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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 0-23223
CURAGEN CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware |
|
06-1331400 |
| (State or other jurisdiction of |
|
(I.R.S. Employer |
| incorporation or organization) |
|
Identification No.) |
555 Long Wharf Drive, 11th Floor, New Haven, Connecticut 06511
(Address of principal executive office) (Zip Code)
Registrant’s telephone number, including area code: (203) 401-3330
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
shares outstanding of the Registrant’s common stock as of October 31, 2002 was 49,297,106.
1
CURAGEN CORPORATION AND SUBSIDIARY FORM 10-Q
INDEX
| PART I. Financial Information |
|
Page
|
| |
| |
|
Item 1. |
|
Financial Statements |
|
|
| |
|
|
|
|
|
3 |
| |
| |
|
|
|
|
|
4 |
| |
| |
|
|
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5 |
| |
| |
|
|
|
|
|
6-7 |
| |
| |
|
Item 2. |
|
|
|
8-13 |
| |
| |
|
Item 4. |
|
|
|
13 |
| |
| PART II. Other Information |
|
|
| |
| |
|
Item 6. |
|
|
|
15 |
| |
| |
|
16 |
| |
| |
|
|
|
17-18 |
| |
| |
|
|
|
19 |
2
CURAGEN CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share data)
| |
|
September 30, 2002
|
|
|
December 31,
2001
|
|
| |
|
(unaudited) |
|
|
|
|
| ASSETS |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
70,744 |
|
|
$ |
235,618 |
|
| Short-term investments |
|
|
231,020 |
|
|
|
272,731 |
|
| Marketable securities |
|
|
129,710 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Cash and investments |
|
|
431,474 |
|
|
|
508,349 |
|
| Income taxes receivable |
|
|
1,951 |
|
|
|
856 |
|
| Accounts receivable |
|
|
2,879 |
|
|
|
— |
|
| Other current assets |
|
|
172 |
|
|
|
676 |
|
| Prepaid expenses |
|
|
2,579 |
|
|
|
2,810 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
439,055 |
|
|
|
512,691 |
|
| Property and equipment, net |
|
|
34,036 |
|
|
|
21,907 |
|
| Notes receivable—related parties |
|
|
140 |
|
|
|
190 |
|
| Other assets |
|
|
106 |
|
|
|
131 |
|
| Intangible assets, net |
|
|
3,198 |
|
|
|
3,782 |
|
| |
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
476,535 |
|
|
$ |
538,701 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable |
|
$ |
4,014 |
|
|
$ |
3,476 |
|
| Accrued expenses |
|
|
1,731 |
|
|
|
1,744 |
|
| Accrued payroll and related items |
|
|
2,273 |
|
|
|
1,924 |
|
| Interest payable |
|
|
1,500 |
|
|
|
3,750 |
|
| Deferred revenue |
|
|
3,133 |
|
|
|
2,025 |
|
| Current portion of obligations under capital leases |
|
|
2,072 |
|
|
|
2,800 |
|
| Other current liabilities |
|
|
797 |
|
|
|
841 |
|
| |
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
15,520 |
|
|
|
16,560 |
|
| |
|
|
|
|
|
|
|
|
| Long-term liabilities: |
|
|
|
|
|
|
|
|
| Convertible subordinated debt |
|
|
150,000 |
|
|
|
150,000 |
|
| Obligations under capital leases, net of current portion |
|
|
547 |
|
|
|
2,297 |
|
| |
|
|
|
|
|
|
|
|
| Total long-term liabilities |
|
|
150,547 |
|
|
|
152,297 |
|
| |
|
|
|
|
|
|
|
|
| Commitments and contingencies |
|
|
|
|
|
|
|
|
| Minority interest in subsidiary |
|
|
11,155 |
|
|
|
13,899 |
|
| Stockholders' equity: |
|
|
|
|
|
|
|
|
| Common Stock; $.01 par value, issued and outstanding 49,278,967 shares at
September 30, 2002, and 48,729,319 shares
at December 31, 2001 |
|
|
493 |
|
|
|
487 |
|
| Additional paid-in capital |
|
|
483,491 |
|
|
|
480,050 |
|
| Accumulated other comprehensive income |
|
|
2,891 |
|
|
|
— |
|
| Accumulated deficit |
|
|
(186,126 |
) |
|
|
(124,592 |
) |
| Unamortized stock-based compensation |
|
|
(1,436 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Total stockholders' equity |
|
|
299,313 |
|
|
|
355,945 |
|
| |
|
|
|
|
|
|
|
|
| Total liabilities and stockholders' equity |
|
$ |
476,535 |
|
|
$ |
538,701 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
3
CURAGEN CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| |
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Collaboration revenue |
|
$ |
6,019 |
|
|
$ |
6,084 |
|
|
$ |
14,490 |
|
|
$ |
17,986 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
|
6,019 |
|
|
|
6,084 |
|
|
|
14,490 |
|
|
|
17,986 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Research and development |
|
|
21,295 |
|
|
|
17,388 |
|
|
|
63,667 |
|
|
|
45,861 |
|
| General and administrative |
|
|
6,207 |
|
|
|
4,830 |
|
|
|
17,394 |
|
|
|
13,989 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
27,502 |
|
|
|
22,218 |
|
|
|
81,061 |
|
|
|
59,850 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss from operations |
|
|
(21,483 |
) |
|
|
(16,134 |
) |
|
|
(66,571 |
) |
|
|
(41,864 |
) |
| Interest income, net |
|
|
528 |
|
|
|
2,860 |
|
|
|
1,407 |
|
|
|
11,583 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss before income taxes and minority interest in subsidiary loss |
|
|
(20,955 |
) |
|
|
(13,274 |
) |
|
|
(65,164 |
) |
|
|
(30,281 |
) |
| Income tax benefit (expense) |
|
|
(28 |
) |
|
|
1,750 |
|
|
|
857 |
|
|
|
2,550 |
|
| Minority interest in subsidiary loss |
|
|
1,101 |
|
|
|
407 |
|
|
|
2,773 |
|
|
|
982 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
($ |
19,882 |
) |
|
($ |
11,117 |
) |
|
($ |
61,534 |
) |
|
($ |
26,749 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and diluted net loss per share |
|
$ |
(0.41 |
) |
|
$ |
(0.23 |
) |
|
$ |
(1.26 |
) |
|
$ |
(0.56 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average number of shares used in
computing basic and diluted net loss per share |
|
|
48,989 |
|
|
|
48,651 |
|
|
|
48,898 |
|
|
|
48,041 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
4
CURAGEN CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| |
|
Nine Months Ended |
|
| |
|
September 30,
|
|
| |
|
2002
|
|
|
2001
|
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| Net loss |
|
($ |
61,534 |
) |
|
($ |
26,749 |
) |
| Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
6,997 |
|
|
|
5,030 |
|
| Non-monetary compensation |
|
|
325 |
|
|
|
576 |
|
| Stock-based 401(k) employer plan match |
|
|
815 |
|
|
|
632 |
|
| Minority interest |
|
|
(2,773 |
) |
|
|
(982 |
) |
| Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
| Income taxes receivable |
|
|
(1,095 |
) |
|
|
(4,182 |
) |
| Accounts receivable |
|
|
(2,879 |
) |
|
|
(33 |
) |
| Other current assets |
|
|
504 |
|
|
|
(916 |
) |
| Prepaid expenses |
|
|
231 |
|
|
|
(580 |
) |
| Other assets |
|
|
13 |
|
|
|
53 |
|
| Accounts payable |
|
|
538 |
|
|
|
(353 |
) |
| Accrued expenses |
|
|
(13 |
) |
|
|
1,632 |
|
| Accrued payroll and related items |
|
|
349 |
|
|
|
384 |
|
| Interest payable |
|
|
(2,250 |
) |
|
|
(2,250 |
) |
| Deferred revenue |
|
|
1,108 |
|
|
|
468 |
|
| Other current liabilities |
|
|
(44 |
) |
|
|
121 |
|
| |
|
|
|
|
|
|
|
|
| Net cash used in operating activities |
|
|
(59,708 |
) |
|
|
(27,149 |
) |
| |
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| Acquisitions of property and equipment |
|
|
(18,529 |
) |
|
|
(9,239 |
) |
| Proceeds from sale of fixed assets |
|
|
29 |
|
|
|
— |
|
| Payments for intangible assets |
|
|
(18 |
) |
|
|
(60 |
) |
| Repayments from related parties |
|
|
50 |
|
|
|
137 |
|
| Net inflows (outflows) from purchases and maturities of short-term investments |
|
|
41,711 |
|
|
|
(37,272 |
) |
| Net outflows from purchases and maturities of marketable securities |
|
|
(126,819 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(103,576 |
) |
|
|
(46,434 |
) |
| |
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| Payments on capital lease obligations |
|
|
(2,478 |
) |
|
|
(2,681 |
) |
| Proceeds from sale-leaseback of equipment |
|
|
— |
|
|
|
901 |
|
| Proceeds from issuance of Common Stock |
|
|
— |
|
|
|
85,000 |
|
| Payments of stock issuance costs |
|
|
— |
|
|
|
(124 |
) |
| Payments of financing costs |
|
|
(12 |
) |
|
|
(12 |
) |
| Proceeds from exercise of stock options |
|
|
897 |
|
|
|
782 |
|
| Proceeds from exercise of warrants |
|
|
— |
|
|
|
62 |
|
| Proceeds from issuance of Restricted Stock |
|
|
3 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Net cash (used in) provided by financing activities |
|
|
(1,590 |
) |
|
|
83,928 |
|
| |
|
|
|
|
|
|
|
|
| Net (decrease) increase in cash and cash equivalents |
|
|
(164,874 |
) |
|
|
10,345 |
|
| Cash and cash equivalents, beginning of period |
|
|
235,618 |
|
|
|
329,495 |
|
| |
|
|
|
|
|
|
|
|
| Cash and cash equivalents, end of period |
|
$ |
70,744 |
|
|
$ |
339,840 |
|
| |
|
|
|
|
|
|
|
|
| Supplemental cash flow information: |
|
|
|
|
|
|
|
|
| Interest paid |
|
$ |
9,334 |
|
|
$ |
9,608 |
|
| |
|
|
|
|
|
|
|
|
| Supplemental schedule of non-cash financing transactions: |
|
|
|
|
|
|
|
|
| Obligations under capital leases |
|
$ |
0 |
|
|
$ |
901 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements
5
CURAGEN CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. In the opinion of our management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal
recurring accruals, necessary to present fairly our consolidated financial position, results of operations and cash flows. Interim results are not necessarily indicative of the results that may be expected for the entire year. The condensed
consolidated financial statements include CuraGen Corporation and our majority-owned subsidiary, 454 Corporation (“the Company”), and accordingly, all material intercompany balances and transactions have been eliminated.
The September 30, 2001 and December 31, 2001 condensed consolidated financial statements have been reclassified
to conform to the classifications used in 2002. All dollar amounts are shown in thousands, except par value and per share data.
The accompanying condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto included in our Annual Report
on Form 10-K for the year ended December 31, 2001.
2. Accumulated Other Comprehensive Income
Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” (“SFAS
130”) requires reporting and displaying of comprehensive income and its components. In accordance with SFAS 130, the accumulated balance of other comprehensive income is disclosed as a separate component of stockholders’ equity and is
composed of unrealized gains and losses on marketable securities. For the three and nine months ended September 30, 2002, other comprehensive income was $1.9 million and $2.9 million, respectively, as compared to $0 for the corresponding periods.
The Company adopted SFAS 130 during the second quarter of 2002.
3. Subsequent Event—Restructuring Plan
On November 7, 2002, the Company announced a restructuring plan intended to reduce costs and
focus its resources on prioritizing, selecting and rapidly advancing its most promising drug candidates. As a result of the restructuring plan, the Company’s employee base was reduced by approximately 125 personnel, representing approximately
25% of its workforce. The reduction in personnel represented early-stage drug discovery and general and administrative positions.
In connection with this restructuring plan, a charge of approximately $11 million will be recorded in the fourth quarter of 2002, consisting of approximately $3 million related to employee separation
costs and asset impairment costs related to equipment no longer in service. The employee separation costs will be recorded under FASB 146 (see Note 3) and include amounts to be paid for severance and related benefits.
The Company has included in the restructuring charge of approximately $11 million a write-off of approximately $8 million,
consisting of costs previously incurred in conjunction with the planned construction of its campus facilities, including the company headquarters and protein production facility in Branford, Connecticut. At September 30, 2002, these costs were
included in property and equipment, net. Plans to construct these facilities have been deferred indefinitely, pending improvements in the external financing environment, which might afford the Company the ability to finance the future construction
costs.
6
4. Recently Enacted Pronouncements
In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 145, “Rescission of
FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of
that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. SFAS 145 amends FASB Statement
No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 are
effective for annual financial statements issued on or after May 15, 2002. The adoption of SFAS 145 is not expected to have a material effect on the Company’s financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities” (“SFAS 146”). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at its fair market value when the liability is incurred, rather than at the date of an entity’s
commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company intends to record the effect of the November 7, 2002 restructuring plan, as discussed in
Note 2, under the early adoption provisions of SFAS 146.
7
CURAGEN CORPORATION AND SUBSIDIARY MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s
Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2002 and for the three and nine month periods ended September 30, 2002 and 2001 should be read in conjunction with the sections of our audited condensed
consolidated financial statements and notes thereto as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included in our Annual Report on Form 10-K for the year ended December
31, 2001.
Overview
We are a genomics based pharmaceutical development company. We apply proprietary functional genomic technologies, bioinformatic systems, and disease expertise to discover genes and proteins, and to
determine how these genes and proteins function in the context of disease. We use this information to develop protein, antibody, and small molecule therapeutics to treat metabolic diseases, cancer, inflammatory diseases, and central nervous system
disorders. We are developing protein drugs on our own behalf, and have established alliances to develop antibody drugs across all disease areas, and to develop small molecule drugs to treat obesity and diabetes. We are currently pursuing additional
collaborations to develop small molecule drugs across our remaining disease areas. We were incorporated in November 1991 and, until March 1993, were engaged primarily in organizational activities, research and development of our technology, grant
preparation and obtaining financing. We have incurred losses since inception, principally as a result of research and development and general and administrative expenses in support of our operations. We anticipate incurring additional losses over
the next several years as we expand our drug development operations. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Our ability to earn revenues and become profitable is dependent
primarily on our ability to successfully develop and commercialize pharmaceutical products based upon our expertise in genomics, our technologies, and our drug discovery and development programs. Accomplishing this goal also depends in part on our
ability to maintain our existing strategic alliances, and on our ability to establish new alliances to aid us in developing and commercializing small molecule therapeutics. We cannot guarantee that any such strategic alliances, either new or
existing, will be successful. In June 2000, we established a majority-owned subsidiary, 454 Corporation (“454”), to develop novel technologies for rapidly and comprehensively analyzing entire genomes. We expect that 454 will commercialize
these products upon their development, which may be a future source of revenues for us.
Our failure to
successfully develop and market pharmaceutical products, or establish additional strategic alliances to aid us in this effort over the next several years would materially adversely affect our business, financial condition and results of operations.
Royalties or other revenue generated for us from commercial sales of products developed through the application of our technologies and respective expertise are not expected for several years, if at all.
On November 7, 2002, we announced a restructuring plan intended to reduce costs and focus our resources on prioritizing, selecting and
rapidly advancing our most promising drug candidates. As a result of the restructuring plan, our employee base was reduced by approximately 125 personnel, representing approximately 25% of our workforce. The reduction in personnel represented
early-stage drug discovery and general and administrative positions.
In connection with this restructuring plan,
a charge of approximately $11 million will be recorded in the fourth quarter of 2002, consisting of approximately $3 million related to employee separation costs and asset impairment costs related to equipment no longer in service. The employee
separation costs will be recorded under FASB 146 (see Note 3) and include amounts to be paid for severance and related benefits.
Included in the restructuring charge of approximately $11 million is a write-off of approximately $8 million, consisting of costs previously incurred in conjunction with the planned construction of our campus facilities, including
the company headquarters and protein production facility in Branford, Connecticut. At September 30, 2002, these costs were included in property and equipment, net. Plans to construct these facilities have been deferred indefinitely, pending
improvements in the external financing environment, which might afford us the ability to finance the future construction costs.
8
We expect to substantially complete our restructuring plan by the end of 2002. If
our restructuring program is implemented in the manner and on the timeline we intend, we expect to begin to realize the benefits of our restructuring plan by the end of the fourth quarter of 2002.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and as such, actual results may differ from
these estimates under different assumptions or conditions.
Our critical accounting policies, which are more fully
described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001, include the following:
Revenue Recognition—We have entered into certain collaborative research agreements that provide for the partial or complete funding of specified projects in
exchange for access to, and certain rights in, the data discovered under the related projects. Revenue is recognized based upon work performed or upon the attainment of certain benchmarks or milestones specified in the related agreements. We have
also entered into a collaborative research exchange agreement in which services and technology access are exchanged between the collaborative partners. Revenues and expenses under this exchange agreement are based upon the fair value of the work
performed by each collaborative partner. Deferred revenue arising from payments received from collaborative agreements is recognized as income when earned.
Cash and Investments—We consider investments readily convertible into cash, with an original maturity of three months or less, to be cash equivalents. Investments with an original maturity
greater than three months but less than one year are considered short-term investments. The carrying amount of the investments approximates fair value due to their short maturity. Investments with an original maturity greater than one year are
considered marketable securities and are classified as available-for-sale securities, and are carried at fair value with the unrealized gains and losses reported in stockholders’ equity under the caption “Accumulated Other Comprehensive
Income”. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest on debt securities, amortization of premiums and accretion of discounts are included in interest income.
The cost of securities sold, if any, is based on the specific identification method.
Property and
Equipment—Property and equipment are recorded at cost. Equipment is depreciated over the estimated useful lives of the related assets, ranging from three to seven years, using the straight-line method. Equipment under capital leases is
amortized over the shorter of the estimated useful life or the terms of the lease, using the straight-line method. Leasehold improvements are amortized over the shorter of the estimated life or the term of the lease, using the straight-line method.
Equipment which is not yet placed in service, or buildings and leasehold improvements the construction of which is not yet completed, are classified as construction in progress and included in property and equipment. Under accounting principles
generally accepted in the United States of America, land is not required to be depreciated.
Impairment of
Long-Lived Assets—We regularly evaluate the recoverability of the net carrying value of our property, and intangible assets, when an indicator of impairment is present by comparing the carrying values to the estimated future undiscounted
cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the need for a write-down due to impairment. The impairment write-down would be the difference between the carrying amounts and the fair value of these
assets as determined by using estimated future undiscounted cash flows. A loss on impairment would be recognized by a charge to earnings.
Patent Application Costs—Costs incurred in filing for patents are charged to operations, until such time as it is determined that the filing will be successful. When it becomes evident with reasonable certainty
that an application will be successful, the costs incurred in filing for patents will begin to be capitalized. Capitalized costs related to successful patent applications will be amortized over a period not to exceed twenty years or the remaining
life of the patent, whichever is shorter, using the straight-line method.
9
Stock-Based Compensation—In October 1995, the Financial Accounting
Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), which was effective for us beginning January 1, 1996. SFAS 123 requires
expanded disclosures of stock-based compensation arrangements with employees and non-employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instruments awarded to employees. Companies
are permitted to continue to apply Accounting Principles Board (“APB”) No. 25, which recognizes compensation cost based on the intrinsic value of the equity instruments awarded. We will continue to apply APB No. 25 to our stock-based
compensation awards to employees.
Results of Operations
Three and Nine Months Ended September 30, 2002 and 2001
Revenue. Collaboration revenue for the three and nine months ended September 30, 2002 was $6.0 million and $14.5 million, a decrease of $0.1 million and $3.5 million, or 1% and 19%, as compared to $6.1
million and $18.0 million for the corresponding periods in 2001. Revenues in the three month period ended September 30, 2002 were primarily a result of our collaborative research exchange arrangement with Abgenix, Inc. (“Abgenix”) and a
milestone payment from Bayer AG (“Bayer”), while the same period in 2001 primarily included revenue from our collaborative research exchange arrangement with Abgenix and our collaborative research agreements with Bayer and GlaxoSmithKline,
Inc. (“Glaxo”). Revenues recorded in the nine month period ended September 30, 2002 were primarily a result of our collaborative research exchange arrangement with Abgenix and included a milestone payment from Bayer while the same period
in 2001 included revenue from our collaborative research exchange arrangement with Abgenix and our collaborative research agreements with Bayer, COR Therapeutics, Inc. (“COR”) and Glaxo. The decreases in revenue are primarily due to the
completion of the research portion of the collaborative research agreements with COR in the first quarter of 2001 and Glaxo in the fourth quarter of 2001.
Further revenue growth will be dependent upon our ability to enter into additional collaborations and strategic alliances, maintain and expand current collaborations, receive royalties and milestone
payments from products currently under development by our current and former collaborators and successfully develop and market products that may arise from our own internal drug development pipeline. We expect fourth quarter 2002 collaborative
revenues to decrease slightly from corresponding 2001 levels, unless we enter into new agreements, or receive royalties and milestone payments from products currently under development by our current and former collaborative partners.
Operating Expenses. Research and development expenses for the three and nine months ended
September 30, 2002 were $21.3 million and $63.7 million, compared to $17.4 million and $45.9 million for the same periods in 2001. The increases of $3.9 million and $17.8 million, or 22% and 39%, were primarily attributable to increased internal
research efforts and our obligations to fulfill research requirements under existing collaborations and strategic alliances, which included payments for contractual services, increased equipment depreciation, and additional personnel costs. We
expect that research and development expenses for the remainder of 2002 will increase in comparison to the third quarter of 2002, as we continue advancing our products toward clinical development, and as the operations of 454 continue to grow.
General and administrative expenses for the three and nine months ended September 30, 2002 increased $1.4 million
and $3.4 million, or 29% and 24%, to $6.2 million and $17.4 million as compared to $4.8 million and $14.0 million for the three and nine months ended September 30, 2001. The increases were primarily attributable to higher personnel and payroll
costs, increases in expenses in connection with upgrades and expansion of our facilities, as well as legal expenses in support of the development of our intellectual property portfolio. We anticipate reductions in general and administrative
expenses, principally payroll and related personnel costs for the remainder of 2002 as compared to the third quarter of 2002, as we continue to closely monitor patent-related legal expenses and decrease the amount of facilities expansions.
Interest Income, Net. Net interest income for the three and nine months ended
September 30, 2002 of $0.5 million and $1.4 million decreased $2.4 million and $10.2 million, or 83% and 88%, as compared to $2.9 million and $11.6 million for the same periods in 2001. Gross interest income for the three and nine months ended
September 30, 2002 of $3.1 million and $9.1 million decreased $2.4 million and $10.4 million, or 44% and 53%, as compared to $5.5 million and $19.5 million for the same periods in 2001. The decreases in gross and net interest income were primarily
due to lower cash and investment balances and declines in interest rates earned on our investments. Gross interest expense for the three and nine months ended September 30, 2002 of $2.5 million and $7.7 million represented a decrease of $0.1 million
and $0.2 million, or 4% and 3%, as compared to $2.6 million and
10
$7.9 million for the three and nine months ended September 30, 2001. This decrease was primarily a result of declining interest payments on various expiring capital leases. We expect gross
interest expense to increase slightly in the future in conjunction with anticipated equipment financing for capital expenditures.
Income Taxes. For the three and nine months ended September 30, 2002, we recorded a net Connecticut income tax expense of $0.02 million and a net income tax benefit of $0.9 million, respectively. The
income tax benefit is a result of Connecticut legislation, which allows companies to obtain cash refunds from the State of Connecticut at a rate of 65% of their annual research and development expense credit, in exchange for foregoing carryforward
of a research and development credit for state tax purposes. For the year ended December 31, 2002, we anticipate that the income tax benefit will be approximately $1.2 million, as we incur additional qualifying research and development costs.
As a result of Connecticut legislation passed in July 2002, effective for tax years beginning on or after January
1, 2002, companies are required to pay on an annual basis a minimum of 30% of the capital base component of their Connecticut corporation business tax, notwithstanding available tax credit carry-forwards. Therefore, for the nine months ended
September 30, 2002, the net income tax benefit includes an accrual of approximately $0.2 million for the capital base tax liability.
Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, valuation allowances in amounts equal to the deferred income tax assets have been
established to reflect these uncertainties in all periods presented.
Net Loss. For
the three and nine months ended September 30, 2002, we reported a net loss of $19.9 million and $61.5 million or $0.41 per share and $1.26 per share as compared to $11.1 million and $26.7 million or $0.23 per share and $0.56 per share for the same
periods in 2001. The increases in net loss of $8.8 million and $34.8 million, or 79% and 130%, were primarily due to additional research and development and general and administrative expenses in support of the advancement of our drug discovery and
development efforts, and declines in collaboration revenue and gross interest income. Since inception, we have incurred operating losses, and as of September 30, 2002, we had an accumulated deficit of $186.1 million. We have not paid any federal
income taxes since inception.
Minority Interest in Subsidiary Loss. Minority
interest in subsidiary loss for the three and nine months ended September 30, 2002, which is the portion of 454’s loss attributable to stockholders of 454 other than us, was $1.1 million and $2.8 million as compared to $0.4 million and $1.0
million for the same periods in 2001. The increases of $0.7 million and $1.8 million, or 175% and 180%, were primarily due to 454’s increased purchases of laboratory supplies, increased equipment depreciation, additional personnel costs and
legal expenses in support of the development of their intellectual property portfolio. As the expected future level of 454’s loss increases, we anticipate recording an increased minority interest in subsidiary loss based upon the minority
shareholders’ ownership percentage.
Liquidity and Capital Resources
As of September 30, 2002, we had $431.5 million in cash and investments as compared to $508.3 million as of December 31, 2001. The decrease in cash and investments
during the first nine months of 2002 of $76.8 million was primarily a result of additional operating losses in support of our research and development activities, acquisitions of additional property and equipment and payment of interest to the
holders of our convertible subordinated debt. We have financed our operations since inception primarily through public offerings, our convertible subordinated debt offering, revenues received under our collaborative research agreements, private
placements of equity securities, government grants and capital leases. As of September 30, 2002, we had recognized $95.3 million of cumulative sponsored research revenues from collaborative research agreements and government grants. To date,
inflation has not had a material effect on our business.
Our cash investing activities have consisted primarily
of acquisitions of equipment and expenditures for leasehold improvements. At September 30, 2002, our gross investment in lab and office equipment, computers, land and leasehold improvements since inception was $57.4 million, including approximately
$8 million associated with our campus facilities in Branford, Connecticut. At September 30, 2002, equipment with a gross book value of $10.0 million secured our equipment financing facilities. We had approximately $1.2 million in material
commitments for capital expenditures at September 30, 2002.
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Our cash requirements under the restructuring plan are anticipated to be
approximately $1.5 million, of which we expect the majority to be paid to terminated employees prior to December 31, 2002. We expect to substantially complete our restructuring plan by the end of 2002. If our restructuring program is implemented in
the manner and on the timeline we intend, we expect to begin to realize the benefits of our restructuring plan by the end of the fourth quarter of 2002.
In accordance with our investment policy, we are utilizing the following investment objectives for cash and investments: (1) investment decisions are made with the expectation of minimum risk of
principal loss, even with a modest penalty in yield; (2) appropriate cash balances and related short-term funds are maintained for immediate liquidity needs, and appropriate liquidity is available for medium-term cash needs; and (3) maximum
after-tax yield is achieved.
Cash Flows For The Nine Months Ended September 30, 2002
Operating Activities. Net cash used in operating activities was $59.7 million for the nine months
ended September 30, 2002 and was primarily due to the net cash loss from operations of $56.2 million, increases in income taxes receivable of $1.1 million and accounts receivable of $2.9 million in addition to a decrease in interest payable of $2.3
million, offset by decreases in other current assets of $0.5 million and prepaid expenses of $0.2 million, and increases in accounts payable of $0.5 million, accrued payroll and related items of $0.3 million and deferred revenue of $1.1 million.
Investing Activities. Net cash used in investing activities was $103.6 million for
the nine months ended September 30, 2002 and was primarily due to acquisitions of property and equipment of $18.5 million and net outflows from purchases and maturities of short-term investments and marketable securities of $85.1 million.
Financing Activities. Net cash used in financing activities was $1.6 million for
the nine months ended September 30, 2002 and primarily included payments on capital lease obligations of $2.5 million, offset by proceeds from exercises of stock options in the amount of $0.9 million.
Future Liquidity
Sources of Liquidity. During the remainder of 2002, we expect to fund our operations through a combination of the following sources: cash and investment balances; collaboration revenue; gross
interest income; and tax benefits from the State of Connecticut.
Uses of
Liquidity. Through the end of 2002, we plan to continue making substantial investments in our emerging preclinical and clinical drug pipeline. We foresee the following as significant uses of liquidity: research and
development expenses; general and administrative expenses; gross interest expense; facilities and equipment costs; and employee separation costs in relation to our restructuring plan announced in November 2002 (see Note 2).
We believe that our existing cash and investment balances and other sources of liquidity will be sufficient to meet our requirements
through the end of 2003. We consider our expenditures to be crucial to our future success and by continuing to make strategic investments in research and development, we believe that we are building substantial value for our shareholders.
While we will continue to explore alternate sources for financing our business activities, including the possibility of public and/or private offerings of our securities, we cannot assure that in the future these sources of liquidity will be
available when needed or that our actual cash requirements will not be greater than anticipated. In appropriate strategic situations, we may seek financial assistance from other sources, including contributions by others to joint ventures and other
collaborative or licensing agreements for the development and testing of products under development.
Minority
Interest in Subsidiary
As of September 30, 2002, minority interest in subsidiary was $11.2 million. Minority
interest in subsidiary is related to the establishment of 454, our majority-owned subsidiary, during 2000 and reflects the initial minority shareholders’ capitalization less a gain recognition of $3.9 million as a result of our contribution of
technology to 454, and less the minority shareholders’ portion of losses and stock issuance costs incurred to date. The minority interest in subsidiary is expected to continue to decrease during the remainder of 2002 as 454 incurs expenditures
associated with technology development.
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Recently Enacted Pronouncements
In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement,
FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. SFAS 145 amends FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback
transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 are effective for
annual financial statements issued on or after May 15, 2002. The adoption of SFAS 145 is not expected to have a material effect on our financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be recognized at its fair market value when the liability is incurred, rather than at the date of an entity’s commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31, 2002. We intend to record the effect of the November 7, 2002 restructuring plan, as discussed in Note 2, under the early adoption provisions of SFAS 146.
Item 4. Controls and Procedures
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(a) |
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Evaluation of Disclosure Controls and Procedures |
As of October 16, 2002 (a date within 90 days before the filing date of this Form 10-Q), an evaluation was performed by our Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)). Based on that
evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective as of October 16, 2002.
| |
(b) |
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Changes in Internal Controls |
The CEO and CFO have indicated that there have been no significant changes in our internal controls or other factors that could significantly affect internal controls subsequent to October 16, 2002,
including any corrective actions with regard to significant deficiencies and material weaknesses.
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Certain Factors That May Affect Results of Operations
This report contains forward-looking statements that are subject to certain risks and uncertainties. These include statements regarding: (i) our expectation that
SFAS 145 will not have a material effect on our financial statements, (ii) our intention to record the effect of the November 7, 2002 restructuring plan under the early adoption provisions of SFAS 146, (iii) our ability to apply proprietary
functional genomic technologies, bioinformatic systems, and disease expertise to discover genes and proteins, and to determine how these genes and proteins function in the context of disease, (iv) our expectation that losses will fluctuate from
quarter to quarter and that such fluctuations may be substantial, (v) the ability of our subsidiary, 454 Corporation, to commercialize products upon their development and create a future source of revenues for us, (vi) our expectation that our
restructuring plan will be substantially complete and that we will begin to realize the benefits of the plan by the end of 2002, (vii) our expectation that 2002 collaborative revenues will decrease slightly from 2001 levels, (viii) the expectation
that gross interest expense will remain relatively constant in the near future, (ix) our income tax benefit which will be approximately $1.2 million in 2002, as we incur additional qualifying research and development costs, (x) our ability to fund
our operations through a combination of sources during 2002 and to make substantial investments in our emerging preclinical and clinical drug pipeline, (xi) our belief that our sources of liquidity will be sufficient to meet our requirements through
the end of 2003, and (xii) the increased loss attributed to our minority ownership in 454 during 2002 as it increases expenditures associated with technology development. Such statements are based on our management’s current expectations and
are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. We caution investors that there can be no assurance that actual results or business
conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the following: our ability to successfully complete our restructuring plan
announced on November 7, 2002, our stage of development as a genomics based pharmaceutical company, uncertainties of clinical trials, government regulation and healthcare reform, technological uncertainty and product development risks, product
liability exposure, uncertainty of additional funding, our history of incurring losses and the uncertainty of achieving profitability, reliance on research collaborations and strategic alliances, competition, our ability to protect our patents and
proprietary rights, and uncertainties relating to commercialization rights. Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001 for a more detailed description of these risks. We disclaim any intention or
obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law.
14
Part II—Other Information
Item 6. Exhibits and Reports on Form 8-K
| A. |
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Exhibits |
| |
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Exhibit 10.1—Employment Agreement, dated September 9, 2002, between the Registrant and Timothy M. Shannon |
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| |
|
Exhibit 99.1—Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,
United States Code) |
B. Reports on Form 8-K
On July 25, 2002 we filed a report on Form 8-K under Item 5 “Other Events and Regulation FD Disclosure” announcing financial
results for the quarter ended June 30, 2002.
On September 18, 2002 we filed a report on Form 8-K under Item 5
“Other Events and Regulation FD Disclosure” announcing that in collaboration with Bayer AG’s toxicologists, we have developed an innovative technology capable of predicting a drug compound’s potential for toxicity. In addition,
we received a milestone payment of $2.9 million from Bayer for successfully developing this technology and industrializing it into a high-throughput format.
15
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.
| Dated: November 14, 2002 |
|
CuraGen Corporation |
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|
|
| |
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By: /s/ Jonathan M. Rothberg, Ph.D. |
| |
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Jonathan M. Rothberg, Ph.D. |
| |
|
Chief Executive Officer, President and |
| |
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Chairman of the Board |
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|
|
| |
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By: /s/ David M. Wurzer |
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David M. Wurzer |
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Executive Vice-President, Chief Financial Officer |
| |
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and Treasurer (principal financial and accounting |
| |
|
officer of the registrant) |
16
I, Jonathan M. Rothberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CuraGen 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 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 functions):
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 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 14, 2002
/s/ Jonathan M. Rothberg, Ph.D.
Jonathan M. Rothberg, Ph.D.
Chief Executive Officer, President and
Chairman of the
Board
17
CERTIFICATIONS
I, David M. Wurzer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CuraGen 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 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 functions):
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 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 14, 2002
/s/ David M. Wurzer
David M. Wurzer
Executive
Vice-President, Chief Financial Officer
and Treasurer (principal financial and accounting officer of the registrant)
18
CURAGEN CORPORATION
| No. |
|
|
| Exhibit 10.1 |
|
Employment Agreement, dated September 9, 2002, between the Registrant and Timothy M. Shannon |
| Exhibit 99.1 |
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States
Code) |
19