**U.S.SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

### **FORM10-Q**

 

 

**(MarkOne)**

 

**ý****                                 QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THEQUARTERLY PERIOD ENDED MARCH 31, 2002**

 

**o****                                 TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THETRANSITION PERIOD FROM          TO**

 

**CommissionFile Number 000-30493**

 

**Restoragen, Inc.**

(Exactname of small business issuer as specified in its charter)

 

| **Delaware**                                  |   | **47-0727668**       |
|-----------------------------------------------|--------|----------------------|
| (State or other  jurisdiction                 |   | (I.R.S. Employer     |
| of incorporation  or organization)            |   | Identification  No.) |
|                                          |   |                 |
| **3820  N.W. 46th Street, Lincoln, Nebraska** |   | **68524-1637**       |
| (Address of  principal executive offices)     |   | Zip Code             |
|                                          |   |                 |

**     (402) 470-2100     **

(Issuer’sTelephone Number)

 

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such report), and (2) has been subject to suchfiling requirements for the past 90 days.      YES ý NO  o

 

As of May 13, 2002, theCompany had 7,379,408 shares of Common Stock, $.01 par value per share,outstanding.

** **

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** **

**RESTORAGEN, INC.**

**INDEX**

 

 
| **PART  I.**   | **FINANCIAL  INFORMATION** |                                                                                                         |
|----------------|----------------------------|--------------------------------------------------------------------------------------------------------------|
|           |                       |                                                                                                         |   |
|           | ITEM 1.                    | FINANCIAL STATEMENTS                                                                                         |   |
|           |                       | Condensed  Consolidated Balance Sheets as of  March 31, 2002 and December 31, 2001                           |
|           |                       |
|           |                       | Condensed  Consolidated Statements of Operations for the three  month periods ended March 31, 2002 and 2001  |
|           |                       |
|           |                       | Condensed  Consolidated Statements of Cash Flows for the three   month periods ended March 31, 2002 and 2001 |
|           |                       |
|           |                       | Notes  to Condensed Consolidated Financial Statements                                                        |
|           |                       |                                                                                                         |   |
|           | ITEM  2.                   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL   CONDITION AND RESULTS OF OPERATIONS                |
|           |                       | Cautionary  Statement About Forward-Looking Statements                                                       |
|           |                       | Overview                                                                                                     |
|           |                       | Results  of Operations                                                                                       |
|           |                       | Liquidity and Capital  Resources                                                                             |
|           |                       | New Accounting  Pronouncements                                                                               |
|           |                       | Critical Accounting  Policies                                                                                |
|           |                       | Contractual  Obligations and Commitments                                                                     |
|           |                       | Market Risk                                                                                                  |
|           |                       |                                                                                                         |   |
|           | ITEM  3.                   | QUALITATIVE  AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK                                                   |
|           |                       |                                                                                                         |   |
| **PART II.**   | **OTHER INFORMATION**      |                                                                                                         |
|           |                       |                                                                                                         |   |
|           | ITEM  1.                   | LEGAL  PROCEEDINGS                                                                                           |   |
|           |                       |                                                                                                         |   |
|           | ITEM 2.                    | CHANGES IN SECURITIES                                                                                        |   |
|           |                       |                                                                                                         |   |
|           | ITEM 3.                    | DEFAULTS UPON  SENIOR SECURITIES                                                                             |
|           |                       |                                                                                                         |   |
|           | ITEM  4.                   | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                         |
|           |                       |                                                                                                         |   |
|           | ITEM  5.                   | OTHER  INFORMATION                                                                                           |   |
|           |                       |                                                                                                         |   |
|           | ITEM 6.                    | EXHIBITS AND  REPORTS ON FORM 8-K                                                                            |
|           |                       |                                                                                                         |   |
| **SIGNATURES** |                       |
|                |                            |                                                                                                              |  |  |  |

 

 

2

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**RESTORAGEN****, INC.**

(adevelopment stage company)

CondensedConsolidated Balance Sheets

(unaudited)

 
|                                                                                                                                    |      | **March 31,** |       | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|-----------|---------------|------------|------------------|--------|
|                                                                                                                                    |      | **2002**      |       | **2001**         |   |
| ASSETS                                                                                                                                  |      |          |       |             |   |
|                                                                                                                                    |      |          |       |             |   |
| Current assets                                                                                                                          |      |          |       |             |   |
| Cash and cash equivalents                                                                                                               |      | $             | 8,475,981  |             | $      | 13,010,711 |   |
| Short-term investments                                                                                                                  |      | —        |       | 1,999,314        |   |
| Prepaid expenses                                                                                                                        |      | 85,783        |       | 146,655          |   |
| Other current assets                                                                                                                    |      | 38,945        |       | 41,100           |   |
| Total current assets                                                                                                                    |      | 8,600,709     |       | 15,197,780       |   |
|                                                                                                                                    |      |          |       |             |   |
| Property and equipment, net of accumulated                                                                                              |      |          |       |             |   |
| depreciation $4,013,203 and $3,798,251                                                                                                  |      | 5,706,995     |       | 5,845,068        |   |
| Patents and patents licensed, net of accumulated                                                                                        |      |          |       |             |   |
| amortization of $235,030 and $222,007                                                                                                   |      | 650,614       |       | 663,637          |   |
| Deferred financing costs, net of accumulated                                                                                            |      |          |       |             |   |
| amortization of $511,102 and $384,516                                                                                                   |      | 501,587       |       | 628,173          |   |
| Other assets                                                                                                                            |      | 74,695        |       | 76,118           |   |
|                                                                                                                                    |      |          |       |             |   |
| Total assets                                                                                                                            |      | $             | 15,534,600 |             | $      | 22,410,776 |   |
|                                                                                                                                    |      |          |       |             |   |
| LIABILITIES AND SHAREHOLDERS’ DEFICIT                                                                                              |      |          |       |             |   |
|                                                                                                                                    |      |          |       |             |   |
| Current liabilities:                                                                                                                    |      |          |       |             |   |
| Accounts payable                                                                                                                        |      | $             | 1,190,422  |             | $      | 2,803,131 |   |
| Accrued expenses                                                                                                                        |      | 1,536,794     |       | 427,817          |   |
| Capital lease obligations — current portion                                                                                        |      | 535,868       |       | 564,362          |   |
| Notes payable — current portion                                                                                                    |      | 756,663       |       | 696,127          |   |
| Deferred revenue                                                                                                                        |      | 200,000       |       | —           |   |
| Total current liabilities                                                                                                               |      | 4,219,747     |       | 4,491,437        |   |
|                                                                                                                                    |      |          |       |             |   |
| Long-term liabilities:                                                                                                                  |      |          |       |             |   |
| Capital lease obligations — less current portion                                                                                   |      | 520,428       |       | 649,984          |   |
| Notes payable — less current portion                                                                                               |      | 633,471       |       | 859,338          |   |
| Convertible notes payable                                                                                                               |      | 18,000,000    |       | 18,000,000       |   |
| Total long-term liabilities                                                                                                             |      | 19,153,899    |       | 19,509,322       |   |
|                                                                                                                                    |      |          |       |             |   |
| Total liabilities                                                                                                                       |      | 23,373,646    |       | 24,000,759       |   |
|                                                                                                                                    |      |          |       |             |   |
| Redeemable preferred stock                                                                                                              |      |          |       |             |   |
| Series A and A,F ($0.01 par value, 11,750 and  211,750 shares authorized, 11,750 and 20,092issued and outstanding, at redemption value) |      |          |       |             |   |
|                                                                                                                                    |      |          |       |             |
|                                                                                                                                    | 1,953,437 |          | 3,050,277  |             |
|                                                                                                                                    |      |          |       |             |   |
| Shareholders’ deficit                                                                                                              |      |          |       |             |   |
| Common stock, ($0.01 par value, 40,000,000                                                                                              |      |          |       |             |   |
| shares authorized, 7,379,408 shares issued                                                                                              |      |          |       |             |   |
| and outstanding)                                                                                                                        |      | 73,794        |       | 73,794           |   |
| Convertible preferred stock, Series B,C,D,E,F,G,H                                                                                       |      |          |       |             |   |
| ($0.01 par value; 706,500 shares authorized, 354,442 and                                                                                |      |          |       |             |   |
| 346,100 shares issued and outstanding, respectively)                                                                                    |      | 3,544         |       | 3,461            |   |
| Additional paid-in capital                                                                                                              |      | 81,387,095    |       | 80,281,920       |   |
| Deficit accumulated during development stage                                                                                            |      | (91,256,916   | )          | (84,999,435      | )      |
| Total shareholders’ deficit                                                                                                        |      | (9,792,483    | )          | (4,640,260       | )      |
|                                                                                                                                    |      |          |       |             |   |
| Total liabilities and shareholders’ deficit                                                                                        |      | $             | 15,534,600 |             | $      | 22,410,776 |   |
|                                                                                                                                    |      |          |       |             |   |
| See accompanying notes to consolidated  financial statements                                                                            |      |          |       |             |   |

 

 

3

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**RESTORAGEN, INC.**

(adevelopment stage company)

CondensedConsolidated Statements of Operations

(unaudited)

 
|                                                         |   |                   |       |                        |   | **Cumulative period** |   |
|--------------------------------------------------------------|--------|------------------------|------------|-----------------------------|--------|-----------------------|--------|
|                                                         |   | **Three Months Ended** |       | **From April 15, 1988**     |   |
|                                                         |   | **March 31,**          |       | **(date of incorporation)** |   |
|                                                         |   | **2002**               |       | **2001**                    |   | **to March 31, 2002** |   |
|                                                         |   |                   |       |                        |   |                  |   |
| Revenues                                                     |   | $                      | —     |                        | $      | 1,318                 |   | $ | 3,669,163 |   |
|                                                         |   |                   |       |                        |   |                  |   |
| Operating costs and expenses:                                |   |                   |       |                        |   |                  |   |
| General and administrative                                   |   | 851,261                |       | 802,195                     |   | 23,375,736            |   |
| Research and development                                     |   | 3,746,505              |       | 3,007,158                   |   | 69,442,518            |   |
| Corporate restructuring                                      |   | 1,181,104              |       | —                      |   | 1,181,104             |   |
|                                                         |   |                   |       |                        |   |                  |   |
| Total operating costs and expenses                           |   | 5,778,870              |       | 3,809,353                   |   | 93,999,358            |   |
|                                                         |   |                   |       |                        |   |                  |   |
| Operating loss                                               |   | (5,778,870             | )          | (3,808,035                  | )      | (90,330,195           | )      |
|                                                         |   |                   |       |                        |   |                  |   |
| Other income (expense)                                       |   |                   |       |                        |   |                  |   |
| Interest income                                              |   | 36,260                 |       | 110,153                     |   | 1,901,200             |   |
| Interest expense                                             |   | (514,871               | )          | (205,448                    | )      | (2,827,921            | )      |
|                                                         |   | (478,611               | )          | (95,295                     | )      | (926,721              | )      |
|                                                         |   |                   |       |                        |   |                  |   |
| NET LOSS                                                     |   | $                      | (6,257,481 | )                           | $      | (3,903,330            | )      | $ | (91,256,916 | ) |
|                                                         |   |                   |       |                        |   |                  |   |
| Preferred stock dividends                                    |   |                   |       |                        |   |                  |   |
| accreted and accumulating but                                |   |                   |       |                        |   |                  |   |
| not declared                                                 |   | $                      | (810,984   | )                           | $      | (690,984              | )      | $ | (13,590,105 | ) |
|                                                         |   |                   |       |                        |   |                  |   |
| Net loss applicable to common                                |   |                   |       |                        |   |                  |   |
| stock                                                        |   | $                      | (7,068,465 | )                           | $      | (4,594,314            | )      | $ | (104,847,021 | ) |
|                                                         |   |                   |       |                        |   |                  |   |
| Basic and diluted loss per                                   |   |                   |       |                        |   |                  |   |
| common share                                                 |   | $                      | (0.96      | )                           | $      | (0.62                 | )      | $ | (25.27 | ) |
|                                                         |   |                   |       |                        |   |                  |   |
| Average number of common shares                              |   |                   |       |                        |   |                  |   |
| outstanding — basic and diluted                         |   | 7,379,408              |       | 7,351,494                   |   | 4,148,423             |   |
|                                                         |   |                   |       |                        |   |                  |   |
| See  accompanying notes to consolidated financial statements |   |                   |       |                        |   |

 

4

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**RESTORAGEN, INC.**

(adevelopment stage company)

CondensedConsolidated Statements of Cash Flows

(unaudited)

 
|                                                         |   |                              |                        |                    |   | **Cumulative period** |   |
|--------------------------------------------------------------|--------|-----------------------------------|-----------------------------|-------------------------|--------|-----------------------|--------|
|                                                         |   | **Three Months Ended  March 31,** |                        | **from April 15, 1988** |   |
|                                                         |   |                              | **(date of incorporation)** |                    |
|                                                         |   | **2002**                          |                        | **2001**                |   | **to March 31, 2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                        |   |                              |                        |                    |   |                  |   |
| Net loss                                                     |   | $                                 | (6,257,481                  | )                       | $      | (3,903,330            | )      | $ | (91,256,916 | ) |
| Adjustments to reconcile net loss to net cash                |   |                              |                        |                    |   |                  |   |
| flows from operating activities:                             |   |                              |                        |                    |   |                  |   |
| Depreciation and amortization                                |   | 227,975                           |                        | 234,336                 |   | 4,488,055             |   |
| Amortization of deferred financing costs                     |   | 126,586                           |                        | 64,086                  |   | 1,011,102             |   |
| Acquired in process research and development                 |   | —                            |                        | —                  |   | 1,200,000             |   |
| Stock-based compensation expense                             |   | 8,418                             |                        | 87,087                  |   | 6,246,170             |   |
| Change in operating assets and liabilities:                  |   |                              |                        |                    |   |                  |   |
| Prepaid expenses and other current assets                    |   | 63,026                            |                        | (68,949                 | )      | (624,727              | )      |
| Accounts payable, accrued expenses and deferred revenues     |   | (303,732                          | )                           | 122,913                 |   | 3,883,593             |   |
|                                                         |   |                              |                        |                    |   |                  |   |
| Net cash flows from operating activities                     |   | (6,135,208                        | )                           | (3,463,857              | )      | (75,052,723           | )      |
|                                                         |   |                              |                        |                    |   |                  |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                        |   |                              |                        |                    |   |                  |   |
| Purchase of property and equipment                           |   | (76,878                           | )                           | (415,541                | )      | (9,721,045            | )      |
| Decrease/(increase) in deposits and other assets             |   | 1,423                             |                        | (5,000                  | )      | (306,374              | )      |
| Increase in patents                                          |   | —                            |                        | —                  |   | (892,938              | )      |
| Acquisition of R&C, Inc. and GRFCo                       |   | —                            |                        | —                  |   | (1,200,000            | )      |
|                                                         |   |                              |                        |                    |   |                  |   |
| Net cash flows from investing activities                     |   | (75,455                           | )                           | (420,541                | )      | (12,120,357           | )      |
|                                                         |   |                              |                        |                    |   |                  |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                        |   |                              |                        |                    |   |                  |   |
| Net proceeds from issuance of common stock                   |   |                              |                        | 214,263                 |   | 39,710,261            |   |
| Net proceeds from issuance of preferred stock                |   | —                            |                        | —                  |   | 34,591,371            |   |
| Proceeds from long-term obligations                          |   | —                            |                        | —                  |   | 23,125,426            |   |
| Payments on notes payable and capital leases                 |   | (323,381                          | )                           | (299,844                | )      | (3,178,997            | )      |
| Proceeds from bridge notes payable                           |   | —                            |                        | —                  |   | 3,765,500             |   |
| Payments on bridge notes payable                             |   | —                            |                        | —                  |   | (2,364,500            | )      |
|                                                         |   |                              |                        |                    |   |                  |   |
| Net cash flows from financing activities                     |   | (323,381                          | )                           | (85,581                 | )      | 95,649,061            |   |
|                                                         |   |                              |                        |                    |   |                  |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         |   | (6,534,044                        | )                           | (3,969,979              | )      | 8,475,981             |   |
|                                                         |   |                              |                        |                    |   |                  |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD             |   | 15,010,025                        |                        | 9,492,135               |   | —                |   |
|                                                         |   |                              |                        |                    |   |                  |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                   |   | $                                 | 8,475,981                   |                    | $      | 5,522,156             |   | $ | 8,475,981 |   |
|                                                         |   |                              |                        |                    |   |                  |   |
| Supplemental Disclosures of Investing Financing Activities:  |   |                              |                        |                    |   |                  |   |
|                                                         |   |                              |                        |                    |   |                  |   |
| Interest paid                                                |   | $                                 | 102,035                     |                    | $      | 141,362               |   | $ | 1,751,997 |   |
|                                                         |   |                              |                        |                    |   |                  |   |
| See accompanying notes to consolidated  financial statements |   |                              |                        |                    |   |                  |   |

 

 

5

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**Restoragen, Inc.**

Notes to CondensedConsolidated Financial Statements

March 31, 2002 and2001

(unaudited)

 

(1)                                  **Summaryof Significant Accounting Policies**

 

**Basis of Presentation -**The condensed consolidated balance sheetas of March 31, 2002, the condensed consolidated statements of operations forthe three month periods ended March 31, 2002 and 2001 and the condensedconsolidated statements of cash flows for the three month periods ended March31, 2002 and 2001 have been prepared by the Company without audit in accordancewith accounting principles generally accepted in the United States ofAmerica.  Accordingly, they do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America.  In the opinion of management, all adjustments (all of which arenormal and recurring in nature) considered necessary to present fairly thefinancial position at March 31, 2002, and results of operations and cash flowsfor the three month periods ended March 31, 2002 and 2001 have beenincluded.  Results of operations for theinterim periods are not necessarily indicative of the results that may beexpected for the full fiscal year, or any other period.  These financial statements and notes shouldbe read in conjunction with the audited financial statements for the year endedDecember 31, 2001, included in the Company’s Form 10-K filed with theSecurities and Exchange Commission.

 

In July 2001, theFASB issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”),“Goodwill and Other Intangible Assets”, which is effective January 1,2002.  SFAS 142 requires, among otherthings, the discontinuance of goodwill amortization.  In addition, the standard includes provisions for thereclassification of certain existing recognized intangibles as goodwill,reassessment of the useful lives of existing recognized intangibles,reclassification of certain intangibles out of previously reported goodwill andthe identification of reporting units for purposes of assessing potentialfuture impairments of goodwill.  Therewas no impact to the Company’s financial statements as a result of adoptingthis standard.

 

InJune 2001, the Financial Accounting Standards Board issued SFAS No. 143,“Accounting for Asset Retirement Obligations”. This standard addresses financial accounting and reporting forobligations related to the retirement of tangible long-lived assets and therelated asset retirement costs.  SFASNo. 143 is effective for fiscal years beginning after June 15, 2002.  The Company does not expect its adoption ofthis standard to have a significant impact on the consolidated financialstatements.

 

InAugust 2001, the Financial Accounting Standards Board issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”.  This standard addresses financial accountingand reporting for the impairment or disposal of certain long-lived assets.  SFAS No. 144 is effective for fiscal yearsbeginning after December 15, 2001. There was no impact to the Company’s financial statements as a result ofadopting this standard.

 

 

6

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**Deferred Revenue —**Deferred revenue relates to advancesunder third-party production arrangements. These revenues are recognized as earned.

 

**ShareholdersEquity -**Inconnection with the issuance of the convertible notes in December 2001, theCompany issued 999,997 warrants to purchase common stock of the Company at aper share warrant exercise price equal to the lower of $9.00 or the lowest percommon equivalent share price at which the Company sells equity after the dateof the warrants.  Each lender initiallyreceived warrants to purchase a number of shares of common stock equal to 50%of the amount of notes held divided by the warrant exercise price.  Commencing with the 90th day after theinitial date of issuance of the warrants, the number of shares of common stockinto which the warrants are exercisable increases by an additional 10% of thenotes held divided by the warrant exercise price for each 30-day period inwhich the notes continue to remain outstanding and not converted, up to 100% ofthe outstanding notes divided by the warrant exercise price.  Pursuant to this provision, warrants wereissued to purchase 200,000 shares of the Company’s common stock in March 2002.

 

Holder redemption rights on Series F Preferred Stockexpired on March 31, 2002.  Inconnection with the expiration of these rights, the Series F Preferred Stockhas been reclassified to shareholders’ equity as of March 31, 2002.

 

Accumulateddividends on preferred stock as of March 31, 2002 are as follows:

 

| **Preferred  Stock Series** |          | **Accumulated** |       |
|-----------------------------|---------------|-----------------|------------|
|                        | **Dividends** |            |
|                        |          |            |       |
| A                           |          | $               | 778,438    |   |
| B                           |          | 1,169,477       |       |
| C                           |          | 1,255,005       |       |
| D                           |          | 3,293,396       |       |
| E                           |          | 790,554         |       |
| F                           |          | 3,995,110       |       |
| G                           |          | 1,828,125       |       |
| H                           |          | 480,000         |       |
|                        |          | $               | 13,590,105 |   |

 

 

7

----

 

**Going Concern Considerations** - The Company, from inception, hasexperienced losses from its activities in research and development and has hadminimal revenues.  This and the fact thatthe Company is a development stage business create a substantial doubt as toits ability to continue as a going concern.

 

The Company’sability to obtain profitability on substantial portions of its operations willalso depend in large part on:  obtainingadditional financing through equity or debt issues or developmentcollaborations, as necessary; obtaining regulatory approvals of its productsand entering into satisfactory agreements for product commercialization.

 

The financialstatements do not include any adjustments relating to the recoverability andclassification of recorded asset amounts or the amounts and classification ofliabilities that might be necessary should the Company be unable to continue asa going concern.

 

(2)                                  **CorporateRestructuring**

 

On February 21, 2002, theCompany announced and implemented a restructuring and reduction in workforcefrom 121 employees to 60 employees.  Thefollowing is a summary of restructuring charges related to the staff reductionand consolidation of facilities:

 
| Employee compensation and benefits: Severance pay and benefits |   |    |      |
|----------------------------------------------------------------|--------|---------|-----------|
|                                                           | $      | 923,250 |      |
|                                                           |   |    |      |
| Occupancy and equipment costs:                                 |   |    |      |
| Non-cancelable  lease costs, net of estimated sublease income  |   | 115,350 |      |
|                                                           |   |    |      |
| Other:                                                         |   |    |      |
| Loss on  impairment and abandoment of property and equipment   |   | 142,504 |      |
|                                                           |   |    |      |
| Total corporate  restructuring charges                         |   | $       | 1,181,104 |   |

 

The Companyexpects the majority of costs associated with the restructuring to be paidduring 2002.  As of March 31, 2002,approximately $0.4 million of the severance pay and benefits had been paid.

 

 

8

----

 

 

**Item2.****                                                     ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Following is a discussionand analysis of the Company’s consolidated condensed financial condition andresults of operations for the three months ended March 31, 2002 and 2001.  The section should be read in conjunctionwith the Company’s audited financial statements for the year ended December 31,2001, and Management’s Discussion and Analysis of Financial Condition andResults of Operations contained in the Company’s Form 10-K for the year endedDecember 31, 2001, as filed with the Securities and Exchange Commission.

 

**CautionaryStatement About Forward-Looking Statements**

 

This Form 10-Q contains,in addition to historical information, forward-looking statements that arebased on the Company’s current expectations, beliefs, intentions or futurestrategies.  Such forward looking statementsinvolve known and unknown risks, uncertainties and other factors which maycause the actual results, performance or achievements of the Company to bematerially different from any future results, performance or achievements,expressed or implied by such forward-looking statements. The words “believe,”“expect,” “anticipate,” “plan,” “seek” and similar expressions identifyforward-looking statements.  Readers arecautioned not to place undue reliance on these forward-looking statements thatspeak only as of the date the statement was made.  These statements are subject to risks and uncertainties thatcould cause actual results to differ materially from the statements, includingthe dependence of the Company on obtaining future financing, uncertaintiesinvolved in the additional development of the Company’s new pharmaceuticalproducts, including securing strategic partners to fund further development,the outcomes of clinical trials, obtaining regulatory approvals or clearances,the ability of the Company’s products to be manufactured in commercialquantities, availability of commercial production capacity, the development ofpartnerships for distribution and marketing, protection of the Company’s patentand proprietary rights, avoiding infringement of competitor’s proprietaryrights, potential competition and the extent to which reimbursement for thecosts of the products and treatments will be available from government healthadministration authorities, private health insurers and otherorganizations.  These risks are furtherdescribed in the Company’s Form 10-K for the year ended December 31, 2001 underthe heading, “Management’s Discussion and Analysis of Financial Condition andResults of Operations — Additional Factors That May Affect FuturePerformance”  .The Company does notundertake responsibility to update such forward-looking statements to reflectevents that arise after the date of this report.

 

**Overview**

 

Restoragen Inc. is adevelopment stage biotechnology company focused on the development of peptidetherapeutics. The Company’s principal pharmaceutical product currently underdevelopment is recombinant human GLP-1 (rGLP-1). GLP-1 is believed to be animportant insulinotropic peptide that regulates metabolism and has been shownto reduce high blood glucose levels and to improve insulin secretion and actionin type II diabetics. For some time the Company has focused its drugdevelopment efforts on rGLP-1 for the treatment of type II diabetes and iscurrently completing phase 2 (b) clinical trials for type II diabetes patientswho are failing oral therapy.

 

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As a result of it’s research in type IIdiabetes, the Company believes that GLP-1 has the potential to decrease insulinresistance. While virtually all type II diabetic patients have insulinresistance, most people who have insulin resistance do not develop diabetes.They do, however, frequently present with other serious disorders. Inparticular, it appears that insulin resistance is a major risk factor for mostserious and common cardiovascular diseases. Restoragen has conceived and filedpatent applications for uses of rGLP-1 and its analogs in variouscardiovascular diseases.  The Company’sstrategy is to establish partnerships with market leading pharmaceuticalcompanies and medical device companies to develop and commercialize rGLP-1 forcertain niche cardiovascular diseases in which insulin resistance is anunderlying factor.

 

TheCompany also intends to establish partnerships with market leadingpharmaceutical and drug delivery companies to develop and commercializesustained release formulations of rGLP-1 for type II diabetes and othermetabolic diseases and cardiovascular disorders in which insulin resistance isan underlying factor.

 

The Company continues to develop its capabilities in production,purification and amidation of medium range peptides using proprietaryrecombinant technologies and chemistries. The Company believes its ability todevelop commercially viable recombinant peptide production methods could be ofvalue to companies who have peptides exceeding 20 amino acid residues underdevelopment and who require large scale, cost effective processes for latestage clinical trials and commercialization.

 

**Resultsof Operations**

 

Research anddevelopment expenses include those costs associated with the research,development, production and testing of our pharmaceutical products, includingall direct costs incurred in conducting our clinical trials and all costsrelated to the protection of proprietary rights.  These costs have aggregated $69.4 million since ourinception.  Research and developmentcosts were $3.7 million for the three month period ended March 31, 2002, ascompared to $3.0 million for the same period in the prior fiscal year.  The increase in costs primarily reflectshigher clinical trial expenditures associated with the phase II(b) trial forpatients with type II diabetes.  Generaland administrative expenses were $0.9 million for the three month period endedMarch 31, 2002, as compared to $0.8 million for the same period in 2001.

 

In February 2002,Restoragen announced a restructuring and a reduction of total workforce from121 to 60 employees.  In connection withthe restructuring, the Company recorded restructuring costs of approximately $1.2million during the first quarter of 2002. The restructuring was required as the Company realigned its businessstrategy. The revised strategy will involve strategic partnering to develop andcommercialize peptide-based therapeutics for clinically and economicallyimportant cardiovascular and metabolic diseases.  The Company will also seek to enter into strategic relationshipswith companies who would benefit from Restoragen’s ability to developcommercially viable recombinant peptide production methods.  

 

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After the restructuring, it is anticipated that the Company’s ongoingnet cash outflow for the remainder of the year will be approximately $1.5million per month.

 

Interestincome decreased to $0.04 million for the three month period ended March 31,2002, as compared to $0.11 million for the same period in 2001, reflectinglower interest rates. We incurred interest expense of $0.5 million for thethree month period ended March 31, 2002 compared to $0.2 million for the sameperiod in 2001.  The increase reflectsinterest charges associated with the bridge loan financing secured in December2001.

 

**Liquidityand Capital Resources**

 

Working capital was $4.4 million as ofMarch 31, 2002, compared to $10.7 million as of December 31, 2001.  Cash and cash equivalents were $8.5 millionas of March 31, 2002.

 

During the three months ended March 31,2002, the Company used approximately $6.1 million of cash for operatingactivities and $0.1 million for asset acquisitions.  Capital repayments in respect of equipment financing totaled $0.3million.  Based on its anticipatedrevised operating plan, the Company believes that existing cash and cashequivalents will be sufficient to fund operations until the third quarter of2002.  The Company continues to seekfinancing through collaborative arrangements with potential strategicpartners.  Additional financing may notbe available to the Company.  If unableto obtain financing, the Company will be required to further modify thebusiness plan and may discontinue some or all of its operations.

 

As of March 31, 2002, the Company had a shareholders deficitaccumulated during the development stage of $91.3 million. Historically theauditors’ reports on the Company’s financial statements have contained anexplanatory paragraph concerning the Company’s ability to continue as a goingconcern and its status as a development stage company. The Company expects toincur additional losses and will require additional working capital as itcontinues to operate.

 

**NewAccounting Pronouncements**

 

In July 2001, theFASB issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”),“Goodwill and Other Intangible Assets”, which is effective January 1,2002.  SFAS 142 requires, among otherthings, the discontinuance of goodwill amortization.  In addition, the standard includes provisions for thereclassification of certain existing recognized intangibles as goodwill,reassessment of the useful lives of existing recognized intangibles,reclassification of certain intangibles out of previously reported goodwill andthe identification of reporting units for purposes of assessing potentialfuture impairments of goodwill.  Therewas no impact to the Company’s financial statements as a result of adoptingthis standard.

 

InJune 2001, the Financial Accounting Standards Board issued SFAS No. 143,“Accounting for Asset Retirement Obligations”. This standard addresses financial accounting and reporting forobligations related to the retirement of tangible long-lived assets and therelated asset retirement costs.  SFASNo. 143 is effective for fiscal years beginning after June 15, 2002.  The Company does not expect its adoption ofthis standard to have a significant impact on the consolidated financialstatements.

 

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InAugust 2001, the Financial Accounting Standards Board issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”.  This standard addresses financial accountingand reporting for the impairment or disposal of certain long-lived assets.  SFAS No. 144 is effective for fiscal yearsbeginning after December 15, 2001. There was no impact to the Company’s financial statements as a result ofadopting this standard.

 

**CriticalAccounting Policies**

 

The Company reviewslong-lived assets and certain intangibles for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  An evaluation of recoverabilityis performed by comparing the undiscounted cash flows associated with the assetto the asset’s carrying amount to determine if a writedown is required.

 

As permitted by SFAS No. 123, “Accounting for Stock-basedCompensation”, the Company accounts for its stock-based awards to employeesunder the intrinsic value method in accordance with Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” and relatedinterpretations.  All stock-based awardsto independent consultants are accounted for under the fair value method asrequired by SFAS No. 123 and related interpretations.

 

**Contractual Obligations and Commitments**

 

Ourcontractual obligations and commitments, consisting of capital and operatinglease obligations, notes payable and convertible notes payable have not changedsignificantly during the three month period ending March 31, 2002.

 

**Market Risk**

 

We are exposed tomarket risk related to changes in interest rates. The Company does not usederivative financial instruments for speculative or trading purposes.  Due to the nature of cash and cashequivalents, we believe that there is no material market risk exposure.

 

 

**Item3.****        ****QUALITATIVEAND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.**

 

See Item 2,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations - Market Risk”.

 

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**PART II**

 

**OTHER INFORMATION**

 

**Item1.**         **LEGALPROCEEDINGS****.**

 

               None

 

**Item2.**   **CHANGES INSECURITIES****.**

 

                                                In connection with the issuance of theconvertible notes in December 2001, the Company issued 999,997 warrants topurchase common stock of the Company at a per share warrant exercise priceequal to the lower of $9.00 or the lowest per common equivalent share price atwhich the Company sells equity after the date of the warrants.  Each lender initially received warrants topurchase a number of shares of common stock equal to 50% of the amount of notesheld divided by the warrant exercise price. Commencing with the 90th day after the initial date of issuance of the warrants,the number of shares of common stock into which the warrants are exercisableincreases by an additional 10% of the notes held divided by the warrantexercise price for each 30-day period in which the notes continue to remainoutstanding and not converted, up to 100% of the outstanding notes divided bythe warrant exercise price.  Pursuant tothis provision, warrants were issued to purchase 200,000 shares of theCompany’s common stock in March 2002.

 

**Item3.****        ****DEFAULTSUPON SENIOR SECURITIES****.**

 

None

 

**Item4.****        ****SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS****.**

 

                None

 

**Item5.   OTHER INFORMATION****.**

 

In connection with therestructuring, the Company has consolidated operations within one building andthe principal business address is now 3820 N.W. 46th Street, LincolnNE 68524-1637

 

**Item6.****          ****                EXHIBITS AND REPORTS ON FORM 8-K****.**

 

(a)                                  Exhibits

 

##### None

 

(b)                                 Reports on Form 8-K

The Company filed a Form8-K on February 26, 2002, referencing a press release dated February 21, 2002,announcing the Company’s corporate restructuring and workforce reduction.  No financial statements were required to befiled with the form.

 

 

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**SIGNATURES**

 

 

                Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                      |   |                   | RESTORAGEN,  INC.              |
|---------------------------|--------|------------------------|--------------------------------|
|                      |   |                   |                           |   |   |   |
| Dated:  May 13, 2002 |   | /s/ Ashleigh W. Palmer |                           |
|                      |   |                   | Ashleigh W. Palmer             |
|                      |   |                   | Chief Executive Officer        |
|                      |   |                   | (Duly Authorized Officer)      |
|                      |   |                   |                           |   |   |   |
|                      |   |                   | /s/ David S. Walker            |   |
|                      |   |                   | David S. Walker                |
|                      |   |                   | Chief Financial Officer        |
|                      |   |                   | (Principal Financial  Officer) |
|                           |        |                        |                                |  |  |  |  |  |  |

 

 

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