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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: November 25, 1995
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Commission File No: 0-10824
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GENOME THERAPEUTICS CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2297484
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
IDENTIFICATION OF INCORPORATION OR ORGANIZATION) NO.)
100 BEAVER STREET; WALTHAM, MASSACHUSETTS 02154
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER: (617) 893-5007
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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
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Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
COMMON STOCK 13,751,011
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$.10 PAR VALUE Outstanding January 3, 1996
SERIES B RESTRICTED STOCK 57,512
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$.10 PAR VALUE Outstanding January 3, 1996
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Genome Therapeutics Corp. and Subsidiaries
Index to Unaudited Financial Information and Other Information
Page
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Part I
Financial Information
Unaudited:
Consolidated Condensed Balance Sheets as of 3
August 31, 1995 and November 25, 1995
Consolidated Statements of Operations 4
for the 13 week period ended November
26, 1994 and November 25, 1995
Consolidated Statements of Cash Flows for the 5
13 week period ended November 26, 1994
and November 25, 1996
Notes to Consolidated Condensed Financial 6-7
Statements for the 13 week period ended
November 26, 1994 and November 25, 1995
Management's Discussion and Analysis of Financial
Conditions and Results of Operations 8-11
Part II
Other Information:
Other Information 12
Signature 13
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
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August 31, November 25,
1995 1995
(Unaudited)
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Assets:
Current Assets:
Cash and Cash Equivalents $ 5,886,184 $ 2,276,648
Marketable Securities 2,340,592 5,712,936
Accounts Receivable (net of allowances
for doubtful accounts) 360,793 399,069
Unbilled Costs and Fees 259,005 171,380
Prepaid Expenses and Other Current Assets 50,140 80,387
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Total Current Assets 8,896,714 8,640,420
Equipment and Leasehold Improvements, at cost:
Laboratory and Scientific Equipment 1,464,987 1,923,642
Leasehold Improvements 1,597,069 1,607,271
Office Equipment and Furniture 903,946 1,184,688
Construction in progress 206,103 64,233
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4,172,105 4,779,834
Less Accumulated Depreciation
and Amortization 2,451,632 2,576,123
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1,720,473 2,203,711
Restricted Cash 784,471 776,360
Other Assets 127,016 123,315
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$11,528,674 $11,743,806
=========== ===========
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts Payable $409,282 $327,812
Accrued Expenses 1,736,569 1,546,046
Deferred Contract Revenue 774,048 947,201
Current Maturities of Capital Lease Obligations 478,033 681,463
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Total Current Liabilities 3,397,932 3,502,522
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Capital Lease Obligations, net of Current Maturities 892,239 1,169,712
Shareholders' Equity 7,238,503 7,071,572
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$11,528,674 $11,743,806
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See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Thirteen-week Period Ended
November 26, November 25,
1994 1995
(Unaudited)
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Revenues:
Government Research $ 1,525,957 $ 1,365,893
Collaborative Research, License Fees and Royalties 35,560 716,536
Interest Income 41,082 118,385
Product and Service 11,943 12,565
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Total Revenues 1,614,542 2,213,379
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Costs and Expenses:
Cost of Government Research 1,325,798 1,282,178
Research and Development 255,630 1,078,995
Selling, General and Administrative 482,063 513,449
Cost of Product and Service 1,053 506
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Total Costs and Expenses 2,064,544 2,875,128
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Net Loss ($450,002) ($661,749)
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Net Loss per Common Share ($0.04) ($0.05)
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Weighted Average Number of
Common Shares Outstanding 11,778,946 13,539,632
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See Notes to Consolidated Condensed Financial Statements.
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GENOME THERAPEUTICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Thirteen-week Period Ended
November 26, November 25,
1994 1995
(Unaudited)
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Cash Flows from Operating Activities:
Net Loss (450,002) ($661,749)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities:
Depreciation and Amortization 65,596 132,375
Deferred Compensation 6,489 1,817
Changes in Assets and Liabilities:
Accounts Receivable (103,215) (38,276)
Unbilled Costs and Fees 59,672 87,625
Prepaid Expenses and Other Current Assets (20,140) (30,247)
Accounts Payable 36,636 (81,470)
Accrued Expenses (49,445) (119,398)
Deferred Contract Revenue (11,740) 173,153
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Total Adjustments (16,147) 125,579
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Net Cash Used in Operating Activities (466,149) (536,170)
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Cash Flows from Investing Activities:
Purchases of Marketable Securities (1,000,544) (3,872,344)
Proceeds from Sale of Marketable Securities 3,000,000 500,000
(Increase) Decrease in Restricted Cash (58,886) 8,111
Purchases of Equipment and Leasehold Improvements (80,154) (15,876)
Decrease in Other Assets (8,278) 0
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Net Cash Provided by (Used in) Investing Activities 1,852,138 (3,380,109)
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Cash Flows from Financing Activities:
Proceeds from Sale of Common Stock and Warrants 0 17,520
Proceeds from Exercise of Stock Options 0 404,356
Payments on Capital Lease Obligations (63,343) (115,133)
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Net Cash Provided by (Used in) Financing Activities (63,343) 306,743
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Net Increase (Decrease) in Cash and Cash Equivalents 1,322,646 (3,609,536)
Cash and Cash Equivalents, at Beginning of Period 1,114,162 5,886,184
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Cash and Cash Equivalents, at End of Period $2,436,808 $2,276,648
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Supplemental Disclosure of Cash Flow Information:
Interest Paid during Period $ 10,938 $ 40,740
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Supplemental Schedule of Non-cash Investing Activities:
Property and Equipment Acquired under Capital Leases $ 333,948 $ 591,853
========== ==========
See Notes to Consolidated Condensed Financial Statements.
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Notes to Consolidated Condensed Financial Statements
(Unaudited)
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1. Basis of Presentation
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The unaudited consolidated condensed financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the
opinion of management, the unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial
statements and include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of interim period results.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes, however, that its
disclosures are adequate to make the information presented not
misleading. The results of operations for the 13 week period
ended November 25, 1995 are not necessarily indicative of the results to
be expected for the full fiscal year. The accompanying consolidated
condensed financial statements should be read in conjunction with the
Company's Form 10-K which was filed with the Securities and Exchange
Commission on November 29, 1995 and as amended on Form 10-K/A on
January 9, 1996.
2. Net Loss Per Share
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Net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during the period. Common share
equivalents have not been included in the calculation, as their effects
would be anti-dilutive.
3. Cash Equivalents and Marketable Securities
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The Company applies Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities.
The Company's cash equivalents and marketable securities are classified
as available-for-sale. Cash equivalents are short-term, highly liquid
investments with original maturities of less than three months.
Marketable securities are investment securities with original maturities
of greater than three months. Cash equivalents consist of money market
funds, repurchase agreements and debt securities. Marketable securities
are carried at fair market value which approximates amortized cost,
accordingly unrealized holding gains and losses were immaterial. The
Company has not recorded any realized gains or losses on its marketable
securities. Marketable securities consist of commercial paper with an
average maturity of six to nine months. The Company has $784,471 and
$776,360 in restricted cash at August 31, 1995 and November 25, 1995,
respectively, in connection with certain capital lease obligations.
4. Use of Estimates in the Preparation of Financial Statements
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The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
5. Capital Lease Obligations
-------------------------
The Company has various capital lease line arrangements under which it can
finance up to $4,000,000 of certain office and laboratory equipment. These
leases are payable in 36 monthly installments. The interest rate ranges from
prime (8.75% at August 31, 1995) plus 1% to 11.42%. The Company is required
to maintain certain restricted cash balances, as defined (see Note 3). In
addition, the Company is required to maintain certain financial ratios
pertaining to minimum cash balances, tangible net worth, debt to tangible
net worth and maximum loss. The Company has approximately $1,400,000
available under these various capital lease agreements at November 25, 1995.
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Additionally, in connection with its facilities lease, the Company issued a
$100,000 note payable in September 1994 to its lessor to finance leasehold
improvements. The note bears interest at 9% and is payable in 60 monthly
payments of $2,076.
Capital lease obligations at August 31, 1995 are as follows:
Year Ending August 31,
1996 ..................................................... $ 589,644
1997 ..................................................... 587,276
1998 ..................................................... 354,272
1999 ..................................................... 40,135
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Total minimum lease payments ............................. 1,571,327
Less -- Amount representing interest ..................... 201,055
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Present value of total minimum lease payments ............ 1,370,272
Less -- Current portion .................................. 478,033
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$ 892,239
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Subsequent to August 31, 1995, the Company entered into approximately
$592,000 of additional capital lease obligations under the capital lease
line arrangements discussed above.
6. Subsequent Event -- Schering-Plough
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In December 1995, the Company entered into a collaboration and license
agreement with Schering Corporation and Schering-Plough Ltd. (collectively,
"Schering-Plough") providing for the use by Schering-Plough of the genomic
sequence of a specified pathogen the Company is sequencing to identify new
gene targets for development of antibiotics effective against drug-resistant
infectious organisms. As part of this agreement, the Company granted
Schering-Plough exclusive access to certain of the Company's genomic
sequence databases. The Company also granted Schering-Plough a non-exclusive
license to use the Company's bioinformatics systems for Schering-Plough's
internal use in connection with the genomic databases licensed to
Schering-Plough under the agreement and other genomic databases
Schering-Plough develops or acquires. The Company also agreed to undertake
certain research efforts to identify bacteria-specific genes essential to
microbial survival and to develop biological assays to be used by
Schering-Plough in screening natural product and compound libraries to
identify antibiotics with new mechanisms of action.
Under the agreement, Schering-Plough made an up-front payment to the Company
of $3 million. In addition, upon completion of certain development
milestones, Schering-Plough has agreed to pay the Company a minimum of an
additional $10.3 million in expense allowances, research funding and
milestone payments. Subject to the achievement of additional product
development milestones and Schering-Plough's election to extend the research
collaboration, Schering-Plough has agreed to pay the Company up to an
additional approximately $40.5 million (inclusive of the $10.3 million
referred to in the previous sentence) in expense allowances, research
funding and milestone payments.
The agreement grants Schering-Plough exclusive worldwide rights to make, use
and sell pharmaceutical and vaccine products based on the Company's genomic
database of specified pathogen and on the technology developed in the course
of the research program. The Company has also granted Schering-Plough a
right of first negotiation if during the term of the research plan the
Company desires to enter into a collaboration with a third party with
respect to the development or sale of any compounds which are targeted
against, as their primary indication, the pathogen that is the principal
subject of the Company's agreement with Schering-Plough. The Company will be
entitled to receive royalties on Schering-Plough's sale of therapeutic
products and vaccines developed using the technology licensed from the
Company. Subject to certain limitations, the Company retained the rights to
make, use, and sell diagnostic products developed based on the Company's
genomic database licensed to Schering-Plough or the technology developed
in the course of the research program.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged in the field of genomics -- the discovery and
characterization of genes. Currently, the Company's primary activity is genomic
research and development. For the past several years, the Company's primary
source of revenues have been government research grants and contracts and
collaborative agreements with pharmaceutical company partners. The Company
entered into corporate collaborations with Astra Hassle AB ("Astra") relating to
H. Pylori in August 1995 and with Schering Corporation and Schering-Plough, Ltd.
(collectively, "Schering-Plough") in December 1995 providing for the use by
Schering-Plough of the genomic sequence of a specific pathogen that the Company
is sequencing to identify new gene targets for the development of novel
antibiotics.
The Company will not receive significant product revenues on a sustained basis
until such time, if any, at which products based on the Company's research
efforts are commercialized. The Company's product development strategy is to
enter into collaborations with pharmaceutical and biotechnology companies
whereby these corporate partners will provide most of or all of the financial
and other resources required to complete the development and to commercialize
products based on the Company's genomics research in exchange for a variety of
license and milestone payments, research support and royalties. In order for a
product to be commercialized based on the Company's research, it will be
necessary for the collaborators to conduct pre-clinical tests and clinical
trials, obtain regulatory clearances and make manufacturing, distribution and
marketing arrangements. Accordingly, the Company does not expect to receive
royalties based on product revenues for many years.
As of November 25, 1995, the Company had outstanding approximately $12,034,000
of government grants and research contracts under which services had yet to be
performed over approximately the next 18 to 24 months. The Company's government
grants and contracts are typically funded annually and are subject to
appropriation by the United States Congress each year. Funding may be
discontinued or reduced at any time by the United States Congress. As of
November 25, 1995 the funded portion of these grants and contracts was
$4,201,000. For the thirteen week period ended November 26, 1994 and November
25, 1995 revenue recognized pursuant to United States government grants and
research accounted for approximately 95% and 62%, respectively of the Company's
total revenues. The Company plans to continue to seek government grants and
contracts in the genomics field and to enter into additional corporate
partnering arrangements with the goal of advancing the Company's genomic
technologies and gene discovery programs and of obtaining revenues sufficient to
cover a portion of the Company's cash requirements. There can be no assurance
that the Company will be able successfully to pursue this strategy.
The Company has incurred significant losses, since inception, with an
accumulated deficit of approximately $35,836,000 at November 25, 1995. The
Company's results of operations have fluctuated from period to period and may
continue to fluctuate in the future based upon the timing and compensation of
funding under existing and new government grants and contracts and collaborative
agreements.
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RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED NOVEMBER 25, 1995 AND NOVEMBER 26, 1994
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REVENUE
Total revenues increased 37% from $1,615,000 for the 13 week period ended
November 26, 1994 to $2,213,000 for the 13 week period ended November 25, 1995.
Government research revenue decreased approximately 10% from $1,526,000 for the
13 week period ended November 26, 1994 to $1,366,000 for the 13 week period
ended November 25, 1995. The decrease in government research revenue for the 13
week period ended November 25, 1995 was primarily attributable to a change in
the mix of government grants and contracts under which services were performed
to grants and contracts which contain provisions for lower overhead
reimbursement rates. Revenue derived from government research grants and
contracts is generally based upon direct costs such as labor and laboratory
supplies as well as an allocation for reimbursement of a portion of overhead.
Collaborative research, license fees and royalties increased from
$36,000 for the 13 week period ended November 26, 1994 to $716,000 for the 13
week period ended November 25, 1995, primarily due to revenues received under
the Company's collaboration with Astra which began in August 1995.
Interest income increased 188% from $41,000 for the 13 week period ended
November 26, 1994 to $118,000 for the 13 week period ended November 25, 1995
reflecting the increase in funds available for investment as a result of the
Company's sale of Common Stock in a private placement in
March 1995 and payments received under the Astra collaboration in August 1995.
COSTS AND EXPENSES
Total costs and expenses increased 39% from $2,065,000 for the 13 week period
ended November 26, 1994 to $2,875,000 for the 13 week period ended November 25,
1995. Cost of government and collaborative research consists of payroll and
related costs, laboratory supplies and overhead expenses (including facilities
and equipment expenses). The cost of government research decreased 3% from
$1,326,000 for the 13 week period ended November 26, 1994 to $1,282,000 for the
13 week period ended November 25, 1995. Cost of government research, as a
percentage of government research revenue, was 94% for the 13 week period ended
November 25, 1995 and 87% for the 13 week period ended November 26, 1994. This
increase was primarily due to a change in the mix of government grants and
contracts under which services were performed during the 13 week period ended
November 25, 1995 to grants and contracts which contain provisions for lower
overhead reimbursement rates. Cost of government research, as a percentage of
government research revenue, fluctuates based upon the nature of the government
contracts and grants, the overhead reimbursement rates under such contracts and
grants, as well as changes in the Company's overhead structure.
Research and development expense, which includes both company-sponsored
research and development and research funded pursuant to arrangements with the
Company's corporate collaborators, increased 321% from $256,000 for the 13 week
period ended November 26, 1994 to $1,079,000 for the 13 week period ended
November 25, 1995. The increase was primarily related to increased expenses
related to the Company's H. Pylori and Staph. pathogen gene discovery programs
and prostate cancer and BPH human gene discovery programs. The H. Pylori program
is funded under the Company's collaborative agreement with Astra. The increase
consisted primarily of increases in payroll and related expenses, laboratory
supplies and overhead expenses. The Company expects to continue to increase
research and development expenditures in fiscal 1996, particularly with respect
to its human gene discovery programs.
Selling, general and administrative expenses increased 7% from $482,000 for
the 13 week period ended November 26, 1994 to $513,000 for the 13 week period
ended November 25, 1995. The increase in selling, general and administrative
expenses for the 13 week period ended November 25, 1995 was primarily due to an
increase in payroll and related expenses, interest expense and other corporate
expenses.
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LIQUIDITY AND CAPITAL RESOURCES
Since September 1, 1992, the Company's primary sources of cash have been
government grants and contract revenue, revenue from collaborative research
agreements, borrowing under capital leases, and proceeds from sale of equity
securities. In fiscal 1995, the Company received net proceeds of approximately
$2,403,000 from the private sale of Common Stock and warrants and the exercise
of stock options. In August and December 1995, the Company entered into
collaborative arrangements under which it received $3,500,000 from Astra and
$3,000,000.
As of November 25, 1995, the Company had cash, cash equivalents and marketable
securities of approximately $8,766,000 (of which approximately $776,000 is
restricted in connection with certain capital lease obligations) and working
capital of approximately $5,138,000. The Company has various arrangements under
which it can finance up to $4,000,000 of certain office and laboratory equipment
and leasehold improvements. Under these arrangements, the Company is required
to maintain certain financial ratios, including minimum levels of tangible net
worth, total indebtedness to tangible net worth, maximum loss, and minimum
restricted cash balances. At November 25, 1995 the Company had approximately
$1,400,000 available under these arrangements and had an outstanding balance of
approximately $1,851,000 which is repayable over the three year period ending
December 1998.
The Company's operating activities used cash of approximately $536,000 and
$466,000 for the 13 week period ended November 25, 1995 and November 26, 1994,
respectively. Cash was used in such period primarily to fund the Company's
operating losses.
The Company's investing activities used cash of approximately $3,380,000 for
the 13 week period ended November 25, 1995 primarily to purchase marketable
securities, equipment and leasehold improvements. The Company's investing
activities provided cash of approximately $1,852,000 for the 13 week period
ended November 26, 1994 primarily from sales of marketable securities.
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Financing activities provided cash of approximately $307,000 for the 13 week
period ended November 25, 1995 primarily from the sale of Common Stock and
warrants and the exercise of stock options, net of payments of capital lease
obligations. Financing activities used cash of approximately $63,000 for the
13 week period ended November 24, 1994 for payments of capital lease
obligations.
The Company currently estimates that it will acquire $1,500,000 of capital
equipment during fiscal 1996, consisting primarily of computer systems,
lab equipment and office equipment. The Company plans to utilize its capital
lease arrangements to finance the acquisition of this equipment. During the
13 week period ended November 25, 1995, the Company purchased approximately
$608,000 of capital equipment of which $592,000 was financed under capital
leases.
The Company believes that its existing capital resources are adequate to meet
its working capital needs through at least the next 24 months. There can be no
assurance, however, that changes in the Company's plans or other events
affecting the Company's operations will not result in accelerated or unexpected
expenditures.
The Company may seek additional funding through public or private financing
and expects to seek additional funding through collaborative or other
arrangements with corporate partners. There can be no assurance, however, that
additional financing will be available from any of these sources or will be
available on terms acceptable to the Company.
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Part II
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Item 1. Legal Proceedings
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None
Item 2. Changes In Securities
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None
Item 3. Defaults Upon Senior Securities
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None
Item 4. Submission of Matters to a Vote of Security Holders
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None
Item 5. Other Information
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None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
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10.29 Collaboration and License Agreement between the Company,
Schering Corporation and Schering-Plough Ltd. dated as of
December 6, 1995.
b) Reports on Form 8-K
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None.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized who also serves in the capacity of principal
financial officer.
Genome Therapeutics Corp.
/s/ Fenel M. Eloi
-----------------------------
Fenel M. Eloi
(Principal Financial Officer)
Date: January 9, 1995
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