SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1996.
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 number 0-27976.
GalaGen Inc.
(Exact name of registrant as specified in its charter)
Delaware 41-1719104
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 Lexington Ave. North
Arden Hills, Minnesota 55126
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(Address of principal executive offices) (Zip Code)
(612) 481-2105
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.Common stock, $.01 par value
7,140,965 shares as of September 30, 1996.
1
INDEX
GalaGen Inc.
(A Development Stage Company)
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 30, 1996, and December 31, 1995...........3
Statements of Operations - Three month periods ended
September 30, 1996, and September 30, 1995, nine month
periods ended September 30, 1996, and September 30, 1995,
and for the period November 17, 1987 (inception) through
September 30, 1996...................................................4
Statements of Cash Flows - Nine months ended
September 30, 1996, and September 30, 1995, and for the
period November 17, 1987 (inception) through
September 30, 1996...................................................5
Notes to Financial Statements........................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.....................9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................12
SIGNATURES...................................................................14
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GalaGen Inc.
(A Development Stage Company)
Balance Sheets
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,290,390 $ 509,339
Available-for-sale securities 7,236,534 -
Prepaid and deferred expenses 236,635 81,703
--------------- -------------
Total current assets 13,763,559 591,042
Property, plant, & equipment: 1,064,883 230,484
Less accumulated depreciation (180,355) (149,783)
--------------- -------------
Net property, plant, and equipment 884,528 80,701
Deferred financing expenses - 146,487
--------------- -------------
Total assets $ 14,648,087 $ 818,230
--------------- -------------
--------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses $ 1,386,474 $ 1,623,949
--------------- -------------
Total current liabilities 1,386,474 1,623,949
Convertible promissory notes, net of discount - 8,198,900
Other long-term liabilities 45,000 698,404
Shareholders' equity(deficiency):
Series A Preferred Stock, $.01 par value: - 25,000
Authorized shares - 2,500,000
Issued and outstanding shares - 0 -
September 30, 1996
Series B Preferred Stock, $.01 par value: - 12,347
Authorized shares - 1,300,000
Issued and outstanding shares - 0 -
September 30, 1996
Series C Preferred Stock, $.01 par value: - 5,510
Authorized shares - 551,000
Issued and outstanding shares - 0 -
September 30, 1996
Series E Preferred Stock, $.01 par value: - 3,385
Authorized shares - 5,000,000
Issued and outstanding shares - 0 -
September 30, 1996
Series F-1 Preferred Stock, $.01 par value: - 171
Authorized shares - 34,287
Issued and outstanding shares - 0 -
September 30, 1996
Preferred Stock, $.01 par value: - -
Authorized shares - 15,000,000 pro forma
Issued and outstanding shares - none
Common stock, $.01 par value: 71,410 19,521
Authorized shares - 40,000,000
Issued and outstanding shares- 7,140,965-
September 30, 1996
Additional paid-in capital 59,141,489 23,812,106
Accumulated deficit (45,061,452) (32,400,329)
Deferred compensation (925,684) (1,180,734)
Unrealized gain/(loss) on available-for-sale securities (9,150) -
--------------- --------------
Total shareholders' equity (deficiency) 13,216,613 (9,703,023)
--------------- --------------
Total liabilities and shareholders' equity (deficiency) $ 14,648,087 $ 818,230
--------------- --------------
--------------- --------------
SEE ACCOMPANYING NOTES
Note: The balance sheet at December 31, 1995, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
3
GalaGen Inc.
(A Development Stage Company)
Statements of Operations (Unaudited)
PERIOD FROM
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED NOVEMBER 17, 1987
----------------------------- ----------------------------- (INCEPTION) TO
SEP. 30, 1996 SEP. 30, 1995 SEP. 30, 1996 SEP. 30, 1995 SEP. 30, 1996
------------- ------------- ------------- ------------- -----------------
Revenues:
Product sales $ - $ - $ - $ - $ 1,449,593
Product royalties - - - - 62,747
Research and development revenues - - - 100,000 396,350
------------- ------------- ------------- ------------- ---------------
- - - 100,000 1,908,690
Operating costs and expenses:
Cost of goods sold - - - - 3,468,711
Research and development 1,659,079 794,325 3,444,800 3,063,490 21,382,716
General and administrative 493,226 494,449 1,405,896 1,197,474 13,565,132
------------- ------------- ------------- ------------- ---------------
Operating loss (2,152,305) (1,288,774) (4,850,696) (4,160,964) (36,507,869)
Interest income 205,476 20,670 413,421 24,844 565,225
Interest expense (8,902) (130,856) (927,004) (345,291) (2,427,385)
------------- ------------- ------------- ------------- ---------------
Net loss before extraordinary gain (1,955,731) (1,398,960) (5,364,279) (4,481,411) (38,370,029)
Extraordinary gain on extinguishment
of debt - 404,393 - 404,393 605,421
------------- ------------- ------------- ------------- ---------------
Net loss for the period and deficit
accumulated during the development
stage (1,955,731) (994,567) (5,364,279) (4,077,018) (37,764,608)
Less preferred stock dividends - - (7,296,844) - (7,296,844)
------------- ------------- ------------- ------------- ---------------
Net loss applicable to common
shareholders $ (1,955,731) $ (994,567) $(12,661,123) $ (4,077,018) $(45,061,452)
------------- ------------- ------------- ------------- ----------------
------------- ------------- ------------- ------------- ----------------
Net loss per share applicable to
common shareholders:
Primary $ (.27) $ (.49) $ (1.96) $ (2.01) $ (27.97)
Fully diluted $ (.27) $ (.20) $ (1.96) $ (.87) $ (19.66)
Weighted average number of
common shares outstanding:
Primary 7,134,136 2,042,117 6,450,999 2,028,571 1,610,892
Fully diluted 7,134,136 4,872,568 6,450,999 4,702,966 2,292,148
SEE ACCOMPANYING NOTES
4
GalaGen Inc.
(A Development Stage Company)
Statements of Cash Flows (Unaudited)
PERIOD FROM
FOR THE NINE MONTHS ENDED NOVEMBER 17, 1987
----------------------------------- (INCEPTION) TO
SEP. 30, 1996 SEP. 30, 1995 SEP. 30, 1996
-------------- -------------- ---------------
OPERATING ACTIVITIES:
Net loss $ (12,661,123) $ (4,077,018) $ (45,061,452)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 308,718 76,349 1,829,867
Preferred stock dividend 7,296,844 - 7,296,844
Interest expense 768,064 - 768,064
Extraordinary gain - (404,393) (605,421)
Equity issued for services - 311,078 3,115,224
Changes in operating assets and liabilities (943,457) 1,608,558 1,125,803
-------------- -------------- ---------------
Net cash used in operating activities $ (5,230,954) $ (2,485,426) $ (31,531,071)
-------------- -------------- ---------------
INVESTING ACTIVITIES:
Purchase of plant, property and equipment, net (834,490) (37,779) (2,821,020)
Purchase of available-for-sale securities, net (7,230,447) - (7,230,447)
-------------- -------------- ---------------
Net cash used in investing activities $ (8,064,937) $ (37,779) $ (10,051,467)
FINANCING ACTIVITIES:
Proceeds from equity offering 19,083,346 195,000 32,760,912
Proceeds from notes 500,000 2,400,000 15,618,420
Payment of notes, including interest (506,404) - (506,404)
-------------- -------------- --------------
Net cash from financing activities $ 19,076,942 $ 2,595,000 $ 47,872,928
-------------- -------------- --------------
Increase in cash 5,781,051 71,795 6,290,390
Cash and cash equivalents at beginning of period 509,339 430,153 -
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 6,290,390 $ 501,948 $ 6,290,390
-------------- -------------- --------------
-------------- -------------- --------------
SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
Deferred compensation for employee options - - 1,657,000
Value of convertible debt warrants - 109,000 114,333
Conversion of convertible promissory notes plus
related accrued interest, net of financing costs 9,469,075 - 9,469,075
SEE ACCOMPANYING NOTES
5
GalaGen Inc. (A Development Stage Company)
Notes to Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of normal, recurring accruals) considered
necessary for fair presentation have been included. Operating results for
the nine month period ended September 30, 1996, are not necessarily
indicative of the results that may be expected for the year ended December
31, 1996. These financial statements should be read in conjunction with
the audited financial statements and accompanying notes for the fiscal
year ended December 31, 1995, contained in the Company's Prospectus dated
March 27, 1996.
2. CASH AND CASH EQUIVALENTS
Cash equivalents include short-term highly liquid investments
purchased at cost, which approximate market, with original maturities of
three months or less.
3. INVESTMENTS
Investments in debt securities with a remaining maturity of more than
three months at the date of purchase are classified as marketable
securities. Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Debt securities are classified as available-for-
sale as of September 30, 1996. The Company considers the net unrealized
gain (loss) on these investments to be temporary, and as such has recorded
it through shareholders' equity. The amortized cost and estimated market
value of investments are as follows:
GROSS GROSS ESTIMATED
AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES MARKET VALUE
-------------- ---------------- ----------------- ------------
As of September 30, 1996
Commercial paper $ 981,021 $ 0 $ (141) $ 980,880
U.S. Government agency securities 3,540,014 422 (2,167) 3,538,269
U.S. Treasury securities 2,531,834 5,911 0 2,537,745
Investment grade debt securities 192,815 0 (13,175) 179,640
------------ ------------ ------------ ------------
$7,245,684 $ 6,333 $ (15,483) $7,236,534
The amortized cost and estimated market value of investments by contractual maturity are as follows:
GROSS GROSS ESTIMATED
AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES MARKET VALUE
-------------- ---------------- ----------------- ------------
As of September 30, 1996
Due in one year or less $ 4,020,350 $ 422 $ (1,316) $ 4,019,456
Due after one year through two years 3,225,334 5,911 (14,167) 3,217,078
------------ ------------ ------------ ------------
$ 7,245,684 $ 6,333 $ (15,483) $ 7,236,534
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided for on the straight line method. At September 30,
1996, construction in progress consisted of leasehold improvements in connection
with the Company's pilot plant manufacturing facility (see Note 5 of Notes to
Financial Statements below). At September 30, 1996, property and equipment
consisted of the following:
6
Furniture, fixtures and equipment $ 318,731
Construction in progress 746,152
-----------
1,064,883
Less accumulated depreciation (180,355)
-----------
$ 884,528
5. COMMITMENTS
During June 1996 the Company entered into a series of leasing
agreements with Cargill Leasing Corporation ("Cargill") which includes a
Commitment Letter, Master Equipment Lease and an Agreement for Progress
Payments (the "Agreements"). The Agreements provide that the Company may
purchase up to $1,100,000 of manufacturing equipment for the Company's
pilot plant facility through lease take-downs from Cargill. The lease
take-down at September 30, 1996, was approximately $232,000. The Company
expects that the lease take-downs will end in December 1996 at which time
full lease payments will commence for a period of seven years with the
Company's option to extend for an additional 12 months. Interest upon
commencement of full lease payments will be computed on a weighted average
of LIBOR and the rate on five year U.S. Treasury Notes. Prior to the
commencement of full lease payments, the Company is required to make
interest payments at prime plus 2% on the lease take-down. The lease is
guaranteed by Land O' Lakes, Inc. This lease will be structured as an
operating lease in accordance with FASB 13.
During June 1996, the Company entered into a five year lease agreement
with Land O' Lakes, Inc. for specified space within the Land O' Lakes
facility in connection with the Company's pilot plant manufacturing
facility. The lease calls for annual payments of approximately $86,000 and
can be extended for additional one year periods at the option of the
Company.
6. LINE OF CREDIT
In January 1996, the Company entered into a $2.7 million line of
credit agreement with a commercial bank, which expired with the closing of
the Company's initial public offering (the "Offering") on April 1, 1996.
Loans under this line of credit were to be guaranteed by six parties and
the guarantee was collateralized by letters of credit posted by them in the
aggregate amount of $2.7 million. In consideration for the guarantees and
letters of credit posted by these parties, the Company issued warrants to
purchase an initial aggregate of 162,014 shares of common stock at $7.00
per share.
In connection with this transaction, each of John Pappajohn and Land
O'Lakes, Inc., guaranteed $500,000 of the $2.7 million line of credit, and
in exchange received a warrant to purchase 30,003 shares of common stock at
$7.00 per share. John Pappajohn is a director and shareholder of the
Company. Land O'Lakes, Inc. is a shareholder and has a representative
serving on the board of directors of the Company.
In January 1996, the Company issued two convertible promissory notes
for $375,000 and $125,000 to two investment funds controlled by Investment
Advisers, Inc., which is a shareholder and has a representative serving on
the board of directors of the Company. The notes became due on completion
of the Offering. The notes were convertible into Series E Preferred Stock
at the option of the holder. In connection with these notes, the Company
issued warrants to purchase 30,003 shares which are identical to the line
of credit warrants described above. The notes have been repaid.
7. REVERSE STOCK SPLIT
On January 19, 1996, the Board approved a reverse stock split of
3.6923-for-1 for the Company's outstanding common stock. The Company's
shareholders approved this reverse stock split in March 1996. All
information in the financial statements with respect to the common stock
and to the conversion prices and ratios of all the preferred stock have
been adjusted to reflect this change. The reverse stock split had no
effect on the numbers of shares of preferred stock issued and outstanding
(as opposed to the conversion prices of all the preferred stock and the
numbers of shares of common stock into which the preferred stock will
convert).
7
8. INITIAL PUBLIC OFFERING
GalaGen Inc. consummated the Offering on April 1, 1996, which
consisted of 2,000,000 shares of common stock at a $10 per share price to
the public. All of the Company's preferred stock mandatorily converted
into common stock immediately prior to the closing of the Offering. Series
A Preferred Stock converted on a 1-for-1 basis, Series B Preferred Stock
converted on a 1.625-for-1 basis, Series C Preferred Stock converted on a
1.667-for-1 basis. The terms of the Series D, Series E and Series F-1
Preferred Stock provided that the conversion prices of such stock be
automatically adjusted to reflect the lower of their effective conversion
price at the time of closing or 70% of the initial public offering price in
the Offering. The $7,296,844 value of the additional shares received due
to such adjustments by the holders of Convertible Promissory Notes (which
converted into Series D Preferred Stock) and the Series E and Series F-1
Preferred stock upon conversion, based on a conversion price of 70% of the
Offering price of $10 per share, was recorded in the second quarter of 1996
as a preferred stock dividend and an increase to the net loss to arrive at
net loss available to holders of common stock in the calculation of net
loss per share.
Additionally, the 192,017 common stock warrants issued for
consideration for the guarantee of the Company's $2,700,000 line of credit
and for the $375,000 and $125,000 promissory notes described above in Note
6 provide that the exercise price be equal to 70% of the Offering price.
The difference between the Offering price and exercise price multiplied by
the number of warrants, plus the intrinsic value of the warrants was
$768,064. Of that amount, $160,000 was recorded in the first quarter of
1996 as interest expense, and $608,064 was recorded as interest expense in
the second quarter of 1996.
9. EMPLOYEE STOCK PURCHASE PLAN
In March 1996, the Company adopted the Employee Stock Purchase Plan
whereby 270,833 shares of common stock have been reserved. All employees
who have met the service eligibility requirements are eligible to
participate and may direct the Company to make payroll deductions of one to
ten percent of their compensation during a purchase period for the purchase
of shares under the plan. Participants may purchase up to 5000 shares of
common stock for a given purchase period provided the fair market value of
the stock is not more than $25,000 (determined at the beginning of each
purchase period). The plan provides a participating employee the right,
subject to certain limitations, to purchase the Company's common stock at a
price equal to the lower of 85% of the fair market value of the Company's
common stock on the first day, or the last day, of the applicable purchase
period. The first purchase commenced on July 1, 1996, and will end on
December 31, 1996. Subsequent purchase periods will run for twelve months.
10. LOSS PER SHARE
The primary loss per share is based on the weighted average common
shares outstanding during the period. The fully diluted loss per share
assumes the conversion of preferred shares outstanding prior to the initial
public offering to common shares as of the beginning of the period. The
loss per share for periods prior to April 1, 1996, the closing date of the
Offering, also gives effect to the requirements of Staff Accounting
Bulletin No. 83 (SAB 83).
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
GalaGen Inc. is developing oral therapeutics that target life-
threatening and infectious diseases such as those caused by
antibiotic-resistant and emerging pathogens. The Company's naturally
derived immunotherapeutics are comprised of concentrated pathogen-
specific polyclonal antibodies which the Company produces in
concentrated form using its proprietary immunization technology. The
Company's products in development address serious gastrointestinal
infections complicating AIDS, cancer and antibiotic therapy, as well
as peptic ulcer disease. GalaGen's lead product in development,
Sporidin-G, is a polyclonal antibody product with specificity for
Cryptosporidium parvum, a parasite which causes chronic, life-
threatening diarrhea in AIDS and other immunocompromised patients.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996, AND SEPTEMBER 30, 1995
GENERAL. The net loss of $1,955,731 for the three months ended
September 30, 1996, increased from the net loss of $994,567 for the
three months ended September 30, 1995, due in part to a $404,393 gain
in the earlier period from debt reduction settlements of the
Company's terminated transgenics program. Historical spending levels
are not indicative of future spending levels because the Company has
entered a period of rapid growth in product development activity,
which will include substantial increases in costs relating to
personnel, research and development activity, small-scale
manufacturing facilities and accelerated clinical trial activity. For
these reasons, the Company believes its expenses and losses have and
will continue to increase dramatically before any material product
revenues are generated.
RESEARCH AND DEVELOPMENT EXPENSES. Expenses for research and
development increased to $1,659,079 for the three months ended
September 30, 1996, from $794,325 for the three months ended September
30, 1995. Approximately $415,000 of the $864,754 increase was due to
increased spending for the Company's clinical trials, particularly
Sporidin-G. The remaining increase is a result of expanded research
and development program spending, including additional research and
development personnel expense. The Company expects research and
development expenses to continue to increase as the Company's
clinical trial activity accelerates, particularly expenses associated
with the development of Sporidin-G as the Company continues to expand
the number of clinical sites necessary to enroll the number of
patients that will be required to complete its ongoing Phase II/III
nationwide clinical trial.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses of $493,226 for the three months ended September 30, 1996,
were substantially equal to the $494,449 expense for the three months
ended September 30, 1995. Increased non-cash deferred compensation
expense was offset by decreased administrative support.
INTEREST INCOME AND EXPENSE. Interest income increased to
$205,476 for the three months ended September 30, 1996, from $20,670
for the three months ended September 30, 1995. This increase is
attributable to the Company's increased level of investable funds
which resulted from the Offering. Interest expense decreased to
$8,902 for the three months ended September 30, 1996, from $130,856
for the three months ended September 30, 1995. The $121,954 decrease
was due primarily to decreased Convertible Promissory Note interest
expense due to the conversion of such notes into common stock upon the
Offering.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT. The extraordinary
gain on extinguishment of debt of $404,393 for the three months ended
September 30, 1995, related to certain debt reduction settlements
regarding the Company's terminated transgenics program.
NINE MONTHS ENDED SEPTEMBER 30, 1996, AND SEPTEMBER 30, 1995
GENERAL. The net loss before preferred stock dividends of
$5,364,279 for the nine months ended September 30, 1996, increased
from the net loss of $4,077,018 for the three months ended September
30, 1995. Historical spending levels are not indicative of future
spending levels because the Company has entered a period of rapid
9
growth in product development activity, which will include substantial
increases in costs relating to personnel, research and development
activity, small-scale manufacturing facilities and accelerated
clinical trial activity. For these reasons, the Company believes its
expenses and losses have and will continue to increase dramatically
before any material product revenues are generated.
RESEARCH AND DEVELOPMENT EXPENSES. Expenses for research and
development increased to $3,444,800 for the nine months ended
September 30, 1996, from $3,063,490 for the nine months ended
September 30, 1995. The increase of $381,310 was due primarily to
increased clinical trial expense and research and development
spending on personnel and programs, which was significantly offset by
a onetime $300,000 license fee paid by the Company in March 1995, and
activity during the nine months ended September 30, 1995, in the
Company's transgenics program, which was terminated in May 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $1,405,896 for the nine months ended September
30, 1996, from $1,197,474 for the nine months ended September 30,
1995. The increase of $208,422 was due to increases during the 1996
period in non-cash deferred compensation expense, and expenses
associated with additional staffing.
INTEREST INCOME AND EXPENSE. Interest income increased to
$413,421 for the nine months ended September 30, 1996, from $24,844
for the nine months ended September 30, 1995. This increase is
attributable to the Company's increased level of investable funds
which resulted from the Offering. Interest expense increased to
$927,004 for the nine months ended September 30, 1996, from $345,291
for the nine months ended September 30, 1995. The $581,713 increase
was due primarily to the value of warrants issued to guarantors of a
line of credit and to the purchasers of additional Convertible
Promissory Notes, offset by decreased Convertible Promissory Note
interest expense due to the conversion of such notes into common stock
upon the Offering.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT. The extraordinary
gain on extinguishment of debt of $404,393 for the nine months ended
September 30, 1995, related to certain debt reduction settlements
regarding the Company's terminated transgenics program.
PREFERRED STOCK DIVIDENDS. The preferred stock dividends of
$7,296,844 for the nine months ended September 30, 1996, are a result
of the onetime valuation of the additional shares issued to holders of
the Series D, Series E and Series F-1 Preferred Stock upon conversion
to common stock (see Note 8 of Notes to Financial Statements) .
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that the proceeds from its second quarter
Offering, and interest thereon, will enable it to fund its operating
expenses and capital requirements as currently planned through
approximately the end of the third quarter of 1997. The immediately
preceding statement is a forward-looking statement that involves risks
and uncertainties, and the Company's actual capital requirements will
depend on many factors, including the commercial success of the
Company's products, the progress of the Company's research and
development, the scope and results of preclinical studies and clinical
trials, the cost of obtaining regulatory approvals, the Company's
success in obtaining the strategic alliances required to fund certain
of its programs, determinations as to the commercial potential of
certain of the Company's products, the status of competitive products
and the establishment of additional manufacturing capacity.
Cash used in operations was $5,230,954 and $2,485,426 for the
nine months ended September 30, 1996, and 1995, respectively. Cash
used in operations went primarily to fund operating losses. The
increase of $2,745,528 was due to the repayment of certain obligations
and to an increased operating loss. The Company invested a net amount
of $7,230,477 in available-for-sale debt securities (see Note 3 of
Notes to Financial Statements) for the nine months ended September
30, 1996, $71,717 in computer equipment used to support Company
operations and $746,152 for leasehold improvements for the Company's
pilot plant manufacturing facility during that same period. Net cash
used in investing activities for the comparable 1995 period resulted
from equipment purchases.
The Company expects to incur substantial additional research and
development and other costs, including costs related to clinical
studies, as well as capital expenditures necessary to establish
commercial scale cGMP manufacturing facilities. The Company will need
to raise substantial additional funds for longer term product
10
development, manufacturing and marketing activities it plans to
undertake in the future. The Company's ability to continue funding its
planned operations beyond the third quarter of 1997 is dependent upon
its ability to obtain additional funds through equity or debt
financing, strategic alliances, license agreements or from other
financing sources. A lack of adequate funding could eventually result
in the insolvency or bankruptcy of the Company. At a minimum, if
adequate funds are not available, the Company may be required to delay
or to eliminate expenditures for certain of its product development
efforts or to license to third parties the rights to commercialize
products or technologies that the Company would otherwise seek to
develop itself. Because of the Company's significant long-term capital
requirements, it may seek to raise funds when conditions are
favorable, even if it does not have an immediate need for such
additional capital at such time.
Except for the historical information contained herein, matters
discussed in this Management's Discussion and Analysis of Financial
Condition and Results of Operations are forward-looking statements
that involve risks and uncertainties, and actual results may be
materially different. Factors that could cause actual results to
differ include: levels of resources devoted by the Company to the
development of its manufacturing and marketing capabilities, risks
generally associated with construction of manufacturing facilities,
the ability of the Company to make technological advances, the status
of competitive products, the ability of the Company to establish
strategic alliances to provide research and development funding to the
Company and other risk factors listed in the Company's Prospectus
dated March 27, 1996.
11
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
EXHIBIT DESCRIPTION
------- -----------
3.2 Restated Certificate of Incorporation of the Company.
3.4 Restated Bylaws of the Company(1)
4.1 Specimen Common Stock Certificate.(1)
4.2 Warrant purchase 13,541 shares of Common Stock of the Company
issued to Piper Jaffray Inc., dated January 26, 1993.(1)
4.3 Warrant to purchase 20,312 shares of Common Stock of the Company
issued to Gus A. Chafoulias, dated October 12, 1993.(1)
4.4 Warrant to purchase 20,312 shares of Common Stock of the Company
issued to John Pappajohn, dated October 12, 1993.(1)
4.5 Warrant to purchase 9,479 shares of Common Stock of the Company
issued to Cato Holding Company, dated June 21, 1994.(1)
4.6 Form of Common Stock Warrant to purchase shares of Common Stock
of the Company, issued in connection with the sale of
Convertible Promissory Notes.(1)
4.7 Warrant to purchase 17,144 shares of Series F-1 Convertible
Preferred Stock of the Company issued to Chiron Corporation, dated
March 29, 1995.(1)
4.8 Warrant to purchase 42,856 shares of Series F-2 Convertible
Preferred Stock of the Company issued to Chiron Corporation, dated
March 29, 1995.(1)
4.9 Warrant to purchase 60,000 shares of Series F-3 Convertible
Preferred Stock of the Company issued to Chiron Corporation, dated
March 29, 1995.(1)
4.10 Warrant to purchase 80,000 shares of Series F-3 Convertible
Preferred Stock of the Company issued to Chiron Corporation, dated
March 29, 1995.(1)
4.11 Warrant to purchase 18,750 shares of Common Stock of the Company
issued to IAI Investment Funds VI, Inc. (IAI Emerging Growth
Fund), dated January 30, 1996.(1)
4.12 Warrant to purchase 6,250 shares of Common Stock of the Company
issued to IAI Investment Funds IV, Inc. (IAI Regional Fund),
dated January 30, 1996.(1)
4.13 Warrant to purchase 25,000 shares of Common Stock of the
Company issued to John Pappajohn, dated February 2, 1996.(1)
4.14 Warrant to purchase 25,000 shares of Common Stock of the Company
issued to Edgewater Private Equity Fund, L.P., dated February 2,
1996.(1)
4.15 Warrant to purchase 10,000 shares of Common Stock of the Company
issued to Joseph Giamenco, dated February 2, 1996.(1)
4.16 Warrant to purchase 25,000 shares of Common Stock of the Company
issued to Gus A. Chafoulias, dated February 2, 1996.(1)
4.17 Warrant to purchase 25,000 shares of Common Stock of the Company
issued to JIBS Equities, dated February 2, 1996.(1)
4.18 Warrant to purchase 25,000 shares of Common Stock of the Company
issued to Land O Lakes, Inc., dated February 2, 1996.(1)
12
EXHIBIT DESCRIPTION
------- -----------
4.19 Bridge Note (Promissory Note Convertible into Series E
Convertible Preferred payable to IAI Investment Funds VI, Inc.
(IAI Emerging Growth Fund), in the amount of $375,000 dated
January 30, 1996.(1)
4.20 Bridge Note (Promissory Note Convertible into Series E
Convertible Stock) payable to IAI Investment Funds IV, Inc. (IAI
Regional Fund), in the amount of $125,000 dated January 30,
1996.(1)
10.1 License Agreement between the Company and Land Lakes dated May
7, 1992.(1)
10.2 Royalty Agreement between the Company and Land Lakes dated May
7, 1992.(1)
10.3 Supply Agreement between the Company and Land Lakes dated May 7,
1992.(1)
10.4 Master Services Agreement between the Company and Land
Lakes dated May 7, 1992.(1)
10.5 GalaGen Inc. 1992 Stock Plan.
10.7 Stock and Warrant Purchase Agreement between the Company and
Corporation dated March 20, 1995.(1)
10.8 License and Collaboration Agreement between the Company and
Chiron dated March 20, 1995.(1)
10.9 GalaGen Inc. Employee Stock Plan., as amended. (2)
10.10 Credit Agreement between the Company and Norwest Bank Minnesota, N.A.
dated as of January 24, 1996.(1)
10.11 Commitment between the Company and Cargill Leasing
Corporation, dated June 5, 1996. (2)
10.12 Master Lease between the Company and Cargill Leasing
Corporation, dated June 6, 1996. (2)
10.13 Agreement for Payments between the Company and Cargill
Leasing Corporation, dated June 6, 1996. (2)
10.14 Agreement for between the Company and Land O'Lakes, dated
June 3, 1996 .(2)
10.15 Letter agreement with John G. Watson dated September 14, 1996.
11.1 Statement re: computation of per share earnings (loss).
27 Financial Data Schedule.
__________________________
(1) Incorporated herein by reference to the same numbered Exhibit to
the Company's Registration Statement on Form S-1 (Registration
No. 333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to
the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996 (File No. 0-27976).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
13
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.
GalaGen Inc.
____________
(Registrant)
Date: November 12, 1996 By: /s/ Robert A. Hoerr
_________________________
Robert A. Hoerr,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1996 By: /s/ Gregg A. Waldon
_________________________
Gregg A. Waldon,
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
14
EXHIBIT INDEX
EXHIBIT DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
3.2 Restated Certificate of Incorporation of the Company. Electronic
Transmission
3.4 Restated Bylaws of the Company.(1) Incorporated By
Reference
4.1 Specimen Common Stock Certificate.(1) Incorporated By
Reference
4.2 Warrant to purchase 13,541 shares of Common Stock of the Incorporated By
Company issued to Piper Jaffray Inc., dated January 26, 1993.(1) Reference
4.3 Warrant to purchase 20,312 shares of Common Stock of the Incorporated By
Company issued to Gus A. Chafoulias, dated October 12, 1993.(1) Reference
4.4 Warrant to purchase 20,312 shares of Common Stock of the Incorporated By
Company issued to John Pappajohn, dated October 12, 1993.(1) Reference
4.5 Warrant to purchase 9,479 shares of Common Stock of the Incorporated By
Company issued to Cato Holding Company, dated June 21, 1994.(1) Reference
4.6 Form of Common Stock Warrant to purchase shares of Common Incorporated By
Stock of the Company, issued in connection with the sale of Reference
Convertible Promissory Notes.(1)
4.7 Warrant to purchase 17,144 shares of Series F-1 Incorporated By
Convertible Preferred Stock of the Company issued to Chiron Reference
Corporation, dated March 29, 1995.(1)
4.8 Warrant to purchase 42,856 shares of Series F-2 Incorporated By
Convertible Preferred Stock of the Company issued to Chiron Reference
Corporation, dated March 29, 1995.(1)
4.9 Warrant to purchase 60,000 shares of Series F-3 Incorporated By
Convertible Preferred Stock of the Company issued to Chiron Reference
Corporation, dated March 29, 1995.(1)
4.10 Warrant to purchase 80,000 shares of Series F-3 Incorporated By
Convertible Preferred Stock of the Company issued to Chiron Reference
Corporation, dated March 29, 1995.(1)
4.11 Warrant to purchase 18,250 shares of Common Stock of the Incorporated By
Company issued to IAI Investment Funds VI, Inc. (IAI Emerging Reference
Growth Fund), dated January 30, 1996.(1)
4.12 Warrant to purchase 6,250 shares of Common Stock of the Incorporated By
Company issued to IAI Investment Funds IV, Inc. (IAI Regional Reference
Fund), dated January 30, 1996.(1)
4.13 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to John Pappajohn, dated February 2, 1996.(1) Reference
4.15 Warrant to purchase 10,000 shares of Common Stock of the Incorporated By
Company issued to Joseph Giamenco, dated February 2, 1996.(1) Reference
4.16 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
15
EXHIBIT DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
Company issued to Gus A. Chafoulias, dated February 2, 1996.(1) Reference
4.17 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to JIBS Equities, dated February 2, 1996.(1) Reference
4.18 Warrant to purchase 25,000 shares of Common Stock of the Incorporated By
Company issued to Land O'Lakes, Inc., dated February 2, 1996.(1) Reference
4.19 Bridge Note (Promissory Note Convertible into Series E Incorporated By
Convertible Preferred Stock) payable to IAI Investment Funds VI, Reference
Inc. (IAI Emerging Growth Fund), in the amount of $375,000 dated
January 30, 1996.(1)
4.20 Bridge Note (Promissory Note Convertible into Series E Incorporated By
Convertible Preferred Stock) payable to IAI Investment Funds IV, Reference
Inc. (IAI Regional Fund), in the amount of $125,000 dated
January 30, 1996.(1)
10.1 License Agreement between the Company and Land O'Lakes Incorporated By
dated May 7, 1992.(1) Reference
10.2 Royalty Agreement between the Company and Land O'Lakes Incorporated By
dated May 7, 1992.(1) Reference
10.3 Supply Agreement between the Company and Land O'Lakes Incorporated By
dated May 7, 1992.(1) Reference
10.4 Master Services Agreement between the Company and Land Incorporated By
O'Lakes dated May 7, 1992.(1) Reference
10.5 GalaGen Inc. 1992 Stock Plan. Electronic
Transmission
10.7 Stock and Warrant Purchase Agreement between the Company Incorporated By
and Chiron Corporation dated March 20, 1995.(1) Reference
10.8 License and Collaboration Agreement between the Company Incorporated By
and Chiron Corporation dated March 20, 1995.(1) Reference
10.9 GalaGen Inc. Employee Stock Purchase Plan, as amended. (2) Incorporated By
Reference
10.10 Credit Agreement between the Company and Norwest Bank Incorporated By
Minnesota, N.A., dated as of January 24, 1996.(1) Reference
10.11 Commitment Letter between the Company and Cargill Leasing Incorporated By
Corporation, dated June 5, 1996. (2) Reference
10.12 Master Equipment Lease between the Company and Cargill Incorporated By
Leasing Corporation, dated June 6, 1996. (2) Reference
10.13 Agreement for Progress Payments between the Company and Incorporated By
Cargill Leasing Corporation, dated June 6, 1996. (2) Reference
10.14 Agreement for Lease between the Company and Land O'Lakes, Incorporated By
dated June 3, 1996. (2) Reference
16
EXHIBIT DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
10.15 Letter agreement with John G. Watson dated September 14, 1996 Electronic
Transmission
11.1 Statement re: computation of per share earnings (loss). Electronic
Transmission
27 Financial Data Schedule. Electronic
Transmission
_____________________________________________
(1) Incorporated herein by reference to the same numbered Exhibit to the Company's Registration Statement
on Form S-1 (Registration No. 333-1032).
(2) Incorporated herein by reference to the same numbered Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1996 (File No. 0-27976).
17