trials will be required prior to
submission of any regulatory application for commercial use. There can be no
assurance that the Company or any collaborator or licensee will be permitted to
undertake clinical trials of any potential products, if developed, that
sufficient numbers of patients can be enrolled for such trials, or that such
clinical trials will demonstrate that the products tested are safe and
efficacious. Even if clinical trials are successful, there can be no assurance
that the Company or any collaborator or licensee will obtain regulatory
approval for any product, that an approved product can be produced and
distributed in commercial quantities at reasonable costs or gain acceptance for
use by physicians and other health care providers, or that any potential
products will be marketed successfully at prices that would permit the Company
to operate profitably. The failure of any of these events to occur could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Need for Additional Capital; Uncertainty of Additional Funding. The
Company expects negative cash flow from operations to continue for the
foreseeable future. The Company will require substantial additional funds to
continue research and development, conduct preclinical studies and clinical
trials, conduct activities relating to commercialization of rights it has
retained in corporate agreements, if any, and expand administrative
capabilities. The Company estimates that at its planned rate of spending,
existing cash and cash equivalents, together with the net proceeds from the
Offering, the proceeds from the sale of the Amgen Shares, and the interest
income earned on such proceeds (collectively, the "Proceeds"), will be
sufficient to fund operations for approximately the next 17 months. In order
to achieve this result, however, the Company will need to closely manage the
rate of expenditures for all of its research programs. Although the Company
anticipates that such Proceeds will be sufficient to meet its funding
requirements for its primary research programs for approximately the next 17
months, the Company will be required to curtail the expansion of, or to reduce
the level of expenditures for, certain of its other research programs, or to
seek corporate collaborations with respect to such programs at an earlier stage
than would be required if the Company had greater financial resources or obtain
other funding. There can be no assurance that any such corporate collaborations
will be obtained on terms favorable to the Company or at all or that any such
funding will be available on terms favorable to the Company or at all.
17
<PAGE> 18
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
There can be no assurance that the Company's assumptions regarding its
future levels of expenditures and operating losses will prove accurate. The
Company's future funding requirements will depend on many factors, including
any expansion or acceleration and the breadth of the Company's research and
development programs; the results of research and development, preclinical
studies and clinical trials conducted by the Company or its collaborative
partners or licensees, if any; the acquisition and licensing of products and
technologies or businesses, if any; the Company's ability to establish and
maintain corporate relationships and academic collaborations; the Company's
ability to integrate the operations of Mercator; the Company's ability to
manage growth; competing technological and market developments; the time and
costs involved in filing, prosecuting, defending and enforcing patent and
intellectual property claims; the receipt of licensing or milestone fees from
any current or future collaborative and license arrangements, if established;
the continued funding of governmental research grants; the timing of regulatory
approvals; and other factors. To the extent undertaken by the Company, the
time and costs involved in conducting preclinical studies and clinical trials,
seeking regulatory approvals, and scaling-up manufacturing and
commercialization activities also would increase the Company's funding
requirements.
The Company will need to raise substantial additional capital to fund
future operations. Prior to the Offering, Interneuron has funded substantially
all of the Company's operations. Interneuron, however, is under no obligation
to provide, and the Company does not expect that Interneuron will provide, any
additional funds in the future. The Company intends to seek additional funding
through public or private equity or debt financing and from collaborators and
licensees. There can be no assurance that additional financing will be
available when needed, or that, if available, such financing will be available
on terms acceptable to the Company. If additional funds are raised by issuing
equity securities, dilution to existing stockholders will result. In addition,
in the event that additional funds are obtained through arrangements with
collaborators or licensees, such arrangements may require the Company to
relinquish rights to certain of its technologies or potential products that it
would otherwise seek to develop or commercialize itself. If funding is
insufficient at any time in the future, the Company may be required to delay,
scale back or eliminate some or all of its research and development programs or
cease operations.
Dependence on Collaborators and Licensees. The Company's strategy for
development and commercialization of drugs and other products from its
discoveries depends upon the establishment of corporate relationships. The
Company expects to rely on these relationships in order to research and develop
potential products, conduct preclinical studies and clinical trials, obtain
regulatory approvals, and manufacture and market any resulting products. The
Company has entered into agreements with Amgen, Chiron Corporation ("Chiron")
and Novo Nordisk A/S ("Novo Nordisk"). The Company's revenues will be
dependent on the success of the products developed through these and future
corporate relationships. The failure of the Company's collaborators and
licensees to develop, obtain regulatory approval for, and market products
incorporating the Company's discoveries would have a material adverse effect on
the Company's business, financial condition and results of operations. There
can be no assurance that any
18
<PAGE> 19
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
collaborators and licensees will commit sufficient development resources,
technology, regulatory expertise, manufacturing, marketing and other resources
towards developing, promoting and commercializing products incorporating the
Company's discoveries. Further, competitive conflicts may arise among these
third parties that could prevent them from working cooperatively with the
Company. The amount and timing of resources devoted to these activities by such
parties could depend on the achievement of milestones by the Company and
generally will be controlled by such parties. In addition, the Company's
corporate agreements generally provide the Company's collaborators and licensees
with the right to terminate the agreement in part or in full under certain
circumstances. Any such termination would substantially reduce the likelihood
that the applicable product candidate or candidates would be developed, would
obtain regulatory approvals and would be manufactured and successfully
commercialized and any such termination could, therefore, have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's milestone payments or royalties from sales of
products by collaborators or licensees, if any, may be less than the revenues
the Company could have generated had it commercialized and marketed products
itself. There can be no assurance that the Company will be successful in
establishing additional or maintaining existing collaborative or licensing
arrangements, that any collaborators or licensees will be successful in
developing and commercializing products or that the Company will receive
milestone payments or generate revenues from royalties sufficient to offset the
Company's significant investment in research and development and other costs. If
the Company chooses in the future to engage directly in the development,
manufacturing and marketing of certain products, it will require substantial
additional funds, personnel and production and other facilities. There can be
no assurance that any of these resources will be available to the Company on
acceptable terms, if at all. See " -- Need for Additional Capital; Uncertainty
of Additional Funding."
Intense Competition; Rapid Technological Change. Research in the
field of genomics is highly competitive. Competitors of the Company in the
genomics area include, among others, public companies such as Genome
Therapeutics Corp., Human Genome Sciences, Inc., Incyte Pharmaceuticals, Inc.,
Microcide Pharmaceuticals, Inc., Millennium Pharmaceuticals, Inc.
("Millennium"), Myriad Genetics, Inc. and Sequana Therapeutics, Inc., as well
as private companies and major pharmaceutical companies and universities and
other research institutions, including those receiving funding from the
federally funded Human Genome Project. A number of entities are attempting to
rapidly identify and patent randomly-sequenced genes and gene fragments. In
addition, certain other entities are pursuing a gene identification,
characterization and product development strategy based on gene mapping. The
Company's competitors may discover, characterize or develop important genes in
advance of the Company, which could have a material adverse effect on any
related Company discovery program. The Company expects competition to
intensify in genomics research as technical advances in the field are made and
become more widely known.
The Company is subject to significant competition from organizations
that are pursuing the same or similar technologies as those which constitute
the Company's discovery platforms,
19
<PAGE> 20
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
and from organizations that are pursuing pharmaceutical or other products that
are or may be competitive with the Company's or its collaborators' or
licensees' potential products. Many of the organizations competing with the
Company have greater capital resources, larger research and development staffs
and facilities, greater experience in drug discovery and development, the
regulatory approval process and pharmaceutical product manufacturing, and
greater marketing capabilities than the Company.
The Company is and will continue to be reliant on its collaborators
and licensees for support of its programs, including support for its
preclinical and clinical development, manufacturing and marketing. The
Company's present and future collaborators and licensees are now conducting or
are expected to conduct, multiple product development efforts within each
disease or technology area that is the subject of the relationship with the
Company. Any product candidate or technology of the Company may therefore be
subject to internal competition with a potential product under development or a
technology platform under evaluation by a collaborator or licensee. See
" -- Dependence on Collaborators and Licensees."
Uncertainty of Patents and Proprietary Rights. The Company's success
will depend to a significant extent on its ability to obtain and enforce
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. Because the patent positions of
biotechnology and pharmaceutical companies can be highly uncertain and
frequently involve complex legal and factual questions, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted with certainty. Commercialization of pharmaceutical
products can be subject to substantial delays as a result of the time required
for product development, testing and regulatory approval. The value of any
patents issued or licensed to the Company may depend upon the remaining term of
patent protection available at the time any products covered by such patents
are commercialized.
The Company actively pursues a policy of seeking patent protection for
a number of its proprietary products and technologies. Progenitor has licensed
from Ohio University two issued U.S. patents and pending U.S. patent
applications relating to stem cell technology and to gene delivery technology,
along with certain corresponding foreign patent applications and one issued
foreign patent. Progenitor has received one issued U.S. patent relating to
nucleic acid molecules encoding the B219 leptin receptor. In addition,
Progenitor presently has seven pending U.S. patent applications which disclose
certain leptin receptors (including various isoforms of the leptin receptor),
nucleic acid molecules encoding the receptors, genetically-engineered cells and
antibodies to the receptors. The Company believes that there may be
significant litigation regarding patent and other intellectual property rights
relating to leptin and leptin receptors. The Company is aware that Millennium
has filed at least one patent application relating to a receptor for leptin and
its use in obesity applications, and has licensed to Hoffmann-La Roche Inc.
rights to develop certain therapeutics for obesity using Millennium's discovery
of a leptin receptor.
In June 1996, Millennium filed a "Protest" in the USPTO in connection
with the Progenitor applications relating to leptin receptors. A Protest is a
procedure available for use by
20
<PAGE> 21
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
a third party to provide the patent examiner who is reviewing the involved
application or applications with what the third party believes to be relevant
information. The Protest procedure does not afford any right to the third
party to participate in the patent prosecution process beyond the filing of its
written protest. Millennium's Protest primarily argued that any claims allowed
to Progenitor should not be so broad as to cover Millennium's own leptin
receptor. Notwithstanding the Protest, the USPTO recently issued to the
Company one U.S. patent and one notice of allowance for claims relating to
nucleic acid molecules encoding certain leptin receptors.
There can be no assurance that Millennium's patent application, or
additional patent applications filed by Millennium or others, will not result
in issued patents covering a leptin receptor, the leptin protein or other
ligands, or any of their respective uses, including obesity. There can be no
assurance that the invention by Millennium will be accorded an invention date
later than the Company's invention date, that any patent issued to the Company
would be broad enough to cover leptin receptors of Millennium or others. The
Company's failure to obtain a patent that covers the leptin receptors of
Millennium or others, or the issuance of a patent to a third party covering a
leptin receptor, the leptin protein or other ligands, or any of their
respective uses, including obesity, could have a material adverse effect on the
Company's business, financial condition and results of operations.
A number of other groups are attempting to identify partial gene
sequences and full-length genes, the functions of which have not been
characterized. The public availability of partial gene sequence information
before the Company applies for patent protection on a corresponding full-length
gene could adversely affect the Company's ability to obtain patent protection
with respect to such a gene. To the extent any patents issue to other parties
on such partial or full-length genes, and as other patents issue with the
expansion of the biotechnology industry, the risk increases that the potential
products and processes of the Company or its collaborators or licensees may
give rise to claims of patent infringement.
The patent positions of pharmaceutical and biotechnology firms,
including the Company, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved,
particularly in regard to human therapeutic uses. Substantial periods of time
pass before the USPTO responds to patent applications. In addition, the
coverage claimed in a patent application can be significantly reduced before a
patent is issued. Consequently, the Company does not know whether any of its
pending or future patent applications will result in the issuance of patents
or, if any patents are issued, whether the patents will be subjected to further
proceedings limiting their scope, and whether they will provide significant
proprietary protection or competitive advantage, or will be circumvented or
invalidated. Because patent applications in the U.S. are maintained in secrecy
until patents issue and patent applications in certain other countries
generally are not published until more than 18 months after they are filed, and
since publication of discoveries in scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it or any
21
<PAGE> 22
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
licensor was the first creator of inventions covered by pending patent
applications or that it or such licensor was the first to file patent
applications on such inventions.
There can be no assurance that any patents issued to the Company would
not be found invalid or unenforceable by a court or that such patents would
cover products or technologies of the Company's competitors. Competitors or
potential competitors may have filed patent applications or received patents,
and may obtain additional patents and proprietary rights relating to compounds
or processes competitive with those of the Company. To protect its proprietary
rights, the Company may be required to participate in interference proceedings
declared by the USPTO to determine priority of invention, which may result in
substantial cost to the Company. Moreover, even if the Company's patents
issue, there can be no assurance that they will provide sufficient proprietary
protection or will not be later limited, circumvented or invalidated.
Accordingly, there can be no assurance that the Company will develop
proprietary technologies that are patentable, that the Company's patent
applications will result in patents being issued or that, if issued, patents
will afford protection against competitors with similar technology or products,
nor can there be any assurance that the Company's patents will not be held
invalid by a court of competent jurisdiction.
In addition to patent protection, the Company also relies to a
significant extent upon trade secret protection for its confidential and
proprietary information, including many of the Company's key discovery
technologies. There can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets or disclose such
technology. To protect its trade secrets, Progenitor has required its
employees, consultants, scientific advisors and parties to collaboration and
licensing agreements to execute confidentiality agreements upon the
commencement of employment, the consulting relationship or the collaboration or
licensing arrangement, as the case may be, with Progenitor. In the case of
employees, the agreements also provide that all inventions resulting from work
performed by them while employed by Progenitor will be the exclusive property
of Progenitor. Mercator did not enter into such agreements with all of its
former employees and consultants. The Company will continue to require its
employees, consultants, scientific advisors and collaborators and licensees to
execute confidentiality agreements and inventions assignment agreements (in the
case of its employees) upon the commencement of employment, the consulting
relationship or the collaboration or license with the Company. There can be no
assurance, however, that these agreements will provide meaningful protection of
the Company's trade secrets or adequate remedies in the event of unauthorized
use or disclosure of such information, that the Company can meaningfully
protect its rights in such unpatented proprietary technology through other
means, that any obligation to maintain the confidentiality of such proprietary
technology will not be breached by employees, consultants, advisors,
collaborators, licensees or others, that former Mercator employees or
consultants will not disclose proprietary information of Mercator without being
in breach of any confidentiality restriction, or that others will not
independently develop the same or substantially equivalent technology. The
loss of trade secret protection of any of the
22
<PAGE> 23
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Company's key discovery technologies would materially and adversely affect the
Company's competitive position and could have a material adverse effect on the
Company's business, financial condition and results of operations. Finally,
disputes may arise as to the ownership of proprietary rights to the extent that
outside collaborators, licensees or consultants apply technological information
developed independently by them or others to Company projects or apply Company
technology to other projects and, if adversely determined, such disputes could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company may incur substantial costs if it is required to defend
itself in patent suits brought by third parties or if the Company initiates
such a suit to enforce the Company's patents or to determine the validity,
scope or enforceability of other parties' proprietary rights. Any legal action
against the Company or its collaborators or licensees claiming damages and
seeking to enjoin commercial activities relating to the affected products and
processes could, in addition to subjecting the Company to potential liability
for damages, require the Company or its collaborators or licensees to obtain a
license or licenses in order to continue to manufacture or market the affected
products and processes or require the Company or its collaborators or licensees
to cease doing so. There can be no assurance that the Company or its
collaborators or licensees would prevail in any such action or that any license
required under any such patents would be made available on commercially
acceptable terms, if at all. Any adverse outcome of such litigation could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, if the Company becomes involved in such
litigation, it could consume a substantial portion of the Company's managerial
and financial resources. The Company is unable to predict how courts will
resolve any future issues relating to the validity, scope or enforceability of
its patents should they be challenged.
It is uncertain whether any third-party patents will require the
Company to alter its products or processes, obtain licenses, cease certain
activities or pay substantial damages. If any licenses are required, there can
be no assurance that the Company will be able to obtain any such license on
commercially acceptable terms, if at all. Failure by the Company or its
collaborators and licensees to obtain a license to any technology required to
commercialize the Company's discoveries may have a material adverse effect on
the Company's business, financial condition and results of operations.
Management of Growth; Risk of Acquiring New Technologies. One of the
Company's strategies is to maintain its technological competitiveness by
accessing new equipment and advanced technologies. The expansion of the
Company's scientific infrastructure may involve the retention of additional
personnel, the establishment of new or expanded facilities and the acquisition
of technology rights, products, equipment, businesses or assets of other
companies. There can be no assurance that the Company's management personnel,
systems, procedures and controls will be adequate to support the expansion of
the Company's operations. The acquisition of additional personnel, technology
rights, products, equipment, businesses or assets of other
23
<PAGE> 24
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
companies, as well as the entry into new areas of scientific research, will
require the dedication of management resources in order to achieve the strategic
objectives associated with such growth and expansion. There can be no assurance
that the Company will be able to manage successfully the growth and expansion of
its operations. Failure of the Company to manage its growth, or any specific
acquisition of additional capabilities, could have a material adverse effect on
the Company's business, financial condition and results of operations.
Risks Associated with the Acquisition of Mercator. On February 14,
1997, Progenitor entered into the Acquisition Agreement with Mercator under
which the operations of the respective companies would be combined by means of
a merger of a wholly-owned subsidiary of Progenitor with and into Mercator,
contingent upon the completion of the Offering. In completing the Acquisition,
Progenitor relied upon certain representations and warranties made by Mercator
with respect to Mercator and its operations as well as Progenitor's own due
diligence investigation. There can be no assurance that such representations
and warranties are true in all respects or that Progenitor's due diligence
uncovered all materially adverse facts relating to the assets, research
capabilities and operations of Mercator. The representations and warranties of
Mercator did not survive the closing of the Acquisition and the Company will
not have any remedy for breaches of representations and warranties identified
after the closing. Furthermore, the Acquisition involves the integration of
two companies that have previously operated independently at different
locations with separate work forces. No assurance can be given that
difficulties encountered in integrating the operations of Mercator will be
overcome, or that the specific benefits expected from the integration of
Mercator, including the addition of new research capabilities, equipment and
technologies, will be achieved or that any anticipated cost savings will be
realized. The acquisition of Mercator also involves a number of special risks,
including assimilation of new operations and personnel; the diversion of
resources from the Company's existing business, research capabilities,
equipment and technologies; coordination of geographically separated facilities
and work forces; management challenges associated with the integration of the
companies in addition to the other requirements associated with growth of the
Company's scientific infrastructure and research capabilities; assimilation of
new management personnel; and maintenance of standards, controls, procedures
and policies. The process of integrating Mercator's operations, including its
personnel, could cause interruption of, or loss of momentum in, the activities
of the Company's business and operations, including those of the business
acquired.
In connection with the Acquisition, the Company expects to incur
several one-time charges in the quarter and fiscal year ending September 30,
1997 which in the aggregate are currently estimated to be approximately $31.0
million, including the write-off of $27.0 million in costs related to the
purchase of in-process research and development, $1.0 million for severance,
retention and bonus programs, $2.5 million for employee relocation, and
$500,000 for other costs such as benefit costs, the consolidation of
operations, the elimination of duplicate systems and facilities, and other
integration costs. These amounts are preliminary estimates only and could be
materially higher. Factors that could increase such costs include any
unexpected employee
24
<PAGE> 25
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
turnover, unforeseen delays in addressing duplicate facilities once the
Acquisition has been completed and the associated costs of hiring temporary
employees and consultants, and any additional fees and charges to obtain
consents, regulatory approvals or permits. In addition, as a result of the
Acquisition, the Company added approximately 35 new employees, and therefore
expects substantial increases in the costs of salaries, benefits, laboratory
supplies and incidental items in future periods. There can be no assurance
that the Company will not incur additional charges in subsequent periods to
reflect other costs associated with the Acquisition or from the integration of
operations after the Acquisition. There can be no assurance that the
Acquisition will not have a material adverse effect on the business, financial
condition and results of operations of the Company or that the Company will
realize the benefits and strategic objectives sought through the Acquisition.
Costs associated with the Acquisition, or liabilities and expenses associated
with the operations of Mercator, that exceed the expectations of Progenitor,
could have a material adverse effect on the Company's financial condition and
results of operations.
Under Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), utilization of prior net operating loss carryforwards is limited
after an ownership change to an annual amount equal to the value of the loss
corporation's stock immediately before the date of the ownership change,
multiplied by the federal long-term tax exempt rate. To date, the Company has
not incurred an ownership change under Section 382. As a result of the
Offering, the Acquisition and related transactions, the Company is likely to
incur such a change of ownership, in which case the Company's ability to use
the losses incurred prior to the date of the Offering may be limited as to
timing, pursuant to Section 382.
Uncertainties Related to Clinical Trials. Before seeking regulatory
approval for the commercial sale of any products that may be developed
incorporating the Company's discoveries, the Company or its collaborators or
licensees will be required to demonstrate through preclinical studies and
clinical trials that such products are safe and effective for use in the target
indications. To date, no product candidates incorporating the Company's
discoveries have entered clinical trials. The results from preclinical studies
and early clinical trials may not be indicative of results that will be
obtained in large-scale testing, and there can be no assurance that any
clinical trials, if undertaken, will demonstrate sufficient safety and efficacy
to obtain the requisite regulatory approvals or will result in marketable
products. Clinical trials also are often conducted with patients having
advanced stages of disease. During the course of treatment, these patients can
die or suffer other adverse medical effects for reasons that may not be related
to the product candidate being tested but which can nevertheless affect
clinical trial results. A number of companies in the biotechnology industry
have suffered significant setbacks in advanced clinical trials, even after
achieving promising results in earlier trials. If products developed by the
Company or its collaborators or licensees are not shown to be safe and
effective in clinical trials, the resulting delays in developing other product
candidates and conducting related preclinical studies and clinical trials, as
well as the need for additional financing, would have a material adverse effect
on the Company's business, financial condition and results of operations.
25
<PAGE> 26
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Government Regulation; No Assurance of Regulatory Approval. Prior to
marketing, any new drug or other product developed by the Company or its
collaborators or licensees must undergo an extensive regulatory approval
process in the United States and other countries. This regulatory process,
which includes preclinical studies and clinical trials and also may include
post-marketing studies of each product candidate to establish its safety and
efficacy, usually takes many years and requires the use of substantial
resources. Preclinical studies include laboratory evaluations and will require
animal tests conducted in accordance with the United States Food and Drug
Administration's ("FDA") current Good Laboratory Practices ("cGLP") regulations
to assess the product's potential safety and efficacy. Data obtained from
preclinical studies and clinical trials are susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. Delays
or rejections also may be encountered based upon changes in FDA policies for
drug or biologic approval during the period of product development and FDA
regulatory review of each new drug application ("NDA") submitted in the case of
new pharmaceutical agents, or product license application ("PLA") in the case
of biologics. Product development of new pharmaceuticals is highly uncertain,
and unanticipated developments, clinical or regulatory delays, unexpected
adverse side effects or inadequate therapeutic efficacy could slow or prevent
the product development efforts of the Company and its collaborators or
licensees, and have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
regulatory approval will be obtained for any drugs or other products developed
by the Company or its collaborators or licensees. Furthermore, regulatory
approval may entail limitations on the indicated use of a drug or other
product. Because certain of the products likely to result from the Company's
discovery programs involve the application of new technologies and may be based
upon a new therapeutic approach, such products may be subject to substantial
additional review by various government regulatory authorities other than the
FDA and, as a result, regulatory approvals may be obtained more slowly than for
products using conventional technologies. Under current guidelines, proposals
to conduct clinical research involving gene therapy at institutions supported
by the National Institutes of Health ("NIH") must be submitted to the FDA and
the NIH, and may be subject to approval by the Recombinant DNA Advisory
Committee ("RAC") and the NIH. Furthermore, gene therapies are relatively new
echnologies that have not been tested extensively in humans. The regulatory
requirements governing these products and related clinical procedures for their
use are uncertain and subject to change.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continual review. Among the conditions for product
approval and continued marketing approval is that the quality control and
manufacturing procedures of the Company or its collaborators or licensees
conform to the FDA's current good manufacturing practice ("cGMP") regulations
which must be followed at all times. In complying with cGMP requirements,
manufacturers must expend time, money and effort on a continuing basis in
production, record keeping and quality control. Manufacturing establishments,
both domestic and foreign, are subject to inspection by or under the authority
of the FDA and by other federal, state and local agencies. Failure to pass
such inspections may subject the manufacturer to
26
<PAGE> 27
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
possible FDA actions such as the suspension of manufacturing, seizure of the
product, withdrawal of approval or other regulatory sanctions. The FDA also
may require the manufacturer to recall a product from the market.
Discovery of previously unknown problems with a product may have
adverse effects on the Company's business, including withdrawal of the product
from the market. Violations of regulatory requirements at any stage, including
during preclinical studies and clinical trials, the approval process or
post-approval, may result in various adverse consequences to the Company,
including the FDA's delay in approval of or refusal to approve a product,
withdrawal of an approved product from the market or the imposition of criminal
penalties against the manufacturer and NDA or PLA holder. The Company has not
submitted an investigational new drug application ("IND") for any product
candidate, and no product candidate has been approved for commercialization in
the U.S. or elsewhere. The Company intends to rely primarily on its
collaborators or licensees to file INDs and generally direct the regulatory
approval process. No assurance can be given that the Company or any of its
collaborators or licensees will be able to conduct clinical trials or obtain
the necessary approvals from the FDA or other regulatory authorities for any
products. Failure to obtain required governmental approvals will delay or
preclude the Company's collaborators or licensees from marketing drugs or other
products developed by the Company or will limit the commercial use of such
products and could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Key Personnel. The Company is highly dependent upon the
principal members of its scientific and management staff and the services of
Dr. Douglass B. Given, President and Chief Executive Officer, and Dr. H. Ralph
Snodgrass, Vice President, Research and Chief Scientific Officer, in
particular. The loss of either of these persons could have a material adverse
effect on the Company's business, financial condition and results of
operations. In order to support the Company's existing operations, the Company
will be required to hire and retain additional management, administrative and
financial personnel. Recruiting and retaining qualified scientific personnel
and advisors to perform research and development work in the future also will
be critical to the Company's success. There can be no assurance that the
Company will be able to attract and retain such personnel and advisors on
acceptable terms given the competition among numerous pharmaceutical,
biotechnology and other companies, universities and other research institutions
for experienced personnel and advisors. In addition, the Company's anticipated
growth and expansion, including the Acquisition, is expected to place increased
demands on the Company's resources and management skills. The failure of the
Company's existing personnel to handle such increased demands or the Company's
failure to attract and to retain additional personnel with such capabilities
could have a material adverse effect on the Company's business, financial
condition and results of operations. See " -- Risks Associated with the
Acquisition of Mercator."
Dependence on Research Collaborators and Scientific Advisors. The
Company has relationships with collaborators at academic and other institutions
who conduct research in
27
<PAGE> 28
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
cooperation with the Company. Such collaborators are not employees of the
Company. All of the Company's consultants are employed by employers other than
the Company and may have commitments to, or consulting or advisory contracts
with, other entities that may limit their availability to the Company. As a
result, the Company has limited control over their activities and, except as
otherwise required by its collaboration and consulting agreements, can expect
only limited amounts of their time to be dedicated to the Company's activities.
The potential success of the Company's discovery programs depends in part on
continued collaborations with researchers at academic and other institutions.
There can be no assurance that the Company will be able to negotiate additional
acceptable collaborations at academic and other institutions or that its
existing collaborations will be maintained or be successful.
The Company's research collaborators and scientific advisors sign
agreements which provide for confidentiality of the Company's proprietary
information and results of studies, but not all of Mercator's former employees
and consultants have signed such agreements. There can be no assurance that
the Company will be able to maintain the confidentiality of its technology and
other confidential information in connection with every collaboration, and any
unauthorized dissemination of the Company's confidential information could have
a material adverse effect on the Company's business, financial condition and
results of operations. See " -- Uncertainty of Patents and Proprietary Rights."
Control of Company By, and Potential Conflicts of Interest With,
Interneuron. Interneuron beneficially owns approximately 37% of the Company's
Common Stock, and is and may continue to be the Company's largest stockholder.
Accordingly, Interneuron will continue to have substantial influence over the
election of directors of the Company and other matters submitted to a
stockholder vote, including extraordinary corporate transactions such as a
merger or sale of substantially all of the Company's assets. In addition, the
Company and Interneuron have entered into an intercompany services agreement
that provides among other things that in the event of any future equity
offering by the Company, Interneuron has the right to purchase (at the same
price and on the same terms as such equity offering) a portion of the shares
being offered so as to maintain its fully-diluted interest in the Company
immediately prior to such equity offering, subject to certain limitations.
Interneuron may elect to increase its ownership percentage in the
Company through other means, including additional equity investments or the
purchase of Common Stock in the open market. Interneuron, however, has not
made any commitment to purchase additional securities and there can be no
assurance that it will do so. Interneuron's ownership of a substantial block
of the Company's voting stock could have the effect of delaying or preventing
sales of additional securities of the Company or a sale of the Company or other
change of control supported by the other stockholders of the Company.
In addition, the Company may be subject to various risks arising from
Interneuron's influence over the Company, including conflicts of interest
relating to new business opportunities that could be pursued by the Company or
by Interneuron and its other affiliates, and significant
28
<PAGE> 29
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
corporate transactions for which stockholder approval is required. The Company
granted Interneuron an option and right of first refusal to acquire an
exclusive, worldwide license to manufacture, use and sell Del-l for human
therapeutic uses in exchange for a royalty to the Company based on sales. While
the option agreement specifies the payments to be made to Interneuron if the
Company or a third party develops such a therapeutic, the terms of any license
agreement should Interneuron exercise its option, including the amount of the
royalty to the Company, will be determined through negotiations between
Interneuron and the Company and, given the relationship between Interneuron and
the Company, the terms of any such license agreement may not be as favorable to
the Company as those that may be obtainable from a third party. In addition,
such option and right of first refusal may have an adverse effect on the
Company's ability to enter into license or other agreements relating to Del-1
with third parties. In connection with the grant of the option, Interneuron
relinquished its right to certain minimum return adjustments to the conversion
ratio of the Company's Series A Preferred Stock. Interneuron and the Company
agreed to determine the value of the relinquishment of the minimum return
adjustments and the extent to which such value may be credited against payments,
including royalties, that would otherwise be payable by Interneuron to the
Company under any such license. Such relinquishment may be deemed taxable
income to the Company. There can be no assurance that all of such income would
be offset by current expenses or operating loss carryforwards.
Uncertainty of Health Care Reform Measures and Third-Party
Reimbursement. The business and financial condition of pharmaceutical and
biotechnology companies will continue to be affected by the efforts of
third-party payors, such as government health administration authorities,
private health insurers and other organizations, to contain or reduce the cost
of health care. In the U.S. and in certain foreign jurisdictions there have
been, and the Company expects that there will continue to be, a number of
legislative and regulatory proposals aimed at changing the health care system.
While the Company cannot predict whether any such legislative or regulatory
proposals will be adopted or the effect that such proposals may have on its
business, the consideration or approval of such proposals could have a material
adverse effect on the trading and market price of the Common Stock or on the
Company's ability to raise capital or to complete additional corporate
agreements, and the adoption of such proposals could have a material adverse
effect on the Company's business, financial condition and results of
operations.
In both domestic and foreign markets, successful commercial sales of
the Company's or its collaborators' or licensees' potential products will
depend in part on the availability of reimbursement from government and health
administrative authorities, private health insurers or other third-party
payors. Third-party payors are increasingly challenging the price and
cost-effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
Future legislation and regulations affecting the pricing of pharmaceuticals
could further limit reimbursement for medical products
29
<PAGE> 30
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
and services. There can be no assurance that any of the Company's potential
products will be considered cost-effective or that adequate third- party
reimbursement will be available to enable the Company, its collaborators or
licensees to maintain price levels sufficient to realize an appropriate return
on its investment. In addition, the trend toward managed health care in the
U.S. and the concurrent growth of managed care organizations, such as health
maintenance organizations, which could control or significantly influence the
purchase of health care services and products, as well as legislative proposals
to reduce government insurance programs, could result in pricing pressure for
any products that might be developed by the Company. If adequate reimbursement
is not provided by government and other third-party payors for the Company's or
its collaborators' or licensees' potential products, there would be a material
adverse effect on the Company's business, financial condition and results of
operations.
Risk of Product Liability. The testing, manufacture, marketing and
sale of pharmaceutical and other products entail the inherent risk of liability
claims or product recalls and associated adverse publicity. Clinical trials
and sales by the Company or its collaborators or licensees of potential
products incorporating the Company's discoveries may expose the Company to
potential liability resulting from the use of such products. Such liability
might result from claims made directly by consumers or by regulatory agencies,
pharmaceutical companies or others selling such products. The Company
currently has a limited amount of clinical trial and product liability
insurance coverage through Interneuron. The Company will seek to obtain its
own coverage upon completion of the Offering and to maintain and appropriately
increase such coverage as clinical development of any product candidates
progresses and if and when its products are ready to be commercialized. There
can be no assurance that the Company will be able to obtain such insurance or,
if obtained, that such insurance can be acquired at a reasonable cost or in
sufficient amounts to protect the Company against such liability. Certain of
the Company's license agreements require it to indemnify licensors against
product liability claims arising from products developed using the licensed
technology. Also, certain of these agreements and other collaborative and
license agreements require the Company to maintain minimum levels of insurance
coverage. The failure to maintain product liability coverage, the occurrence
of any product liability claim or a recall of products of the Company or its
collaborators or licensees could inhibit or prevent commercialization of
products being developed by the Company and could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, to the extent any product liability claim exceeds the
amount of any insurance coverage, the Company's business, financial condition
and results of operations could be materially and adversely affected.
No Prior Trading Market; No Assurance of Active Trading Market;
Potential Volatility of Trading Prices. Prior to the Offering, there was no
public market for the Common Stock or the Warrants and there can be no
assurance that an active public market for the Common Stock or the Warrants
will be sustained. The stock market has experienced significant price and
volume fluctuations that are often unrelated to the operating performance of
particular companies. In addition, the market prices of securities of other
biotechnology companies in the past have been
30
<PAGE> 31
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
highly volatile and the market price of the Company's Common Stock and Warrants
also may experience such volatility. Factors such as the results of
preclinical studies and clinical trials by the Company or its collaborative
partners, licensees or competitors, evidence of the safety or efficacy of
products of the Company or its competitors, announcements of technological
innovations or new discoveries, product opportunities or products by the
Company or its competitors, changes in governmental regulations or third-party
reimbursement policies, developments in patent or other proprietary rights of
the Company or its competitors, fluctuations in the Company's operating results
and changes in general market conditions for biotechnology stocks could have an
adverse impact on the future price of the Common Stock and the Warrants.
Possible Delisting from the Nasdaq National Market; Market
Illiquidity. The Common Stock and Warrants (collectively, the "Listed
Securities") are listed separately on the Nasdaq National Market. In order to
maintain such listing, the Company will be required to comply with certain
Nasdaq National Market listing maintenance standards including minimum tangible
asset value amounts, public float requirements and minimum stock price amounts.
There can be no assurance that the Company will be able to comply with such
listing maintenance standards as in effect from time to time. If the Company
is unable to comply with the standards for continued listing, the Listed
Securities could be subject to delisting from the Nasdaq National Market.
Trading, if any, in the Listed Securities would thereafter be conducted on the
Nasdaq Small Cap Market or on an electronic bulletin board established for
securities that do not meet the Nasdaq Small Cap Market listing requirements or
in what is commonly referred to as the "pink sheets." As a result of any such
delisting from the Nasdaq National Market, an investor would find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
the Company's securities.
Redemption of Warrants. The outstanding Warrants are subject to
redemption at $0.01 per Warrant upon at least 30 days (but not more than 60
days) written notice provided that the market price of the Common Stock during
the 30 consecutive trading days ending within three days of the date of the
notice of redemption equals or exceeds 200% of the then-current Warrant
exercise price. If the Company exercises the right to redeem the outstanding
Warrants, a holder would be forced to (i) exercise the Warrant; (ii) sell the
Warrant at the then-current market price; or (iii) accept the redemption price
which, at the time the Warrants are called for redemption, is likely to be
substantially less than the then-current market price of the Warrants.
Current Prospectus Required To Exercise The Warrants. Holders will be
able to exercise the Warrants only if a current prospectus relating to the
shares of Common Stock issuable upon exercise of the Warrants (the "Warrant
Shares") is then in effect. Although the Company has undertaken to maintain
the effectiveness of a current prospectus covering the Warrant Shares subject
to certain limited exceptions, there can be no assurance that the Company will
be able to do so. The value of the Warrants may be impaired if a current
prospectus covering the Common Stock issuable upon exercise of the Warrants is
not kept effective.
31
<PAGE> 32
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Anti-Takeover Considerations. The Company has the authority to issue
up to 5,000,000 shares of Preferred Stock in one or more series and to fix the
powers, designations, preferences and relative rights thereof without any
further vote or action by the Company's stockholders. The Company has no
current plans to issue shares of Preferred Stock. However, the rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock would dilute the voting power of
holders of Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company. In addition, all outstanding
options under the Company's 1992 Stock Option Plan and 1996 Stock Incentive
Plan become exercisable, and purchase dates under the 1996 Employee Stock
Purchase Plan could be accelerated, upon certain changes in control of the
Company. The Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law, which could delay or make more difficult a
merger, tender offer or proxy contest involving the Company and may have the
effect of discouraging takeovers which could be in the best interest of certain
stockholders. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. There can be no assurance that
this provision, the rights of option holders and the Company's ability to issue
Preferred Stock will not have an adverse effect on the market value of the
Company's stock or Warrants in the future.
Hazardous and Radioactive Materials; Environmental Matters. Research
and development conducted by the Company involves the controlled use of
hazardous materials, chemicals, biological materials and radioactive compounds.
The Company, and its collaborators and licensees, as applicable, are subject to
international, federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such substances and certain
waste products. The Company believes that the safety procedures relating to
its in-house research and development and production efforts are in material
compliance with the standards currently prescribed by such laws and
regulations. However, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of an accident,
the Company could be held liable for any resulting damages, and any such
liability could exceed the Company's resources. Moreover, there can be no
assurance that the Company's collaborators and licensees are and will continue
to be in compliance with such standards or that the Company will not be
required to incur significant costs in the future to comply with new or
modified standards. In such events, there would be a material adverse effect
on the Company's business, financial condition and results of operations.
Management Discretion as to Use of Proceeds. The Company intends to
use the net proceeds of the Offering, together with the cash proceeds received
from the sale of the Amgen Shares and the sale of 25,000 shares of Common Stock
to The Ohio University Foundation, primarily for research and development. In
addition, the Company intends to use a portion of such net proceeds as follows:
(i) approximately $1.0 million to pay expenses relating to
32
<PAGE> 33
PROGENITOR, INC. (A DEVELOPMENT STAGE COMPANY)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
employee benefit and retention plans relating to the Acquisition; and (ii)
approximately $1.0 million relating to legal, accounting and other costs
incurred in the Acquisition and related Form S-4 registration statement. The
Company expects to consolidate its operations in California, and, in connection
with such consolidation, to use approximately $2.5 million of such net proceeds
to facilitate employee relocation, and $500,000 of such net proceeds for other
costs such as benefit costs, the consolidation of operations, the elimination
of duplicate systems and facilities, and other integration costs. The Company
anticipates using the balance of such net proceeds for the expansion or upgrade
of facilities, acquisition of equipment and for working capital and other
general corporate purposes. The Company also may use such proceeds for other
purposes, including the acquisition of technology rights, products, equipment,
businesses or assets of other companies. Accordingly, management will retain
broad discretion over the use of such net proceeds. There can be no assurance
as to the timing or application of such proceeds, or that the application
thereof will not have a material adverse effect on the Company's future
business, financial condition or results of operations.
Absence of Dividends. The Company has never declared or paid cash
dividends on its Common Stock. The Company currently intends to retain any
future earnings to finance the growth and development of its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future.
33
<PAGE> 34
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. LEGAL PROCEEDINGS
The Company is not currently a party to any litigation that
could have a material adverse effect on its business, financial
condition or results of operations.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds
As described above in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company has completed the
Offering. The following information relates to the use of proceeds of the
Offering:
(1) Effective Date of Registration Statement and Commission File
Number. The Company's Registration Statement on Form S-1, File No. 333-05369
(the "Registration Statement"), relating to the Offering, became effective on
August 6, 1997.
(2) Offering Date. The initial closing date of the Offering was August
12, 1997. A subsequent closing in connection with the partial exercise by the
Underwriters of the Offering of their over-allotment option occurred on
September 10, 1997.
(3) Managing Underwriters. Lehman Brothers Inc.
(4) Securities Registered and Proposed Aggregate Offering Price. The
Company registered a total of 3,162,500 Units, each Unit consisting of one share
of Common Stock ("Unit Share") and one Warrant, and 3,162,500 shares of Common
Stock issuable upon exercise of the Warrants (the "Warrant Shares"). The
proposed maximum aggregate offering price was $37,950,000 for the Units and
$56,925,000 for the Warrant Shares.
(5) Securities Sold. A total of 2,875,000 Units were sold pursuant to
the Offering. This consisted of 2,750,000 Units sold on August 12, 1997 upon the
initial closing of the Offering, and 125,000 Units sold on September 10, 1997
pursuant to the partial exercise, at the request of Lehman Brothers Inc. as
managing underwriter, of the over-allotment option granted to the Underwriters.
None of the Warrants had been exercised as of September 15, 1997, and
consequently no Warrant Shares had been sold. The Company intends to maintain
the effectiveness of the Registration Statement with respect to the 2,875,000
Warrant Shares issuable upon exercise of the Warrants actually sold.
(6) Aggregate Gross Proceeds, Expenses and Aggregate Net Proceeds. The
sale of the 2,875,000 Units generated aggregate gross proceeds of $20,125,000,
consisting of $15,453,125 from the sale of the Unit Shares (at a price of $5.375
per share) and $4,671,875 from the sale of the Warrants (at a price of $1.625
per Warrant). The aggregate net proceeds to the Company from the sale of the
2,875,000 Units were approximately $17,200,000, after deducting underwriting
discounts and commissions of approximately $1,200,000 and estimated expenses of
the Offering of approximately $1,700,000 payable by the Company. The Company
also received $4,500,000 in cash and a $1,000,000 promissory note from the sale
of the Amgen
34
<PAGE> 35
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Shares, and approximately $67,000 in cash from the sale of 25,000 shares of
Common Stock to The Ohio University Foundation, pursuant to a stock purchase
right.
(7) Use of Proceeds. The Company intends to use the net proceeds of
the Offering, together with the cash proceeds received from the sale of the
Amgen Shares and the sale of 25,000 shares of Common Stock to The Ohio
University Foundation, primarily for research and development. In addition, the
Company intends to use a portion of such net proceeds as follows: (i)
approximately $1.0 million to pay expenses relating to employee benefit and
retention plans relating to the Acquisition; and (ii) approximately $1.0 million
relating to legal, accounting and other costs incurred in the Acquisition and
related Form S-4 registration statement. The Company expects to consolidate its
operations in California, and, in connection with such consolidation, to use
approximately $2.5 million of such net proceeds to facilitate employee
relocation, and $500,000 of such net proceeds for other costs such as benefit
costs, the consolidation of operations, the elimination of duplicate systems and
facilities, and other integration costs. The Company anticipates using the
balance of such net proceeds for the expansion or upgrade of facilities,
acquisition of equipment and for working capital and other general corporate
purposes. The Company also may use such proceeds for other purposes, including
the acquisition of technology rights, products, equipment, businesses or assets
of other companies.
The amounts actually expended for each purpose, including the
allocation of funding among the Company's research programs, will depend on
numerous factors, including any expansion or acceleration and the breadth of
the Company's research and development programs; the results of research and
development, preclinical studies and clinical trials conducted by the Company
or its collaborative partners or licensees, if any; the acquisition and
licensing of products and technologies or businesses, if any; the Company's
ability to establish and maintain corporate relationships and academic
collaborations; the Company's ability to integrate the operations of Mercator;
the Company's ability to manage growth; competing technological and market
developments; the time and costs involved in filing, prosecuting, defending and
enforcing patent and intellectual property claims; the receipt of licensing or
milestone fees from any current or future collaborative and license
arrangements, if established; the continued funding of governmental research
grants; the timing of regulatory approvals; and other factors. To the extent
undertaken by the Company, the time and costs involved in conducting
preclinical studies and clinical trials, seeking regulatory approvals, and
scaling-up manufacturing and commercialization activities also would increase
the Company's funding requirements. The Company estimates that at its planned
rate of spending, existing cash and cash equivalents, together with the net
proceeds from the Offering, the proceeds from the sale of the Amgen Shares, and
the interest income earned on such proceeds (collectively, the "Proceeds"),
will be sufficient to fund operations for approximately the next 17 months. In
order to achieve this result, however, the Company will need to closely manage
the rate of expenditures for all of its research programs. Although the
Company anticipates that such Proceeds will be sufficient to meet its funding
requirements for its primary research programs for approximately the next 17
months, the Company will be required to curtail the expansion of, or to reduce
the level of expenditures for, certain of its other research programs, or to
seek corporate collaborations with respect to such programs at an earlier stage
than would be required if the Company had greater financial resources or obtain
other funding. There can be no assurance that any such corporate
35
<PAGE> 36
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
collaboration will be obtained on terms favorable to the Company or at all or
that any such funding will be available on terms favorable to the Company or at
all. Pending such uses, the Company intends to invest the net proceeds of the
Offering in investment grade, interest-bearing securities.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 26, 1997, Interneuron, as majority stockholder, executed a
written consent approving the following items: (i) an increase in the number
of shares of Common Stock reserved for issuance under the Company's 1996 Stock
Incentive Plan from 850,000 to 2,850,000; and (ii) adoption of the Company's
1997 Stock Option Plan.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
Exhibit
Number Description
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Data Schedule
_________________
(b) Reports on Form 8-K
None.
36
<PAGE> 37
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.
PROGENITOR, INC.
9/19/97 /s/ Mark N.K. Bagnall
- --------------------- ---------------------------------
Date Mark N.K. Bagnall
Vice President, Finance and Chief
Financial Officer
37
<PAGE> 38
EXHIBIT INDEX
Exhibit
No. Description
- ------ -----------
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
<PAGE> 1
Exhibit 11.1
Progenitor, Inc.
Computation of Net Loss per Share
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------
1997 1996 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss ($1,650,568) ($1,239,259) ($4,454,716) ($2,780,298)
Weighted average number of shares outstanding:
Weighted average shares outstanding, beginning
of period 2,887,217 2,852,779 2,885,904 2,789,271
Add: Common and common share equivalents issued
at prices below the anticipated Offering price
during the 12 months immediately preceding the
filing date of the Offering 32,765 32,765 32,765 32,765
Add: Weighted average common shares issued
during period 0 0 657 34,926
--------------------------------------------------------------------
Weighted average number of shares outstanding
used in computing net loss per share 2,919,982 2,885,544 2,919,326 2,856,962
--------------------------------------------------------------------
Net loss per share: (0.57) (0.43) (1.53) (0.97)
====================================================================
</TABLE>
39
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS INCLUDED IN THE FORM 10-Q TO WHICH THIS IS
AN EXHIBIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 49,907
<SECURITIES> 0
<RECEIVABLES> 175,498
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 401,730
<PP&E> 1,953,729
<DEPRECIATION> 896,001
<TOTAL-ASSETS> 6,894,780
<CURRENT-LIABILITIES> 3,454,546
<BONDS> 0
0
23,695
<COMMON> 2,887
<OTHER-SE> 14,972,322
<TOTAL-LIABILITY-AND-EQUITY> 6,894,780
<SALES> 0
<TOTAL-REVENUES> 1,091,487
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,992,748
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 553,455
<INCOME-PRETAX> (4,454,716)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,454,716)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,454,716)
<EPS-PRIMARY> (1.53)
<EPS-DILUTED> (1.53)
</TABLE>
