---

---




U. S. SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.20549











FORM 10-QSB





(Mark One)


|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------




| | For the quarterly period ended June 30, 2001
| | --------------------------------------------




OR





| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------




Commission File Number 0-27264











GENSTAR THERAPEUTICS CORPORATION


(Exact name of registrant as specified in its charter)





|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 33-0687976
(I.R.S. Employer
Identification no.) | 
|----------------------------------------------------------------------- |  | ----------------------------------------------- | 




10865 Altman Row, 2nd Floor, San Diego, CA, 92121


(Address of principal executive offices) (Zip code)





Registrants Telephone Number, including area code: (858) 450-5949











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 of the Common Stock of the registrant outstanding as of August 10, 2001, was
23,307,119.





---

---




GENSTAR THERAPEUTICS CORPORATION


(A development stage enterprise)





INDEX TO FORM 10-QSB





|        |  |                                                                                                                                                                                           |  | Page No.
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|        |  | PART I.    FINANCIAL INFORMATION                                                                                                                                                          |  |         
|       
|       
|       
|Item 1. |  | Financial Statements                                                                                                                                                                      |  |         
|       
|       
|       
|        |  | Condensed Consolidated Balance Sheets June 30, 2001 (Unaudited) and December 31,

     
2000                                                                                              |  | 2       
|       
|       
|       
|        |  | Condensed Consolidated Statements of Operations (Unaudited) Three and Six Months

     
Ended June 30, 2001 and 2000 and the period from July 1, 1991 (inception) to June

     
30, 2001 |  | 3       
|       
|       
|       
|        |  | Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June

     
30, 2001 and 2000 and the period from July 1, 1991 (inception) to June 30, 2001                  |  | 4       
|       
|       
|       
|        |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                            |  | 5       
|       
|       
|       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                                                                                     |  | 7       
|       
|       
|       
|        |  | PART II.    OTHER INFORMATION                                                                                                                                                             |  |         
|       
|       
|       
|Item 1. |  | Legal Proceedings                                                                                                                                                                         |  | 10      
|       
|       
|       
|Item 2. |  | Changes in Securities                                                                                                                                                                     |  | 10      
|       
|       
|       
|Item 3. |  | Defaults Upon Senior Securities                                                                                                                                                           |  | 10      
|       
|       
|       
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                                                                                       |  | 10      
|       
|       
|       
|Item 5. |  | Other Information                                                                                                                                                                         |  | 10      
|       
|       
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                                                                                          |  | 10      
|       
|       
|       
|        |  | Signatures                                                                                                                                                                                |  | 11      




GENSTAR THERAPEUTICS CORPORATION


(A development stage enterprise)





CONDENSED CONSOLIDATED BALANCE SHEETS





|                                                                                                                              |  | June 30,

2001   |   | December 31,

2000
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | - | ------------------
|
|ASSETS                                                                                                                       
|                                                                                                                              |  |                  |   |                   
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|Current assets:                                                                                                              
|Cash and cash equivalents                                                                                                     |  | $    4,589,107   |   |                   
|Short-term investments                                                                                                        |  | 15,274,918       |   |                   
|Accounts receivable                                                                                                           |  | 18,297           |   |                   
|Investments underlying deferred compensation                                                                                  |  |                 |   |                   
|Receivable from related party                                                                                                 |  | 1,699,394        |   |                   
|Other current assets                                                                                                          |  | 155,003          |   |                   
|                                                                                                                              |  |                  |   |                   
|Total current
assets                                                                                                          |  | 21,736,719       |   |                   
|Property and equipment, net                                                                                                   |  | 2,482,869        |   |                   
|Restricted cash                                                                                                               |  | 428,383          |   |                   
|Deferred loan fee                                                                                                             |  | 450,492          |   |                   
|Other assets                                                                                                                  |  | 476,952          |   |                   
|                                                                                                                              |  |                  |   |                   
|                                                                                                                              |  | $ 25,575,415     |   |                   
|                                                                                                                              |  |                  |   |                   
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                         
|                                                                                                                              |  |                  |   |                   
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|Current liabilities:                                                                                                         
|Accounts payable                                                                                                              |  | $        385,012 |   |                   
|Accrued employee benefits                                                                                                     |  | 255,758          |   |                   
|Other accrued liabilities                                                                                                     |  | 160,912          |   |                   
|Current portion of notes payable                                                                                              |  | 285,341          |   |                   
|Current portion of capital lease obligation                                                                                   |  | 313,342          |   |                   
|                                                                                                                              |  |                  |   |                   
|Total current
liabilities                                                                                                     |  | 1,400,365        |   |                   
|Notes payable, net of current portion                                                                                         |  | 378,407          |   |                   
|Capital lease obligation, net of current portion                                                                              |  | 489,323          |   |                   
|Other long-term liabilities                                                                                                   |  | 237,692          |   |                   
|Deferred compensation                                                                                                         |  | 422,299          |   |                   
|Advance from related party                                                                                                    |  | 5,848,361        |   |                   
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|Commitments                                                                                                                  
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|Stockholders equity:                                                                                                        
|Preferred Stock$0.01 par value, 5,000,000 shares authorized:                                                                
|Series A Preferred Stock,
5,830 shares issued and outstanding                                                                 |  | 58               |   |                   
|Series B Preferred Stock,
7,041 shares issued and outstanding                                                                 |  | 70               |   |                   
|Series C Preferred Stock,
20,000 shares issued and outstanding                                                                |  | 20               |   |                   
|Common Stock$0.001 par value, 40,000,000 shares authorized;

               22,964,524 and 22,726,052 issued and outstanding |  | 22,965           |   |                   
|Unrealized gain on short-term investments                                                                                     |  | 352,294          |   |                   
|Additional paid-in capital                                                                                                    |  | 44,115,748       |   |                   
|Deficit accumulated during development stage                                                                                  |  | (27,692,187      | ) |                   
|                                                                                                                              |  |                  |   |                   
|Total stockholders
equity                                                                                                    |  | 16,798,968       |   |                   
|                                                                                                                              |  |                  |   |                   
|                                                                                                                              |  | $ 25,575,415     |   |                   
|                                                                                                                              |  |                  |   |                   




See accompanying notes.





GENSTAR THERAPEUTICS CORPORATION


(A development stage enterprise)





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





|                                                                                         |  | Three Months Ended |   | Six Months Ended |                  | July 1, 1991

(inception) to

June 30, 2001
|---------------------------------------------------------------------------------------- |  | ------------------ | - | ---------------- | ---------------- | -------------------------------------------
|
|Revenue                                                                                  |  | $     40,263       |   |                  | $       40,262   |                                            
|                                                                                         |  |                    |   |                  |                  |                                            
|Costs and expenses:                                                                     
|Cost of sales                                                                            |  |                   |   |                  |                 |                                            
|Research and development                                                                 |  | 2,332,256          |   |                  | 1,438,565        |                                            
|Write-off of acquired in-process

               technology                              |  |                   |   |                  | 1,633,205        |                                            
|General and administrative                                                               |  | 879,590            |   |                  | 669,650          |                                            
|                                                                                         |  |                    |   |                  |                  |                                            
|Total costs and
expenses                                                                 |  | 3,211,846          |   |                  | 3,741,420        |                                            
|                                                                                         |  |                    |   |                  |                  |                                            
|Loss from operations                                                                     |  | (3,171,583         | ) |                  | (3,701,158       | )                                          
|Other income (expense)                                                                   |  | 137                |   |                  | (17,253          | )                                          
|Interest expense                                                                         |  | (129,779           | ) |                  | (31,620          | )                                          
|Interest income                                                                          |  | 311,649            |   |                  | 336,544          |                                            
|                                                                                         |  |                    |   |                  |                  |                                            
|Net loss                                                                                 |  | $(2,989,576        | ) |                  | $ (3,413,487     | )                                          
|                                                                                         |  |                    |   |                  |                  |                                            
|Basic and diluted loss per share                                                         |  | $       (0.13      | ) |                  | $          (0.16 | )                                          
|                                                                                         |  |                    |   |                  |                  |                                            
|Number of shares used in the

     computation of basic and diluted

     loss per share |  | 22,871,491         |   |                  | 21,609,347       |                                            
|                                                                                         |  |                    |   |                  |                  |                                            




See accompanying notes.





GENSTAR THERAPEUTICS CORPORATION


(A development stage enterprise)





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





|                                                                                             |  | For the six months ended

June 30, |   | July 1, 1999

(inception) to

June 30,

2001
|-------------------------------------------------------------------------------------------- |  | ---------------------------------- | - | --------------------------------------------
|
|Net loss                                                                                     |  | $(5,558,259                        | ) |                                             
|Adjustments to reconcile net loss to net cash used in operating

     activities:           
|Write-off of in-process technology acquired with stock                                       |  |                                   |   |                                             
|Expenses paid via advances from related party                                                |  |                                   |   |                                             
|Depreciation and amortization                                                                |  | 332,208                            |   |                                             
|Stock and options issued for services and other                                              |  |                                   |   |                                             
|(Gain) loss on disposal of fixed assets                                                      |  | 7,274                              |   |                                             
|Amortization of debt discount and loan fee                                                   |  | 135,148                            |   |                                             
|Deferred rent                                                                                |  | 203,829                            |   |                                             
|Change in assets and liabilities:                                                           
|Accounts
receivable                                                                          |  | (5,120                             | ) |                                             
|Other current
assets                                                                         |  | (25,031                            | ) |                                             
|Other assets                                                                                 |  | (730,864                           | ) |                                             
|Accounts
payable                                                                             |  | (64,252                            | ) |                                             
|Other current
liabilities                                                                    |  | (7,178                             | ) |                                             
|Deferred
compensation                                                                        |  | 4,975                              |   |                                             
|                                                                                             |  |                                    |   |                                             
|Net cash used in operating activities                                                        |  | (5,707,270                         | ) |                                             
|Cash flows from investing activities:                                                       
|Purchase of short-term investments                                                           |  | (9,418,509                         | ) |                                             
|Sale of short-term investments                                                               |  | 10,196,070                         |   |                                             
|Purchase of property and equipment                                                           |  | (542,300                           | ) |                                             
|                                                                                             |  |                                    |   |                                             
|Net cash provided by (used in) investing

                                   activities      |  | 235,261                            |   |                                             
|Cash flows from financing activities:                                                       
|Advances from related party                                                                  |  | 2,173,374                          |   |                                             
|Repayment of note receivable from stockholder                                                |  |                                   |   |                                             
|Proceeds from investors short-swing profit                                                  |  | 123,820                            |   |                                             
|Proceeds from notes payable and other                                                        |  | 653,233                            |   |                                             
|Repayment of capital lease and notes payable                                                 |  | (242,421                           | ) |                                             
|Stock issuance costs                                                                         |  |                                   |   |                                             
|Proceeds from issuance of common stock upon exercise of

               options and warrants |  | 58,455                             |   |                                             
|Proceeds from sale of common stock and preferred stock                                       |  | 2,000,000                          |   |                                             
|Net advances from Medstone                                                                   |  |                                   |   |                                             
|Capital contribution by Medstone                                                             |  |                                   |   |                                             
|                                                                                             |  |                                    |   |                                             
|Net cash provided by financing activities                                                    |  | 4,766,461                          |   |                                             
|                                                                                             |  |                                    |   |                                             
|Net (decrease) increase in cash and equivalents                                              |  | (705,548                           | ) |                                             
|Cash and equivalents, beginning of period                                                    |  | 5,294,655                          |   |                                             
|                                                                                             |  |                                    |   |                                             
|Cash and equivalents, end of period                                                          |  | $4,589,107                         |   |                                             
|                                                                                             |  |                                    |   |                                             




See accompanying notes.





GENSTAR THERAPEUTICS CORPORATION


(A development stage enterprise)





NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30, 2001





1.  The unaudited financial information furnished herein, in the opinion of management, reflects
all adjustments, consisting only of normal recurring adjustments, which are necessary to state fairly the consolidated financial position, results of operations, and cash flows of GenStar Therapeutics Corporation as of and for the periods indicated.
GenStar presumes that users of the interim financial information have read or have access to the Companys audited consolidated financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations
for the year ended December 31, 2000 and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies or recent significant events, may be determined in that context. Accordingly, footnote and
other disclosures which would substantially duplicate the disclosures contained in Form 10-KSB for the year ended December 31, 2000 filed on April 2, 2001 by the Company have been omitted. The financial information herein is not necessarily
representative of a full years operations.





2.  Cash and cash equivalents consist primarily of highly liquid investments with original
maturities of 90 days or less when purchased. Short-term investments consist of debt and equity securities with maturities in excess of 90 days when purchased. In accordance with the Financial Accounting Standards Boards Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, management determines the appropriate classification of short-term investment securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Securities classified as available-for-sale are carried at fair value, with gains and losses, if any, reported as a separate component of stockholders equity and included in comprehensive
loss.





3.  In accordance with the Financial Accounting Standards Boards SFAS No. 128, Earnings per
Share, net loss per share is based on the average number of shares of common stock outstanding during the six-month periods ended June 30, 2001 and 2000. Equivalent shares arising from convertible preferred stock, convertible debt, warrants for
Common Stock and outstanding stock options have not been included in the computation of net loss per share as their effect would be antidilutive.





4.  In February 2001, the Company entered into a capital lease agreement under which up to
$2,325,000 in equipment may be leased. The Company financed $653,000 of equipment under this lease agreement during the six months ended June 30, 2001. Additionally, in April, 2001, the Company entered into an additional capital lease agreement
under which $94,000 of equipment was financed. During the six months ended June 30, 2000 the Company acquired equipment valued at $86,000 under a capital lease agreement.





5.  Cash paid for interest during the six months ended 2001 and 2000 was $110,000 and $39,000,
respectively.





6.  SFAS No. 130, Reporting Comprehensive Income, reporting and displaying comprehensive income
(loss) and its components which, for the Company, includes net loss and unrealized gains and losses on investments. In accordance with SFAS No. 130, the accumulated balance of other comprehensive income is disclosed as a separate component of
stockholders equity. For the three and six months ended June 30, 2001 and 2000, respectively, the comprehensive loss consisted of:





|                               |  | Three months ended

June 30, |   | Six months ended

June 30,
|------------------------------ |  | ---------------------------- | - | --------------------------
|
|Net loss                       |  | $(2,989,576                  | ) |                           
|Other comprehensive loss:     
|Unrealized loss on investments |  | (82,752                      | ) |                           
|                               |  |                              |   |                           
|Comprehensive loss             |  | $(3,072,328                  | ) |                           
|                               |  |                              |   |                           

GENSTAR THERAPEUTICS CORPORATION


(A development stage enterprise)





NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)








7.  In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, which the Company adopted on January 1, 2001. SFAS No. 133 sets forth a comprehensive and consistent standard for the recognition of derivatives and hedging activities. The adoption of SFAS
No. 133 did not have an impact on our results of operations or financial condition as we currently hold no derivative financial instruments and do not currently engage in hedging activities.





8.  Under the terms of our Developmental Collaboration Agreement and Credit Agreements with
Baxter, Baxter was required to provide funding for pre-clinical development of the hemophilia product and when the Company treated the first patient in a Phase I Clinical Trial for the hemophilia product, a milestone payment of $2,000,000 was due
from Baxter. The $2,000,000 milestone payment was to be in the form of a purchase of Series C Preferred Stock. The first patient in the Phase I Clinical Trial was treated in June 2001, at which time Baxter paid the milestone payment and the Company
issued 20,000 shares of Series C Preferred Stock.





Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operation





Overview





GenStar commenced operations as a stand-alone entity in January 1996 and has been in the development stage
since inception. Our original mission was to develop products to treat diseases in urology, with a particular interest in prostate cancer. We had licensed technology that uses the IL-3 gene to treat several types of cancer, but did not have
technology to deliver the gene. On July 8, 1998, we entered into an agreement with Baxter Healthcare Corporation in which we acquired the exclusive rights to gene delivery technologies and laboratory equipment. The gene delivery technology will be
used to enhance our existing technology and to develop products to deliver other genes. We believe that the gene delivery technology provides a higher level of expression of the gene being delivered compared to other gene therapy approaches. Prior
to our license of the technology, Baxter had been developing this technology for the treatment of hemophilia and cancer and has continued to fund the development of our Factor VIII product for hemophilia.





In exchange for the exclusive license to the gene delivery technology and equipment, we issued 1,841,219
shares of common stock and 5,830 shares of Series A Preferred Stock to Baxter. The assets acquired from Baxter were valued based on the fair market value of our common stock on the date of the agreement. We obtained an appraisal of the value of the
equipment acquired. Based upon the very early stage of development of the technology, the value of the technology was charged to acquired in-process technology.





In May 2000, we acquired all of the outstanding shares of Allegro Cell Systems, Inc. (Allegro) in exchange
for 288,000 shares of GenStar Common stock and an obligation to issue an additional 12,000 shares of common stock. Allegro has a license to certain technologies for the treatment and prevention of AIDS and for lentiviral gene therapy. Allegro has no
products, revenues, employees, facilities or other assets. Based upon the very early stage of development of the technology and the lack of alternative future uses for it, the value of the technology was charged to acquired in-process
technology.





The technology for the treatment and prevention of AIDS is based upon vaccination with a genetically
modified HIV virus. The modified virus is incapable of replication and suitable for administration to humans. The modified virus is still capable of infecting cells and expressing HIV genes resulting in the generation of immune responses that
eradicate HIV infected cells in laboratory studies.





GenStars current activities consist of the development of the MAXIMUM-AD gene transfer system for our
hemophilia A product, our DUAL-AD vector product for prostate cancer, and the MAXIMUM-AD and LENTI-HIV vector systems for the treatment and prevention of HIV/AIDS and other sexually transmitted diseases. We anticipate defining additional uses for
our vector technologies and potentially acquiring other technologies. We expect to incur increasing research and development expenditures as we focus our efforts on further development of these products. We expect no product revenues in the near
future and to incur significant losses for at least the next five years.





Results of Operations





| | Revenues
| | --------




GenStar has generated revenues to date of $1,193,000 from contract research agreements and grants. Total
revenues for the six months ended June 30, 2000 and 2001 were $73,000 and $72,000, respectively, and for the three months ended June 30, 2000 and 2001 were $40,000 for both years. We anticipate seeking additional research agreements and grants to
help fund research and development efforts. We do not anticipate revenues from products for at least five years.





| | Research and development and acquired in-process technology expense
| | -------------------------------------------------------------------




Research and development expenses, excluding acquired in-process technology expenses, increased $1,851,000
to $4,275,000 during the six months ended June 30, 2001 compared to $2,424,000 for the six months ended June 30, 2000. During the three months ended June 30, 2001 research and development expenses, excluding acquired in-process technology increased
$893,000 to $2,332,000 compared to $1,439,000 for the three months ended June 30, 2000. Research and development expenses, excluding acquired in-process technology expenses, increased in both the six month and three month periods ended June 30, 2001
compared to the same periods of 2000 due principally to an overall increase in research and development activity. In May 2000, the company acquired Allegro, which resulted in a charge to write-off acquired in-process technology of $1,633,000. There
were no acquired in-process technology expenses during either the six months or three months ended June 30, 2001 compared to $1,633,000 for both the six and three months ended June 30, 2000. We anticipate increasing research and development
expenditures in the future as we conduct preclinical and clinical testing necessary to bring our products to market and to establish additional manufacturing capabilities.





| | General and administrative expense
| | ----------------------------------




General and administrative expense increased $708,000 during the six months ended June 30, 2001 to
$1,711,000 compared to $1,003,000 for the six months ended June 30, 2000. During the three months ended June 30, 2001 general and administrative expense increased $210,000 to $880,000 compared to $670,000 for the three months ended June 30, 2000.
General and administrative expenses include the costs of our administrative personnel and consultants, office lease expenses and other overhead costs, including legal and accounting costs. General and administrative expenses have increased related
to the increased level of operations, and we expect general and administrative expenses to continue to increase to support our increasing research and development activities.





| | Interest income and expense
| | ---------------------------




Interest income increased $111,000 during the six months ended June 30, 2001 to $609,000 compared to
$498,000 for the six months ended June 30, 2000. During the three months ended June 30, 2001 interest income decreased $25,000 to $312,000 compared to $337,000 for the three months ended June 30, 2000. Interest income is a result of the investment
of excess cash in money market accounts, corporate and international bonds and certificates of deposit. Interest expense increased $201,000 for the six months ended June 30, 2001 to $253,000 compared to $52,000 for the six months ended June 30,
2000. During the three months ended June 30, 2001 interest expense increased $98,000 to $130,000 compared to $32,000 for the three months ended June 30, 2000. Interest expense in both 2000 and 2001 relates to equipment financing and interest accrued
on the deferred compensation liability.





Liquidity and Capital Resources





Net cash used by operating activities during the six months ended June 30, 2000 and 2001 was $2,672,000 and
$5,722,000, respectively. Net cash used by operating activities consists primarily of GenStars net loss increased by non-cash expenses. Net cash used by investing activities during the six months ended June 30, 2000 of $739,000 consists of the
purchase of furniture and equipment. Net cash provided by investing activities during the six months ended June 30, 2001 of $250,000 consists of purchases and sales of short-term investments and purchases of furniture and equipment. Net cash
provided by financing activities of $26,704,000 for the six months ended June 30, 2000 consists primarily of net proceeds from the sale of common stock and warrants for common stock of $23,781,000, proceeds from convertible notes payable of $750,000
and $2,230,000 paid by Baxter under the credit agreement. Net cash provided by financing activities during the six months ended June 30, 2001 of $4,766,000 consists primarily of $2,173,000 paid by Baxter under the credit agreement, proceeds from the
sale of Series C Preferred Stock to Baxter of $2,000,000, proceeds from our capital lease agreement of $653,000, offset by repayments of capital lease and notes payable of $242,000.





GenStars future capital requirements will depend on many factors, including scientific progress in
our research and development programs, our ability to establish collaborative arrangements with others for drug development, progress with preclinical and clinical trials, the time and costs involved in obtaining regulatory approvals and effective
commercialization activities. Medstone International, Inc. provided GenStar with a $500,000 capital contribution of cash on February 9, 1996. In July 1998, we completed an offering of 8% Convertible Subordinated Notes due June 30, 1999, which raised
$1,030,000. These notes were converted to common stock on June 22, 1999. In April 1999, we completed another offering of Convertible Subordinated Notes due March 30, 2000, which raised $400,000. These notes were converted to common stock on June 22,
1999. In January 2000, we raised $8.3 million from the sale of Common Stock and warrants for Common Stock. In February 2000, we raised an additional $17 million from the sale of Common Stock. GenStar has incurred net losses of $31,418,000 since its
inception and has never been profitable during its existence. We expect to incur significant additional operating losses over the next several years as our research and development efforts expand. Our ability to achieve profitability depends upon
our ability, alone or with others, to successfully complete development of products, obtain required regulatory approvals and manufacture and market products. We may not be successful and we may never attain significant revenues or profitability.
Our operations to date have consumed substantial amounts of cash. The negative cash flow from operations is expected to continue and to accelerate for at least the next four years. The development of our products will require a commitment of
substantial funds to conduct the costly and time-consuming research, preclinical and clinical testing necessary to bring our products to market and to establish manufacturing and marketing capabilities.





We anticipate our existing capital resources will enable us to maintain our current and planned operations
through 2003. We will need to raise substantial additional capital to fund future operations. We intend to seek additional funding either through collaborative arrangements or through public or private equity or debt financings. Additional financing
may not be available on acceptable terms or at all. If adequate funds are not available, we may be required to delay or reduce the scope of our operations or to obtain funds through arrangements with collaborative partners or others that may require
us to relinquish rights we may otherwise have.





Quantitative and Qualitative Disclosures About Market Risk





The primary objective of our investment activities is to preserve principal while at the same time
maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the fair value of the
principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the fair value of the principal amount of our
investment will probably decline. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt
securities. The average duration of all of our investments has generally been less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments.
Therefore, no quantitative tabular disclosure is required.





The Company does not conduct business with foreign entities, and does not have any foreign exchange
risk.





GENSTAR THERAPEUTICS CORPORATION


(A development stage enterprise)





PART II.    OTHER INFORMATION





Item 1.    Legal Proceedings





None.





Item 2.    Changes in Securities





None.





Item 3.    Defaults Upon Senior Securities





None.





Item 4.    Submission of Matters to a Vote of Security Holders





None.





Item 5.    Other Information





None.





Item 6.    Exhibits and Reports on Form 8-K





None.





SIGNATURES





In accordance with the requirements of the Exchange Act, the Registrant has caused this Report to be
signed on its behalf by the undersigned, hereunto duly authorized.





| | GENSTAR
THERAPEUTICS
CORPORATION
| | --------------------------------

| | A Delaware Corporation
| | ----------------------




| | /s/    CARIN
D. SANDVIK
| | -----------------------

| | By:
| | ---

| | Carin D. Sandvik
| | ----------------

| | Sr. Director of Finance and Administration
| | ------------------------------------------

| | Chief Accounting Officer
| | ------------------------

| | (Principal accounting officer)
| | ------------------------------




Date:    August 14, 2001