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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ___________ TO __________.
COMMISSION FILE NO. 0-19651
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GENAERA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3445668
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5110 CAMPUS DRIVE
PLYMOUTH MEETING, PENNSYLVANIA 19462
------------------------------ -----
(Address of principal executive offices) (ZIP Code)
610-941-4020
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
The number of outstanding shares of the Registrant's Common Stock, par
value $.002 per share, on November 12, 2002 was 35,666,491.
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GENAERA CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Balance Sheets as of September 30, 2002 and December 31, 2001 .......3
Statements of Operations for the three- and nine-month periods ended
September 30, 2002 and 2001 .................................4
Statements of Cash Flows for the nine-month periods ended
September 30, 2002 and 2001 .................................5
Notes to Financial Statements .......................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ......23
ITEM 4. Controls and Procedures .........................................23
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ...............................................24
ITEM 2. Changes in Securities and Use of Proceeds .......................24
ITEM 3. Defaults Upon Senior Securities .................................24
ITEM 4. Submission of Matters to a Vote of Security Holders .............24
ITEM 5. Other Information ...............................................24
ITEM 6. Exhibits and Reports on Form 8-K ................................24
SIGNATURES .................................................................25
CERTIFICATIONS .............................................................26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENAERA CORPORATION
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 1,172 $ 1,973
Short-term investments (NOTE 2) ............................................. 10,769 14,105
Prepaid expenses and other current assets ................................... 302 218
-------- ---------
Total current assets ...................................................... 12,243 16,296
Fixed assets, net .............................................................. 1,554 1,456
Other assets ................................................................... 64 64
-------- ---------
Total assets ............................................................ $ 13,861 $ 17,816
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 2,174 $ 2,521
Note payable (NOTE 2) ....................................................... 2,500 2,500
Accrued development expense - short-term (NOTE 6) ........................... -- 480
Other current liabilities ................................................... 60 82
-------- ---------
Total current liabilities ................................................. 4,734 5,583
Accrued development expense - long-term (NOTE 6) ............................... 1,529 1,529
Other liabilities .............................................................. 170 50
Series A redeemable convertible preferred stock (liquidation value
of $1,098 and $1,044 at September 30, 2002 and December 31, 2001,
respectively) (NOTE 4) ..................................................... 1,098 1,044
Commitments, contingencies and other matters (NOTE 6) ..........................
Stockholders' equity (NOTE 3):
Preferred stock - $.001 par value per share; 9,211 shares authorized;
0.9 shares issued and outstanding as Series A redeemable convertible
preferred stock at September 30, 2002 and December 31, 2001; 10.0
shares issued and outstanding as Series B convertible preferred stock
at September 30, 2002 and December 31, 2001 (liquidation value of
$10,000) ................................................................... -- --
Common stock - $.002 par value per share; 75,000 shares authorized; 35,666
shares and 32,864 shares issued and outstanding at September 30, 2002 and
December 31, 2001, respectively ............................................ 71 66
Additional paid-in capital ..................................................... 187,238 180,112
Accumulated other comprehensive income - unrealized gain on investments ........ 1 23
Accumulated deficit ............................................................ (180,980) (170,591)
--------- ---------
Total stockholders' equity ................................................ 6,330 9,610
-------- --------
Total liabilities and stockholders' equity .............................. $ 13,861 $ 17,816
======== ========
See accompanying notes to financial statements.
3
GENAERA CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Collaborative research agreement revenues .........$ 349 $ 455 $ 1,202 $ 705
----------- ----------- ----------- -----------
Costs and expenses:
Research and development ....................... 2,686 3,601 9,234 8,156
General and administrative ..................... 657 755 2,395 2,478
----------- ----------- ----------- -----------
3,343 4,356 11,629 10,634
----------- ----------- ----------- -----------
Loss from operations .............................. (2,994) (3,901) (10,427) (9,929)
Interest income ................................... 61 197 214 713
Interest expense .................................. (36) (44) (122) (197)
----------- ----------- ----------- -----------
Net loss .......................................... (2,969) (3,748) (10,335) (9,413)
Dividends on preferred stock ...................... 19 20 54 82
----------- ----------- ----------- -----------
Net loss applicable to common stockholders ........$ (2,988) $ (3,768) $ (10,389) $ (9,495)
=========== =========== =========== ===========
Net loss applicable to common stockholders
per share -- basic and diluted ...........$ (0.08) $ (0.11) $ (0.30) $ (0.29)
=========== =========== =========== ===========
Weighted average shares outstanding --
basic and diluted ........................ 35,652 32,841 34,634 32,660
=========== =========== =========== ===========
See accompanying notes to financial statements.
4
GENAERA CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (10,335) $ (9,413)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 387 647
Amortization of investment discounts/premiums ............................. (191) (537)
Compensation expense on option grants and equity awards ................... 183 261
Receipt and retirement of Series A redeemable convertible
preferred stock ....................................................... -- (300)
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses and other ......................... (84) 60
Increase (decrease) in accounts payable and accrued expenses .............. (347) 938
Decrease in accrued development expenses .................................. (480) (1,350)
Increase in other liabilities ............................................. 98 47
----------- -----------
Net cash used in operating activities .......................................... (10,769) (9,647)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments ..................................................... (20,695) (30,198)
Proceeds from maturities of investments ..................................... 24,200 31,179
Capital expenditures ........................................................ (485) (736)
----------- -----------
Net cash provided by investing activities ...................................... 3,020 245
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series B convertible preferred stock .............. -- 9,908
Proceeds from issuance of common stock ...................................... 6,943 --
Proceeds from exercise of stock options ..................................... 5 849
----------- -----------
Net cash provided by financing activities ...................................... 6,948 10,757
----------- -----------
Net increase (decrease) in cash and cash equivalents ........................... (801) 1,355
Cash and cash equivalents at beginning of period ............................... 1,973 599
----------- -----------
Cash and cash equivalents at end of period ..................................... $ 1,172 $ 1,954
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest ....................................... $ 125 $ 160
=========== ===========
See accompanying notes to financial statements.
5
GENAERA CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements of Genaera Corporation ("Genaera" or
the "Company") are unaudited and have been prepared by the Company pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission ("SEC")
for interim financial statements. The December 31, 2001 balance sheet was
derived from audited financial statements, however, certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to SEC rules and regulations.
The Company believes that the financial statements include all adjustments of a
normal and recurring nature necessary to present fairly the results of
operations, financial position, changes in stockholders' equity and cash flows
for the periods presented. Results of operations for interim periods are not
necessarily indicative of those to be achieved for full fiscal years. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001. There have been no material changes in accounting
policies from those stated in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
NOTE 2. NOTE PAYABLE
The Company refinanced its $2,500,000 note payable in the second quarter of
2002. Under the terms of the new note payable, the Company makes monthly
interest-only payments at an annual rate of 5.346%, with principal due in June
2003. The Company maintained investments with an approximate market value of
$2,791,000 at the bank as collateral for the note payable as of September 30,
2002.
NOTE 3. STOCKHOLDERS' EQUITY
The changes in stockholders' equity from December 31, 2001 to September 30,
2002 are summarized as follows (in thousands):
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------------ ADDITIONAL COMPRE- STOCK-
NUMBER PAID-IN HENSIVE ACCUMULATED HOLDERS'
OF SHARES AMOUNT CAPITAL INCOME DEFICIT EQUITY
--------- ------ ------- ------ ------- ------
Balance at December 31, 2001 ............. 32,864 $ 66 $180,112 $ 23 $(170,591) $ 9,610
Exercise of stock options and
compensation expense on
option grants and stock awards ...... 43 -- 188 -- -- 188
Common stock issued pursuant to
private placement ................... 2,759 5 6,938 -- -- 6,943
Dividends on preferred stock .......... -- -- -- -- (54) (54)
Comprehensive loss:
Net loss ........................ -- -- -- -- (10,335) (10,335)
Carrying value adjustment ....... -- -- -- (22) -- (22)
------- ----- --------- ------ ---------- --------
Total comprehensive loss .............. -- -- -- -- -- (10,357)
------- ----- --------- ------ ---------- --------
Balance at September 30, 2002 ............ 35,666 $ 71 $187,238 $ 1 $(180,980) $ 6,330
======= ===== ======== ====== ========= ========
6
GENAERA CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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On April 10, 2002, the Company completed the sale of 2,758,855 shares of
its common stock at $2.75 per share. The shares were sold to three of its larger
current institutional shareholders: Wellington Management Company, LLC, the
State of Wisconsin Investment Board ("SWIB"), and Caxton Associates, LLC. Wells
Fargo Securities, LLC acted as a placement agent for 1,813,400 of the shares
sold. Net proceeds from the offering, after deducting placement agent fees and
offering expenses, were $6,943,000. Warrants to purchase 100,000 shares of the
Company's common stock at an exercise price of $2.75 per share will be issued to
the placement agent in connection with this transaction. When issued, these
warrants will be exercisable and have a term of 5 years from the date of the
transaction. The gross proceeds from this offering are considered a "financing
activity" for the purposes of the 1999 Abbott Settlement (as described in "NOTE
6. Commitments, Contingencies, and Other Matters.") As a condition of SWIB's
purchase of its shares, the Company agreed to, and subsequently did, amend its
outstanding stock option plans and its corporate by-laws to, in general,
prohibit the Company from, among other things, issuing options with exercise
prices below fair market value, from reducing the exercise price of options,
from canceling and re-granting options at lower exercise prices and from issuing
certain convertible securities, each without requisite stockholder approval.
NOTE 4. PREFERRED STOCK
The Company's certificate of incorporation provides the board of directors
the power to issue shares of preferred stock without stockholder approval. This
preferred stock could have voting rights, including voting rights that could be
superior to that of the Company's common stock, and the board of directors has
the power to determine these voting rights. As of September 30, 2002, the
Company's board of directors has designated 80,000 shares of preferred stock as
Series A redeemable convertible preferred stock (the "Series A Preferred Stock")
and 10,000 shares of preferred stock as Series B convertible preferred stock
(the "Series B Preferred Stock"). In connection with an agreement with
Genentech, Inc., 1,188 shares of Series A Preferred Stock were issued during
2000 and 888 shares are outstanding as of September 30, 2002. Preferred
dividends of $210,000 have been accrued as of September 30, 2002 on the Series A
Preferred Stock. In connection with an agreement with MedImmune, Inc. (as
described in "NOTE 5. Collaboration Agreements"), 10,000 shares of Series B
Preferred Stock were issued in April 2001 and are outstanding as of September
30, 2002.
NOTE 5. COLLABORATION AGREEMENTS
In April 2001, the Company entered into a research collaboration and
licensing agreement with MedImmune to develop and commercialize therapies
related to the Company's IL9 program. MedImmune is expected to fund at least
$2,500,000 for research and development activities at the Company through April
2003 (the "R&D Funding"), which will be recognized by the Company as revenues on
a straight-line basis over the two-year period. In addition to the R&D Funding,
MedImmune also will reimburse the Company for certain external costs incurred by
the Company in connection with the IL9 research plan, which will be recognized
by the Company as revenues when the related expenses are incurred. For the
three-month period ended September 30, 2002, the Company recognized $349,000 as
revenue related to the R&D Funding ($315,000) and external cost reimbursements
($34,000). For the nine-month period ended September 30, 2002, the Company
recognized $1,202,000 as revenue related to the R&D Funding ($935,000) and
external cost reimbursements ($267,000). For the three-month period ended
September 30, 2001, the Company recognized $455,000 as revenue related to the
R&D Funding ($315,000) and external cost reimbursements ($140,000). For the
nine-month period ended September 30, 2001, the Company recognized $705,000 as
revenue related to the R&D Funding ($565,000) and external cost reimbursements
($140,000).
7
GENAERA CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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Due to the January 2002 implementation of Emerging Issues Task Force No.
01-14, Income Statement Characterization of Reimbursements Received for 'Out of
Pocket' Expenses Incurred, $140,000 previously recorded as research and
development expense offsets for the three- and nine-month periods ended
September 30, 2001 has been reclassified as revenues in the current comparative
financial statements.
In September 2001, the Company received a contingent award of up to
$1,700,000 from an affiliate of the Cystic Fibrosis Foundation ("CFF") to
support early clinical evaluation of LOMUCIN(TM) involving patients with cystic
fibrosis. This award has been granted and shall be paid to the Company from time
to time upon the achievement of certain development milestones. Of this grant,
$125,000 has been received as of September 30, 2002 and is recorded as a
long-term liability. The Company did not recognize this amount as revenue
because it is refundable to the CFF upon marketing approval by the FDA or, if
development milestones are satisfied, the Company elects not to enter Phase 3
clinical trials or to commercialize the product within two years of the
completion of milestone requirements.
NOTE 6. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Manufacturing Agreement
In January 1999 and prior, the Company entered into several agreements with
Abbott Laboratories providing for the purchase of approximately $10,000,000 of
bulk drug substance to be used in the manufacturing process for LOCILEX(TM)
Cream. As FDA approval of LOCILEX(TM) Cream did not occur, the Company
renegotiated this agreement with Abbott in September 1999 (the "Abbott
Settlement"), paying Abbott $4,200,000 at that time and receiving partial
delivery of material. An additional $3,400,000 was due to Abbott and payable if
the Company receives in excess of $10,000,000 of additional funds (as defined in
the agreement) in any year beginning in 2000, in which case the Company must pay
15% of such excess over $10,000,000 to Abbott. The Company recorded this
conditional obligation as a liability in 1999 at its then present value. As a
result of the Company's financing activities during 2000 and other cash inflows,
$1,392,000 of this liability was payable and paid to Abbott on March 1, 2001. As
a result of the Company's financing activities during 2001 and other cash
inflows, $480,000 of this liability was payable and paid to Abbott on March 1,
2002. The remaining amount of $1,529,000 due to Abbott is included in long-term
liabilities as of September 30, 2002 as the Company has not received in excess
of $10,000,000 of cash inflows for the nine-month period ended September 30,
2002.
Liquidity
The Company has not generated any revenues from product sales and has
funded operations primarily from the proceeds of public and private placements
of its securities. Substantial additional financing will be required by the
Company in the near-term to fund its continuing research and development
activities. No assurance can be given that any such financing will be available
when needed or that the Company's research and development efforts will be
successful.
On September 25, 2002, the Company was notified by The Nasdaq Stock Market,
Inc. that the Company's common stock had closed for more than 30 consecutive
trading days below the minimum $1.00 per share requirement for continued
inclusion on the Nasdaq National Market under Marketplace Rule 4450(a)(5).
During October 2002, the Company applied to Nasdaq to transfer from the Nasdaq
National Market to the Nasdaq SmallCap Market. On October 30, 2002, the Company
announced that its request to transfer to the Nasdaq SmallCap Market had been
approved, effective October 31, 2002. The Company's securities will continue
trading under its current symbol: "GENR."
8
GENAERA CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Transferring to the Nasdaq SmallCap Market provides the Company with a
grace period until March 24, 2003 to regain compliance with the Nasdaq Stock
Market's $1.00 minimum bid price requirement. In the event the Company does not
meet the minimum bid price requirement by March 24, 2003, Nasdaq can grant the
Company an additional 180-day grace period to regain compliance if it meets the
"core" initial listing standards for the Nasdaq SmallCap Market as of that date,
principally, a $5 million stockholders' equity requirement. If a company that
has transitioned to the Nasdaq SmallCap Market so desires, generally it can
transition back to the Nasdaq National Market by meeting the $1.00 minimum bid
price requirement for 30 consecutive trading days during the grace periods and
complying with the other applicable National Market standards. If the Nasdaq
Small Cap Market does not grant the Company the additional 180-day grace period
on March 24, 2003, Nasdaq may begin its procedures for delisting the Company.
In the absence of raising additional funds or significantly reducing
expenses, the Company believes it has sufficient resources to sustain operations
through the end of 2003. The Company regularly explores alternative means of
financing its operations and seeks funding through various sources, including
public and private securities offerings and collaborative arrangements with
third parties. The Company currently does not have any commitments to obtain
additional funds and may be unable to obtain sufficient funding in the future on
acceptable terms, if at all. If the Company cannot obtain funding, it will need
to delay, scale back or eliminate research and development programs or enter
into collaborations with third parties to commercialize potential products or
technologies that it might otherwise seek to develop or commercialize
independently, or seek other arrangements. If the Company engages in
collaborations, it will receive lower consideration upon commercialization of
such products than if it had not entered into such arrangements or if it entered
into such arrangements at later stages in the product development process.
NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and nullifies Emerging Issues Task Force Issue No. 94-3. The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company plans to adopt SFAS No. 146 in
January 2003.
NOTE 8. REALIGNMENT OF OPERATIONS
On August 14, 2002, the Company announced that it implemented a realignment
of operations intended to focus resources on its most advanced product
development programs and significantly reduce expenses. Under the realignment
plan, the Company reduced its headcount by approximately 35%, or 23 employees,
primarily impacting unsupported preclinical research programs. All of the
employees affected by the workforce reduction were offered severance and
outplacement support. The Company recorded a nonrecurring charge of
approximately $506,000 for the three-month period ended September 30, 2002, of
which $498,000 and $8,000 are recorded in Research and Development Expense and
General and Administrative Expense, respectively. For the three- and nine-month
periods ended September 30, 2002, the Company has paid $223,000 in cash
severance and outplacement support against this accrual, leaving a remaining
accrual of $283,000 at September 30, 2002.
9
GENAERA CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 9. SUBSEQUENT EVENT
On November 7, 2002, as part of its ongoing cost containment efforts, the
Company announced that it had recently reduced its headcount by approximately
32%, or 11 employees, primarily impacting preclinical and nonclinical
development scientific staff. All of the employees affected by the workforce
reduction were offered severance and outplacement support. The Company
anticipates recording a nonrecurring charge of approximately $320,000 in the
fourth quarter of 2002 related to this action. The Company also transitioned
David F. Jarosz, its former Executive Vice President and Chief Business Officer,
to a six-month consulting contract with the Company. The Company also announced
that Michael R. Dougherty, its former Chairman of the Company's Board of
Directors, is stepping down from that position while remaining a member of the
Company's Board of Directors.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Our disclosure and analysis in this Quarterly Report on Form 10-Q contains
some forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. Such
statements may include words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," "hope," and other words and terms of
similar meaning. In particular, these include, among others, statements relating
to present or anticipated scientific progress, development of potential
pharmaceutical products, future revenues, capital expenditures, research and
development expenditures, future financing and collaborations, personnel,
manufacturing requirements and capabilities, the impact of new accounting
pronouncements, and other statements regarding matters that are not historical
facts or statements of current condition.
There are important factors that could cause actual results to differ
materially from those expressed or implied by such forward-looking statements,
including those addressed below under "Risk Factors Related to Our Business."
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by law. You are advised, however, to consult any further
disclosures we make on related subjects in our filings with the U.S. Securities
and Exchange Commission.
OVERVIEW
Genaera Corporation is a biopharmaceutical company committed to developing
medicines for serious diseases from genomics and natural products. Research and
development efforts are focused on anti-angiogenesis and respiratory diseases.
Genaera has three products in development addressing substantial unmet medical
needs in major pharmaceutical markets. These include squalamine, an
anti-angiogenesis treatment for cancer and eye disease; interleukin-9 antibody,
a respiratory treatment based on the discovery of a genetic cause of asthma; and
LOMUCIN(TM), a mucoregulator to treat the overproduction of mucus and secretions
involved in many forms of chronic respiratory disease. We were incorporated in
the State of Delaware in 1987.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The SEC recently released cautionary advice regarding critical accounting
policies. The SEC has defined critical policies and practices as items that are
both most important to the portrayal of a company's financial condition and
results, and require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effects of
matters that are inherently uncertain. The preparation of our financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported in our financial statements and accompanying
notes. Actual results could differ materially from those estimates. The items in
our financial statements requiring significant estimates and judgments are as
follows:
Revenue Recognition
Contract revenue for research and development is recorded as earned based
on the performance requirements of the contract. Non-refundable contract fees
for which no further performance obligations exist, and for which there is no
continuing involvement by us, are recognized on the earlier of when the payments
are received or when collection is assured. Revenue from non-refundable upfront
license fees
11
and certain guaranteed payments where we continue involvement through
development collaboration is recognized on a straight-line basis over the
development period. Revenue associated with performance milestones is recognized
based upon the achievement of the milestones, as defined in the respective
agreements. Revenue under R&D cost reimbursement contracts or government grants
is recognized as the related costs are incurred. Advance payments received in
excess of amounts earned are classified as liabilities until earned. Payments
received that are refundable also are classified as liabilities until the refund
provision expires. We make an estimate as to the appropriate deferral period for
recognition of revenue on any collaborative fees received. Changes in these
estimates, due to the evolution of the development program, can have a
significant effect on the timing of revenue recorded.
Research and Development Expenses
Research and development expenses include related salaries, contractor
fees, and facility costs. R&D expenses consist of independent R&D contract
costs, contract manufacturing costs and costs associated with collaborative R&D
arrangements. In addition, we fund R&D at other research institutions under
agreements that are generally cancelable. R&D expenses also include external
activities such as investigator-sponsored trials. All such costs are charged to
R&D expense systematically as incurred, which may be measured by percentage of
completion, contract milestones, patient enrollment or the passage of time. At
the initiation of certain contracts, we must make an estimate as to the duration
and expected completion date of the contract, which may require a change due to
accelerations, delays or other adjustments to the contract period or work
performed. Changes in these estimates could have a significant effect on the
amount of R&D costs in a specific period.
Stock-Based Compensation
We account for stock-based employee compensation under the intrinsic
value-based method set forth by Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations.
Effective January 1, 1996, we adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Stock or other equity-based compensation for
non-employees must be accounted for under the fair value-based method as
required by SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, and other related
interpretations. Under this method, the equity-based instrument is valued at
either the fair value of the consideration received or the equity instrument
issued on the date of grant. The resulting compensation cost is recognized and
charged to operations over the service period, which is usually the vesting
period. Estimating the fair value of equity securities involves a number of
judgments and variables that are subject to significant change. A change in the
fair value estimate could have a significant effect on the amount of
compensation cost.
RISK FACTORS RELATED TO OUR BUSINESS
Any investment in shares of our common stock involves a high degree of
risk. You should carefully consider the following risk factors, together with
the other information presented in this Quarterly Report on Form 10-Q and our
Annual Report on Form 10-K for the year ended December 31, 2001.
IF WE DO NOT RAISE ADDITIONAL CAPITAL, WE MAY NOT BE ABLE TO CONTINUE OUR
RESEARCH AND DEVELOPMENT PROGRAMS AND MAY NEVER COMMERCIALIZE ANY PRODUCTS.
We believe our current resources are sufficient to meet our research and
development goals and sustain operations through the end of 2003. However, we
will need to raise substantial additional funds in the future to continue our
research and development programs and to commercialize our potential products.
If we are unable to raise such funds, we may be unable to complete our
development activities for any of our proposed products.
12
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings, collaborative arrangements with third parties and other strategic
alliances and business transactions. We currently do not have any commitments to
provide additional funds, and may be unable to obtain sufficient funding in the
future on acceptable terms, if at all. We may be compelled to seek
collaborations with third parties to commercialize potential products or
technologies that we might otherwise seek to develop or commercialize ourselves,
or seek other arrangements, none of which may result in our obtaining necessary
funds. If we cannot obtain funding, we will need to delay, scale back or
eliminate research and development programs. If we raise additional capital by
issuing equity or securities convertible into equity, our stockholders may
experience dilution and our share price may decline. Any debt financing may
result in restrictions on spending or payment of dividends. If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.
WE MAY BE UNABLE TO MAINTAIN THE STANDARDS FOR LISTING ON THE NASDAQ SMALL CAP
MARKET, WHICH COULD ADVERSELY AFFECT THE LIQUIDITY OF OUR COMMON STOCK AND COULD
SUBJECT OUR COMMON STOCK TO THE "PENNY STOCK" RULES.
Our common stock is currently listed on the Nasdaq Small Cap Market. Nasdaq
requires listed companies to maintain standards for continued listing, including
a minimum bid price for shares of a company's stock and a minimum tangible net
worth. If we are unable to maintain these standards, our common stock could be
delisted.
On September 25, 2002, we were notified by The Nasdaq Stock Market, Inc.
that our common stock had closed for more than 30 consecutive trading days below
the minimum $1.00 per share requirement for continued inclusion on the Nasdaq
National Market under Marketplace Rule 4450(a)(5). During October 2002, we
applied to Nasdaq to transfer from the Nasdaq National Market to the Nasdaq
SmallCap Market. On October 30, 2002, we announced that our request to transfer
to the Nasdaq SmallCap Market had been approved, effective October 31, 2002. Our
securities will continue trading under our current symbol: "GENR."
Transferring to the Nasdaq SmallCap Market provides us with a grace period
until March 24, 2003 to regain compliance with the Nasdaq Stock Market's $1.00
minimum bid price requirement. In the event that we do not meet the minimum bid
price requirement by March 24, 2003, Nasdaq can grant us an additional 180-day
grace period to regain compliance if we meet the "core" initial listing
standards for the Nasdaq SmallCap Market as of that date, principally, a $5
million stockholders' equity requirement. If a company that has transitioned to
the Nasdaq SmallCap Market so desires, generally it can transition back to the
Nasdaq National Market by meeting the $1.00 minimum bid price requirement for 30
consecutive trading days during the grace periods and complying with the other
applicable National Market standards. If the Nasdaq Small Cap Market does not
grant us the additional 180-day grace period on March 24, 2003, Nasdaq may begin
its procedures for delisting the Company.
If we are unable to meet the requirements for inclusion on the Nasdaq Small
Cap Market, our common stock may be traded on an electronic bulletin board
established for securities that are not included in Nasdaq or traded on a
national securities exchange or in some published quotation service. If this
occurs, it could be more difficult to sell our securities or obtain the same
level of market information as to the price of our common stock as is currently
available.
In addition, if our common stock were delisted from Nasdaq, it would be
subject to the so-called "penny stock" rules. The U.S. Securities and Exchange
Commission has adopted regulations that define a "penny stock" to be any equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions, such as any securities listed on a national securities
exchange or quoted on Nasdaq.
13
For any transaction involving a "penny stock," unless exempt, the rules impose
additional sales practice requirements on broker-dealers, subject to certain
exceptions.
For transactions covered by the "penny stock" rules, a broker-dealer must
make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to the
transaction. The "penny stock" rules also require broker-dealers to deliver
monthly statements to "penny stock" investors disclosing recent price
information for the "penny stock" held in the account, and information on the
limited market in "penny stocks." Prior to the transaction, a broker-dealer must
provide a disclosure schedule relating to the "penny stock" market. In addition,
the broker-dealer must disclose the following:
o commissions payable to the broker-dealer and the registered
representative; and
o current quotations for the security as mandated by the applicable
regulations.
If our common stock were delisted and determined to be a "penny stock," a
broker-dealer may find it more difficult to trade our common stock and an
investor may find it more difficult to acquire or dispose of our common stock in
the secondary market.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL LOSSES IN THE FORESEEABLE FUTURE AND
MAY NEVER GENERATE REVENUES OR BECOME PROFITABLE.
To date, we have engaged primarily in the research and development of drug
candidates. We have not generated any revenues from product sales and have
incurred losses in each year since our inception. We currently have a
substantial accumulated deficit.
Our proposed products are in a relatively early developmental stage and
will require significant research, development and testing. We must obtain
regulatory approvals for any proposed product prior to commercialization of the
product. Our operations also are subject to various competitive and regulatory
risks. As a result, we are unable to predict when or if we will achieve any
product revenues or become profitable. We expect to experience substantial
losses in the foreseeable future as we continue our research, development and
testing efforts.
DEVELOPMENT AND COMMERCIAL INTRODUCTION OF OUR PRODUCTS WILL TAKE SEVERAL MORE
YEARS AND MAY NOT BE SUCCESSFUL.
We are dedicating substantially all of our resources to research and
development, do not have any marketed products, and have not generated any
product revenue. Because substantially all of our potential products currently
are in research, preclinical development or the early and middle stages of
clinical testing, revenues from sales of any products will not occur for at
least the next several years, if at all. Our technologies are relatively new
fields and may not lead to commercially viable pharmaceutical products. Before
we can commercially introduce any products, we will likely incur substantial
expense for, and devote a significant amount of time to, preclinical testing and
clinical trials. We cannot apply for regulatory approval of our potential
products until we have performed additional research and development testing and
demonstrated in preclinical testing and clinical trials that our product
candidates are safe and effective for use in humans. Some of our product
candidates are in the early stages of research and development, and we may
abandon further development efforts on these product candidates before they
reach clinical trials. Conducting clinical trials is a lengthy, time-consuming
and expensive process. Our clinical trials may not demonstrate the safety and
efficacy of our potential products, and we may encounter unacceptable side
effects or other problems in the clinical trials. Should this occur, we may have
to delay or discontinue development of the potential products. Further, even if
we believe that any product is safe or effective, we may not obtain the required
regulatory approvals, be able to manufacture our products in commercial
quantities or be able to market any product successfully.
14
IF WE DO NOT OBTAIN REQUIRED REGULATORY APPROVALS, WE WILL NOT BE ABLE TO
COMMERCIALIZE ANY OF OUR PRODUCT CANDIDATES.
Numerous governmental authorities, including the FDA in the United States,
regulate our business and activities. Federal, state and foreign government
agencies impose rigorous preclinical and clinical testing and approval
requirements on our product candidates. In general, the process of obtaining
government approval for pharmaceutical products is time consuming and costly.
Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our efforts. A delay or denial of
regulatory approval for any of our drug candidates, such as that which occurred
for LOCILEX(TM) Cream, a topical treatment of infection in diabetic foot ulcers,
will materially affect our business. Even if we receive approval of a product
candidate, it may be conditioned upon certain limitations and restrictions as to
the drugs used and may be subject to continuous review. If we fail to comply
with any applicable regulatory requirements, we could be subject to penalties,
including warning letters, fines, withdrawal of regulatory approval, product
recalls, operating restrictions, injunctions, and criminal prosecution.
WE EXPECT TO RELY ON THIRD PARTIES IN CONNECTION WITH THE DEVELOPMENT OF OUR
PRODUCTS AND EXPECT TO RELY ON THIRD PARTIES TO MARKET ANY PRODUCTS WE DEVELOP;
IF THESE PARTIES DO NOT PERFORM AS EXPECTED, WE MAY NEVER SUCCESSFULLY DEVELOP
OR COMMERCIALIZE OUR PRODUCTS.
We expect to delegate the responsibility for all, or a significant portion,
of the development and regulatory approval for certain potential products to
third parties. We do not have control over the amount and timing of resources to
be devoted to the development of these potential products by our collaborative
partners. Our collaborators may not place a high priority on their contractual
arrangements with us. Collaborators may develop products independently or
through third parties that could compete with our proposed products. For
example, GlaxoSmithKline, a current collaborative partner, which entered into an
agreement with us relating to the development of LOCILEXTM, maintains a
significant presence in the antibiotic area and currently sells a topical
antibiotic product indicated for the treatment of certain skin infections. In
addition, a collaborator may decide to end a relationship with us, which would
require that we repartner the technology. For example, in December 2000,
Genentech provided notice to us of its election to terminate the collaboration
agreement covering the IL9 antibody development program and related respiratory
technology. Ultimately, these third parties may never develop an approvable or
marketable product.
We do not have our own sales and marketing staff. In order to successfully
market our future products, we must enter into marketing and distribution
arrangements with third parties. If these parties do not market a product
successfully, we may never generate sufficient revenue to become profitable.
Additionally, we may be unable to successfully enter into arrangements with
other parties for such products.
We also may decide to establish our own sales force to market and sell
certain products. Although some members of our management have limited
experience in marketing pharmaceutical products, we have no experience with
respect to marketing our products. If we choose to pursue this alternative, we
will need to spend significant additional funds and devote significant
management resources and time to establish a successful sales force. This effort
may not be successful. Moreover, because our financial resources are limited,
our sales and marketing expenditures in this area would likely be modest
compared to our competitors.
15
WE FACE FORMIDABLE COMPETITION WITH RESPECT TO THE PRODUCTS WE ARE SEEKING TO
DEVELOP AND THE RECRUITMENT OF HIGHLY TRAINED SCIENTIFIC PERSONNEL.
The pharmaceutical industry is characterized by intense competition. Many
companies, research institutions and universities are conducting research and
development activities in our fields of interest. Some of these companies are
currently involved in research and development activities focused on the
pathogenesis of disease, and the competition among companies attempting to find
genes responsible for disease is intense. In addition, we are aware that
research on compounds derived from animal host-defense systems is being
conducted by others. We also may face competition from companies using different
or advanced techniques that could render our future products obsolete. Most of
these entities have substantially greater financial, technical, manufacturing,
marketing, distribution and other resources than we have.
Many companies are working to develop and market products intended for the
additional disease areas being targeted by us, including cancer, age-related
macular degeneration and chronic obstructive respiratory diseases. A number of
major pharmaceutical companies have significant franchises in these disease
areas, and can be expected to invest heavily to protect their interests. With
respect to cancer and AMD, anti-angiogenic agents are under development at a
number of companies. In the respiratory field, other biopharmaceutical companies
also have reported the discovery of genes relating to asthma and other
respiratory diseases.
Many of the companies developing or marketing competing products have
significantly greater financial resources than us and significantly more
experience than us in undertaking preclinical testing and human clinical trials
of new or improved therapeutic products and obtaining regulatory approvals of
such products. Some of these companies may be in advanced phases of clinical
testing of various drugs that may be competitive with our proposed products.
We expect technological developments in the biopharmaceutical field to
occur at a rapid rate and expect competition to intensify as advances in this
field are made. Accordingly, we must continue to devote substantial resources
and efforts to research and development activities in order to maintain a
competitive position in this field. Our efforts may not be successful.
Colleges, universities, governmental agencies and other public and private
research organizations are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with our technology. In
addition, these institutions, along with pharmaceutical and specialized
biotechnology companies, can be expected to compete with us in recruiting highly
qualified scientific personnel.
IF WE DO NOT DEVELOP AND MAINTAIN RELATIONSHIPS WITH CONTRACT MANUFACTURERS, WE
MAY NOT SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.
We currently do not have the resources, facilities, or technical
capabilities to manufacture any of our proposed products in the quantities and
quality necessary for commercial sale. We have no plans to establish a
commercial manufacturing facility. We expect to depend upon contract
manufacturers for commercial scale manufacturing of our proposed products in
accordance with regulatory standards. For example, we currently are working with
outside contractors for the chemical production of squalamine. This dependence
on contract manufacturers may restrict our ability to develop and deliver
products on a timely, profitable and competitive basis, especially because the
number of companies capable of producing our proposed products is limited. These
contract manufacturers generally have multiple projects and they may give ours a
lower priority than others. As a result of contract manufacture errors, our
product could be lost or delivered late, delaying our clinical and preclinical
programs, or may not be produced in accordance with all current applicable
regulatory standards. Product not produced in accordance with all current
applicable regulatory standards may lead to adverse outcomes for patients and/or
product recalls. Furthermore, the development of a robust, low-cost
manufacturing process for the
16
commercial production of squalamine and other proposed products will require
significant time and expenditure by us. We may be unable to maintain
arrangements with qualified outside contractors to manufacture materials at
costs that are affordable to us, if at all.
Contract manufacturers that we use may utilize their own technology, our
technology, or technology acquired or licensed from third parties in developing
a manufacturing process. If we determine to engage a different contract
manufacturer, we may need to obtain a license or other technology transfer from
the original contract manufacturer. Even if a license is available from the
original contract manufacturer on acceptable terms, we may be unable to
successfully effect the transfer of the technology to the new contract
manufacturer. Any such technology transfer also may require the transfer of
requisite data for regulatory purposes, including information contained in a
proprietary drug master file held by a contract manufacturer. If we rely on a
contract manufacturer that owns the drug master file, our ability to change
contract manufacturers may be more limited.
WE DEPEND ON OUR INTELLECTUAL PROPERTY, AND IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY, OUR BUSINESS MAY BE HARMED.
Patents
Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies, both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. If we do not maintain patent and other protections, other
companies could offer for sale products that are substantially identical to ours
without incurring the sizeable development and testing costs that we have
incurred. As a result, our ability to recover these expenditures and realize
profits upon commercialization likely would be diminished.
The process of obtaining patents can be time consuming and expensive. Even
after significant expenditure, a patent may not issue. We can never be certain
that we were the first to develop the technology or that we were the first to
file a patent application for the particular technology because U.S. patent
applications are maintained in secrecy by the U.S. Patent and Trademark Office
until a patent issues, and publications in the scientific or patent literature
concerning new technologies occur some time after actual discoveries of the
technologies are made.
We are subject to the risk that:
o patents will not issue from any of our patent applications;
o our patent rights will not be sufficient to protect our technology;
o others may file patents ahead of us in time and prevent the
issuing of our patent claims;
o others will not design around the patented aspects of our technology;
o our patents will be successfully challenged or circumvented by
our competitors; or
o an adverse outcome in a suit challenging our patents would subject us
to significant liabilities to third parties, require rights to be
licensed from third parties, or require us to cease using such
technology.
The cost of litigation related to patents can be substantial, regardless of
the outcome.
Other Intellectual Property
In order to protect our proprietary technology and processes, we also rely
on trade secrets and confidentiality agreements with our employees, consultants,
outside scientific collaborators, and other advisors. We may find that these
agreements will be breached, or that our trade secrets have otherwise become
known or independently developed or discovered by our competitors.
17
Certain of our exclusive rights to patents and patent applications are
governed by contract. Generally, these contracts require that we pay royalties
on sales of any products that are covered by patent claims. If we are unable to
pay the royalties, we may lose our rights to these patents and patent
applications. Additionally, some of these agreements also require that we
develop the licensed technology under certain timelines. If we do not adhere to
an acceptable schedule of commercialization, we may lose our rights.
Potential Ownership Disputes
Disputes may arise as to the ownership of our technology. Most of our
research and development personnel previously worked at other biotechnology
companies, pharmaceutical companies, universities, or research institutions.
These entities may raise questions as to when technology was developed, and
assert rights to the technology. We have been involved in these kinds of
disputes in the past and have resolved them. We may not prevail in any similar
disputes that may arise in the future.
Similar technology ownership disputes may arise in the context of
consultants, vendors or third parties, such as contract manufacturers. For
example, our consultants are employed by or have consulting agreements with
third parties. There may be disputes as to the capacity in which consultants are
operating when they make certain discoveries. We may not prevail in any such
disputes.
IF WE CANNOT RECRUIT AND RETAIN QUALIFIED MANAGEMENT, WE MAY NOT BE ABLE TO
SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR PRODUCTS.
We depend to a considerable degree on a limited number of key personnel.
Most significant responsibilities have been assigned to a relatively small
number of individuals. We do not maintain "key man" insurance on any of our
employees. The loss of certain management and scientific personnel could
adversely affect our ability to develop and commercialize products.
WE ARE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN
SIGNIFICANT COSTS.
We are subject to significant potential product liability risks inherent in
the testing, manufacturing and marketing of human therapeutic products,
including the risk that:
o our proposed products cause some undesirable side effects or injury
during clinical trials;
o our products cause undesirable side effects or injury in the market; or
o third parties that we engage incur liabilities that we have agreed to
indemnify them against.
While we carry insurance, this coverage may be insufficient to cover our
product liability losses. Moreover, product liability coverage is expensive and
we may be unable to maintain adequate coverage on acceptable terms.
IF WE DO NOT RECEIVE ADEQUATE THIRD-PARTY REIMBURSEMENT FOR ANY OF OUR DRUG
CANDIDATES, SOME PATIENTS MAY BE UNABLE TO AFFORD OUR PRODUCTS AND SALES COULD
SUFFER.
In both the United States and elsewhere, the availability of reimbursement
from third-party payers, such as government health administration authorities,
private health insurers and other organizations, can affect prescription
pharmaceutical sales. These organizations are increasingly challenging the
prices charged for medical products and services, particularly where they
believe that there is only an incremental therapeutic benefit that does not
justify the additional cost. If any of our products ever obtain marketing
approval, coverage and reimbursement may not be available for these products,
or, if available, may not be adequate. Without insurance coverage, many patients
may be unable to afford our products, in which case sales of the product would
be adversely affected.
18
There also has been a trend toward government reforms intended to contain
or reduce the cost of health care. In certain foreign markets, pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been a number of federal and state proposals to
implement similar government control. We expect this trend to continue, but we
cannot predict the nature or extent of any reform that results. These reforms
could adversely affect our ability to obtain financing for the continued
development of our proposed products or market any of our products that are
successfully developed. Furthermore, reforms could have a broader impact by
limiting overall growth of health care spending, such as Medicare and Medicaid
spending, which could also adversely affect our business.
OUR STOCK PRICE IS EXTREMELY VOLATILE.
The market prices and trading volumes for securities of biopharmaceutical
and biotechnology companies, including ours, have historically been, and will
likely continue to be, highly volatile. Future events affecting our business, or
that of our competitors, may have a significant impact on our stock price. Among
these events are the following:
o product testing results from us or our competitors;
o technological innovations by us or our competitors;
o new commercial products from us or our competitors;
o government regulations;
o proprietary rights;
o regulatory actions; and
o litigation.
THE EXERCISE OF OPTIONS AND WARRANTS AND OTHER ISSUANCES OF SHARES WILL LIKELY
HAVE A DILUTIVE EFFECT ON OUR STOCK PRICE.
We currently have a large number of options and warrants outstanding and
exercisable, though none of which grant the right to purchase shares of our
common stock at prices below its September 30, 2002 market price. Some warrant
exercise prices are subject to adjustment under the anti-dilution provisions of
the warrant agreements. Should our market price increase in the future, the
exercise of options and warrants at prices below the market price of our common
stock could adversely affect the price of our common stock. Additional dilution
may result from the issuance of shares of our capital stock in connection with
collaborations or manufacturing arrangements or in connection with other
financing efforts.
OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD
DISCOURAGE A TAKEOVER.
Our certificate of incorporation provides our board of directors the power
to issue shares of preferred stock without stockholder approval. This preferred
stock could have voting rights, including voting rights that could be superior
to that of our common stock. In addition, Section 203 of the Delaware General
Corporation Law contains provisions that impose restrictions on stockholder
action to acquire control of Genaera. The effect of these provisions of our
certificate of incorporation and Delaware law could discourage third parties
from seeking to obtain control, even though the price at which such third
parties seek to acquire our common stock is in excess of the market price for
our stock.
19
RESULTS OF OPERATIONS
Revenues
To date, we have not received any revenues from product sales. Our revenues
have consisted principally of revenues recognized under collaborations with
third parties. In April 2001, we entered into a research collaboration and
licensing agreement with MedImmune to develop and commercialize therapies
related to our IL9 program. In accordance with the contract, MedImmune is
expected to fund at least $2.5 million for our research and development
activities through April 2003, payable in eight equal quarterly installments
plus certain external cost reimbursements. For the three-month period ended
September 30, 2002, we recognized $349,000 as revenue related to the R&D Funding
($315,000) and external cost reimbursements ($34,000). For the nine-month period
ended September 30, 2002, we recognized $1,202,000 as revenue related to the R&D
Funding ($935,000) and external cost reimbursements ($267,000). For the
three-month period ended September 30, 2001, we recognized $455,000 as revenue
related to the R&D Funding ($315,000) and external cost reimbursements
($140,000). For the nine-month period ended September 30, 2001, we recognized
$705,000 as revenue related to the R&D Funding ($565,000) and external cost
reimbursements ($140,000).
Research and Development Expenses
Research and development expenses decreased in the three-month period ended
September 30, 2002, as compared to the same period in 2001, from $3.6 million in
2001 to $2.7 million in 2002, due to the absence of squalamine manufacturing
efforts and trodulamine development efforts. These reductions were partially
offset by the one-time $500,000 accrual of severance and related costs
associated with the realignment of operations in August 2002. Research and
development expenses increased in the nine-month period ended September 30,
2002, as compared to the same period in 2001, from $8.2 million in 2001 to $9.2
million in 2002, due to increases in personnel and related costs associated with
the Company's research programs, along with the one-time $500,000 accrual of
severance and related costs associated with the realignment of operations in
August 2002. The level of research and development expenses in future periods
will depend principally upon the progress of our research and development
programs and our capital resources.
General and Administrative Expenses
General and administrative expenses decreased in the three-month period
ended September 30, 2002, as compared to the same period in 2001, from $755,000
in 2001 to $657,000 in 2002 due principally to decreases in G&A personnel.
General and administrative expenses decreased only slightly in the nine-month
period ended September 30, 2002, as compared to the same period in 2001, from
$2.5 million in 2001 to $2.4 million in 2002.
Other Income and Expense
Other income and expense is primarily comprised of interest income
generated from cash and investments, net of interest expense related to the $2.5
million note payable. Interest income for the three- and nine-month periods
ended September 30, 2002 decreased, as compared to the same period in 2001, due
to declining investment interest yields and lower average investment balances.
Interest expense for the three- and nine-month periods ended September 30, 2002
decreased, as compared to the same period in 2001, due to a reduction in the
note payable's interest rate and because the long-term obligation to Abbott
Laboratories is now recorded at its face value and we no longer recognize
additional interest expense on the obligation.
20
Realignment of Operations
On August 14, 2002, we announced that we are implementing a realignment of
operations intended to focus resources on our most advanced product development
programs, squalamine and LOMUCIN(TM) and significantly reduce expenses. We will
proceed with our ongoing phase 2b non-small cell lung cancer study, and commence
our first "wet" macular degeneration study. Additional studies for squalamine,
including our planned trial in advanced ovarian cancer, will require, at a
minimum, additional funding. For LOMUCIN(TM), we anticipate having the results
from our chronic asthma study later this year, and are proceeding with the
startup of our initial clinical trials in cystic fibrosis. The cystic fibrosis
trials are funded in part by our alliance with the Cystic Fibrosis Foundation,
which has provided a Therapeutics Development Grant of up to $1,700,000.
MedImmune continues as our partner for the IL-9 antibody program for asthma and
fully funds these research and development efforts. Under the realignment plan,
we reduced our headcount by approximately 35%, primarily impacting unsupported
preclinical research programs. All of the employees affected by the workforce
reduction were offered severance and outplacement support. We recorded a
nonrecurring charge of approximately $506,000 for the three-month period ended
September 30, 2002. For the three- and nine-month periods ended September 30,
2002, we paid $223,000 in cash severance and outplacement support against this
accrual, leaving a remaining accrual of $283,000 at September 30, 2002.
Subsequent Event
On November 7, 2002, as part of its ongoing cost containment efforts, we
announced that we had recently reduced our headcount by approximately 32%, or 11
employees, primarily impacting preclinical and nonclinical development
scientific staff. All of the employees affected by the workforce reduction were
offered severance and outplacement support. We anticipate recording a
nonrecurring charge of approximately $320,000 in the fourth quarter of 2002
related to this action. We also transitioned David F. Jarosz, our former
Executive Vice President and Chief Business Officer, to a six-month consulting
contract with the Company. We also announced that Michael R. Dougherty, our
former Chairman of our Board of Directors, is stepping down from that position
while remaining a member of our Board of Directors.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments were $11.9 million at September 30, 2002 as
compared to $16.1 million at December 31, 2001. On April 10, 2002, we completed
the sale of approximately 2.7 million shares of our common stock at $2.75 per
share. Net proceeds from the offering, after deducting placement agent fees and
offering expenses, were approximately $6.9 million. The primary use of cash
during the period was to finance our research and development operations.
Current liabilities decreased $849,000 to $4.7 million at September 30,
2002 from $5.6 million at December 31, 2001 due to the payment of our short-term
obligation to Abbott along with decreases in other accrued expenses. Under the
terms of our $2.5 million note payable, we make monthly interest-only payments
at an annual rate of 5.346%, with principal due in June 2003. We maintain
investments of $2.8 million as collateral for the note payable.
Our capital expenditure requirements will depend upon numerous factors,
including the progress of our research and development programs, the time and
cost required to obtain regulatory approvals, our ability to enter into
additional collaborative arrangements, the demand for products based on our
technology, if and when such products are approved, and possible acquisitions of
products, technologies and companies. We had no significant commitments for
capital expenditures as of September 30, 2002.
21
After considering the private placement investment in April, and in the
absence of raising additional funds or significantly reducing expenses, we
believe we have sufficient resources to sustain operations through the end of
2003.
We will need to raise substantial additional funds in the future to
continue our research and development programs and to commercialize our
potential products. If we are unable to raise such funds, we may be unable to
complete our development activities for any of our proposed products.
On September 25, 2002, we were notified by The Nasdaq Stock Market, Inc.
that our common stock had closed for more than 30 consecutive trading days below
the minimum $1.00 per share requirement for continued inclusion on the Nasdaq
National Market under Marketplace Rule 4450(a)(5). During October 2002, we
applied to Nasdaq to transfer from the Nasdaq National Market to the Nasdaq
SmallCap Market. On October 30, 2002, we announced that our request to transfer
to the Nasdaq SmallCap Market had been approved, effective October 31, 2002. Our
securities will continue trading under our current symbol: "GENR."
Transferring to the Nasdaq SmallCap Market provides us with a grace period
until March 24, 2003 to regain compliance with the Nasdaq Stock Market's $1.00
minimum bid price requirement. In the event that we do not meet the minimum bid
price requirement by March 24, 2003, Nasdaq can grant us an additional 180-day
grace period to regain compliance if we meet the "core" initial listing
standards for the Nasdaq SmallCap Market as of that date, principally, a $5
million stockholders' equity requirement. If a company that has transitioned to
the Nasdaq SmallCap Market so desires, generally it can transition back to the
Nasdaq National Market by meeting the $1.00 minimum bid price requirement for 30
consecutive trading days during the grace periods and complying with the other
applicable National Market standards. If the Nasdaq Small Cap Market does not
grant us the additional 180-day grace period on March 24, 2003, Nasdaq may begin
its procedures for delisting the Company.
We regularly explore alternative means of financing our operations and seek
funding through various sources, including public and private securities
offerings and collaborative arrangements with third parties. We currently do not
have any commitments to obtain additional funds and may be unable to obtain
sufficient funding in the future on acceptable terms, if at all. If we cannot
obtain funding, we will need to delay, scale back or eliminate research and
development programs or enter into collaborations with third parties to
commercialize potential products or technologies that we might otherwise seek to
develop or commercialize ourselves, or seek other arrangements. If we engage in
collaborations, we will receive lower consideration upon commercialization of
such products than if we had not entered into such arrangements, or if we
entered into such arrangements at later stages in the product development
process.
22
Contractual Cash Obligations
The table below sets forth our contractual cash obligations at September
30, 2002 (in thousands):
CASH PAYMENTS DUE BY PERIOD
---------------------------------------------
LESS THAN AFTER
CONTRACTUAL CASH OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
---------------------------- ----- ------ --------- --------- -------
Bank debt /1/ $2,500 $2,500 $ -- $ -- $ --
Abbott settlement /2/ 1,529 -- 1,529 -- --
Operating lease on building /3/ 1,897 336 706 757 98
Operating leases and maintenance
contracts on equipment 331 185 119 26 1
Research and development
contracts 1,930 1,842 88 -- --
------ ------ ------ ---- ----
Total contractual cash obligations $8,187 $4,863 $2,442 $783 $ 99
====== ====== ====== ==== ====
- --------------
/1/ We maintain cash and investments of approximately $2.8 million as collateral
for this obligation. Our current intention is to refinance this obligation
just prior to its maturity.
/2/ Payable if we receive in excess of $10 million of additional funds in any
year beginning in 2000, in which case 15% of such excess over $10 million
shall be payable to Abbott.
/3/ The lease provides for escalations relating to increases in the Consumer
Price Index not to exceed 7% but no less than 3.5% beginning in December
2002. We have assumed a minimum lease payment escalation of 3.5% for the
purposes of this table.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks associated with interest rate changes. Our exposure
to market risk for changes in interest rates relates primarily to our investment
portfolio. We invest in only U.S. government debt instruments that meet high
quality credit standards, as specified in our investment policy. The policy also
limits the amount of credit exposure we may have to any one issue, issuer or
type of investment.
As of September 30, 2002, our portfolio investments consisted of $1.2
million in cash and $10.7 million in U.S government debt instruments having a
maturity of less than one year. Due to the nature of our investment portfolio,
management believes that a sudden change in interest rates would not have a
material effect on the value of the portfolio. Management estimates that if the
average annualized yield of our investments had decreased by 100 basis points,
our interest income for the nine-month period ended September 30, 2002 would
have decreased by approximately $106,000. This estimate assumes that the
decrease occurred on the first day of 2002 and reduced the annualized yield of
each investment instrument by 100 basis points. The impact on our future
interest income will depend largely on the gross amount of our investment
portfolio.
We do not currently have any significant direct foreign currency exchange
rate risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on Form
10-Q, the Company's principal executive officer and principal financial officer
have concluded that the Company's disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
"Exchange Act")) are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any material litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 License, Development and Commercialization Agreement Between
Laboratorios Bago SA and Genaera Corporation *+
------------
* Filed herewith.
+ Confidential treatment has been requested as to certain
portions of this exhibit pursuant to an application filed with
the Securities and Exchange Commission. The omitted portions
have been separately filed with the Securities and Exchange
Commission.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K on August 14, 2002 regarding
CEO/CFO certifications pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
We filed a Current Report on Form 8-K on August 14, 2002
incorporating a press release regarding our Second Quarter 2002
financial results and a realignment of operations.
We filed a Current Report on Form 8-K on August 15, 2002
incorporating a press release regarding the death of Board of
Directors member Bernard Canavan, M.D.
We filed a Current Report on Form 8-K on September 27, 2002
incorporating a press release regarding our receipt of a
notification by NASDAQ regarding Marketplace Rule 4450(a)(5).
24
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.
GENAERA CORPORATION
DATE: November 12, 2002 By: /s/ Christopher P. Schnittker
-----------------------------
CHRISTOPHER P. SCHNITTKER
Vice President and
Chief Financial Officer
25
CERTIFICATIONS
I, Roy C. Levitt, M.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Genaera Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Roy C. Levitt
- -----------------
Roy C. Levitt, M.D.
President and Chief Executive Officer
26
I, Christopher P. Schnittker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Genaera Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Christopher P. Schnittker
- -----------------------------
Christopher P. Schnittker
Vice President and Chief Financial Officer
27
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 License, Development and Commercialization Agreement Between
Laboratorios Bago SA and Genaera Corporation *+
- ------------
* Filed herewith.
+ Confidential treatment has been requested as to certain portions
of this exhibit pursuant to an application filed with the
Securities and Exchange Commission. The omitted portions have
been separately filed with the Securities and Exchange
Commission.